[Federal Register Volume 78, Number 47 (Monday, March 11, 2013)]
[Rules and Regulations]
[Pages 15409-15541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04902]



[[Page 15409]]

Vol. 78

Monday,

No. 47

March 11, 2013

Part II





 Department of Health and Human Services





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45 CFR Parts 153, 155, 156, et al.





 Patient Protection and Affordable Care Act; HHS Notice of Benefit and 
Payment Parameters for 2014 and Amendments to the HHS Notice of Benefit 
and Payment Parameters for 2014; Final Rules; Patient Protection and 
Affordable Care Act; Establishment of Exchanges and Qualified Health 
Plans; Small Business Health Options Program; Proposed Rule

Federal Register / Vol. 78 , No. 47 / Monday, March 11, 2013 / Rules 
and Regulations

[[Page 15410]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 153, 155, 156, 157 and 158

[CMS-9964-F]
RIN 0938-AR51


Patient Protection and Affordable Care Act; HHS Notice of Benefit 
and Payment Parameters for 2014

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

ACTION: Final rule.

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SUMMARY: This final rule provides detail and parameters related to: the 
risk adjustment, reinsurance, and risk corridors programs; cost-sharing 
reductions; user fees for Federally-facilitated Exchanges; advance 
payments of the premium tax credit; the Federally-facilitated Small 
Business Health Option Program; and the medical loss ratio program. 
Cost-sharing reductions and advance payments of the premium tax credit, 
combined with new insurance market reforms, are expected to 
significantly increase the number of individuals with health insurance 
coverage, particularly in the individual market. In addition, we expect 
the premium stabilization programs--risk adjustment, reinsurance, and 
risk corridors--to protect against the effects of adverse selection. 
These programs, in combination with the medical loss ratio program and 
market reforms extending guaranteed availability (also known as 
guaranteed issue) and prohibiting the use of factors such as health 
status, medical history, gender, and industry of employment to set 
premium rates, will help to ensure that every American has access to 
high-quality, affordable health insurance.

DATES: This final rule is effective on April 30, 2013.

FOR FURTHER INFORMATION CONTACT:
Sharon Arnold, (301) 492-4286; Laurie McWright, (301) 492-4311; or Jeff 
Wu, (301) 492-4305, for general information.
Kelly Horney, (410) 786-0558, for matters related to the risk 
adjustment program generally.
Michael Cohen, (301) 492-4277, for matters related to the risk 
adjustment methodology and the methodology for determining the 
reinsurance contribution rate and payment parameters.
Adrianne Glasgow, (410) 786-0686, for matters related to the 
reinsurance program.
Jaya Ghildiyal, (301) 492-5149, for matters related to the risk 
corridors program and user fees for Federally-facilitated Exchanges.
Johanna Lauer, (301) 492-4397, for matters related to cost-sharing 
reductions and advance payments of the premium tax credit.
Bobbie Knickman, (410) 786-4161, for matters related to the distributed 
data collection approach for the HHS-operated risk adjustment and 
reinsurance programs.
Rex Cowdry, (301) 492-4387, for matters related to the Small Business 
Health Options Program.
Carol Jimenez, (301) 492-4457, for matters related to the medical loss 
ratio program.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary
    A. Purpose
    B. Summary of Major Provisions
    C. Costs and Benefits
II. Background
    A. Premium Stabilization
    B. Cost-Sharing Reductions
    C. Advance Payments of the Premium Tax Credit
    D. Exchanges
    E. Market Reform Rules
    F. Essential Health Benefits and Actuarial Value
    G. Medical Loss Ratio
    H. Tribal Consultation
III. Provisions of the Proposed Rule and Responses to Public 
Comments
    A. Provisions for the State Notice of Benefit and Payment 
Parameters
    B. Provisions and Parameters for the Permanent Risk Adjustment 
Program
    1. Approval of State-Operated Risk Adjustment
    2. Risk Adjustment User Fees
    3. Overview of the Risk Adjustment Methodology HHS Will 
Implement When Operating Risk Adjustment on Behalf of a State
    4. State Alternate Methodology
    5. Risk Adjustment Data Validation
    6. State-Submitted Alternate Risk Adjustment Methodology
    C. Provisions and Parameters for the Transitional Reinsurance 
Program
    1. State Standards Related to the Reinsurance Program
    2. Contributing Entities and Excluded Entities
    3. National Contribution Rate
    4. Calculation and Collection of Reinsurance Contributions
    5. Eligibility for Reinsurance Payments Under the Health 
Insurance Market Reform Rules
    6. Reinsurance Payment Parameters
    7. Uniform Adjustment to Reinsurance Payments
    8. Supplemental State Reinsurance Payment Parameters
    9. Allocation and Distribution of Reinsurance Contributions
    10. Reinsurance Data Collection Standards
    D. Provisions for the Temporary Risk Corridors Program
    1. Definitions
    2. Risk Corridors Establishment and Payment Methodology
    3. Risk Corridors Data Requirements
    4. Manner of Risk Corridor Data Collection
    E. Provisions for the Advance Payments of the Premium Tax Credit 
and Cost-Sharing Reduction Programs
    1. Exchange Responsibilities With Respect to Advance Payments of 
the Premium Tax Credit and Cost-Sharing Reductions
    2. Exchange Functions: Certification of Qualified Health Plans
    3. QHP Minimum Certification Standards Relating to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions
    4. Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing 
Reductions
    F. Provisions on User Fees for a Federally-facilitated Exchange 
(FFE)
    G. Distributed Data Collection for the HHS-Operated Risk 
Adjustment and Reinsurance Programs
    1. Background
    2. Issuer Data Collection and Submission Requirements
    H. Small Business Health Options Program
    I. Medical Loss Ratio Requirements Under the Patient Protection 
and Affordable Care Act
    1. Treatment of Premium Stabilization Payments, and Timing of 
Annual MLR Reports and Distribution of Rebates
    2. Deduction of Community Benefit Expenditures
    3. Summary of Errors in the MLR Regulation
IV. Provisions of the Final Regulations
V. Collection of Information Requirements
VI. Regulatory Impact Analysis
    A. Statement of Need
    B. Overall Impact
    C. Impact Estimates of the Payment Notice Provisions
    D. Alternatives Considered
    E. Regulatory Flexibility Act
    F. Unfunded Mandates
    G. Federalism
    Regulations Text

Acronyms

Affordable Care Act The Affordable Care Act of 2010 (which is the 
collective term for the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) and the Health Care and Education Reconciliation 
Act (Pub. L. 111-152))
APTC Advance payments of the premium tax credit
ASO Administrative services only contractor
AV Actuarial Value
CFR Code of Federal Regulations
CHIP Children's Health Insurance Program
CMS Centers for Medicare & Medicaid Services
COBRA Consolidated Omnibus Budget Reconciliation Act
EHB Essential health benefits
ERISA Employee Retirement Income Security Act
FFE Federally-facilitated Exchange

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FF-SHOP Federally-facilitated Small Business Health Options Program 
Exchange
FPL Federal poverty level
HCC Hierarchical condition category
HHS United States Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
IHS Indian Health Service
IRS Internal Revenue Service
MLR Medical loss ratio
NAIC National Association of Insurance Commissioners
OMB United States Office of Management and Budget
OPM United States Office of Personnel Management
PHS Act Public Health Service Act
PRA Paperwork Reduction Act of 1985
QHP Qualified health plan
SHOP Small Business Health Options Program
The Code Internal Revenue Code of 1986
TPA Third party administrator

I. Executive Summary

A. Purpose

    Beginning in 2014, individuals and small businesses will be able to 
purchase private health insurance through competitive marketplaces 
called Affordable Insurance Exchanges, ``Exchanges,'' or 
``Marketplaces.'' Individuals who enroll in qualified health plans 
through Exchanges may receive premium tax credits that make health 
insurance more affordable and financial assistance to cover some or all 
cost sharing for essential health benefits. We expect that the premium 
tax credits, combined with the new insurance reforms, will 
significantly increase the number of individuals with health insurance 
coverage, particularly in the individual market. Premium stabilization 
programs--risk adjustment, reinsurance, and risk corridors--are 
expected to protect against the effects of adverse selection. These 
programs, in combination with the medical loss ratio program and market 
reforms extending guaranteed availability (also known as guaranteed 
issue), and prohibiting the use of factors such as health status, 
medical history, gender, and industry of employment to set premium 
rates, will help to ensure that every American has access to high-
quality, affordable health care.
    Premium stabilization programs: The Affordable Care Act establishes 
a permanent risk adjustment program, a transitional reinsurance 
program, and a temporary risk corridors program to provide payments to 
health insurance issuers that cover higher-risk populations and to more 
evenly spread the financial risk borne by issuers.
    The transitional reinsurance program and the temporary risk 
corridors program, which begin in 2014, are designed to provide issuers 
with greater payment stability as insurance market reforms are 
implemented and Exchanges facilitate increased enrollment. The 
reinsurance program will reduce the uncertainty of insurance risk in 
the individual market by partially offsetting issuers' risk associated 
with high-cost enrollees. The risk corridors program will protect 
against uncertainty in rate setting for qualified health plans by 
limiting the extent of issuers' financial losses and gains. On an 
ongoing basis, the risk adjustment program is intended to provide 
increased payments to health insurance issuers that attract higher-risk 
populations, such as those with chronic conditions, and reduce the 
incentives for issuers to avoid higher-risk enrollees. Under this 
program, funds are transferred from issuers with lower-risk enrollees 
to issuers with higher-risk enrollees.
    In the Premium Stabilization Rule \1\ we laid out a regulatory 
framework for these three programs. In that rule, we stated that the 
specific payment parameters for those programs would be published in 
this final rule. In this final rule, we describe these standards, and 
include payment parameters for these programs.
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    \1\ 77 FR 17220 (March 23, 2012).
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    Advance payments of the premium tax credit and cost-sharing 
reductions: This final rule establishes standards for advance payments 
of the premium tax credit and for cost-sharing reductions. These 
programs assist eligible low- and moderate-income Americans in 
affording health insurance on an Exchange. Section 1401 of the 
Affordable Care Act amended the Internal Revenue Code (26 U.S.C.) to 
add section 36B, allowing an advance, refundable premium tax credit to 
help individuals and families afford health insurance coverage. Section 
36B of the Code was subsequently amended by the Medicare and Medicaid 
Extenders Act of 2010 (Pub. L. 111-309) (124 Stat. 3285 (2010)); the 
Comprehensive 1099 Taxpayer Protection and Repayment of Exchange 
Subsidy Overpayments Act of 2011 (Pub. L. 112-9) (125 Stat. 36 (2011)); 
and the Department of Defense and Full-Year Continuing Appropriations 
Act, 2011 (Pub. L. 112-10) (125 Stat. 38 (2011)). The section 36B 
credit is designed to make a qualified health plan (QHP) purchased on 
an Exchange affordable by reducing an eligible taxpayer's out-of-pocket 
premium cost.
    Under sections 1401, 1411, and 1412 of the Affordable Care Act and 
45 CFR part 155 subpart D, an Exchange makes an advance determination 
of tax credit eligibility for individuals who enroll in QHP coverage 
through the Exchange and seek financial assistance. Using information 
available at the time of enrollment, the Exchange determines whether 
the individual meets the income and other requirements for advance 
payments and the amount of the advance payments that can be used to pay 
premiums. Advance payments are made periodically under section 1412 of 
the Affordable Care Act to the issuer of the QHP in which the 
individual enrolls.
    Section 1402 of the Affordable Care Act provides for the reduction 
of cost sharing for certain individuals enrolled in a QHP through an 
Exchange, and section 1412 of the Affordable Care Act provides for the 
advance payment of these reductions to issuers. This assistance will 
help eligible low- and moderate-income qualified individuals and 
families afford the out-of-pocket spending associated with health care 
services provided through Exchange-based QHP coverage. The statute 
directs issuers to reduce cost sharing for essential health benefits 
for individuals with household incomes between 100 and 400 percent of 
the Federal poverty level (FPL) who are enrolled in a silver level QHP 
through an individual market Exchange and are eligible for advance 
payments of the premium tax credit. The statute also directs issuers to 
eliminate cost sharing for Indians (as defined in section 4(d) of the 
Indian Self-Determination and Education Assistance Act) with a 
household income at or below 300 percent of the FPL who are enrolled in 
a QHP of any ``metal'' level (that is, bronze, silver, gold, or 
platinum) through the individual market in the Exchange, and prohibits 
issuers of QHPs from requiring cost sharing for Indians, regardless of 
household income, for items or services furnished directly by the 
Indian Health Service, an Indian Tribe, a Tribal Organization, or an 
Urban Indian Organization, or through referral under contract health 
services.
    HHS published a bulletin \2\ outlining an intended regulatory 
approach to calculating actuarial value and implementing cost-sharing 
reductions on February 24, 2012 (AV/CSR Bulletin). The AV/CSR Bulletin 
outlined an intended regulatory approach governing the calculation of 
AV, de minimis variation standards, silver plan

[[Page 15412]]

variations for individuals eligible for cost-sharing reductions, and 
advance payments of cost-sharing reductions to issuers, among other 
topics. In the Exchange Establishment Rule,\3\ we set forth eligibility 
standards for these cost-sharing reductions. In this final rule, we 
make minor revisions to the eligibility standards for families and 
establish standards governing the administration of cost-sharing 
reductions and provide specific payment parameters for the program.
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    \2\ Available at: http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf.
    \3\ 77 FR 18310 (March 27, 2012).
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    Federally-facilitated Exchange user fees: Section 1311(d)(5)(A) of 
the Affordable Care Act contemplates an Exchange charging assessments 
or user fees to participating issuers to generate funding to support 
its operations. When operating a Federally-facilitated Exchange under 
section 1321(c)(1) of the Affordable Care Act, HHS has the authority 
under sections 1321(c)(1) and 1311(d)(5)(A) of the statute to collect 
and spend such user fees. In addition, 31 U.S.C. 9701 permits a Federal 
agency to establish a charge for a service provided by the agency. 
Office of Management and Budget Circular A-25 Revised (Circular A-25R) 
establishes Federal policy regarding user fees and specifies that a 
user charge will be assessed against each identifiable recipient for 
special benefits derived from Federal activities beyond those received 
by the general public. In this final rule, we establish a user fee for 
issuers participating in a Federally-facilitated Exchange.
    Small Business Health Options Program (SHOP): Section 1311(b)(1)(B) 
of the Affordable Care Act directs each State that chooses to operate 
an Exchange to establish a SHOP that provides QHP options for small 
businesses. The Exchange Establishment Rule sets forth standards for 
the administration of SHOP Exchanges. In this final rule, we clarify 
and expand upon the standards established in the Exchange Establishment 
Rule.
    Medical loss ratio (MLR) program: Section 2718 of the Public Health 
Service Act (PHS Act) generally requires health insurance issuers to 
submit an annual MLR report to HHS and provide rebates of premium if 
they do not achieve specified MLRs. On December 1, 2010, we published 
an interim final rule entitled ``Health Insurance Issuers Implementing 
Medical Loss Ratio (MLR) Requirements under the Patient Protection and 
Affordable Care Act'' (75 FR 74864) which established standards for the 
MLR program. Since then, we have made several revisions and technical 
corrections to those rules. This final rule amends the regulations to 
specify how issuers are to account for payments or receipts from the 
risk adjustment, reinsurance, and risk corridors programs, and to 
change the timing of the annual MLR report and distribution of rebates 
required of issuers to account for the premium stabilization programs. 
This final rule also amends the regulations to revise the treatment of 
community benefit expenditures in the MLR calculation for issuers 
exempt from Federal income tax to promote a level playing field.

B. Summary of the Major Provisions

    This final rule fills in the framework established by the Premium 
Stabilization Rule with provisions and parameters for the three premium 
stabilization programs--the permanent risk adjustment program, the 
transitional reinsurance program, and the temporary risk corridors 
program. It also establishes key provisions governing advance payments 
of the premium tax credit, cost-sharing reductions, and user fees for 
Federally-facilitated Exchanges. Finally, the final rule includes a 
number of amendments relating to the SHOP and the MLR program.
    Risk Adjustment: The goal of the Affordable Care Act risk 
adjustment program is to mitigate the impact of possible adverse 
selection and stabilize the premiums in the individual and small group 
markets as and after insurance market reforms are implemented. We are 
finalizing a number of standards and parameters for implementing the 
risk adjustment program, including:
     Provisions governing a State operating a risk adjustment 
program;
     The risk adjustment methodology HHS will use when 
operating risk adjustment on behalf of a State, including the risk 
adjustment model, the payments and charges methodology, and the data 
collection approach; and
     An outline of the data validation process we expect to use 
when operating risk adjustment on behalf of a State.
    Reinsurance: The Affordable Care Act directs that a transitional 
reinsurance program be established in each State to help stabilize 
premiums for coverage in the individual market from 2014 through 2016. 
In this final rule, we establish a number of standards and parameters 
for implementing the reinsurance program, including:
     Provisions excluding certain types of health insurance 
coverage and plans from reinsurance contributions;
     The national per capita contribution rate and the 
methodology for calculating the contributions to be paid by health 
insurance issuers and self-insured group health plans;
     Provisions establishing eligibility for reinsurance 
payments;
     The uniform reinsurance payment parameters and the 
approach that HHS will use to calculate and administer the reinsurance 
program on behalf of a State; and
     The distributed data collection approach we will use to 
implement the reinsurance program.
    Risk Corridors: The temporary risk corridors program permits the 
Federal government and QHPs to share in profits or losses resulting 
from inaccurate rate setting from 2014 through 2016. We are finalizing 
a change to the risk corridors calculation in which reinsurance 
contributions will be treated as a regulatory fee instead of an 
adjustment to allowable costs, and are replacing the term ``taxes'' in 
our proposed definition of taxes with the term ``taxes and regulatory 
fees.'' We are also finalizing provisions governing the treatment of 
profits and taxes and regulatory fees within the risk corridors 
calculation. This provision aligns the risk corridors calculation with 
the MLR calculation. We are also finalizing an annual schedule for the 
program and standards for data submissions.
    Advance Payments of the Premium Tax Credit: Sections 1401 and 1411 
of the Affordable Care Act provide for advance payments of the premium 
tax credit for low- and moderate-income enrollees in a QHP through an 
Exchange. In this final rule, we are finalizing a number of standards 
governing the administration of this program, including:
     Provisions governing the reduction of premiums by the 
amount of any advance payments of the premium tax credit; and
     Provisions governing the allocation of premiums to 
essential health benefits.
    Cost-Sharing Reductions: Sections 1402 and 1412 of the Affordable 
Care Act provide for reductions in cost sharing on essential health 
benefits for low- and moderate-income enrollees in silver level health 
plans offered in the individual market on Exchanges. It also provides 
for reductions in cost sharing for Indians enrolled in QHPs at any 
metal level. In this final rule, we establish a number of standards 
governing the cost-sharing reduction program, including:
     Provisions governing the design of variations of QHPs with 
cost-sharing structures for enrollees of various income levels and for 
Indians to implement cost-sharing reductions;

[[Page 15413]]

     The maximum annual limitations on cost sharing applicable 
to the plan variations;
     Provisions governing the assignment and reassignment of 
enrollees to plan variations based on eligibility for cost-sharing 
reductions;
     Provisions governing issuer submissions of estimates of 
cost-sharing reductions, which are paid in advance to QHP issuers by 
the Federal government; and
     Provisions governing reconciliation of these advance 
estimates against actual cost-sharing reductions provided.
    User Fees: This final rule establishes a user fee, calculated as a 
percentage of the premium for a QHP, applicable to issuers 
participating in a Federally-facilitated Exchange. This final rule also 
outlines HHS's approach to calculating the fee.
    SHOP: Beginning in 2014, SHOP Exchanges will allow small employers 
to offer employees a variety of QHPs. In this final rule, we establish 
a number of standards and processes for implementing SHOP Exchanges, 
including:
     Standards governing the definitions and counting methods 
used to determine whether an employer is a small or large employer and 
whether an employee is a full-time employee;
     A method for employers to make a QHP available to 
employees in the Federally-facilitated SHOP (FF-SHOP);
     The default minimum participation rate in the FF-SHOP;
     QHP standards linking FFE and FF-SHOP participation and 
ensuring broker commissions in FF-SHOP that are the same as those in 
the outside market; and
     Allowing Exchanges and SHOPs to selectively list only 
brokers registered with the Exchange or SHOP (and adopting that policy 
for FFEs and FF-SHOPs).
    MLR: The MLR program requires an issuer to rebate a portion of 
premiums if its medical loss ratio falls short of the applicable 
standard for the reporting year. This ratio is calculated as the sum of 
health care claims costs and amounts spent on quality improvement 
activities divided by premium revenue, excluding taxes and regulatory 
fees, and after accounting for the premium stabilization programs. In 
this final rule, we establish a number of standards governing the MLR 
program, including:
     Provisions accounting for risk adjustment, reinsurance, 
and risk corridors payments and charges in the MLR calculation;
     A revised timeline for MLR reporting and rebates; and
     Provisions modifying the treatment of community benefit 
expenditures.

C. Costs and Benefits

    The provisions of this final rule, combined with other provisions 
in the Affordable Care Act, will improve the individual insurance 
market by making insurance more affordable and accessible to millions 
of Americans who currently do not have affordable options available to 
them. The shortcomings of the individual market today have been widely 
documented.\4\
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    \4\ Michelle M. Doty et al., Failure to Protect: Why the 
Individual Insurance Market Is Not a Viable Option for Most U.S. 
Families: Findings from the Commonwealth Fund Biennial Health 
Insurance Survey, 2007, The Commonwealth Fund, July 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011.
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    These limitations of the individual market are made evident by how 
few people actually purchase coverage in the individual market. In 
2011, approximately 48.6 million people were uninsured in the United 
States,\5\ while only around 10.8 million were enrolled in the 
individual market.\6\ The relatively small fraction of the target 
market that actually purchases coverage in the individual market in 
part reflects people's resources, how expensive the product is relative 
to its value, and how difficult it is for many people to access 
coverage.
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    \5\ 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.
    \6\ Source: CMS analysis of June 2012 Medical Loss Ratio Annual 
Reporting data for 2011 MLR reporting year, available at http://cciio.cms.gov/resources/data/mlr.html.
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    The provisions of this final rule, combined with other provisions 
in the Affordable Care Act, will improve the functioning of both the 
individual and the small group markets while stabilizing premiums. The 
transitional reinsurance program will help to stabilize premiums in the 
individual market. Reinsurance will attenuate individual market rate 
increases that might otherwise occur because of the immediate 
enrollment of higher risk individuals, potentially including those 
currently in State high-risk pools. In 2014, it is anticipated that 
reinsurance payments will result in premium decreases in the individual 
market of between 10 and 15 percent relative to the expected cost of 
premiums without reinsurance.
    The risk corridors program will protect QHP issuers in the 
individual and small group market against inaccurate rate setting and 
will permit issuers to lower rates by not adding a risk premium to 
account for perceived uncertainties in the 2014 through 2016 markets.
    The risk adjustment program protects against the potential of 
adverse selection by allowing issuers to set premiums according to the 
average actuarial risk in the individual and small group market without 
respect to the type of risk selection the issuer would otherwise expect 
to experience with a specific product offering in the market. This 
should lower the risk issuers would otherwise price into premiums in 
the expectation of enrolling individuals with unknown health status. In 
addition, it mitigates the incentive for health plans to avoid 
unhealthy members. The risk adjustment program also serves to level the 
playing field inside and outside of the Exchange.
    Provisions addressing advance payments of the premium tax credit 
and cost-sharing reductions will help provide financial assistance for 
certain eligible individuals enrolled in QHPs through the Exchanges. 
This assistance will help many low-and moderate-income individuals and 
families obtain health insurance. For many people, cost sharing is a 
significant barrier to obtaining needed health care.\7\ The 
availability of premium tax credits and cost-sharing reductions through 
Exchanges starting in 2014 will result in lower net premium rates for 
many people currently purchasing coverage in the individual market, and 
will encourage younger and healthier enrollees to enter the market, 
leading to a healthier risk pool and to reductions in premium rates for 
current policyholders.\8\
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    \7\ Brook, Robert H., John E. Ware, William H. Rogers, Emmett B. 
Keeler, Allyson Ross Davies, Cathy D. Sherbourne, George A. 
Goldberg, Kathleen N. Lohr, Patricia Camp and Joseph P. Newhouse. 
The Effect of Coinsurance on the Health of Adults: Results from the 
RAND Health Insurance Experiment. Santa Monica, CA: RAND 
Corporation, 1984. Available at: http://www.rand.org/pubs/reports/R3055.
    \8\ Congressional Budget Office, Letter to Honorable Evan Bayh, 
providing an Analysis of Health Insurance Premiums Under the Patient 
Protection and Affordable Care Act, November 30, 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The 
Coverage and Cost Effects of Implementation of the Affordable Care 
Act in New York State, Urban Institute, March 2012.
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    The provisions addressing SHOP Exchanges will reduce the burden and 
costs of enrolling employees in small group plans, and give small 
businesses many of the cost advantages and choices that large 
businesses already have. Additionally, SHOP Exchanges will

[[Page 15414]]

allow for small employers to preserve control over health plan choices 
while saving employers money by spreading issuers' administrative costs 
across more employers.
    The provisions addressing the MLR program will result in a more 
accurate calculation of MLR and rebate amounts, since it will reflect 
issuers' claims-related expenditures, after adjusting for the premium 
stabilization programs.
    Issuers may incur some one-time fixed costs to comply with the 
provisions of the final rule, including administrative and hardware 
costs. However, issuer revenues and expenditures are also expected to 
increase substantially as a result of the expected increase in the 
number of people purchasing individual market coverage. In addition, 
States may incur administrative and operating costs if they choose to 
establish their own programs. In accordance with Executive Orders 12866 
and 13563, we believe that the benefits of this regulatory action would 
justify the costs.

II. Background

    Starting in 2014, individuals and small businesses will be able to 
purchase qualified health plans--private health insurance that has been 
certified as meeting certain standards--through competitive 
marketplaces, called Exchanges. The Department of Health and Human 
Services, the Department of Labor, and the Department of the Treasury 
have been working in close coordination to release guidance related to 
qualified health plans and Exchanges in several phases. The Patient 
Protection and Affordable Care Act (Pub. L. 111-148) was enacted on 
March 23, 2010. The Health Care and Education Reconciliation Act (Pub. 
L. 111-152) was enacted on March 30, 2010. We refer to the two statutes 
collectively as the Affordable Care Act in this final rule. HHS 
published detail and parameters related to the risk adjustment, 
reinsurance, and risk corridors programs; cost-sharing reductions; user 
fees for Federally-facilitated Exchanges; advance payments of the 
premium tax credit; the Federally-facilitated Small Business Health 
Option Program; and the medical loss ratio program, in a December 7, 
2012 Federal Register proposed rule entitled ``Patient Protection and 
Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 
2014'' (77 FR 73118).

A. Premium Stabilization

    A proposed regulation was published in the Federal Register on July 
15, 2011 (76 FR 41930) to implement health insurance premium 
stabilization policies in the Affordable Care Act. The Premium 
Stabilization Rule implementing the health insurance premium 
stabilization programs (that is, risk adjustment, reinsurance, and risk 
corridors) (Premium Stabilization Rule) (77 FR 17220) was published in 
the Federal Register on March 23, 2012. A white paper on risk 
adjustment concepts was published on September 12, 2011 (Risk 
Adjustment White Paper). A bulletin was published on May 1, 2012, 
outlining our intended approach to implementing risk adjustment when we 
are operating risk adjustment on behalf of a State (Risk Adjustment 
Bulletin). On May 7 and 8, 2012, we hosted a public meeting in which we 
discussed that approach (Risk Adjustment Spring Meeting).
    A bulletin was published on May 31, 2012, outlining our intended 
approach to making reinsurance payments to issuers when we are 
operating the reinsurance program on behalf of a State (Reinsurance 
Bulletin). HHS solicited comment on proposed operations for both 
reinsurance and risk adjustment when we are operating the program on 
behalf of a State.

B. Cost-Sharing Reductions

    The AV/CSR Bulletin was published on February 24, 2012 outlining an 
intended regulatory approach to calculating actuarial value and 
implementing cost-sharing reductions. In that bulletin, we outlined an 
intended regulatory approach for the design of plan variations for 
individuals eligible for cost-sharing reductions and advance payments 
and reimbursement of cost-sharing reductions to issuers, among other 
topics. We reviewed and considered comments to the AV/CSR Bulletin in 
developing the provisions relating to cost-sharing reductions in this 
final rule.

C. Advance Payments of the Premium Tax Credit

    A proposed regulation relating to the health insurance premium tax 
credit was published by the Department of the Treasury in the Federal 
Register on August 17, 2011 (76 FR 50931). A final rule relating to the 
health insurance premium tax credit was published by the Department of 
the Treasury in the Federal Register on May 23, 2012 (77 FR 30377, to 
be codified at 26 CFR parts 1 and 602).

D. Exchanges

    A Request for Comment relating to Exchanges was published in the 
Federal Register on August 3, 2010 (75 FR 45584). An Initial Guidance 
to States on Exchanges was issued on November 18, 2010. A proposed 
regulation was published in the Federal Register on July 15, 2011 (76 
FR 41866) to implement components of the Exchange. A proposed 
regulation regarding Exchange functions in the individual market, 
eligibility determinations, and Exchange standards for employers was 
published in the Federal Register on August 17, 2011 (76 FR 51202). A 
final rule implementing components of the Exchanges and setting forth 
standards for eligibility for Exchanges (Exchange Establishment Rule) 
was published in the March 27, 2012 Federal Register (77 FR 18310).
    A proposed rule which, among other things, reflects new statutory 
eligibility provisions, titled ``Medicaid, Children's Health Insurance 
Programs, and Exchanges: Essential Health Benefits in Alternative 
Benefit Plans, Eligibility Notices, Fair Hearing and Appeal Processes 
for Medicaid and Exchange Eligibility Appeals and Other Provisions 
Related to Eligibility and Enrollment for Exchanges, Medicaid and CHIP, 
and Medicaid Premiums and Cost Sharing'' was published in the January 
22, 2013 Federal Register (78 FR 4594) (Medicaid and Exchange 
Eligibility Appeals and Notices).

E. Market Reform Rules

    A notice of proposed rulemaking relating to market reforms and 
effective rate review was published in the Federal Register on November 
26, 2012 (77 FR 70584). The final rule was made available for public 
inspection at the Office of the Federal Register on February 22, 2013 
(Market Reform Rule).

F. Essential Health Benefits and Actuarial Value

    A notice of proposed rulemaking relating to essential health 
benefits and actuarial value was published in the Federal Register on 
November 26, 2012 (77 FR 70644). The final rule was published in the 
Federal Register on February 25, 2013 (78 FR 12834) (EHB/AV Rule).

G. Medical Loss Ratio

    HHS published a request for comment on section 2718 of the PHS Act 
in the April 14, 2010 Federal Register (75 FR 19297), and published an 
interim final rule with 60-day comment period relating to MLR program 
on December 1, 2010 (75 FR 74864). An interim final rule with 30-day 
comment period and a final rule with 30-day comment period were 
published in the Federal Register on December 7, 2011 (76 FR 76596 and 
76574). A final rule was published in

[[Page 15415]]

the Federal Register on May 16, 2012 (77 FR 28790).

H. Tribal Consultations

    Following publication of the proposed rule, we issued a letter to 
Tribal leaders seeking input on the provisions of the proposed rule. We 
also discussed the provisions of the proposed rule in an all-Tribes 
webinar and conference call and in two meetings with the Tribal 
Technical Advisory Group. We considered the comments offered during 
these discussions in developing the provisions in this final rule.

III. Provisions of the Proposed Rule and Responses to Public Comments

    We received approximately 420 comments from consumer advocacy 
groups, health care providers, employers, health insurers, health care 
associations, and individuals. The comments ranged from general support 
or opposition to the proposed provisions to very specific questions or 
comments regarding proposed changes. In this section, we summarize the 
provisions of the proposed rule and discuss and provide responses to 
the comments (with the exception of comments on the paperwork burden or 
the economic impact analysis, which we discuss in those sections of 
this final rule). We have carefully considered these comments in 
finalizing this rule.
    Comment: We received a number of comments requesting that the 
comment period be extended to 60 days.
    Response: HHS provided a 30-day comment period, which is consistent 
with the Administrative Procedure Act. We note that HHS previously 
sought and received significant comment on the Risk Adjustment White 
Paper, the Risk Adjustment Bulletin, presentations made during the Risk 
Adjustment Spring Meeting, the Reinsurance Bulletin, the AV/CSR 
Bulletin, and the Premium Stabilization Rule, which outlined the policy 
proposed in the proposed rule. HHS believes that interested 
stakeholders had adequate opportunity to provide comment on the 
policies established in this final rule.
    Comment: One commenter requested that HHS issue a separate final 
rule containing provisions for each part of the Code of Federal 
Regulations.
    Response: As noted in the Premium Stabilization Rule, the proposed 
rule, and this final rule, many of the programs covered by this rule 
are closely linked. To simplify the regulatory process, facilitate 
public comment, and provide the information needed to meet statutory 
deadlines, we elected to propose and finalize these regulatory 
provisions in one rule.
    Comment: We received several comments pertaining to the proposed 
EHB/AV Rule and the proposed Market Reform Rule.
    Response: Those comments are addressed in the final EHB/AV Rule and 
the final Market Reform Rule.
    Comment: One commenter suggested that the standards set forth by 
HHS pertaining to the HHS-operated risk adjustment or reinsurance 
programs be the minimum requirements for State-operated risk adjustment 
or reinsurance programs.
    Response: HHS aims to provide States with flexibility in 
implementing these programs while ensuring that the goals of the 
premium stabilizations programs are being met. Many of the provisions 
applicable to the risk adjustment and reinsurance programs when 
operated by a State are also applicable to these programs when operated 
by HHS on behalf of a State.
    Comment: Several commenters asked that HHS monitor and oversee the 
implementation of the premium stabilization programs.
    Response: HHS takes seriously its responsibility to monitor the 
implementation of these programs to protect consumers, prevent fraud 
and abuse, and ensure the programs achieve their goals. We will provide 
further detail on the oversight of these programs in future rulemaking 
and guidance.

A. Provisions for the State Notice of Benefit and Payment Parameters

    In Sec.  153.100(c), we proposed to require that, for benefit year 
2014 only, a State must publish a State notice by March 1, 2013, or by 
the 30th day following publication of the final HHS notice of benefit 
and payment parameters for 2014, whichever is later. Because the 
effective date of this rule will be 60 days after its publication, we 
will not finalize the proposed change to Sec.  153.100(c). 
Nevertheless, consistent with our proposal, we are finalizing our 
policy that, for 2014 only, a State must publish a State notice of 
benefit and payment parameters by the 30th day following publication of 
this final rule by deeming the March 1 deadline specified in the 
existing regulation to be extended until the date that is 30 days after 
publication of this final rule.
    Comment: A number of commenters supported the proposed deadline 
extension for benefit year 2014, while others opposed such an 
extension. Some suggested that HHS not allow States to operate risk 
adjustment or reinsurance.
    Response: We believe that States should have the flexibility to 
operate risk adjustment and reinsurance. Because of the publication 
date of this final rule, it is clear that a State will not have the 
notice necessary to publish a State notice of benefit and payment 
parameters by the deadline specified in the regulation--that is, March 
1, 2013 for the 2014 benefit year. Thus, as described above, although 
we are not finalizing our proposal to amend the regulation, we are 
setting the deadline for 2014 only as the 30th day after publication of 
this final rule.

B. Provisions and Parameters for the Permanent Risk Adjustment Program

    The risk adjustment program is a permanent program created by 
Section 1343 of the Affordable Care Act that transfers funds from lower 
risk, non-grandfathered plans to higher risk, non-grandfathered plans 
in the individual and small group markets, inside and outside the 
Exchanges. In subparts D and G of the Premium Stabilization Rule, we 
established standards for the administration of the risk adjustment 
program. A State approved or conditionally approved by the Secretary to 
operate an Exchange may establish a risk adjustment program, or have 
HHS do so on its behalf. Section 1343 of the Affordable Care Act 
requires each State to operate a risk adjustment program. In States 
that have elected not to operate their own risk adjustment program, HHS 
will operate a program on their behalf. Our authority to operate risk 
adjustment on the State's behalf arises from sections 1321(c)(1) and 
1343 of the Affordable Care Act. Based on HHS's communications with 
States, as of February 25, 2013, Massachusetts is the only State 
electing to operate a risk adjustment program for the 2014 benefit 
year.
    In the Premium Stabilization Rule, we established that a risk 
adjustment program is operated using a risk adjustment methodology. 
States operating their own risk adjustment program may use a risk 
adjustment methodology developed by HHS, or may elect to submit an 
alternate methodology to HHS for approval. In the Premium Stabilization 
Rule, we also laid out standards for States and issuers with respect to 
the collection and validation of risk adjustment data.
    In section III.B.1. of the proposed rule, we proposed standards for 
HHS approval of a State-operated risk adjustment program (regardless of 
whether a State elects to use the HHS-developed methodology or an 
alternate, Federally certified risk adjustment methodology). In section 
III.B.2. of the proposed rule, we proposed a small fee to support HHS 
operation of the risk adjustment program. In section III.B.3. of the 
proposed rule, we described the

[[Page 15416]]

methodology that HHS would use when operating a risk adjustment program 
on behalf of a State. States operating a risk adjustment program can 
use this methodology, or submit an alternate methodology, in a process 
we described in section III.B.4. of the proposed rule. Finally, in 
section III.B.5. of the proposed rule, we described the data validation 
process we proposed to use when operating a risk adjustment program on 
behalf of a State. (These provisions are discussed fully in the 
proposed rule at 77 FR at 73123-73149).
1. Approval of State-Operated Risk Adjustment
a. Risk Adjustment Approval Process
    In the proposed rule, we proposed an approval process for States 
seeking to operate their own risk adjustment program. Specifically, we 
proposed a new paragraph (c) in Sec.  153.310, entitled ``State 
responsibility for risk adjustment,'' which sets forth a State's 
responsibilities with regard to risk adjustment program operations. 
With this change, we also proposed to redesignate paragraphs (c) and 
(d) to paragraphs (e) and (f) of Sec.  153.310.
    In paragraph Sec.  153.310(c)(1), we proposed that if a State is 
operating a risk adjustment program for a benefit year, the State 
administer the program through an entity that meets certain standards. 
These standards would ensure the entity has the capacity to operate the 
risk adjustment program throughout the benefit year, and is able to 
administer the Federally certified risk adjustment methodology the 
State has chosen to use.
    As proposed in Sec.  153.310(c)(1)(i), the entity must be 
operationally ready to implement the applicable Federally certified 
risk adjustment methodology and process the resulting payments and 
charges. We believe that it is important for a State to demonstrate 
that its risk adjustment entity has the capacity to implement the 
applicable Federally certified risk adjustment methodology so that 
issuers may have confidence in the program, and so that the program can 
effectively mitigate the potential effects of adverse selection. To 
meet this standard, we proposed that a State demonstrate that the risk 
adjustment entity: (1) Have systems in place to implement the data 
collection approach, to calculate individual risk scores, and calculate 
issuers' payments and charges in accordance with the applicable 
Federally certified risk adjustment methodology; and (2) have tested, 
or have plans to test, the functionality of the system that would be 
used for risk adjustment operations prior to the start of the 
applicable benefit year. We proposed that States also demonstrate that 
the entity has legal authority to carry out risk adjustment program 
operations, and has the resources to administer the applicable risk 
adjustment methodology in its entirety, including the ability to make 
risk adjustment payments and collect risk adjustment charges.
    We proposed in paragraph Sec.  153.310(c)(1)(ii) that the entity 
have relevant experience to operate a risk adjustment program. To meet 
this standard, we proposed that a State demonstrate that the entity 
have on staff, or have contracted with, individuals or firms with 
experience relevant to the implementation of a risk adjustment 
methodology. This standard is intended to ensure that the entity has 
the resources and staffing necessary to successfully operate the risk 
adjustment program.
    We proposed in paragraph Sec.  153.310(c)(2) that a State seeking 
to operate its own risk adjustment program ensure that the risk 
adjustment entity complies with all applicable provisions of subpart D 
of 45 CFR part 153 in the administration of the applicable Federally 
certified risk adjustment methodology. In particular, we proposed that 
the State ensure that the entity complies with the privacy and security 
standards set forth in Sec.  153.340.
    We proposed in Sec.  153.310(c)(3) that the State conduct oversight 
and monitoring of risk adjustment activities in order for HHS to 
approve the State's risk adjustment program. Because the integrity of 
the risk adjustment program has important implications for issuers and 
enrollees, we proposed to consider the State's plan to monitor the 
conduct of the entity.
    Finally, we proposed in Sec.  153.310(d) that a State submit to HHS 
information that establishes that it and its risk adjustment entity 
meet the criteria set forth in Sec.  153.310(c).
    Comment: Commenters generally agreed with our approach to approving 
State risk adjustment programs beginning in benefit year 2015.
    Response: We are finalizing these provisions as proposed.
b. Risk Adjustment Approval Process for Benefit Year 2014
    Because of the unique timing issues for approving a State-operated 
risk adjustment program, we proposed a transitional policy for benefit 
year 2014. We proposed not to require that a State-operated risk 
adjustment program receive approval for benefit year 2014. Instead, we 
proposed a transitional, consultative process that would commence 
shortly after the provisions of this final rule are effective. We are 
finalizing these provisions as proposed.
    Comment: One commenter supported the transitional process but urged 
that the transitional process not be applied to future years. Another 
commenter requested that HHS require approval in 2014, but make the 
approval determination on the basis of the proposed consultative 
process. Other commenters suggested that HHS not allow States to 
conduct risk adjustment until the agency could formally approve States, 
beginning in 2015.
    Response: We proposed the transitional policy based on the unique 
circumstances of 2014, and we do not anticipate extending it to future 
years. Although we are mindful of concerns that States may not be fully 
ready to operate a complex risk adjustment program for benefit year 
2014, we note that each aspect of a State's operations (including data 
collection) must be performed in line with one of the Federally 
certified risk adjustment methodologies published in this final rule. 
Finally, we note that any State that begins operation of risk 
adjustment under this transitional process must obtain formal 
certification for benefit year 2015. We believe this process is 
sufficiently robust to ensure any State operating risk adjustment in 
2014 will be prepared to do so.
2. Risk Adjustment User Fees
    In the proposed rule, we noted that, if a State is not approved to 
operate or chooses to forgo operating its own risk adjustment program, 
HHS would operate risk adjustment on the State's behalf. Our authority 
to operate risk adjustment on the State's behalf arises from sections 
1321(c)(1) and 1343 of the Affordable Care Act. In States where HHS is 
operating risk adjustment, we proposed that issuers of risk adjustment 
covered plans remit a user fee to fund HHS's operation of a Federally 
operated risk adjustment program. The authority to charge this user fee 
can be found under sections 1343, 1311(d)(5), and 1321(c)(1) of the 
statute, and under 31 U.S.C. 9701, which permits a Federal agency to 
establish a charge for a service provided by the agency. OMB Circular 
No. A-25R, which establishes Federal policy regarding user fees, 
specifies that a user charge will be assessed against each identifiable 
recipient of special benefits derived from Federal activities beyond 
those received by the general public. The risk adjustment program will 
provide special benefits as defined in section 6(a)(1)(b) of OMB 
Circular No. A-25R to an issuer of a risk adjustment covered plan 
because it will mitigate the

[[Page 15417]]

financial instability associated with adverse selection as other market 
reforms go into effect. The risk adjustment program will also 
contribute to consumer confidence in the insurance industry by helping 
to stabilize premiums across the individual and small group health 
insurance markets.
    We further proposed to determine the total amount needed to fund 
HHS risk adjustment operations by examining the contract costs of 
operating the program, including development of the model and 
methodology, collections, payments, account management, data 
collection, program integrity and audit functions, operational and 
fraud analytics, stakeholder training, and operational support (not 
including Federal personnel costs). We proposed to develop a per capita 
user fee rate by dividing the amount we intend to collect over the 
course of the benefit year by the expected annual enrollment in risk 
adjustment covered plans (other than plans not subject to market 
reforms and student health plans) for that benefit year. We also 
proposed a standardized schedule for assessment and collection of risk 
adjustment user fees. Although the user fees would be assessed on a 
per-enrollee-per-month basis to account for fluctuations in monthly 
enrollment, we proposed to collect them only once, in June of the year 
following the benefit year, in order to synchronize user fee collection 
with risk adjustment payments and charges.
    Based on comments received, we are adding Sec.  153.610(f), 
finalizing our risk adjustment user fee assessment and collection 
approach as proposed. We clarify that enrollment data for each month 
will be captured by the servers used in the distributed data collection 
approach. We are also finalizing our intention to set a per capita user 
fee rate in the annual HHS notice of benefit and payment parameters 
using the proposed methodology. The user fee will be determined by 
dividing HHS's total contract costs for risk adjustment operations in 
the applicable benefit year by the expected annual enrollment in risk 
adjustment covered plans for that benefit year. Based on this 
methodology, for benefit year 2014, we are establishing a per capita 
annual user fee rate of $0.96, which we will apply as a per-enrollee-
per-month risk adjusted user fee of $0.08.
    Comment: One commenter expressed support for the proposal to 
collect user fees to fund HHS risk adjustment operations. Other 
commenters, though not commenting on risk adjustment user fees 
specifically, urged HHS to minimize or eliminate the fees it collects 
from issuers in order to maintain affordable coverage in the post-2014 
health insurance market.
    Response: We believe that a reliable funding source is necessary to 
ensure a robust Federal risk adjustment program. We clarify that we are 
establishing the risk adjustment user fee for the sole purpose of 
funding HHS's costs for operating the Federal risk adjustment program, 
and we intend to keep the user fee amount as low as possible.
3. Overview of the Risk Adjustment Methodology HHS Will Implement When 
Operating Risk Adjustment on Behalf of a State
    The goal of the risk adjustment program is to stabilize the 
premiums in the individual and small group markets as and after 
insurance market reforms are implemented. The risk adjustment 
methodology proposed in the proposed rule, which HHS would use when 
operating risk adjustment on behalf of a State, is based on the premise 
that premiums should reflect the differences in plan benefits and plan 
efficiency, not the health status of the enrolled population.
    Under Sec.  153.20 of the Premium Stabilization Rule, a risk 
adjustment methodology is made up of five elements:
     The risk adjustment model uses an individual's recorded 
diagnoses, demographic characteristics, and other variables to 
determine a risk score, which is a relative measure of how costly that 
individual is anticipated to be.
     The calculation of plan average actuarial risk and the 
calculation of payments and charges average all individual risk scores 
in a risk adjustment covered plan, make certain adjustments, and 
calculate the funds to be transferred between plans. In the proposed 
rule, these two elements of the methodology were presented together as 
the payment transfer formula.
     The data collection approach describes the program's 
approach to obtaining data. HHS will do so using the distributed model 
described in section III.G. of this final rule.
     The schedule for the risk adjustment program describes the 
timeframe for risk adjustment operations.
    The risk adjustment methodology addresses three considerations: (1) 
The newly insured population; (2) plan metal levels and permissible 
rating variation; and (3) the need for inter-plan transfers that net to 
zero. Risk adjustment payments or charges are calculated from the 
payment transfer formula. The key feature of the HHS risk adjustment 
methodology is that the risk score alone does not determine whether a 
plan is assessed charges or receives payments. Transfers depend not 
only on a plan's average risk score, but also on its plan-specific cost 
factors relative to the average of these factors within a risk pool 
within a State.
    As discussed in the proposed rule, the risk adjustment methodology 
developed by HHS:
     Was developed on commercial claims data for a population 
similar to the expected population to be risk adjusted;
     Uses the HCC grouping logic used in the Medicare 
population, with HCCs refined and selected to reflect the expected risk 
adjustment population;
     Calculates risk scores with a concurrent model (current 
year diagnoses predict current year costs);
     Establishes 15 risk adjustment models, one for each 
combination of metal level (platinum, gold, silver, bronze, 
catastrophic) and age group (adults, children, infants);
     Results in ``balanced'' payment transfers within a risk 
pool within a market within a State;
     Adjusts payment transfers for plan metal level, geographic 
rating area, induced demand, and age rating, so that transfers reflect 
health risk and not other cost differences; and
     Transfers funds between plans within a market within a 
State.
    We are finalizing the methodology HHS will use when operating the 
risk adjustment program as proposed, with the following modifications: 
we have included individuals over 64 in the demographic factors; we 
have updated the cost-sharing reduction (CSR) adjustment factors for 
zero cost-sharing plan variations to align with the induced demand 
factors used in the CSR program; we have made technical corrections to 
the payment transfer formula; we have clarified that geographic cost 
factors will be calculated for each risk pool in each market in a 
State; and we have clarified how transfers will be calculated at the 
plan level.
    Comment: We received many comments supporting HHS's general 
approach to the risk adjustment methodology we will use when operating 
risk adjustment on behalf of a State.
    Response: We are finalizing the methodology as proposed with minor 
modifications.
    Comment: We received one comment suggesting that current risk 
adjustment methodologies are inadequate because they do not fully 
account for the sickest patients with the most complex medical

[[Page 15418]]

conditions. Another commenter suggested that HHS take an expanded view 
of risk mitigation by working to ensure a stable risk pool.
    Response: The Affordable Care Act establishes a risk adjustment 
program, and permits the Secretary to base this program on the criteria 
and methods used in Medicare Parts C and D. While we used criteria and 
methods from Medicare when appropriate, we also customized this 
methodology to best mitigate adverse selection based on our projections 
of the 2014 marketplace. Though we anticipate making future adjustments 
to the model, we seek to balance stakeholders' desire for a stable 
model in the initial years with introducing model improvements as 
additional data becomes available. We look forward to engaging with 
stakeholders throughout this process. We believe that this program, 
along with the other 2014 market reforms, will help ensure a stable 
risk pool.
    Comment: We received one comment that HHS should provide issuers 
information to assess their risk scores and State average risk scores 
as part of the premium development process for 2014.
    Response: As noted in the proposed rule, risk adjustment transfers 
depend not only on a plan's average risk score, but also on its cost 
factors compared to the average of these factors within a risk pool 
within a market within a State. HHS does not currently have the data 
necessary to calculate the State average risk score to provide to 
issuers in time for the development of 2014 premiums. HHS contemplates 
providing technical assistance to States and issuers who are interested 
in this information.
    Comment: We received several comments that HHS should monitor the 
risk adjustment methodology's performance, with a particular focus on 
the newly insured population.
    Response: We intend to monitor the methodology's performance to 
determine future adjustments to the model, as data become available.
a. Risk Adjustment Applied to Plans in the Individual and Small Group 
Markets
    In the Premium Stabilization Rule, we defined a ``risk adjustment 
covered plan'' in Sec.  153.20 as health insurance coverage offered in 
the individual or small group markets, excluding plans offering 
excepted benefits and certain other plans, including ``any other plan 
determined not to be a risk adjustment covered plan in the annual HHS 
notice of benefit and payment parameters.'' We proposed to amend this 
definition by replacing ``and any plan determined not to be a risk 
adjustment covered plan in the annual HHS notice of benefit and payment 
parameters'' with ``and any other plan determined not to be a risk 
adjustment covered plan in the applicable Federally certified risk 
adjustment methodology.'' We noted that, under this revised definition, 
we would describe any plans not determined to be risk adjustment 
covered plans under the HHS risk adjustment methodology in the annual 
HHS notice of benefit and payment parameters, which is subject to 
notice and comment.
    We described our proposed treatment of certain types of plans 
(specifically, plans not subject to market reforms, student health 
plans, and catastrophic plans), and our proposed approach to risk 
pooling for risk adjustment purposes when a State merges markets for 
the purposes of the single risk pool provision described in section 
1312(c) of the Affordable Care Act.
    Plans not subject to market reforms: Certain types of plans 
offering non-grandfathered health insurance coverage in the individual 
and small group markets would not be subject to the insurance market 
reforms in the Market Reform Rule and the EHB/AV Rule. In addition, 
plans providing benefits through health insurance policies that begin 
in 2013, with renewal dates in 2014, would not be subject to these 
requirements until renewal in 2014. The statute specifies that the risk 
adjustment program is to assess charges on non-grandfathered health 
insurance coverage in the individual and small group markets with less 
than average actuarial risk and to make payments to non-grandfathered 
health insurance coverage in these markets with higher than average 
actuarial risk. We stated that we interpret actuarial risk to mean 
predictable risk that the issuer has not been able to compensate for 
through exclusion or pricing. In the current market, plans are 
generally not subject to the insurance market reforms that begin in 
2014 described at Sec.  147.102 (fair health insurance premiums), Sec.  
147.104 (guaranteed availability of coverage, subject to the student 
health insurance provisions at Sec.  147.145), Sec.  147.106 
(guaranteed renewability of coverage, subject to the student health 
insurance provisions at Sec.  147.145), Sec.  156.80 (single risk 
pool), and subpart B of part 156 (essential health benefits), and so 
are generally able to minimize actuarial risk by excluding certain 
conditions (for example, maternity coverage for women of child-bearing 
age) and denying coverage to those with certain high-risk conditions.
    In the proposed rule, we proposed to use the authority in section 
1343(b) of the Affordable Care Act to ``establish criteria and methods 
to be used in carrying out * * * risk adjustment activities'' for plans 
not subject to insurance market reforms at Sec.  147.102 (fair health 
insurance premiums), Sec.  147.104 (guaranteed availability of 
coverage, subject to the student health insurance provisions at Sec.  
147.145), Sec.  147.106 (guaranteed renewability of coverage, subject 
to the student health insurance provisions at Sec.  147.145), Sec.  
156.80 (single risk pool), and subpart B of part 156 (essential health 
benefits package). We stated that because plans not subject to these 
market reform rules are able to effectively minimize actuarial risk, we 
believe these plans would have uniform and virtually zero actuarial 
risk. We proposed to treat these plans separately, such that these 
plans would not be subject to risk adjustment charges and would not 
receive risk adjustment payments. Also, these plans would not be 
subject to the issuer requirements described in subparts G and H of 
part 153. We noted that plans offering coverage through policies issued 
in 2013 and subject to these requirements upon renewal would become 
subject to risk adjustment upon renewal, and would comply with the 
requirements established in subparts G and H of part 153 at that time.
    Student health plans: Only individuals attending a particular 
college or university are eligible to enroll in a student health plan 
(as described in Sec.  147.145) offered by that college or university. 
In the proposed rule, we stated our belief that student health plans, 
because of their unique characteristics, will have relatively uniform 
actuarial risk. We proposed to use the authority in section 1343(b) of 
the Affordable Care Act to ``establish criteria and methods to be used 
in carrying out * * * risk adjustment activities'' to treat these plans 
as a separate group that would not be subject to risk adjustment 
charges and would not receive risk adjustment payments. Therefore, 
these plans would not be subject to the requirements described in 
subparts G and H of part 153.
    Catastrophic plans: Unlike metal level coverage, only individuals 
age 30 and under, or individuals for whom insurance is deemed to be 
unaffordable, as specified in section 1302(e) of the Affordable Care 
Act, are eligible to enroll in catastrophic plans. Because of the 
unique characteristics of this population, we proposed to use our 
authority to establish ``criteria and methods'' to risk adjust 
catastrophic plans in a separate risk pool from the general (metal 
level) risk pool. Catastrophic plans with less than

[[Page 15419]]

average actuarial risk compared with other catastrophic plans would be 
assessed charges, while catastrophic plans with higher than average 
actuarial risk compared with other catastrophic plans would receive 
payments. We did not propose to exempt these plans from the 
requirements in subparts G and H of part 153.
    Merger of markets: Section 1312(c) of the Affordable Care Act 
directs issuers to use a single risk pool for a market--the individual 
or small group market--when developing rates and premiums. Section 
1312(c)(3) of the Affordable Care Act gives States the option to merge 
the individual and small group market into a single risk pool. To align 
risk pools for the risk adjustment program and rate development, we 
proposed to merge markets when operating risk adjustment on behalf of a 
State if the State elects to do the same for single risk pool purposes. 
When the individual and small group markets are merged, we proposed 
that the State average premium described in section III.B.3.c would be 
the average premium of all applicable individual and small group market 
plans in the applicable risk pool, and normalization under the transfer 
equation would occur across all plans in the applicable risk pool in 
the individual and small group market.
    Risk adjustment in State of licensure: Risk adjustment is a State-
based program in which funds are transferred within a market within a 
State, as described above. In general, a risk adjustment methodology 
will be linked to the rate and benefit requirements applicable under 
State and Federal law in a particular State. Such requirements may 
differ from State to State, and apply to policies filed and approved by 
the department of insurance in a State. However, a plan licensed in a 
State (and therefore subject to that State's rate and benefit 
requirements) may enroll individuals in multiple States. To help ensure 
that policies in the small group market are subject to risk adjustment 
programs linked to the State rate and benefit requirements applicable 
to that policy, we proposed in Sec.  153.360 that a risk adjustment 
covered plan be subject to risk adjustment in the State in which the 
policy is filed and approved.
    We are finalizing these provisions as proposed, with a 
clarification that risk adjustment covered plans in the small group 
market will be subject to risk adjustment in the State in which the 
employer's policy is filed and approved.
    Comment: We received a number of comments that expressed support 
for our proposed approach to student health plans, plans not subject to 
market reform rules, and catastrophic plans. Several of these 
commenters urged HHS to align the single risk pool approach to student 
health plans with the proposed approach in risk adjustment. Some 
commenters expressed concern that separately risk adjusting 
catastrophic plans would prevent the enrollees in these plans from 
contributing to the general risk pool.
    Response: Provisions related to the single risk pool provision were 
finalized in the Market Reform Rule, which was made available for 
public inspection at the Office of the Federal Register on February 22, 
2013. Non-grandfathered student health insurance coverage is exempt 
from the single risk pool requirement.
    As commenters noted, the risk adjustment program complements the 
single risk pool provision, which broadens the risk pool by including 
catastrophic claims experience in the development of the index rate. 
Because enrollment in catastrophic plans is limited to certain 
enrollees that are likely to have a different risk profile than 
enrollees in metal-level plans, we believe it is appropriate to risk 
adjust these plans in a separate risk pool. For this reason, we are 
finalizing the treatment of catastrophic plans, student health plans, 
and plans not subject to the market reform rules as proposed.
    Comment: We received comments suggesting several different 
approaches to our proposal that risk adjustment covered plans be 
subject to risk adjustment in the State in which the enrollee's policy 
is filed and approved, including that we modify the requirement to 
mirror the MLR program's situs of contract requirement, and that we 
clarify that the employer, not the enrollee, is the policyholder in the 
small group market.
    Response: We are modifying the proposed provision to clarify that 
risk adjustment covered plans in the small group will be subject to 
risk adjustment in the State in which the employer's policy is filed 
and approved.
b. Overview of the HHS Risk Adjustment Model
    The proposed HHS risk adjustment models predict plan liability for 
an enrollee based on that person's age, sex, and diagnoses (risk 
factors), producing a risk score. We proposed separate models for 
adults, children, and infants to account for cost differences in each 
of these age groups. Each HHS risk adjustment model predicts 
individual-level risk scores, but is designed to predict average group 
costs to account for risk across plans. This method accords with the 
Actuarial Standard Board's Actuarial Standard of Practice for risk 
classification.
    We are finalizing the HHS risk adjustment models as proposed with 
the following modifications: we have fixed a typographical error to 
include individuals over 64 in the demographic factors, we have 
clarified the calculation of age for infants who were born in one 
benefit year and discharged in the following benefit year, and we have 
updated the CSR adjustment factors to align with the induced demand 
factors used in the CSR program.
    Comment: We received a number of comments supporting HHS's general 
approach to establishing risk adjustment models.
    Response: We are finalizing the models as proposed with minor 
modifications.
    Comment: One commenter expressed concern that the number of HHS 
risk adjustment models proposed would create inaccuracies in the model.
    Response: The statistical performance of each of the models is well 
within the published ranges for concurrent models. The HHS risk 
adjustment models better predict plan liability because they account 
for age-related clinical and cost differences and differing plan 
liabilities due to differences in actuarial value across metal levels.
(1) Data Used To Develop the HHS Risk Adjustment Models
    In the proposed rule, we described the data used to develop (that 
is, calibrate) the HHS risk adjustment models. We proposed that the HHS 
risk adjustment models would be concurrent and not include prescription 
drug use as a predictor. Finally, we proposed separate risk adjustment 
models for each metal level because plans at different metal levels 
would have different liability for enrollees with the same expenditure 
patterns. We received the following comments about these approaches:
    Comment: We received several comments in support of HHS's decision 
not to include prescription drug data as a predictor in the HHS risk 
adjustment models. A number of other commenters suggested that HHS 
include prescription drug data as a predictor in the HHS risk 
adjustment models to improve each model's predictive accuracy, or 
consider inclusion of this data as a predictor in the future.
    Response: HHS is finalizing its proposal to exclude prescription 
drugs for the initial HHS risk adjustment models, but will consider how 
prescription drugs could be included in future HHS risk adjustment 
models.
    Comment: We received a number of comments in support of the 
concurrent

[[Page 15420]]

modeling approach, though a number of these comments suggested that we 
transition to a prospective model.
    Response: In 2014, 2013 diagnostic data for individuals enrolled in 
risk adjustment covered plans will not be available. We also anticipate 
that enrollees may move between plans, or between programs. A 
concurrent model is better able to handle changes in enrollment than a 
prospective model because individuals newly enrolling in health plans 
may not have prior data available that can be used in risk adjustment. 
We are therefore finalizing our approach to use a concurrent model. We 
plan to investigate the feasibility of transitioning to a prospective 
approach in the future.
    Comment: One commenter asked for further information about the 
standardized benefit designs used to estimate plan liability in the HHS 
risk adjustment models.
    Response: Plan liabilities were defined by applying standardized 
benefit design parameters for each given metal level to total 
expenditures. The standard benefit designs were created using the 
Actuarial Value Calculator to ensure that each benefit design aligns 
with the applicable metal level. While an individual plan's design may 
differ from the standardized benefit, we believe the design is a 
reasonable approximation for the average plan design at each metal 
level. The catastrophic plan design was estimated using the estimated 
maximum annual limitation on cost sharing described in section III.E. 
of this final rule.
    Comment: We received several comments on HHS's approach to account 
for infant claims if there is no separate infant birth claim from which 
to gather diagnoses. Some commenters encouraged HHS to require separate 
claims for mothers and infants. Some commenters recommended that HHS 
separate these claims in operations. One commenter noted that in the 
State of Washington there are legal impediments to separating claims 
for mothers and infants in the first 21 days of life.
    Response: HHS calibrated the HHS risk adjustment models by 
excluding infant claims that were bundled with the mothers, as well as 
infants without birth codes due to data limitations. In operation, 
issuers will separate infant and mother claims when possible. If an 
infant claim cannot be separated, HHS will assign the infant to the 
lowest severity category and the ``term'' maturity category. We note 
that HHS does not intend to unbundle claims in operation.
    Comment: We received one comment that data used to calibrate the 
HHS risk adjustment models will not reflect the risk adjustment 
population beginning in 2014. Several commenters suggested that the 
calibration data set did not reflect benefits that issuers will offer 
beginning in 2014.
    Response: We believe that the commercial data set used for 
calibration is a reasonable approximation of the population that will 
be risk adjusted in 2014. The calibration data set was restricted to 
individuals with prescription drug coverage, mental health coverage, 
and medical coverage, which are part of the essential health benefits 
package that issuers will offer starting in 2014.
(2) Principles of Risk Adjustment and the HCC Classification System
    We proposed to use a diagnostic classification system. A diagnostic 
classification system determines which diagnosis codes should be 
included, how the diagnosis codes should be grouped, and how the 
diagnostic groupings should interact for risk adjustment purposes. The 
ten principles that were used to develop the HCC classification system 
for the Medicare risk adjustment model also guided the creation of the 
HHS risk adjustment models that we proposed to use when HHS operates 
risk adjustment on behalf of a State. We selected 127 of the full 
classification of 264 HHS HCCs for inclusion in the HHS risk adjustment 
models.
    Comment: We received several comments in support of the HHS HCC 
classification system.
    Response: We are finalizing the HHS HCC classification system as 
proposed.
    Comment: Several commenters requested that HHS provide the ICD-9 
codes included in each HHS HCC.
    Response: We have provided this information for the proposed HHS 
risk adjustment models on our Web site at: http://cciio.cms.gov/resources/files/ra_instructions_proposed_1_2013.pdf and http://cciio.cms.gov/resources/files/ra_tables_proposed_1_2013.xlsx. We 
intend to provide a final version of these documents to reflect the HHS 
risk adjustment models in the future.
    Comment: Several commenters requested the classification of ICD-10 
codes to HHS HCCs.
    Response: We are completing the mapping of ICD-10 codes to HHS HCCs 
and will release this information in future guidance.
    Comment: Several commenters suggested that additional HHS HCCs 
should be included in the HHS risk adjustment models.
    Response: In selecting the factors to be included in the HHS risk 
adjustment models, we considered the basic criteria below to determine 
which HCCs should be included in the HHS risk adjustment model:
     Whether the HCC represents clinically significant medical 
conditions with significant costs for the target population;
     Whether there will be a sufficient sample size to ensure 
stable results for the HCC;
     Whether excluding the HCC would exclude (or limit the 
impact of) diagnoses particularly subject to discretionary coding;
     Whether the HCC identifies chronic or systematic 
conditions that represent insurance risk selection or risk 
segmentation, rather than random acute events;
     Whether the HCCs represent poor quality of care; and
     Whether the HCC is applicable to the model age group.
    We also included a factor to measure increased utilization due to 
receipt of CSRs. Each model's R-squared and predictive ratios were 
within published ranges for concurrent models. Thus, we have not 
included additional HCCs at this time.
    Comment: We received a comment in support of our approach to HHS 
HCC selection.
    Response: We are finalizing the HHS HCCs included in the HHS risk 
adjustment models as proposed.
(3) Factors Included in the HHS Risk Adjustment Models
    The proposed HHS risk adjustment models predict annualized plan 
liability expenditures using age and sex categories, HHS HCCs, and, 
where applicable, disease interactions. Dollar coefficients were 
estimated for these factors using weighted least squares regression, 
where the weight was the fraction of the year enrolled. For each model, 
the factors were the statistical regression dollar coefficients divided 
by a weighted average plan liability for the full modeling sample. Due 
to the inherent clinical and cost differences in the adult (age 21+), 
child (age 2-20), and infant (age 0-1) populations, HHS proposed 
separate risk adjustment models for each age group.
    Comment: We received a few comments suggesting the weights of 
specific factors in the HHS risk adjustment models were lower than 
expected.
    Response: The HHS risk adjustment models predict annualized plan 
liability. The factors were estimated using weighted least squares 
regression. For each risk adjustment model, the factors were the 
statistical regression

[[Page 15421]]

dollar values for each factor in the model divided by a weighted 
average plan liability for the full modeling sample. Some factors were 
grouped or constrained and thus do not exactly represent the 
statistical regression dollar value. Some factors were grouped or 
constrained to reduce model complexity, avoid inclusion of HHS HCCs 
with small sample size, limit upcoding by severity within an HCC 
hierarchy, reduce additivity within a disease group, and avoid 
coefficient values in which a lower-ranked HCC in a disease hierarchy 
had higher coefficient than a higher-ranked HCC.
    Comment: A few commenters requested that age be calculated at the 
time of enrollment. Several commenters asked that age for newborns be 
defined as date of birth rather than the age as of the last day of 
enrollment in a risk adjustment covered plan. Another commenter 
requested that HHS clarify that age determinations be consistent 
between model calibration and program operation.
    Response: The HHS risk adjustment models were calibrated using age 
as of the last month of enrollment due to data limitations. To align 
with model calibration, an enrollee's age for risk score calculation 
will be the age as of the enrollee's last day of enrollment in a risk 
adjustment covered plan in the applicable benefit year will be used for 
enrollees in program operation. We are clarifying our approach to 
calculating the age of infants who are born in a benefit year but are 
not discharged until the following year. In such a case, the infant 
will be defined as age 0 for both benefit years. For example, if an 
infant is born in December of 2014 but has a discharge date of January 
2015, the infant would be assigned age 0 for purposes of risk score 
calculation in benefit year 2014 and for the entire 2015 benefit year.
    Comment: We received comments supporting the inclusion of a 
demographic factor to account for individuals aged 65 or older. We also 
received comments requesting that the HHS risk adjustment models 
include additional factors such as income, receipt of care from an 
essential community provider, and enrollee language.
    Response: In response to comments, we made a typographical 
correction to re-label the highest adult age factor as 60+. Because 
data for individuals 65 or older is not captured in the calibration 
dataset, the estimation of a separate demographic factor for those 65 
or older is impractical at this time. Other factors such as income are 
also not feasible to include due to data limitations. Therefore, we 
have not modified the HHS risk adjustment models to include such 
factors. Tables 2, 4, and 5 contain the final factors for the HHS risk 
adjustment models.
    Comment: We received several comments that the HHS risk adjustment 
models do not appropriately account for short-term enrollment. One 
commenter suggested that risk scores for individuals that were enrolled 
for only part of a year would be inaccurate.
    Response: Our models were calibrated to account for short-term 
enrollment in several ways. First, enrollee diagnoses were included 
from the time of enrollment. Also, in the statistical estimation 
strategy for the HHS HCCs, average monthly expenditures were defined as 
the enrollee's expenditures for the enrollment period divided by the 
number of enrollment months, annualized expenditures (plan liability) 
were defined as average monthly expenditures multiplied by 12, and 
regressions were weighted by months of enrollment divided by 12. We 
believe that this statistical strategy, alongside the minimum 
enrollment requirement, ensures that monthly expenditures are correctly 
estimated for all individuals.
(4) Adjustments to Model Discussed in the Risk Adjustment White Paper
    We proposed to include an adjustment for the receipt of CSRs in the 
HHS risk adjustment models, but not to adjust for receipt of 
reinsurance payments.
    Comment: We received comments that were generally supportive of the 
CSR adjustment to risk scores. One commenter stated that the proposed 
factors do not adequately account for changes in utilization as 
enrollees in cost-sharing plan variations may also use more high cost 
services. Another commenter requested that HHS clarify whether plan 
liability for increased utilization due to CSR is accounted for by the 
CSR adjustment factor in the HHS risk adjustment models.
    Response: We are finalizing the CSR adjustment factor as proposed, 
with the modification to the typographical error described in Table 1 
below. The CSR adjustment factor for the HHS risk adjustment models is 
intended to account for the increased plan liability due to increased 
utilization of health care services by enrollees receiving CSRs.
    Comment: We received several comments that noted a typographical 
error in the zero cost-sharing adjustments.
    Response: We have revised the CSR adjustment to align with the CSR 
adjustment in section III.E. for enrollees in zero cost-sharing plan 
variations. Table 1 contains the final CSR adjustment factors.
    Comment: Several commenters supported our proposal to not adjust 
the HHS risk adjustment models for reinsurance payments.
    Response: We are finalizing our proposal to not adjust the HHS risk 
adjustment models for reinsurance payments since reinsurance is a 
temporary program and already offsets adverse selection.

               Table 1--Cost-Sharing Reduction Adjustment
------------------------------------------------------------------------
                                                              Induced
         Household income                  Plan AV          utilization
                                                              factor
------------------------------------------------------------------------
                     Silver Plan Variant Recipients
------------------------------------------------------------------------
100-150 percent of FPL............  Plan Variation 94               1.12
                                     percent.
150-200 percent of FPL............  Plan Variation 87               1.12
                                     percent.
200-250 percent of FPL............  Plan Variation 73               1.00
                                     percent.
>250 percent of FPL...............  Standard Plan 70                1.00
                                     percent.
------------------------------------------------------------------------
                      Zero Cost-Sharing Recipients
------------------------------------------------------------------------
<300 percent of FPL...............  Platinum (90                    1.00
                                     percent).
<300 percent of FPL...............  Gold (80 percent)...            1.07
<300 percent of FPL...............  Silver (70 percent).            1.12
<300 percent of FPL...............  Bronze (60 percent).            1.15

[[Page 15422]]

 
>300 percent of FPL...............  Limited Cost-Sharing            1.00
                                     Recipients.
------------------------------------------------------------------------

(5) Model Performance Statistics
    To evaluate model performance, we examined the R-squared and 
predictive ratios of the HHS risk adjustment models.
    Comment: Several commenters asked for further details on the 
statistical performance of the HHS risk adjustment models.
    Response: HHS analyzed the statistical performance of each model 
(adult, child, infant at each metal level). The R-squared (the 
percentage of individual variation explained by the model) for each 
model was within the range of published estimates for concurrent 
models.\9\ These values can be found in Table 8. Additionally, the 
predictive ratios for the overall samples for each of the 15 models 
were also within the range of published estimates.
---------------------------------------------------------------------------

    \9\ Winkelman, Ross and Syed Mehmud. ``A Comparative Analysis of 
Claims-Based Tools for Health Risk Assessment.'' Society of 
Actuaries. April 2007.
---------------------------------------------------------------------------

(6) Summary of Models
    For clarity, we describe here the HHS risk adjustment models that 
we are finalizing. An individual's risk score will be calculated for 
adults and children as the sum of the factors in the applicable model 
for the relevant age and sex categories, HHS HCCs, and, where 
applicable, disease interactions. These factors are listed below in 
Tables 2 and 4. In the adult models, an individual with at least one of 
the HCCs that comprises the severe illness indicator variable and at 
least one of the HCCs interacted with the severe illness indicator 
variable would be assigned a single interaction factor. A hierarchy is 
imposed on these interaction groups such that an individual with a high 
cost interaction is excluded from having a medium cost interaction. The 
high or the medium interaction factor would be added to demographic and 
diagnosis factors of the individual. The HCCs that comprise the severe 
illness indicator variable can be found in Table 3. The CSR adjustment 
factors listed in Table 1 are multiplied by the sum of the applicable 
demographic, HHS HCCs, and disease interaction factors.
    The infant model utilizes a mutually exclusive group approach in 
which infants are assigned a maturity category (by gestation and birth 
weight) and a severity category. There are 5 maturity categories: 
Extremely Immature; Immature; Premature/Multiples; Term; and Age 1. For 
the maturity category, age 0 infants would be assigned to one of the 
first four categories and age 1 infants would be assigned to the age 1 
category. As discussed previously, infants who are born in a benefit 
year but are not discharged until the following year will be defined as 
age 0 for both benefit years. There are 5 severity categories based on 
the clinical severity and associated costs of the non-maturity HCCs: 
Severity Level 1 (Lowest Severity) to Severity Level 5 (Highest 
Severity). All infants (age 0 or 1) are assigned to a severity category 
based on the highest severity of their non-maturity HCCs. The 5 
maturity categories and 5 severity categories would be used to create 
25 mutually exclusive interaction terms to which each infant is 
assigned. An infant who has HCCs in more than one severity category 
would be assigned to the highest of those severity categories. An 
infant who has no HCCs or only a newborn maturity HCC would be assigned 
to Severity Level 1 (Lowest). The male-age factor would be added to the 
maturity-severity category to which the infant is assigned, and the sum 
of the factors would be multiplied by the CSR adjustment factor. The 
maturity-severity factors and the HCCs that comprise these factors can 
be found in Tables 5-7.

                                  Table 2--Adult Risk Adjustment Model Factors
----------------------------------------------------------------------------------------------------------------
             Factor                  Platinum          Gold           Silver          Bronze       Catastrophic
----------------------------------------------------------------------------------------------------------------
                                               Demographic Factors
----------------------------------------------------------------------------------------------------------------
Age 21-24, Male.................           0.258           0.208           0.141           0.078           0.062
Age 25-29, Male.................           0.278           0.223           0.150           0.081           0.064
Age 30-34, Male.................           0.338           0.274           0.187           0.101           0.079
Age 35-39, Male.................           0.413           0.339           0.240           0.140           0.113
Age 40-44, Male.................           0.487           0.404           0.293           0.176           0.145
Age 45-49, Male.................           0.581           0.487           0.365           0.231           0.195
Age 50-54, Male.................           0.737           0.626           0.484           0.316           0.269
Age 55-59, Male.................           0.863           0.736           0.580           0.393           0.339
Age 60+, Male...................           1.028           0.880           0.704           0.487           0.424
Age 21-24, Female...............           0.433           0.350           0.221           0.101           0.072
Age 25-29, Female...............           0.548           0.448           0.301           0.156           0.120
Age 30-34, Female...............           0.656           0.546           0.396           0.243           0.203
Age 35-39, Female...............           0.760           0.641           0.490           0.334           0.293
Age 40-44, Female...............           0.839           0.713           0.554           0.384           0.338
Age 45-49, Female...............           0.878           0.747           0.583           0.402           0.352
Age 50-54, Female...............           1.013           0.869           0.695           0.486           0.427
Age 55-59, Female...............           1.054           0.905           0.726           0.507           0.443
Age 60+, Female.................           1.156           0.990           0.798           0.559           0.489
----------------------------------------------------------------------------------------------------------------

[[Page 15423]]

 
                                                Diagnosis Factors
----------------------------------------------------------------------------------------------------------------
HIV/AIDS........................           5.485           4.972           4.740           4.740           4.749
Septicemia, Sepsis, Systemic              13.696          13.506          13.429          13.503          13.529
 Inflammatory Response Syndrome/
 Shock..........................
Central Nervous System                     7.277           7.140           7.083           7.117           7.129
 Infections, Except Viral
 Meningitis.....................
Viral or Unspecified Meningitis.           4.996           4.730           4.621           4.562           4.550
Opportunistic Infections........           9.672           9.549           9.501           9.508           9.511
Metastatic Cancer...............          25.175          24.627          24.376          24.491          24.526
Lung, Brain, and Other Severe             11.791          11.377          11.191          11.224          11.235
 Cancers, Including Pediatric
 Acute Lymphoid Leukemia........
Non-Hodgkin`s Lymphomas and                6.432           6.150           6.018           5.983           5.970
 Other Cancers and Tumors.......
Colorectal, Breast (Age < 50),             5.961           5.679           5.544           5.500           5.483
 Kidney, and Other Cancers......
Breast (Age 50+) and Prostate              3.509           3.294           3.194           3.141           3.121
 Cancer, Benign/Uncertain Brain
 Tumors, and Other Cancers and
 Tumors.........................
Thyroid Cancer, Melanoma,                  1.727           1.559           1.466           1.353           1.315
 Neurofibromatosis, and Other
 Cancers and Tumors.............
Pancreas Transplant Status/                9.593           9.477           9.411           9.434           9.439
 Complications..................
Diabetes with Acute                        1.331           1.199           1.120           1.000           0.957
 Complications..................
Diabetes with Chronic                      1.331           1.199           1.120           1.000           0.957
 Complications..................
Diabetes without Complication...           1.331           1.199           1.120           1.000           0.957
Protein-Calorie Malnutrition....          14.790          14.790          14.786          14.862          14.883
Mucopolysaccharidosis...........           2.335           2.198           2.130           2.071           2.052
Lipidoses and Glycogenosis......           2.335           2.198           2.130           2.071           2.052
Amyloidosis, Porphyria, and                2.335           2.198           2.130           2.071           2.052
 Other Metabolic Disorders......
Adrenal, Pituitary, and Other              2.335           2.198           2.130           2.071           2.052
 Significant Endocrine Disorders
Liver Transplant Status/                  18.445          18.197          18.105          18.165          18.188
 Complications..................
End-Stage Liver Disease.........           6.412           6.102           5.974           6.001           6.012
Cirrhosis of Liver..............           2.443           2.255           2.177           2.137           2.125
Chronic Hepatitis...............           1.372           1.228           1.152           1.071           1.046
Acute Liver Failure/Disease,               4.824           4.634           4.548           4.547           4.550
 Including Neonatal Hepatitis...
Intestine Transplant Status/              77.945          78.110          78.175          78.189          78.195
 Complications..................
Peritonitis/Gastrointestinal              13.144          12.823          12.681          12.743          12.764
 Perforation/Necrotizing
 Enterocolitis..................
Intestinal Obstruction..........           7.257           6.922           6.789           6.842           6.864
Chronic Pancreatitis............           6.682           6.385           6.269           6.309           6.329
Acute Pancreatitis/Other                   3.614           3.380           3.281           3.245           3.234
 Pancreatic Disorders and
 Intestinal Malabsorption.......
Inflammatory Bowel Disease......           2.894           2.640           2.517           2.398           2.355
Necrotizing Fasciitis...........           7.878           7.622           7.508           7.545           7.559
Bone/Joint/Muscle Infections/              7.878           7.622           7.508           7.545           7.559
 Necrosis.......................
Rheumatoid Arthritis and                   3.414           3.135           3.009           2.987           2.982
 Specified Autoimmune Disorders.
Systemic Lupus Erythematosus and           1.263           1.124           1.051           0.954           0.921
 Other Autoimmune Disorders.....
Osteogenesis Imperfecta and                3.524           3.300           3.184           3.126           3.107
 Other Osteodystrophies.........
Congenital/Developmental                   3.524           3.300           3.184           3.126           3.107
 Skeletal and Connective Tissue
 Disorders......................
Cleft Lip/Cleft Palate..........           2.168           1.978           1.891           1.815           1.793
Hemophilia......................          49.823          49.496          49.321          49.330          49.329
Myelodysplastic Syndromes and             15.404          15.253          15.182          15.214          15.224
 Myelofibrosis..................
Aplastic Anemia.................          15.404          15.253          15.182          15.214          15.224
Acquired Hemolytic Anemia,                 7.405           7.198           7.099           7.090           7.089
 Including Hemolytic Disease of
 Newborn........................
Sickle Cell Anemia (Hb-SS)......           7.405           7.198           7.099           7.090           7.089
Thalassemia Major...............           7.405           7.198           7.099           7.090           7.089
Combined and Other Severe                  5.688           5.489           5.402           5.419           5.423
 Immunodeficiencies.............
Disorders of the Immune                    5.688           5.489           5.402           5.419           5.423
 Mechanism......................
Coagulation Defects and Other              3.080           2.959           2.899           2.880           2.872
 Specified Hematological
 Disorders......................
Drug Psychosis..................           3.776           3.517           3.389           3.302           3.274
Drug Dependence.................           3.776           3.517           3.389           3.302           3.274
Schizophrenia...................           3.122           2.854           2.732           2.647           2.624
Major Depressive and Bipolar               1.870           1.698           1.601           1.476           1.436
 Disorders......................
Reactive and Unspecified                   1.870           1.698           1.601           1.476           1.436
 Psychosis, Delusional Disorders
Personality Disorders...........           1.187           1.065           0.974           0.836           0.790
Anorexia/Bulimia Nervosa........           3.010           2.829           2.732           2.657           2.631
Prader-Willi, Patau, Edwards,              5.387           5.219           5.141           5.101           5.091
 and Autosomal Deletion
 Syndromes......................

[[Page 15424]]

 
Down Syndrome, Fragile X, Other            1.264           1.171           1.099           1.015           0.985
 Chromosomal Anomalies, and
 Congenital Malformation
 Syndromes......................
Autistic Disorder...............           1.187           1.065           0.974           0.836           0.790
Pervasive Developmental                    1.187           1.065           0.974           0.836           0.790
 Disorders, Except Autistic
 Disorder.......................
Traumatic Complete Lesion                 11.728          11.537          11.444          11.448          11.449
 Cervical Spinal Cord...........
Quadriplegia....................          11.728          11.537          11.444          11.448          11.449
Traumatic Complete Lesion Dorsal          10.412          10.205          10.108          10.111          10.111
 Spinal Cord....................
Paraplegia......................          10.412          10.205          10.108          10.111          10.111
Spinal Cord Disorders/Injuries..           6.213           5.969           5.861           5.843           5.836
Amyotrophic Lateral Sclerosis              3.379           3.094           2.967           2.927           2.919
 and Other Anterior Horn Cell
 Disease........................
Quadriplegic Cerebral Palsy.....           2.057           1.810           1.681           1.610           1.589
Cerebral Palsy, Except                     0.729           0.596           0.521           0.437           0.408
 Quadriplegic...................
Spina Bifida and Other Brain/              0.727           0.590           0.522           0.467           0.449
 Spinal/Nervous System
 Congenital Anomalies...........
Myasthenia Gravis/Myoneural                5.174           4.999           4.921           4.900           4.891
 Disorders and Guillain-Barre
 Syndrome/Inflammatory and Toxic
 Neuropathy.....................
Muscular Dystrophy..............           2.118           1.928           1.848           1.771           1.745
Multiple Sclerosis..............           7.441           6.971           6.764           6.830           6.850
Parkinson`s, Huntington`s, and             2.118           1.928           1.848           1.771           1.745
 Spinocerebellar Disease, and
 Other Neurodegenerative
 Disorders......................
Seizure Disorders and                      1.578           1.411           1.321           1.229           1.199
 Convulsions....................
Hydrocephalus...................           7.688           7.552           7.486           7.492           7.493
Non-Traumatic Coma, and Brain              9.265           9.102           9.022           9.026           9.025
 Compression/Anoxic Damage......
Respirator Dependence/                    40.054          40.035          40.022          40.105          40.131
 Tracheostomy Status............
Respiratory Arrest..............          12.913          12.707          12.612          12.699          12.728
Cardio-Respiratory Failure and            12.913          12.707          12.612          12.699          12.728
 Shock, Including Respiratory
 Distress Syndromes.............
Heart Assistive Device/                   33.372          33.025          32.877          32.978          33.014
 Artificial Heart...............
Heart Transplant................          33.372          33.025          32.877          32.978          33.014
Congestive Heart Failure........           3.790           3.648           3.587           3.591           3.594
Acute Myocardial Infarction.....          11.904          11.451          11.258          11.423          11.478
Unstable Angina and Other Acute            6.369           6.001           5.861           5.912           5.935
 Ischemic Heart Disease.........
Heart Infection/Inflammation,              6.770           6.611           6.537           6.530           6.528
 Except Rheumatic...............
Specified Heart Arrhythmias.....           3.363           3.193           3.112           3.063           3.046
Intracranial Hemorrhage.........          10.420          10.062           9.907           9.943           9.959
Ischemic or Unspecified Stroke..           4.548           4.304           4.215           4.242           4.256
Cerebral Aneurysm and                      5.263           5.000           4.890           4.867           4.859
 Arteriovenous Malformation.....
Hemiplegia/Hemiparesis..........           5.979           5.846           5.794           5.858           5.881
Monoplegia, Other Paralytic                4.176           4.024           3.959           3.938           3.931
 Syndromes......................
Atherosclerosis of the                    11.941          11.801          11.745          11.844          11.876
 Extremities with Ulceration or
 Gangrene.......................
Vascular Disease with                      8.228           7.996           7.896           7.922           7.932
 Complications..................
Pulmonary Embolism and Deep Vein           4.853           4.642           4.549           4.539           4.537
 Thrombosis.....................
Lung Transplant Status/                   31.457          31.161          31.030          31.131          31.161
 Complications..................
Cystic Fibrosis.................          10.510          10.142           9.957           9.960           9.962
Chronic Obstructive Pulmonary              1.098           0.978           0.904           0.810           0.780
 Disease, Including
 Bronchiectasis.................
Asthma..........................           1.098           0.978           0.904           0.810           0.780
Fibrosis of Lung and Other Lung            2.799           2.657           2.596           2.565           2.556
 Disorders......................
Aspiration and Specified                   9.052           8.934           8.883           8.913           8.924
 Bacterial Pneumonias and Other
 Severe Lung Infections.........
Kidney Transplant Status........          10.944          10.576          10.432          10.463          10.482
End Stage Renal Disease.........          37.714          37.356          37.193          37.352          37.403
Chronic Kidney Disease, Stage 5.           2.189           2.048           1.995           1.990           1.992
Chronic Kidney Disease, Severe             2.189           2.048           1.995           1.990           1.992
 (Stage 4)......................
Ectopic and Molar Pregnancy,               1.377           1.219           1.120           0.912           0.828
 Except with Renal Failure,
 Shock, or Embolism.............
Miscarriage with Complications..           1.377           1.219           1.120           0.912           0.828
Miscarriage with No or Minor               1.377           1.219           1.120           0.912           0.828
 Complications..................
Completed Pregnancy With Major             3.778           3.285           3.134           2.931           2.906
 Complications..................
Completed Pregnancy With                   3.778           3.285           3.134           2.931           2.906
 Complications..................
Completed Pregnancy with No or             3.778           3.285           3.134           2.931           2.906
 Minor Complications............
Chronic Ulcer of Skin, Except              2.515           2.371           2.313           2.304           2.304
 Pressure.......................
Hip Fractures and Pathological             9.788           9.570           9.480           9.521           9.536
 Vertebral or Humerus Fractures.
Pathological Fractures, Except             1.927           1.805           1.735           1.648           1.620
 of Vertebrae, Hip, or Humerus..
Stem Cell, Including Bone                 30.944          30.908          30.893          30.917          30.928
 Marrow, Transplant Status/
 Complications..................

[[Page 15425]]

 
Artificial Openings for Feeding           11.093          10.939          10.872          10.943          10.965
 or Elimination.................
Amputation Status, Lower Limb/             7.277           7.087           7.009           7.056           7.073
 Amputation Complications.......
----------------------------------------------------------------------------------------------------------------
                                               Interaction Factors
----------------------------------------------------------------------------------------------------------------
Severe illness x Opportunistic            12.094          12.327          12.427          12.527          12.555
 Infections.....................
Severe illness x Metastatic               12.094          12.327          12.427          12.527          12.555
 Cancer.........................
Severe illness x Lung, Brain,             12.094          12.327          12.427          12.527          12.555
 and Other Severe Cancers,
 Including Pediatric Acute
 Lymphoid Leukemia..............
Severe illness x Non-Hodgkin`s            12.094          12.327          12.427          12.527          12.555
 Lymphomas and Other Cancers and
 Tumors.........................
Severe illness x Myasthenia               12.094          12.327          12.427          12.527          12.555
 Gravis/Myoneural Disorders and
 Guillain-Barre Syndrome/
 Inflammatory and Toxic
 Neuropathy.....................
Severe illness x Heart Infection/         12.094          12.327          12.427          12.527          12.555
 Inflammation, Except Rheumatic.
Severe illness x Intracranial             12.094          12.327          12.427          12.527          12.555
 Hemorrhage.....................
Severe illness x HCC group G06            12.094          12.327          12.427          12.527          12.555
 (HCC Group 6 includes
 Myelodysplastic Syndromes and
 Myelofibrosis, and Aplastic
 Anemia)........................
Severe illness x HCC group G08            12.094          12.327          12.427          12.527          12.555
 (HCC Group 8 includes Combined
 and Other Severe
 Immunodeficiencies, and
 Disorders of the Immune
 Mechanism).....................
Severe illness x End-Stage Liver           2.498           2.648           2.714           2.813           2.841
 Disease........................
Severe illness x Acute Liver               2.498           2.648           2.714           2.813           2.841
 Failure/Disease, Including
 Neonatal Hepatitis.............
Severe illness x Atherosclerosis           2.498           2.648           2.714           2.813           2.841
 of the Extremities with
 Ulceration or Gangrene.........
Severe illness x Vascular                  2.498           2.648           2.714           2.813           2.841
 Disease with Complications.....
Severe illness x Aspiration and            2.498           2.648           2.714           2.813           2.841
 Specified Bacterial Pneumonias
 and Other Severe Lung
 Infections.....................
Severe illness x Artificial                2.498           2.648           2.714           2.813           2.841
 Openings for Feeding or
 Elimination....................
Severe illness x HCC group G03             2.498           2.648           2.714           2.813           2.841
 (HCC Group 3 includes
 Necrotizing Fasciitis and Bone/
 Joint/Muscle Infections/
 Necrosis)......................
----------------------------------------------------------------------------------------------------------------


       Table 3--HHS HCCs in the Severe Illness Indicator Variable
------------------------------------------------------------------------
                               Description
-------------------------------------------------------------------------
Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock.
Peritonitis/Gastrointestinal Perforation/Necrotizing Enter colitis.
Seizure Disorders and Convulsions.
Non-Traumatic Coma, Brain Compression/Anoxic Damage.
Respirator Dependence/Tracheostomy Status.
Respiratory Arrest.
Cardio-Respiratory Failure and Shock, Including Respiratory Distress
 Syndromes.
Pulmonary Embolism and Deep Vein Thrombosis.
------------------------------------------------------------------------


                                  Table 4--Child Risk Adjustment Model Factors
----------------------------------------------------------------------------------------------------------------
                    Factor                        Platinum       Gold        Silver       Bronze    Catastrophic
----------------------------------------------------------------------------------------------------------------
                                               Demographic Factors
----------------------------------------------------------------------------------------------------------------
Age 2-4, Male.................................        0.283        0.209        0.106        0.019         0.000
Age 5-9, Male.................................        0.196        0.140        0.064        0.005         0.000
Age 10-14, Male...............................        0.246        0.189        0.110        0.047         0.033
Age 15-20, Male...............................        0.336        0.273        0.191        0.114         0.095
Age 2-4, Female...............................        0.233        0.165        0.071        0.019         0.000
Age 5-9, Female...............................        0.165        0.113        0.048        0.005         0.000
Age 10-14, Female.............................        0.223        0.168        0.095        0.042         0.031
Age 15-20, Female.............................        0.379        0.304        0.198        0.101         0.077
----------------------------------------------------------------------------------------------------------------
                                                Diagnosis Factors
----------------------------------------------------------------------------------------------------------------
HIV/AIDS......................................        2.956        2.613        2.421        2.228         2.166
Septicemia, Sepsis, Systemic Inflammatory            17.309       17.142       17.061       17.081        17.088
 Response Syndrome/Shock......................

[[Page 15426]]

 
Central Nervous System Infections, Except            12.636       12.409       12.296       12.313        12.319
 Viral Meningitis.............................
Viral or Unspecified Meningitis...............        3.202        3.004        2.896        2.750         2.702
Opportunistic Infections......................       20.358       20.262       20.222       20.201        20.189
Metastatic Cancer.............................       34.791       34.477       34.307       34.306        34.300
Lung, Brain, and Other Severe Cancers,               11.939       11.618       11.436       11.358        11.334
 Including Pediatric Acute Lymphoid Leukemia..
Non-Hodgkin`s Lymphomas and Other Cancers and         9.354        9.071        8.908        8.806         8.774
 Tumors.......................................
Colorectal, Breast (Age < 50), Kidney, and            3.689        3.480        3.337        3.188         3.143
 Other Cancers................................
Benign/Uncertain Brain Tumors, and Other              3.308        3.084        2.954        2.814         2.769
 Cancers and Tumors \10\......................
Thyroid Cancer, Melanoma, Neurofibromatosis,          1.530        1.368        1.254        1.114         1.066
 and Other Cancers and Tumors.................
Pancreas Transplant Status/Complications......       18.933       18.476       18.264       18.279        18.289
Diabetes with Acute Complications.............        2.629        2.354        2.198        1.904         1.799
Diabetes with Chronic Complications...........        2.629        2.354        2.198        1.904         1.799
Diabetes without Complication.................        2.629        2.354        2.198        1.904         1.799
Protein-Calorie Malnutrition..................       13.930       13.794       13.726       13.751        13.759
Mucopolysaccharidosis.........................        6.177        5.867        5.696        5.642         5.625
Lipidoses and Glycogenosis....................        6.177        5.867        5.696        5.642         5.625
Congenital Metabolic Disorders, Not Elsewhere         6.177        5.867        5.696        5.642         5.625
 Classified...................................
Amyloidosis, Porphyria, and Other Metabolic           6.177        5.867        5.696        5.642         5.625
 Disorders....................................
Adrenal, Pituitary, and Other Significant             6.177        5.867        5.696        5.642         5.625
 Endocrine Disorders..........................
Liver Transplant Status/Complications.........       18.322       18.048       17.922       17.898        17.888
End-Stage Liver Disease.......................       12.960       12.754       12.650       12.622        12.614
Cirrhosis of Liver............................        1.177        1.027        0.920        0.871         0.833
Chronic Hepatitis.............................        1.177        1.027        0.920        0.807         0.775
Acute Liver Failure/Disease, Including                6.255        6.092        6.003        5.972         5.966
 Neonatal Hepatitis...........................
Intestine Transplant Status/Complications.....      106.169      106.704      106.991      107.180       107.222
Peritonitis/Gastrointestinal Perforation/            16.784       16.360       16.156       16.171        16.179
 Necrotizing Enterocolitis....................
Intestinal Obstruction........................        5.715        5.451        5.307        5.210         5.178
Chronic Pancreatitis..........................       16.692       16.315       16.148       16.163        16.166
Acute Pancreatitis/Other Pancreatic Disorders         3.843        3.685        3.584        3.471         3.434
 and Intestinal Malabsorption.................
Inflammatory Bowel Disease....................        5.049        4.673        4.471        4.320         4.271
Necrotizing Fasciitis.........................        5.829        5.551        5.398        5.318         5.292
Bone/Joint/Muscle Infections/Necrosis.........        5.829        5.551        5.398        5.318         5.292
Rheumatoid Arthritis and Specified Autoimmune         2.689        2.473        2.327        2.171         2.122
 Disorders....................................
Systemic Lupus Erythematosus and Other                1.397        1.249        1.139        0.996         0.951
 Autoimmune Disorders.........................
Osteogenesis Imperfecta and Other                     1.536        1.410        1.311        1.211         1.183
 Osteodystrophies.............................
Congenital/Developmental Skeletal and                 1.536        1.410        1.311        1.211         1.183
 Connective Tissue Disorders..................
Cleft Lip/Cleft Palate........................        1.785        1.573        1.441        1.281         1.228
Hemophilia....................................       46.388       45.839       45.551       45.541        45.535
Myelodysplastic Syndromes and Myelofibrosis...       29.387       29.168       29.063       29.075        29.078
Aplastic Anemia...............................       29.387       29.168       29.063       29.075        29.078
Acquired Hemolytic Anemia, Including Hemolytic        7.791        7.476        7.308        7.229         7.203
 Disease of Newborn...........................
Sickle Cell Anemia (Hb-SS)....................        7.791        7.476        7.308        7.229         7.203
Thalassemia Major.............................        7.791        7.476        7.308        7.229         7.203
Combined and Other Severe Immunodeficiencies..        5.690        5.455        5.339        5.270         5.247
Disorders of the Immune Mechanism.............        5.690        5.455        5.339        5.270         5.247
Coagulation Defects and Other Specified               4.909        4.754        4.650        4.543         4.511
 Hematological Disorders......................
Drug Psychosis................................        4.067        3.816        3.693        3.596         3.566
Drug Dependence...............................        4.067        3.816        3.693        3.596         3.566
Schizophrenia.................................        5.536        5.127        4.916        4.775         4.730
Major Depressive and Bipolar Disorders........        1.779        1.591        1.453        1.252         1.188
Reactive and Unspecified Psychosis, Delusional        1.779        1.591        1.453        1.252         1.188
 Disorders....................................
Personality Disorders.........................        0.935        0.832        0.723        0.511         0.441
Anorexia/Bulimia Nervosa......................        2.565        2.372        2.252        2.146         2.111
Prader-Willi, Patau, Edwards, and Autosomal           3.606        3.347        3.239        3.201         3.189
 Deletion Syndromes...........................
Down Syndrome, Fragile X, Other Chromosomal           2.403        2.203        2.093        1.982         1.943
 Anomalies, and Congenital Malformation
 Syndromes....................................
Autistic Disorder.............................        1.673        1.500        1.372        1.177         1.112
Pervasive Developmental Disorders, Except             0.963        0.850        0.723        0.511         0.441
 Autistic Disorder............................
Traumatic Complete Lesion Cervical Spinal Cord       18.394       18.224       18.156       18.210        18.228
Quadriplegia..................................       18.394       18.224       18.156       18.210        18.228
Traumatic Complete Lesion Dorsal Spinal Cord..       18.394       18.224       18.156       18.210        18.228
Paraplegia....................................       18.394       18.224       18.156       18.210        18.228
Spinal Cord Disorders/Injuries................        4.668        4.416        4.287        4.181         4.150
Amyotrophic Lateral Sclerosis and Other              14.484       14.155       13.995       13.958        13.954
 Anterior Horn Cell Disease...................
Quadriplegic Cerebral Palsy...................        5.717        5.367        5.223        5.251         5.262
Cerebral Palsy, Except Quadriplegic...........        1.899        1.672        1.557        1.447         1.412
Spina Bifida and Other Brain/Spinal/Nervous           0.943        0.785        0.686        0.592         0.562
 System Congenital Anomalies..................

[[Page 15427]]

 
Myasthenia Gravis/Myoneural Disorders and             5.301        5.071        4.950        4.861         4.832
 Guillain-Barre Syndrome/Inflammatory and
 Toxic Neuropathy.............................
Muscular Dystrophy............................        3.122        2.915        2.800        2.698         2.669
Multiple Sclerosis............................        5.370        4.996        4.806        4.769         4.752
Parkinson`s, Huntington`s, and Spinocerebellar        3.122        2.915        2.800        2.698         2.669
 Disease, and Other Neurodegenerative
 Disorders....................................
Seizure Disorders and Convulsions.............        2.188        2.012        1.882        1.702         1.644
Hydrocephalus.................................        6.791        6.630        6.550        6.521         6.513
Non-Traumatic Coma, and Brain Compression/            9.073        8.882        8.788        8.753         8.735
 Anoxic Damage................................
Respirator Dependence/Tracheostomy Status.....       34.717       34.532       34.471       34.623        34.668
Respiratory Arrest............................       14.998       14.772       14.669       14.691        14.696
Cardio-Respiratory Failure and Shock,                14.998       14.772       14.669       14.691        14.696
 Including Respiratory Distress Syndromes.....
Heart Assistive Device/Artificial Heart.......       25.734       25.262       25.057       25.189        25.225
Heart Transplant..............................       25.734       25.262       25.057       25.189        25.225
Congestive Heart Failure......................        6.292        6.159        6.073        6.013         5.992
Acute Myocardial Infarction...................        4.568        4.453        4.410        4.433         4.448
Unstable Angina and Other Acute Ischemic Heart        4.568        4.453        4.410        4.433         4.448
 Disease......................................
Heart Infection/Inflammation, Except Rheumatic       12.842       12.655       12.573       12.590        12.597
Hypoplastic Left Heart Syndrome and Other             7.019        6.823        6.668        6.528         6.480
 Severe Congenital Heart Disorders............
Major Congenital Heart/Circulatory Disorders..        2.257        2.143        2.018        1.870         1.828
Atrial and Ventricular Septal Defects, Patent         1.411        1.319        1.206        1.078         1.047
 Ductus Arteriosus, and Other Congenital Heart/
 Circulatory Disorders........................
Specified Heart Arrhythmias...................        4.483        4.276        4.141        4.052         4.026
Intracranial Hemorrhage.......................       21.057       20.757       20.616       20.617        20.618
Ischemic or Unspecified Stroke................        8.498        8.373        8.324        8.360         8.363
Cerebral Aneurysm and Arteriovenous                   4.704        4.464        4.344        4.280         4.250
 Malformation.................................
Hemiplegia/Hemiparesis........................        5.561        5.404        5.334        5.315         5.310
Monoplegia, Other Paralytic Syndromes.........        5.561        5.404        5.334        5.315         5.310
Atherosclerosis of the Extremities with              10.174        9.937        9.799        9.688         9.641
 Ulceration or Gangrene.......................
Vascular Disease with Complications...........       11.571       11.355       11.257       11.260        11.272
Pulmonary Embolism and Deep Vein Thrombosis...       13.894       13.661       13.557       13.591        13.604
Lung Transplant Status/Complications..........      100.413      100.393      100.412      100.660       100.749
Cystic Fibrosis...............................       13.530       13.006       12.743       12.739        12.742
Chronic Obstructive Pulmonary Disease,                0.521        0.458        0.354        0.215         0.175
 Including Bronchiectasis.....................
Asthma........................................        0.521        0.458        0.354        0.215         0.175
Fibrosis of Lung and Other Lung Disorders.....        5.812        5.657        5.555        5.472         5.450
Aspiration and Specified Bacterial Pneumonias        10.730       10.615       10.549       10.566        10.571
 and Other Severe Lung Infections.............
Kidney Transplant Status......................       18.933       18.476       18.264       18.279        18.289
End Stage Renal Disease.......................       43.158       42.816       42.659       42.775        42.808
Chronic Kidney Disease, Stage 5...............       11.754       11.581       11.472       11.374        11.340
Chronic Kidney Disease, Severe (Stage 4)......       11.754       11.581       11.472       11.374        11.340
Ectopic and Molar Pregnancy, Except with Renal        1.191        1.042        0.917        0.674         0.590
 Failure, Shock, or Embolism..................
Miscarriage with Complications................        1.191        1.042        0.917        0.674         0.590
Miscarriage with No or Minor Complications....        1.191        1.042        0.917        0.674         0.590
Completed Pregnancy With Major Complications..        3.419        2.956        2.778        2.498         2.437
Completed Pregnancy With Complications........        3.419        2.956        2.778        2.498         2.437
Completed Pregnancy with No or Minor                  3.419        2.956        2.778        2.498         2.437
 Complications................................
Chronic Ulcer of Skin, Except Pressure........        1.570        1.479        1.394        1.314         1.289
Hip Fractures and Pathological Vertebral or           7.389        7.174        7.022        6.882         6.842
 Humerus Fractures............................
Pathological Fractures, Except of Vertebrae,          2.353        2.244        2.128        1.965         1.912
 Hip, or Humerus..............................
Stem Cell, Including Bone Marrow, Transplant         30.558       30.485       30.466       30.522        30.538
 Status/Complications.........................
Artificial Openings for Feeding or Elimination       14.410       14.247       14.197       14.340        14.383
Amputation Status, Lower Limb/Amputation             10.174        9.937        9.799        9.688         9.641
 Complications................................
----------------------------------------------------------------------------------------------------------------

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

    \10\ This HCC also includes Breast (Age 50+) and Prostate 
Cancer.

[[Page 15428]]



                                 Table 5--Infant Risk Adjustment Models Factors
----------------------------------------------------------------------------------------------------------------
              Group                  Platinum          Gold           Silver          Bronze       Catastrophic
----------------------------------------------------------------------------------------------------------------
Extremely Immature * Severity            393.816         392.281         391.387         391.399         391.407
 Level 5 (Highest)..............
Extremely Immature * Severity            225.037         223.380         222.424         222.371         222.365
 Level 4........................
Extremely Immature * Severity             60.363          59.232          58.532          58.247          58.181
 Level 3........................
Extremely Immature * Severity             60.363          59.232          58.532          58.247          58.181
 Level 2........................
Extremely Immature * Severity             60.363          59.232          58.532          58.247          58.181
 Level 1 (Lowest)...............
Immature * Severity Level 5              207.274         205.589         204.615         204.629         204.644
 (Highest)......................
Immature * Severity Level 4.....          89.694          88.105          87.188          87.169          87.178
Immature * Severity Level 3.....          45.715          44.305          43.503          43.394          43.379
Immature * Severity Level 2.....          33.585          32.247          31.449          31.221          31.163
Immature * Severity Level 1               33.585          32.247          31.449          31.221          31.163
 (Lowest).......................
Premature/Multiples * Severity           173.696         172.095         171.169         171.111         171.108
 Level 5 (Highest)..............
Premature/Multiples * Severity            34.417          32.981          32.155          31.960          31.925
 Level 4........................
Premature/Multiples * Severity            18.502          17.382          16.694          16.311          16.200
 Level 3........................
Premature/Multiples * Severity             9.362           8.533           7.967           7.411           7.241
 Level 2........................
Premature/Multiples * Severity             6.763           6.144           5.599           4.961           4.771
 Level 1 (Lowest)...............
Term * Severity Level 5                  132.588         131.294         130.511         130.346         130.292
 (Highest)......................
Term * Severity Level 4.........          20.283          19.222          18.560          18.082          17.951
Term * Severity Level 3.........           6.915           6.286           5.765           5.092           4.866
Term * Severity Level 2.........           3.825           3.393           2.925           2.189           1.951
Term * Severity Level 1 (Lowest)           1.661           1.449           0.998           0.339           0.188
Age1 * Severity Level 5                   62.385          61.657          61.217          61.130          61.108
 (Highest)......................
Age1 * Severity Level 4.........          10.855          10.334           9.988           9.747           9.686
Age1 * Severity Level 3.........           3.633           3.299           3.007           2.692           2.608
Age1 * Severity Level 2.........           2.177           1.930           1.665           1.320           1.223
Age1 * Severity Level 1 (Lowest)           0.631           0.531           0.333           0.171           0.137
Age 0 Male......................           0.629           0.587           0.574           0.533           0.504
Age 1 Male......................           0.117           0.102           0.094           0.065           0.054
----------------------------------------------------------------------------------------------------------------


     Table 6--HHS HCCs Included in Infant Model Maturity Categories
------------------------------------------------------------------------
       Maturity category                     HCC/Description
------------------------------------------------------------------------
Extremely Immature............  Extremely Immature Newborns, Birthweight
                                 < 500 Grams.
Extremely Immature............  Extremely Immature Newborns, Including
                                 Birthweight 500-749 Grams.
Extremely Immature............  Extremely Immature Newborns, Including
                                 Birthweight 750-999 Grams.
Immature......................  Premature Newborns, Including
                                 Birthweight 1000-1499 Grams.
Immature......................  Premature Newborns, Including
                                 Birthweight 1500-1999 Grams.
Premature/Multiples...........  Premature Newborns, Including
                                 Birthweight 2000-2499 Grams.
Premature/Multiples...........  Other Premature, Low Birthweight,
                                 Malnourished, or Multiple Birth
                                 Newborns.
Term..........................  Term or Post-Term Singleton Newborn,
                                 Normal or High Birthweight.
Age 1.........................  All age 1 infants.
------------------------------------------------------------------------


     Table 7--HHS HCCs Included in Infant Model Severity Categories
------------------------------------------------------------------------
       Severity category                           HCC
------------------------------------------------------------------------
Severity Level 5 (Highest)....  Metastatic Cancer.
Severity Level 5..............  Pancreas Transplant Status/
                                 Complications.
Severity Level 5..............  Liver Transplant Status/Complications.
Severity Level 5..............  End-Stage Liver Disease.
Severity Level 5..............  Intestine Transplant Status/
                                 Complications.
Severity Level 5..............  Peritonitis/Gastrointestinal Perforation/
                                 Necrotizing Enterocolitis.
Severity Level 5..............  Respirator Dependence/Tracheostomy
                                 Status.
Severity Level 5..............  Heart Assistive Device/Artificial Heart.
Severity Level 5..............  Heart Transplant.
Severity Level 5..............  Congestive Heart Failure.
Severity Level 5..............  Hypoplastic Left Heart Syndrome and
                                 Other Severe Congenital Heart
                                 Disorders.
Severity Level 5..............  Lung Transplant Status/Complications.
Severity Level 5..............  Kidney Transplant Status.
Severity Level 5..............  End Stage Renal Disease.
Severity Level 5..............  Stem Cell, Including Bone Marrow,
                                 Transplant Status/Complications.
Severity Level 4..............  Septicemia, Sepsis, Systemic
                                 Inflammatory Response Syndrome/Shock.
Severity Level 4..............  Lung, Brain, and Other Severe Cancers,
                                 Including Pediatric Acute Lymphoid
                                 Leukemia.
Severity Level 4..............  Mucopolysaccharidosis.
Severity Level 4..............  Major Congenital Anomalies of Diaphragm,
                                 Abdominal Wall, and Esophagus, Age < 2.
Severity Level 4..............  Myelodysplastic Syndromes and
                                 Myelofibrosis.
Severity Level 4..............  Aplastic Anemia.
Severity Level 4..............  Combined and Other Severe
                                 Immunodeficiencies.

[[Page 15429]]

 
Severity Level 4..............  Traumatic Complete Lesion Cervical
                                 Spinal Cord.
Severity Level 4..............  Quadriplegia.
Severity Level 4..............  Amyotrophic Lateral Sclerosis and Other
                                 Anterior Horn Cell Disease.
Severity Level 4..............  Quadriplegic Cerebral Palsy.
Severity Level 4..............  Myasthenia Gravis/Myoneural Disorders
                                 and Guillain-Barre Syndrome/
                                 Inflammatory and Toxic Neuropathy.
Severity Level 4..............  Non-Traumatic Coma, Brain Compression/
                                 Anoxic Damage.
Severity Level 4..............  Respiratory Arrest.
Severity Level 4..............  Cardio-Respiratory Failure and Shock,
                                 Including Respiratory Distress
                                 Syndromes.
Severity Level 4..............  Acute Myocardial Infarction.
Severity Level 4..............  Heart Infection/Inflammation, Except
                                 Rheumatic.
Severity Level 4..............  Major Congenital Heart/Circulatory
                                 Disorders.
Severity Level 4..............  Intracranial Hemorrhage.
Severity Level 4..............  Ischemic or Unspecified Stroke.
Severity Level 4..............  Vascular Disease with Complications.
Severity Level 4..............  Pulmonary Embolism and Deep Vein
                                 Thrombosis.
Severity Level 4..............  Aspiration and Specified Bacterial
                                 Pneumonias and Other Severe Lung
                                 Infections.
Severity Level 4..............  Chronic Kidney Disease, Stage 5.
Severity Level 4..............  Hip Fractures and Pathological Vertebral
                                 or Humerus Fractures.
Severity Level 4..............  Artificial Openings for Feeding or
                                 Elimination.
Severity Level 3..............  HIV/AIDS.
Severity Level 3..............  Central Nervous System Infections,
                                 Except Viral Meningitis.
Severity Level 3..............  Opportunistic Infections.
Severity Level 3..............  Non-Hodgkin`s Lymphomas and Other
                                 Cancers and Tumors.
Severity Level 3..............  Colorectal, Breast (Age < 50), Kidney
                                 and Other Cancers.
Severity Level 3..............  Benign/Uncertain Brain Tumors, and Other
                                 Cancers and Tumors.\11\
Severity Level 3..............  Lipidoses and Glycogenosis.
Severity Level 3..............  Adrenal, Pituitary, and Other
                                 Significant Endocrine Disorders.
Severity Level 3..............  Acute Liver Failure/Disease, Including
                                 Neonatal Hepatitis.
Severity Level 3..............  Intestinal Obstruction.
Severity Level 3..............  Necrotizing Fasciitis.
Severity Level 3..............  Bone/Joint/Muscle Infections/Necrosis.
Severity Level 3..............  Osteogenesis Imperfecta and Other
                                 Osteodystrophies.
Severity Level 3..............  Cleft Lip/Cleft Palate.
Severity Level 3..............  Hemophilia.
Severity Level 3..............  Disorders of the Immune Mechanism.
Severity Level 3..............  Coagulation Defects and Other Specified
                                 Hematological Disorders.
Severity Level 3..............  Prader-Willi, Patau, Edwards, and
                                 Autosomal Deletion Syndromes.
Severity Level 3..............  Traumatic Complete Lesion Dorsal Spinal
                                 Cord.
Severity Level 3..............  Paraplegia.
Severity Level 3..............  Spinal Cord Disorders/Injuries.
Severity Level 3..............  Cerebral Palsy, Except Quadriplegic.
Severity Level 3..............  Muscular Dystrophy.
Severity Level 3..............  Parkinson`s, Huntington`s, and
                                 Spinocerebellar Disease, and Other
                                 Neurodegenerative Disorders.
Severity Level 3..............  Hydrocephalus.
Severity Level 3..............  Unstable Angina and Other Acute Ischemic
                                 Heart Disease.
Severity Level 3..............  Atrial and Ventricular Septal Defects,
                                 Patent Ductus Arteriosus, and Other
                                 Congenital Heart/Circulatory Disorders.
Severity Level 3..............  Specified Heart Arrhythmias.
Severity Level 3..............  Cerebral Aneurysm and Arteriovenous
                                 Malformation.
Severity Level 3..............  Hemiplegia/Hemiparesis.
Severity Level 3..............  Cystic Fibrosis.
Severity Level 3..............  Fibrosis of Lung and Other Lung
                                 Disorders.
Severity Level 3..............  Pathological Fractures, Except of
                                 Vertebrae, Hip, or Humerus.
Severity Level 2..............  Viral or Unspecified Meningitis.
Severity Level 2..............  Thyroid, Melanoma, Neurofibromatosis,
                                 and Other Cancers and Tumors.
Severity Level 2..............  Diabetes with Acute Complications.
Severity Level 2..............  Diabetes with Chronic Complications.
Severity Level 2..............  Diabetes without Complication.
Severity Level 2..............  Protein-Calorie Malnutrition.
Severity Level 2..............  Congenital Metabolic Disorders, Not
                                 Elsewhere Classified.
Severity Level 2..............  Amyloidosis, Porphyria, and Other
                                 Metabolic Disorders.
Severity Level 2..............  Cirrhosis of Liver.
Severity Level 2..............  Chronic Pancreatitis.
Severity Level 2..............  Inflammatory Bowel Disease.
Severity Level 2..............  Rheumatoid Arthritis and Specified
                                 Autoimmune Disorders.
Severity Level 2..............  Systemic Lupus Erythematosus and Other
                                 Autoimmune Disorders.
Severity Level 2..............  Congenital/Developmental Skeletal and
                                 Connective Tissue Disorders.
Severity Level 2..............  Acquired Hemolytic Anemia, Including
                                 Hemolytic Disease of Newborn.
Severity Level 2..............  Sickle Cell Anemia (Hb-SS).

[[Page 15430]]

 
Severity Level 2..............  Drug Psychosis.
Severity Level 2..............  Drug Dependence.
Severity Level 2..............  Down Syndrome, Fragile X, Other
                                 Chromosomal Anomalies, and Congenital
                                 Malformation Syndromes.
Severity Level 2..............  Spina Bifida and Other Brain/Spinal/
                                 Nervous System Congenital Anomalies.
Severity Level 2..............  Seizure Disorders and Convulsions.
Severity Level 2..............  Monoplegia, Other Paralytic Syndromes.
Severity Level 2..............  Atherosclerosis of the Extremities with
                                 Ulceration or Gangrene.
Severity Level 2..............  Chronic Obstructive Pulmonary Disease,
                                 Including Bronchiectasis.
Severity Level 2..............  Chronic Ulcer of Skin, Except Pressure.
Severity Level 1 (Lowest).....  Chronic Hepatitis.
Severity Level 1..............  Acute Pancreatitis/Other Pancreatic
                                 Disorders and Intestinal Malabsorption.
Severity Level 1..............  Thalassemia Major.
Severity Level 1..............  Autistic Disorder.
Severity Level 1..............  Pervasive Developmental Disorders,
                                 Except Autistic Disorder.
Severity Level 1..............  Multiple Sclerosis.
Severity Level 1..............  Asthma.
Severity Level 1..............  Chronic Kidney Disease, Severe (Stage
                                 4).
Severity Level 1..............  Amputation Status, Lower Limb/Amputation
                                 Complications.
Severity Level 1..............  No Severity HCCs.
------------------------------------------------------------------------

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

    \11\ This HCC also includes Breast (Age 50+) and Prostate 
Cancer.

       Table 8--R-Squared Statistic for HHS Risk Adjustment Models
------------------------------------------------------------------------
                                                              R-Squared
                   Risk adjustment model                      statistic
------------------------------------------------------------------------
Platinum Adult............................................         0.360
Platinum Child............................................         0.307
Platinum Infant...........................................         0.292
Gold Adult................................................         0.355
Gold Child................................................         0.302
Gold Infant...............................................         0.289
Silver Adult..............................................         0.352
Silver Child..............................................         0.299
Silver Infant.............................................         0.288
Bronze Adult..............................................         0.351
Bronze Child..............................................         0.296
Bronze Infant.............................................         0.289
Catastrophic Adult........................................         0.350
Catastrophic Child........................................         0.295
Catastrophic Infant.......................................         0.289
------------------------------------------------------------------------

c. Overview of the Payment Transfer Formula
    In the proposed rule, we proposed to calculate risk adjustment 
transfers after the close of the applicable benefit year, following the 
completion of issuer risk adjustment data reporting.
    Transfers are calculated at the geographic rating area level for 
each plan (HHS would calculate two separate transfer amounts for a plan 
that operates in two rating areas). In other words, the payment 
transfer formula would treat each rating area segment of enrollment as 
a separate plan for the purposes of calculating transfers. Payment 
transfer amounts would be aggregated at the issuer level (that is, at 
the level of the entity licensed by the State) such that each issuer 
would receive an invoice and a report detailing the basis for the net 
payment that would be made or the charge that would be owed. The 
invoice would also include plan-level risk adjustment information.
    The payment transfer formula is based on the difference between two 
plan premium estimates: (1) A premium based on plan-specific risk 
selection; and (2) a premium without risk selection. Transfers are 
intended to bridge the gap between these two premium estimates:
[GRAPHIC] [TIFF OMITTED] TR11MR13.000

    Conceptually, the goal of payment transfers is to provide plans 
with payments to help cover their actual risk exposure beyond the 
premiums the plans would charge reflecting allowable rating and their 
applicable cost factors. In other words, payments would help cover 
excess actuarial risk due to risk selection. Both of these premium 
estimates are based on the State average premium. The payment transfer 
formula includes the following premium adjustment terms:
     Plan average risk score: Multiplying the plan average risk 
score by the State average premium shows how a plan's premium would 
differ from the State average premium based on the risk selection 
experienced by the plan.
     Actuarial value (AV): A particular plan's premium may 
differ from the State average premium based on the plan's cost-sharing 
structure, or AV. An AV adjustment is applied to the State average 
premium to account for relative differences between a plan's AV and the 
market average AV.
     Permissible rating variation: Plan rates may differ based 
on allowable age rating factors. The rating adjustment accounts for the 
impact of allowable rating factors on the premium that would be 
realized by the plan.
     Geographic cost differences: Differences in unit costs and 
utilization

[[Page 15431]]

may lead to differences in the average premium between intra-State 
rating areas, holding other cost factors (for example, benefit design) 
constant. The geographic cost adjustment accounts for cost differences 
across rating areas.
     Induced demand: Enrollee spending patterns may vary based 
on the generosity of cost sharing. The induced demand adjustment 
accounts for greater utilization of health care services induced by 
lower enrollee cost sharing in higher metal level plans.
    The State average premium is multiplied by these factors to develop 
the plan premium estimates used in the payment transfer formula. The 
factors are relative measures that compare how plans differ from the 
market average with respect to the cost factors (that is to say, the 
product of the adjustments is normalized to the market average product 
of the cost factors).
    In the absence of these adjustments, transfers would reflect 
liability differences attributed to cost factors other than risk 
selection. For example, in the absence of the AV adjustment, a low AV 
plan with lower-risk enrollees would be overcharged because the State 
average premium would not be scaled down to reflect the fact that the 
plan's AV is lower than the average AV of plans operating in the market 
in the State.
    The figure below shows how the State average premium, the plan 
average risk score, and other plan-specific cost factors are used to 
develop the two plan premium estimates that are used to calculate 
payment transfers:
[GRAPHIC] [TIFF OMITTED] TR11MR13.001

    We are finalizing the payment transfer formula as proposed, with 
several technical corrections. We clarify that IDF stands for induced 
demand factor in the equations, and modify the denominator of the plan 
average premium formula within the State average premium and geographic 
cost factor calculations to reflect the billable member calculation. 
Therefore, the 2014 HHS risk adjustment payment transfer formula is:
[GRAPHIC] [TIFF OMITTED] TR11MR13.002

Where:
Ps= State average premium;
PLRSt = plan i's plan liability risk score;
AVi= plan i's metal level AV;
ARFi= plan i`s allowable rating factor;
IDFi = plan i's induced demand factor;
GCFi = plan i's geographic cost factor;
si = plan i's share of State enrollment;
and the denominator is summed across all plans in the risk pool in 
the market in the State.

    Risk adjustment transfers will be calculated at the risk pool 
level. Each State will have a risk pool for all of its metal-level 
plans. Catastrophic plans will be treated as a separate risk pool for 
purposes of risk adjustment. Individual and small group market plans 
will either be pooled together or treated as separate risk pools, 
depending on how the State treats these pools under the single risk 
pool provisions.
    The payment transfer formula provides a per member per month (PMPM) 
transfer amount for a plan within a rating area. The PMPM transfer 
amount derived from the payment transfer formula (TPMPM) will be 
multiplied by each plan's rating area billable member months ([Sgr]bMb) 
to calculate the plan's total risk adjustment payment for a given 
rating area (Ti).
[GRAPHIC] [TIFF OMITTED] TR11MR13.003

    Comment: We received a number of comments in support of the general 
approach to calculating payment transfers, including HHS's approach to 
adjusting for plan cost factors in the transfer equation.
    Response: We are finalizing the payment transfer formula as 
proposed with minor technical corrections, specified below.
    Comment: We received one comment requesting that HHS clarify the 
calculation of payment transfers at the plan level.
    Response: Because we have proposed and are finalizing a geographic 
cost factor, transfers must be calculated for each rating area in which 
a plan operates. However, we note that, because the denominator of each 
term of the payment transfer equation is the Statewide average of the 
product of the terms, transfers occur within the risk pool within the 
market within the State.
    Comment: We received one comment requesting that HHS provide 
detailed examples of the payment transfer formula.
    Response: We anticipate working closely with issuers and other 
stakeholders to provide examples of the payment transfer formula and 
its application in a market.
    (1) State Average Premium
    We proposed a payment transfer formula that is based on the State 
average premium for the applicable market. Plan average premiums will 
be calculated from the actual premiums charged to their enrollees, 
weighted by the number of months enrolled. We make a technical 
correction to the formula to calculate PMPM plan average premiums, as 
described below. The equations for calculating State average premiums 
were proposed as:

[[Page 15432]]

[GRAPHIC] [TIFF OMITTED] TR11MR13.004

    The second equation shows the proposed formula to calculate plan 
average premiums. The proposed formula, which we are modifying as 
described below, was the weighted mean over all subscribers s of 
subscriber premiums Ps, with Ms representing the number of billable 
member months of enrollment for each subscriber s. Due to a 
typographical error and to align with the calculation of plan average 
risk score, we have modified the denominator of the plan average 
premium equation from the proposed rule. The denominator in the revised 
formula is equal to the sum of the billable member months for all 
billable members b enrolled in the plan. The numerator of this formula 
remains unchanged from the proposed rule. The numerator is equal to the 
product of each subscriber's billable member months (the billable 
member months attributed to the individual that is the policy 
subscriber) and the average monthly premium for the subscriber, summed 
across all of the subscribers s in the plan. The calculation of each 
plan's total premium revenue--the numerator of this formula--uses 
subscriber-level premiums in order to align with the way that premium 
information will be captured in data on issuers' distributed data 
environments. The final formula is:
[GRAPHIC] [TIFF OMITTED] TR11MR13.005

    Billable member months are defined as the number of months during 
the risk adjustment period billable members are enrolled in the plan 
(billable members exclude children who do not count towards family 
rates). In non-community rated States, issuers are required to 
individually rate each member covered under a family policy and, in the 
case of large families, issuers are only allowed to include the three 
oldest children in the development of family rates. Therefore, for 
large families, only the three oldest children are counted as billable 
members in the risk adjustment transfer formula. In community rated 
States that require family tiering, the number of billable members 
under a family policy may vary based on the State's tiering structure. 
For example, if a State's largest family tier is set at two or more 
children, only the first two children under the family policy would 
count as billable members. HHS will assess each State's rating 
requirements and will provide community rated States with additional 
details on how billable members will be counted in the transfer 
formula.
    Comment: We received a number of comments in support of our 
proposal to use the State average premium as the basis for risk 
adjustment transfers. One commenter suggested that use of a plan's own 
premium may cause unintended distortions in the transfer formula. One 
commenter suggested that we use net claims, or approximate net claims 
by using 90 percent of the State average premium, as the basis for risk 
adjustment transfers.
    Response: The goal of the payment transfer formula is, to the 
extent possible, to promote risk-neutral premiums. We agree with 
commenters that use of a plan's own premium may cause unintended 
distortions in transfers. We also believe that both claims and 
administrative costs include elements of risk selection, and therefore, 
that transfers should be based on the entire premium. We are finalizing 
our proposal to base the payment transfer formula on the State average 
premium.
(2) Plan Average Risk Score
    The proposed plan average risk score calculation included an 
adjustment to account for the family rating rules set forth in the 
Market Reform Rule, which limits the number of dependent children in 
non-community rated States that count toward the build-up of family 
rates to three. The formula below shows the final plan average risk 
score calculation including the risk of all members on the policy, 
including those children not included in the premium.
[GRAPHIC] [TIFF OMITTED] TR11MR13.006

    Where:
PLRSi is plan i's average plan liability risk score, the subscript e 
denotes each enrollee within the plan;
PLRSe is each enrollee's individual plan liability risk score;
Me is the number of months during the risk adjustment period the 
enrollee is enrolled in the plan; and
Mb is the number of months during the risk adjustment period the 
billable member b is enrolled in the plan (billable members exclude 
children who do not count towards family rates).

    We received the following comments regarding the calculation of the 
plan average risk score:
    Comment: We received comments in support of this approach to 
calculating plan average risk score. We received one comment that 
calculating plan average risk score with an adjustment for billable 
members would be administratively burdensome for issuers.
    Response: We are finalizing this term as proposed. We note that, 
when HHS is operating risk adjustment on behalf of the State, HHS will 
calculate the plan average risk score and so there will be no 
additional administrative burden for issuers.
(3) Actuarial Value (AV)
    The proposed AV adjustment in the payment transfer formula accounts 
for relative differences in plan liability due to differences in AV. 
Table 9 shows the AV adjustment that will be used for

[[Page 15433]]

each category of metal level plans. We received no comments on this 
adjustment, and are finalizing this provision as proposed.

  Table 9--Actuarial Value (AV) Adjustment Used for Each Metal Level in
                      the Payment Transfer Formula
------------------------------------------------------------------------
                                                                 AV
                        Metal level                          Adjustment
------------------------------------------------------------------------
Catastrophic..............................................          0.57
Bronze....................................................          0.60
Silver....................................................          0.70
Gold......................................................          0.80
Platinum..................................................          0.90
------------------------------------------------------------------------

(4) Allowable rating variation
    We proposed an allowable rating factor adjustment in the payment 
transfer formula. The Allowable Rating Factor (ARF) adjustment accounts 
only for age rating. Tobacco use, wellness discounts, and family rating 
requirements will not be included in the payment transfer formula. 
Geographic cost variation is treated as a separate adjustment in the 
payment transfer formula. We recognize that there may be special rating 
circumstances in States (for example, community rating) and we intend 
to clarify how the payment transfer formula will address these 
circumstances through future rulemaking or guidance. We received 
comments in support of the allowable rating variation adjustment, and 
are finalizing this provision as proposed.

                                                  Table 10--Example Allowable Rating Factor Calculation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Enrollment percentages (Share of member-months)
            Age band                State age-   -------------------------------------------------------------------------------------------------------
                                   rating curve            Plan A                    Plan B                    Plan C                     State
--------------------------------------------------------------------------------------------------------------------------------------------------------
21..............................           1.000  33.30 percent...........  40.00 percent...........  10.00 percent...........  31.70 percent
(Age bands from 22-39 omitted)
40..............................           1.278  33.30 percent...........  40.00 percent...........  20.00 percent...........  33.30 percent
(Age bands from 41-63 omitted)
64 and older....................           3.000  33.30 percent...........  20.00 percent...........  70.00 percent...........  35.00 percent
Total member-months.............  ..............  300,000.................  200,000.................  100,000.................  600,000
Allowable Rating Factor.........  ..............  1.758...................  1.511...................  2.456...................  1.793
--------------------------------------------------------------------------------------------------------------------------------------------------------

(5) Induced demand
    We proposed to use the same induced demand factors in the payment 
transfer formula, shown in Table 11. We received the following comments 
regarding the induced demand proposed provisions:
    Comment: We received comments that, due to a typographical error, 
the definition of the induced demand factor expressed in the full 
payment transfer formula in the proposed rule was ``plan i's allowable 
rating factor'' rather than ``plan i's induced demand factor.''
    Response: We have made this change in the equation above.

  Table 11--Induced Demand Adjustment Used for Each Metal Level in the
                        Payment Transfer Formula
------------------------------------------------------------------------
                                                               Induced
                        Metal level                            demand
                                                             adjustment
------------------------------------------------------------------------
Catastrophic..............................................          1.00
Bronze....................................................          1.00
Silver....................................................          1.03
Gold......................................................          1.08
Platinum..................................................          1.15
------------------------------------------------------------------------

(6) Geographic Area Cost Variation
    The proposed geographic cost factor (GCF) is an adjustment in the 
payment transfer formula because there are some plan costs--such as 
input prices or utilization rates--that vary geographically and are 
likely to affect plan premiums. GCFs will be calculated for each rating 
area established by the State under Sec.  147.102(b). These factors 
will be calculated based on the observed average silver plan premium 
for the metal-level risk pool (calculated separately for individual and 
small group if the State does not have a merged market) or catastrophic 
plan premium for the catastrophic risk pool, in a geographic area 
relative to the Statewide average silver or catastrophic plan premium. 
Calculation of the GCF involves three steps. First, the average premium 
is computed for each silver or catastrophic plan, as applicable, in 
each rating area (using the same formula that is used to compute plan 
premiums in the State average premium calculation discussed above). We 
note that the same modification described above regarding the 
calculation of the plan average premium also applies to this term. The 
proposed calculation was:
[GRAPHIC] [TIFF OMITTED] TR11MR13.007

Where:
Pi, is the average premium for plan i;
s indexes all subscribers enrolled in the plan;
Ms is the number of billable member months for billable members 
under the policy of subscriber s; and
Ps is the premium for subscriber s.

    The final calculation is:
    [GRAPHIC] [TIFF OMITTED] TR11MR13.008
    
    Where:
Pi, is the average premium for plan i;
s indexes all subscribers enrolled in the plan;
Ms is the number of billable member months for the subscriber s;
Ps is the premium for subscriber s; and
    Mb is the number of billable members b enrolled in the plan.

    The second step is to generate a set of plan average premiums that 
standardizes the premiums for age rating. Plan premiums are 
standardized for age by dividing the average plan premium by the plan 
rating factor (calculated at the rating area level), the enrollment-
weighted rating factor applied to all billable members (discussed 
above). This formula is:
[GRAPHIC] [TIFF OMITTED] TR11MR13.009


Where:

PiAS is plan i's age standardized average premium;
Pi, is the average premium for plan i; and
ARFi is the allowable rating factor.

    The third and final step is to compute a GCF for each area in each 
risk pool and assign it to all plans in that area. This is accomplished 
with the following calculation:

[[Page 15434]]

[GRAPHIC] [TIFF OMITTED] TR11MR13.011

    With the exception of the plan average risk score calculation 
discussed above, all of the other calculations used in the payment 
transfer formula are based on billable members (that is, children who 
do not count toward family policy premiums are excluded). Member 
months, the State average premium, the allowable rating factor, and the 
geographic cost factor are all calculated based on billable members.
    Comment: We received one comment requesting that HHS include a 
geographic cost adjustment even if the State elected to use one rating 
area. Another commenter suggested that HHS include an adjustment in the 
risk adjustment methodology that accounts for the increased cost of 
providing care in rural areas.
    Response: The purpose of the geographic cost adjustment is to 
remove differences in premium due to allowable geographic rating 
variation. We believe that the cost of care in a particular area are 
reflected in premiums, and therefore captured in the geographic cost 
factor adjustment. Issuers of plans in a State with a single rating 
area would not vary rates within the State based on geography, and so 
it would not be necessary to remove differences in premiums due to 
allowed rating variation based on geography.
d. Overview of the Data Collection Approach
    In Sec.  153.20, we proposed a technical correction to the 
definition of risk adjustment data collection approach. We proposed to 
delete ``and audited'' so that the definition of risk adjustment data 
collection approach means ``the specific procedures by which risk 
adjustment data is to be stored, collected, accessed, transmitted, 
validated and the applicable timeframes, data formats, and privacy and 
security standards.'' We received no comments on the proposed technical 
correction to the definition of data collection approach, and are 
finalizing the provision as proposed. Comments regarding the data 
collection approach for the risk adjustment program are addressed in 
section III.G. of this final rule.
    We also proposed to modify Sec.  153.340(b)(3) by adding the 
additional restriction that ``Use and disclosure of personally 
identifiable information is limited to those purposes for which the 
personally identifiable information was collected (including for 
purposes of data validation).'' ``Personally identifiable information'' 
is a broadly used term across Federal agencies, and has been defined in 
the Office of Management and Budget Memorandum M-07-16 (May 22, 
2007).\12\ This addition will further ensure the privacy and security 
of potentially sensitive data by limiting the use or disclosure of any 
personally identifiable information collected as a part of this 
program. We received no comments on the proposed modification and are 
finalizing the provision as proposed.
---------------------------------------------------------------------------

    \12\ Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf.
---------------------------------------------------------------------------

e. Schedule for Risk Adjustment
    Under Sec.  153.610(a), issuers of risk adjustment covered plans 
will provide HHS with risk adjustment data in the form and manner 
specified by HHS. Under the HHS-operated risk adjustment program, 
issuers will not send, but must make available to HHS, anonymized 
claims and enrollment data, as specified in section III.G. of this 
final rule, for benefit year 2014 beginning January 1, 2014. Enrollee 
risk scores will be calculated based on enrollee enrollment periods and 
claims dates of discharge that occur between January 1, 2014 and 
December 31, 2014. Enrollee risk scores for subsequent benefit years 
will be calculated based on claims and enrollment periods for that same 
benefit year.
    As set forth in the proposed Sec.  153.730, claims to be used in 
the risk score calculation must be made available to HHS by April 30 of 
the year following the benefit year. We believe this date provides for 
ample claims run-out to ensure that diagnoses for the benefit year are 
captured, while providing HHS sufficient time to run enrollee risk 
score, plan average risk, and payments and charges calculations and 
meet the June 30 deadline described at the redesignated Sec.  
153.310(e). Comments in response to the proposed Sec.  153.730 are 
addressed in section III.G of this final rule.
    Comment: We received a number of comments that HHS should provide 
issuers with interim reports of risk scores and other information.
    Response: We are committed to implementing the risk adjustment 
program in a transparent way, and seek to provide issuers with the 
information necessary for program operations and rate development. We 
are assessing the feasibility of providing program information prior to 
the close of the benefit year.
4. State Alternate Methodology
a. Technical Correction
    The Premium Stabilization Rule established standards for States 
that establish their own risk adjustment programs. Under the proposed 
revision to Sec.  153.310, a State may establish a risk adjustment 
program if it elects to operate an Exchange and is approved to operate 
risk adjustment in the State. If a State does not meet the requirements 
to operate risk adjustment, HHS will carry out all functions of risk 
adjustment on behalf of the State. In

[[Page 15435]]

Sec.  153.320(a), we established that Federally certified methodologies 
must be used in the operation of the risk adjustment program, and 
defined the process by which a methodology may become Federally 
certified. We proposed to modify Sec.  153.320(a)(1) and (a)(2) to 
clarify that these methodologies must be published in ``the applicable 
annual'' notice of benefit and payment parameters as opposed to ``an 
annual'' HHS notice of benefit and payment parameters. This proposed 
change makes clear that methodologies must be certified for use each 
year. We did not receive any comments on this proposed change, and will 
finalize it as proposed.
b. State Alternate Risk Adjustment Methodology Evaluation Criteria
    In Sec.  153.330(a), we specified the elements required to be 
included with the request to HHS for certification of an alternate risk 
adjustment methodology. Section 153.330(a)(1)(i) states that a request 
for certification for an alternate methodology must include the 
elements specified in Sec.  153.320(b), which includes a complete 
description of: (1) The risk adjustment model; (2) the calculation of 
plan average actuarial risk; (3) the calculation of payments and 
charges; (4) the risk adjustment data collection approach; and (5) the 
schedule for the risk adjustment program. Section 153.330(a)(1)(ii) 
states that the alternate methodology request must also include the 
calibration methodology and frequency of calibration, and Sec.  
153.330(a)(1)(iii) provides that the request must include statistical 
performance metrics specified by HHS. Section 153.330(a)(2) requires 
that the request also include certain descriptive and explanatory 
information relating to the alternate methodology. We proposed to 
evaluate risk adjustment methodologies based on the information 
submitted under Sec.  153.330(a). We proposed additional evaluation 
criteria to certify alternate risk adjustment methodologies in a new 
paragraph Sec.  153.330(b).
    In the new Sec.  153.330(b)(1), we proposed to consider whether the 
alternate risk adjustment methodology meets criteria that correspond to 
the elements of the alternate methodology request described in 
paragraph Sec.  153.330(a)(1) and (2). Specifically, we stated that we 
would be evaluating the extent to which an alternate risk adjustment 
methodology:
    (i) Explains the variation in health care costs of a given 
population;
    (ii) Links risk factors to daily clinical practices and is 
clinically meaningful to providers;
    (iii) Encourages favorable behavior among providers and health 
plans and discourages unfavorable behavior;
    (iv) Uses data that is complete, high in quality, and available in 
a timely fashion;
    (v) Is easy for stakeholders to understand and implement;
    (vi) Provides stable risk scores over time and across plans; and
    (vii) Minimizes administrative costs.
    For example, to determine the extent that an alternate methodology 
explains the variation in health care costs of a given population, we 
would consider whether the risk adjustment model was calibrated from 
data reflecting the applicable market benefits, was calibrated on a 
sample that is reasonably representative of the anticipated risk 
adjustment population, and was calibrated using a sufficient sample to 
ensure stable weights across time and plans. In addition, in evaluating 
this criterion, we would consider whether the methodology has suitably 
categorized the types of plans subject or not subject to risk 
adjustment, given the overall approach taken by the methodology and the 
goal of the program to account for plan average actuarial risk. States 
must provide a rationale for the methodology's approach to the plans 
subject to risk adjustment. Under this proposed criteria, we would also 
evaluate the State's method for calculating payments and charges.
    In the proposed Sec.  153.330(b)(2), we would consider whether the 
alternate methodology complies with the requirements of subpart D, 
especially Sec.  153.310(e) (as proposed to be renumbered) and Sec.  
153.340. Section 153.310(e) requires alternate methodologies to have a 
schedule that provides annual notification to issuers of risk 
adjustment covered plans of payments and charges by June 30 of the year 
following the benefit year. Section 153.340(b)(1) sets forth a number 
of minimum requirements for data collection under risk adjustment, 
including standards relating to data privacy and security. While the 
Federal approach will not directly collect data from issuers, but 
instead will use a distributed approach that will not include 
personally identifiable information, the Premium Stabilization Rule 
gave States the flexibility to design their own data collection 
approach, provided privacy and security standards are met. The privacy 
and security of enrollees' data is of paramount importance to HHS, and 
the data collection approach in an alternate methodology must protect 
personally identifiable information, if any, that is stored, 
transmitted, or analyzed, to be certified. The application for 
certification of the alternate methodology should identify which data 
elements contain personally identifiable information, and should 
specify how the State would meet these data and privacy security 
requirements.
    In Sec.  153.330(b)(3), we proposed to consider whether the 
alternate risk adjustment methodology accounts for payment transfers 
across metal levels. We believe that sharing risk across metal levels 
is a critical part of a risk adjustment methodology as new market 
reforms are implemented because of the need to mitigate adverse 
selection across metal levels, as well as within metal levels. The 
proposed HHS risk adjustment methodology transfers funds between plans 
across metal levels, and under this proposal, State alternate 
methodologies would do so as well.
    Under the proposed HHS risk adjustment methodology, we will apply 
risk adjustment to catastrophic plans in their own risk pool--that is, 
we will transfer funds between catastrophic plans, but not between 
catastrophic plans and metal level plans. For a number of plans, such 
as student health plans and plans not subject to the market reform 
rules, we will not transfer payments under the HHS risk adjustment 
methodology. However, as discussed above, we believe that States should 
have the flexibility to submit a methodology that transfers funds 
between these types of plans (either in their own risk pool or with the 
other metal levels).
    In Sec.  153.330(b)(4), we proposed to consider whether the 
elements of the alternate methodology align with each other. For 
example, the data collected through the data collection approach should 
align with the data required by the risk adjustment model to calculate 
individual risk scores.
    Comment: A commenter requested further clarity on Sec.  
153.330(a)(2)(iii), which requires that a State's request to operate an 
alternate methodology must include an assessment of the extent to which 
the methodology encourages favorable behavior among providers and 
discourages unfavorable behavior.
    Response: We provided examples of favorable and unfavorable 
behavior in the proposed rule, at 77 FR at 73146. There, we stated that 
we would consider whether the alternate methodology discriminates 
against vulnerable populations, as evidenced by unjustified 
differential treatment on the basis of features like age, disability, 
or expected length of life. We also stated that alternate methodologies 
should take into account the health care needs of

[[Page 15436]]

diverse segments of the risk adjustment population, including but not 
limited to women, children, people with disabilities, and other 
vulnerable groups. We will provide further guidance on these criteria 
in connection with our evaluation of particular proposed State 
alternate methodologies.
    Comment: A commenter requested that HHS delete the reference to 
``stakeholders'' in the criterion that an alternate methodology be easy 
to understand and replace it with the term ``carriers.''
    Response: Risk adjustment affects the overall stability of State 
insurance markets, with potential impacts on many individuals and 
entities, including State governments and enrollees. Therefore, we 
believe the methodology should be reasonably comprehensible to all 
enrollees and entities, or ``stakeholders.'' We will maintain our use 
of ``stakeholders'' rather than ``carriers'' because we believe that 
all affected individuals should be reasonably able to understand the 
methodology.
    Comment: A commenter requested that HHS approve alternate 
methodologies independent of a State's factor weights.
    Response: An alternate methodology's factor weights may influence 
the risk adjustment methodology's ability to meet the evaluation 
criteria. The factor weights, therefore, will be included in the 
evaluation process.
    Comment: A commenter generally supported our alternate methodology 
certification process, but recommended that we additionally require 
that a State's proposed alternate methodology must perform similarly to 
or better than the HHS methodology in that State.
    Response: We believe it would be difficult to assess whether a 
State's methodology performs ``better'' than the HHS methodology in 
light of the various policy goals that different States may have in 
mind. We believe that States understand their markets well, and that 
the proposed set of criteria is sufficiently detailed to achieve a high 
quality risk adjustment methodology. Therefore, we are finalizing these 
criteria as proposed.
    Comment: A commenter recommended that State alternate methodology 
applications be made available to the public.
    Response: HHS is committed to transparency in its process of 
evaluating and certifying State alternate methodologies. We will 
publish approved State alternate methodologies in the annual HHS notice 
of benefit and payment parameters. Because we require that States 
publish their alternate methodologies in the State notice of benefit 
and payment parameters, we believe that this publication is sufficient 
for public access to the methodology itself and other supporting 
information.
c. Payment and Charges
    In the preamble to the Premium Stabilization Rule, we noted that we 
plan to establish a national method for calculation of payments and 
charges. In the proposed rule, we expanded on this approach by 
designating areas of State flexibility within the general approach to 
payment transfers. We received no comments on the national method for 
calculating payments and charges or the State flexibility within this 
method. We are finalizing this approach as proposed.
5. Risk Adjustment Data Validation
    We proposed to add a new subsection, Sec.  153.630, which set forth 
risk adjustment data validation standards applicable to all issuers of 
risk adjustment covered plans when HHS is operating risk adjustment. We 
proposed that, beginning in 2014, HHS will conduct a six-stage data 
validation program when operating risk adjustment on behalf of a State: 
(1) Sample selection; (2) initial validation audit; (3) second 
validation audit; (4) error estimation; (5) appeals; and (6) payment 
adjustments. We noted that States are not required to adopt this HHS 
data validation methodology. We are finalizing these provisions as 
proposed.
    Comment: We received a comment asking that the cost of the audits 
associated with data validation be paid for by the Federal government.
    Response: At this time, it is the policy of HHS that costs related 
to the second validation audit process be borne by the Federal 
government, while costs associated with initial validation audit 
process be borne by the applicable issuer. We note that a State may 
choose to allocate the costs of data validation differently when 
operating its own risk adjustment program.
    Comment: We received a comment requesting that data validation 
requirements be expressed in Sec.  153.710(c), relating to data 
collection standards.
    Response: We are finalizing the data validation requirements in 
Sec.  153.630. We believe that the data validation requirements should 
remain independent of the data collection standards because the data 
validation requirements are specific to the HHS-operated risk 
adjustment program and the data collection standards apply to both the 
risk adjustment and reinsurance programs when operated by HHS.
    Comment: We received a comment expressing concern that the data 
validation process as described will extend beyond a year, potentially 
affecting payment transfers.
    Response: We appreciate the concerns of the commenter. We intend to 
complete the data validation process within one year, in time for 
payment adjustments to be made the following benefit year.
    Comment: We received a comment asking that States operating risk 
adjustment programs be required to follow uniform Federal data 
validation standards, particularly during the first few years of the 
program.
    Response: The risk adjustment program is intended to be a State-
based program. We believe that a State operating its own risk 
adjustment program should have the flexibility to implement a data 
validation program that best complements its program design, including 
the State's data collection approach and desired level of audit 
complexity. We note, however, that States and issuers still must abide 
by the standards for developing a data validation program as described 
in the Premium Stabilization Rule.
    Comment: We received a comment requesting clarification on how 
issuers that leave a market during the year will affect the Statewide 
data validation process.
    Response: We will provide further detail on this and other data 
validation issues in future rulemaking and guidance.
a. Data Validation Process When HHS Operates Risk Adjustment
(1) Sample Selection
    In Sec.  153.630 of the proposed rule, we discussed some of the 
guidelines for selecting a statistically valid sample for data 
validation. We proposed that HHS would choose an adequate sample size 
of enrollees such that the estimated payment errors would be 
statistically sound and enrollee-level risk score distributions would 
reflect enrollee characteristics for each issuer. Additionally, the 
sample would cover applicable subpopulations for each issuer, such as 
enrollees with and without risk adjustment diagnoses.
    Comment: We received a comment asking for additional information on 
the statistical validity of the expected sample size of 300, including 
the confidence interval and expected error rate tolerance. We also 
received numerous comments requesting the opportunity to comment on a 
proposed

[[Page 15437]]

statistical selection methodology in future guidance.
    Response: We anticipate providing more detailed information on the 
HHS sampling methodology in future rulemaking and guidance, including 
sample sizes and expected tolerances and confidence intervals.
    Comment: We received a comment expressing support for the inclusion 
of enrollees both with and without risk adjustment diagnoses in the 
sample. The commenter also suggested that HHS conduct more 
comprehensive audits for members without any risk adjustment diagnoses, 
including full medical record review during the second validation 
audit.
    Response: Individuals without risk adjustment diagnoses will be 
subject to audits of their demographic information as well as medical 
record reviews during both the initial and second validation audits to 
determine whether any risk adjustment HCCs should have been assigned 
that were not. We anticipate revisiting this policy after the first 
year of the program to assess the utility of performing medical record 
reviews on enrollees with no HCCs. Over time, we anticipate that 
issuers will utilize the front-end HHS-operated data submission 
processes to ensure they are providing all relevant risk adjustment 
diagnosis for enrollees as opposed to relying on back-end audit 
processes to reveal this information.
(2) Initial Validation Audit
    In Sec.  153.630(b), we proposed that once the audit samples are 
selected by HHS, issuers would conduct independent audits of the risk 
adjustment data for their initial validation audit sample enrollees. In 
Sec.  153.630(b)(1), we proposed that issuers of risk adjustment 
covered plans engage one or more auditors to conduct these independent 
initial validation audits. We proposed in Sec.  153.630(b)(2) through 
(4) that issuers ensure that initial validation auditors are reasonably 
capable of performing the audit, the audit is completed, the auditor is 
free from conflicts of interest, and the auditor submits information 
regarding the initial validation audit to HHS in the manner and 
timeframe specified by HHS. These proposed requirements would ensure 
the initial validation audit is conducted according to minimum audit 
standards, and issuers or auditors transmit necessary information to 
HHS for use in the second validation audit. We are finalizing these 
provisions as proposed.
    We also proposed that issuers conduct data validation in accordance 
with audit standards established by HHS. We described three methods for 
establishing these audit standards, and requested comment on these 
approaches.
    Comment: We received multiple comments suggesting that auditors 
conduct interim checks of issuer data during the plan year before the 
formal validation audit. We received a few comments proposing that 
auditors report the findings of the interim checks to HHS so that 
issuers found to have outlier results could be subject to greater audit 
scrutiny.
    Response: We believe that requiring auditors to perform multiple 
interim checks of issuer data throughout the plan year will be 
burdensome for issuers. However, an issuer may voluntarily have such 
checks performed if it believes them to be necessary for appropriate 
implementation of risk adjustment and compliance.
    Comment: We received a comment asking that HHS specify in future 
guidance the common coding and documentation standards that issuers 
will be subject to, and provide issuers an opportunity to comment on 
the standards.
    Response: We will clarify in future rulemaking and guidance the 
uniform audit standards that issuers and auditors will be subject to.
    Comment: We received many comments supporting a certification 
requirement for auditor firms before acting as a validation auditor. A 
number of commenters supported the development of audit standards. One 
commenter supported HHS adopting both approaches.
    Response: We considered prospectively certifying entities prior to 
acting as validation auditors. This approach is utilized before 
performing audits on organizations collecting and reporting performance 
measures through Health Effectiveness Data and Information Set (HEDIS). 
While this approach may ensure that entities performing validation 
audits are capable of conducting the audits in accordance with HHS 
standards, we believe at this time that issuers will be diligent in 
selecting audit entities capable of complying with HHS audit standards, 
and that adequate enforcement remedies exist should an audit entity 
fail to comply with the standards. We will monitor the performance of 
validation auditors to determine whether such certification or 
additional safeguards are necessary in the future.
(3) Second Validation Audit
    In Sec.  153.630(c), we proposed that HHS retain an independent 
second validation auditor to verify the accuracy of the findings of the 
initial validation audit using a sub-sample of the initial validation 
audit sample enrollees for review. Issuers would submit (or ensure 
their initial validation auditor submits) data validation information, 
as specified by HHS, from their initial validation audit for each 
enrollee included in the second validation audit sub-sample. We are 
finalizing these provisions as proposed.
    Comment: We received a comment suggesting that HHS provide, for 
both the initial and secondary validation audits, a comparison of a 
plan's diagnosis reporting accuracy to the calibration data set for the 
risk adjustment models' diagnosis accuracy as reported through 
MarketScan[supreg].
    Response: We do not have access to the underlying medical records 
necessary to perform such an audit for the calibration data set. We 
will consider performing similar analyses in future years, as more data 
becomes available.
    Comment: We received a comment seeking clarity on whether the error 
process would be based exclusively on the second validation audit, and 
whether the results of the second validation audit would be applied 
only to the subsample under Sec.  153.630(c).
    Response: We anticipate applying any error rate determined by the 
second validation audit to the error rate calculated by the initial 
validation audit. This reconciled error rate will be extrapolated to an 
issuer's entire risk adjusted population, not just the subsample under 
Sec.  153.630(c). We intend to consult with stakeholders on the details 
of the methodology for error rate calculation to inform future 
rulemaking.
    Comment: We received a comment asking HHS to permit issuers to 
submit additional information to the second validation auditor if the 
initial information provided to the initial validation auditor does not 
meet the proposed audit standards.
    Response: We do not believe that it is appropriate or efficient to 
permit issuers to submit additional information to the second 
validation auditor in the event that the initial information provided 
does not meet the proposed audit standards. We believe that limiting 
the review of the second validation audit to only that information made 
available during the initial validation will help to ensure the entire 
validation process is completed in a timely manner and will provide 
incentives for making all relevant information available to the initial 
validation auditor.

[[Page 15438]]

(4) Error Estimation
    In the preamble to the proposed rule, we stated that we would 
estimate risk score error rates based on the findings from the data 
validation process. HHS plans to conduct further analysis to determine 
the most effective methodology for adjusting plan risk scores for 
calculating risk adjustment payment transfers. We are finalizing these 
provisions as proposed.
    Comment: We received a few comments regarding the error estimation 
process generally. One comment proposed a three-tiered approach to 
extrapolating error rates to overall plan payment. The commenter 
suggested that sufficiently low error rates within a certain range of 
model accuracy would receive no extrapolation to plan payment, while 
high outlier error rates would subject an issuer to an additional round 
of audits. All other plans would receive an extrapolation of the plan's 
error rate to its payment rate. Another commenter asked that HHS 
perform an outlier analysis on risk scores within a State. Another 
commenter suggested that HHS audit all issuers to determine a mean or 
expected error rate, then perform appropriate statistical tests to 
compare issuer error rates to this expected error rate, and then 
determine the impact on plan payments. We also received a comment 
requesting that HHS use a dollar adjustment instead of a percent 
adjustment to the risk score.
    Response: Following additional engagement with stakeholders, we 
expect to provide further detail on our approach to error estimation 
and payment transfer adjustments in future rulemaking and guidance.
    Comment: We received a comment requesting clarification on whether 
error adjustments apply if an issuer under-reports its risk scores.
    Response: Consistent with the approach in Medicare Advantage, we 
intend to apply error adjustments if an issuer under-reports its risk 
scores. We will provide further detail on these adjustments in future 
rulemaking and guidance.
(5) Appeals
    Pursuant to Sec.  153.350(d), HHS or a State operating risk 
adjustment must provide an administrative process to appeal data 
validation findings. We proposed in Sec.  153.630(d) that issuers may 
appeal the findings of a second validation audit or the application of 
a risk score error rate to its risk adjustment payments and charges. We 
anticipate that appeals would be limited to instances in which the 
audit was not conducted in accordance with the second validation audit 
standards established by HHS.
    Comment: We received a few comments expressing support that the 
appeals process be limited to the application of audit standards, and 
not the standards themselves.
    Response: We are finalizing this provision as proposed.
(6) Payment Adjustments
    We proposed that HHS would use a prospective approach when making 
payment adjustments based on findings from the data validation process. 
Specifically, we would use an issuer's data validation error estimates 
from the prior year to adjust the issuer's average risk score in the 
current transfer year. Additionally, because the credibility of the 
system is important for the success of the program, we proposed in 
paragraph Sec.  153.630(e) that HHS may also adjust payments and 
charges for issuers that do not comply with the initial or second 
validation audit standards set forth in Sec.  153.630(b) and (c).
    Comment: We received a comment requesting further clarity on what 
impact a prospective approach to payment adjustments will have on plan 
pricing assumptions, and how actuarial soundness will be maintained if 
an issuer's risk profile changes substantially from year to year.
    Response: We anticipate addressing these issues following 
stakeholder consultations prior to further rulemaking on data 
validation.
b. Proposed HHS-Operated Data Validation Process for Benefit Years 2014 
and 2015
    We proposed that issuers of risk adjustment covered plans adhere to 
the data validation process beginning with data for the 2014 benefit 
year. However, due to the complexity of the risk adjustment program and 
the data validation process, and the uncertainty in the market that 
will exist in 2014, we are concerned that adjusting payments and 
charges without first gathering information on the prevalence of error 
could lead to a costly and potentially ineffective audit program. 
Therefore, we proposed that issuers conduct an initial validation audit 
and that we conduct a second validation audit for benefit years 2014 
and 2015, but that we would not adjust payments and charges based on 
validation findings during these first two years of the program. 
Although we proposed not to adjust payments and charges based on error 
estimates discovered, we noted that other remedies, such as prosecution 
under the False Claims Act, may be applicable to issuers not in 
compliance with the risk adjustment program requirements.
    We requested comments on this approach, particularly with respect 
to improvements to the data validation process generally, whether there 
are alternatives to forgoing changes to payments and charges that we 
should adopt, and what methods we should adopt to ensure data integrity 
in the first two years of the program.
    We also requested comments on the possibility of conducting the 
second validation audits at the auditor level as opposed to the issuer 
level in future years. As we anticipate that a small number of audit 
firms will perform the majority of the initial audits, this would allow 
us to examine the accuracy of the initial validation audit without 
having to draw large initial validation audit record samples from each 
issuer that participates in risk adjustment.
    Comment: A number of commenters supported not altering payments and 
charges based on 2014 and 2015 data validation results. Numerous other 
commenters requested that HHS apply error rates to payment transfers 
from the outset of the program, while another commenter supported a 
one-year observation period before effecting data validation payment 
transfers.
    Response: While we appreciate the concerns of the commenters, we 
continue to believe that in light of the complexity of the data 
validation process, two years of observation experience will help HHS 
refine its data validation process by enabling us to gather sufficient 
data on issuer and auditor error, and will provide issuers and auditors 
enough time to adjust to the audit program. Although we are not 
adjusting payments and charges based on error rates, we note that other 
remedies, such as prosecution under the False Claims Act, may be 
applicable to issuers not in compliance with the risk adjustment 
program requirements when HHS operates risk adjustment on behalf of a 
State.
    Comment: We received multiple comments supporting the publishing of 
a report on error rates discovered during the first two years of the 
data validation program. One commenter asked for additional 
clarification of the overall goal of the report, whether the report 
will identify issuers and providers, and if the report will disclose 
error rates attributable to providers.
    Response: The intent of the report is to provide issuers and 
auditors information on the level of error in the commercial market 
under the HHS-operated risk adjustment program. Additionally, we may 
study the extent to which errors at the auditor level

[[Page 15439]]

contribute to risk score error rate findings during the initial 
validation audits. We do not anticipate that the report will identify 
providers, but it may identify issuers. We do anticipate that the 
report will identify the error rates attributable to auditors.
    Comment: We received one comment requesting further clarification 
on the timeframe in which issuers will be directed to provide sample 
data for a benefit year. The commenter also asked for further 
clarification on program integrity efforts if payment transfers are not 
altered by data validation audit results.
    Response: We will issue further guidance and rulemaking on these 
matters.
c. Data Security and Transmission
    In Sec.  153.630(f), we proposed data security and transmission 
requirements for issuers related to the HHS data validation process. In 
Sec.  153.630(f)(1), we proposed that issuers submit any risk 
adjustment data and source documentation specified by HHS for the 
initial and second validation audits to HHS in the manner and timeframe 
established by HHS. We proposed in Sec.  153.630(f)(2) that, in 
connection with the initial validation audit, the second validation 
audit, and any appeals, an issuer must ensure that it and its initial 
validation auditor complies with the security standards described at 
Sec.  164.308, Sec.  164.310, and Sec.  164.312. We did not receive any 
comments on these provisions, and are finalizing them as proposed.
6. State-Submitted Alternate Risk Adjustment Methodology
    HHS received an alternate risk adjustment methodology from one 
State, the Commonwealth of Massachusetts. We are certifying this 
methodology as a Federally certified methodology for use in 
Massachusetts. A summary of that methodology, as prepared by the 
Commonwealth, is provided below. More detailed information about this 
methodology can be obtained from the Commonwealth of Massachusetts upon 
request. In addition, the Commonwealth of Massachusetts must publish a 
State notice of benefit and payment parameters, which will contain 
additional detail, within 30 days of the publication date of this final 
rule. Issuers and other interested parties should consult both of these 
sources. Additional questions may be addressed to Jean Yang, Executive 
Director of the Massachusetts Health Connector, at (617) 933-3059.
a. Policy Goals of the Massachusetts 2014 State Alternate Risk 
Adjustment Methodology
    The Commonwealth of Massachusetts shares the same view as the 
Federal government with respect to the importance of the risk 
adjustment program and strives to achieve similar policy goals through 
the State-operated risk adjustment program powered by an alternate 
methodology. These specific goals include the following:
     The risk adjustment models should accurately explain 
variation in health care costs;
     The clinical classification used in the Commonwealth's 
alternate risk adjustment models should link risk factors to daily 
clinical practice and should be clinically meaningful to providers;
     The design of the clinical classification and the risk 
weights in the Commonwealth's alternate risk adjustment models should 
encourage favorable behavior from providers and health plans and 
discourage unfavorable behavior;
     The design of the Commonwealth's alternate risk adjustment 
methodology should reflect the Commonwealth's market characteristics, 
experience with risk adjustment, and be supportive of other health care 
reform initiatives in the Commonwealth;
     The Commonwealth's alternate risk adjustment methodology 
should use data that is complete, high quality and available in a 
timely fashion;
     The Commonwealth's alternate risk adjustment methodology 
should be easy for stakeholders to understand and implement;
     The methodology should account for risk selection across 
metal levels;
     The risk adjustment models and additional adjustment 
factors should provide stable risk scores over time and across plans;
     The operations of the Commonwealth's risk adjustment 
program should minimize administrative costs; and
     There should be reasonable alignment among different 
elements of the alternate methodology.
    Starting from the same conceptual foundation as the proposed HHS 
risk adjustment methodology, the proposed Massachusetts alternate 
methodology is designed to address a number of Massachusetts-specific 
market characteristics and leverage existing data infrastructures to 
reduce the administrative burden for health plan issuers as well as for 
the Health Connector, which will be administering the program.
b. Conceptual Framework for Risk Adjustment Funds Transfer
    Massachusetts's conceptual framework for calculating risk 
adjustment funds transfer is consistent with the proposed Federal risk 
adjustment methodology in that funds transfer is based on State average 
premium and should provide plans with payments to help cover excess 
actuarial risk due to risk selection; that is, risk exposure beyond the 
premiums issuers can charge reflecting allowable rating and their 
applicable cost factors.
    Massachusetts proposes a single, merged risk adjustment pool for 
metal level plans in the small group and non-group market to be 
consistent with Massachusetts's merged market rules. Consistent with 
the proposed HHS methodology, Massachusetts proposes to keep 
catastrophic plans in their own risk adjustment pool, separate from the 
rest of the merged market. Massachusetts believes this will help ensure 
the accuracy of the risk adjustment calculations as well as the 
affordability of the catastrophic plans because funds transfer will 
take place amongst the catastrophic plans only, instead of between the 
catastrophic plans and the metal level plans if all plans were merged 
in one risk adjustment pool. It should be noted that under the current 
regulations in Massachusetts, pricing of the catastrophic plans is 
subject to the same merged market rules as the small group and non-
group plans. Keeping catastrophic plans in a separate risk adjustment 
pool does not segment the market from a pricing perspective because 
catastrophic plans are still subject to single risk pool requirements, 
and risk adjustment is retrospective and applies to all non-
grandfathered small group and non-group health plans, including 
catastrophic plans.
    Due to the lack of empirical data, Massachusetts is unable to 
calibrate a separate risk adjustment model for catastrophic plans. It 
proposes to use the bronze risk adjustment model and an actuarial value 
adjustment factor of 0.57 in the funds transfer calculation for 
catastrophic plans in the initial years, and revisit this approach in 
future recalibrations when empirical data is available. Massachusetts 
proposes to treat student health plans and plans that are not subject 
to the Affordable Care Act Market Reform Rules in the same manner as 
the Federal methodology.
c. Data Used to Develop Risk Adjustment Methodology
    Massachusetts used data from three different sources to develop the 
risk

[[Page 15440]]

adjustment models and additional adjustment factors in the 
Commonwealth's alternate risk adjustment methodology:
     For the non-group and small group market, data from the 
Massachusetts All Payer Claims Database (APCD). Calendar Year 2010, and 
7/1/2011 to 6/30/2012 membership and claims data from the Massachusetts 
APCD. The Commonwealth obtained data extracts on non-group policy 
holders and small group members for group size up to 100 with ages 0 to 
64 and eligible for medical and pharmacy coverage during the two 
observation periods. Collectively, Massachusetts thinks they are 
representative of a significant portion of the population that is 
subject to the risk adjustment program under the Affordable Care Act. 
About 700,000 unique individuals were included in the model development 
sample.
     For enrollees under 300 percent FPL who are not eligible 
for Medicaid, data from the Commonwealth Care program. Fiscal Years 
2010 and 2011 Commonwealth Care program's membership and claims. More 
than 100,000 unique members with ages 0 to 64 from Commonwealth Care 
met the selection criteria and were included in the model development 
sample.
    Commonwealth Care is a subsidized insurance program created as part 
of the 2006 Massachusetts health care reform law. It is administered by 
the Health Connector, and serves individuals with income up to 300 
percent FPL who are not eligible for Medicaid and generally do not have 
access to employer-sponsored health insurance. As of December 2012, 
there are close to 198,000 members enrolled in the program. 
Massachusetts anticipates that, effective January 1, 2014, a portion of 
the current Commonwealth Care members will enroll in the expanded 
Medicaid program, and the remainder will access QHPs with tax credits 
through the Exchange.
    Most health plan issuers that participate in the current 
Commonwealth Care program are local Medicaid managed care organizations 
(``MMCOs'') whose provider reimbursement level is typically lower than 
that of the commercial payers in Massachusetts for the same types of 
services. To normalize plan paid amount between the APCD data and the 
Commonwealth Care data, Massachusetts re-priced Commonwealth Care 
claims using unit prices derived from the APCD data. This was done 
using the Milliman Health Cost Guidelines[supreg] (``HCG'') Grouper. 
The HCG categorizes claims into more than 80 types of services, 
allowing us to directly compare unit prices by service type between the 
Commonwealth Care claims and the APCD claims. There were service types 
with very few members in either dataset. To obtain robust unit cost 
estimates, Massachusetts consolidated them with other service types 
that are similar in nature.
     For additional sample size for calibration purposes, 
Calendar Year 2010 Truven Health Analytics Marketscan[supreg] 
Commercial Claims and Encounters database for New England States. 
Massachusetts selected members with ages 0 to 64 who were eligible for 
medical and pharmacy coverage in PPO or Comprehensive plan type, and 
re-sampled them to match the age/gender distribution of the APCD data. 
The primary reason for using the Marketscan[supreg] data was to obtain 
a larger sample size which allowed for calibrating more robust risk 
adjustment models and to strengthen the data quality of the overall 
model development sample. Massachusetts notes that data from 
Marketscan[supreg] mostly represent large group experience. However, 
Massachusetts thinks that it is still a useful additional data source. 
More than 700,000 unique members were included from the 
Marketscan[supreg] New England States.
    The consolidated claims data was then processed again through the 
Milliman Health Cost Guidelines[supreg] grouper system. The results 
from the grouper were compared to regional cost and utilization 
benchmarks and checked for reasonability. In this process, 
Massachusetts excluded some commercial payers in the APCD data, as well 
as certain claim lines in the Marketscan[supreg] data.
d. Risk Adjustment Models
(1) HCC Clinical Classification
    Using claims from clinically valid sources (for example, 
laboratory, radiology, durable medical equipment, and transportation 
are not considered clinically valid), Massachusetts grouped diagnosis 
codes using the HCC classification system. Massachusetts referenced the 
HCC classification system in Pope et al. (2000), a Federally funded 
research study that laid the foundation for the CMS HCC risk adjustment 
payment system for Medicare Advantage.\13\ The classification system in 
Pope et al. (2000) contains approximately 780 DxGroups which are then 
aggregated to more than 180 condition categories (``CC''s). Clinical 
hierarchies are then applied on the CCs to create HCCs. Because the HCC 
classification system was originally designed for the senior 
population, the designs of the condition categories may not be fully 
reflective of the characteristics of the commercial population. Through 
an iterative process using the model development sample, Massachusetts 
identified 20 DxGroups that were not very well predicted under the 
original HCC grouping and promoted them into their own HCCs.
---------------------------------------------------------------------------

    \13\ Available at: http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/HealthCareFinancingReview/downloads/04summerpg119.pdf .
---------------------------------------------------------------------------

    When determining acceptable types of claims for grouping the HCCs, 
Massachusetts modified the approach outlined by Pope et al. (2000) to 
ensure that risk adjustment does not create unintended consequences 
with respect to how care is accessed in the current Massachusetts 
market environment. For example, Massachusetts accepted diagnosis codes 
from visits/encounters with nurse practitioners and physician 
assistants, recognizing that in patient-center medical home and ACO 
care settings, nurse practitioners and physician assistants play active 
and important roles in preventive care and chronic care management. 
Massachusetts also accepted diagnosis codes in claims from skilled 
nursing facilities and ambulatory surgical centers if the claims were 
coded by a clinician.
    In the process of revising the original HCCs to better reflect the 
characteristics of the commercial population, Massachusetts followed 
the same 10 principles for designing a risk adjustment classification 
system as discussed in the proposed Federal risk adjustment 
methodology.
    Compared with the 127 HHS-defined HCCs used by the Federal 
methodology, Massachusetts's methodology includes 162 Massachusetts-
defined HCCs.\14\ Below, Massachusetts discusses the key considerations 
with regard to the Commonwealth's decision to apply a more expansive 
set of condition categories.
---------------------------------------------------------------------------

    \14\ Massachusetts's list of HCCs is available in Table 16 of 
this alternate methodology, while HHS's list of HCCs is published 
elsewhere in this rule. Note that the two lists are numbered 
differently, and different ICD-9 codes are associated with different 
HCCs and DxGs.
---------------------------------------------------------------------------

    Risk adjustment is a premium redistribution process that equalizes 
actuarial risks amongst a State's health plan issuers and helps 
stabilize premiums under modified community rating and individual 
mandate. Conceptually, risk adjustment models should be as accurate as 
possible while minimizing the potential for ``gaming''

[[Page 15441]]

and coding creep. A more accurate model typically requires a higher 
number of predictive factors, and in the case of the HCCs, more HCCs. 
However, having more HCCs may also open up more opportunities for 
coding creep and gaming of the system. Therefore, a careful balance 
must be achieved. Although Massachusetts acknowledges that its higher 
number of HCCs may create some added potential for gaming or coding 
creep, it believes this risk is minimal because it will use only 
certain claims types and certain provider types, will impose clinical 
hierarchies, and will exclude certain vague diagnoses and codes subject 
to discretionary coding. Further, Massachusetts and its issuers have 
experience with the necessary best practices of risk adjustment and 
intend to implement an effective data validation process.
    The Affordable Care Act risk adjustment program is designed to be a 
budget-neutral revenue redistribution among issuers. Health insurance 
issuers expect fair and adequate transfer of funds; that is, member 
risk profiles should be accurately stratified and correctly ranked.
    The complete list of the condition categories included in the 
Massachusetts models is provided in Table 16. Although Massachusetts 
includes more HCCs than under the proposed Federal methodology, the 
Commonwealth notes that most commercial risk adjustment models use 
almost twice as many condition categories as it includes here.
(2) HCC Models
    Similar to the HHS approach, Massachusetts calibrated models for 
bronze, silver, gold and platinum benefit tiers separately based on 
actuarial value. Due to the lack of empirical data, Massachusetts is 
unable to apply a separately-calibrated risk adjustment model for 
catastrophic plans until a sufficient amount of data becomes available 
in the future. At the present time, it plans to apply the risk 
adjustment model developed for bronze plans to catastrophic plans, and 
proposes to use the actuarial value adjustment factor of 0.57 (as 
provided by the Federal methodology) to account for benefit design 
related utilization differences between catastrophic plans and other 
metal level plans. For calculating funds transfer, Massachusetts plans 
to keep the catastrophic plans in their own risk adjustment pool in the 
initial years, which is consistent with the proposed Federal 
methodology. Please also refer to the conceptual framework for risk 
adjustment funds transfer above for more information on Massachusetts's 
treatment of catastrophic plans in risk adjustment.
    The model dependent variable is total plan paid amount, or ``plan 
liability.'' Factors or explanatory variables included in the risk 
adjustment models are--1 constant term, 2 age/gender factors, 162 HCCs 
and 2 disease interaction terms. Unlike the proposed Federal 
methodology where there are 3 sets of risk weights by age cohort for 
each metal level, that is, 15 models in total, Massachusetts's models 
do not contain separate risk weights by age cohort. The Massachusetts 
methodology has 4 models, one for each metal level. The bronze model 
will be applicable to both the bronze plans and the catastrophic plans.
    In risk adjustment modeling work, partial-year eligibility is 
typically addressed by annualizing the dependent variable and weighting 
the least squares regressions by the fraction of eligibility. 
Massachusetts began modeling using this approach and found that the 
predictive accuracy for members with short eligibility, especially 
newborns, was low. Upon further analyses, Massachusetts believes that 
this was related to annualizing the dependent variable and using 
eligibility duration as weight in regressions. As a result 
Massachusetts explored nonlinear modeling techniques and developed a 
set of factors to adjust for partial-year eligibility. In its risk 
adjustment models, the minimum eligibility duration requirement is 1 
month.
    Massachusetts's thinking on this issue reflects the Commonwealth's 
experience with programs that have high turnover rates, such as the 
Commonwealth Care program. Massachusetts believes that prediction 
biases associated with partial-year eligibility could aggravate 
selection issues if not addressed adequately.
    Massachusetts took an iterative approach to developing the risk 
adjustment models. In each iteration, factors with negative and/or 
statistically insignificant coefficients and factors without adequate 
sample size were either excluded or combined with other factors. The 
unique feature of the HCC risk adjustment models is clinical 
hierarchy--that is, the coefficient of a less severe condition category 
should not exceed the coefficient of a more severe condition in the 
same clinical hierarchy. This ensures clinical validity and preserves 
healthcare resource for treating more severe medical conditions. 
Massachusetts ensured that all coefficients follow the clinical 
hierarchies. Where they did not, it forced monotonicity in the 
regression coefficients using restricted regressions.
    Because the models are by metal level, one HCC may receive 4 
different risk weights in the 4 models. Under the assumption that an 
HCC treated in a lower metal level plan should not lead to higher plan 
liability than if it were treated in a higher metal level plan, 
Massachusetts also forced monotonicity by HCC across metal levels.
    In the final models, all factors have nonnegative and statistically 
significant coefficients, and have met the monotonicity requirements of 
the HCCs and the monotonicity requirements Massachusetts imposed by 
metal level. Massachusetts also checked that the member-level total 
predictions are monotonic across benefit tiers by age/gender groups. 
Table 17 provides the full set of coefficients.
    Below is an example of how to calculate an individual risk score 
from these HCC models.

    Example: Member 001, male, 25 years old, is enrolled in a Gold 
plan for 6 months, and has three HCCs-HCC005, HCC032, and HCC072.
Member Risk Score = Constant Term + Demographic Factor + Sum 
(Medical Risk Factors)/Duration Adjustment Factor
= 0.108698 + 0 + (4.203378 + 1.093277 + 4.025404)/0.742262
= 12.667685

    The Constant Terms, Demographics Factor and Medical Risk Factors 
are provided in Table 17. The Duration Adjustment Factors are provided 
in Table 18.
(3) Predictive Accuracy
    The final model R-Squared is provided below in Table 12.

                     Table 12--Final Model R-Squared
------------------------------------------------------------------------
                                                             Model R-
                                             Counts of      Squared for
                                              Unique        Predicting
                                              Members       Paid $PMPY
                                                             (percent)
------------------------------------------------------------------------
Platinum................................         344,472           48.54
Gold....................................         171,207           52.91
Silver..................................         415,245           46.66
Bronze..................................         193,725           47.58
------------------------------------------------------------------------

    These are comparable to the R-Squared levels observed in many 
commercial risk adjustment models. Massachusetts also validated the 
models using a more recent data extract from the Commonwealth's APCD 
and obtained similar R-Squared values.

[[Page 15442]]

e. Adjusting for Induced Demand
(1) Adjusting for Metallic Tier and Cost-Sharing Reduction
    In the proposed rule, a set of induced utilization adjustment 
factors were provided to account for the expected utilization level 
differences associated with different benefit levels of plans, as well 
as those that result from CSRs applied to Silver Variation plans.
    Massachusetts proposes to use the HHS proposed induced demand 
factors to adjust for induced utilization tied to metallic tiers. In 
terms of adjusting for induced utilization associated with CSR through 
Silver Variation plans, however, its methodology must appropriately 
account for Massachusetts's unique circumstance as related to the 
anticipated cost-sharing wrap above and beyond the Federal CSR.
    As a result, from the perspective of induced utilization 
adjustment, the factors supplied in the HHS methodology (specifically 
calibrated for target AVs of 73 percent, 87 percent and 94 percent) may 
not be adequate for Massachusetts. To overcome this limitation, 
Massachusetts constructed a continuous induced demand curve by fitting 
a polynomial trend line to the HHS proposed induced utilization factors 
by metal level, which Massachusetts extended to 100 percent AV and 
validated as described below.
    Using the APCD and Commonwealth Care data sets Massachusetts 
calculated an average member-month-weighted risk score and an average 
PMPM claim amount for each metallic tier. It then backed out the 
average risk score to calculate a risk-neutral PMPM claim amount for 
each metallic tier. Massachusetts performed this analysis separately 
for non-group and small group after adjusting the non-group results for 
the impact of non-group selection. The difference in the risk neutral 
rate by tier is the impact of benefit design induced utilization. With 
data from both the APCD and Commonwealth Care, Massachusetts was able 
to populate the curve with a continuous range of AV values including 
those that are close to 100 percent.
    The sample size for bronze and silver metal levels was too small to 
be credible but for the gold and platinum metal levels the results were 
consistent with the HHS factors. Massachusetts determined that this 
validated its decision to use the HHS-proposed induced demand factors 
to adjust for induced utilization tied to metallic tiers.
    For plans subject to anticipated cost-sharing wrap subsidies 
Massachusetts intends to use the same induced demand curve to determine 
the increased utilization as a result of subsidized cost sharing. In 
Table 13 below it has listed induced demand factors by actuarial value 
in 2 percent increments.

                    Table 13--Induced Demand Factors
------------------------------------------------------------------------
                                                          Induced demand
                         Plan AV                              factor
------------------------------------------------------------------------
0. 70...................................................          1. 000
0. 72...................................................          1. 008
0. 74...................................................          1. 017
0. 76...................................................          1. 027
0. 78...................................................          1. 037
0. 80...................................................          1. 049
0. 82...................................................          1. 061
0. 84...................................................          1. 073
0. 86...................................................          1. 087
0. 88...................................................          1. 101
0. 90...................................................          1. 117
0. 92...................................................          1. 132
0. 94...................................................          1. 149
0. 96...................................................          1. 167
0. 98...................................................          1. 185
------------------------------------------------------------------------

(2) Adjusting for Non-Group Selection
    The proposed Market Reform Rule and the proposed HHS notice of 
benefit and payment parameters for 2014 contemplate separate risk pools 
for individual and small group policies and modified community rating 
to be applied separately within each risk pool. The Commonwealth has 
had a merged small and non-group market since its landmark reform in 
2006, where small groups and non-group plans are subject to the same 
index rate and pricing methodology.
    In order to determine if there is an underlying selection dynamic 
related only to members' group versus non-group status, Massachusetts 
applied concurrent risk adjustment models developed for the 
Commonwealth to merged market membership and claims data from the 
Commonwealth's APCD. The models account for cost variations due to 
demographics, medical comorbidities and plan benefit design. The risk-
adjusted paid amount was calculated at the member level.
    Members were grouped by non-group versus small group. Groups of 1 
were treated as non-group policies in its analysis. The average actual 
annual paid amount and the average risk-predicted annual paid amount 
were compared in total and by metal level. The ratio of actual paid to 
the risk-predicted paid for those enrolled in non-group products was 
compared to the same ratio for those enrolled in small group products. 
Any meaningful difference between the ratios for these two groups would 
indicate that there is a cost difference between the types of members--
that is, non-group versus small group--that is not explained by the 
characteristics accounted for in the risk adjustment models.
    Massachusetts found a higher average ratio for the non-group market 
segment. However, it also found that this selection was limited to 
platinum plans. As such, Massachusetts's methodology includes an 
induced demand factor that will only be applied to those enrolled in 
platinum plans. Based on two years' worth of APCD data, Massachusetts 
found that on average the ratio for platinum plans was 5.7 percent 
higher for non-group over small group, while for gold plans it was 
broadly consistent between non-group and small group. The Commonwealth 
plans to re-calibrate this factor periodically based on up-to-date 
experience of the market. This factor will be applied to individuals 
who enrolled in platinum plans and do not receive premium subsidies or 
CSRs. The individual risk score will be multiplied by this factor.
    This adjustment mechanism as part of the risk adjustment 
methodology is uniquely relevant to the merged market in Massachusetts. 
In other States where there are separate risk pools for individual 
plans and small group plans the selection differential is embedded in 
the underlying claims level of each risk pool.
f. Calculation of Funds Transfer
    The funds transfer calculation Massachusetts proposes is 
structurally the same as the proposed Federal methodology, although 
some of the adjustment factors included in the Commonwealth's 
calculation are defined differently and were developed from the 
Commonwealth's own data.
    Massachusetts will use the following formula to calculate risk 
adjustment funds transfers.
[GRAPHIC] [TIFF OMITTED] TR11MR13.012


[[Page 15443]]


(1), where

Ti = plan i's risk adjustment transfer amount
PLRSi = plan i's plan liability risk score
PS = average premium for Massachusetts
AVi = plan i's metal level AV
ARFi = allowable rating factor for plan i
IDFi = plan i's induced demand factors for benefit design and non-
group selection
GCFi = plan i's geographic cost factor
si= plan i's share of the Commonwealth's enrollment

    The first fraction in formula (1) is premium with risk selection, 
and the second fraction is premium without risk selection. Each 
component will average to 1.0 across all plans in the Commonwealth's 
merged market. Massachusetts will keep catastrophic plans in their own 
risk adjustment pool. In this case, formula (1) will apply to the 
catastrophic risk adjustment pool and the metal level plans risk 
adjustment pool separately.
    The calculation of PLRSi, plan i's plan liability risk score, is 
the enrolled member month weighted risk scores of plan i using the risk 
adjustment models and adjusted by billable member months. It is 
calculated as shown by HHS. See the section above on HCC models and 
Tables 17 and 18 below for the risk weights and how to calculate member 
level risk scores. Massachusetts proposes to use this approach for 
calculating plan liability risk scores under the assumption that the 
proposed Federal rule for family rating will be replicated by the 
Commonwealth.
    The calculation of the State average premium is as shown by HHS.
    Massachusetts will use the Federal adjustment factors for plan AV 
in the Commonwealth's funds transfer calculations. The AV adjustment 
factors (AVi for plan i) are listed in Table 14 below.

                     Table 14--AV Adjustment Factors
------------------------------------------------------------------------
                                                           AV adjustment
                       Metal level                            factor
------------------------------------------------------------------------
Catastrophic............................................            0.57
Bronze..................................................            0.60
Silver..................................................            0.70
Gold....................................................            0.80
Platinum................................................            0.90
------------------------------------------------------------------------

    Massachusetts's methodology includes two separate induced demand 
factors (IDFi for plan i), one relates to benefit design and CSR and 
one for group selection. These two factors are multiplicative, except 
for individuals who will receive Federal subsidies and additional State 
subsidies, because their cost-sharing level is prescribed rather than 
selected.
    Allowable rating factors (ARFi for plan i) will include the State-
defined uniform age rating curve. Pending final State decision on all 
rating factors applicable to 2014, Massachusetts will provide 
additional specifications as needed on additional adjustment steps to 
ensure the accuracy of risk adjustment.
    Massachusetts proposes to calculate geographic cost factors 
consistent with the HHS methodology, except that it plans to use gold 
plans as the benchmark for the calculations because gold plans are 
expected to attract the most enrollment in the Massachusetts merged 
market after 2014, whereas silver plans will likely have relatively low 
enrollment based on the product market in Massachusetts today. Having a 
data sample with sufficient enrollment is necessary in order to 
credibly measure regional cost differences. Massachusetts has not yet 
made a final decision on the number of rating areas, permissible range 
of the rates by area, or the schedule for implementing the changes. 
However, regardless of the specific decisions that determine the actual 
factors, the calculations will follow the formula shown by HHS.
g. Data Collection Approach
    Massachusetts proposes an approach to risk adjustment data 
collection that leverages the Commonwealth's existing APCD as a 
resource for data submission to support risk adjustment data 
collection. This approach facilitates Massachusetts's policy goals of 
administrative simplicity and minimizing the number and types of data 
submissions by health plan issuers. Consistent with Federal 
requirements, it also facilitates the use of data that is complete, 
high in quality, and available in a timely fashion. Moreover, as 
elaborated below, use of the APCD ensures that the Commonwealth does 
not as part of risk adjustment data collection store any personally 
identifiable information for use as a unique identifier (except as may 
be required for data validation).
    The APCD is maintained by the Massachusetts Center for Health 
Information and Analysis (CHIA) and requires data submission from the 
following entities: Public payers, commercial insurance issuers, health 
maintenance organizations, third-party administrators, and self-insured 
plans. Data submissions must be filed monthly.
    The APCD collects payer data for all members living in 
Massachusetts. Health plan issuers and other payers submit five files 
each month: Member eligibility, medical claims, pharmacy claims, dental 
claims and provider details. Product description files from all of the 
payers are submitted to the APCD on a quarterly basis. Detailed data 
submission requirements are in place and available for review on CHIA's 
Web site, http://www.mass.gov/chia/researcher/health-care-delivery/hcf-data-resources/apcd/. Members of a Massachusetts employer group who 
live out of State are currently excluded unless the payer also holds a 
contract with the Commonwealth's employee health administrator to 
provide data for State-covered non-resident individuals. The 
Commonwealth is working with CHIA and the affected data submitters 
actively to have this resolved before 2014 to ensure the accuracy of 
risk adjustment. It is also working with CHIA and issuers in the 
Commonwealth to evaluate additional data elements needed to support 
risk adjustment calculations.
    The APCD already collects most of the data elements to support risk 
adjustment (see discussion of the data extract elements below), and 
nearly all other elements have to this date been scheduled to be added 
as part of APCD collection. As part of data intake, automated data 
quality checks are performed by CHIA. Once data are quality checked the 
subset required for risk adjustment are processed for purposes of 
creating an extract for risk adjustment calculations. Creation of the 
extract signifies the beginning of the risk adjustment data collection 
process. The extract provides only those data elements that are 
necessary for risk adjustment and contains no personally identifiable 
information for use as a unique identifier for an enrollee's data.
    Using the data extract from the APCD, the Health Connector will be 
responsible for performing all risk adjustment calculations as well as 
facilitating payment and charge transactions. The data extracts will be 
maintained in a secure environment that meets applicable Federal and 
State security standards.
    Below Massachusetts describes the data elements currently submitted 
to the APCD that will be used to create the risk adjustment extract. 
The Commonwealth also reviews the Health Connector's authority to use 
the APCD to support risk adjustment data collection, and provide 
additional details on data quality monitoring and control, data privacy 
and security standards, and the data management plan for risk 
adjustment operations.
h. Available Data in APCD for Risk Adjustment
    As noted, the APCD already collects most of the data elements 
needed for risk adjustment. Member files include member and subscriber 
identifiers,

[[Page 15444]]

relationships, demographics, information about the payer, product and 
coverage, and duration of enrollment. Claims files include all paid 
claims (including encounter data on capitated services) for covered 
services, including but not limited to institutional and professional 
services, therapies, durable medical equipment (DME), transportation, 
laboratory services, imaging, and skilled nursing. Pharmacy files 
include all prescribed and dispensed medications. Dental claims files 
include all treatments and services. Provider files support the 
identification of providers by specialty and location. Product files 
provide limited information about the different insurance products that 
correspond to the Member file.
    On the Commonwealth of Massachusetts Web site, http://www.mass.gov/chia/researcher/health-care-delivery/hcf-data-resources/apcd/submitting-data-to-the-apcd.html#regulations, it has made available a 
table of a subset of the data elements that are currently collected 
from payers. It will use the identified elements as inputs for 
calculating risk adjustment funds transfers and the assignment of a 
member to the correct plan.
    There are data elements required to calculate risk adjustment funds 
transfer that the APCD currently does not collect, such as monthly 
premium, employer zip code, household income level, Indian status, and 
AV or inputs used to calculate AV using the Federal AV calculator. 
Massachusetts is currently working with CHIA, other State agencies, and 
the issuers in Massachusetts to add these data elements as part of APCD 
data collection and is working with plans to have them submitted by 
June 1, 2013. Some data elements--Indian status and household income--
will be submitted to the APCD via the Exchange.
    In addition, certain plans may not have sufficient claims 
experience reported in the APCD. This gap may occur because plans may 
be exempt from data submission or are new to the Massachusetts market. 
Current APCD regulations exempt small plans with less than 1,000 
covered lives in Massachusetts-based plans from submitting regular data 
files. This exemption recognizes the administrative cost of programming 
and providing regular data extracts. Health plan issuers that are new 
to the Massachusetts market will need to take time to build up the 
capacity to submit data to the APCD on a regular basis. As such, 
Massachusetts plans to establish a method for small and new-to-market 
plans to submit minimally necessary data for risk adjustment through an 
alternate mechanism than the APCD. The specifications for this 
alternate submission, the secure data transfer methodology, and the 
communication of results to the issuers will be developed as part of 
risk adjustment operations and will not use any personally identifiable 
information as a unique identifier.
(1) Legal Authority for the Health Connector To Access APCD Data for 
Risk Adjustment
    Massachusetts General Laws (M. G. L.) Chapter 118GSec.  6 
authorized the Division of Health Care Finance and Policy (DHCFP) to 
collect uniform information from public and private health care payers 
and to operate the Commonwealth's APCD. The Commonwealth's authority to 
collect, analyze and report health care cost and utilization was 
further expanded with the passage and subsequent enactment of Chapter 
224 of the Acts of 2012. Section 19 of this law established CHIA with 
broad responsibility for health care data collection, analysis and 
reporting, including the APCD. CHIA assumes all of the data collection, 
management and analysis tasks previously performed by DHCFP. In 
addition, the statute enables CHIA to provide government agencies and 
other parties access to data for the purpose of lowering total medical 
expenses, coordinating care, benchmarking, quality analysis and other 
research, for administrative or planning purposes. CHIA may also 
provide information to and work with other State agencies to ``collect 
and disseminate data concerning the cost, price and functioning of the 
health care system in the Commonwealth and the health status of 
individuals.''
    Massachusetts is currently developing an agreement with CHIA to 
obtain data management and analytic support to administer the risk 
adjustment program, consistent with M. G. L. ch. 12C which gives CHIA 
the authority to enter into interagency service agreements with other 
Massachusetts agencies ``for transfer and use of data.''
(2) Data Security and Privacy Protection
    As noted, under existing law and regulation, the Commonwealth 
already collects a range of data through its APCD and protects this 
information as described below.
    Specifically in relation to data collection under risk adjustment 
and Federal requirements, the risk adjustment extract created through 
the APCD will not use or store any personally identifiable information 
for use as a unique identifier for an enrollee's data. Only those data 
fields that are reasonably necessary as part of the risk adjustment 
methodology will be included in the extract.
    For background, the APCD data is hosted on servers located at the 
offices of the Commonwealth of Massachusetts Executive Office of Health 
and Human Services Center for Health Information and Analysis at Two 
Boylston Street, Boston, Massachusetts 02116. CMS has approved CHIA's 
application to receive and hold Medicare data under the newly created 
APCD category. In fact, CHIA was the first APCD to apply and be 
approved. CHIA is fully compliant with the CMS Data Use Agreement (See 
CMS DUA 20937).
    CHIA is an experienced custodian of protected health information. 
Since 1982, CHIA (as DHCFP) has served as the repository for the 
State's Hospital Discharge Data, Emergency Room Data and Outpatient 
Observation Data. CHIA has extensive claims processing experience as 
the operator of the State's Health Safety Net program. CHIA has passed 
two independent third party security audits--a HIPAA security audit and 
a SAS-70 Type 2 audit. In addition, PCI security audits are done 
quarterly on CHIA's web portal.
    As indicated above, the data extract produced by the APCD on behalf 
of the Health Connector for calculating risk adjustment funds transfer 
will contain no personally identifiable information for use as a unique 
identifier for an enrollee's data. All personal identifiers will be 
replaced with a scrambled Unique Member Identification number that is 
created independent of any HIPAA Protected Health Information or other 
personally identifiable information. This number will be a string of 
letters, numbers and symbols that cannot be ``de-encrypted'' to yield 
decipherable data.
    The risk adjustment data extract will be securely transmitted into 
a secure data environment that will be established by the Health 
Connector. Calculations of plan actuarial risks and funds transfer will 
take place in this secure environment, with no personally identifiable 
information being used as a unique identifier. Massachusetts states 
that it has a fully HIPAA-compliant facility and data infrastructure in 
active use for operating the risk adjustment program for the 
Commonwealth Care program, which can be used for administering the 
Affordable Care Act risk adjustment program. Massachusetts also states 
that it is in active discussions with CHIA on the possibility of 
establishing a dedicated secure data

[[Page 15445]]

environment for risk adjustment at CHIA's Data Center.
    Finally, leveraging funding applied through the Health Connector's 
Level 2 Exchange Establishment Grant (currently under CCIIO review), 
CHIA plans to upgrade its disaster recovery program to meet the 
performance requirement necessary for supporting risk adjustment.
(3) Data Quality Control
    The APCD data intake and warehousing operation incorporates data 
quality evaluation and monitoring processes to ensure the integrity and 
accuracy of downstream files.
    CHIA has published a set of data completeness checks containing 
nearly 800 unique automated tests that are conducted at intake within 
the secure processing environment. These checks are used to assess the 
file's compliance with minimum standards. A full list of these checks 
is available on CHIA's Web site: http://www.mass.gov/chia/researcher/health-care-delivery/hcf-data-resources/apcd/submitting-data-to-the-apcd.html.
    When this evaluation process is complete, a report is generated for 
the payer's review. The report shows the test results and whether the 
file ``passes'' and can move forward into the next phase of processing. 
If a file does not pass at any point in this process, the APCD does not 
conduct any further processing and notifies the payer that errors must 
be corrected and the files resubmitted. Full resubmission of a file is 
required in order to maintain file integrity.
    CHIA will submit further supplemental information detailing its 
plans to collect data from any non-compliant issuers, including 
additional information on alternate data submission procedures.
(4) Data Collection Timeline
    Massachusetts plans to provide quarterly funds transfer calculation 
summaries to each issuer that is subject to risk adjustment and will be 
working with the issuers to determine the appropriate content and level 
of detail for the quarterly report summaries. The proposed timeline for 
processing and analyzing APCD data for Calendar Year 2014 for the 
purpose of risk adjustment is illustrated below. Massachusetts is in 
discussions with CHIA and the issuers regarding the timeline and also 
plan to conduct test runs to ensure the feasibility of the timeline and 
quality of the data collection process.

                         Table 15--Proposed Timeline for Risk Adjustment Data Collection
----------------------------------------------------------------------------------------------------------------
                           Time period                                                Activity
----------------------------------------------------------------------------------------------------------------
Each quarter:
    Months 1, 2, 3...............................................  Issuers submit data. Data submitters submit
                                                                    on a monthly basis.
Month 3 + 1 month (Month 4)......................................  Claims run-out period.
Month 3 + 2 months (Month 5).....................................  Quality checks at designated points in
                                                                    current APCD process.
                                                                   Member identity resolution and de-
                                                                    identification via removal of personal
                                                                    identifiers.
                                                                   CHIA creates extract with minimally necessary
                                                                    data elements and sends to Connector or
                                                                    Connector's designee to calculate risk
                                                                    adjustment.
                                                                   Quality review by the Connector or its
                                                                    designee. The purpose here is to determine
                                                                    whether data meets quality standards for
                                                                    risk adjustment purposes. Identified issues
                                                                    and recommended action steps will be sent to
                                                                    CHIA and the issuers regarding resubmission.
Month 3 + 3 months (Month 6).....................................  Conducts all calculations relating to risk
                                                                    adjustment.
                                                                   Sends a preliminary report to data submitters
                                                                    for review and discusses results and
                                                                    observations with issuers.
January through March of the following year......................  Claims run-out period. The proposed data
                                                                    submission deadline is March 31 of the
                                                                    following year, i.e., 3 months claims
                                                                    runout.
April of the following year......................................  Filing deadline for claims paid through March
                                                                    31 of the following year.
May of the following year........................................  Quality assurance process and creation of the
                                                                    data extract.
                                                                   Grouping and review with data submitters.
June of the following year.......................................  Funds transfer settlements calculated and
                                                                    reports generated by June 30 of the
                                                                    following year.
----------------------------------------------------------------------------------------------------------------

i. Schedule of Calibration and Recalibration
    The risk adjustment models and the additional adjustment factors 
proposed will need to be calibrated and recalibrated periodically to be 
reflective of current market conditions, the evolving insured 
population, medical technology and other secular trends in 
Massachusetts. Massachusetts will evaluate the goodness of fit of the 
risk adjustment models and the appropriateness of the additional 
adjustment factors on an ongoing basis and recalibrate every three 
years if the evaluation justifies. On October 1, 2014, the entire 
country is expected to transition to ICD-10-CM coding. Massachusetts 
expects to update the current clinical classification system such that 
it can group ICD-10-CM diagnosis codes into the existing HCCs in 2014. 
However, it does not plan to recalibrate the risk factors in the models 
due to the lack of claims experience under the new coding system.
j. Data Validation
    While not part of the risk adjustment methodology, Massachusetts is 
considering a range of potential data validation approaches. The 
Premium Stabilization Rule, Sec.  153.350 requires States operating a 
risk adjustment program to conduct data validation and provide an 
appeals process. The key goal from Massachusetts's perspective is to 
strike a balance between a data validation process that optimizes the 
identification of errors while implementing a workable system that is 
not administratively burdensome and that recognizes the zero sum nature 
of transfers between health plan issuers. Under the Premium 
Stabilization Rule, Massachusetts will be developing its approach to 
data validation and an appeals process, and will provide an overview of 
current considerations in its State notice of benefit and payment 
parameters.

[[Page 15446]]



 Table 16--List of HCCs in Massachusetts Risk Adjustment Methodology for
                                  2014
------------------------------------------------------------------------
                    HCC                              Description
------------------------------------------------------------------------
HCC001....................................  HIV/AIDS.
HCC201....................................  Bacteremia.
HCC002....................................  Septicemia/Shock.
HCC003....................................  Central Nervous System
                                             Infection.
HCC004....................................  Tuberculosis.
HCC005....................................  Opportunistic Infections.
HCC202....................................  Secondary Cancer Except
                                             Lymph Node.
HCC203....................................  Secondary Cancer of Lymph
                                             Node.
HCC204....................................  Cancer of the Brain/Nervous
                                             System/Pituitary, Pineal
                                             Glands.
HCC205....................................  Acute Leukemia.
HCC008....................................  Lung, Upper Digestive Tract,
                                             and Other Severe Cancers.
HCC009....................................  Lymphatic, Head and Neck,
                                             Brain, and Other Major
                                             Cancers.
HCC010....................................  Breast, Prostate, Colorectal
                                             and Other Cancers and
                                             Tumors.
HCC011....................................  Other Respiratory and Heart
                                             Neoplasms.
HCC012....................................  Other Digestive and Urinary
                                             Neoplasms.
HCC013....................................  Other Neoplasms.
HCC015....................................  Diabetes with Renal
                                             Manifestation.
HCC016....................................  Diabetes with Neurologic or
                                             Peripheral Circulatory
                                             Manifestation.
HCC017....................................  Diabetes with Acute
                                             Complications.
HCC018....................................  Diabetes with Ophthalmologic
                                             Manifestation.
HCC019....................................  Diabetes with No or
                                             Unspecified Complications.
HCC020....................................  Type I Diabetes Mellitus.
HCC021....................................  Protein-Calorie
                                             Malnutrition.
HCC022....................................  Other Significant Endocrine
                                             and Metabolic Disorders.
HCC023....................................  Disorders of Fluid/
                                             Electrolyte/Acid-Base
                                             Balance.
HCC025....................................  End-Stage Liver Disease.
HCC026....................................  Cirrhosis of Liver.
HCC027....................................  Chronic Hepatitis.
HCC028....................................  Acute Liver Failure/Disease.
HCC029....................................  Other Hepatitis and Liver
                                             Disease.
HCC030....................................  Gallbladder and Biliary
                                             Tract Disorders.
HCC031....................................  Intestinal Obstruction/
                                             Perforation.
HCC032....................................  Pancreatic Disease.
HCC033....................................  Inflammatory Bowel Disease.
HCC034....................................  Peptic Ulcer, Hemorrhage,
                                             Other Specified
                                             Gastrointestinal Disorders.
HCC035....................................  Appendicitis.
HCC036....................................  Other Gastrointestinal
                                             Disorders.
HCC037....................................  Bone/Joint/Muscle Infections/
                                             Necrosis.
HCC038....................................  Rheumatoid Arthritis and
                                             Inflammatory Connective
                                             Tissue Disease.
HCC206....................................  Spinal Stenosis.
HCC039....................................  Disorders of the Vertebrae
                                             and Spinal Discs (See
                                             HCC206).
HCC040....................................  Osteoarthritis of Hip or
                                             Knee.
HCC041....................................  Osteoporosis and Other Bone/
                                             Cartilage Disorders.
HCC042....................................  Congenital/Developmental
                                             Skeletal and Connective
                                             Tissue Disorders.
HCC207....................................  Hemophilia.
HCC044....................................  Severe Hematological
                                             Disorders (See HCC207).
HCC045....................................  Disorders of Immunity.
HCC208....................................  Hereditary Hemolytic Anemias
                                             and Coagulation Defects.
HCC209....................................  Toxic/Unspecified
                                             Encephalopathy.
HCC048....................................  Delirium and Encephalopathy
                                             (See HCC209).
HCC049....................................  Dementia.
HCC050....................................  Senility, Nonpsychotic
                                             Organic Brain Syndromes/
                                             Conditions.
HCC051....................................  Drug/Alcohol Psychosis.
HCC052....................................  Drug/Alcohol Dependence.
HCC054....................................  Schizophrenia.
HCC055....................................  Major Depressive, Bipolar,
                                             and Paranoid Disorders.
HCC056....................................  Reactive and Unspecified
                                             Psychosis.
HCC057....................................  Personality Disorders.
HCC058....................................  Depression.
HCC059....................................  Anxiety Disorders.
HCC061....................................  Profound Mental Retardation/
                                             Developmental Disability.
HCC062....................................  Severe Mental Retardation/
                                             Developmental Disability.
HCC063....................................  Moderate Mental Retardation/
                                             Developmental Disability.
HCC064....................................  Mild/Unspecified Mental
                                             Retardation/Developmental
                                             Disability.
HCC065....................................  Other Developmental
                                             Disability.
HCC066....................................  Attention Deficit Disorder.
HCC067....................................  Quadriplegia, Other
                                             Extensive Paralysis.
HCC068....................................  Paraplegia.
HCC069....................................  Spinal Cord Disorders/
                                             Injuries.
HCC070....................................  Muscular Dystrophy.
HCC071....................................  Polyneuropathy.
HCC072....................................  Multiple Sclerosis.

[[Page 15447]]

 
HCC073....................................  Parkinson's and Huntington's
                                             Diseases.
HCC074....................................  Seizure Disorders and
                                             Convulsions.
HCC075....................................  Coma, Brain Compression/
                                             Anoxic Damage.
HCC076....................................  Mononeuropathy, Other
                                             Neurological Conditions/
                                             Injuries.
HCC077....................................  Respirator Dependence/
                                             Tracheostomy Status.
HCC078....................................  Respiratory Arrest.
HCC210....................................  Post Trauma/Surgery
                                             Pulmonary Insufficiency,
                                             Incl Adult Respir Distress
                                             Syndr.
HCC079....................................  Cardio-Respiratory Failure
                                             and Shock (See HCC210).
HCC080....................................  Congestive Heart Failure.
HCC081....................................  Acute Myocardial Infarction.
HCC082....................................  Unstable Angina and Other
                                             Acute Ischemic Heart
                                             Disease.
HCC083....................................  Angina Pectoris/Old
                                             Myocardial Infarction.
HCC084....................................  Coronary Atherosclerosis/
                                             Other Chronic Ischemic
                                             Heart Disease.
HCC085....................................  Heart Infection/
                                             Inflammation, Except
                                             Rheumatic.
HCC086....................................  Valvular and Rheumatic Heart
                                             Disease.
HCC087....................................  Major Congenital Cardiac/
                                             Circulatory Defect.
HCC088....................................  Other Congenital Heart/
                                             Circulatory Disease.
HCC092....................................  Specified Heart Arrhythmias.
HCC093....................................  Other Heart Rhythm and
                                             Conduction Disorders.
HCC095....................................  Cerebral Hemorrhage.
HCC096....................................  Ischemic or Unspecified
                                             Stroke.
HCC097....................................  Precerebral Arterial
                                             Occlusion and Transient
                                             Cerebral Ischemia.
HCC098....................................  Cerebral Atherosclerosis and
                                             Aneurysm.
HCC100....................................  Hemiplegia/Hemiparesis.
HCC102....................................  Speech, Language, Cognitive,
                                             Perceptual Deficits.
HCC104....................................  Vascular Disease with
                                             Complications.
HCC105....................................  Vascular Disease.
HCC106....................................  Other Circulatory Disease.
HCC107....................................  Cystic Fibrosis.
HCC108....................................  Chronic Obstructive
                                             Pulmonary Disease.
HCC109....................................  Fibrosis of Lung and Other
                                             Chronic Lung Disorders.
HCC110....................................  Asthma.
HCC111....................................  Aspiration and Specified
                                             Bacterial Pneumonias.
HCC112....................................  Pneumococcal Pneumonia,
                                             Empyema, Lung Abscess.
HCC113....................................  Viral and Unspecified
                                             Pneumonia, Pleurisy.
HCC114....................................  Pleural Effusion/
                                             Pneumothorax.
HCC115....................................  Other Lung Disorders.
HCC116....................................  Legally Blind.
HCC117....................................  Major Eye Infections/
                                             Inflammations.
HCC118....................................  Retinal Detachment.
HCC119....................................  Proliferative Diabetic
                                             Retinopathy and Vitreous
                                             Hemorrhage.
HCC120....................................  Diabetic and Other Vascular
                                             Retinopathies.
HCC122....................................  Glaucoma.
HCC125....................................  Significant Ear, Nose, and
                                             Throat Disorders.
HCC126....................................  Hearing Loss.
HCC128....................................  Kidney Transplant Status.
HCC130....................................  Dialysis Status.
HCC211....................................  Acute Renal Failure.
HCC131....................................  Non-Acute Renal Failure (See
                                             HCC211).
HCC132....................................  Nephritis.
HCC133....................................  Urinary Obstruction and
                                             Retention.
HCC134....................................  Incontinence.
HCC135....................................  Urinary Tract Infection.
HCC136....................................  Other Urinary Tract
                                             Disorders.
HCC137....................................  Female Infertility.
HCC138....................................  Pelvic Inflammatory Disease
                                             and Other Specified Female
                                             Genital Disorders.
HCC141....................................  Ectopic Pregnancy.
HCC142....................................  Miscarriage/Abortion.
HCC143....................................  Completed Pregnancy With
                                             Major Complications.
HCC144....................................  Completed Pregnancy With
                                             Complications.
HCC145....................................  Completed Pregnancy Without
                                             Complications (Normal
                                             Delivery).
HCC146....................................  Uncompleted Pregnancy With
                                             Complications.
HCC147....................................  Uncompleted Pregnancy With
                                             No or Minor Complications.
HCC148....................................  Decubitus Ulcer of Skin.
HCC150....................................  Extensive Third-Degree
                                             Burns.
HCC151....................................  Other Third-Degree and
                                             Extensive Burns.
HCC152....................................  Cellulitis, Local Skin
                                             Infection.
HCC154....................................  Severe Head Injury.
HCC155....................................  Major Head Injury.
HCC156....................................  Concussion or Unspecified
                                             Head Injury.
HCC157....................................  Vertebral Fractures.
HCC158....................................  Hip Fracture/Dislocation.

[[Page 15448]]

 
HCC159....................................  Major Fracture, Except of
                                             Skull, Vertebrae, or Hip.
HCC160....................................  Internal Injuries.
HCC161....................................  Traumatic Amputation.
HCC164....................................  Major Complications of
                                             Medical Care and Trauma.
HCC168....................................  Extremely Low Birthweight
                                             Neonates.
HCC169....................................  Very Low Birthweight
                                             Neonates.
HCC212....................................  Low Birthweight (1500-2499
                                             grams) or Unspecified.
HCC170....................................  Serious Perinatal Problem
                                             Affecting Newborn (See
                                             HCC212).
HCC171....................................  Other Perinatal Problems
                                             Affecting Newborn.
HCC172....................................  Normal, Single Birth.
HCC213....................................  Bone Marrow Transplant
                                             Status/Complications.
HCC174....................................  Major Organ Transplant
                                             Status (See HCC213).
HCC175....................................  Other Organ Transplant/
                                             Replacement.
HCC176....................................  Artificial Openings for
                                             Feeding or Elimination.
HCC177....................................  Amputation Status, Lower
                                             Limb/Amputation
                                             Complications.
HCC180....................................  Radiation Therapy.
HCC181....................................  Chemotherapy.
HCC182....................................  Rehabilitation
------------------------------------------------------------------------


        Table 17--Proposed Risk Adjustment Models for Massachusetts Risk Adjustment Methodology for 2014
----------------------------------------------------------------------------------------------------------------
                                                                                                      Bronze/
                     Factor                          Platinum          Gold           Silver       catastrophic
----------------------------------------------------------------------------------------------------------------
Constant Term...................................       0. 108698       0. 108698       0. 054613       0. 054613
Female, 0-1.....................................       0. 120243       0. 120243       0. 120243       0. 076300
Male, 0-1.......................................       0. 430573       0. 252549       0. 252549       0. 130423
HCC001..........................................       4. 151453       4. 151453       3. 974417       3. 974417
HCC201..........................................       5. 439483       5. 439483       5. 439483       5. 439483
HCC002..........................................       4. 911655       4. 911655       4. 911655       4. 911655
HCC003..........................................       2. 070673       2. 070673       2. 070673       2. 070673
HCC004..........................................       1. 458104       0. 580915       0. 580915       0. 580915
HCC005..........................................       4. 203378       4. 203378       4. 203378       4. 203378
HCC202..........................................       6. 482786       6. 482786       6. 482786       6. 482786
HCC203..........................................       6. 482786       6. 482786       5. 475333       5. 475333
HCC204..........................................       6. 047288       4. 581452       4. 147687       2. 272855
HCC205..........................................      10. 703344      10. 703344      10. 703344      10. 703344
HCC008..........................................       2. 272855       2. 272855       2. 272855       2. 272855
HCC009..........................................       1. 075169       1. 075169       1. 075169       1. 075169
HCC010..........................................       1. 075169       1. 075169       1. 075169       1. 075169
HCC011..........................................       1. 075169       1. 075169       1. 075169       1. 075169
HCC012..........................................       0. 375903       0. 373614       0. 373614       0. 373614
HCC013..........................................       0. 375903       0. 373614       0. 373614       0. 373614
HCC015..........................................       0. 921977       0. 921977       0. 921977       0. 921977
HCC016..........................................       0. 395184       0. 395184       0. 395184       0. 395184
HCC017..........................................       0. 395184       0. 395184       0. 395184       0. 320869
HCC018..........................................       0. 320869       0. 320869       0. 320869       0. 320869
HCC019..........................................       0. 320869       0. 320869       0. 320869       0. 320869
HCC020..........................................       0. 844671       0. 844671       0. 769198       0. 769198
HCC021..........................................       8. 780537       8. 780537       8. 780537       8. 780537
HCC022..........................................       0. 976845       0. 976845       0. 976845       0. 976845
HCC023..........................................       1. 346099       1. 346099       1. 346099       1. 346099
HCC025..........................................       1. 601166       1. 601166       1. 346120       1. 346120
HCC026..........................................       0. 986228       0. 986228       0. 408007       0. 408007
HCC027..........................................       0. 460726       0. 460726       0. 408007       0. 408007
HCC028..........................................       1. 601166       1. 601166       1. 346120       1. 346120
HCC029..........................................       0. 408007       0. 408007       0. 408007       0. 408007
HCC030..........................................       1. 977590       1. 977590       1. 882379       1. 882379
HCC031..........................................       3. 749986       3. 749986       3. 749986       3. 749986
HCC032..........................................       1. 093277       1. 093277       1. 093277       1. 093277
HCC033..........................................       1. 790188       1. 790188       1. 595541       1. 595541
HCC034..........................................       0. 940108       0. 940108       0. 940108       0. 940108
HCC035..........................................       2. 683705       2. 683705       2. 683705       2. 011126
HCC036..........................................       0. 405518       0. 405518       0. 377057       0. 377057
HCC037..........................................       2. 952592       2. 952592       2. 952592       2. 952592
HCC038..........................................       1. 094796       1. 094796       1. 094796       1. 094796
HCC206..........................................       2. 098343       2. 098343       2. 098343       2. 098343
HCC039..........................................       0. 569751       0. 569751       0. 569751       0. 569751
HCC040..........................................       1. 094796       1. 094796       1. 094796       1. 094796
HCC041..........................................       0. 311993       0. 311993       0. 311993       0. 311993
HCC042..........................................       1. 125274       1. 125274       1. 125274       1. 125274

[[Page 15449]]

 
HCC207..........................................      30. 636640      30. 636640      14. 101544       7. 514115
HCC044..........................................       5. 694090       5. 694090       5. 694090       5. 694090
HCC045..........................................       1. 011533       1. 011533       1. 011533       1. 011533
HCC208..........................................       1. 404092       1. 404092       1. 404092       1. 404092
HCC209..........................................       2. 918243       2. 918243       2. 918243       2. 918243
HCC048..........................................       1. 345886       1. 345886       1. 182955       1. 182955
HCC049..........................................       1. 216549       1. 216549       1. 086774       1. 086774
HCC050..........................................       1. 019842       1. 019842       1. 019842       1. 019842
HCC051..........................................       1. 343297       1. 343297       1. 343297       1. 343297
HCC052..........................................       0. 845301       0. 845301       0. 845301       0. 845301
HCC054..........................................       2. 625043       2. 625043       2. 161218       2. 161218
HCC055..........................................       0. 848033       0. 848033       0. 772826       0. 772826
HCC056..........................................       0. 848033       0. 848033       0. 772826       0. 772826
HCC057..........................................       0. 338729       0. 338729       0. 338729       0. 338729
HCC058..........................................       0. 338729       0. 338729       0. 338729       0. 338729
HCC059..........................................       0. 293976       0. 234661       0. 234661       0. 234661
HCC061..........................................       2. 234452       0. 911836       0. 911836       0. 416412
HCC062..........................................       0. 551357       0. 551357       0. 416412       0. 416412
HCC063..........................................       0. 551357       0. 416412       0. 416412       0. 416412
HCC064..........................................       0. 416412       0. 416412       0. 416412       0. 206061
HCC065..........................................       0. 315057       0. 315057       0. 315057       0. 206061
HCC066..........................................       0. 229744       0. 229744       0. 206061       0. 206061
HCC067..........................................       5. 447025       5. 447025       5. 447025       5. 447025
HCC068..........................................       2. 224234       2. 224234       2. 224234       2. 224234
HCC069..........................................       2. 098343       2. 098343       2. 098343       2. 098343
HCC070..........................................       1. 390521       1. 390521       1. 390521       1. 390521
HCC071..........................................       1. 209341       1. 209341       1. 209341       1. 209341
HCC072..........................................       4. 312296       4. 025404       4. 025404       4. 025404
HCC073..........................................       1. 217710       1. 217710       1. 217710       1. 217710
HCC074..........................................       1. 302181       0. 980434       0. 980434       0. 980434
HCC075..........................................       6. 388482       6. 388482       6. 388482       5. 638247
HCC076..........................................       0. 382239       0. 382239       0. 382239       0. 382239
HCC077..........................................      30. 588977      30. 588977      17. 179162      17. 179162
HCC078..........................................       6. 741034       6. 741034       6. 741034       2. 760821
HCC210..........................................      14. 638331      14. 638331      14. 638331      14. 638331
HCC079..........................................       4. 963995       4. 963995       2. 922954       2. 760821
HCC080..........................................       1. 268543       1. 268543       1. 268543       1. 268543
HCC081..........................................       5. 873126       5. 873126       5. 873126       5. 873126
HCC082..........................................       3. 409746       3. 409746       3. 409746       3. 170501
HCC083..........................................       1. 185868       1. 185868       1. 185868       1. 185868
HCC084..........................................       0. 518025       0. 518025       0. 518025       0. 518025
HCC085..........................................       3. 358496       3. 358496       3. 358496       3. 358496
HCC086..........................................       0. 748725       0. 748725       0. 748725       0. 748725
HCC087..........................................       4. 962870       4. 456078       2. 859281       2. 119499
HCC088..........................................       0. 748725       0. 748725       0. 748725       0. 748725
HCC092..........................................       1. 226834       1. 226834       1. 226834       1. 226834
HCC093..........................................       1. 005026       1. 005026       1. 005026       1. 005026
HCC095..........................................       6. 224877       6. 224877       4. 744856       4. 744856
HCC096..........................................       0. 917154       0. 917154       0. 705810       0. 705810
HCC097..........................................       0. 065189       0. 065189       0. 065189       0. 065189
HCC098..........................................       0. 065189       0. 065189       0. 065189       0. 065189
HCC100..........................................       2. 224234       2. 224234       2. 224234       2. 224234
HCC102..........................................       2. 941517       2. 941517       2. 941517       2. 941517
HCC104..........................................       2. 598472       2. 598472       2. 598472       2. 598472
HCC105..........................................       0. 831150       0. 831150       0. 831150       0. 831150
HCC106..........................................       0. 685084       0. 685084       0. 685084       0. 685084
HCC107..........................................       8. 318393       7. 678688       4. 188453       3. 417106
HCC108..........................................       0. 445827       0. 445827       0. 445827       0. 445827
HCC109..........................................       0. 445827       0. 445827       0. 445827       0. 445827
HCC110..........................................       0. 327310       0. 327310       0. 298068       0. 298068
HCC111..........................................       4. 185448       4. 185448       4. 185448       4. 185448
HCC112..........................................       2. 487771       2. 487771       2. 487771       2. 487771
HCC113..........................................       0. 459994       0. 459994       0. 459994       0. 459994
HCC114..........................................       4. 665050       4. 665050       4. 461861       4. 461861
HCC115..........................................       0. 245923       0. 245923       0. 174247       0. 174247
HCC116..........................................       1. 846476       1. 846476       1. 846476       1. 846476
HCC117..........................................       0. 871167       0. 871167       0. 871167       0. 293138
HCC118..........................................       0. 425465       0. 303314       0. 303314       0. 303314
HCC119..........................................       0. 975698       0. 975698       0. 975698       0. 975698
HCC120..........................................       0. 975698       0. 629335       0. 629335       0. 387584

[[Page 15450]]

 
HCC122..........................................       0. 156864       0. 156864       0. 156864       0. 156864
HCC125..........................................       0. 441244       0. 441244       0. 441244       0. 441244
HCC126..........................................       0. 343108       0. 245527       0. 245527       0. 245527
HCC128..........................................       3. 935445       3. 086230       3. 086230       3. 086230
HCC130..........................................      25. 095071      25. 095071      25. 095071      25. 095071
HCC211..........................................       5. 931077       5. 931077       3. 957413       3. 957413
HCC131..........................................       0. 609381       0. 609381       0. 609381       0. 548312
HCC132..........................................       0. 609381       0. 609381       0. 548312       0. 548312
HCC133..........................................       0. 828794       0. 828794       0. 828794       0. 828794
HCC134..........................................       0. 333109       0. 333109       0. 179712       0. 179712
HCC135..........................................       0. 186132       0. 186132       0. 186132       0. 186132
HCC136..........................................       0. 308014       0. 308014       0. 308014       0. 308014
HCC137..........................................       2. 229861       2. 019901       1. 191632       1. 191632
HCC138..........................................       0. 587042       0. 587042       0. 587042       0. 587042
HCC141..........................................       1. 003553       1. 003553       1. 003553       0. 718760
HCC142..........................................       0. 557164       0. 557164       0. 480684       0. 431174
HCC143..........................................       4. 184966       4. 184966       3. 619387       3. 002414
HCC144..........................................       3. 332900       2. 868669       2. 280000       1. 954919
HCC145..........................................       1. 171729       0. 774339       0. 774339       0. 216043
HCC146..........................................       0. 557164       0. 557164       0. 480684       0. 216043
HCC147..........................................       0. 280304       0. 280304       0. 216043       0. 216043
HCC148..........................................      12. 543259      12. 543259       6. 014584       6. 014584
HCC150..........................................       2. 424426       2. 424426       2. 424426       2. 424426
HCC151..........................................       2. 424426       2. 424426       2. 424426       2. 424426
HCC152..........................................       0. 333411       0. 322440       0. 322440       0. 322440
HCC154..........................................      15. 385354      15. 385354      10. 060566      10. 060566
HCC155..........................................       1. 019842       1. 019842       1. 019842       1. 019842
HCC156..........................................       0. 378295       0. 378295       0. 378295       0. 378295
HCC157..........................................       2. 098343       2. 098343       2. 098343       2. 098343
HCC158..........................................       3. 274125       3. 274125       3. 274125       3. 274125
HCC159..........................................       0. 995242       0. 995242       0. 995242       0. 995242
HCC160..........................................       1. 169886       1. 169886       1. 169886       1. 169886
HCC161..........................................       4. 800076       4. 800076       3. 252883       3. 252883
HCC164..........................................       4. 416936       4. 416936       4. 416936       4. 416936
HCC168..........................................      50. 030035      31. 846702       8. 770478       1. 517088
HCC169..........................................      31. 846702      31. 846702       8. 770478       1. 517088
HCC212..........................................       5. 348103       4. 531656       2. 869468       1. 517088
HCC170..........................................       5. 118321       3. 980982       2. 713315       1. 517088
HCC171..........................................       0. 944286       0. 944286       0. 833781       0. 833781
HCC172..........................................       0. 766750       0. 282812       0. 282812       0. 282812
HCC213..........................................      26. 085463      26. 085463      22. 031148      22. 031148
HCC174..........................................      13. 907770      13. 907770      10. 852783       6. 023029
HCC175..........................................       0. 417558       0. 391105       0. 391105       0. 145153
HCC176..........................................       5. 768476       5. 768476       5. 768476       5. 768476
HCC177..........................................       0. 879358       0. 879358       0. 879358       0. 879358
HCC180..........................................       4. 989476       4. 989476       4. 989476       4. 989476
HCC181..........................................      13. 774728      13. 774728      13. 774728      13. 774728
HCC182..........................................       1. 791185       1. 791185       1. 791185       1. 791185
INT01...........................................       3. 869565       3. 869565       3. 869565       3. 869565
INT02...........................................       1. 608754       1. 608754       1. 608754       1. 608754
----------------------------------------------------------------------------------------------------------------

    Definition of the interaction terms:
INT01 = CANCER*IMMUNE, and INT02 = CVD*VD,

Where,

CANCER = MAX (MAX (of HCC008-HCC014), MAX (of HCC202-HCC205));
IMMUNE = HCC045;
CVD = MAX (of HCC095-HCC103);
VD = MAX (HCC104, HCC105);

  Table 18--Duration Adjustment in Risk Adjustment Models in Massachusetts Risk Adjustment Methodology for 2014
----------------------------------------------------------------------------------------------------------------
              Month of eligibility                   Platinum          Gold           Silver          Bronze
----------------------------------------------------------------------------------------------------------------
1...............................................        0.225160        0.343520        0.474510        1.000000
2...............................................        0.341279        0.462802        0.584191        1.000000
3...............................................        0.435275        0.550953        0.659754        1.000000
4...............................................        0.517282        0.623502        0.719223        1.000000
5...............................................        0.591389        0.686292        0.769018        1.000000
6...............................................        0.659754        0.742262        1.000000        1.000000
7...............................................        0.723686        0.793130        1.000000        1.000000

[[Page 15451]]

 
8...............................................        1.000000        0.840003        1.000000        1.000000
9...............................................        1.000000        1.000000        1.000000        1.000000
10..............................................        1.000000        1.000000        1.000000        1.000000
11..............................................        1.000000        1.000000        1.000000        1.000000
12..............................................        1.000000        1.000000        1.000000        1.000000
----------------------------------------------------------------------------------------------------------------


              Table 19--Clinical Hierarchies in Massachusetts Risk Adjustment Methodology for 2014
----------------------------------------------------------------------------------------------------------------
                                                 If the Condition
 DISEASE HIERARCHIES Hierarchical Condition   Category is Listed in    . . . Then drop the HCC(s) listed in this
               Category (HCC)                   this column . . .                       column
----------------------------------------------------------------------------------------------------------------
                                   Hierarchical Condition Category (HCC) Label
----------------------------------------------------------------------------------------------------------------
5..........................................  Opportunistic            112, 113, 115
                                              Infections.
202........................................  Secondary Cancer Except  203, 204, 8, 9, 10, 11, 12, 13
                                              Lymph Node.
203........................................  Secondary Cancer of      204, 8, 9, 10, 11, 12, 13
                                              Lymph Node.
204........................................  Cancer of the Brain/     8, 9, 10, 11, 12, 13
                                              Nervous System/
                                              Pituitary, Pineal
                                              Glands.
205........................................  Acute Leukemia.........  8, 9, 10, 11, 12, 13
8..........................................  Lung, Upper Digestive    9, 10, 11, 12, 13
                                              Tract, and Other
                                              Severe Cancers.
9..........................................  Lymphatic, Head and      10, 11, 12, 13
                                              Neck, Brain, and Other
                                              Major Cancers.
10.........................................  Breast, Prostate,        11, 12, 13
                                              Colorectal and Other
                                              Cancers and Tumors.
11.........................................  Other Respiratory and    12, 13
                                              Heart Neoplasms.
12.........................................  Other Digestive and      13
                                              Urinary Neoplasms.
15.........................................  Diabetes with Renal      16, 17, 18, 19
                                              Manifestation.
16.........................................  Diabetes with            17, 18, 19
                                              Neurologic or
                                              Peripheral Circulatory
                                              Manifestation.
17.........................................  Diabetes with Acute      18, 19
                                              Complications.
18.........................................  Diabetes with            19
                                              Ophthalmologic
                                              Manifestation.
25.........................................  End-Stage Liver Disease  26, 27, 28, 29, 34, 36
26.........................................  Cirrhosis of Liver.....  27, 29
27.........................................  Chronic Hepatitis......  29
28.........................................  Acute Liver Failure/     29
                                              Disease.
31.........................................  Intestinal Obstruction/  34, 36
                                              Perforation.
32.........................................  Pancreatic Disease.....  36
33.........................................  Inflammatory Bowel       34, 36
                                              Disease.
34.........................................  Peptic Ulcer,            36
                                              Hemorrhage, Other
                                              Specified
                                              Gastrointestinal
                                              Disorders.
38.........................................  Rheumatoid Arthritis     39, 40
                                              and Inflammatory
                                              Connective Tissue
                                              Disease.
206........................................  Spinal Stenosis........  39
207........................................  Hemophilia.............  44, 208
44.........................................  Severe Hematological     208
                                              Disorders.
209........................................  Toxic/Unspecified        48, 50
                                              Encephalopathy.
48.........................................  Delirium and             50
                                              Encephalopathy.
49.........................................  Dementia...............  50
51.........................................  Drug/Alcohol Psychosis.  52
54.........................................  Schizophrenia..........  55, 56, 57, 58, 59
55.........................................  Major Depressive,        56, 57, 58, 59
                                              Bipolar, and Paranoid
                                              Disorders.
56.........................................  Reactive and             57, 58, 59
                                              Unspecified Psychosis.
57.........................................  Personality Disorders..  58, 59
58.........................................  Depression.............  59
61.........................................  Profound Mental          62, 63, 64, 65, 66
                                              Retardation/
                                              Developmental
                                              Disability.
62.........................................  Severe Mental            63, 64, 65, 66
                                              Retardation/
                                              Developmental
                                              Disability.
63.........................................  Moderate Mental          64, 65, 66
                                              Retardation/
                                              Developmental
                                              Disability.
64.........................................  Mild/Unspecified Mental  65, 66
                                              Retardation/
                                              Developmental
                                              Disability.
65.........................................  Other Developmental      66
                                              Disability.
67.........................................  Quadriplegia, Other      68, 69, 76, 100, 157
                                              Extensive Paralysis.
68.........................................  Paraplegia.............  69, 76, 100, 157
69.........................................  Spinal Cord Disorders/   39, 76, 157
                                              Injuries.
70.........................................  Muscular Dystrophy.....  76
71.........................................  Polyneuropathy.........  76
72.........................................  Multiple Sclerosis.....  76
73.........................................  Parkinson's and          76
                                              Huntington's Diseases.
74.........................................  Seizure Disorders and    76
                                              Convulsions.
75.........................................  Coma, Brain Compression/ 209, 48, 50, 76
                                              Anoxic Damage.
77.........................................  Respirator Dependence/   78, 210, 79
                                              Tracheostomy Status.
210........................................  Post Trauma/Surgery      79
                                              Pulmonary
                                              Insufficiency, Incl
                                              Adult Respir Distress
                                              Syndrom.
78.........................................  Respiratory Arrest.....  79
81.........................................  Acute Myocardial         82, 83, 84
                                              Infarction.
82.........................................  Unstable Angina and      83, 84
                                              Other Acute Ischemic
                                              Heart Disease.
83.........................................  Angina Pectoris/Old      84
                                              Myocardial Infarction.

[[Page 15452]]

 
85.........................................  Heart Infection/         86, 88
                                              Inflammation, Except
                                              Rheumatic.
86.........................................  Valvular and Rheumatic   88
                                              Heart Disease.
87.........................................  Major Congenital         88
                                              Cardiac/Circulatory
                                              Defect.
92.........................................  Specified Heart          93
                                              Arrhythmias.
95.........................................  Cerebral Hemorrhage....  96, 97, 98
96.........................................  Ischemic or Unspecified  97, 98
                                              Stroke.
97.........................................  Precerebral Arterial     98
                                              Occlusion and
                                              Transient Cerebral
                                              Ischemia.
104........................................  Vascular Disease with    105, 106
                                              Complications.
105........................................  Vascular Disease.......  106
107........................................  Cystic Fibrosis........  108, 109, 110, 115
108........................................  Chronic Obstructive      109, 110, 115
                                              Pulmonary Disease.
109........................................  Fibrosis of Lung and     110, 115
                                              Other Chronic Lung
                                              Disorders.
110........................................  Asthma.................  115
111........................................  Aspiration and           112, 113, 115
                                              Specified Bacterial
                                              Pneumonias.
112........................................  Pneumococcal Pneumonia,  113, 115
                                              Empyema, Lung Abscess.
113........................................  Viral and Unspecified    115
                                              Pneumonia, Pleurisy.
114........................................  Pleural Effusion/        115
                                              Pneumothorax.
119........................................  Proliferative Diabetic   120
                                              Retinopathy and
                                              Vitreous Hemorrhage.
128........................................  Kidney Transplant        130, 131, 132, 136, 175
                                              Status.
130........................................  Dialysis Status........  211, 131, 132, 136
131........................................  Non-Acute Renal Failure  132, 136
132........................................  Nephritis..............  136
137........................................  Female Infertility.....  138
141........................................  Ectopic Pregnancy......  142, 146, 147
142........................................  Miscarriage/Abortion...  146, 147
143........................................  Completed Pregnancy      144, 145, 146, 147
                                              With Major
                                              Complications.
144........................................  Completed Pregnancy      145, 146, 147
                                              With Complications.
145........................................  Completed Pregnancy      146, 147
                                              Without Complications
                                              (Normal Delivery).
146........................................  Uncompleted Pregnancy    147
                                              With Complications.
150........................................  Extensive Third-Degree   151
                                              Burns.
154........................................  Severe Head Injury.....  209, 48, 50, 75, 76, 155, 156
155........................................  Major Head Injury......  50, 156
157........................................  Vertebral Fractures....  206, 39
161........................................  Traumatic Amputation...  177
168........................................  Extremely Low            169, 212, 170, 171, 172
                                              Birthweight Neonates.
169........................................  Very Low Birthweight     212, 170, 171, 172
                                              Neonates.
212........................................  Low Birthweight (1500-   171, 172
                                              2499 grams) or
                                              Unspecified.
170........................................  Serious Perinatal        171, 172
                                              Problem Affecting
                                              Newborn.
171........................................  Other Perinatal          172
                                              Problems Affecting
                                              Newborn.
213........................................  Bone Marrow Transplant   175
                                              Status/Complications.
174........................................  Major Organ Transplant   175
                                              Status.
----------------------------------------------------------------------------------------------------------------

k. Caveats and Limitations
    In preparing its application Massachusetts relied on data from 
Massachusetts APCD, Commonwealth Care and Marketscan[supreg] New 
England in developing the risk adjustment models and additional 
adjustment factors, and as such the results may not apply to other 
States' risk adjustment programs. Additionally, there are limitations 
in the datasets which may affect the accuracy and robustness of the 
models and factors presented here.

C. Provisions and Parameters for the Transitional Reinsurance Program

    The Affordable Care Act directs the establishment of a transitional 
reinsurance program in each State to help stabilize premiums for 
coverage in the individual market from 2014 through 2016. The 
reinsurance program is designed to alleviate the need to build into 
premiums the risk of enrolling individuals with significant unmet 
medical needs. By equitably stabilizing premiums in the individual 
market throughout the United States, the reinsurance program is 
intended to help millions of Americans purchase affordable health 
insurance, reduce unreimbursed usage of hospital and other medical 
facilities by the uninsured, and thereby lower medical expenses and 
premiums for all people with private health insurance.
    In the proposed rule, we aimed to administer the reinsurance 
program to provide reinsurance payments in an efficient, fair, and 
accurate manner, where reinsurance assistance is needed most, to 
effectively stabilize premiums nationally. In addition, we stated our 
intent to implement the reinsurance program in a manner that minimizes 
the administrative burden of collecting contributions and making 
reinsurance payments. For example, we proposed to collect contributions 
from health insurance issuers and self-insured group health plans in 
all States, including States that elect to operate reinsurance. We also 
stated our intent to simplify collections by using a uniform per capita 
contribution rate. In addition, in the HHS-operated reinsurance 
program, we proposed to calculate reinsurance payments using the same 
distributed approach for data collection that we will use when 
operating the risk adjustment program on behalf of States.\15\ This 
would permit issuers to receive reinsurance payments using the same 
systems established for the risk adjustment program, resulting in less 
administrative burden and lower costs,

[[Page 15453]]

while maintaining the security of identifiable health information.
---------------------------------------------------------------------------

    \15\ See our discussion of this distributed data collection 
approach in section III.G. of this final rule.
---------------------------------------------------------------------------

    In the proposed rule, we proposed uniform reinsurance payment 
parameters to be used across all States, regardless of whether the 
State, or HHS on behalf of a State, operates reinsurance. In addition, 
we proposed an annual calendar under which reinsurance contributions 
would be collected from all contributing entities, and reinsurance 
payments would be disbursed to issuers of reinsurance-eligible plans. 
Furthermore, we proposed to distribute reinsurance payments based on 
the need for reinsurance payments in each State. We believe that 
allocating contributions in this manner better meets States' individual 
reinsurance needs and fulfills HHS's obligation to provide equitable 
allocation of these funds under section 1341(b)(2)(B) of the Affordable 
Care Act, than does a policy that limits the disbursement of 
reinsurance payments only to the State in which the contributions are 
collected.
    Comment: One commenter requested that HHS consider extending the 
reinsurance program past 2016.
    Response: Section 1341 of the Affordable Care Act mandates that the 
transitional reinsurance program operate in the three year period 
beginning January 1, 2014, which we interpret to mean that the program 
will operate in benefit years 2014, 2015 and 2016. As a result, we have 
no statutory authority to extend the program. We note that, under this 
final rule, reinsurance payments for benefit year 2016 will be made in 
2017, and section 1341(a)(4)(B) provides that amounts remaining 
unexpended as of December 2016 may be used to make payments under any 
reinsurance program of a State in the individual market in effect in 
the two-year period beginning on January 1, 2017.
1. State Standards Related to the Reinsurance Program
a. State-Operated Reinsurance Programs, Generally
    In the proposed rule, we set forth a reinsurance contribution and 
payment process, and the uniform contribution rate and reinsurance 
payment parameters that would apply to all States in the 2014 benefit 
year. We proposed to amend Sec.  153.100(a)(1) to delete the reference 
to State modification of data collection frequency as set forth in the 
Premium Stabilization Rule. That deletion would remove the ability of a 
State electing to operate reinsurance to modify, via a State notice of 
benefit and payment parameters, the data collection frequency for 
issuers to receive reinsurance payments. Under Sec.  153.100(a)(1), a 
State establishing a reinsurance program may still modify the data 
requirements for health insurance issuers to receive reinsurance 
payments, provided that the State publishes a State notice of benefit 
and payment parameters that specifies those modifications.
    In Sec.  153.100(a)(2), we proposed that a State electing to 
collect additional reinsurance contributions for purposes of making 
supplemental reinsurance payments or using additional funds for 
supplemental reinsurance payments under Sec.  153.220(d) publish 
supplemental State reinsurance payment parameters in its State notice 
of benefit and payment parameters. To create the most effective 
reinsurance program, we proposed to collect reinsurance contributions 
on behalf of all States from both health insurance issuers and self-
insured group health plans in the aggregate, and we proposed to 
disburse reinsurance payments based on a State's need for reinsurance 
payments, not based on where the contributions were collected. As a 
result, HHS would no longer be able to attribute additional funds for 
administrative expenses back to a State. We therefore proposed to amend 
Sec.  153.100(a)(3) of the Premium Stabilization Rule to clarify that 
any additional contributions collected for administrative expenses must 
be collected by the State operating reinsurance.
    Section 1341 of the Affordable Care Act provides that States may 
elect to operate reinsurance. Based on HHS's communications with 
States, as of February 25, 2013, Maryland and Connecticut are the only 
States electing to operate reinsurance for 2014. Pursuant to Sec.  
153.100, a State that wishes to collect additional reinsurance funds 
pursuant to Sec.  153.220(d) must publish the supplemental contribution 
rate and supplemental State reinsurance payment parameters in a State 
notice of benefit and payment parameters, which for 2014 must be 
published by the 30th day following the publication of this final rule.
    We are finalizing these provisions as proposed, with a technical 
amendment to Sec.  153.210(a)(2) in which we clarify that a State's 
obligation to ensure that each applicable reinsurance entity operates 
in a distinct geographic area applies regardless of whether the State 
contracts with or establishes the applicable reinsurance entities. As 
we also clarify below, governmental entities may serve as applicable 
reinsurance entities. We are also amending Sec.  153.100(a)(2) by 
replacing the cross-reference to Sec.  153.220(d) with Sec.  
153.220(d)(1). We are making corresponding revisions in Sec.  
153.100(d)(2); and Sec.  153.110(b); 153.400(a).
    Comment: One commenter requested that HHS prohibit States operating 
reinsurance from modifying the data requirements for health insurance 
issuers to receive reinsurance payments.
    Response: Although we recognize the efficiencies to multi-State 
issuers of having a uniform set of data requirements, we believe that a 
State should have the flexibility to collect the data it deems 
necessary, in the manner it deems most appropriate, to calculate 
reinsurance payments for issuers of non-grandfathered individual market 
plans in the State. Accordingly, we will permit State flexibility 
regarding data requirements. As set forth in Sec.  153.100(a)(1), a 
State modifying the data requirements must describe those requirements 
in its State notice of benefit and payment parameters.
    Comment: One commenter asked that HHS permit a governmental entity 
to be eligible to serve as an applicable reinsurance entity.
    Response: We interpret the definition of an applicable reinsurance 
entity in section 1341(c)(1) of the Affordable Care Act as a ``not-for-
profit organization,'' the purpose of which is to stabilize premiums in 
the first three years of Exchange operation and the duties of which are 
to carry out the reinsurance program, to be broad enough to include a 
governmental entity. Accordingly, we believe that an applicable 
reinsurance entity is a not-for-profit organization that is exempt from 
taxation under Chapter 1 of the Internal Revenue Code of 1986, 
including a governmental entity and a quasi-governmental entity that 
was not created for and does not operate to make a profit, and carries 
out reinsurance functions under this part on behalf of the State.
    Comment: One commenter requested that HHS permit a State to obtain 
a waiver from the reinsurance program set forth in section 1341 of the 
Affordable Care Act.
    Response: HHS has no authority to grant such a waiver. As set forth 
in the Premium Stabilization Rule, if a State does not elect to operate 
reinsurance, HHS will operate reinsurance on behalf of the State.
    Comment: One commenter asked whether HHS will implement an approval 
process for States choosing to operate reinsurance, similar to the 
process used to approve States choosing to operate the risk adjustment 
program.

[[Page 15454]]

    Response: Unlike the risk adjustment program, there will be no 
formal approval process for State-operated reinsurance programs. 
However, HHS will establish a consultative pre-implementation process 
to ensure that each State operating reinsurance is ready to operate 
beginning in 2014. HHS intends to work closely with States throughout 
the duration of the reinsurance program to ensure States' operational 
readiness.
    Comment: One commenter sought clarification on the functions that a 
State operating reinsurance must perform.
    Response: This final rule sets forth a number of functions that a 
State operating reinsurance must perform, consistent with the functions 
of the HHS-operated reinsurance program. For example, under Sec.  
153.240, a State operating reinsurance must ensure that the State's 
applicable reinsurance entity collects data required to calculate 
reinsurance payments, makes reinsurance payments, and provides a 
process for reinsurance-eligible plans that do not generate individual 
enrollee claims in the normal course of business to submit claims. In 
addition, a State operating reinsurance must notify issuers of requests 
for reinsurance payments made and actual reinsurance payments to be 
provided. In addition to performing payment functions, a State 
operating reinsurance may elect to collect additional funds or use 
State funds under Sec.  153.220(d)(1)(ii) or Sec.  153.220(d)(2) 
(proposed as (d)(3) in the proposed rule) to fund administrative 
expenses or set up and fund supplemental reinsurance payment parameters 
that ``wrap around'' the uniform reinsurance payment parameters.
b. Reporting to HHS
    In Sec.  153.210(e) of the proposed rule, we stated that a State 
establishing the reinsurance program would be required to provide 
information to HHS regarding all requests for reinsurance payments 
received from all reinsurance-eligible plans for each quarter during 
the benefit year in the State. In Sec.  153.240(b)(2), we proposed that 
a State, or HHS on behalf of the State, would use the information 
collected by HHS or submitted under Sec.  153.210(e) to provide issuers 
of reinsurance-eligible plans with quarterly updates of requests for 
reinsurance payments for the plan under both the uniform payment 
parameters and any State supplemental payments parameters set forth 
under Sec.  153.232, as determined by HHS or the State's applicable 
reinsurance entity, as applicable. This information could be used by an 
individual market issuer in developing rates in subsequent benefit 
years. We are finalizing these provisions as proposed, with 
modifications in Sec.  153.240(b)(2) to clarify that a State must 
provide to an issuer of a reinsurance-eligible plan the calculation of 
the total reinsurance payments requested under the national reinsurance 
payment parameters and State supplemental reinsurance payment 
parameters, on a quarterly basis during the applicable benefit year in 
a timeframe and manner determined by HHS.
    Comment: Several commenters supported the proposal that HHS or 
States operating reinsurance provide to issuers quarterly updates of 
requests for reinsurance payments made under the uniform payment 
parameters and State supplemental payment parameters, as applicable. 
Several commenters urged HHS not to require a State operating 
reinsurance to provide these quarterly estimates.
    Response: Because the purpose of the reinsurance program is to help 
stabilize premiums, and because interim information on reinsurance 
claims will be useful for issuers in setting rates in subsequent 
benefit years, we are finalizing Sec.  153.240(b) as proposed.
    Comment: One commenter requested clarification on whether updates 
of reinsurance payment requests made would be provided on a rolling 
basis throughout the benefit year, or only after all reinsurance 
payment requests have been submitted. Commenters suggested that total 
payment requests across all issuers be specified so that issuers can 
estimate whether total payments will exceed total contributions.
    Response: A State operating reinsurance or HHS, on behalf of the 
State, will issue reports on a quarterly basis on the total amount of 
reinsurance requests submitted. We appreciate the suggestions for the 
quarterly reporting format, and will take them under consideration. We 
anticipate issuing guidance for States and issuers regarding quarterly 
reporting.
c. Additional State Collections
    In Sec.  153.220(d), we proposed that a State operating reinsurance 
may elect to collect more than the amounts based on the national 
contribution rate set forth in the annual HHS notice of benefit and 
payment parameters for administrative expenses of the applicable 
reinsurance entity or for additional reinsurance payments. In addition, 
under Sec.  153.220(d)(2), we proposed that a State must notify HHS 
within 30 days after publication of the draft annual HHS notice of 
benefit and payment parameters for the applicable benefit year of the 
additional contribution rate that it elects to collect. We are 
finalizing these provisions as proposed with the following 
modification: we are deleting Sec.  153.220(d)(2), which required a 
State to notify HHS within 30 days after publication of the draft 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year of the additional contribution rate that it elects to 
collect.
    Comment: We received several comments asking HHS to eliminate the 
requirement set forth in Sec.  153.220(d)(2), which provided that a 
State must notify HHS within 30 days after publication of the draft 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year of the additional contribution rate that it elects to 
collect. However, one commenter encouraged HHS to keep this 
requirement.
    Response: Because HHS will no longer collect additional 
contributions on behalf of a State, and will not immediately need this 
information, we are removing Sec.  153.220(d)(2) from this final rule. 
Any State operating reinsurance and electing to collect additional 
contributions under Sec.  153.220(d) must set forth any additional 
contribution rate that it elects to collect in its State notice of 
benefit and payment parameters.
    Comment: One commenter asked HHS to clarify that States may collect 
additional administrative expenses only when a State is operating 
reinsurance.
    Response: Only a State operating reinsurance is permitted to 
collect additional administrative expenses under Sec.  153.220(d). The 
State must set forth any additional contribution rate in its State 
notice of benefit and payment parameters.
    Comment: One commenter asked HHS to prohibit States from collecting 
additional funds for administrative expenses.
    Response: To allow State flexibility in operating reinsurance, a 
State operating reinsurance will be permitted to collect additional 
funds for administrative expenses as the State deems necessary.
    Comment: Several commenters opposed the collection of additional 
funds by States from self-insured plans, and urged HHS to specify in 
regulatory text that States cannot collect from self-insured plans 
covered by ERISA.
    Response: We reiterate that nothing in section 1341 of the 
Affordable Care Act or 45 CFR part 153 of this final rule gives a State 
the authority to collect any funds--whether under the national 
contribution rate or under an additional State contribution rate--from 
self-

[[Page 15455]]

insured group health plans covered by ERISA.
    Comment: One commenter requested that HHS specify that the Federal 
Employees Health Benefit Act prohibits States from imposing additional 
State reinsurance fund collections on Federal Employees Health Benefits 
Program (FEHB) plans.
    Response: Although Sec.  153.220(d) provides that a State may elect 
to collect additional reinsurance contributions for administrative 
expenses or reinsurance payments, we do not interpret section 1341 of 
the Affordable Care Act or 45 CFR part 153 of this final rule as giving 
States any additional authority to collect from contributing entities. 
Any such authority must come from other State or Federal law.
d. State Collections
    In Sec.  153.220(a), we proposed that if a State establishes a 
reinsurance program, HHS will collect all reinsurance contributions 
from all contributing entities for that State under a national 
contribution rate. In Sec.  153.220(d)(3) of the proposed rule (which 
we now renumber as Sec.  153.220(d)(2)), we proposed that States may 
use additional funds, which were not collected as additional 
reinsurance contributions, to make supplemental reinsurance payments 
under the State supplemental reinsurance payment parameters. This would 
allow States to use other revenue sources, such as funds collected for 
State high-risk pools. This would also ensure that additional State 
collections for reinsurance payments and other State funds may be used 
to reduce premiums. We are finalizing these provisions as proposed.
    Comment: Several commenters asked that HHS permit States to collect 
contributions from health insurance issuers. Other commenters supported 
the proposed centralized collection of reinsurance contribution under 
the national contribution rate.
    Response: HHS will collect contributions from health insurance 
issuers and self-insured group health plans in all States, including 
States that elect to operate reinsurance. This will allow for a 
centralized and streamlined process for the collection of 
contributions, and will avoid inefficiencies resulting from the use of 
different collection processes in different States. Federal collections 
will also leverage economies of scale, reducing the overall 
administrative costs of the transitional reinsurance program.
e. High-Risk Pools
    Section 1341(d) of the Affordable Care Act and Sec.  153.250 of the 
Premium Stabilization Rule provide that a State must eliminate or 
modify its high-risk pool to the extent necessary to carry out the 
transitional reinsurance program. However, any changes made to a State 
high-risk pool must comply with the terms and conditions of Grants to 
States for Operation of Qualified High-Risk Pools (CFDA 93.780), as 
applicable. Under Sec.  153.400(a)(2)(iii), we proposed that State 
high-risk pools would be excluded from making reinsurance contributions 
and would not receive reinsurance payments.
    The Affordable Care Act permits a State to coordinate its high-risk 
pool with the reinsurance program ``to the extent not inconsistent'' 
\16\ with the statute. We clarify that nothing in the Premium 
Stabilization Rule or this final rule prevents a State that establishes 
the reinsurance program from using State money designated for the 
State's high-risk pool towards the reinsurance program. However, a 
State may not use funds collected for the Affordable Care Act 
reinsurance program for its high-risk pool. Finally, a State could 
designate its high-risk pool as its applicable reinsurance entity, 
provided that the high-risk pool meets all the criteria for being an 
applicable reinsurance entity.
---------------------------------------------------------------------------

    \16\ See section 1341(d) of the Affordable Care Act.
---------------------------------------------------------------------------

    Comment: Several commenters requested that we permit State high-
risk pools to be eligible for reinsurance payments for their high-risk 
enrollees. Commenters stated that the sudden termination of high-risk 
pools in 2014 would result in high-risk pool enrollees flooding the 
individual market, potentially resulting in premium increases for all 
individual market enrollees and a loss of access to providers currently 
administering care for high-risk pool enrollees.
    Response: Under the definition of a reinsurance-eligible plan in 
Sec.  153.20 of the Premium Stabilization Rule, State high-risk pools 
are not eligible to receive reinsurance payments for their high-risk 
enrollees because high-risk pool coverage is not individual market 
coverage. We note that if a high-risk pool were to be structured as 
individual market coverage subject to the market reform rules, it would 
be eligible for reinsurance payments and would also, therefore, be a 
contributing entity.
    Comment: Several commenters asked that HHS clarify that States can 
continue to operate high-risk pools to complement the reinsurance 
program and to provide continuity of coverage to risk pool enrollees.
    Response: States have the flexibility to decide whether to 
maintain, phase-out, or eliminate their high-risk pools. Because State 
high-risk pools and the reinsurance program both target high-cost 
enrollees, high-risk pools can operate alongside reinsurance serving a 
distinct subset of the target population.
    Comment: Several commenters asked that the Federal government 
continue to provide funding for the State High Risk Pool Grant program.
    Response: Funding for the State High Risk Pool Grant Program is not 
addressed in this final rule.
2. Contributing Entities and Excluded Entities
    Section 1341 of the Affordable Care Act provides that health 
insurance issuers and third party administrators on behalf of group 
health plans must make payments to an applicable reinsurance entity. In 
the proposed rule, we stated that, with respect to insured coverage, 
issuers are responsible for making reinsurance contributions. With 
respect to a self-insured group health plan, the plan is responsible, 
although a third party administrator (TPA) or administrative services 
only (ASO) contractor may be utilized to transfer reinsurance 
contributions on behalf of a plan. A self-insured, self-administered 
group health plan without a TPA or ASO contractor would make its 
reinsurance contributions directly. For the reasons described above and 
in the preamble of the proposed rule, we are modifying the definition 
of ``contributing entity'' in Sec.  153.20 to clarify that a 
``contributing entity'' is a health insurance issuer or a self-insured 
group health plan.
    Comment: Several commenters asked that HHS amend the definition of 
contributing entity, clarifying the liability of TPAs.
    Response: We have amended the definition of ``contributing entity'' 
in Sec.  153.20 to include the clarification we provided in the 
proposed rule at 77 FR 73152. This amended definition states that a 
contributing entity is a health insurance issuer or a self-insured 
group health plan. Thus, we clarify that a self-insured group health 
plan is ultimately responsible for the reinsurance contributions, even 
though it may elect to use a TPA or ASO contractor to transfer the 
reinsurance contributions.
    Comment: Several commenters sought clarification regarding whether 
self-insured group health plans may remit reinsurance contributions 
directly to HHS even if the plan otherwise

[[Page 15456]]

contracts with a TPA or ASO contractor for administration of benefits.
    Response: A self-insured group health plan may elect to make its 
reinsurance contributions directly to HHS or through a TPA or an ASO 
contractor.
    Comment: One commenter suggested that requiring issuers to submit a 
separate payment for each insured group would add significant 
administrative burden.
    Response: HHS will provide details on the process for submission of 
reinsurance contributions in future guidance.
    Comment: One commenter stated that the proposed rule does not 
address whether a TPA may charge administrative fees for the additional 
work it will undertake to collect reinsurance fees and forward them to 
HHS.
    Response: Any fee for such services would be negotiated between the 
plan and the TPA or ASO contractor. We note that the program is 
designed to minimize administrative costs, which we expect to be 
relatively low.
    Comment: Several commenters asked that HHS clarify that a plan with 
several TPAs should determine if and which TPA will calculate the 
enrollment count and submit reinsurance payments.
    Response: The self-insured group health plan is liable for 
reporting enrollment counts and making reinsurance contributions. It 
may utilize any TPA or ASO contractor it wishes (or none) to perform 
these functions.
    Under section 1341(b)(3)(B)(i) of the Affordable Care Act, 
contribution amounts for reinsurance are to reflect, in part, an 
issuer's ``fully insured commercial book of business for all major 
medical products.'' We interpret this statutory language to mean that 
reinsurance contributions are not required for coverage that is not 
``major medical coverage'' or for health insurance coverage that is 
non-commercial. We also interpret this statutory language to exclude 
expatriate health coverage, as defined by the Secretary. HHS plans to 
define expatriate health coverage in the near future.
    (1) Major Medical Coverage: In Sec.  153.400(a)(1)(i), we proposed 
that a contributing entity make reinsurance contributions for its 
health coverage except to the extent that such coverage is not ``major 
medical coverage.'' Section 1341(b)(3)(B)(i) of the Affordable Care Act 
refers to ``major medical products,'' but does not define the term. The 
preamble to the proposed rule at 77 FR 73152 discussed the definition 
that should apply for reinsurance purposes. We are finalizing the 
provisions as proposed.
    Comment: One commenter requested that we codify in regulation text 
the description of major medical coverage that was set forth in 
preamble.
    Response: We reiterate that for purposes of the reinsurance program 
only, our view is that major medical coverage is health coverage, which 
may be subject to reasonable enrollee cost sharing, for a broad range 
of services and treatments including diagnostic and preventive 
services, as well as medical and surgical conditions provided in 
various settings, including inpatient, outpatient, and emergency room 
settings. Coverage that is limited in scope (for example, dread disease 
coverage, hospital indemnity coverage, or stand-alone vision coverage 
or stand-alone dental coverage), or extent (for example, coverage that 
is not subject to section 2711 of the PHS Act and its implementing 
regulations) would not be major medical coverage.\17\
---------------------------------------------------------------------------

    \17\ See Section 7F of the National Association of Insurance 
Commissioners (NAIC) Model Regulation to Implement the Accident and 
Sickness Insurance Minimum Standards Model Act, (MDL-171) for a 
definition of major medical expense coverage. Available at: http://naic.org/committees_index_model_description_a_c.htm#accident_health.
---------------------------------------------------------------------------

    In the proposed rule, we stated that when an individual has both 
Medicare coverage and employer-provided group health coverage, the 
Medicare Secondary Payer (MSP) rules under section 1862(b) of the Act 
would apply, and the group health coverage would be considered major 
medical coverage only if the group health coverage is the primary payer 
of medical expenses (and Medicare is the individual's secondary payer) 
under the MSP rules. For example, a working 68-year-old employee 
enrolled in a group health plan who, under the MSP rules, is a 
beneficiary for whom Medicare is the secondary payer would be counted 
for purposes of reinsurance contributions. However, a 68-year-old 
retiree enrolled in a group health plan who, under the MSP rules, is a 
beneficiary for whom Medicare is the primary payer would not be counted 
for purposes of reinsurance contributions. Similarly, an individual 
covered under a group health plan with only Medicare Part A 
(hospitalization) benefits (where Medicare is the primary payer) would 
not be counted for purposes of reinsurance contributions because the 
group health coverage would not be considered major medical coverage. 
We also stated that individuals entitled to Medicare because of 
disability or end-stage renal disease that have other primary coverage 
under the MSP rules would be treated consistently with the working 
aged, as outlined above.
    We are finalizing the proposed provisions with the following 
revisions, described below: (a) We are modifying the exception in Sec.  
153.400(a)(1)(iii) to exclude from reinsurance contributions expatriate 
health coverage, as defined by the Secretary; (b) we are adding Sec.  
153.400(a)(1)(iv) to codify the Medicare coordination rule; and (c) we 
are adding Sec.  153.400(a)(2)(xiii) to exclude a self-insured group 
health plan or health insurance coverage that is limited to 
prescription drug benefits from reinsurance contributions.
    Comment: Several commenters supported the proposed treatment of 
group health coverage that is considered secondary to Medicare under 
the MSP rules; some requested that the Medicare coordination rule 
contained in the preamble of the proposed rule appear in regulation 
text.
    Response: We have added paragraph (iv) to Sec.  153.400(a)(1) to 
codify the rule in regulation text. We have included this rule at Sec.  
153.400(a)(1) to clarify that, to the extent a plan or coverage applies 
to individuals with respect to which benefits under Title XVIII of the 
Social Security Act (Medicare) are primary under the MSP rules, 
reinsurance contributions are not required on behalf of those enrollees 
under that plan or coverage. In order for a contributing entity to 
determine its enrollment count as required by Sec.  153.405 while 
taking into account enrollees for which the employer group health 
coverage is considered secondary to Medicare under the MSP rules, we 
clarify that the contributing entity may use any reasonable method of 
estimating the number or percentage of its enrollees. For example, a 
contributing entity may calculate the percentage of enrollees for which 
the employer group health coverage is secondary under the MSP rules on 
the dates it uses when applying the snapshot counting method or actual 
count method, or on other periodic dates, and reduce the enrollment 
count calculated using one of the methods in Sec.  153.405 by that 
percentage. A contributing entity may also calculate the total 
enrollment of individuals for which the employer group health coverage 
is secondary under the MSP rules on the last day of the third quarter 
and reduce the enrollment count that was calculated using one of the 
methods in Sec.  153.405.
    Comment: Several commenters requested that employer-provided 
retiree coverage be excluded from reinsurance contributions.

[[Page 15457]]

    Response: We have no statutory authority to make the requested 
change under section 1341 of the Affordable Care Act. We clarify that 
employer-provided retiree coverage is subject to reinsurance 
contributions unless one of the general exceptions applies (for 
example, the coverage is not major medical coverage).
    Comment: One commenter requested that we expand the Medicare 
coordination rule to exclude from reinsurance contributions any 
employer-provided coverage that is secondary to any other coverage.
    Response: We decline to make this exclusion because we believe that 
it would be difficult for an individual sponsor or issuer to determine 
and verify (and it would be difficult for HHS to confirm) without 
extensive coordination with other issuers and sponsors which enrollees 
have another source of coverage, whether that other source of coverage 
is major medical coverage, and which coverage is primary. We also 
believe that few individuals will have two sources of primary major 
medical coverage.
    Comment: Two commenters requested additional clarification as to 
how the MSP rules interact with the reinsurance program when an 
individual has employer-provided group health coverage and is eligible 
for Medicare due to end-stage renal disease or disability.
    Response: If an individual is eligible for Medicare due to end-
stage renal disease or disability, then whether reinsurance 
contributions would be required on behalf of the individual would 
depend upon whether the Medicare coverage is primary, as with the 
working-aged.
    Comment: A few commenters requested that the preamble language in 
the proposed rule clarifying that a separate plan that provides 
coverage for prescription drugs is excluded from reinsurance 
contributions be codified in regulation text. One commenter requested 
clarification that retiree drug plans including employer group waiver 
plans and other employer-sponsored Part D plans are excluded from 
reinsurance contributions.
    Response: We are amending Sec.  153.400(a)(2) to include a new 
paragraph (xiii) providing that a self-insured group health plan or 
health insurance coverage that is limited to prescription drug benefits 
is excluded from reinsurance contributions. Since they only provide 
coverage for prescription drug benefits, these plans are not major 
medical coverage. We also note that Sec.  153.400(a)(2)(ii)(A) contains 
an exception for coverage provided by an issuer under contract to 
provide benefits under Medicare because these private Medicare plans 
are not part of an issuer's commercial book of business (as discussed 
in the next section of this preamble).
    (2) Commercial Book of Business: The second general exception at 
Sec.  153.400(a)(1)(ii) from the reinsurance contribution requirement 
applies to health insurance coverage that is not part of an issuer's 
commercial book of business. Section 1341(b)(3)(B)(i) of the Affordable 
Care Act refers to a ``commercial book of business,'' which we proposed 
to interpret to refer to large and small group health insurance 
policies and individual market health insurance policies. For example, 
products offered by an issuer under Medicare Part C or D would be part 
of a ``governmental'' book of business, not a commercial book of 
business. Similarly, a plan or coverage offered by a Tribe to Tribal 
members and their spouses and dependents, and other persons of Indian 
descent closely affiliated with the Tribe in the capacity of the Tribal 
members as Tribal members (and not in their capacity as current or 
former employees of the Tribe or their dependents) would not be part of 
a commercial book of business. But a plan or coverage offered by the 
Federal government, a State government, or a Tribe to employees (or 
retirees or dependents) because of a current or former employment 
relationship would be part of a commercial book of business.
    We are finalizing the provisions as proposed.
    Comment: One commenter agreed that coverage offered to Federal, 
State, or Tribal employees should be subject to reinsurance 
contributions, and that this coverage would be part of an issuer's 
commercial book of business. Another commenter stated that since 
Federal and State employee plans make up a significant share of the 
market's large group enrollment, these plans should be included in a 
carrier's book of business for purposes of the reinsurance 
contribution.
    Response: For reinsurance purposes, we agree that insured coverage 
offered to Federal, State or Tribal employees is part of an issuer's 
commercial book of business. As discussed in the preamble to the 
proposed rule, we interpret ``commercial book of business'' to refer to 
insured large and small group policies and individual market policies.
    (3) Policy filed and approved by a State: The third proposed 
general exception from reinsurance contributions at Sec.  
153.400(a)(1)(iii) was for insured coverage not filed or approved by a 
State. As noted in the preamble to the proposed rule at 77 FR at 73153, 
this exception was intended primarily to address group expatriate 
coverage for individuals whose work requires them to spend a 
substantial period of time overseas. We are amending Sec.  
153.400(a)(1)(iii) so that expatriate health coverage, as defined by 
the Secretary, is excluded from reinsurance contributions.
    Comment: Some commenters requested that all expatriate coverage be 
excluded from reinsurance contributions, including coverage filed with 
and approved by a State, as well as self-insured expatriate coverage.
    Response: As described above, we are amending this provision so 
that all expatriate health coverage, as defined by the Secretary, is 
excluded from reinsurance contributions. We plan to define expatriate 
health coverage, as well as explain the applicability of the Affordable 
Care Act to such coverage, in the near future.
    Comment: A few commenters noted considerable variation in filing 
methods for issuers of health insurance coverage in the large group 
market. The commenters expressed concern that issuers that should make 
reinsurance contributions may be excluded because of the different 
filing and approval requirements. For example, some States may not 
require explicit approval of certain new policy forms, but instead 
those forms may be deemed approved via issuer certification. One 
commenter requested clarification as to whether an issuer that is 
regulated by a State agency other than a department of insurance would 
be subject to reinsurance contributions under the ``filed and approved 
by a State'' language.
    Response: We recognize that States can and do use different filing 
methods to obtain the information from issuers necessary to carry out 
their regulatory responsibilities. However, we are amending Sec.  
153.400(a)(1)(iii) so that the exception from reinsurance contributions 
applies to all expatriate health coverage, as defined by the Secretary.
    We proposed in Sec.  153.400(a)(2) to explicitly exclude the 
following types of plans and coverage from reinsurance contributions. 
We are finalizing these provisions as proposed.
    (a) Excepted benefits. We proposed no change in policy with respect 
to plans or health insurance coverage that consist solely of excepted 
benefits as defined by section 2791(c) of the PHS Act, as currently 
described in Sec.  153.400(a)(2)(i) of the Premium Stabilization Rule.

[[Page 15458]]

    Comment: A few commenters noted that stand-alone dental or vision 
coverage is excluded from reinsurance contributions, and requested that 
other dental or vision coverage should be excluded as well. One 
commenter suggested that reinsurance contributions should not apply to 
``carve-out'' arrangements that must be offered alongside an employer's 
major medical coverage that are similar to prescription drug carve-
outs, for example, behavioral health and transplant coverage.
    Response: An employer decides whether to offer group health 
coverage, the scope of the coverage, and its structure. An employer 
that provides dental or vision coverage may do so on a stand-alone 
basis, in which case the benefits may qualify as excepted benefits, or 
may include the coverage with the major medical benefits as part of a 
group health plan. Excepted benefits are not subject to reinsurance 
contributions.
    (b) Private Medicare, Medicaid, CHIP, State high-risk pools, and 
Basic Health Plans: Both Medicare and Medicaid have fee-for-service or 
traditional components, as well as managed care components in which 
private health insurance issuers, under contract with HHS, deliver the 
requisite benefits. As discussed in the preamble to the Premium 
Stabilization Rule, these private Medicare or Medicaid plans are 
excluded from reinsurance contributions because they are not part of a 
commercial book of business. We also clarified in the proposed rule 
that for purposes of reinsurance contributions, programs under the 
CHIP, Federal and State high-risk pools (including the Pre-Existing 
Condition Insurance Plan Program under section 1101 of the Affordable 
Care Act), and Basic Health Plans described in section 1331 of the 
Affordable Care Act are similarly excluded from reinsurance 
contributions because they are not part of a commercial book of 
business.
    (c) Health Reimbursement Arrangements (HRAs) integrated with a 
group health plan. Section 153.400(a)(2)(v) of the proposed rule 
excluded HRAs that are integrated with a group health plan offered in 
conjunction with a major medical plan (integrated HRAs) from 
reinsurance contributions. The preamble to the proposed rule noted that 
reinsurance contributions generally would be required for that group 
health plan.
    Comment: Several commenters requested that stand-alone HRAs be 
excluded from reinsurance contributions. Alternatively, some commenters 
requested that the ``one covered life'' rule that the Fees on Health 
Insurance Policies and Self-Insured Plans for the Patient-Centered 
Outcomes Research Trust final rule (the PCORTF Rule) \18\ applies to 
stand-alone HRAs also apply for purposes of reinsurance contributions. 
Some commenters requested clarification on when an HRA is 
``integrated'' with a traditional group health plan or health insurance 
coverage, on how to classify arrangements similar to HRAs that do not 
meet the technical definition of an HRA, and regarding the treatment of 
specific types of HRAs (for example, an HRA that only may be used to 
pay premiums under a fully insured plan).
---------------------------------------------------------------------------

    \18\ See the Fees on Health Insurance Policies and Self-Insured 
Plans for the Patient-Centered Outcomes Research Trust final rule 
(the PCORTF Rule) published on December 6, 2012 (77 FR 72721).
---------------------------------------------------------------------------

    Response: As described above, integrated HRAs are excluded from 
reinsurance contributions. We note that the Department of Labor, the 
U.S. Treasury and HHS recently issued guidance on certain HRA-related 
issues in ``Affordable Care Act Implementation FAQs-Set 11,'' which can 
be found at http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs11.html.
    (d) Health saving accounts (HSAs): Section 153.400(a)(2)(vi) of the 
proposed rule excluded HSAs from reinsurance contributions. An HSA is 
an individual arrangement that is offered along with a high deductible 
health plan. For purposes of reinsurance contributions, we believe that 
an HSA is not major medical coverage because it consists of a fixed 
amount of funds that are available for both medical and non-medical 
purposes, and thus would be excluded from reinsurance contributions. We 
note that reinsurance contributions generally would be required for the 
high deductible health plan because it is major medical coverage.
    Comment: Some commenters requested clarification on HSAs 
``integrated with a group health plan'' for reinsurance contributions 
purposes.
    Response: HSAs are excluded from reinsurance contributions because 
they consist of a fixed amount of funds that are available for both 
medical and non-medical purposes and therefore do not provide major 
medical coverage.
    (e) Health flexible spending arrangements (FSAs): Health FSAs are 
usually funded by an employee's voluntary salary reduction 
contributions under section 125 of the Code. Because section 9005 of 
the Affordable Care Act limits the annual amount that may be 
contributed by an employee to a health FSA to $2,500 (indexed for 
inflation), we believe that a health FSA is not major medical coverage 
under this final rule, and therefore is excluded from reinsurance 
contributions.
    (f) Employee assistance plans, disease management programs, and 
wellness programs: Employee assistance plans, disease management 
programs, and wellness programs typically provide ancillary benefits to 
employees that in many cases do not constitute major medical coverage. 
Employers, plan sponsors, and health insurance issuers have flexibility 
in designing these programs to provide services that are additional 
benefits to employees, participants, and beneficiaries. If the program 
(whether self-insured or insured) does not provide major medical 
coverage, we proposed to exclude it from reinsurance contributions and 
we are finalizing that provision in the final rule. We also note that 
employers that provide one or more of these ancillary benefits often 
sponsor major medical plans which would be subject to reinsurance 
contributions, absent other excluding circumstances.
    (g) Stop-loss and indemnity reinsurance policies: For purposes of 
reinsurance, we proposed to exclude stop-loss insurance and indemnity 
reinsurance because they do not constitute major medical coverage for 
the applicable covered lives. Generally, a stop-loss policy is an 
insurance policy that protects against health insurance claims that are 
catastrophic or unpredictable in nature and provides coverage to self-
insured group health plans once a certain level of risk has been 
absorbed by the plan. Stop-loss insurance allows an employer to self-
insure for a set amount of claims costs, with the stop-loss insurance 
covering all or most of the remainder of the claims costs that exceed 
the set amount. An indemnity reinsurance policy is an agreement between 
two or more insurance companies under which the reinsuring company 
agrees to accept and to indemnify the issuing company for all or part 
of the risk of loss under policies specified in the agreement, and the 
issuing company retains its liability to, and its contractual 
relationship with, the applicable lives covered. We believe these types 
of policies were not intended to be subject to the reinsurance program. 
No inference is intended as to whether stop-loss or reinsurance 
policies constitute health insurance policies for purposes other than 
reinsurance contributions.
    (h) Military Health Benefits: TRICARE is the component of the 
Military Health System that furnishes health care insurance to active 
duty and retired personnel of the uniformed services

[[Page 15459]]

(and covered dependents) through private issuers under contract. 
Although TRICARE coverage is provided by private issuers, it is not 
part of a commercial book of business because the relationship between 
the uniformed services and service members differs from the traditional 
employer-employee relationship in certain important respects. For 
example, service members may not resign from duty during a period of 
obligated service, may not form unions, and may be subject to 
discipline for unexcused absences from duty.
    In addition to TRICARE, the Military Health System also includes 
health care services that doctors, dentists, and nurses provide to 
uniformed services members on military bases and ships. The Veterans 
Health Administration within the U.S. Department of Veterans Affairs 
provides health care to qualifying veterans of the uniformed services 
at its outpatient clinics, hospitals, medical centers, and nursing 
homes. Because we do not consider these programs to be part of a 
commercial book of business, such military health programs are excluded 
from reinsurance contributions.
    (i) Tribal coverage: Section 153.400(a)(2)(xi) of the proposed rule 
excluded plans or coverage (whether fully insured or self-insured) 
offered by a Tribe to Tribal members and their spouses and dependents 
(and other persons of Indian descent closely affiliated with the Tribe) 
in their capacity as Tribal members (and not in their capacity as 
current or former employees of the Tribe or their dependents). 
Similarly, we proposed that coverage provided to Tribal members through 
programs operated under the authority of the Indian Health Service 
(IHS), Tribes or Tribal organizations, or Urban Indian organizations, 
as defined in section 4 of the Indian Health Care Improvement Act would 
be excluded from reinsurance contributions because it is not part of a 
commercial book of business. We note, however, that a plan or coverage 
offered by a Tribe to its employees (or retirees or dependents) on 
account of a current or former employment relationship would be 
required to make reinsurance contributions.
    Comment: Some commenters asked that self-insured Tribal plans that 
cover Tribal employees be excluded from reinsurance contributions, in a 
manner similar to Tribal plans that cover Tribal members based on their 
status as Tribal members.
    Response: Similar to Federal and State-based employment coverage, 
these Tribal plans are based on employment relationships. We do not 
have the authority to make this exclusion.
    We received additional comments which requested exceptions for 
other types of entities.
    Comment: Several commenters requested that plans or coverage 
provided by a voluntary employee beneficiary association (VEBA) 
established and maintained under the terms of a class action or 
bankruptcy settlement ordered by a court (court-ordered VEBA) be 
excluded from reinsurance contributions. A court-ordered VEBA provides 
retiree medical benefits to former employees of certain companies. The 
court order specifies the funding and the eligible individuals, and the 
former employers have no ongoing financial or administrative 
responsibility. A significant percentage of existing court-ordered 
VEBAs are not well funded.
    Response: We are unable to categorically exclude court-ordered 
VEBAs. We note, however, that many VEBAs may be excluded from 
reinsurance contributions because they do not provide major medical 
coverage.
    Comment: Some commenters requested that certain jointly 
administered Taft-Hartley plans that provide health coverage to 
collectively bargained employees be excluded from reinsurance 
contributions. Generally, many of these plans are self-insured and 
self-administered, and include multiemployer plans within the meaning 
of section 3(37) of ERISA.
    Response: While we recognize the unique nature of these plans, and 
their important role in providing coverage to collectively bargained 
employees and covered dependents, we do not have authority under the 
statute to exclude them from reinsurance contributions. As clarified in 
the Premium Stabilization Rule and in this final rule, we do not 
interpret the application of section 1341 of the Affordable Care Act to 
be limited to issuers and TPAs on behalf of group health plans. We view 
the plans' coverage as employment-based, and as a result subject to 
reinsurance contributions (unless another exclusion applies).
    Comment: Several commenters asked for clarification as to whether 
individuals with group health coverage that elect Consolidated Omnibus 
Budget Reconciliation Act (COBRA) continuation coverage or similar 
continuation coverage under State law are covered lives for reinsurance 
purposes.
    Response: Our view is that COBRA or other continuation coverage is 
a form of employment-based group health coverage paid for by the former 
employee. Therefore, to the extent the COBRA coverage qualifies as 
major medical coverage (and no other exception applies), it is subject 
to reinsurance contributions.
    Comment: A few commenters stated that employer-provided coverage 
for part-time employees should be excluded from reinsurance 
contributions.
    Response: Unless the coverage for part-time employees is self-
insured and is not major medical coverage, or is not part of an 
issuer's commercial book of business, it is subject to reinsurance 
contributions (so long as no other exception applies).
3. National Contribution Rate
a. 2014 Rate
    As specified in Sec.  153.220(c) of the Premium Stabilization Rule, 
HHS plans to publish in the annual HHS notice of benefit and payment 
parameters the national per capita reinsurance contribution rate for 
the upcoming benefit year. Section 1341(b)(3)(B)(iii) of the Affordable 
Care Act specifies the total contribution amounts to be collected from 
contributing entities (reinsurance pool) as $10 billion for 2014, $6 
billion for 2015, and $4 billion for 2016, and sections 
1341(b)(3)(B)(iv) and 1341(b)(4) of the Affordable Care Act direct the 
collection of funds for contribution to the U.S. Treasury in the 
amounts of $2 billion for 2014, $2 billion for 2015, and $1 billion for 
2016. We sought comments on whether deferring the collection of the $2 
billion in funds payable to the U.S. Treasury for 2014 until 2016 would 
be consistent with the statutory requirements described above, and 
whether there are other steps that could be taken to reduce the burden 
of these collections on contributing entities. Finally, section 
1341(b)(3)(B)(ii) of the Affordable Care Act allows for the collection 
of additional amounts for administrative expenses. Taken together, 
these three components make up the total dollar amount to be collected 
from contributing entities for each of the three years of the 
reinsurance program under the national per capita contribution rate.
    Each year, the national per capita contribution rate will be 
calculated by dividing the sum of the three amounts (the national 
reinsurance pool, the U.S. Treasury contribution, and administrative 
costs) by the estimated number of enrollees in plans that must make 
reinsurance contributions. As an illustration, under the Affordable 
Care Act, the 2014 national reinsurance pool is $10 billion, and the 
contribution to

[[Page 15460]]

the U.S. Treasury is $2 billion. The amount to be collected for 
administrative expenses for benefit year 2014 is $20.3 million (or 0.2 
percent of the $10 billion dispersed), as discussed in greater detail 
below. The HHS estimate of the number of enrollees in plans that must 
make reinsurance contributions that total the $12.02 billion described 
above yields an annual per capita contribution rate of $63.00 in 
benefit year 2014 or $5.25 per month.
    Section 153.220(c) of the proposed rule (previously designated as 
Sec.  153.220(e) in the Premium Stabilization Rule) stated that HHS 
plans to set in the annual HHS notice of benefit and payment parameters 
for the applicable benefit year the proportion of contributions 
collected under the national contribution rate to be allocated to 
reinsurance payments, payments to the U.S. Treasury, and administrative 
expenses. In Table 20, we specify these proportions (or amounts, as 
applicable):

   Table 20--Proportion of Contributions Collected Under the National
    Contribution Rate for Reinsurance Payments, Payments to the U.S.
                  Treasury and Administrative Expenses
------------------------------------------------------------------------
                                       If total
                                     contribution          If total
                                   collections under     contribution
                                     the national      collections under
    Proportion or amount for:      contribution rate     the national
                                   are less than or    contribution rate
                                    equal to $12.02      are more than
                                        billion         $12.02 billion
------------------------------------------------------------------------
Reinsurance payments............  83.2 percent ($10   The difference
                                   billion/$12.02      between total
                                   billion).           national
                                                       collections and
                                                       those
                                                       contributions
                                                       allocated to the
                                                       U.S. Treasury and
                                                       administrative
                                                       expenses.
Payments to the U.S. Treasury...  16.6 percent ($2    $2 billion.
                                   billion/$12.02
                                   billion).
Administrative expenses.........  0.2 percent ($20.3  $20.3 million.
                                   million/$12.02
                                   billion).
------------------------------------------------------------------------

    In light of the comments received, we are finalizing these 
provisions as proposed.
    Comment: Many commenters stated that a national contribution rate 
would penalize States with lower medical costs, and require those 
States to subsidize other States with higher medical costs. Some 
commenters asked that HHS vary the contribution rate using an index of 
health care costs by State. Conversely, many commenters supported a 
national per capita contribution rate. One commenter asked that the 
national contribution rate be calculated based on a percentage of 
premium and not on a per capita basis.
    Response: As stated in the Premium Stabilization Rule (77 FR 
17227), we are using a national, per capita contribution rate because 
it is a simpler approach that minimizes the administrative burden of 
collections. In addition, varying the contribution rate using an index 
of health care costs would not capture a State's reinsurance needs, 
which will also vary based upon the relative sizes of the State's 
individual, group, self-insured markets, and the uninsured.
    Comment: Several commenters expressed concern about the annual per 
capita national contribution rate of $63.00 for benefit year 2014, and 
suggested lowering the rate. Many commenters were concerned with the 
expense of the reinsurance contribution for employees.
    Response: Section 1341 of the Affordable Care Act states that the 
total contribution amounts to be collected from contributing entities 
for 2014 is $12 billion plus administrative expenses. We estimate that 
the $63 annual ($5.25 monthly) per capita contribution rate for benefit 
year 2014 will lead to collections in the statutory amount (plus 
administrative expenses) which we have concluded we have no regulatory 
authority to change.
    Comment: One commenter expressed concern that self-insured group 
health plans are excluded from receiving reinsurance payments and do 
not benefit proportionally or directly from their reinsurance 
contribution. As such, this commenter suggested that HHS prorate the 
contribution rate for self-insured group health plans, by collecting 
less than the $63 annual per capita national contribution rate from 
those plans.
    Response: Section 1341 of the Affordable Care Act directs health 
insurance issuers and self-insured group health plans to make 
reinsurance contributions. HHS has set forth a national per capita 
contribution rate for the 2014 benefit year which applies to all 
contributing entities, including self-insured group health plans.
    Comment: Several commenters asked HHS to defer the collection of 
the $2 billion payable to the U.S. Treasury in 2014 until 2016.
    Response: We considered the commenters' statutory interpretations 
for how such a deferral may be permissible under section 1341 of the 
Affordable Care Act and would support such a deferral, but concluded 
that we have no statutory authority to defer the collection.
    Comment: Several commenters asked HHS to eliminate the $20.3 
million collection for administrative expenses. One commenter stated 
that HHS has no authority to collect administrative expenses to pay for 
HHS operating reinsurance on behalf of a State.
    Response: We interpret section 1341(b)(3)(B)(ii) of the Affordable 
Care Act to authorize the collection of additional amounts for 
administrative expenses, including for HHS when HHS operates 
reinsurance on behalf of a State. We agree with the commenters on the 
need to keep these administrative expenses at a minimum, and intend to 
operate the program efficiently. We note that our estimate of 
administrative expenses--$20.3 million--represents approximately 0.2 
percent of the reinsurance amounts to be collected for 2014, and the 
costs of Federal employees are not included in the national 
contribution rate.
    Comment: Several commenters asked for clarification regarding 
whether an employer may pass the cost of the reinsurance contribution 
to its enrollees in self-insured group health plans.
    Response: This final rule does not address how an employer would 
meet the reinsurance contribution requirements.
    Comment: One commenter asked how the national contribution rate 
will affect premiums or the affordability of coverage once implemented.
    Response: As set forth in the regulatory impact analysis to this 
final rule, HHS estimates that reinsurance payments to issuers will 
reduce premiums in the individual market by between 10 to 15 percent. 
This is an HHS estimate for the 2014 benefit year, based in part on a 
2009 analysis of health insurance premiums by the Congressional Budget 
Office.
    Comment: Several commenters asked HHS to explain the methodology 
used to develop the national contribution rate and the assumptions 
behind the enrollment estimates that were used to

[[Page 15461]]

calculate the national contribution rate for 2014.
    Response: As described in the proposed rule, HHS developed the 
Affordable Care Act Health Insurance Model (ACAHIM), which estimates 
market enrollment in a manner that incorporates the effects of State 
and Federal policy choices and accounts for the behavior of individuals 
and employers. We used the ACAHIM, which was developed with reference 
to existing models such as those of the Congressional Budget Office and 
the Office of the Actuary, to characterize medical expenditures and 
enrollment choices across the 2014 marketplace. The ACAHIM is made up 
of integrated modules which predict the number and characteristics of 
market entrants and medical spending. The outputs of the ACAHIM, 
especially the estimated enrollment and expenditure distributions, were 
used to analyze estimated enrollment in the 2014 marketplace.
    The market enrollment module of the ACAHIM predicts coverage status 
of individuals in 2014, incorporating the effects of State and Federal 
policy choices and accounting for the behavior of individuals and 
employers. Using recent Current Population Survey data with appropriate 
population adjustments, the ACAHIM assigns individuals to a single 
health insurance market as their baseline (pre-Affordable Care Act) 
insurance status. The module estimates transitions from coverage status 
in the baseline to individuals' projected status in 2014, taking into 
account factors such as Medicaid eligibility, eligibility for advance 
payments of the premium tax credit and cost-sharing reductions under 
the Exchange, and current take-up rates of insurance.
    Comment: Several commenters sought clarification on whether the 
reinsurance contributions may be charged back to an ERISA plan as a 
reasonable plan expense. Several commenters asked whether IRS had 
indicated that the reinsurance contribution is tax-deductible as an 
ordinary and necessary business expenses. Several commenters also asked 
HHS to clarify that the contribution amount will be considered a ``plan 
cost'' for all purposes.
    Response: The Department of Labor advised HHS upon its review of 
this final rule that paying reinsurance contributions would constitute 
a permissible expense of the plan for purposes of Title I of the ERISA 
because the payment is required by the plan under the Affordable Care 
Act (see, 77 FR 73198, fn 56). Questions seeking clarification 
regarding particular situations should be directed to the Department of 
Labor. See generally Advisory Opinion 2001-01A to Mr. Carl Stoney, Jr., 
available at www.dol.gov/ebsa (discussing settlor versus plan 
expenses). For a discussion regarding the tax status of reinsurance 
contributions pursuant to the Affordable Care Act, see the FAQ issued 
by the IRS (http://www.irs.gov/uac/Newsroom/ACA-Section-1341-Transitional-Reinsurance-Program-FAQs).
b. Federal Administrative Fees
    In the proposed rule, we estimated the Federal administrative 
expenses of operating reinsurance for the 2014 benefit year to be 
approximately $20.3 million, or 0.2 percent of the $10 billion in 
reinsurance funds to be distributed for the 2014 benefit year. This 
figure reflects the Federal government's significant economies of scale 
in operating the program, and results in a national per capita 
contribution rate of $0.11 annually for HHS administrative expenses.
    In the proposed rule, we set forth the process for apportioning the 
annual per capita amount of $0.11 of administrative expenses as 
follows: $0.055 of the total amount collected per capita would be 
allocated to administrative expenses incurred in the collection of 
contributions from health insurance issuers and self-insured group 
health plans; and $0.055 of the total amount collected per capita would 
be allocated to administrative expenses incurred for activities 
supporting the administration of payments to issuers of reinsurance-
eligible plans. We proposed that if a State operates reinsurance, HHS 
would retain $0.055 to offset the costs of contributions collection, 
and would allocate $0.055 towards administrative expenses for 
reinsurance payments. The total amounts allocated towards 
administrative expenses for reinsurance payments would be distributed 
to States operating reinsurance (or retained by HHS where HHS is 
operating reinsurance) in proportion to the State-by-State total 
requests for reinsurance payments made under the uniform payment 
parameters. We are finalizing these provisions as proposed.
    Comment: Several commenters sought clarification on how 
administrative expenses will be distributed to States operating 
reinsurance.
    Response: The 2014 allocation for Federal administrative expenses 
for operating reinsurance totals $20.3 million. HHS will keep 50 
percent to cover the administrative expense of collecting reinsurance 
contributions from health insurance issuers and self-insured group 
health plans. The 50 percent allocated for reinsurance payment 
activities will be distributed in proportion to the State-by-State 
total requests for reinsurance payments (by total dollars) made under 
the uniform payment parameters. States operating reinsurance will 
receive that allocation; HHS will retain the allocation for States not 
operating reinsurance.
    Comment: Several commenters sought clarification on the methodology 
used to develop the Federal administrative expenses of implementing the 
reinsurance program in 2014.
    Response: We determined HHS's total costs for administering 
reinsurance on behalf of States by examining HHS's contract costs of 
operating reinsurance. These contracts cover collections, payments, 
account management, data collection, program integrity, operational and 
fraud analytics, stakeholder training, and operational support. We did 
not include the cost of Federal personnel. We divided HHS's projected 
total costs for administering reinsurance on behalf of States by the 
expected enrollment in health insurance plans and self-insured group 
health plans. We anticipate that the total cost for HHS to operate 
reinsurance on behalf of States for the 2014 benefit year will be $20.3 
million, or $0.11 per capita per year.
    Comment: One commenter expressed concern that HHS under-estimated 
the cost to a State of administering reinsurance.
    Response: The cost estimates in the proposed rule are estimates of 
HHS's costs of administering the program. HHS may benefit from 
economies of scale not available to the States. We understand that 
States operating reinsurance may need to collect additional funds for 
administrative expenses.
4. Calculation and Collection of Reinsurance Contributions
a. Calculation of Reinsurance Contribution Amount and Timeframe for 
Collections
    HHS intends to administer the reinsurance program in a manner that 
minimizes the administrative burden on health insurance issuers and 
self-insured group health plans, while ensuring that contributions are 
calculated accurately. Thus, we proposed in Sec.  153.400(a) and Sec.  
153.240(b)(1), respectively, to collect and pay out reinsurance funds 
annually to minimize the costs of administering the reinsurance program 
and the burden on contributing entities.
    In the Premium Stabilization Rule, we stated that we would collect 
reinsurance contributions through a per capita

[[Page 15462]]

assessment on contributing entities. To clarify how this assessment is 
made, we proposed in Sec.  153.405 that the reinsurance contribution of 
a contributing entity be calculated by multiplying the average number 
of covered lives of reinsurance contribution enrollees during the 
benefit year for all of the contributing entity's plans and coverage 
that must pay reinsurance contributions, by the national contribution 
rate for the applicable benefit year.
    In Sec.  153.405(b), we proposed that a contributing entity must 
submit to HHS an annual enrollment count of the average number of 
covered lives of reinsurance contribution enrollees no later than 
November 15 of benefit year 2014, 2015, and 2016, as applicable. The 
count must be determined as specified in proposed Sec.  153.405(d), 
(e), (f), or (g), as applicable. We proposed to amend Sec.  153.400(a) 
so that each contributing entity would make annual reinsurance 
contributions at the national contribution rate, and under any 
additional applicable State supplemental contribution rate, if a State 
elects to collect additional contributions for administrative expenses 
or supplemental reinsurance payments under Sec.  153.220(d). We believe 
that this annual collection schedule will ensure a more accurate count 
of a contributing entity's average covered lives, and will avoid the 
need for any initial estimates and subsequent reconciliation to account 
for fluctuations in enrollment during the course of the benefit year.
    In Sec.  153.405(c)(1), we proposed that within 15 days of 
submission of the annual enrollment count or by December 15, whichever 
is later, HHS would notify each contributing entity of the reinsurance 
contribution amounts to be paid based on the submitted annual 
enrollment count. We specified in Sec.  153.405(c)(2) that a 
contributing entity remit contributions to HHS within 30 days after the 
date of the notification of contributions due for the applicable 
benefit year. The amount to be paid by the contributing entity would be 
based upon the notification received under Sec.  153.405(c)(1).
    We are finalizing these provisions as proposed, with technical 
corrections to Sec.  153.400, where we clarify that each contributing 
entity must make reinsurance contributions annually at the national 
contribution rate; to Sec.  153.405(c), where we clarify that HHS will 
notify a contributing entity of reinsurance contributions amounts to be 
paid for a benefit year by the later of December 15 or 30 days after 
the submission of the annual enrollment count; and Sec.  153.405(a)(1), 
Sec.  153.405(b) and Sec.  153.405(d), where we delete ``average'' to 
clarify that reinsurance contributions are calculated by multiplying 
the number of covered lives of reinsurance contribution enrollees 
during the applicable benefit year for all contributing entities by the 
national contribution rate, pursuant to Sec.  153.405(a).
    Comment: Several commenters asked HHS to collect contributions 
after all reinsurance payment requests are submitted and aggregated, 
emphasizing that the reinsurance contributions should equal the 2014 
requests for reinsurance payments.
    Response: Under the Affordable Care Act, the total contribution 
amounts to be collected from contributing entities for reinsurance 
payments and payments to the U.S. Treasury for 2014 are $12 billion. We 
estimate that the $63.00 ($5.25 monthly) annual per capita contribution 
rate for benefit year 2014 will lead to collections in that amount, 
including the $20.3 million in administrative expenses. We recognize 
the possibility that reinsurance payment requests for 2014 may be less 
than contributions collected for 2014, but section 1341(b)(3)(B)(4)(A) 
of the Affordable Care Act provides that unused funds after making the 
2014 reinsurance payments may be used to stabilize premiums for the 
three years of the reinsurance program. As set forth in Sec.  
153.235(b), any unused funds will be used for reinsurance payments 
under the uniform reinsurance payment parameters for subsequent benefit 
years.
    Comment: One comment received sought clarification on whether 
contributing entities are required to make reinsurance contributions 
once per year.
    Response: As set forth in Sec.  153.400(a), a contributing entity 
makes reinsurance contributions at the national contribution rate 
annually.
    Comment: Several commenters requested that HHS revise the date by 
which a contributing entity must submit the annual enrollment count 
date to the end of the benefit year, so that issuers may submit 
enrollment counts on 12 months of data.
    Response: Due to operational time constraints surrounding the 
collection of reinsurance contributions, HHS must receive annual 
enrollment counts by November 15 of the applicable benefit year in 
order to invoice and collect contributions in time to aggregate payment 
requests and make payments. We do not believe the earlier submission 
will significantly impair the accuracy of the enrollment count.
    Counting Methods for Health Insurance Issuers: In Sec.  153.405(d), 
we proposed a number of methods that a health insurance issuer may use 
to determine the average number of covered lives of reinsurance 
contribution enrollees under a health insurance plan for a benefit year 
for purposes of the annual enrollment count. These methods promote 
administrative efficiencies by building on the methods permitted for 
purposes of the fee to fund the Patient-Centered Outcomes Research 
Trust Fund (77 FR 72721), modified for applicability to the 
transitional reinsurance program so that a health insurance issuer may 
determine an annual enrollment count during the fourth quarter of the 
benefit year. Thus, under each of these methods, the number of covered 
lives will be determined based on the first nine months of the benefit 
year.
    (1) Actual Count Method: Under the PCORTF Rule, an issuer may use 
the ``actual count method'' to determine the number of lives covered 
under the plan for the plan year by calculating the sum of the lives 
covered for each day of the plan year and dividing that sum by the 
number of days in the plan year. We proposed that, for reinsurance 
contributions purposes, a health insurance issuer would add the total 
number of lives covered for each day of the first nine months of the 
benefit year and divide that total by the number of days in those nine 
months of the benefit year.
    (2) Snapshot Count Method: Under the PCORTF Rule, a health 
insurance issuer may use the ``snapshot count method'' generally by 
adding the total number of lives covered on a certain date during the 
same corresponding month in each quarter, or an equal number of dates 
for each quarter, and dividing the total by the number of dates on 
which a count was made. For reinsurance contributions purposes, an 
issuer would add the totals of lives covered on a date (or more dates, 
if an equal number of dates are used for each quarter) during the same 
corresponding month in each of the first three quarters of the benefit 
year (provided that the dates used for the second and third quarters 
must be within the same week of the quarter as the date used for the 
first quarter), and divide that total by the number of dates on which a 
count was made. For this purpose, the same months must be used for each 
quarter (for example, January, April and July).
    (3) Member Months Method or State Form Method: Under the PCORTF 
Rule, a health insurance issuer may use the ``Member Months Method'' or 
``State Form Method'' by using data from the

[[Page 15463]]

NAIC Supplemental Health Exhibit or similar data from other State 
forms. However, data from these forms may be out of date at the time of 
the annual enrollment count submission, and we believe that it is 
important that health insurance issuers achieve an accurate count of 
covered lives, particularly for individual market plans. We expect that 
the individual market will be subject to large increases in enrollment 
between 2014 and 2016. Therefore, we proposed a modified counting 
method based upon the ratio of covered lives per policy in the NAIC or 
State form. Specifically, we proposed that health insurance issuers 
using this method multiply the average number of policies for the first 
nine months of the applicable benefit year by the ratio of covered 
lives per policy calculated from the NAIC Supplemental Health Care 
Exhibit (or from a form filed with the issuer's State of domicile for 
the most recent time period). Issuers would count the number of 
policies in the first nine months of the applicable benefit year by 
adding the total number of policies on one date in each quarter, or an 
equal number of dates for each quarter (or all dates for each quarter), 
and dividing the total by the number of dates on which a count was 
made.\19\
---------------------------------------------------------------------------

    \19\ For example, if a health insurance issuer indicated on the 
NAIC form for the most recent time period that it had 2,000 policies 
covering 4,500 covered lives, it would apply the ratio of 4,500 
divided by 2,000, equaling 2.25 to the number of policies it had 
over the first three quarters of the applicable benefit year. If the 
issuer had an average of 2,300 policies in the three quarters of the 
applicable benefit year, it would report 2.25 multiplied by 2,300 as 
the number of covered lives for the purposes of reinsurance 
contributions.
---------------------------------------------------------------------------

    Counting Methods for Self-Insured Group Health Plans: In Sec.  
153.405(e), we proposed a number of methods that a self-insured group 
health plan may use to determine the average number of covered lives 
for purposes of the annual enrollment count. These methods mirror the 
methods permitted for sponsors of self-insured group health plans under 
the PCORTF Rule, modified slightly for timing with the reinsurance 
program, so that enrollment counts may be obtained on a more current 
basis.
    (1) Actual Count Method or Snapshot Count Method: We proposed that 
self-insured plans, like health insurance issuers, may use the actual 
count method or snapshot count method as described above.
    (2) Snapshot Factor Method: Under the PCORTF Rule, a plan sponsor 
generally may use the ``snapshot factor method'' by adding the total 
number of lives covered on any date (or more dates if an equal number 
of dates are used for each quarter) during the same corresponding month 
in each quarter, and dividing that total by the number of dates on 
which a count was made, except that the number of lives covered on a 
date is calculated by adding the number of participants with self-only 
coverage on the date to the product of the number of participants with 
coverage other than self-only coverage on the date and a factor of 
2.35.\20\ For this purpose, the same months must be used for each 
quarter (for example, January, April, July, and October). For 
reinsurance contributions purposes, a self-insured group health plan 
would use this PCORTF counting method over the first three quarters of 
the benefit year, provided that the corresponding dates for the second 
and third quarters of the benefit year must be within the same week of 
the quarter as the date selected for the first quarter.
---------------------------------------------------------------------------

    \20\ The preamble to the proposed PCORTF Rule published on April 
17, 2012 (77 FR 22691) explains that ``the 2.35 dependency factor 
reflects that all participants with coverage other than self-only 
have coverage for themselves and some number of dependents. The 
Treasury Department and the IRS developed the factor, and other 
similar factors used in the regulations, in consultation with 
Treasury Department economists and in consultation with plan 
sponsors regarding the procedures they currently use for estimating 
the number of covered individuals.''
---------------------------------------------------------------------------

    (3) Form 5500 Method: Under the PCORTF Rule, a plan sponsor may use 
the ``Annual Return/Report of Employee Benefit Plan'' filed with the 
Department of Labor (Form 5500) by using data from the Form 5500 for 
the last applicable plan year. We proposed that, for purposes of 
reinsurance contributions, a self-insured group health plan may also 
rely upon such data, even though the data may reflect enrollment in a 
previous benefit year. Our modeling of the 2014 health insurance 
marketplace, discussed in section III.C.6. of this final rule, suggests 
that enrollment in self-insured group health plans is less likely to 
fluctuate than enrollment in the individual market. Thus, we proposed 
that a self-insured group health plan may calculate the number of lives 
covered for a plan that offers only self-only coverage by adding the 
total participants covered at the beginning and end of the benefit 
year, as reported on the Form 5500, and dividing by two. Additionally, 
a self-insured group plan that offers self-only coverage and coverage 
other than self-only coverage may calculate the number of lives covered 
by adding the total participants covered at the beginning and the end 
of the benefit year, as reported on the Form 5500.
    Counting Methods for Plans With Self-insured and Insured Options: 
An employer may sponsor a group health plan that offers one or more 
coverage options that are self-insured and one or more other coverage 
options that are insured. In Sec.  153.405(f), we proposed that to 
determine the number of covered lives of reinsurance contribution 
enrollees under a group health plan with both self-insured and insured 
options for a benefit year, a plan sponsor must use one of the methods 
specified in either Sec.  153.405(d)(1) or Sec.  153.405(d)(2)--the 
``actual count'' method or ``snapshot count'' for health insurance 
issuers.
    Aggregation of self-insured group health plans and health insurance 
plans: We proposed in Sec.  153.405(g)(1) that if a plan sponsor 
maintains two or more group health plans or health insurance plans that 
collectively provide major medical coverage for the same covered lives, 
which we refer to as ``multiple plans'' for purposes of the reinsurance 
program, then these multiple plans must be treated as a single self-
insured group health plan for purposes of calculating any reinsurance 
contribution amount due under paragraph (c) of this section. This 
approach would prevent the double counting of a covered life for major 
medical coverage offered across multiple plans, and prohibit plan 
sponsors that provide such major medical coverage from splitting the 
coverage into separate arrangements to avoid reinsurance contributions 
on the grounds that it does not offer major medical coverage.
    For purposes of Sec.  153.405(g)(1), the plan sponsor is 
responsible for paying reinsurance contributions. We proposed to define 
``plan sponsor'' in proposed Sec.  153.405(g)(2) based on the 
definition of the term in the PCORTF Rule as:
    (A) The employer, in the case of a plan established or maintained 
by a single employer;
    (B) The employee organization, in the case of a plan established or 
maintained by an employee organization;
    (C) The joint board of trustees, in the case of a multiemployer 
plan (as defined in section 414(f) of the Code);
    (D) The committee, in the case of a multiple employer welfare 
arrangement;
    (E) The cooperative or association that establishes or maintains a 
plan established or maintained by a rural electric cooperative or rural 
cooperative association (as such terms are defined in section 3(40)(B) 
of ERISA);
    (F) The trustee, in the case of a plan established or maintained by 
a voluntary employees' beneficiary association (meaning that the 
association is not merely serving as a funding vehicle for a plan that 
is established or maintained by an employer or other person);

[[Page 15464]]

    (G) In the case of a plan, the plan sponsor of which is not 
described in (A) through (F) above, the person identified or designated 
by the terms of the document under which the plan is operated as the 
plan sponsor, provided that designation is made and consented to by no 
later than the date by which the count of covered lives for that 
benefit year is required to be provided. After that date, the 
designation for that benefit year may not be changed or revoked, and a 
person may be designated as the plan sponsor only if the person is one 
of the persons maintaining the plan (for example, one of the employers 
that is maintaining the plan with one or more other employers); or
    (H) In the case of a plan the sponsor of which is not described in 
(A) through (F) above, and for which no identification or designation 
of a plan sponsor has been made under (G), each employer or employee 
organization that maintains the plan (with respect to employees of that 
employer or employee organization), and each board of trustees, 
cooperative or association that maintains the plan.
    Exceptions: We proposed two exceptions to this aggregation rule, in 
Sec.  153.405(g)(3). A plan sponsor is not required to include as part 
of a single group health plan as determined under paragraph Sec.  
153.405(g)(1): (a) any group health plan that consists solely of 
excepted benefits within the meaning of section 2791(c) of the PHS Act 
(such as stand-alone dental or vision benefits); or (b) benefits 
related to prescription drug coverage. These exceptions were designed 
to reduce the burden on plan sponsors who have chosen to structure 
their coverage in that manner.
    Multiple Plans: In Sec.  153.405(g)(4), we proposed the counting 
requirements for multiple plans in which at least one of the plans is 
an insured plan (Sec.  153.405(g)(4)(i)), and multiple plans not 
including an insured plan (Sec.  153.405(g)(4)(ii)). First, we 
anticipate that a plan sponsor would generate or obtain a list of the 
participants in each plan and then analyze the lists to identify those 
participants that have major medical coverage across all the plans 
collectively. To calculate the average number of covered lives of 
reinsurance contribution enrollees across multiple plans, we proposed 
that a plan sponsor must use one of the methods applicable to health 
insurance plans or self-insured group health plans under Sec.  
153.405(d) and Sec.  153.405(e), respectively, applied across the 
multiple plans as a whole. We also proposed to require reporting to HHS 
or the applicable reinsurance entity concerning multiple plans, as 
discussed in Sec.  153.405(g)(4). Additionally, it is important to note 
that the reinsurance program will operate on a benefit year basis, 
which is defined in Sec.  153.20 of the proposed rule (by reference to 
Sec.  155.20) as the calendar year. Therefore, the applicable counting 
methods, whether or not a particular plan operates on a calendar year 
basis, would not vary.
    Multiple Group Health Plans Including an Insured Plan: When one or 
more of the multiple group health plans is an insured plan, we proposed 
that the actual count method for health insurance issuers in Sec.  
153.405(d)(1) or the snapshot count method for health insurance issuers 
in Sec.  153.405(d)(2) must be used. We proposed to prohibit the use of 
the ``Member Months Method'' or ``State Form Method'' to count covered 
lives across multiple insured plans because those methods would not 
easily permit aggregate counting, since the identities of the covered 
lives are not available on the applicable forms. We proposed that the 
plan sponsor must determine and report, in a timeframe and manner 
established by HHS, to HHS (or the applicable reinsurance entity, if 
the multiple plans all consist solely of health insurance plans and the 
applicable reinsurance entity of a State is collecting contributions 
from health insurance issuers in such State): (1) The average number of 
covered lives calculated; (2) the counting method used; and (3) the 
names of the multiple plans being treated as a single group health plan 
as determined by the plan sponsor and reported to HHS.
    Multiple Self-Insured Group Health Plans Not Including an Insured 
Plan: We described the counting provisions applicable to multiple self-
insured group health plans (that is, when none of the plans is an 
insured plan) in proposed paragraph Sec.  153.405(g)(4)(ii). There are 
four counting methods available for self-insured plans which are set 
forth in Sec.  153.405(e)(1) through Sec.  153.405(e)(4). Section 
153.405(e)(1) permits a plan sponsor to use the actual count method 
under Sec.  153.405(d)(1) or the snapshot count method under Sec.  
153.405(d)(2) that are also available for insured plans. Paragraph 
(e)(2) permits an additional method (the snapshot factor method) for 
self-insured plans. We proposed not to permit a plan sponsor to use the 
fourth method, the ``Form 5500 Method'' as described in proposed Sec.  
153.405(e)(3) to count covered lives across multiple self-insured plans 
because that method would not easily permit aggregate counting, since 
the identities of the covered lives are not available on that form. 
Thus, we proposed three possible methods for multiple self-insured 
plans under paragraph Sec.  153.405(g)(4)(ii). We further proposed that 
the plan sponsor must report to HHS, in a timeframe and manner 
established by HHS: (1) The average number of covered lives calculated; 
(2) the counting method used; and (3) the names of the multiple plans 
being treated as a single group health plan as determined by the plan 
sponsor.
    Consistency with PCORTF Rule Not Required: We proposed not to 
require consistency in counting methods between the count calculated 
under the PCORTF Rule and the count calculated for reinsurance 
purposes. In other words, we would allow a contributing entity to use, 
either the counting method corresponding to the method selected for the 
PCORTF Rule or a different counting method for reinsurance purposes. 
Because time periods and counting methods may differ, we would not 
require that a contributing entity submit consistent estimates of its 
covered lives in the return required in connection with the PCORTF Rule 
and the annual enrollment count required for reinsurance contributions 
(although these counts should be performed in accordance with the rules 
of the counting method chosen). However, when calculating the average 
number of covered lives across two or more plans under proposed 
paragraph (g) for purposes of reinsurance, the same counting method 
would be used across all of the multiple plans, because they would be 
treated as a single plan for counting purposes.
    We are finalizing these provisions as proposed, with the following 
modifications: we updated the footnotes that referenced the proposed 
PCORTF Rule with the citation for the final POCRTF Rule; we made a 
number of technical adjustments to the aggregation rules set forth in 
Sec.  153.405--we provided plan sponsors with the option to count any 
coverage options within a single group health plan separately if the 
coverage options are treated as offering major medical coverage, we 
provided plan sponsors with the option not to aggregate group health 
plans for purposes of counting covered lives if each group health plan 
is treated as offering major medical coverage, and we included HRAs, 
HSAs, and FSAs in the categories of group health plans that are 
excluded from the counting rules.
    Comment: One commenter asked that HHS confirm that the count of 
covered lives for purposes of determining reinsurance contributions 
would be members enrolled in the first nine

[[Page 15465]]

months of each year throughout the reinsurance program (and will not be 
calculated on a twelve-month basis for the second and third years of 
the reinsurance program).
    Response: We intend that the number of covered lives will be 
determined based on the first nine months of each of the 2014, 2015, 
and 2016 benefit years.
    Comment: Some commenters asked HHS to clarify how the counting 
methods apply to plans that have a non-calendar plan year.
    Response: The reinsurance program will operate on a calendar year 
basis. As set forth in Sec.  153.405, a contributing entity will 
determine its enrollment count by counting the average number of 
covered lives of reinsurance contribution enrollees during the first 
nine months of the benefit year (that is, calendar year) for all of the 
contributing entity's plans and coverage that must pay reinsurance 
contributions.
    Comment: Several commenters stated that when a TPA or ASO 
contractor is submitting reinsurance contributions on behalf of a self-
insured group health plan, the TPA or ASO contractor should be 
permitted to count members consistent with the methodology they use for 
fully insured lives.
    Response: Many of the counting methods available to fully insured 
plans are also available to self-insured plans. If a self-insured 
plan's TPA or ASO contractor is an issuer that can easily perform such 
a count, such a choice may be the most efficient. However, this final 
rule does not require one specific counting method, and provides a 
self-insured plan, which is responsible for reporting the enrollment 
count and ensuring the payment of the reinsurance contribution, with 
the flexibility to use the counting method that it chooses.
    Comment: Several commenters generally appreciated the use of PCORTF 
counting methods. Some commenters suggested that HHS direct plan 
sponsors or issuers to count enrollment on the last day of each month 
and calculate membership based on an average across all months.
    Response: In order to relieve the administrative burden of 
submitting the annual enrollment count, HHS has incorporated, with 
slight modifications for timing, the counting methods set forth in the 
PCORTF Rule. Allowing contributing entities to choose from a variety of 
counting methods gives contributing entities the flexibility to choose 
a counting method that works best for that plan or coverage.
    Comment: Numerous commenters stated that it is unreasonable to 
believe that employers are unable to identify the States in which their 
employees reside or work. Several commenters supported HHS's proposal 
to eliminate the need for employers to allocate employees by State of 
residence.
    Response: State-based allocation of enrollees in a contributing 
entity's plans or coverage is not necessary because reinsurance 
contributions will be collected by HHS and placed into a national pool 
from which reinsurance payments will be made in an efficient, fair, and 
accurate manner where they are needed most. We believe that this will 
be most effective in helping stabilize premiums nationally.
    Comment: One commenter asked HHS to revise the snapshot counting 
methods so that issuers would be permitted to use the same date in the 
first month in each quarter for counting members, in addition to being 
able to use any date within the same week of the quarter.
    Response: Under the ``snapshot count method,'' a health insurance 
issuer or self-insured group health plan would add the totals of 
covered lives on a date (or more dates if an equal number of dates are 
used for each quarter) during the same corresponding month in each of 
the first three quarters of the benefit year (provided that the dates 
used for the second and third quarters must fall within the same week 
of the quarter as the date used for the first quarter), and divide that 
total by the number of dates on which a count was made. For this 
purpose, the same months must be used for each quarter (for example, 
January, April and July). Under the ``snapshot factor method,'' a self-
insured group health plan would use this PCORTF counting method over 
the first three quarters of the benefit year, provided that for this 
purpose, the corresponding dates for the second and third quarters of 
the benefit year must fall within the same week of the quarter as the 
date selected for the first quarter. We believe that those counting 
methods provide sufficient flexibility, and intend to keep these 
methods consistent with the PCORTF Rule.
    Comment: One commenter asked that HHS permit contributing entities 
to submit enrollment counts and contributions electronically. One 
commenter encouraged HHS to permit contributing entities to submit 
reinsurance contributions electronically in a manner similar to that 
used for submissions of collections under the PCORTF Rule.
    Response: HHS will provide details on the submission of enrollment 
counts and contributions in future guidance.
    Comment: One commenter asked that HHS give contributing entities 
flexibility in correcting errors when making reinsurance contributions.
    Response: Given the complexities related to the first year of the 
reinsurance program, HHS is aware that operational difficulties may 
arise. We intend to work closely with contributing entities in 
establishing the operational processes for the submission of enrollment 
counts and contributions.
    Comment: One commenter suggested that HHS clarify that the enrollee 
counting methods exclude plan participants who do not have major 
medical coverage.
    Response: As set forth in Sec.  153.400(a)(1)(i), reinsurance 
contributions are not required for a plan or health insurance coverage 
that is not major medical coverage. Consequently, enrollees in those 
plans are not required to be included in a count of covered lives for 
purposes of reinsurance contributions unless required under Sec.  
153.405(f) or (g).
    Comment: One commenter stated that in order to apply the enrollee 
counting rules accurately, an employer must be able to determine in 
what circumstances different health coverage options constitute a 
single group health plan. The commenter suggested that for the purposes 
of reinsurance, group health plans be identified by reference to the 
COBRA rules because they are widely used. Under the COBRA rules, group 
health arrangements maintained by the same employer generally are 
treated as a single group health plan unless the instruments governing 
the arrangements designate them as separate plans and the employer 
operates them as separate plans.
    Response: Section 1301(b)(3) of the Affordable Care Act defines 
``group health plan'' by reference to section 2791(a) of the Public 
Health Service Act, which states that a group health plan is an 
employee welfare benefit plan (as defined in section 3(1) of ERISA) to 
the extent that the plan provides medical care (as defined in section 
2791(a)(2)) to employees or their dependents (as defined under the 
terms of the plan), directly or through insurance, reimbursement, or 
otherwise.
    However, we note that the IRS has promulgated COBRA regulations for 
determining the number of group health plans an employer maintains. 26 
CFR 54.4980B-2, QA 6 (2001) \21\ states, in relevant part, that except 
as otherwise provided in the regulation, all health care benefits 
provided by a corporation, partnership or other entity or trade or

[[Page 15466]]

business shall constitute one group health plan unless it is clear from 
the instruments governing the arrangement(s) that the benefits are 
being provided under separate plans, and the arrangement(s) are 
operated under such instruments as separate plans. The COBRA 
regulations include an anti-abuse rule which states that if a principal 
purpose of establishing separate plans is to evade any requirement of 
law, the separate plans will be considered a single plan to the extent 
necessary to prevent the evasion. We clarify that for purposes of 
counting covered lives for reinsurance contributions, an employer may 
count its group health plans in accordance with these regulations, 
subject to the anti-abuse rule.
---------------------------------------------------------------------------

    \21\ See http://www.gpo.gov/fdsys/pkg/CFR-2011-title26-vol17/pdf/CFR-2011-title26-vol17-sec54-4980B-2.pdf.
---------------------------------------------------------------------------

    Comment: One commenter suggested that HHS revise proposed Sec.  
153.405(f) to permit employers to disaggregate a group health plan that 
offers both self-insured and insured coverage options to different 
groups, and to permit an issuer with respect to one group health plan 
that contains multiple insured options written by more than one issuer 
to treat the insured options as separate group health plans for 
purposes of the counting rules. The commenter stated that Sec.  
153.405(f) as currently drafted is not consistent with current plan 
sponsor and issuer practices.
    Response: We are amending Sec.  153.405(f) to permit such 
disaggregation, so long as each coverage option is treated as major 
medical coverage, except if a coverage option consists solely of 
excepted benefits as defined by section 2791(c) of the PHS Act, only 
provides benefits related to prescription drugs, or is an HRA, HSA, or 
FSA. This amendment is designed to allow contributing entities 
flexibility in performing enrollment counts, while collecting 
reinsurance contributions for all enrollees with major medical 
coverage, without ``double-counting.''
    Comment: One commenter suggested that the plan aggregation rules be 
permissive rather than mandatory, and that it should apply only to 
overlapping simultaneous coverage.
    Response: We agree that the plan aggregation rules should only 
apply to overlapping, simultaneous coverage. For the reasons set forth 
in the prior response, we are amending Sec.  153.405(f) and (g) to 
permit disaggregation, so long as each coverage option or separate 
group health plan is treated as major medical coverage, except if a 
coverage option or separate group health plan consists solely of 
excepted benefits as defined by section 2791(c) of the PHS Act, only 
provides benefits related to prescription drugs, or is a HRA, HSA, or 
FSA.
    Comment: One commenter suggested that the plan aggregation rules 
set forth in Sec.  153.405(g) should not apply to any plan or health 
insurance coverage that is excluded from making reinsurance 
contributions.
    Response: We have clarified that the plan aggregation rules do not 
apply to a plan or health insurance coverage that consists solely of 
excepted benefits as defined by section 2791(c) of the PHS Act, only 
provides benefits related to prescription drugs, or is an HRA, HSA, or 
FSA. However, we decline to exempt other plans or coverage excluded 
from making reinsurance contributions from the aggregation rules 
because the aggregation rules are designed in part to ensure 
reinsurance contribution collections from arrangements involving 
multiple plans that collectively provide major medical coverage, even 
when each component plan does not. Thus, a plan providing only hospital 
benefits might have to be aggregated with a plan that provides medical 
coverage other than hospital benefits, even though the hospital benefit 
plan on its own would be excluded from making reinsurance contributions 
because it is not major medical coverage.
b. State Use of Contributions Attributed to Administrative Expenses
    In the proposed rule, HHS provided guidance on three restrictions 
that we intend to propose on the use of reinsurance contributions for 
administrative expenses, to permit States operating the reinsurance 
program to accurately estimate the cost of administrative expenses. 
First, we intend to apply the prohibitions described in section 
1311(d)(5)(B) of the Affordable Care Act to the reinsurance program 
which prohibit an Exchange from using funds intended for administrative 
and operational expenses of the Exchange for such purposes as staff 
retreats, promotional giveaways, and excessive executive compensation. 
Second, we intend to propose that reinsurance funds intended for 
administrative expenses may not be used for any expense not necessary 
to the operation or administration of the reinsurance program. Third, 
we intend to propose that an applicable reinsurance entity must 
allocate any shared, indirect, or overhead costs between reinsurance-
related and other State expenses based on generally accepted accounting 
principles, consistently applied. We received no comments on this 
guidance. We intend to issue future rulemaking including these 
provisions.
5. Eligibility for Reinsurance Payments under the Health Insurance 
Market Reform Rules
    We proposed to add Sec.  153.234 to clarify that, under either the 
uniform reinsurance payment parameters or the State supplemental 
reinsurance payment parameters, a reinsurance-eligible plan's covered 
claims costs for an enrollee incurred prior to the application of 2014 
market reform rules--Sec.  147.102 (fair health insurance premiums), 
Sec.  147.104 (guaranteed availability of coverage, subject to the 
student health insurance provisions at Sec.  147.145), Sec.  147.106 
(guaranteed renewability of coverage, subject to the student health 
insurance provisions at Sec.  147.145), Sec.  156.80 (single risk 
pool), and subpart B of part 156 (essential health benefits package)--
would not count toward either the uniform or State supplemental 
attachment points, reinsurance caps, or coinsurance rates. In other 
words, those claims would not be eligible for reinsurance payments. We 
noted in the preamble of the proposed rule that, unlike plans subject 
to the 2014 market reform rules under the Affordable Care Act, plans 
not subject to these 2014 market reforms rules may use several 
mechanisms to avoid claims costs for newly insured individuals. (We 
also noted that student health plan eligibility would be subject to the 
modified guaranteed availability and guaranteed issue requirements 
only, to the extent that they apply, as set forth in Sec.  147.145, and 
we would require that the student health plans meet those modified 
requirements to be eligible for reinsurance payments.) The market 
reform rules will be effective for the individual market for policy 
years beginning on or after January 1, 2014. As a result, policies that 
are issued in 2013 will be subject to these rules at the time of 
renewal in 2014, and therefore, become eligible for reinsurance 
payments at the time of renewal in 2014.
    We believe that providing reinsurance payments only to those 
reinsurance-eligible plans that are subject to the 2014 market reform 
rules better reflects the reinsurance program's purpose of mitigating 
premium adjustments to account for risk from newly insured individuals. 
We also proposed that State-operated reinsurance programs similarly 
limit eligibility for reinsurance payments, although we recognize that 
this policy contrasts with the approach proposed for State-operated 
risk adjustment programs, under which States are permitted to choose to 
risk-adjust plans not subject to the 2014 market reform rules. Because 
some

[[Page 15467]]

States may have enacted State-specific rating and market reforms that 
they believe would justify the inclusion of these plans in risk 
adjustment before their renewal dates, permitting State flexibility on 
the applicability of risk adjustment to plans not subject to the 2014 
market reform rules furthers the goals of the risk adjustment program. 
However, we believe that State flexibility for eligibility for 
reinsurance payments does not further the goal of the reinsurance 
program. Last, we proposed to operate the reinsurance program on a 
calendar year basis, which we believe to be most feasible from policy 
and administrative standpoints. For the reasons described in the 
proposed rule and considering the comments received, we are finalizing 
the provisions proposed in Sec.  153.234.
    Comment: Commenters generally supported the operation of the 
reinsurance program on a calendar year basis. Commenters also requested 
that HHS use a calendar year approach versus a plan year approach for 
administrative simplicity. A commenter also requested that HHS use the 
term ``calendar year'' instead of ``benefit year'' to avoid confusion 
among issuers.
    Response: We use the term ``benefit year'' throughout this final 
rule instead of ``calendar year'' because, under Sec.  155.20 of the 
Exchange Establishment Rule, ``benefit year'' is defined as a calendar 
year for which a health plan provides coverage for health benefits. For 
consistency, HHS will continue to use the term ``benefit year.''
6. Reinsurance Payment Parameters
    As described in the Premium Stabilization Rule, reinsurance 
payments to eligible issuers would be made for a portion of an 
enrollee's claims costs paid by the issuer that exceeds an attachment 
point, subject to a coinsurance rate and a reinsurance cap. The 
coinsurance rate, attachment point, and reinsurance cap are the 
reinsurance ``payment parameters.'' We proposed uniform reinsurance 
payment parameters that would be applicable to the reinsurance program 
for each State, whether or not operated by a State. We believe that 
using uniform payment parameters will result in equitable access to the 
reinsurance funds across States and will further the goal of premium 
stabilization across all States by disbursing reinsurance contributions 
where they are most needed.
    We noted in the proposed rule that the primary purpose of the 
transitional reinsurance program is to stabilize premiums by setting 
the reinsurance payment parameters to achieve the greatest impact on 
rate setting, and therefore, premiums, through reductions in plan risk, 
while complementing the current commercial reinsurance market. The 
reinsurance program is designed to protect against issuers' potential 
perceived need to raise premiums due to the implementation of the 2014 
market reform rules, specifically, guaranteed availability. HHS expects 
that any potential new high-cost claims from newly insured individuals 
would be balanced out by low-cost claims from many newly insured 
individuals who enter the individual market as a result of the 
availability of premium tax credits, more affordable coverage, the 
minimum coverage provision, and greater transparency and competition in 
the market. To that end, the reinsurance program is designed to 
alleviate the concern of new high-cost claims from newly insured 
individuals.
    We proposed that the 2014 uniform reinsurance payment parameters be 
established at: (a) An attachment point of $60,000, when reinsurance 
payments would begin, (b) a national reinsurance cap of $250,000, when 
the reinsurance program stops paying claims for a high-cost individual, 
and (c) a uniform coinsurance rate of 80 percent, which is the 
reimbursement percentage applied to the issuer's aggregated paid claims 
amounts on behalf of an enrollee while giving issuers an incentive to 
contain costs between the attachment point and reinsurance cap. These 
three proposed payment parameters would help offset high-cost 
enrollees. The parameters would not interfere with traditional 
commercial reinsurance, which typically has attachment points in the 
$250,000 range. We estimate that these uniform payment parameters will 
result in total requests for reinsurance payments of approximately $10 
billion in the 2014 benefit year. We intend to continue to monitor 
individual market enrollment and claims patterns to appropriately 
disburse reinsurance payments throughout each of the benefit years 
during which the reinsurance program is in effect.
    We are finalizing the proposed payment parameters, and the 
associated payment provisions proposed in Sec.  153.230(a) through 
Sec.  153.230(c), with a technical revision in Sec.  153.230(a) 
changing ``non-grandfathered individual market plan'' to ``reinsurance-
eligible plan'' and clarifying in Sec.  153.230(c) that national 
reinsurance payments are calculated as the product of the national 
coinsurance rate multiplied by the health insurance issuer's claims 
costs for an individual enrollee's covered benefits that the health 
insurance issuer incurs in the applicable benefit year.
    Comment: Several commenters supported the use of uniform payment 
parameters. Many commenters, however, suggested that States should be 
able to set their own payment parameters using State contributions to 
better target their local markets. Several commenters sought State 
flexibility and autonomy, with some commenters stating that they had 
spent substantial time and money preparing a State-operated program 
specific to the State. One commenter stated that uniform payment 
parameters and the national allocation of reinsurance payments will not 
ensure issuers of the aggregate funding available to pay claims in 
their respective markets until well after premium setting decisions for 
the next benefit year must be made.
    Response: We believe that these uniform payment parameters best 
meet the reinsurance program's goals to promote premium stabilization 
and market stability in all States while providing plans incentives to 
continue effective management of enrollee costs. We aim to administer 
the transitional reinsurance program in an efficient, fair, and 
accurate manner so that reinsurance funds are allocated equitably and 
can maximize downward pressure on premiums. To maximize the program's 
impact on premiums, uniform reinsurance payment parameters would allow 
the allocation of reinsurance contributions where they are most needed, 
to reimburse issuers with high costs in the individual market in 2014, 
2015 and 2016. This policy is consistent with the statutory goals of 
the reinsurance program--to stabilize premiums in the initial years of 
Exchange implementation and market reform. Additionally, as set forth 
in Sec.  153.240(b)(2), a State, or HHS on behalf of the State, will 
provide each reinsurance-eligible plan the expected requests for 
reinsurance payments made under the national payment parameters and 
State supplemental parameters, if applicable. These reports can provide 
the information necessary for issuers to set rates in subsequent 
benefit years.
    Comment: Several commenters requested more detail on the 
methodology used to calculate the uniform reinsurance payment 
parameters. One commenter requested that HHS detail the methodology 
used to determine the $60,000 attachment point. Another commenter 
requested that HHS raise the reinsurance cap to $500,000 to account for 
attachment points in commercial reinsurance higher than $250,000. 
Alternately, one commenter suggested that HHS use a first-dollar 
approach with no attachment point and a lower coinsurance rate to

[[Page 15468]]

better incentivize issuers to control costs from the beginning of an 
individual's care. Several commenters suggested that the proposed 
contribution rate is insufficient to fully fund the proposed uniform 
reinsurance payment parameters, and asked HHS to set the uniform 
payment parameters such that expected payments would be fully funded.
    Response: As described in the proposed rule and earlier in this 
preamble, we used the ACAHIM, which estimates market enrollment 
incorporating the effects of State and Federal policy choices and 
accounting for the behavior of individuals and employers. These 
assumptions and projections led to our estimate of the 2014 individual 
and employer-sponsored insurance markets and expenditures, and 
permitted us to estimate uniform payment parameters that will lead to 
requests for reinsurance payments of approximately $10 billion.
    Comment: One commenter asked HHS for guidance on how to account for 
quality improvement costs and attribute those to an individual, though 
they are not claims costs. Another commenter suggested that HHS use an 
alternate method for reinsurance payments, such as a fixed fee schedule 
or a percentage of Medicare reimbursement rates, instead of claims 
costs.
    Response: HHS believes that using claims costs most appropriately 
reimburses issuers for costs related to higher risk individuals and 
will most effectively stabilize premiums.
    Comment: One commenter suggested that HHS synchronize reinsurance 
payments with rules governing claims responsibility, such that if a 
patient changes coverage over the course of a single claim, the issuer 
paying the claim should be eligible for reinsurance payments.
    Response: We believe that using the date of discharge for claims 
payments effectively synchronizes reinsurance payments with claims 
responsibility.
7. Uniform Adjustment to Reinsurance Payments
    We proposed in Sec.  153.230(d) that HHS would adjust reinsurance 
payments by a uniform, pro rata adjustment rate if HHS determines that 
the total requests for reinsurance payments under the reinsurance 
payment parameters will exceed the reinsurance contributions collected 
under the national contribution rate during a given benefit year. In 
the preamble to the proposed rule, we stated that the total amount of 
contributions considered for this purpose would include any 
contributions collected but unused under the national contribution rate 
during any previous benefit year. We are finalizing Sec.  153.230(d) as 
proposed.
    Comment: Several commenters supported the uniform adjustment to 
reinsurance payments in the event that total payment requests exceed 
reinsurance contributions. One commenter objected to the lower 
coinsurance rate that will effectively result from a uniform adjustment 
to payments, stating that this could lead to additional uncertainty for 
issuers.
    Response: We developed the national contribution rate and uniform 
reinsurance payment parameters using enrollment and expenditure 
estimates for 2014, based on the ACAHIM. We recognize that requests for 
reinsurance payments may be greater than predicted, or that collections 
may be lower than predicted. However, we believe that a uniform 
adjustment to payments is the most equitable approach in these 
situations.
    Comment: We received a comment seeking clarification on when, if 
necessary, the uniform adjustment to national reinsurance payments set 
forth in Sec.  153.230(d) would occur, and how HHS will disburse 
reinsurance funds to States operating reinsurance, in order for the 
States to make reinsurance payments.
    Response: As described in Sec.  153.235, HHS plans to allocate and 
disburse to each State operating reinsurance (and will distribute 
directly to issuers if HHS is operating reinsurance on behalf of a 
State), reinsurance contributions collected from contributing entities 
under the national contribution rate for reinsurance payments. The 
disbursed funds would be based on the total requests for reinsurance 
payments made under the national reinsurance payment parameters by all 
States and submitted under Sec.  153.410, net of any adjustment under 
Sec.  153.230(d). Thus, prior to the disbursement, HHS would uniformly 
adjust reinsurance payments, if applicable, following the collection of 
contributions and after the receipt of all claims for reinsurance 
payments, which must be submitted by April 30 of the year following the 
applicable benefit year. Following that adjustment, HHS will make 
reinsurance payments in States where HHS is operating reinsurance on 
behalf of the State, and will distribute funds to States operating 
reinsurance.
8. Supplemental State Reinsurance Payment Parameters
    In Sec.  153.232(a), we proposed that a State establishing the 
reinsurance program may modify the uniform reinsurance payment 
parameters only by establishing State supplemental payment parameters 
that cover an issuer's claims costs beyond the uniform reinsurance 
payment parameters. We further proposed that reinsurance payments under 
these State supplemental payments parameters be made only with the 
additional funds that the State collects for reinsurance payments under 
Sec.  153.220(d)(1)(ii) or State funds applied to the reinsurance 
program under Sec.  153.220(d)(2) (proposed as (d)(3) in the proposed 
rule). We stated our belief that this approach would not prohibit 
States from collecting additional amounts for reinsurance payments as 
provided for under section 1341(b)(3)(B) of the Affordable Care Act, 
while allowing issuers in all States access to the reinsurance payments 
from the contributions collected under the national reinsurance 
contribution rate.
    We proposed in Sec.  153.232(a) that a State choosing to establish 
State supplemental reinsurance payment parameters must set those 
parameters by adjusting the uniform reinsurance payment parameters in 
one or more of the following ways: (1) Decreasing the national 
attachment point; (2) increasing the national reinsurance cap; or (3) 
increasing the national coinsurance rate. We also proposed that a State 
may not alter the uniform reinsurance payment parameters in a manner 
that could result in reduced reinsurance payments.
    To provide issuers with greater certainty for premium rate setting 
purposes, we proposed that a State must ensure that any additional 
funds for reinsurance payments it collects under Sec.  
153.220(d)(1)(ii) or State funds under Sec.  153.220(d)(2) (proposed as 
(d)(3) in the proposed rule), as applicable, are reasonably calculated 
to cover additional reinsurance payments projected to be made under the 
State's supplemental reinsurance payment parameters for a given benefit 
year. In Sec.  153.232(b), we proposed that contributions collected 
under Sec.  153.220(d)(1)(ii) or additional funds collected under Sec.  
153.220(d)(2) (proposed as (d)(3) in the proposed rule), as applicable, 
must be applied toward requests for reinsurance payments made under the 
State supplemental reinsurance payments parameters for each benefit 
year commencing in 2014 and ending in 2016.
    We also proposed in Sec.  153.232(c) that a reinsurance-eligible 
plan becomes eligible for reinsurance payments under a State's 
supplemental reinsurance parameters if its incurred claims costs for an 
individual enrollee's covered benefits during a benefit year exceed: 
(1)

[[Page 15469]]

The supplemental State attachment point; (2) the national reinsurance 
cap; or (3) the national attachment point, if the State has established 
a State supplemental coinsurance rate. This would allow reinsurance 
payments made under the State supplemental payment parameters to ``wrap 
around'' the uniform reinsurance payment parameters so that the State 
could apply any additional contributions it collects under proposed 
Sec.  153.220(d) towards reinsurance payments beyond the uniform 
reinsurance payment parameters. We explained in the proposed rule that 
this approach permits HHS to distribute funds under the uniform payment 
formula to where they are needed most, while allowing States that elect 
to operate reinsurance the flexibility to supplement nationally 
calculated reinsurance payments. As set forth in Sec.  153.240(b), 
States would be required to separate in their reporting to issuers the 
reinsurance payments paid under the uniform reinsurance payment 
parameters and State supplemental reinsurance payment parameters.
    To ensure that reinsurance payments under State supplemental 
payment parameters do not overlap with the uniform reinsurance payment 
parameters, we proposed the method for calculating State supplemental 
reinsurance payments. Specifically, we proposed in Sec.  153.232(d) 
that supplemental reinsurance payments with respect to a health 
insurance issuer's claims costs for an individual enrollee's covered 
benefits must be calculated by taking the sum of: (1) The product of 
such claims costs between the supplemental State attachment point and 
the national attachment point, multiplied by the national coinsurance 
rate (or applicable State supplemental coinsurance rate); (2) the 
product of such claims costs between the national reinsurance cap and 
the supplemental State reinsurance cap, multiplied by the national 
coinsurance rate (or applicable State supplemental coinsurance rate); 
and (3) the product of such claims costs between the national 
attachment point and the national reinsurance cap, multiplied by the 
difference between the State supplemental coinsurance rate and the 
national coinsurance rate.
    Similar to payment calculations under the uniform reinsurance 
payment parameters, we proposed in Sec.  153.232(e) that if all 
reinsurance payments requests under the State supplemental reinsurance 
parameters calculated in a State for a benefit year will exceed all the 
additional funds a State collects for reinsurance payments under Sec.  
153.220(d)(1)(ii) or State funds under Sec.  153.220(d)(2) (proposed as 
(d)(3) in the proposed rule) as applicable, the State must determine a 
uniform pro rata adjustment to be applied to all such requests for 
reinsurance payments in the State. We proposed that each applicable 
reinsurance entity in the State must reduce all requests for 
reinsurance payments under the State supplemental reinsurance payment 
parameters for the applicable benefit year by that adjustment.
    Finally, in Sec.  153.232(f), we proposed that a State must ensure 
that reinsurance payments made to issuers under the State supplemental 
reinsurance payment parameters do not exceed the issuer's total paid 
amount for the reinsurance-eligible claims, and any remaining 
additional funds collected under Sec.  153.220(d)(1)(ii) must be used 
for reinsurance payments under the State supplemental parameters in 
subsequent benefit years.
    We are finalizing these provisions as proposed, with a technical 
correction changing ``non-grandfathered individual market plan'' to 
``reinsurance-eligible plan'' and clarifying that the incurred claims 
costs for an individual enrollee's covered benefits are those incurred 
in the applicable benefit year in Sec.  153.232(c). We are clarifying 
in Sec.  153.232(d) that reinsurance payments will be calculated with 
respect to an issuer's incurred claims costs for an individual 
enrollee's covered benefits incurred in the applicable benefit year.
    Comment: Several commenters urged HHS to allow additional State 
flexibility for the State supplemental reinsurance payment parameters 
under the reinsurance program. In addition, several commenters 
requested flexibility for a State to design a program that would cover 
any shortfall in payments under the reinsurance program's uniform 
parameters.
    Response: One of HHS's goals is to provide the greatest amount of 
flexibility to States while ensuring consistency with the policy goals 
of the reinsurance program. Therefore, under these final rules, we have 
provided States with the flexibility to increase the coinsurance rate 
on reinsurance-eligible claims, which would have the effect of 
increasing payouts under the uniform parameters. Additionally, nothing 
in these final rules prevents a State from establishing a separate 
program that would operate alongside the reinsurance program 
established under section 1341 of the Affordable Care Act. A State 
establishing such a program is free to implement the collections 
methodology and payment formula of its own choosing.
9. Allocation and Distribution of Reinsurance Contributions
    Section 153.220(d) of the Premium Stabilization Rule provided that 
HHS would distribute reinsurance contributions collected for 
reinsurance payments from a State to the applicable reinsurance entity 
for that State. In the proposed rule, we proposed to replace this 
section with Sec.  153.235(a), which provided that HHS would allocate 
and distribute the reinsurance contributions collected under the 
national contribution rate based on the need for reinsurance payments, 
regardless of where the contributions are collected. HHS would disburse 
all contributions collected under the national contribution rate from 
all States for the applicable benefit year, based on all available 
contributions and the aggregate requests for reinsurance payments, net 
of the pro rata adjustment, if any. We believe that this method of 
disbursing reinsurance contributions will allow the reinsurance program 
to equitably stabilize premiums across the nation, and permit HHS to 
direct reinsurance funds based on the need for reinsurance payments. 
Consistent with this proposal, we proposed to amend Sec.  153.220(a) to 
clarify that even if a State establishes the reinsurance program, HHS 
would directly collect the reinsurance contributions for enrollees who 
reside in that State from both health insurance issuers and self-
insured group health plans.
    We are finalizing the provisions as proposed in Sec.  153.220(a). 
We are revising Sec.  153.235(a) to provide that HHS will allocate and 
disburse to each State operating reinsurance (and will distribute 
directly to issuers if HHS is operating reinsurance on behalf of a 
State), reinsurance contributions collected from contributing entities 
under the national contribution rate for reinsurance payments. The 
disbursed funds would be based on the total requests for reinsurance 
payments made under the national reinsurance payment parameters in all 
States and submitted under Sec.  153.410, net of any adjustment under 
Sec.  153.230(d). We are amending Sec.  153.410(a) to clarify that an 
issuer of a reinsurance-eligible plan may make requests for reinsurance 
payments when an issuer's claims costs for an enrollee of that 
reinsurance-eligible plan has met the criteria for reinsurance payments 
in 45 CFR subpart B and this final rule and where applicable the State 
notice of benefit and payment parameters.
    Comment: Several commenters stated that the proposed allocation of 
reinsurance payments would penalize

[[Page 15470]]

States that effectively and efficiently manage health care costs and 
have fewer uninsured individuals. Commenters stated that individual 
markets are largely State-based and that reinsurance works in 
conjunction with risk adjustment, which is also a State-based program. 
Commenters also stated that disbursing reinsurance payments under 
uniform reinsurance payment parameters in all States is contrary to the 
intent of the statute for a State-based program. We also received 
comments stating that the implementation of the reinsurance program as 
proposed would increase the burden for States that wish to supplement 
the reinsurance program. One commenter suggested that reinsurance 
payment allocations in accordance with need could discourage issuers 
from maintaining grandfathered status in order to compete for funds, 
thereby making it difficult for enrollees to keep their current plan.
    Response: To maximize the reinsurance program's impact on premium 
rates, an allocation of reinsurance payments under uniform payment 
parameters allows for HHS to disburse reinsurance contributions where 
they are most needed, to reimburse issuers with high cost claims in the 
individual market in 2014, 2015 and 2016. This policy is consistent 
with the statutory goals of the reinsurance program--to stabilize 
premiums in the initial years of Exchange implementation and market 
reform. Considering the comments received, we are finalizing these 
provisions as proposed.
    Comment: Several commenters asked that HHS refund any unused 
contributions collected or use those funds to lower the contribution 
rate for subsequent benefit years.
    Response: The purpose of the reinsurance program is to stabilize 
premiums in the individual market beginning in 2014. If any funds 
remain after all requests for reinsurance payments are made for any 
benefit year, as required by the statute, HHS plans to use those funds 
for reinsurance payments in subsequent benefit years, furthering the 
goal of section 1341 of the Affordable Care Act.
    Comment: Several commenters supported HHS's proposed annual 
payments schedule coupled with quarterly reporting estimates. One 
commenter requested clarification on whether reinsurance payments would 
be issued on a rolling basis throughout the year, or once annually. 
Several commenters requested that HHS administer reinsurance payments 
throughout the year instead of annually to better accommodate issuers' 
cash flow.
    Response: Because we are seeking to stabilize premiums nationally, 
an annual disbursement of payments preserves fairness in making 
reinsurance payments and allows for HHS to appropriately adjust 
payments, if needed. To better address administrative and operational 
issues, we proposed to make an annual reinsurance payment for each 
benefit year. If we were to collect and make reinsurance payments 
throughout the benefit year, we would likely be required to hold the 
disbursement of a large portion of the reinsurance payments until the 
end of the benefit year to ensure an equitable allocation of payments.
    Comment: Several commenters sought clarification on the process by 
which HHS plans to ensure that reinsurance funds will be used to reduce 
and stabilize premiums in the individual market.
    Response: We expect that an issuer that receives reinsurance 
payments will reduce premiums in the individual market accordingly. We 
note that a State, or HHS operating reinsurance on behalf of the State, 
will provide issuers the estimated amount of the reinsurance payments 
throughout a benefit year so that those issuers can account for 
reinsurance payments in developing their premiums for subsequent 
benefit years. We note that under the single risk pool requirement of 
the final Market Reform Rule (Sec.  156.80), issuers of non-
grandfathered individual market plans must adjust their index rate 
based on the total expected market-wide payments and charges under the 
risk adjustment and reinsurance programs in the State, and based on 
Exchange user fees.
    Comment: Several commenters asked HHS how excess reinsurance funds 
would be distributed after 2016.
    Response: HHS will provide details regarding this issue in future 
rulemaking and guidance.
10. Reinsurance Data Collection Standards
a. Data Collection Standards for Reinsurance Payments
    Section 153.240(a) of the Premium Stabilization Rule directs a 
State's applicable reinsurance entity to collect data needed to 
determine reinsurance payments as described in Sec.  153.230. We 
proposed to amend Sec.  153.240(a) by adding subparagraph (1) which 
would direct a State to ensure that its applicable reinsurance entity 
either collects or is provided access to the data necessary to 
determine reinsurance payments from an issuer of a reinsurance-eligible 
plan. When HHS operates reinsurance on behalf of a State, HHS would 
utilize the same distributed data collection approach proposed for risk 
adjustment. This proposed amendment was meant to clarify that an 
applicable reinsurance entity may either use a distributed data 
collection approach for its reinsurance program or directly collect 
privacy-protected data from issuers to determine an issuer's 
reinsurance payments. The distributed data collection approach would 
not involve the direct collection of data; instead, HHS or the State 
would access data on issuers' secure servers.
    We also proposed to amend Sec.  153.240(a) by adding subparagraph 
(3), directing States to provide a process through which an issuer of a 
reinsurance-eligible plan that does not generate individual enrollee 
claims in the normal course of business, such as a capitated plan, may 
request reinsurance payments or submit data to be considered for 
reinsurance payments based on estimated costs of encounters for the 
plan, in accordance with the requirements of Sec.  153.410. We proposed 
to direct States to ensure that such requests (or a subset of such 
requests) are subject to, to the extent required by the State, a data 
validation program. A State would have the flexibility to design a data 
validation program that meets its adopted methodology and State-
specific circumstances. This proposed amendment would enable certain 
reinsurance-eligible plans, such as staff-model health maintenance 
organizations, that do not generate claims with associated costs in the 
normal course of business to provide data to request and receive 
reinsurance payments.
    When HHS operates reinsurance on behalf of a State, issuers of 
capitated plans would generate claims for encounters, and derive costs 
for those claims when submitting requests for reinsurance payments (or 
submitting data to be considered for reinsurance payments). It is our 
understanding that many capitated plans currently use some form of 
encounter data pricing methodology to derive claims, often by imputing 
an amount based upon the Medicare fee-for-service equivalent price or 
the usual, customary, and reasonable equivalent that would have been 
paid for the service in the applicable market. As set forth in Sec.  
153.710(c), a capitated plan would be required to use its principal 
internal methodology for pricing encounters for reinsurance purposes, 
such as the methodology in use for other State or

[[Page 15471]]

Federal programs (for example, a methodology used for the Medicare 
Advantage market). If a capitated plan has no such methodology, or has 
an incomplete methodology, it would be permitted to implement a 
methodology or supplement the methodology in a manner that yields 
derived claims that are reasonable in light of the specific market that 
the plan is serving. Capitated plans, like all plans that submit 
reinsurance payment requests (or data to be considered for reinsurance 
payments) in the HHS-operated reinsurance program, would be subject to 
validation and audit. Because capitated plans already use pricing 
methodologies, we believe this proposed policy would permit capitated 
plans to participate in the reinsurance program with a minimal increase 
in administrative burden. We have responded to the comments received 
regarding capitated plans in section III.G. of this final rule, where 
capitated plans are discussed in Sec.  153.710(c). We are finalizing 
these provisions as proposed.
b. Notification of Reinsurance Payments
    We proposed to add Sec.  153.240(b)(1), which would direct a State, 
or HHS on behalf of the State, to notify issuers of the total amount of 
reinsurance payments that will be made no later than June 30 of the 
year following the applicable benefit year. This corresponds with the 
date on which a State or HHS must notify issuers of risk adjustment 
payments and charges. As such, by June 30 of the year following the 
applicable benefit year, issuers would be notified of reinsurance 
payments and risk adjustment payments and charges, allowing issuers to 
account for their total reinsurance payments and risk adjustment 
payments and charges when submitting data for the risk corridors and 
MLR programs. To provide issuers in the individual market with 
information to assist in development of premiums and rates in 
subsequent benefit years, we also proposed in Sec.  153.240(b)(2) that 
a State provide quarterly notifications of estimates to each 
reinsurance-eligible plan of the expected requests for reinsurance 
payments. HHS intends to collaborate with issuers and States to develop 
these early notifications. We are finalizing these provisions as 
proposed.
    Comment: Several commenters requested that HHS specify a date by 
which HHS will make reinsurance payments.
    Response: Under Sec.  153.240(b), HHS would notify issuers of 
reinsurance payments to be made under the uniform payment parameters by 
June 30 of the year following the applicable benefit year. We will make 
every effort to issue payments as quickly as possible. We anticipate 
issuing further guidance regarding reinsurance payments.
    Comment: One commenter requested that, if a State is operates 
reinsurance in the 2014 benefit year, the deadline for issuers to file 
rates be moved to April 30 because State supplemental reinsurance 
payment parameters will affect premium rate setting. The commenter also 
requested that for the 2015 and 2016 benefit years, HHS require States 
to publish the State notice of benefit and payments parameters no later 
than January 31 of the prior year to provide issuers with ample time to 
calculate and submit rates for filing approval by March 28.
    Response: We understand the challenges posed by various State and 
Federal deadlines, and anticipate that all stakeholders will work 
together with both States and HHS to meet those deadlines. However, 
State deadlines for submitting rates are within the authority of the 
State.
c. Privacy and Security Standards
    We proposed in Sec.  153.240(d)(1) that a State establishing the 
reinsurance program ensure that the applicable reinsurance entity's 
collection of personally identifiable information \22\ is limited to 
information reasonably necessary for use in the calculation of 
reinsurance payments, and that use and disclosure of personally 
identifiable information is limited to those purposes for which the 
personally identifiable information was collected (including for 
purposes of data validation). In Sec.  153.240(d)(2), we proposed to 
require that an applicable reinsurance entity implement specific 
privacy and security standards to ensure enrollee privacy and to 
protect sensitive information. Specifically, this provision would 
require an applicable reinsurance entity to provide administrative, 
physical, and technical safeguards for personally identifiable 
information that may be used to request reinsurance payments. This 
provision is meant to ensure that an applicable reinsurance entity 
complies with the same privacy and security standards that apply to 
issuers and providers, specifically, the security standards described 
at Sec.  164.308, Sec.  164.310, and Sec.  164.312. We are finalizing 
these provisions as proposed.
---------------------------------------------------------------------------

    \22\ As discussed above, the term ``personally identifiable 
information'' is a broadly used term across Federal agencies, and 
has been defined in the Office of Management and Budget Memorandum 
M-07-16 (May 22, 2007). Available at:
---------------------------------------------------------------------------

    Comment: We received comments supporting the privacy and security 
standards set forth in Sec.  153.240(d) and suggesting audits and other 
safeguards to protect personal health information from inappropriate 
disclosure.
    Response: HHS takes seriously its responsibility to monitor the 
implementation of these programs, including the protection of the 
privacy of consumers. We will provide more information on our approach 
to these and other oversight matters in future rulemaking.
d. Data Collection
    We proposed in Sec.  153.420(a) that an issuer of a reinsurance-
eligible plan seeking reinsurance payments submit or make accessible 
data, in accordance with the reinsurance data collection approach 
established by the State, or HHS on behalf of the State. In Sec.  
153.420(b), we proposed that an issuer of a reinsurance-eligible plan 
submit data to be considered for reinsurance payments for the 
applicable benefit year by April 30 of the year following the end of 
the applicable benefit year. The April 30 deadline would apply to all 
issuers of reinsurance-eligible plans, regardless of whether HHS or the 
State is operating reinsurance. Further details surrounding the data 
collection process when HHS is operating reinsurance on behalf of a 
State is set forth in subpart H of part 153 and section III.G. of this 
final rule. We are finalizing these provisions as proposed.
    Comment: Several commenters requested clarification on the claims 
run-out period.
    Response: An issuer of a risk adjustment covered plan or 
reinsurance eligible plan in a State in which HHS is operating the risk 
adjustment or reinsurance program would submit data for a benefit year 
by April 30 of the year following the applicable benefit year. For 
example, claims incurred in the 2014 benefit year must be submitted to 
HHS by April 30, 2015. The submission deadline (the latest date by 
which data can be provided for the applicable benefit year) will allow 
issuers the time necessary to process claims and submit data to their 
distributed data systems for HHS evaluation. The submission deadline of 
April 30 of the year following the applicable benefit year also permits 
HHS an appropriate timeline for payment calculations. However, as 
described in section III.G. of this final rule, claims submitted for 
the reinsurance program and encounter data submitted for the risk 
adjustment program must be for claims and encounters with discharge 
dates within the applicable benefit year. Use of the discharge date 
best ensures that services provided across benefit years will be

[[Page 15472]]

considered in their entirety rather than being partially or fully 
excluded from consideration as a result of the data submission timing 
requirements.

D. Provisions for the Temporary Risk Corridors Program

1. Definitions
    In the Premium Stabilization Rule, we stated in response to 
comments that we intended to propose that taxes and profits be 
accounted for in the risk corridors calculation, in a manner consistent 
with the MLR program. Therefore, in the proposed rule, we proposed to 
amend Sec.  153.500 by defining ``taxes'' with respect to a QHP as 
Federal and State licensing and regulatory fees paid with respect to 
the QHP as described in Sec.  158.161(a), and Federal and State taxes 
and assessments paid for the QHP as described in Sec.  158.162(a)(1) 
and Sec.  158.162(b)(1). This definition aligns with the regulatory 
fees and taxes and assessments deductible from premiums in the MLR 
calculation. We used this definition to define ``after-tax premiums 
earned,'' which we proposed to mean, with respect to a QHP, premiums 
earned minus ``taxes.'' We also proposed to revise the definition of 
``administrative costs'' in Sec.  153.500 to mean, with respect to a 
QHP, the total non-claims costs incurred by the QHP issuer for the QHP, 
including taxes. We noted that under this broader definition, 
administrative costs may also include regulatory fees and assessments 
other than those included in ``taxes,'' as defined above.
    Using the definitions above, we proposed to amend Sec.  153.500 by 
defining ``profits'' with respect to a QHP to mean the greater of: (1) 
3 percent of after-tax premiums earned; and (2) premiums earned by the 
QHP minus the sum of allowable costs and administrative costs of the 
QHP. Thus, we proposed to define profits for a QHP through the use of 
the risk corridors equation; however, we provided for a 3 percent 
profit margin so that the risk corridors program would protect a 
reasonable profit margin (subject to the 20 percent cap on allowable 
administrative costs as described below).
    Finally, using the definition of profits discussed above, we 
proposed to revise the definition of ``allowable administrative costs'' 
in Sec.  153.500 to mean, with respect to a QHP, the sum of 
administrative costs other than taxes, and profits earned, which sum is 
limited to 20 percent of after-tax premiums earned (including any 
premium tax credit under any governmental program), plus taxes. This 
definition reflects the inclusion of profits and taxes discussed above, 
and clarifies that the 20 percent cap on allowable administrative costs 
applies to taxes, assessments and regulatory fees other than those 
taxes, assessments and regulatory fees defined as deductible from 
premium revenue under the MLR rules, a result that is consistent with 
the way they are accounted for by the MLR rules.
    The preamble to our proposed rule contained an example that 
illustrated the proposed operation of the risk corridors calculation. 
We have included a minor correction to the calculation of profits in 
this example:
     Premiums earned: Assume a QHP with premiums earned of 
$200.
     Allowable costs: Assume allowable costs of $140, including 
expenses for health care quality and health information technology, and 
other applicable adjustments.
     Non-claims costs: Assume that the QHP has non-claims costs 
of $50, of which $15 are properly allocable to licensing and regulatory 
fees and taxes and assessments described in Sec.  158.161(a), Sec.  
158.162(a)(1), and Sec.  158.162(b)(1) (that is, ``taxes'').
    The following calculations result:
     ``Taxes'': Under the proposed definition of taxes, the 
QHP's ``taxes'' will be $15.
     Administrative costs are defined as non-claims costs. In 
this case, those costs would be $50. Administrative costs other than 
``taxes'' would be $35.
     After-tax premiums earned are defined as premiums earned 
minus ``taxes,'' or in this case $200 - $15 = $185.
     Profits are proposed to be defined as the greater of: 3 
percent of premiums earned, or 3 percent * $185 = $5.55; and premiums 
earned by the QHP minus the sum of allowable costs and administrative 
costs, or $200 - ($140 + $50) = $200 - $190 = $10. Therefore, profits 
for the QHP would be $10, which is greater than $5.55
     Allowable administrative costs are defined as the sum of 
administrative costs, other than ``taxes,'' plus profits earned by the 
QHP, which sum is limited to 20 percent of after-tax premiums earned by 
the QHP (including any premium tax credit under any governmental 
program), plus ``taxes.''

= ($35 + $10), limited to 20 percent of $185, plus $15
= $45, limited to $37, plus $15
= $37, plus $15
= $52.

     The target amount is defined as premiums earned reduced by 
allowable administrative costs, or $200 - $52 = $148.
     The risk corridors ratio is the ratio of allowable costs 
to target amount, or the ratio of $140 to $148, or approximately 94.6 
percent (rounded to the nearest one-tenth of one percent), meaning that 
the QHP issuer would be required to remit to HHS 50 percent of 
approximately (97 percent - 94.6 percent) = 50 percent of 2.4 percent, 
or approximately 1.2 percent of the target amount, or approximately 
0.012 * $148, or approximately $1.78.
    We sought comments on the estimates, data sources, and appropriate 
profit margin to use in the risk corridors calculation in the proposed 
rule. We are finalizing these proposed provisions with the following 
modifications. As discussed below, in order to conform with changes 
finalized in this rule for the MLR program, and in response to 
comments, we are deleting Sec.  153.530(b)(1)(ii) to eliminate the 
adjustment to allowable costs for reinsurance contributions made by an 
issuer, and are clarifying the treatment of community benefit 
expenditures within the risk corridors calculation. We are also 
modifying our proposed definition of ``taxes'' in Sec.  153.500, by 
replacing the term ``taxes'' with ``taxes and regulatory fees.''
    Comment: A few commenters noted that, while the proposed rule 
stated that the risk corridors profits calculation was based on after-
tax premiums, the example in the preamble to the proposed rule 
calculated 3 percent of profits based on a pre-tax premium amount (that 
is, earned premiums).
    Response: We are finalizing the definition of ``profits'' based on 
after-tax premiums, as proposed. We have corrected the profits 
calculation example in the preamble.
    Comment: Two commenters stated that the risk corridors formula is 
potentially circular, and asked us to reexamine the treatment of 
profits and taxes in the risk corridors calculation. Because taxes are 
a parameter in the risk corridors calculation, if risk corridors 
payments are taken into account when estimating taxes, the commenters 
believed that it would result in an iterative effect that could affect 
the width of the risk corridors. They stated that a similar effect 
would occur with respect to profits.
    Response: In response to these comments, we are clarifying that, 
similar to the manner in which the MLR is calculated, an issuer should 
not consider risk corridors payments and charges when estimating taxes 
under the risk corridors formula. As described in the preamble to the 
Premium Stabilization Rule, we seek alignment between the MLR and risk 
corridors

[[Page 15473]]

programs when practicable so that similar concepts in the two programs 
are handled in a similar manner, and similar policy goals are 
reflected. Consequently, our treatment of taxes for risk corridors 
purposes follows the approach of the MLR program, as outlined in 
section 3C of the model MLR regulation published by the National 
Association of Insurance Commissioners (NAIC).\23\ We note that, 
because of the way profits is defined for the risk corridors 
calculation, no such circularity will occur with profits.
---------------------------------------------------------------------------

    \23\ Section 3C of the NAIC model regulation, available at 
http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf states, ``[a]ll terms defined in this Regulation, 
whether in this Section or elsewhere, shall be construed, and all 
calculations provided for by this Regulation shall be performed, as 
to exclude the financial impact of any of the rebates provided for 
in sections 8, 9, and 10 [rebate calculation sections].''
---------------------------------------------------------------------------

    Comment: One commenter asked whether reinsurance contributions 
could be considered as ``taxes and regulatory fees'' when determining 
``allowable administrative costs'' in the denominator of the risk 
corridors calculation.
    Response: We note that other provisions of this final rule amend 
the MLR calculation so that reinsurance contributions are included in 
Federal and State licensing and regulatory fees paid with respect to 
the QHP as described in Sec.  158.161(a), and are deducted from 
premiums for MLR purposes. Our proposed definition of ``taxes'' for 
purposes of the risk corridors program cross-referenced Sec.  
158.161(a) and similarly included reinsurance contributions. Thus, in 
response to these comments, and to maintain consistency with the MLR 
calculation and our proposed definition, which we are finalizing as 
proposed, we are making a conforming amendment to Sec.  153.530(b)(1). 
In this final rule, we are deleting Sec.  153.530(b)(1)(ii) and 
clarifying that reinsurance contributions are included in Federal and 
State licensing and regulatory fees paid with respect to the QHP as 
described in Sec.  158.161(a), and thus are included in allowable 
administrative costs for risk corridors purposes. We are also making a 
conforming change to Sec.  153.520(d) to remove the requirement that a 
QHP issuer must attribute reinsurance contributions to allowable costs 
for the benefit year. In addition, we are making a conforming 
modification to the proposed definition of ``taxes'' in Sec.  153.500, 
by replacing the term ``taxes'' with ``taxes and regulatory fees.''
    Comment: Nearly all those that commented on the risk corridors 
profit margin agreed with the 3 percent profit margin set in the 
proposed rule. One commenter suggested that a 2 percent profit margin 
would be more appropriate.
    Response: Based on the comments received and the policy arguments 
outlined in our proposed rule, we are finalizing the definition of 
``profits'' in Sec.  153.500 as proposed.
    Comment: One commenter expressed concern that an allowance for up 
to 3 percent profit could disrupt the budget neutrality of the risk 
corridors program, and asked for clarification on HHS's plans for 
funding risk corridors if payments exceed receipts.
    Response: The risk corridors program is not statutorily required to 
be budget neutral. Regardless of the balance of payments and receipts, 
HHS will remit payments as required under section 1342 of the 
Affordable Care Act.
    Comment: One commenter stated that the risk corridors calculation 
does not account for the credibility adjustment that is part of the MLR 
formula, and recommended setting maximum allowable administrative costs 
at 20 percent plus the allowed credibility adjustment for the carrier's 
block of business. The commenter believed that this change would be 
consistent with the MLR formula and make it more viable for carriers to 
maintain their smaller blocks of business, given the higher claims 
volatility that often characterizes these smaller blocks of business.
    Response: Although we seek consistency with MLR where the risk 
corridors and MLR formulas contain similar parameters, we believe that 
the credibility adjustment is a unique parameter in the MLR formula. 
The MLR statute provides for a credibility adjustment through 
``methodologies * * * designed to take into account the special 
circumstances of smaller plans, different types of plans, and newer 
plans'' at section 2718(c) of the Affordable Care Act. No similar 
reference appears in section 1342 of the Affordable Care Act.
    Comment: One commenter requested clarification on whether community 
benefit expenses would be included in the taxes of non-profit entities 
for the purposes of calculating the risk corridors target amount.
    Response: We believe that accounting for these expenses as taxes 
when calculating the target amount would appropriately align the risk 
corridors formula with the MLR calculation. Our proposed definition of 
``taxes'' in Sec.  153.500 includes Federal and State taxes defined in 
Sec.  158.162(b), which describes payments made by a tax-exempt issuer 
for community benefit expenditures. Consequently, we are clarifying 
that non-profit entities may account for community benefit expenditures 
as ``taxes and regulatory fees'' in a manner consistent with the MLR 
reporting requirements set forth in Sec.  158.162 for the purposes of 
calculating the risk corridors target amount.
2. Risk Corridors Establishment and Payment Methodology
    We proposed to add paragraph (d) to Sec.  153.510, which would 
specify the due date for QHP issuers to remit risk corridors charges to 
HHS. Under this provision, an issuer would be required to remit charges 
within 30 days after notification of the charges. By June 30 of the 
year following an applicable benefit year, under Sec.  153.310(e), QHP 
issuers will have been notified of risk adjustment payments and charges 
for the applicable benefit year. By that same date, under Sec.  
153.240(b)(1), QHP issuers also will have been notified of all 
reinsurance payments to be made for the applicable benefit year. As 
such, we proposed in Sec.  153.530(d) that the due date for QHP issuers 
to submit all information required under Sec.  153.530 of the Premium 
Stabilization Rule is July 31 of the year following the applicable 
benefit year. We also proposed that the MLR reporting deadline be 
revised to align with this schedule. We are finalizing this provision 
as proposed.
    Comment: We received several supportive comments on our proposal to 
require issuers to submit risk corridors information by July 31 of the 
year following the applicable benefit year.
    Response: We are finalizing Sec.  153.530(d) as proposed, so that 
the due date for QHP issuers to submit all risk corridors information 
is July 31 of the year following the applicable benefit year. In 
section III.I.1. of this final rule, we also finalize our proposal to 
align the MLR reporting deadline with this schedule.
    Comment: One commenter asked how payments made under the State 
supplemental reinsurance payment parameters are taken into account in 
the risk corridors calculation. Another commenter requested that HHS 
clarify the treatment of State ``wrap-around'' reinsurance payments 
under the risk corridors calculation, and asked for information on the 
way in which HHS analyzed the impact of the administrative burden 
associated with removing these costs.
    Response: Under section 1342(c)(1)(B) of the Affordable Care Act, 
allowable costs are to be reduced by any risk adjustment and 
reinsurance payments received under sections 1341 and 1343. 
Supplemental reinsurance payments

[[Page 15474]]

made under State supplemental reinsurance payment parameters are 
reinsurance payments received under sections 1341 of the Affordable 
Care Act; thus, allowable costs in the risk corridors formula are to be 
reduced by the reinsurance payments received both under the uniform 
payment parameters and any State supplemental reinsurance payment 
parameters.
    We do not believe that adjusting the risk corridors formula to 
account for this parameter will result in any additional administrative 
burden on issuers, because issuers will be performing the calculations 
to account for these adjustments at the same time they adjust for 
reinsurance payments under the uniform payment parameters.
    Comment: One commenter suggested that we align the risk corridors 
calculation with their suggestions on the MLR calculation, which would 
entail accounting for risk adjustment transfers and reinsurance 
contributions as adjustments to premiums, rather than claims. Another 
commenter similarly recommended that reinsurance payments be treated as 
an adjustment to premiums in the risk corridors calculation, noting 
that such an approach would reflect current market practices.
    Response: We do not believe we have the statutory authority to 
accommodate this request, because section 1342(c)(1)(B) of the 
Affordable Care Act requires reducing allowable costs for reinsurance 
and risk adjustment payments received.
    Comment: A number of commenters indicated that risk corridors 
should be calculated at the issuer level as opposed to the QHP level. 
One commenter indicated that the current policy of calculating risk 
corridors at the plan level is inconsistent with the single risk pool 
requirement in the proposed Market Reform Rule (77 FR 70584), and other 
issuers pointed out other policy concerns, such as non-alignment with 
MLR and lack of statistical credibility.
    Response: We agree that a plan-level risk corridors calculation 
creates an incongruity with the single risk pool requirement set forth 
at Sec.  156.80. Under the regulation as written, risk corridors would 
compare allowable costs (adjusted claims), which are currently plan-
specific, and target amount (adjusted premiums), which under the single 
risk pool requirement must be based on market-wide expected claims. 
After considering comments received on the proposed rule, we are 
publishing an interim final rule elsewhere in this issue of the Federal 
Register to address alignment of the risk corridors calculations with 
the single risk pool requirement. Under the approach implemented in the 
interim final rule, an issuer could reasonably allocate, in accordance 
with Sec.  153.520, allowable administrative costs across its business 
pro rata by premiums earned, leading to an issuer-level risk corridors 
calculation for its QHP business.
3. Risk Corridors Data Requirements
    In Sec.  153.530 of the Premium Stabilization Rule, we stated that 
to support the risk corridors program calculations, a QHP issuer must 
submit data related to actual premium amounts collected, including 
premium amounts paid by parties other than the enrollee in a QHP, 
specifically, advance premium tax credits. We further specified that 
risk adjustment and reinsurance payments be regarded as after-the-fact 
adjustments to allowable costs for purposes of determining risk 
corridors amounts, and that allowable costs be reduced by the amount of 
any cost-sharing reductions received from HHS. For example, if a QHP 
incurred $200 in allowable costs for a benefit year, but received a 
risk adjustment payment of $25, received reinsurance payments of $35, 
and received cost-sharing reduction payments of $15, the QHP issuer's 
allowable costs would be $125 ($200 allowable costs - $25 risk 
adjustment payments received - $35 reinsurance payments received - $15 
cost-sharing reduction payments).
    We additionally proposed an approach to reimbursement of cost-
sharing reductions that would add an additional reimbursement 
requirement for cost-sharing reductions by providers with whom the 
issuer has a fee-for-service compensation arrangement. We proposed that 
issuers be reimbursed for, in the case of a benefit for which the 
issuer compensates the provider in whole or in part on a fee-for-
service basis, the actual amount of cost-sharing reductions provided to 
the enrollee for the benefit and reimbursed to the provider by the 
issuer. However, we clarified that cost-sharing reductions on benefits 
rendered by providers for which the issuer provides compensation other 
than on a fee-for-service arrangement (such as a capitated system), 
would not be held to this standard.
    We also proposed to amend Sec.  153.530(b)(2)(iii) so that 
allowable costs are reduced by any cost-sharing reduction payments 
received by the issuer for the QHP to the extent not reimbursed to the 
provider furnishing the item or service. We received no responses to 
our request for comment on this proposal. Therefore, we are finalizing 
this provision as proposed.
4. Manner of Risk Corridor Data Collection
    We also proposed to amend Sec.  153.530(a), (b), and (c) to specify 
that we will address the manner of submitting required risk corridors 
data in future guidance rather than in this HHS notice of benefit and 
payment parameters. We received no responses to our request for comment 
on this proposal. Therefore, we are finalizing this provision as 
proposed.

E. Provisions for the Advance Payment of the Premium Tax Credit and 
Cost-Sharing Reduction Programs

1. Exchange Responsibilities With Respect to Advance Payments of the 
Premium Tax Credit and Cost-Sharing Reductions
a. Special Rule for Family Policies
    We proposed to amend Sec.  155.305(g)(3), currently entitled 
``special rule for multiple tax households.'' Our proposed amendment 
renamed this paragraph ``special rule for family policies,'' added a 
category for qualified individuals who are not eligible for any cost-
sharing reductions, and revised the introductory text to address 
situations in which Indians (as defined in Sec.  155.300(a)) and non-
Indians enroll in a family policy. The proposed amendment also extended 
the current policy with respect to tax households such that individuals 
on a family policy would be eligible to be assigned to the most 
generous plan variation for which all members of the family are 
eligible. We noted that nothing in this provision precludes qualified 
individuals with different levels of eligibility for cost-sharing 
reductions from purchasing separate policies to secure the highest 
cost-sharing reductions for which they are respectively eligible.
    We discuss this policy further with regard to Indians eligible for 
cost-sharing reductions under section 1402(d) of the Affordable Care 
Act in section III.E.4.i. of this final rule. We are finalizing these 
provisions as proposed.
    Comment: Several commenters supported the proposed policy, noting 
that it would be operationally infeasible for QHP issuers to have two 
family members with different cost-sharing levels enrolled in the same 
policy. Other commenters stated that families should not need to 
purchase multiple individual plans so that each family member can 
receive the full value of the cost-sharing reductions for which they 
are eligible. Commenters expressed concern that for large families, 
premiums for multiple individual plans could offset the value of the 
cost-sharing

[[Page 15475]]

reduction, as well as potentially subjecting family members to separate 
out-of-pocket maximums and separate deductibles. One commenter 
suggested the option of a family-based plan that offers a weighted 
actuarial value reflecting the cost-sharing reductions available to 
individual members. Another commenter was concerned about the ability 
of Exchanges to explain to consumers the advantages and disadvantages 
of buying multiple policies versus one family policy.
    Response: As deductibles and out-of-pocket limits are calculated at 
the policy level, we believe it will be operationally difficult to 
establish separate cost-sharing requirements for different enrollees 
covered by the same policy at this time. HHS will encourage Exchanges 
to provide appropriate guidance to consumers on the relative costs and 
benefits of enrolling in one family policy versus multiple individual 
policies so that families can best take advantage of cost-sharing 
reductions.
b. Recalculation of Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    We proposed to add paragraph (g) to Sec.  155.330 to clarify how an 
Exchange would redetermine the eligibility of an enrollee during a 
benefit year if an Exchange receives and verifies new information 
reported by an enrollee or identifies updated information through data 
matching that affects eligibility for advance payments of the premium 
tax credit and cost-sharing reductions. We proposed that when an 
Exchange recalculates the amount of advance payments of the premium tax 
credit available after considering such a change, an Exchange must 
account for any advance payments already made on behalf of the tax 
filer in that benefit year to minimize, to the extent possible, any 
projected discrepancies between the advance payments and the tax 
filer's projected premium tax credit for the benefit year. We specified 
that this recalculation will only include months for which the tax 
filer has been determined eligible for advance payments of the premium 
tax credit. We also proposed that, when redetermining eligibility for 
cost-sharing reductions during the benefit year, an Exchange must 
determine an individual to be eligible for the category of cost-sharing 
reductions that corresponds to the individual's expected annual 
household income for the benefit year. Further detail and examples of 
this policy were provided in the proposed rule.
    We further noted in the preamble that we considered taking a 
different approach if an eligibility redetermination during the benefit 
year resulted in an increase in advance payments of the premium tax 
credit--we considered proposing that in such a situation, HHS would 
make retroactive payments to the QHP issuer for all prior months of the 
benefit year to reflect the increased advance payment amount, not to 
exceed the total premium for each month. We solicited comments 
regarding whether we should adopt this approach, and if so, how QHP 
issuers should be required to provide the retroactive payments to 
enrollees. Several commenters raised concerns regarding the operational 
and administrative challenges associated with such retroactive 
payments.
    We are finalizing the policy substantially as proposed, with 
modifications to the language in paragraph (g) to increase clarity. We 
are not implementing the retroactive payment approach.
    Comment: A number of commenters expressed their support for the 
proposed approach, though some sought further clarification regarding 
the impact of eligibility redeterminations on advance payments of the 
premium tax credit and cost-sharing reductions. Several commenters also 
requested that HHS modify the proposed approach, by placing a limit on 
the number of redeterminations per benefit year to reduce 
administrative burden, or by providing that when accounting for advance 
payments of the premium tax credit already received by an enrollee 
whose income has since increased, an Exchange should never reduce the 
enrollee's future payments by more than the limits on repayment 
following the benefit year as specified in 26 CFR 1.36B-4(a). Another 
commenter urged that HHS require QHP issuers to conduct extensive 
outreach to enrollees to effectively implement this provision.
    Further, although several commenters expressed support for how the 
alternative proposal could assist enrollees with issues such as past 
due premium amounts, we also received several comments raising concerns 
and seeking additional specificity. Commenters mentioned the 
operational and administrative challenges that the alternative proposal 
would pose for both QHP issuers as well as HHS, and stated that the 
potential advantages for enrollees would be minimal.
    Response: We provide additional detail on redeterminations during 
the benefit year and their implications for cost-sharing reductions in 
Sec.  156.425. We note that redetermining eligibility when changes 
occur is important to the accuracy of eligibility determinations during 
the year. We also note that we expect that QHP issuers will provide 
guidance to enrollees regarding the importance of reporting changes, 
and the avenues through which changes can be reported. In finalizing 
the policy as proposed, we do not specify that the Exchange will 
consider the statutory limits on repayment, as these limits are 
separate from the premium tax credit calculation itself, and are 
intended to be applied at the time of tax filing.
    After considering the comments regarding the operational and 
administrative challenges involved with the alternative proposal, we 
decided to maintain the approach proposed. We believe that the comments 
received that questioned the benefits associated with the alternative 
on which we requested comment, combined with the operational concerns 
regarding how HHS would provide such retroactive payments to QHP 
issuers and the process through which QHP issuers would reimburse 
enrollees, outweigh the potential benefit for enrollees.
c. Administration of Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    Under our authority to administer the payment of cost-sharing 
reductions and advance payments of the premium tax credits conferred in 
section 1412 and the rulemaking authority conferred in section 1321(a) 
of the Affordable Care Act, we proposed to add two paragraphs to Sec.  
155.340. First, we proposed to add paragraph (e) to Sec.  155.340, 
which would provide that if one or more individuals in a tax household 
who are eligible for advance payments of the premium tax credit 
collectively enroll in more than one policy through the Exchange 
(whether by enrolling in more than one policy under a QHP, enrolling in 
more than one QHP, or enrolling in one or more QHPs and one or more 
stand-alone dental plans) for any month in a benefit year, the Exchange 
would allocate the advance payment of the premium tax credit(s) in 
accordance with the methodology proposed in Sec.  155.340(e)(1) and 
(2). Under that methodology, the Exchange must first allocate the 
portion of the advance payment of the premium tax credit(s) that is 
less than or equal to the aggregate adjusted monthly premiums for the 
QHP policies, as defined under 26 CFR 1.36B-3(e), properly allocated to 
EHB, among the QHP policies in proportion to the respective portions of 
the premiums for the policies properly allocated to EHB. Any remaining 
advance payment of the premium tax credit(s) must be allocated among 
the stand-alone dental policies in proportion to the respective 
portions of

[[Page 15476]]

the adjusted monthly premiums for the stand-alone dental policies 
properly allocated to the pediatric dental EHB. We provided additional 
detail on the allocation methodology in the proposed rule and welcomed 
comments on this proposal.
    As discussed in greater detail below, we received a number of 
comments on the allocation of advance payments of premium tax credits 
among QHPs and stand-alone dental plans. We also received one comment 
expressing concern that the proposed allocation methodology was too 
complicated and may prevent consumers from selecting a plan or the 
plans that are in the household's best interest. In particular, the 
proposed pro rata distribution by premium delays the calculation of the 
allocation of the advance payments until after QHPs have been selected. 
This delay would prevent an Exchange from displaying the amount of 
premium that a household would pay out-of-pocket for each plan until 
all plans have been selected.
    We do not want to restrict the way that an Exchange develops the 
consumer shopping experience, and therefore, considering the comment 
received on this approach, we are modifying the proposed rule and 
finalizing a policy to allow Exchanges greater flexibility in 
allocating the advance payment of the premium tax credit if the 
individuals in the tax filers' tax household(s) are enrolled in more 
than one QHP or stand-alone dental plan. Specifically, as finalized in 
Sec.  155.340(e), if one or more advance payments of the premium tax 
credit are to be made on behalf of a tax filer (or two tax filers 
covered by the same plan(s)), and individuals in the tax filers' tax 
households are enrolled in more than one QHP or stand-alone dental 
plan, then the advance payment must be allocated as follows: (1) that 
portion of the advance payment of the premium tax credit that is less 
than or equal to the aggregate adjusted monthly premiums, as defined in 
26 CFR Sec.  1.36B-3(e), for the QHP policies properly allocated to EHB 
must be allocated among the QHP policies in a reasonable and consistent 
manner specified by the Exchange; and (2) any remaining advance payment 
of the premium tax credit must be allocated among the stand-alone 
dental policies (if any) in a reasonable and consistent manner 
specified by the Exchange. We do not choose to set specific parameters 
for the allocation approach; however, the Exchange must apply the same 
approach to all advance payments of the premium tax credit provided 
during a benefit year. We are also making some clarifying modifications 
to the language of this provision.
    For Federally-facilitated Exchanges, we establish a methodology at 
Sec.  155.340(f) in which the advance payment of the premium tax credit 
is allocated based on the number of enrollees covered under the QHP or 
stand-alone dental policy, weighted by the age of the enrollees, using 
the default uniform age rating curve established by the Secretary of 
HHS under Sec.  147.102(e) of the final Market Reform Rule.\24\ If this 
methodology results in an advance payment of the premium tax credit 
allocation that exceeds a QHP's adjusted monthly premium properly 
allocated to EHB, the surplus advance payment of the premium tax credit 
will be allocated evenly to any of the other QHP policies, up to the 
applicable adjusted monthly premium properly allocated to EHB. And, in 
accordance with the general policy, any advance payment of the premium 
tax credit above the aggregate adjusted monthly premiums for the QHP 
policies properly allocated to EHB must be allocated among the stand-
alone dental policies in a similar manner. We provide the following 
example:
---------------------------------------------------------------------------

    \24\ We note that to simplify operations, even if a State 
establishes a uniform age rating curve as allowed under Sec.  
147.102(e), we will continue to use the default uniform age rating 
curve with a 3:1 ratio established by the Secretary of HHS for 
purposes of allocating advance payments of the premium tax credit.
---------------------------------------------------------------------------

     A family that is eligible for a premium tax credit and is 
made up of a child age 18 and two parents age 53 purchases two QHP 
policies and a stand-alone dental policy on an FFE. One parent and the 
child are enrolled in QHP A, with an adjusted monthly premium allocable 
to EHB of $470. The other parent is enrolled in QHP B, with an adjusted 
monthly premium allocable to EHB of $350. The child is enrolled in the 
stand-alone dental policy, with an adjusted monthly premium of $20, 
with all $20 allocable to EHB. The family receives a monthly advance 
payment of the premium tax credit equal to $830. On an FFE, $820 would 
be allocated between the two QHPs (that is, the portion of the advance 
payment of the premium tax credit that is less than or equal to the 
aggregate premiums for the QHP policies allocable to EHB), and the 
remainder ($10) would be allocated to the stand-alone dental plan. 
Assuming the default uniform age curve requires rates for an individual 
aged 53 to be adjusted by 2.04, and rates for an individual aged 18 to 
be adjusted by 0.635, $465 ((820/(2.04 + 2.04 + 0.635))* (2.04 + 
0.635)) would be allocated to QHP A and $355 (820/(2.04 + 2.04 + 
0.635))*2.04) would be allocated to QHP B. However, because $355 
exceeds the portion of QHP A's premium allocable to EHB, the surplus 
allocation ($5) is shifted from QHP A to QHP B. Therefore, $350 will be 
applied to the premium for QHP A, $470 for QHP B, and $10 for the 
stand-alone dental plan.
    This approach will allow an FFE to determine the allocation of the 
advance payment of the premium tax credit prior to plan selection so 
that we may display the amount of premium that a household would pay 
out-of-pocket for each plan during the shopping experience. At the same 
time, this approach approximates an allocation based on premiums 
(prioritizing the QHP policies over the stand-alone dental plan 
coverage as we proposed). State-based Exchanges may choose to adopt the 
Federal methodology or another reasonable methodology under Sec.  
155.340(e) of this final rule.
    Comment: We received a comment stating that the methodology 
proposed in Sec.  155.340(e)(1) and (2) will be too complicated for the 
average consumer to understand, particularly for complex households. 
The proposed methodology would prevent an Exchange from displaying the 
amount of premium that a household would pay out-of-pocket for each 
plan until all plans have been selected. If out-of-pocket costs cannot 
be shown at a plan level prior to selection, consumers could be 
dissuaded from purchasing coverage or might select a single plan for 
all household members, even if doing so is not in the household's best 
interest. The commenter proposed that Exchanges allocate the advance 
payment of the premium tax credit(s) equally to each household member 
to allow consumers to view the amounts of advance payment of the 
premium tax credit(s) allocated to each QHP or stand-alone dental plan 
during the shopping experience, and to permit consumers to compare more 
effectively different plan options and family member groupings.
    Response: We recognize the importance of providing a transparent 
and consumer-friendly shopping experience, and are modifying our 
proposal to allow Exchanges the flexibility to choose a reasonable 
allocation methodology. This policy would allow an Exchange to allocate 
the portion of the advance payment of the premium tax credit that is 
less than or equal to the aggregated adjusted monthly premiums for the 
QHP policies properly allocated to EHB among the QHPs using a per 
member approach. However, the Exchange must still allocate the 
remainder to the stand-

[[Page 15477]]

alone dental plan(s), though this portion may also be allocated using a 
per member approach.
    The approach that will be used by FFEs to allocate the advance 
payment of the premium tax credit will allow the FFE to display the 
amount of premium that a household would pay out-of-pocket for each 
plan during the shopping experience. In addition, the FFE approach 
approximates an allocation based on premiums (prioritizing the QHP 
policies).
    Comment: We received several comments regarding the methodology 
proposed in Sec.  155.340(e)(2). Commenters noted that because we 
proposed that advance payments of the premium tax credit(s) be 
allocated first to QHP policies, and any remainder be allocated to 
stand-alone dental policies, it is unlikely that advance payments of 
the premium tax credit(s) will be available to offset the cost of the 
stand-alone dental policies. One commenter stated that advance payments 
of the premium tax credit(s) should be allocated pro rata among QHP 
policies and stand-alone dental policies according to premium to assist 
families with purchasing pediatric dental coverage, which is one of the 
essential health benefits. Another commenter suggested that advance 
payments of the premium tax credit(s) should be allocated first to any 
stand-alone dental policy, and the remainder allocated to the QHP(s). A 
third commenter stated that the cost to issuers of stand-alone dental 
policies to develop a process to accept advance payments of the premium 
tax credit(s) on behalf of enrollees outweighs the potential benefit, 
and consequently, advance payments of the premium tax credit(s) should 
only be allocated to QHP policies.
    Response: We believe that advance payments of the premium tax 
credit(s) should first be allocated to QHP policies, and any remainder 
should be allocated to stand-alone dental policies. This approach will 
ensure that the majority of the tax credit is allocated to the most 
costly portion of an individual's coverage. While we understand the 
burden on stand-alone dental plans of implementing a process to accept 
the advance payments of the premium tax credit, we believe that 
consumers should not be required to wait until tax filing in order to 
receive the full amount of their premium tax credit benefit.
    We are finalizing paragraph (e) with the changes from the proposed 
rule noted above. The second provision we proposed to add to Sec.  
155.340 was paragraph (f), now relabeled as paragraph (g) in this final 
rule. The standards proposed in this paragraph are discussed below in 
section III.E.4.g.
2. Exchange Functions: Certification of Qualified Health Plans
    We proposed to add Sec.  155.1030 to set forth standards for 
Exchanges to ensure that QHPs in the individual market on the Exchange 
meet the requirements related to advance payments of the premium tax 
credit and cost-sharing reductions, as proposed in Sec.  156.215 and 
described below. We proposed these standards under section 1311(c) of 
the Affordable Care Act, which provides for the Secretary to establish 
criteria for the certification of health plans as QHPs, as well as 
section 1321(a)(1), which provides general rulemaking authority for 
title I of the Affordable Care Act, including the establishment of 
programs for the provision of advance payments of the premium tax 
credit and cost-sharing reductions.
    In Sec.  155.1030(a)(1), we proposed that the Exchange ensure that 
each issuer that offers or seeks to offer a QHP in the individual 
market on the Exchange submit the required plan variations, as proposed 
in Sec.  156.420, for each of its health plans proposed to be offered 
in the individual market on the Exchange and certify that the submitted 
plan variations meet the requirements of Sec.  156.420. We expect that 
an Exchange would collect prior to each benefit year the information 
necessary to validate that the issuer meets the requirements for silver 
plan variations, as detailed in Sec.  156.420(a), and collect for 
certification the information necessary to validate that the issuer 
meets the requirements for zero and limited cost sharing plan 
variations, as detailed in Sec.  156.420(b). We proposed in Sec.  
155.1030(a)(2) that the Exchange provide the actuarial values of the 
QHPs and silver plan variations to HHS. As described in proposed Sec.  
156.430, HHS would use this information to determine the advance 
payments to QHP issuers for the value of the cost-sharing reductions.
    In Sec.  155.1030(b)(1), we proposed the Exchange collect and 
review certain information that an issuer must submit under Sec.  
156.470 that would allow for the calculation of the advance payments of 
cost-sharing reductions and the premium tax credit; in addition, the 
proposal would direct an Exchange to ensure that the allocations 
provided by the issuer are consistent with the standards identified in 
Sec.  156.470(c)-(d). Specifically, in Sec.  156.470(a), we proposed 
that an issuer provide to the Exchange annually for approval, for each 
metal level health plan (that is, a health plan at any of the four 
levels of coverage, as defined in Sec.  156.20) offered, or proposed to 
be offered, in the individual market on the Exchange, an allocation of 
the rate and the expected allowed claims costs for the plan, in each 
case, to: (1) EHB, other than services described in Sec.  
156.280(d)(1),\25\ and (2) any other services or benefits offered by 
the health plan not described in clause (1). In the preamble to the 
proposed rule, we explained that the rate allocation information would 
allow the Exchange to calculate the percentage of the rate attributable 
to EHB; this percentage could then be multiplied by the adjusted 
monthly premium, as defined by 26 CFR 1.36B-3(e), and the monthly 
premium of the QHP in which the taxpayer enrolls, to calculate the 
premium assistance amount. The allocation of the expected allowed 
claims costs would be used to validate the rate allocation, and to 
calculate the advance payments for cost-sharing reductions as described 
in Sec.  156.430.
---------------------------------------------------------------------------

    \25\ 45 CFR 156.280(e)(1)(i) provides that if a QHP provides 
coverage of services described in paragraph (d)(1) of that section, 
the QHP issuer must not use Federal funds, including advance 
payments of the premium tax credit or cost-sharing reductions, to 
pay for the services.
---------------------------------------------------------------------------

    In Sec.  156.470(e), we further proposed that an issuer of a metal 
level health plan offered, or proposed to be offered, in the individual 
market on the Exchange also submit to the Exchange annually for 
approval, an actuarial memorandum with a detailed description of the 
methods and specific bases used to perform the allocations. The 
Exchange and HHS would use this memorandum to verify that the 
allocations meet the standards proposed in Sec.  156.470(c). First, the 
issuer must ensure that the allocation is performed by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies. Second, the rate allocation 
should reasonably reflect the allocation of the expected allowed claims 
costs attributable to EHB (excluding those services described in Sec.  
156.280(d)(1)). Third, the allocation should be consistent with the 
allocation of State-required benefits to be submitted by the issuer as 
proposed and finalized in Sec.  155.170(c) of the final EHB/AV Rule, 
and the allocation requirements described in Sec.  156.280(e)(4) for 
certain services. Fourth, the issuer should calculate the allocation as 
if it were a premium under the fair health insurance premium standards 
described at Sec.  147.102, the single risk pool standards described at 
Sec.  156.80, and the same premium rate standards described at Sec.  
156.255. We proposed this standard because we

[[Page 15478]]

believe the allocation of rates should be performed consistent with the 
standards applicable to the setting of rates.
    In Sec.  156.470(b), we proposed somewhat similar standards for the 
allocation of premiums for stand-alone dental plans. Specifically, we 
proposed that an issuer provide to the Exchange annually for approval, 
for each stand-alone dental plan offered, or proposed to be offered, in 
the individual market on the Exchange, a dollar allocation of the 
expected premium for the plan, to: (1) the pediatric dental essential 
health benefit, and (2) any benefits offered by the stand-alone dental 
plan that are not the pediatric essential health benefit. As described 
in 26 CFR 1.36B-3(k), this allocation will be used to determine the 
premium tax credit, and thus the advance payment of the premium tax 
credit, available if an individual enrolls in both a QHP and a stand-
alone dental plan. We noted that unlike issuers of metal level health 
plans, issuers of stand-alone dental plans would be required to submit 
a dollar allocation of the expected premium for the plan. We specified 
this because, unlike QHPs, issuers of stand-alone dental plans are not 
required to finalize premiums prior to the start of the benefit year. 
However, Sec.  156.470(b) as proposed and finalized here directs stand-
alone dental plan issuers to finalize the dollar amount of the premium 
allocable to the pediatric dental essential health benefit prior to the 
start of the benefit year to allow for the calculation of advance 
payments of the premium tax credit.
    In Sec.  156.470(e), we also proposed that issuers of stand-alone 
dental plans submit to the Exchange annually for approval an actuarial 
memorandum with a detailed description of the methods and specific 
bases used to perform the allocations, demonstrating that the 
allocations meet the standards proposed in Sec.  156.470(d). These 
standards were similar to those proposed for issuers of metal level 
health plans offered or proposed to be offered as QHPs, with some 
adaptations specific to stand-alone dental plans. Specifically, in 
Sec.  156.470(d)(1) and (2) we proposed that the allocation be 
performed by a member of the American Academy of Actuaries in 
accordance with generally accepted actuarial principles and 
methodologies, and be consistent with the allocation applicable to 
State-required benefits to be submitted by the issuer under Sec.  
155.170(c). In addition, in Sec.  156.470(d)(3), we proposed that the 
allocation be calculated as if it were a premium subject to the fair 
health insurance premium standards at Sec.  147.102 and the single risk 
pool standards at Sec.  156.80, as well as the same premium standard 
described at Sec.  156.255. However, in Sec.  156.470(d)(4) we provided 
a specific standard for age-adjustments to account for the fact that 
the dental essential health benefit only applies to the pediatric 
population. We also noted that issuers of stand-alone dental plans are 
not required to submit an allocation of their expected allowed claims 
costs because these plans are not eligible for cost-sharing reductions, 
as described in Sec.  156.440(b).
    In Sec.  155.1030(b)(1), we proposed that the Exchange collect and 
review annually the rate or premium allocation, the expected allowed 
claims cost allocation, and the actuarial memorandum that an issuer 
submits, to ensure that such allocations meet the standards set forth 
in Sec.  156.470(c) and (d). To ensure that the allocations are 
completed appropriately, we explained in the preamble to the proposed 
rule that we expect that the Exchange will review the allocation 
information in conjunction with the rate and benefit information that 
the issuer submits under Sec.  156.210 as finalized in the Exchange 
Establishment Rule. In addition, an Exchange that coordinates its 
review of QHP rates and benefits with the State's Effective Rate Review 
program would be able to also coordinate the allocation review because 
the revised reporting requirements for issuers seeking to increase 
rates set forth in the Market Reform Rule at Sec.  154.215(d)(3)-(4), 
and detailed in the accompanying PRA package, include the rate 
allocation and expected allowed claims cost allocation information. 
These reporting requirements will reduce the need for duplicate 
submissions by issuers and reviews by Exchanges. However, we noted that 
it is ultimately the responsibility of the Exchange to ensure that the 
issuer performs the allocations appropriately for each health plan or 
stand-alone dental plan that the issuer offers, or seeks to offer, on 
the individual market in the Exchange, including those that are not 
seeking to increase rates. Therefore, the preamble identified our 
expectation that Exchanges will collect the allocation information 
through either securing access to the data submission by QHP issuers 
for rate increases under Sec.  154.215, or the QHP certification and 
annual submission process under parts 155 and 156, as appropriate.
    In Sec.  155.1030(b)(2), we proposed that the Exchange submit to 
HHS the approved allocation(s) and actuarial memorandum for each QHP 
and stand-alone dental plan. In paragraph (b)(4), we proposed authority 
for the use of this data by HHS for the approval of the estimates that 
issuers submit for advance payments of cost-sharing reductions 
described in Sec.  156.430, and for the oversight of the advance 
payments of cost-sharing reductions and premium tax credit programs.
    In Sec.  155.1030(b)(3), we proposed that the Exchange collect 
annually any estimates and supporting documentation that a QHP issuer 
submits to receive advance payments for the value of the cost-sharing 
reductions under Sec.  156.430(a). The Exchange would then submit the 
estimates and supporting documentation to HHS for review. We clarified 
further that the Exchange would not review these estimates, and HHS's 
review would simply ensure that the estimates were developed in a 
manner consistent with the methodology established by HHS in the 
preamble to Sec.  156.430(a) of this final rule, in keeping with HHS's 
obligation to safeguard Federal funds.
    We are finalizing the provisions in Sec.  155.1030 as proposed, 
with technical corrections to Sec.  155.1030(a) and (b)(2). We replace 
the phrase, ``The Exchange'' in the beginning of proposed Sec.  
155.1030(a) with ``An Exchange,'' to align with other provisions in 
part 155. We also replace the phrase ``[an issuer] offers or seeks to 
offer'' from the proposed rule with the phrase ``[an issuer] offers, or 
intends to offer'' in the final rule, to align with the language in 
Sec.  156.430(a) requiring issuers to submit information for the 
advance payment of cost-sharing reductions; the scope of these 
regulatory requirements is intended to be the same. Similarly, we are 
making technical corrections to Sec.  156.470(a), (b) and (e) to 
standardize the phrase describing the issuers who must comply with the 
rule as those issuers with plans ``offered, or intended to be offered'' 
on an Exchange.
    We are also adding paragraph (c) to Sec.  155.1030 and paragraph 
(f) to Sec.  156.470 to clarify the application of these provisions to 
multi-State plans. Section 1334 of the Affordable Care Act directs OPM 
to enter into contracts with issuers to offer multi-State plans. 
Accordingly, OPM is responsible for ensuring that multi-State plans and 
their issuers comply with various Exchange standards, including 
standards relating to cost-sharing reductions and advance payments of 
the premium tax credit.
    We are also finalizing the provisions proposed in Sec.  156.470(a), 
(b), (c), (d)(1), and (e). To allow greater flexibility for stand-alone 
dental plan issuers in developing the allocation of dental premiums to 
EHB, we are not finalizing the allocation standards described in 
paragraphs (d)(2), (3), and (4) of the

[[Page 15479]]

proposed rule. We believe the allocation standard previously described 
in subparagraph (d)(1), which requires that the allocation be performed 
by a member of the American Academy of Actuaries in accordance with 
generally accepted actuarial principles and methodologies, is a 
sufficient standard for ensuring that stand-alone dental plan issuers 
allocate the premium accordingly. We intend to provide further details 
on the reporting process for stand-alone dental plan premium 
allocations for the FFE.
    Comment: We received one comment in support of the provisions at 
Sec.  155.1030 that all QHP issuers provide the plan variations as part 
of the certification process. We also received a comment requesting 
that HHS provide to issuers a good-faith compliance safe harbor on the 
new cost-sharing reductions standards and suggesting that this safe 
harbor could be revisited prior to the 2016 plan year.
    Response: We will take the comment into consideration in future 
rulemaking on oversight functions.
    Comment: In regard to Sec.  156.470, we received a comment asking 
for one set of guidance on all actuarial data submissions required for 
QHP certification, rate review, and market stabilization. The commenter 
suggested that HHS develop a standard template for the annual actuarial 
memorandum with specific instructions on what data should be included 
in the actuarial memorandum. In addition, we received a specific 
comment asking for guidance on how issuers should allocate the cost of 
prescription drug essential health benefits.
    Response: As discussed in the preamble of the proposed rule, we 
have attempted to streamline actuarial reporting requirements. In the 
Market Reform Rule, at Sec.  154.215(d)(3)-(4), and detailed in the 
accompanying PRA package, we revised the reporting requirements for 
issuers seeking to increase rates to include the rate allocation and 
expected allowed claims cost allocation information that issuers of 
metal level health plans would submit to an Exchange under Sec.  
156.470(a) finalized here. We created a unified data template for the 
submission, as well as detailed instructions for completing the 
actuarial memorandum. We suggest that Exchanges require issuers not 
seeking rate increases, and stand-alone dental plan issuers who are not 
subject to the rate review program, to use similar reporting processes 
in order to submit the rate and claims cost allocation information to 
the Exchange under Sec.  156.470 as finalized in this final rule.
    In response to the specific comment asking for guidance on 
allocating the cost of prescription drug essential health benefits, we 
refer readers to Sec.  156.122 of the final EHB/AV Rule, which 
specifies that for a plan to meet the EHB requirements, it must cover 
at least the greater of: (1) One drug in every category and class 
within the United States Pharmacopeia's (USP) classification system; or 
(2) the same number of drugs in each category and class as the EHB-
benchmark plan. We do not specify a maximum number of drugs that a plan 
may cover. Therefore, when determining the claims costs for EHB, QHP 
issuers should include all prescription drug claims costs within the 
USP classification system, except for claims costs associated with 
drugs for services described in Sec.  156.280(d)(1).
    Comment: We received several comments relating to the provisions at 
Sec.  156.470(b) and (d) on the allocation of premiums for stand-alone 
dental plans for purposes of calculating advance payments of the 
premium tax credit. One commenter stated that because stand-alone 
dental plans are exempt from the rating standards set forth in the 
final Market Reform Rule, issuers of stand-alone dental plans should 
not be required to follow such standards when determining the premium 
allocation. Another commenter supported the proposed policy because it 
provides equal treatment for the pediatric dental essential health 
benefit with other essential health benefits. However, the same 
commenter asked for clarification that this policy permits an issuer of 
a stand-alone dental plan to offer adult and family dental benefits 
through an Exchange so long as they are offered and priced separately. 
The commenter also asked for clarification of the definition of 
pediatric coverage and the standard proposed at Sec.  156.470(d)(4), 
given that the final EHB/AV Rule specified that states may set 
alternative age limits for pediatric coverage.
    Response: We agree that stand-alone dental plans, as defined at 
Sec.  155.1065, are ``excepted benefits'' under section 2791(c) of the 
PHS Act, and clarify that issuers of stand-alone dental plans are not 
required to follow the rating standards set forth in the final Market 
Reform Rule for purposes of pricing stand-alone dental coverage. In 
addition, to allow greater flexibility in the implementation of the 
provisions in Sec.  156.470 related to stand-alone dental plans, we are 
not finalizing the allocation standards proposed in paragraphs (d)(2), 
(3), and (4) of Sec.  156.470. We believe the allocation standard 
proposed at Sec.  156.470(d)(1), which requires that the allocation be 
performed by a member of the American Academy of Actuaries in 
accordance with generally accepted actuarial principles and 
methodologies, is a sufficient standard for ensuring that issuers 
allocate the premium accordingly, so we are finalizing that provision 
in this final rule. We intend to provide further details on the 
reporting process for stand-alone dental plan premium allocations for 
the FFE.
3. QHP Minimum Certification Standards Relating to Advance Payments of 
the Premium Tax Credit and Cost-Sharing Reductions
    Under HHS's rulemaking authority under sections 1311(c)(1), 
1321(a)(1), 1402 and 1412 of the Affordable Care Act, we proposed to 
add Sec.  156.215. This section would amend the QHP minimum 
certification standards and specify that an issuer seeking to offer a 
health plan on the individual market in the Exchange meet the 
requirements described in subpart E of part 156 related to the 
administration of advance payments of the premium tax credit and cost-
sharing reductions. We proposed to add this section to clarify that 
compliance with part 156 subpart E, including the standards and 
submission requirements proposed at Sec.  156.420 and Sec.  156.470, is 
a requirement of QHP certification, and therefore, is included in the 
standard described at Sec.  155.1000(b), under which an Exchange must 
offer only health plans that meet the minimum certification 
requirements. Under our proposal, continuing compliance with subpart E 
requirements by QHPs and QHP issuers is a condition of certification; 
failure to comply with the requirements could result in decertification 
of the QHP as well as other enforcement actions. This corresponds to 
the proposed addition of Sec.  155.1030, which sets forth the Exchange 
responsibilities on certification with respect to advance payments of 
the premium tax credit and cost-sharing reductions (described 
previously). We received no comments on this provision. For the reasons 
described in the proposed rule, we are finalizing these provisions as 
proposed.
4. Health Insurance Issuer Responsibilities With Respect to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions
a. Definitions
    Under Sec.  156.400, we proposed definitions for terms that are 
used throughout subpart E of part 156. These terms apply only to 
subpart E. Some of these definitions cross-reference definitions 
elsewhere in parts 155 or

[[Page 15480]]

156, including some definitions set forth in the final EHB/AV Rule; the 
terms ``advance payments of the premium tax credit'' and ``Affordable 
Care Act'' were proposed as defined by reference to Sec.  155.20, and 
the term ``maximum annual limitation on cost sharing'' was proposed as 
defined by reference to Sec.  156.130 of the final EHB/AV Rule. The 
terms ``Federal poverty level or FPL'' and ``Indian'' were proposed to 
be defined by reference to Sec.  155.300(a). The term ``de minimis 
variation'' was proposed to be defined by reference to Sec.  
156.140(c)(1) of the final EHB/AV Rule. We also proposed to define 
``stand-alone dental plan'' as a plan offered through an Exchange under 
Sec.  155.1065.
    We proposed to rely on the definitions of ``cost sharing'' and 
``cost-sharing reductions'' from Sec.  156.20. Finally, we noted in the 
preamble to the proposed rule that cost-sharing reductions are subject 
to Sec.  156.280(e)(1)(ii) and do not apply to benefits that are not 
EHB.
    Other definitions were proposed to effectuate the regulations 
proposed in subpart E. These definitions were described in detail in 
the proposed rule and listed below for reference:
     We proposed to define ``standard plan'' as a QHP offered 
at one of the four levels of coverage, defined at Sec.  156.140, with 
an annual limitation on cost sharing that conforms to the requirements 
of Sec.  156.130(a). A standard plan at the bronze, silver, gold, or 
platinum level of coverage is referred to as a standard bronze plan, a 
standard silver plan, a standard gold plan, and a standard platinum 
plan, respectively.
     We proposed to define ``silver plan variation'' as, with 
respect to a standard silver plan, any of the variations of that 
standard silver plan described in Sec.  156.420(a).
     We proposed to define ``zero cost sharing plan variation'' 
as, with respect to a QHP at any level of coverage, the variation of 
such QHP described in Sec.  156.420(b)(1), which provides for the 
elimination of cost sharing for Indians based on household income 
level.
     We proposed to define ``limited cost sharing variation'' 
as, with respect to a QHP at any level of coverage, the variation of 
such QHP described in Sec.  156.420(b)(2), which provides for the 
prohibition on cost sharing applicable to the receipt of benefits from 
IHS or certain other providers, irrespective of income level.
     We proposed to define ``plan variation'' as a zero cost 
sharing plan variation, limited cost sharing plan variation, or silver 
plan variation. We emphasized that the plan variations of a QHP are not 
separate plans, but variations in how the cost sharing required under 
the QHP is to be shared between the enrollee(s) and the Federal 
government.
    We proposed these definitions to administer and implement the cost-
sharing reductions established under section 1402 of the Affordable 
Care Act. Although an issuer will only offer one actual QHP (for 
example, a standard silver plan) with one standard cost-sharing 
structure, we proposed the concept of plan variations to describe how 
certain eligible individuals will pay only a portion of the total cost 
sharing required under that QHP, with the Federal government bearing 
the remaining cost-sharing obligations under section 1402 of the 
Affordable Care Act.
    To reflect how the Affordable Care Act creates different 
eligibility categories with different associated cost-sharing 
reductions, we proposed that each plan variation would reflect the 
enrollee's portion of the cost sharing requirements for the QHP. We 
referred to ``assigning'' enrollees to the applicable plan variation to 
describe how the enrollees will receive the benefits described in 
section 1402 of the Affordable Care Act. We reiterated that these 
variations are not different QHPs and that a change in eligibility for 
cost-sharing reductions simply changes the enrollee's responsibility 
for part of the total cost sharing under the same QHP.
    In addition, we also proposed to define ``de minimis variation for 
a silver plan variation'' as a single percentage point. That is, we 
proposed that a 1 percentage point variation in the AV of a silver plan 
variation would not result in a material difference in the true dollar 
value of the silver plan variation. We noted that this proposal 
differed from the 2 percentage point de minimis variation standard for 
health plans finalized in Sec.  156.140(c) of the final EHB/AV Rule.
    We proposed to define ``most generous'' or ``more generous'' as, 
between a QHP (including a standard silver plan) or plan variation and 
one or more other plan variations of the same QHP, the QHP or plan 
variation designed for the category of individuals last listed in Sec.  
155.305(g)(3).
    We proposed to define the ``annual limitation on cost sharing'' as 
the annual dollar limit on cost sharing required to be paid by an 
enrollee that is established by a particular QHP. We noted that this 
definition refers to the plan-specific cost-sharing parameters, while 
the defined term ``maximum annual limitation on cost sharing'' was 
proposed to refer to the uniform maximum that would apply to all QHPs 
(other than QHPs with cost-sharing reductions) for a particular year 
under standards at Sec.  156.130. Finally, we proposed to define the 
``reduced maximum annual limitation on cost sharing'' as the dollar 
value of the maximum annual limitation on cost sharing for a silver 
plan variation that remains after applying the reduction in the maximum 
annual limitation on cost sharing required by section 1402 of the 
Affordable Care Act, as announced in the annual HHS notice of benefit 
and payment parameters. The reduced maximum annual limitation on cost 
sharing for each silver plan variation for 2014 was proposed in the 
preamble for Sec.  156.420 of this Payment Notice. The reduced maximum 
annual limitation applies, as does the maximum annual limitation, only 
with respect to cost sharing on EHB, and does not apply to cost sharing 
on services provided by out-of-network providers. See Sec.  156.20 
(defining cost sharing) and Sec.  156.130(c).
    We are finalizing these provisions, with the following 
modification: we are amending the reference for the definition of the 
term ``de minimis variation'' to Sec.  156.140(c) instead of Sec.  
156.140(c)(1), in alignment with the final EHB/AV rule. The reduced 
maximum limitation on cost sharing for each silver plan variation is 
finalized in section III.E.4.c. below.
    Comment: Several commenters recommended that the de minimis 
variation for silver plan variations be increased to +/-2 percent as 
proposed in the AV/CSR Bulletin and proposed for standard plans under 
the final EHB/AV rule. Other commenters supported the +/-1 percent de 
minimis variation for silver plan variations.
    Response: We believe that a narrower de minimis variation for plan 
variations prevents differences in cost sharing between plan variations 
and ensures that low- and moderate-income enrollees receive the cost-
sharing reductions for which they are eligible. We believe that because 
cost-sharing reductions are reimbursed by the Federal government, the 
degree of flexibility afforded to issuers of silver plan variations in 
their cost-sharing design should be somewhat less. With this standard, 
we seek to balance the need to ensure that individuals receive the full 
value of the cost-sharing reductions for which they are eligible, and 
issuers' ability to set reasonable cost-sharing requirements.
    Comment: One commenter suggested we define ``de minimis'' variation 
to mean the allowable variation in the AV of a health plan such that 
the proportion

[[Page 15481]]

of EHB paid by the health plan is within the range established in Sec.  
156.140(c).
    Response: The definition of de minimis variation is incorporated by 
reference to Sec.  156.140(c) of the final EHB/AV rule. We do not 
believe that a separate definition of the term ``de minimis'' itself 
for the purpose of plan variations is warranted.
    Comment: We received a number of comments requesting that cost-
sharing reductions be limited to in-network services. One commenter 
opposed excluding out-of-network services from counting towards the 
annual limitation on cost sharing.
    Response: As provided in Sec.  156.130(c) of the final EHB/AV rule, 
in the case of a plan using a network of providers, cost sharing for 
services provided out of network do not count toward the annual 
limitation on cost sharing. We reference this definition and we note 
that cost-sharing requirements for out-of-networks services will 
similarly not count towards a reduced annual limitation on cost 
sharing. We note, however, that section 1402(c)(2) of the Affordable 
Care Act does not specify how any additional reductions should be 
achieved for individuals eligible for cost-sharing reductions. We 
therefore clarify that in developing silver plan variations, issuers 
have the flexibility to reduce cost sharing only for in-network 
services as long as the required AV levels are achieved and the plan 
design does not violate the standards set forth in Sec. Sec.  
156.420(c)-(f).
b. Cost-Sharing Reductions for Enrollees
    In Sec.  156.410(a), we proposed that a QHP issuer must ensure that 
an individual eligible for cost-sharing reductions, as demonstrated by 
assignment to a particular plan variation, pay only the cost sharing 
required of an eligible individual for the applicable covered service 
under a plan variation. We also proposed in this paragraph that the 
enrollee receive this reduction in cost sharing when the cost sharing 
is collected, which might occur when the enrollee visits the emergency 
room for care. This proposal would apply to all forms of cost sharing, 
including copayments, coinsurance, and deductibles. Under our proposal, 
the QHP issuer would ensure that the enrollee is not charged any type 
of cost sharing after the applicable annual limitation on cost sharing 
has been met. Furthermore, we explained in the preamble that for 
services subject to cost sharing, an individual eligible for cost-
sharing reductions would not be eligible for a reduced copayment or 
coinsurance rate until any applicable (potentially reduced) deductible 
has been paid. For the reasons described in the proposed rule and 
considering the comments received, we are finalizing these provisions 
as proposed.
    Comment: Several commenters supported this policy. One commenter 
was concerned that the reduced deductible must be applied before an 
enrollee becomes eligible for the cost-sharing reductions. Another 
commenter was concerned there could be confusion among providers about 
the amount of cost sharing to collect and suggested that HHS require 
QHP issuers to issue membership cards to enrollees that clearly explain 
the enrollee's cost-sharing obligations.
    Response: We believe it is appropriate for enrollees eligible for 
cost-sharing reductions to continue to be required to pay any 
applicable deductibles before taking advantage of other cost-sharing 
reductions. We recognize that QHP issuers will be required to supply 
providers with the necessary cost-sharing information to meet the 
obligation under Sec.  156.410(a) of this final rule to ensure that the 
cost-sharing reductions are provided when the cost sharing is 
collected.
    In Sec.  156.410(b), we proposed that after a qualified individual 
makes a plan selection, a QHP issuer would assign the individual to the 
applicable plan variation based on the eligibility determination sent 
to the QHP issuer by the Exchange. We noted in preamble that the QHP 
issuer is entitled to rely upon the eligibility determination sent to 
the QHP issuer by the Exchange.
    In Sec.  156.410(b)(1), we proposed that a QHP issuer assign a 
qualified individual who chooses to enroll in a silver plan in the 
individual market in the Exchange to the silver plan variation for 
which the qualified individual is eligible. Comments on Sec.  
156.410(b)(2) and (3) are discussed below in the section of this final 
rule related to the special cost-sharing reduction rules for Indians. 
In Sec.  156.410(b)(4), we proposed that a QHP issuer must assign an 
individual determined ineligible by the Exchange for cost-sharing 
reductions to the selected QHP with no cost-sharing reductions. We are 
finalizing these provisions without modification.
    Comment: Commenters generally supported requiring QHP issuers to 
assign enrollees to the plan variation for which they are eligible. One 
commenter specifically suggested that Exchanges only display the plan 
variation of each QHP for which the consumer is eligible to avoid 
confusion.
    Response: The standards set forth in Sec.  156.420 ensure that 
consumers will be best served by being assigned to the most generous 
plan variation for which they are eligible. Therefore, we encourage 
Exchanges to only display the variation of each QHP plan for which the 
consumer is eligible. As noted in the proposed rule, if an individual 
does not wish to receive cost-sharing reductions, the individual may 
elect to decline to apply for cost-sharing reductions.
c. Plan Variations
    In Sec.  156.420, we proposed that issuers submit to the Exchange 
for certification and approval the variations of the health plans that 
they seek to offer or continue to offer in the individual market on the 
Exchange as QHPs that include required levels of cost-sharing 
reductions. We further clarified that under our proposal, multi-State 
plans, as defined in Sec.  155.1000(a), and CO-OP QHPs, as defined in 
Sec.  156.505, would be subject to the provisions of this subpart. OPM 
will certify the plan variations of the multi-State plans and determine 
the time and manner for submission.
    Sections 1402(a) through (c) of the Affordable Care Act direct 
issuers to reduce cost sharing for EHB for eligible insureds enrolled 
in a silver health plan with household incomes between 100 and 400 
percent of the FPL, such that the plan's share (before any 
reimbursement from HHS for cost-sharing reductions) of the total 
allowed costs of the benefits are a certain percentage (that is, the 
health plan meets a certain AV level). To achieve these AV levels, the 
law directs issuers to first reduce the maximum annual limitation on 
cost sharing. After the issuer reduces the annual limitation on cost 
sharing to comply with the applicable reduced maximum annual 
limitation, section 1402(c)(2) of the Affordable Care Act directs the 
Secretary to establish procedures under which an issuer is to further 
reduce cost sharing if necessary to achieve the specified AV levels.
    For individuals with household incomes of 250 to 400 percent of the 
FPL, we noted that without any change in other forms of cost sharing, 
any reduction in the maximum annual limitation on cost sharing will 
cause an increase in AV. Therefore, we proposed not to reduce the 
maximum annual limitation on cost sharing for individuals with 
household incomes between 250 and 400 percent of the FPL. We are 
finalizing this policy as proposed, with the following modifications. 
We are adding a new paragraph (g) to clarify that OPM, rather than the 
Exchange, will determine the time and manner for multi-State plans to 
submit silver plan variations and zero and limited cost sharing plan 
variations for the purpose of certification.

[[Page 15482]]

Additionally, we note a technical correction with regard to the 
submission of plan variations under Sec.  156.420(a); we replace the 
phrase ``[an issuer] seeks to offer or to continue to offer'' with the 
phrase ``[an issuer] offers, or intends to offer,'' to align with the 
language in Sec.  156.430(a).
    Comment: Two commenters recommended that HHS require plans to 
provide individuals with incomes between 250 percent and 400 percent of 
FPL the option of enrolling in a plan variation with a lower annual 
limitation on cost sharing and higher deductibles, copayments, and 
coinsurance in order to reach the statutorily required AV. Another 
commenter recommended that HHS rebate excess cost sharing for 
individuals between 250 percent and 400 percent of the FPL or work with 
IRS to issue a tax credit.
    Response: As noted in the proposed rule, a reduction in the maximum 
annual limitation on cost sharing could require corresponding increases 
in other forms of cost sharing to maintain the statutorily required AV 
levels for individuals between 250-400 percent of FPL. Since we 
anticipate that most individuals would not be expected to reach the 
annual limitation on cost sharing, most individuals would be required 
to pay more up-front costs under such a cost-sharing structure. 
Furthermore, given the additional administrative burden required in 
designing and operating additional silver plan variations, we do not 
modify the proposed policy in this final rule. In addition, we do not 
believe we have the authority to provide individuals in this income 
range with an additional tax credit (beyond that provided for in 
sections 1401 and 1411 of the Affordable Care Act and section 36B of 
the Code).
    For individuals with a household income of 100 to 250 percent of 
the FPL, we proposed an annual three-step process for the design of 
cost-sharing structures in the silver plan variations, as follows:
    Step 1. In the first step, we identify in the annual HHS notice of 
benefit and payment parameters the maximum annual limitation on cost 
sharing applicable to all plans that will offer the EHB package.
    Maximum Annual Limitation on Cost Sharing for Benefit Year 2014: As 
discussed in Sec.  156.130(a) of the final EHB/AV Rule, the maximum 
annual limitation on cost sharing for 2014 is the dollar limit on cost 
sharing for high deductible health plans set by the IRS under section 
223(c)(2)(A)(ii) of the Code for 2014. The IRS will publish this dollar 
limit in the spring of 2013. However, to allow time for HHS to analyze 
the impact of the reductions in the maximum annual limitation on cost 
sharing on health plan AV levels, and to allow issuers adequate time to 
develop the cost-sharing structures of their silver plan variations for 
submission during the QHP certification process, we proposed to 
estimate the dollar limit for 2014. Based on the proposed methodology, 
we estimated that the maximum annual limitation on cost sharing for 
self-only coverage for 2014 will be approximately $6,400 (the maximum 
annual limitation on cost sharing for other than self-only coverage for 
2014 would be twice that amount, or $12,800).\26\ This estimate was 
developed and proposed for purposes of setting the reduced maximum 
annual limitation on cost sharing for silver plan variations. Under 
section 1302(c)(1)(A) of the Affordable Care Act, cost sharing incurred 
under plans offering EHB packages, as defined in Sec.  156.20, in 2014 
cannot exceed the limit set by the IRS under section 
223(c)(2)(A)(ii)(I) and (II) of the Code for the 2014 plan year. For a 
benefit year beginning after 2014, the maximum annual limitation on 
cost sharing will equal the dollar limit for 2014 benefit year adjusted 
by a premium adjustment percentage determined by HHS, under section 
1302(c)(4) of the Affordable Care Act. We plan to propose the premium 
adjustment percentage applicable to the 2015 benefit year in the next 
HHS notice of benefit and payment parameters.
---------------------------------------------------------------------------

    \26\ The methodology is discussed in detail at 77 FR 73171-73172 
of the proposed rule.
---------------------------------------------------------------------------

    Step 2. In the second step, we analyze the effect on AV of the 
reductions in the maximum annual limitation on cost sharing described 
in section 1402(c)(1)(A) of the Affordable Care Act. Under section 
1402(c)(1)(B)(ii), we may adjust the reduction in the maximum annual 
limitation on cost sharing, if necessary, to ensure that the actuarial 
values of the applicable silver plan variations do not exceed the 
actuarial values specified in section 1402(c)(1)(B)(i). We proposed to 
describe these analyses and the reduced annual limitations on cost 
sharing for the three income categories in the annual HHS notice of 
benefit and payment parameters.
    Reduced Maximum Annual Limitation on Cost Sharing for Benefit Year 
2014.
    As described in the proposed rule, for the 2014 benefit year, we 
analyzed the impact on the actuarial values of three model silver level 
QHPs of the reductions described in the Affordable Care Act to the 
estimated maximum annual limitation on cost sharing for self-only 
coverage for 2014 ($6,400). These model plans were meant to represent 
the broad sets of plan designs that we expect issuers to offer at the 
silver level of coverage through an Exchange. All three model plans 
meet the actuarial value requirements for silver health plans, and 
start with an annual limitation on cost sharing equal to the estimated 
maximum annual limitation on cost sharing ($6,400). The plan design 
features of the model QHPs were entered into the AV calculator 
developed by HHS.
    As described in the preamble to the proposed rule, we determined 
that a reduction in the maximum annual limitation on cost sharing 
specified in the Affordable Care Act for enrollees with household 
incomes between 100 and 150 percent of the FPL (\2/3\ reduction), and 
150 and 200 percent of the FPL (\2/3\ reduction), would not cause the 
AVs of any of the model QHPs to exceed the statutorily specified AV 
levels (94 and 87, respectively). In contrast, the reduction in the 
maximum annual limitation on cost sharing specified in the Affordable 
Care Act for enrollees with household incomes between 200 and 250 
percent of FPL (\1/2\ reduction), did cause the AVs of the model QHPs 
to exceed the specified AV level of 73 percent. As a result, we 
proposed that QHP issuers only be required to reduce their annual 
limitation on cost sharing for enrollees in the 2014 benefit year with 
household incomes between 200 and 250 percent of FPL by approximately 
\1/5\, rather than \1/2\. We further proposed to moderate the 
reductions in the maximum annual limitation on cost sharing for all 
three income categories, as shown in Table 21, to account for any 
potential inaccuracies in our estimate of the maximum annual limitation 
on cost sharing for 2014, and unique plan designs that may not be 
captured by our three model QHPs. Based on this analysis, in Table 21, 
we proposed the following reduced maximum annual limitations on cost 
sharing for benefit year 2014:

[[Page 15483]]



                   Table 21--Reductions in Maximum Annual Limitation on Cost Sharing for 2014
----------------------------------------------------------------------------------------------------------------
                                                                                          Reduced maximum annual
                                                                 Reduced maximum annual     limitation on cost
                     Eligibility category                          limitation on cost     sharing for other than
                                                                 sharing for  self-only   self-only coverage for
                                                                   coverage for  2014              2014
----------------------------------------------------------------------------------------------------------------
Individuals eligible for cost-sharing reductions under Sec.                      $2,250                   $4,500
 155.305(g)(2)(i) (that is, 100-150 percent of FPL)...........
Individuals eligible for cost-sharing reductions under Sec.                       2,250                    4,500
 155.305(g)(2)(ii) (that is, 150-200 percent of FPL)..........
Individuals eligible for cost-sharing reductions under Sec.                       5,200                   10,400
 155.305(g)(2)(iii) (that is, 200-250 percent of FPL).........
----------------------------------------------------------------------------------------------------------------

    We proposed that QHP issuers may rely on the reduced maximum annual 
limitations on cost sharing published in the final HHS notice of 
benefit and payment parameters to develop their silver plan variations 
for the 2014 benefit year.
    Step 3. In the proposed third step of the process for structuring 
cost sharing in the silver plan variations, a QHP issuer offering 
coverage in the individual market on an Exchange would be required to 
develop three variations of its standard silver plan--one each for 
individuals with household incomes between 100 and 150 percent of the 
FPL, 150 and 200 percent of the FPL, and 200 and 250 percent of the 
FPL--with each variation having an annual limitation on cost sharing 
that does not exceed the applicable reduced maximum annual limitation 
on cost sharing published in the annual HHS notice of benefit and 
payment parameters. If the application of the reduced annual limitation 
on cost sharing results in an AV for a particular silver plan variation 
that differs from the required 73, 87, or 94 percent AV level by more 
than the permitted amount (that is, the 1 percent de minimis amount for 
silver plan variations, subject to Sec.  156.420(f), as described 
below), the QHP issuer would adjust the cost-sharing structure in that 
silver plan variation to achieve the applicable AV level.
    We proposed specifications in Sec.  156.420(a)(1) through (3) for 
the three silver plan variations, and proposed that they may deviate 
from the required AV levels by the de minimis variation for silver plan 
variations that is, 1 percentage point. We further proposed that 
issuers submit these silver plan variations annually to the Exchange 
for certification, prior to the benefit year. Under our proposal, 
silver plan variations would be approved annually even if the standard 
silver plan does not change, since the reduced maximum annual 
limitation on cost sharing may change annually due to the premium 
adjustment percentage. For the reasons described in the proposed rule 
and considering the comments received and discussed below, we are 
finalizing these provisions, including the reductions in the maximum 
limitation on cost sharing for silver plan variations offered in the 
2014, as proposed with certain clarifications.
    Comment: One commenter noted that the IRS does not release the 
dollar limit on cost sharing until late spring and this would be too 
late for issuers to adjust their product designs to be compliant with 
the IRS limit and also meet State and Federal filing deadlines. The 
commenter suggested that HHS develop an estimate of the maximum annual 
limit on cost sharing that can be used as a safe harbor.
    Response: We are finalizing the proposal to permit QHP issuers to 
rely on the reduced maximum annual limitations on cost sharing 
published in the final HHS notice of benefit and payment parameters to 
develop their silver plan variations for the 2014 benefit year. We plan 
to provide separate guidance on the maximum annual limitation on cost 
sharing for standard plans to QHP issuers seeking to participate in a 
Federally-facilitated Exchange consistent with the approach finalized 
in this Payment Notice.
    Comment: One commenter recommended that the maximum annual 
limitation on cost sharing should be published no later than July 1 of 
the year prior to open enrollment, with a 45-day comment period.
    Response: We understand the need for issuers and stakeholders to 
have adequate time to consider how the maximum annual limitation on 
cost-sharing should be applied in the development of plan variations. 
We note that in later benefit years, the maximum annual limitation on 
cost sharing will be established under a premium adjustment percentage 
established by HHS in the annual notice of benefit and payment 
parameters for the applicable plan year.
    Comment: One commenter suggested that HHS should not adjust the 
reductions in the maximum annual limitation on cost sharing, as these 
adjustments could affect other cost-sharing requirements that a State-
based Exchange might put in place under its authority to develop 
certification standards, as described at Sec.  155.1000(c)(2).
    Response: We believe it is important to make these adjustments to 
ensure that issuers have flexibility when developing their plan 
designs. Without these adjustments, it could be difficult for issuers 
to achieve the required actuarial value levels for certain plan 
variations, while complying with other applicable rules on cost-sharing 
structures, such as the provision at Sec.  156.420(e). Additionally, we 
anticipate working with States and Exchanges individually to address 
the interaction between the standards in the Payment Notice and any 
additional Exchange-specific certification standards.
    Comment: One commenter suggested that when silver plan variations 
cannot be accommodated by the AV calculator, HHS should require that 
the AV determinations be certified by a member of the American Academy 
of Actuaries.
    Response: We clarify that the definition of and standards for 
determining actuarial value in Sec.  156.20 and Sec.  156.135 of the 
final EHB/AV Rule apply to both standard plans and plan variations. 
Accordingly, if a health plan's design for plan variation is not 
compatible with the AV calculator, the issuer would be required to 
follow the processes specified in Sec.  156.135(b) of the final EHB/AV 
Rule.
    Comment: One commenter requested that HHS clarify which ``desired 
metal tier'' should be inputted into the AV calculator to determine the 
AV for the silver plan variations.
    Response: We have designed the AV Calculator such that users may 
select the option to determine whether the plan design satisfies the 
plan variations standards finalized here. To use the AV Calculator to 
verify the AV of a plan variation, users should select the indicator 
that the plan meets the cost-

[[Page 15484]]

sharing reduction standard, and select the desired metal tier. In the 
below table, we provide guidance on which metal tier should be chosen 
to align with the expected utilization for each plan variation. 
Additional information on the AV Calculator can be found at http://cciio.cms.gov/resources/regulations/index.html#pm.

        Table 22--Desired Metal Tier for Silver Plan Variation AV
------------------------------------------------------------------------
                                  Silver plan variation    Desired metal
        Household income                    AV                 tier
------------------------------------------------------------------------
100-150 percent of FPL.........  Plan Variation 94        Platinum.
                                  percent.
150-200 percent of FPL.........  Plan Variation 87        Gold.
                                  percent.
200-250 percent of FPL.........  Plan Variation 73        Silver.
                                  percent.
------------------------------------------------------------------------

    Comment: One commenter asked HHS to clarify how silver plan 
variations could be designed to be compatible with HSAs.
    Response: We are considering this issue and will provide future 
guidance.
    Comment: One commenter asked if HHS could make public its modeling 
regarding the expected rate of change in cost-sharing reduction 
eligibility within a plan year.
    Response: HHS does not have such an analysis to share at this time.
    Comment: Another commenter was concerned about the ability of 
States to supplement cost-sharing reductions under the proposed policy, 
and requested HHS give States that wish to supplement cost sharing the 
flexibility to determine whether issuers must offer all plan 
variations.
    Response: We intend to work with States to assess how the 
requirements regarding plan variations would interact with any 
supplemental cost-sharing reductions a State intends to provide.
    Comment: Several commenters recommended that HHS establish 
parameters for deductibles in silver plan variations. One commenter 
suggested that cost-sharing reductions to reach the required AV levels 
identified in Sec.  156.420(a) should first be used to lower the 
deductible and then reduce coinsurance or copayments, and that 
enrollees should receive negotiated pharmacy prices during the 
deductible phase. The same commenter suggested waiving or reducing the 
deductible for outpatient pharmacy for individuals eligible for cost-
sharing reductions and making cost-sharing reductions in the forms of 
lower coinsurance and copayments available to enrollees assigned to 
plan variations immediately. One commenter asked for allowances to be 
made to permit issuers to develop innovative plan designs.
    Response: We believe that the standards we are finalizing strike 
the appropriate balance between protecting consumers and preserving QHP 
issuer flexibility. The standard in Sec.  156.420(e) that cost sharing 
for a silver plan variation not exceed the corresponding cost sharing 
for a standard silver plan or silver plan variation with a lower AV 
protects low-income populations who are assigned to plan variations. We 
also clarify that, for purposes of the plan variations, any cost 
sharing that an enrollee would have been required to pay under the 
standard plan, but was not required to pay under the plan variation, 
should not be applied to the annual limitation on cost sharing.
    Comment: Several commenters sought clarification on whether issuers 
must submit a silver plan variation for every plan offered on the 
individual market.
    Response: We clarify that for each silver health plan that an 
issuer offers, or intends to offer in the individual market on an 
Exchange, the issuer must submit the three silver plan variations. This 
policy will ensure that low-income individuals can receive cost-sharing 
reductions while enrolled in any silver level QHP offered through the 
Exchange, consistent with section 1402 of the Affordable Care Act.
    Sections 156.420(b) and (d) are discussed below in section 
III.E.4.i. related to the special cost-sharing reduction rules for 
Indians.
    In Sec.  156.420(c) and (e), we proposed additional coverage 
standards for silver plan variations as part of implementing section 
1402. In Sec.  156.420(c), we proposed that silver plan variations 
cover the same benefits and include the same providers as the standard 
silver plan. We further proposed that silver plan variations must 
require the same out-of-pocket spending for benefits other than EHB. 
Lastly, we proposed that silver plan variations be subject to all 
requirements applicable to the standard silver plan (except for the 
requirement that the plan have an AV as set forth in Sec.  
156.140(b)(2) of the final EHB/AV Rule). This means, for example, that 
silver plan variations must meet standards relating to marketing and 
benefit design of QHPs, network adequacy standards, and essential 
community providers. Although these requirements are implicit because a 
plan variation is not a separate plan, we proposed these requirements 
explicitly as regulatory standards to ensure that QHP issuers develop 
appropriate plan variations.
    In Sec.  156.420(e), we proposed a standard to govern the design of 
cost-sharing structures for silver plan variations. Under this 
approach, the cost sharing for enrollees under any silver plan 
variation for an EHB from a provider may not exceed the corresponding 
cost sharing in the standard silver plan or any other silver plan 
variation of the standard silver plan with a lower AV. This proposed 
standard would apply to all types of cost-sharing reductions, including 
reductions to deductibles, coinsurance, and co-payments. An issuer 
would have the flexibility to vary cost sharing on particular benefits 
or providers so long as that cost sharing did not increase for a 
particular benefit or provider in higher AV silver plan variations. For 
the reasons described in the proposed rule and considering the comments 
received, we are finalizing these provisions in paragraphs (c) and (e) 
as proposed.
    Comment: A number of commenters supported the requirement that 
silver plan variations cover the same benefits and include the same 
providers as the standard silver plan. Several commenters also 
generally supported the proposal that the cost sharing for enrollees 
under any silver plan variation for an EHB from a provider may not 
exceed the corresponding cost sharing in the standard silver plan or 
any other silver plan variation of the standard silver plan with a 
lower AV. One commenter supported allowing QHP issuers to have greater 
flexibility to vary cost-sharing structures across plan variations, and 
asked for clarification on whether QHP issuers can continue to use 
medical management policies for silver plan variations. Another 
commenter asked whether issuers may switch between copayments and 
coinsurance for silver plan variations as long as the cost sharing in 
aggregate does not exceed that of plans with lower actuarial values.
    Response: We are finalizing the policy as proposed at Sec.  
156.420(e). We intend

[[Page 15485]]

to interpret and enforce this provision such that a QHP issuer may not 
switch between copayments and coinsurance for silver plan variations 
for the same benefit. We believe that allowing this type of 
substitution could result in an enrollee being subject to greater cost 
sharing under a plan variation with a higher AV, which Sec.  156.420(e) 
is intended to prohibit. However, this provision does not limit an 
issuer's ability to appropriately use reasonable medical management 
techniques in managing costs consistently in its silver plan 
variations. We also direct the commenter's attention to Sec.  
156.125(c) of the final EHB/AV Rule, which codifies this protection in 
connection with anti-discrimination requirements, and section 1563(d) 
of the Affordable Care Act.
    In Sec.  156.420(f), we proposed that, notwithstanding the 
permitted de minimis variation in AV for a health plan or the permitted 
de minimis variation for a silver plan variation, the AV of the 
standard silver plan (which must be 70 percent plus or minus 2 
percentage points) and the AV of the silver plan variation applicable 
to individuals with household incomes between 200 and 250 percent of 
the FPL (which must be 73 percent plus or minus 1 percentage point) 
must differ by at least 2 percentage points. We are finalizing the 
provision as proposed.
    Comment: Several commenters supported this requirement. Another 
commenter was concerned about the ability of issuers to create a viable 
73 percent plan variation given the number of plan design constraints.
    Response: We believe that a 2 percentage point differential will 
ensure that a difference in cost-sharing reductions provided to each 
income category is maintained, while providing issuers the flexibility 
to adjust cost-sharing requirements within these standards.
d. Changes in Eligibility for Cost-Sharing Reductions
    In Sec.  156.425(a), we proposed that if the Exchange notifies a 
QHP issuer of a change in an enrollee's eligibility for cost-sharing 
reductions (including a change following which the enrollee will not be 
eligible for cost-sharing reductions), then the QHP issuer must change 
the individual's assignment so that the individual is assigned to the 
applicable standard plan or plan variation. We also proposed that the 
QHP issuer effectuate the change in eligibility in accordance with the 
effective date of eligibility provided by the Exchange. We explained in 
preamble that an Exchange would establish such dates under Sec.  
155.330(f). We noted that if an enrollee changes QHPs after the 
effective date of the eligibility change as the result of a special 
enrollment period, once the Exchange notifies the issuer of the new QHP 
of the enrollment, that QHP issuer must assign the enrollee to the 
applicable standard plan or plan variation of the QHP selected by the 
enrollee, consistent with Sec.  156.410(b). We are finalizing these 
provisions as proposed.
    Comment: Commenters generally supported the policy, but several 
stated that a change in an enrollee's eligibility for cost-sharing 
reductions should only be applied prospectively. One commenter 
requested that HHS clarify that cost-sharing reductions would not be 
available until the first day of the following month, to eliminate the 
need to re-adjudicate claims. Another commenter suggested that if 
retroactive changes in eligibility for cost-sharing reductions are 
permitted, only claims the issuer receives after the effective date of 
the new assignment should be processed under the new cost-sharing 
requirements.
    Response: We are finalizing the policy as proposed. This policy 
aligns with the eligibility standards and effective dates proposed for 
the amendment at Sec.  155.330(f) of the proposed Medicaid and Exchange 
Eligibility Appeals and Notices Rule, which aim to reduce the need for 
retroactive eligibility changes for cost-sharing reductions, except in 
certain limited scenarios, discussed in that rule.
    Comment: One commenter recommended that HHS ensure that individuals 
who are not assigned to the applicable plan variation in a timely 
manner should be refunded any cost sharing they should not have been 
responsible for after the effective date of the eligibility change.
    Response: We believe that it is important that eligible individuals 
receive the appropriate cost-sharing reductions as of the effective 
date required by the Exchange. As noted in the proposed rule, an 
individual would not be penalized based on changes in eligibility for 
cost-sharing reductions during the benefit year, although he or she 
would be ineligible for any refund on cost sharing to the extent the 
newly applicable deductible or annual limitation on cost sharing is 
exceeded by prior cost sharing.
    Comment: We received a comment seeking clarification that the QHP 
issuer be held harmless for any cost-sharing reductions provided beyond 
the enrollee's actual eligibility level so long as the QHP issuer makes 
assignments and reassignments in accordance with Exchange instructions.
    Response: We reiterate that our final rule requires a QHP issuer to 
follow the eligibility instructions from an Exchange in ensuring the 
provision of cost-sharing reductions and plan variation assignments 
under Sec.  156.410(a) and Sec.  156.425. Therefore, a QHP issuer may 
rely upon the eligibility determination sent by the Exchange. If a QHP 
issuer does not receive notification of an eligibility redetermination, 
the QHP issuer would not be permitted to re-assign the enrollee to a 
different plan variation or standard plan.
    In Sec.  156.425(b), we proposed that in the case of a change in 
assignment to a different plan variation (or standard plan without 
cost-sharing reductions) of the same QHP in the course of a benefit 
year (including in the case of a re-enrollment into the QHP following 
enrollment in a different plan), the QHP issuer must ensure that any 
cost sharing paid by the applicable individuals under the previous plan 
variations (or standard plan without cost-sharing reductions) is 
accounted for in the calculation of deductibles and annual limitations 
on cost sharing in the individual's newly assigned plan variation (or 
standard plan without cost sharing) for the remainder of the benefit 
year. As discussed above, we noted in the preamble that a change from 
or to an individual or family policy of a QHP due to the addition or 
removal of a family member does not constitute a change in plan for the 
family members originally on the individual or family policy. We are 
finalizing these provisions as proposed.
    Comment: One commenter suggested that enrollees not be permitted to 
switch QHPs as a result of a mid-year change in eligibility for cost-
sharing reductions, because an enrollee could mistakenly forfeit credit 
for previously paid cost sharing. Another commenter suggested that 
Exchanges be required to explain to consumers the policy relating to 
continuity of deductibles and annual limitations on cost sharing and 
the implications of switching QHPs mid-year.
    Response: Prohibiting enrollees from switching QHPs would conflict 
with Sec.  155.420(d)(6) of the Exchange Establishment Rule, which 
allows an individual who has a change in eligibility for cost-sharing 
reductions to enroll in or change from one QHP to another during a 
special enrollment period. We note that enrollees may choose a plan 
variation of the same QHP in order to ensure that any cost sharing 
previously paid by the individual is

[[Page 15486]]

taken into account. We encourage Exchanges to provide information to 
consumers on this topic.
    Comment: One commenter asked HHS to consider instituting safe 
harbors if the enrollee already met the annual limit on cost sharing, 
but due to lags in data the QHP is not informed.
    Response: We appreciate the difficulties caused by lags in data, 
and anticipate consulting with stakeholders to provide guidance on 
these sorts of operational issues.
    Comment: One commenter requested an example to illustrate whether 
an individual will be required to satisfy the additional deductible 
amount when moving to a plan with a higher deductible. Another 
commenter recommended that deductible amounts carried forward to a 
policy with a lower deductible be counted towards the annual limitation 
on cost sharing.
    Response: In accordance with the rule finalized here at Sec.  
156.425(b), as long as the change of assignment is to a different plan 
variation of the same QHP, any cost sharing paid by the applicable 
individual under the previous plan variation must be taken into 
account. This requirement would also apply to Indians who change plan 
variations within the same QHP as a result of a change in income, such 
as an Indian who moves from a limited cost sharing plan variation to a 
zero cost sharing plan variation, and then returns to the limited cost 
sharing plan variation of the same QHP.
    Furthermore, as noted in the proposed rule, an individual eligible 
for cost-sharing reductions would not be eligible for a reduced 
copayment or coinsurance until the applicable deductible has been met. 
For example, if the individual satisfies a $500 deductible and pays 
$100 in co-payments in one plan variation, then moves to a different 
plan variation of the same QHP with a $750 deductible as a result of a 
change in eligibility, the plan would apply $600 towards the new 
deductible and the individual would need to satisfy the remaining $150 
of the new deductible to be eligible for the reduced co-payment or 
coinsurance. Conversely, if an enrollee satisfies a $900 deductible in 
a standard plan and then moves to a plan variation of the same QHP with 
a $750 deductible as a result of a change in eligibility, the 
additional $150 the individual already paid must be applied towards the 
reduced annual limitation on cost sharing of the new plan variation. 
However, as we explained in connection with this proposal, the enrollee 
would not receive a rebate for the amount already paid above the 
deductible for the new plan variation.
    Comment: One commenter sought clarification on how the requirements 
for continuity of deductibles and the annual limitation on cost sharing 
would apply if a QHP enrollee becomes eligible for Medicaid, and then 
later, re-enrolls in the QHP. The same commenter asked how the policy 
would apply if the individual switches to a different QHP.
    Response: As noted in the proposed rule, the requirement regarding 
the continuity of deductibles and out-of-pocket maximums would apply as 
long as the change in assignment is to a different plan variation of 
the same QHP. We interpret this to include re-enrollment into the QHP 
following enrollment in a different QHP or another type of coverage 
such as Medicaid within the coverage year. As we also noted in the 
proposed rule, the QHP issuer is not prohibited from or required to 
extend the continuity of deductibles and annual limitations on cost 
sharing policy to situations in which the individual changes QHPs, but 
is permitted to extend this policy, provided that this extension of the 
policy is applied across all enrollees in a uniform manner.
    Comment: One commenter sought clarification on how the proposed 
policy will affect the reconciliation of advance payments of cost-
sharing reductions with actual payments.
    Response: Under the reconciliation policy finalized in this rule, 
cost-sharing reductions properly provided in accordance with this rule 
will be reimbursed. Thus, if an enrollee changes plan variations mid-
year and is properly credited with amounts previously accumulated 
towards a deductible, then cost-sharing reductions on copayments and 
coinsurance that are provided because the deductible under the new plan 
variation is reached more quickly are reimbursable as part of 
reconciliation.
e. Payment for Cost-Sharing Reductions
    We proposed to implement a payment approach under which we would 
make monthly advance payments to issuers to cover projected cost-
sharing reduction amounts, and then reconcile those advance payments at 
the end of the benefit year to the actual cost-sharing reduction 
amounts.\27\ This approach fulfills the Secretary's obligation to make 
``periodic and timely payments equal to the value of the reductions'' 
under section 1402(c)(3) of the Affordable Care Act. We expect that 
this approach would not require issuers to fund the value of any cost-
sharing reductions prior to reimbursement. This approach is similar to 
the one employed for the low-income subsidy under Medicare Part D.
---------------------------------------------------------------------------

    \27\ We noted that these payments (both advance and reconciled), 
and the estimated or actual cost-sharing reductions underlying them, 
are subject to 45 CFR 156.280(e)(1)(ii).
---------------------------------------------------------------------------

    We are finalizing our payment approach as proposed with five 
specific modifications. The first two modifications relate to 
reimbursement for cost-sharing reductions for Indians, which are 
discussed in section III.E.4.i. of this final rule. The third 
modification is the addition of paragraph Sec.  156.430(a)(4), 
clarifying that issuers of multi-State plans must provide the estimates 
described in paragraphs (1) and (2) of Sec.  156.430(a) to OPM, rather 
than the Exchange, in the time and manner established by OPM. The 
fourth modification authorizes HHS to adjust the advance payments for 
cost-sharing reductions during the benefit year. As we acknowledged in 
the proposed rule, QHP issuers will have access to limited data on its 
expected enrollees prior to 2014, which could reduce the accuracy of 
the estimates used to develop the advance payment amounts. Because we 
wish to use the advance payment process to protect QHP issuers from 
being required to bear the entire financial burden of providing cost-
sharing reductions over the benefit year, we are finalizing a change 
from the proposed rule to authorize HHS to adjust the advance payments 
if the QHP issuer provides evidence, certified by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies, that the advance payments for a 
particular QHP are likely to be substantially different than the cost-
sharing reduction amounts provided by the issuer that will be 
reimbursed by HHS after the end of the year during the reconciliation 
process. We discuss this policy further below in relation to Sec.  
156.430(b).
    The fifth modification is to Sec.  156.430(c). As discussed below, 
we are preserving the intent of the provisions proposed at Sec.  
156.430(c)(1) and (2) in finalized paragraphs (c)(1), (2) and (5). This 
restructuring allows for the addition of paragraphs (c)(3), and (4), 
which are established in an interim final rule with comment published 
elsewhere in this issue of the Federal Register. In that interim final 
rule with comment, we describe an approach that would permit a QHP 
issuer to calculate the value of the cost-sharing reductions provided 
under the methodology described in this final rule at Sec.  
156.430(c)(2), or to use an alternative, simplified methodology, under 
which the QHP issuer would calculate the

[[Page 15487]]

value of the cost-sharing reductions provided using certain summary 
cost-sharing parameters. As discussed below and in that interim final 
rule with comment, we believe this flexibility to use an alternative 
methodology will reduce the administrative burden on QHP issuers.
    Comment: We received several comments on our proposed payment 
approach. One commenter supported our proposal to provide advance 
payments and then reconcile those advance payments at the end of the 
benefit year to the actual cost-sharing reduction amounts. Another 
commenter suggested that the advance payment and reconciliation process 
would be too cumbersome and instead, HHS should simply reimburse 
issuers at the end of the year for the actual value of cost-sharing 
reductions provided. A third commenter agreed that an annual 
reconciliation process would be burdensome, and suggested that in the 
initial years the submission of data on the amount of cost-sharing 
reductions provided and the reconciliation of payments should be 
optional. These commenters urged that in future years, HHS should 
reimburse based on monthly estimates of the amount of cost-sharing 
reductions provided.
    Response: We discuss below, in relation to Sec.  156.430(c) and 
(d), our approach for addressing commenters' concerns regarding the 
submission of the amount of cost-sharing reductions provided and the 
reconciliation process.
    To implement our proposed payment approach, in Sec.  
156.430(a)(1)(i) through (iv), we proposed that for each health plan 
that an issuer offers, or intends to offer, in the individual market on 
the Exchange as a QHP, the issuer must provide to the Exchange annually 
prior to the benefit year, for approval by HHS, an estimate of the 
dollar value of the cost-sharing reductions to be provided over the 
benefit year. If the QHP is a silver health plan, the submission must 
identify separately the per member per month dollar value of the cost-
sharing reductions to be provided under each silver plan variation 
identified in Sec.  156.420(a)(1), (2), and (3). And for each QHP, 
regardless of metal level, the submission must identify the per member 
per month dollar value of the cost-sharing reductions to be provided 
under the zero cost sharing plan variation. In addition, the estimate 
should be accompanied by supporting documentation validating the 
estimate. We expect that Exchanges will collect this information from 
issuers through the QHP certification process or an annual submission 
process, and then send the information to HHS for review as required by 
Sec.  156.1030(b)(3) finalized under this rule. Sections 
156.430(a)(1)(ii) and 156.430(a)(2) are further described in section 
III.E.4.i. of this final rule.
    We further proposed that issuers develop the estimates using the 
methodology specified by HHS in the applicable annual HHS notice of 
benefit and payment parameters. In Sec.  156.430(a)(3), we proposed 
that HHS approve estimates that follow this methodology. For the 2014 
benefit year, we proposed that issuers use a methodology that utilizes 
the data that issuers submit under Sec.  156.420 and Sec.  156.470. As 
a result, issuers would not be required under this proposal to submit 
any additional data or supporting documentation to receive advance 
payments in benefit year 2014 for the value of the cost-sharing 
reductions that would be provided under silver plan variations.
    Methodology for Developing Estimate of Value of Cost-Sharing 
Reductions for Silver Plan Variations for 2014 Benefit Year.
    For the 2014 benefit year, we proposed that advance payments be 
estimated on a per enrollee per month basis using the following 
formula:

Per Enrollee Per Month Advance Payment = Monthly Expected Allowed 
Claims Costs for Silver Plan Variation x (Silver Plan Variation AV - 
Standard Plan AV)

    In this formula, the monthly expected allowed claims cost for a 
silver plan variation would equal one-twelfth of the annual expected 
allowed claims costs allocated to EHB, other than services described in 
Sec.  156.280(d)(1),\28\ for the standard silver plan, multiplied by a 
factor to account for the increased utilization that may occur under 
the specific plan variation due to the reduced cost-sharing 
requirements. As proposed in Sec.  156.470, the QHP issuer would submit 
the expected allowed claims cost information to the Exchange annually. 
The Exchange would then review this estimate, and submit the approved 
information to HHS, as described in Sec.  155.1030(b)(2) above, for use 
in the advance payment calculation. HHS would then multiply the monthly 
expected allowed claims cost by one of the following induced 
utilization factors, to arrive at the monthly expected allowed claims 
cost for the particular plan variation. We proposed the following 
induced utilization factors based on our analysis of the expected 
difference in expenditures for enrollees in QHPs of different actuarial 
values. For this analysis, we used the Actuarial Value Calculator, 
developed by HHS using the Health Intelligence Company, LLC (HIC) 
database from calendar year 2010.\29\
---------------------------------------------------------------------------

    \28\ Based on the definition of ``cost sharing'' in 45 CFR 
156.20 and limits on cost-sharing reductions in section 1402(c)(4) 
of the Affordable Care Act, cost-sharing reductions are only 
provided on EHB. In addition, Sec.  156.280(e)(1)(i) states that if 
a QHP provides coverage of services described in paragraph (d)(1) of 
that section, the QHP issuer must not use Federal funds, including 
cost-sharing reductions, to pay for the service.
    \29\ http://cciio.cms.gov/resources/regulations/index.html#pm.

   TABLE 23--Induced Utilization Factors for Purposes of Cost-Sharing
                       Reduction Advance Payments
------------------------------------------------------------------------
                                                              Induced
         Household income              Silver plan AV       utilization
                                                              factor
------------------------------------------------------------------------
100-150 percent of FPL............  Plan Variation 94               1.12
                                     percent.
150-200 percent of FPL............  Plan Variation 87               1.12
                                     percent.
200-250 percent of FPL............  Plan Variation 73               1.00
                                     percent.
------------------------------------------------------------------------

    In the second half of the formula, we proposed the multiplication 
of the monthly expected allowed claims cost for the particular plan 
variation by the difference in AV between the standard silver plan and 
the plan variation. We proposed to use the actuarial values of the QHPs 
and silver plan variations that the Exchange will submit to HHS under 
Sec.  155.1030(a)(2).
    We are finalizing the methodology for determining advance payments 
for the 2014 benefit year as proposed. As noted above, we are also 
adding paragraph (4) to Sec.  156.430(a), clarifying that issuers of 
multi-State plans must provide the estimates described in paragraphs 
(1)

[[Page 15488]]

and (2) of Sec.  156.430(a) to OPM, in the time and manner established 
by OPM.
    In Sec.  156.430(b), we proposed making periodic advance payments 
to issuers based on the approved advance estimates provided under Sec.  
156.430(a) and the actual enrollment information. We proposed to use 
the methodology described above to determine the amount of these 
advance payments. We are finalizing the provisions at Sec.  156.430(a) 
and (b) relating to the advance payments as proposed, with the 
following modification. In response to comments discussed below, we are 
adding subparagraph (b)(2) in the final rule to authorize HHS to adjust 
the advance payment amount for a particular QHP during the benefit year 
if the QHP issuer provides evidence, certified by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies, that the advance payments for a 
particular QHP are likely to be substantially different than the cost-
sharing reduction amounts that the QHP provides that will be reimbursed 
by HHS. Although QHP issuers will be made whole for the value of all 
cost-sharing reductions provided through the reconciliation process 
after the close of the benefit year, we recognize that in certain 
situations, QHP issuers may require adjustments to the advance payments 
during the benefit year. We do not include in this final rule a formal 
process for the submission of information for the adjustment of advance 
payments because we believe the need for an adjustment will be rare, 
and the circumstances necessitating the adjustment will likely be 
unique to each QHP issuer. HHS is also considering other mechanisms for 
mid-year adjustments to advance payments to ensure that QHP issuers are 
provided sufficient advance payments and to safeguard Federal funds. We 
anticipate providing further details on such mechanisms in future 
rulemaking. We also anticipate working closely with QHP issuers in 
order to monitor whether the advance payments are likely to be 
significantly greater than or less than the reconciled cost-sharing 
reduction amounts.
    Comment: We received several comments on the methodology for 
developing estimates of the value of cost-sharing reductions for 
advance payments. One commenter stated that the formula appeared to be 
appropriate and will likely result in accurate estimates. However, the 
commenter was concerned that the formula could produce results that 
vary based on member rating factors.
    Response: As discussed in the proposed Payment Notice in regard to 
the submission of the expected allowed claims costs under Sec.  
156.470(a) and (c), which is the basis of the proposed methodology for 
estimating the value of cost-sharing reductions, we expect issuers to 
calculate the expected allowed claims cost for a plan based on the cost 
of the EHB for all enrollees in all plans in the relevant risk pool 
under Sec.  156.80 of the final Market Reform Rule, and not across a 
standardized population or a plan-specific population. This approach 
should average the effects of the allowable rating factors on plan 
liability. Therefore, we believe the results of the formula will be 
appropriately adjusted for the allowable rating factors.
    Comment: Although commenters generally supported adjusting the 
expected allowed claims costs by an induced utilization factor, one 
commenter stated that the proposed factors do not adequately account 
for changes in utilization as enrollees in plan variations may also use 
more high-cost services.
    Response: We recognize that additional adjustments are necessary to 
account for the expected increased utilization of enrollees in plan 
variations, and as a result created a cost-sharing reduction adjustment 
for the HHS risk adjustment model. As described in section III.B.3.b. 
of this final rule, this factor will help compensate QHP issuers with a 
high number of enrollees that qualify for cost-sharing reductions.
    Comment: We received comments asking for additional detail on the 
process that HHS will use to approve the advance payment amounts. One 
commenter asked that issuers be permitted to make adjustments to the 
advance payment amounts to account for enrollment fluctuations or 
changing demographics of their enrolled population. Another commenter 
suggested that a process be developed to handle discrepancies in the 
advance payments on a prospective basis.
    Response: Section 156.430(a)(3) as finalized here states that HHS's 
approval of the advance payment amounts will be based on whether the 
estimate is made consistent with the methodology specified in the HHS 
notice of benefit and payment parameters.
    In addition, as discussed above, in response to the comments 
received, we are finalizing an additional provision to allow HHS to 
adjust the advance payment amount for a particular QHP during the 
benefit year if the QHP issuer provides evidence that meets certain 
standards. The addition of subparagraph (b)(2) aligns with our goal to 
reduce the financial burden resulting from cost-sharing reductions on 
QHP issuers during the benefit year, our proposal to perform periodic 
reconciliations, and the comments received.
    In Sec.  156.430(c), we proposed that a QHP issuer report to HHS 
the actual amount of cost-sharing reductions provided for use by HHS 
under Sec.  156.430(d) in performing periodic reconciliations of the 
advance payments to the cost-sharing reductions actually provided. We 
noted that additional specifications regarding the submission of actual 
cost-sharing reduction amounts will be provided in future guidance; 
however, the preamble indicated our expectation that QHP issuers will 
submit the actual amount of cost-sharing reductions provided after the 
close of the benefit year. In Sec.  156.430(c)(1) and (c)(2), we 
proposed specific standards for the reporting of cost-sharing reduction 
amounts. In Sec.  156.430(c)(1), we proposed that in the case of a 
benefit for which the QHP issuer compensates the applicable provider in 
whole or in part on a fee-for-service basis, the QHP issuer submit the 
total allowed costs for essential health benefits charged for an 
enrollees' policy for the benefit year, broken down by what the issuer 
paid, what the enrollee paid, and the amount reimbursed to the provider 
for the amount that the enrollee would have paid under the standard QHP 
without cost-sharing reductions. In Sec.  156.430(c)(2), we proposed 
that in the case of a benefit for which the QHP issuer compensates the 
applicable provider in any other manner (such as on a capitated basis), 
the QHP issuer submit the total allowed costs for essential health 
benefits charged for an enrollees' policy for the benefit year, broken 
down by what the issuer paid, what the enrollee paid, and the amount 
that the enrollee would have paid under the standard QHP without cost-
sharing reductions. When we referred to compensation made on a 
capitated basis in this context, we meant a compensation model under 
which issuers make payments to providers based on a contracted rate for 
each enrollee, commonly referred to as a ``per-member-per-month'' rate, 
regardless of the number or type of services provided. We noted that a 
non-fee-for-service provider is not required to be reimbursed by the 
issuer. However, we indicated that we expected that issuers and 
providers in non-fee-for-service arrangements would make available to 
providers compensation for

[[Page 15489]]

cost-sharing reductions through their negotiated capitation payments. 
We sought comments on this assumption and other payment approaches for 
QHPs that use a capitated system to pay providers.
    In Sec.  156.430(d), we proposed to periodically reconcile advance 
payments to issuers against the actual cost-sharing reduction amounts 
reported under Sec.  156.430(c). Thus, where a QHP issuer compensates a 
provider in whole or in part on a fee-for-service basis, we would 
reconcile the advance payments provided to the issuer against the 
actual amount of cost-sharing reductions reimbursed to providers and 
provided to enrollees. Where the QHP issuer compensates a provider 
under another arrangement, such as a capitated arrangement, we would 
reconcile the advance payments made to issuers against the actual cost-
sharing reduction amounts provided to enrollees.
    We are finalizing paragraph (d) as proposed. However, as noted 
before, we are modifying Sec.  156.430(c). We are preserving the intent 
of the provisions proposed at Sec.  156.430(c)(1) and (2), but 
restructuring the provisions into finalized paragraphs (c)(1), (2) and 
(5). This restructuring allows for the addition of paragraphs (c)(3) 
and (4), which are established in an interim final rule with comment 
published elsewhere in this issue of the Federal Register, and 
discussed below.
    In this final rule, we simplify the language proposed at Sec.  
156.430(c)(1) so that it applies to all benefits, including those for 
which the QHP issuer compensates the applicable provider in a manner 
other than fee-for-service. Specifically, we establish that a QHP 
issuer, for each plan variation that it offers on the Exchange, submit 
to HHS, in the manner and timeframe established by HHS, for each 
policy, the total allowed costs for EHB charged for the policy for the 
benefit year, broken down by: (i) The amount the issuer paid; (ii) the 
amount the enrollee(s) paid; and (iii) the amount the enrollee(s) would 
have paid under the standard plan without cost-sharing reductions. In 
paragraph (c)(2), we codify in regulation text the methodology 
discussed in the preamble of the proposed rule for calculating the 
amount the enrollee(s) would have paid under the standard plan without 
cost-sharing reductions. We specify that QHP issuers must apply the 
actual cost-sharing requirements for the standard plan to the allowed 
costs for EHB under the enrollee's policy for the benefit year.
    Lastly, we establish in paragraph (c)(5) that in the case of a 
benefit for which the QHP issuer compensates an applicable provider in 
whole or in part on a fee-for-service basis, allowed costs associated 
with the benefit may be included in the calculation of the amount that 
an enrollee(s) would have paid under the standard plan without cost-
sharing reductions only to the extent the amount was either payable by 
the enrollee(s) as cost sharing under the plan variation or was 
reimbursed to the provider by the QHP issuer. This provision has the 
same effect as the language in Sec.  156.430(c)(1) of the proposed 
rule. Although we do not specify a similar provision for issuers and 
providers in non-fee-for-service arrangements, we expect that those 
issuers will compensate providers for cost-sharing reductions through 
other payment processes.
    Comment: We received a number of comments stating that the 
reporting requirements under Sec.  156.430(c) are too burdensome. 
Commenters noted that although the reporting and reconciliation process 
is appropriate for the Medicare Part D Low-Income Subsidy Program, 
medical benefits are more complex than pharmaceutical benefits and 
often have a longer lag between submission and adjudication. Commenters 
stated that to meet the reporting requirements under Sec.  156.430(c), 
QHP issuers would need to re-adjudicate each claim for enrollees 
receiving cost-sharing reductions in order to determine the difference 
in cost sharing between the applicable plan variation and the standard 
plan. This process could require the development of new information 
systems in a short period of time. One commenter stated that QHP 
issuers could provide HHS with access to member-level claims data for 
enrollees receiving cost-sharing reductions through a distributed data 
model, similar to the approach used for the risk adjustment program. 
The commenter stated that this would simplify administrative processes 
and provide issuers with more time to modify their IT systems. We also 
received several comments suggesting that HHS should allow QHP issuers 
to calculate an estimate of the value of cost-sharing reductions at the 
end of the year using a formula similar to that used for the advance 
payments, but based on the actual claims experience of the enrollees. 
These calculated amounts could be used for a reconciliation process, 
and would place less of a reporting burden on issuers. Commenters also 
offered another alternative approach under which issuers would file 
with the appropriate State department of insurance an adjusted net 
claims rate for each of their plan variations. HHS would then reimburse 
QHP issuers for cost-sharing reductions by multiplying the number of 
enrollees in each plan variation by the difference in net claims for 
the plan variation and the standard plan. Commenters also requested 
additional guidance on the reporting and reconciliation process.
    Response: In the initial years of the Exchanges, before adequate 
data is available on the costs that will be associated with QHPs and 
their plan variations, we believe it is necessary to balance the need 
to safeguard Federal funds and the need to minimize burden on issuers. 
Therefore, as noted above, we are restructuring Sec.  156.430(c) to 
allow for the addition of paragraphs (c)(3) and (4), which are 
established in an interim final rule with comment published elsewhere 
in this issue of the Federal Register. Paragraph (c)(3) permits QHP 
issuers to choose to calculate the amounts that would have been paid 
under the standard plan without cost-sharing reductions using a 
simplified methodology. Under this simplified methodology, as described 
in paragraph (c)(4), a QHP issuer may calculate the value of the cost-
sharing reductions provided by using a formula based on certain summary 
cost-sharing parameters of the standard plan, applied to the total 
allowed costs for each policy. We believe this amendment will allow QHP 
issuers to choose the methodology that best aligns with their 
operational practices, which should reduce the administrative burden on 
issuers in the initial years of the Exchanges.
    Comment: We received several comments stating that both the advance 
payments and the reconciliation process should account for the full 
cost of any induced utilization resulting from the cost-sharing 
reductions.
    Response: Section 1402(c)(3) provides for the Secretary of HHS to 
make payments to QHP issuers equal to the value of the cost-sharing 
reductions. We interpret this provision to require the Secretary to 
reimburse QHP issuers for the reduction in cost sharing associated with 
any induced utilization; however, we do not believe this provision 
provides for the reimbursement of the remaining plan liability 
resulting from any induced utilization. Therefore, we finalize the 
payment methodology as proposed.
    Comment: In response to the provisions proposed in Sec.  156.430(c) 
under which QHP issuers would submit to HHS the portion of the total 
allowed costs for EHB paid by the enrollee, one commenter noted that 
issuers cannot report this amount with certainty since

[[Page 15490]]

the provider ultimately collects this amount from the enrollee.
    Response: We clarify that QHP issuers should report the amount that 
a provider could charge to an enrollee, accounting for the cost-sharing 
reduction. We also clarify that the amount reported as paid by the 
enrollee should include any cost sharing paid by a third party, 
including a State, on behalf of the enrollee.
    Comment: We received several comments that the reporting 
requirements under Sec.  156.430(c) will be difficult for issuers to 
meet that do not use fee-for-service reimbursement methods. Commenters 
suggested that such issuers should receive capitated payments and be 
exempt from the reconciliation process.
    Response: We support the use of such payment methods by issuers to 
pay providers; therefore, the restriction finalized at Sec.  
156.430(c)(5) does not apply to issuers that do not use fee-for-service 
reimbursement methods. However, we believe that these plans must still 
reconcile the advance cost-sharing reductions payments they receive 
from the Federal government.
    Comment: Another commenter proposed that QHP issuers make available 
to providers the amounts reported under Sec.  156.430(c). The commenter 
stated that this information would allow providers to verify that 
enrollees received the correct cost-sharing reductions and to identify 
any inappropriate payments from QHP issuers.
    Response: At this time, we are not addressing this issue, but 
encourage QHP issuers and providers to develop processes to support the 
provision of cost-sharing reductions.
    We proposed in Sec.  156.430(e) that if the actual amounts of cost-
sharing reductions exceed the advance payment amounts provided to the 
issuer, HHS would reimburse the issuer for the shortfall, assuming that 
the issuer has submitted its actual cost-sharing reduction amounts to 
HHS in accordance with Sec.  156.430(c). If the actual amounts of cost-
sharing reductions are less than the advance payment amounts provided 
to the issuer, we proposed that the QHP issuer must repay the 
difference to HHS.
    In Sec.  156.430(f), we proposed rules on advance payment and 
reimbursement of cost-sharing reductions during special transitional 
periods of coverage where eligibility and enrollment are uncertain, 
including requirements relating to cost-sharing reductions provided 
during grace periods following non-payment of premium. In Sec.  
156.430(f)(1), we proposed that a QHP issuer will be eligible for 
reimbursement of cost-sharing reductions provided prior to a 
termination of coverage effective date. Furthermore, any advance 
payments of cost-sharing reductions would be paid to a QHP issuer for 
coverage prior to a determination of termination, including during any 
grace period as described in Sec.  155.430(b)(2)(ii)(A) and (B). The 
determination of termination occurs on the date that the Exchange sends 
termination information to the QHP issuer and HHS under Sec.  
155.430(c)(2). The QHP issuer would be required to repay any advance 
payments of cost-sharing reductions made with respect to any month 
after any termination of coverage effective date during a grace period. 
A QHP issuer generally would not be eligible for reimbursement of cost-
sharing reductions provided after the termination of coverage effective 
date with respect to a grace period. This proposed policy aligns with 
the approach for advance payments of the premium tax credit described 
in Sec.  156.270(e).
    We proposed in Sec.  156.430(f)(2) and (3) that in the case of any 
other retroactive termination, if the termination (or late 
determination thereof) is the fault of the QHP issuer, as reasonably 
determined by the Exchange, the QHP issuer would not be eligible for 
advance payments and reimbursement for cost-sharing reductions provided 
during the period following the termination of coverage effective date 
and prior to the determination of the termination; and if the 
termination (or the late determination thereof) is not the fault of the 
QHP issuer, as reasonably determined by the Exchange, the QHP issuer 
would be eligible for advance payments and reimbursement for cost-
sharing reductions provided during such period.
    In Sec.  156.430(f)(4), we proposed that a QHP issuer would be 
eligible for advance payments and reimbursement of cost-sharing 
reductions provided during any period for resolution of inconsistencies 
in information required to determine eligibility for enrollment under 
Sec.  155.315(f).
    We are finalizing these provisions as proposed.
    Comment: In general, commenters expressed their support for the 
policies set forth at Sec.  156.430(f), but asked for clarification on 
the application of the grace period in relation to cost-sharing 
reductions. Commenters noted that in many states, issuers are not 
permitted to pend claims, and that pharmaceutical claims in particular 
are typically processed at the time and place of service. Other 
commenters stated that QHP issuers should not be permitted to pend 
claims because it shifts the collection burden to health care 
providers. Commenters also requested clarification on whether QHP 
issuers may pend cost-sharing reductions during the second and third 
months of a grace period.
    Response: The Exchange Establishment Final Rule, at Sec.  
156.270(d), authorizes QHP issuers to pend or pay claims during the 
second and third month of a grace period in accordance with company 
policy and State laws. However, as provided in Sec.  156.270(d)(3), QHP 
issuers must notify providers of the possibility for denied claims when 
an enrollee is in the second and third months of the grace period. We 
continue to believe this policy appropriately balances these financial 
risks, while protecting enrollees. We clarify that we expect QHP 
issuers to ensure throughout the grace period that cost-sharing 
reductions are applied at the point of collection for eligible 
enrollees, as required by Sec.  156.410(a) as finalized here. If an 
enrollee's coverage is terminated, QHP issuers may deny any claims that 
were pending, including the reimbursement to the provider for the value 
of the cost-sharing reductions. Providers could then seek payment 
directly from the enrollee for any services provided after the 
termination of coverage, including a refund for the cost-sharing 
reduction. For a discussion of the standards finalized at Sec.  
156.430(b), (d) and (g) in relation to cost-sharing reductions for 
Indians, please refer to section III.E.4.i below.
f. Plans Eligible for Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    In Sec.  156.440, we clarified the applicability of advance 
payments of the premium tax credit and cost-sharing reductions to 
certain QHPs. We proposed that the provisions of part 156 subpart E 
generally apply to qualified health plans offered in the individual 
market on the Exchange.
    However, we proposed in Sec.  156.440(a) that the provisions not 
apply to catastrophic plans because section 36B(c)(3)(A) of the Code 
defines a QHP to exclude catastrophic plans--a definition that also 
applies to section 1402 of the Affordable Care Act, by means of section 
1402(f)(1) of the Affordable Care Act. Further, eligibility for cost-
sharing reductions is tied to a ``coverage month with respect to which 
a premium tax credit is paid,'' which would exclude months during which 
the individual is enrolled in a catastrophic health plan. Therefore, we 
proposed that enrollment in a

[[Page 15491]]

catastrophic plan precludes eligibility for cost-sharing reductions.
    We proposed in Sec.  156.440(b) that the provisions of subpart E, 
to the extent related to cost-sharing reductions, not apply to stand-
alone dental plans. Section 1311(d)(2)(B)(ii) of the Affordable Care 
Act provides that an Exchange must allow a stand-alone dental plan that 
provides pediatric dental benefits that are EHB to be offered 
separately from or in conjunction with a QHP. The Exchange 
Establishment Rule, at Sec.  155.1065, implements these provisions. 
However, section 1402(c)(5) of the Affordable Care Act states if an 
individual enrolls in both a QHP and a stand-alone dental plan, the 
provisions on cost-sharing reductions under sections 1402(a) and (c) of 
the Affordable Care Act do not apply to that portion of the cost-
sharing reductions properly allocable to pediatric dental EHB. Thus, if 
an individual enrolls in both a QHP and a stand-alone dental plan 
offered on an Exchange, cost-sharing reductions are not payable with 
respect to pediatric dental benefits offered by the stand-alone dental 
plan.
    In Sec.  156.440(b), we also proposed that the provisions of 
subpart E, to the extent relating to advance payments of the premium 
tax credit, apply to stand-alone dental plans because section 
36B(b)(3)(E) of the Code provides for the portion of the premium for 
such plans that is allocable to EHB coverage be taken into account in 
calculating the premium tax credit.
    We proposed to clarify in Sec.  156.440(c) that the provisions of 
this subpart E apply to child-only plans. Section 1302(f) of the 
Affordable Care Act and Sec.  156.200(c)(2) provide that an issuer that 
offers a QHP at any level of coverage in an Exchange also must offer 
the plan at the same level of coverage in the Exchange only to 
individuals that have not attained age 21. Under section 1302(f) of the 
Affordable Care Act, the child-only plan is to be treated as a QHP, and 
is therefore subject to the provisions of subpart E. We are finalizing 
these provisions as proposed with minor technical corrections in 
paragraphs (a) and (c) to clarify the cross-references.
    Comment: One commenter was concerned with the exclusion of stand-
alone dental plans from the cost-sharing reduction program. The 
commenter stated that, because pediatric dental coverage is a required 
essential health benefit and the statute guarantees cost-sharing 
reductions for eligible individuals for essential health benefits, 
cost-sharing reductions should apply to stand-alone dental plans.
    Response: We read section 1402(c)(5) of the Affordable Care Act to 
provide that cost-sharing reductions are not payable with respect to 
pediatric dental benefits offered by a stand-alone dental plan. 
Additionally, requiring payment of cost-sharing reductions on pediatric 
dental benefits offered by a stand-alone dental plan would create 
significant operational complexities. However, cost-sharing reductions 
will be provided for pediatric dental benefits if they are offered by a 
QHP (that is not a stand-alone dental plan).
g. Reduction of Enrollee's Share of Premium To Account for Advance 
Payments of the Premium Tax Credit
    In Sec.  156.460(a), we proposed to codify QHP issuer requirements 
set forth in section 1412(c)(2)(B) (i)--(iii) of the Affordable Care 
Act. The law authorizes the payment of advance tax credits to QHP 
issuers on behalf of certain eligible enrollees. The advance payment 
must be used to reduce the portion of the premium charged to enrollees. 
In Sec.  156.460(a)(1), we proposed to codify clause (i) of that 
subparagraph, which requires that a QHP issuer reduce the portion of 
the premium charged to the enrollee by the amount of the advance 
payment of the premium tax credit for the applicable month(s).
    In Sec.  156.460(a)(2), we proposed to codify section 
1412(c)(2)(B)(ii) of the statute, which requires that the QHP issuer 
notify the Exchange of any reduction in the portion of the premium 
charged to the individual. This notification will be sent to the 
Exchange through the standard enrollment acknowledgment in accordance 
with Sec.  156.265(g). That information would then be submitted to the 
Secretary via enrollment information sent from the Exchange to HHS 
under Sec.  155.340(a)(1).
    In Sec.  156.460(a)(3), we proposed to codify section 
1412(c)(2)(B)(iii), which requires that a QHP issuer display the amount 
of the advance payment of the premium tax credit for the applicable 
month(s) on an enrollee's billing statement. This requirement would 
ensure that the enrollee is aware of the total cost of the premium and 
would allow the enrollee to verify that the correct amount for the 
advance payment of the premium tax credit has been applied to his or 
her account.
    Further, in Sec.  156.460(b), we proposed to prohibit QHP issuers 
from terminating or refusing to commence coverage on account of any 
delay in payment of an advance premium tax credit on behalf of an 
enrollee if the issuer has been notified by the Exchange under Sec.  
155.340(a) that it will receive such advance payment. We stated that we 
expect that monthly advance payments of the premium tax credit will be 
paid in the middle of the month, and proposed to prohibit QHP issuers 
from declining or terminating coverage when the enrollee's payments 
have been timely but the advance payments of the premium tax credit are 
not made before the due date for the premium.
    We also proposed to add paragraph (f) to Sec.  155.340 (which we 
designated as Sec.  155.340(g) in this final rule), which sets forth 
standards for an Exchange when it is facilitating the collection and 
payment of premiums to QHP issuers and stand-alone dental plans on 
behalf of enrollees, as permitted under Sec.  155.240(c). Consistent 
with Sec.  156.460(a), proposed Sec.  155.340(f)(1) would direct the 
Exchange to reduce the portion of the premium for the policy collected 
from the enrollee by the amount of the advance payment of the premium 
tax credit for the applicable month(s). Proposed Sec.  155.340(f)(2) 
directs an Exchange to display the amount of the advance payment of the 
premium tax credit for the applicable month(s) on an enrollee's billing 
statement. Collectively, proposed Sec.  155.340(f) and Sec.  156.460 as 
proposed ensure that an enrollee is aware of the total cost of the 
premium so that he or she may verify that the correct advance payment 
of the premium tax credit has been applied. The goals of these 
provisions are to promote transparency between Exchanges or QHP issuers 
and consumers, accurate application of advance payments of the premium 
tax credit, and continuity of coverage for individuals. For the reasons 
described in the proposed rule and considering the comments received, 
we are finalizing Sec.  156.460 as proposed, and are finalizing 
proposed Sec.  155.340(f) as Sec.  155.340(g).
    Comment: A number of commenters stated their support for these 
provisions directing QHP issuers and Exchanges facilitating the 
collection and payment of premiums to reduce premiums collected from 
enrollees by the amount of the advance payments of the premium tax 
credit. The commenters also supported having QHP issuers and Exchanges 
display the advance payment of the premium tax credit on enrollees' 
billing statements. One commenter urged HHS to test the format of the 
billing statement to ensure it is clear to consumers. Several 
commenters also supported the proposed prohibition on a QHP issuer 
terminating coverage following a delay in the issuer's receipt of 
advance payments of the premium tax credit if the issuer has been 
notified by the Exchange that it will receive the payment. One 
commenter stated that

[[Page 15492]]

HHS should implement a process to ensure that individuals prematurely 
terminated in violation of such a provision have coverage reinstated 
quickly.
    Response: Although at this time we do not intend to propose 
additional requirements related to the format of billing statements, we 
encourage Exchanges and QHP issuers to test billing statement formats 
with consumers to ensure that the purpose of the document is clear. We 
appreciate the comment that we implement a process to quickly correct 
instances of premature termination. We will take this into 
consideration in future rulemaking.
h. Allocation of Rates and Claims Costs for Advance Payments of Cost-
Sharing Reductions and the Premium Tax Credit
    As described in section III.E.2. of this final rule, we proposed in 
Sec.  156.470 to direct issuers to allocate the rate or expected 
premium for each metal level health plan and stand-alone dental plan 
offered, or proposed to be offered, in the individual market on the 
Exchange, and the expected allowed claims costs for the metal level 
health plans, among EHB and additional benefits. Under the proposal, 
issuers would submit these allocations annually to the Exchange, along 
with an actuarial memorandum with a detailed description of the methods 
and specific bases used to perform the allocations. The Exchange and 
HHS would use this memorandum to verify that these allocations meet the 
standards set forth in paragraphs (c) and (d) of Sec.  156.470.
    The comments on the provisions at Sec.  156.470, and our response, 
are discussed in section III.E.2. of this final rule. We are finalizing 
the provisions proposed in Sec.  156.470, with a modification to 
paragraph (d), and technical modifications to Sec.  156.470(a),(b), and 
(e). We are also adding paragraph (f) to Sec.  156.470 to clarify the 
application of these provisions to multi-State plans.
i. Special Cost-Sharing Reduction Rules for Indians
    In this section, we address certain provisions throughout proposed 
subpart E governing cost-sharing reductions for Indians.
    Interpretation of section 1402(d)(2) of the Affordable Care Act: In 
the proposed rule, we discussed in detail our interpretation of 
sections 1402(d)(1), 1402(d)(2), and 1402(f)(2) of the Affordable Care 
Act. The implication of these interpretations is that cost-sharing 
reductions under sections 1402(a) and 1402(d)(1) of the Affordable Care 
Act are only available to individuals who are eligible for premium tax 
credits. However, we stated that under our interpretation, cost-sharing 
reductions under section 1402(d)(2) of the Affordable Care Act would be 
available to Indians regardless of their eligibility for premium tax 
credits. This approach aligns with the typical practice today, under 
which cost sharing is not required with respect to services provided to 
an Indian by the IHS, an Indian Tribe, Tribal Organization, or Urban 
Indian Organization.
    We also noted that section 1402(d) of the Affordable Care Act 
specifies that reductions in cost sharing must be provided to Indians 
who purchase coverage on the Exchange. Although section 1402(d)(1) of 
the Affordable Care Act applies only to the individual market, section 
1402(d)(2) of the Affordable Care Act does not contain this explicit 
restriction. We proposed to interpret section 1402(d)(2) of the 
Affordable Care Act to apply only to the individual market because we 
believe section 1402(d)(2) flows from and builds upon the 
identification of ``any qualified health plans'' made in section 
1402(d)(1) and because we believe that Congress did not intend for 
reductions in cost sharing to be available outside the individual 
market Exchanges. We are finalizing this interpretation of the statute, 
which underlies the provisions implementing cost-sharing reductions for 
Indians.
    Comment: Several commenters recommended that HHS issue uniform 
operational guidance on the identification of Indians for use by 
Exchanges and by the IRS that is consistent with the existing HHS 
regulations under 42 CFR 447.50. Commenters expressed concern that the 
lack of uniform operational guidance will impede Exchange, Medicaid, 
and IRS staff in efficiently making accurate and consistent 
determinations of eligibility and will result in delayed or denied 
access for some Indians to specific benefits afforded them under the 
Affordable Care Act.
    Response: The definition proposed for Indian in Sec.  156.400 has 
the meaning given the term in Sec.  155.330(a). We also note that Sec.  
155.350 of the Exchange Establishment Rule currently provides guidance 
on the verification of Indian status. Further guidance on this issue is 
outside the scope of this Payment Notice.
    Proposed provisions of part 156 relating to Indians: Similar to 
cost-sharing reductions for non-Indians, we proposed to use the concept 
of plan variations to describe how Indians would pay only limited, or 
as appropriate, none of the total cost sharing required under that QHP, 
with the Federal government bearing the remaining cost-sharing 
obligation. Our proposed regulations cross-referenced the eligibility 
regulations at Sec.  155.305(g), as finalized here, and Sec.  
155.350(b), finalized in the Exchange Establishment Rule. In Sec.  
156.410(b)(2), we proposed that a QHP issuer assign an Indian 
determined by the Exchange to have an expected household income that 
does not exceed 300 percent of the FPL to a zero cost sharing plan 
variation of the selected QHP (no matter the level of coverage) with no 
cost sharing, based on the enrollment and eligibility information 
submitted to the QHP issuer by the Exchange. In Sec.  156.410(b)(3), we 
proposed that a QHP issuer assign an Indian determined eligible by the 
Exchange for cost-sharing reductions under section 1402(d)(2) of the 
Affordable Care Act to a limited cost sharing plan variation of the 
selected QHP (no matter the level of coverage) with no cost sharing 
required on benefits received from the IHS and certain other providers.
    The assignments to the plan variations would be subject to Sec.  
155.305(g)(3), which governs plan variation placement decisions when a 
single policy covers two or more individuals who are eligible for 
different levels of cost-sharing reductions. In the preamble, we also 
discussed an alternative approach to the provision of cost-sharing 
reductions for Indians. Rather than requiring QHP issuers to assign 
Indians to zero and limited cost sharing plan variations, QHP issuers 
would simply assign Indians to the standard plan (or as appropriate, 
silver plan variation), and waive the cost-sharing requirements, as 
appropriate. We proposed the approach first described above, but sought 
comments on which approach HHS should adopt beginning January 1, 2016. 
For the reasons described in the proposed rule, and considering the 
comments we received, we are finalizing the policy as proposed, though 
we continue to welcome comments on what approach HHS should adopt for 
benefit year beginning on or after January 1, 2016.
    Comment: Several commenters expressed their support for the 
proposed policy at Sec.  155.305(g)(3), noting that the alternative 
approach would be difficult to administer and would require QHP issuers 
to make significant changes to their claims systems because issuers 
today are not able to administer member-based cost-sharing rules. One 
commenter was concerned that it would be difficult for issuers to waive 
cost sharing for Indians at or below 300

[[Page 15493]]

percent of FPL at the point of service under the alternate approach.
    Other commenters, however, expressed concern that the proposed 
approach would require families with Indian members and non-Indian 
members to purchase multiple plans in order for each family member to 
receive the full value of the cost-sharing reductions to which they are 
entitled. Commenters stated that under this policy, the cost savings 
available to Indians could be negated by shifting the liability to 
other non-eligible family members.
    A number of commenters recommended a different approach to address 
the potential increase in costs to be paid by Indian and non-Indian 
members who elect to enroll in different plans in order to take full 
advantage of the cost-sharing reductions available to them. These 
commenters recommended that if family members are enrolled in separate 
plan variations, the combination of the premiums be required to be no 
greater than the premium the family would pay if all members were 
enrolled in the same plan variation. They also recommended that the 
maximum out-of-pocket liability for the plan variation in which the 
non-Indians enrolled be set at a proportion of the maximum liability of 
a single family plan. These commenters also suggested that HHS should 
implement the alternative approach sooner than 2016.
    Response: We will consider adopting the approach recommended by 
commenters for future benefit years; however, given the current 
timeframe and operational concerns, we believe that for the 2014 
benefit year it is infeasible to require issuers to submit plan 
variations that take into account cost-sharing obligations for Indian 
and non-Indian family members covered under a single QHP policy. 
Therefore, in accordance with the policy in the proposed rule that we 
are finalizing here, the assignment of Indians to plan variations would 
be subject to Sec.  155.305(g)(3). If we propose to change the policy 
for years beginning in 2016, we will provide issuers with sufficient 
notice and opportunity to comment to effectuate the required 
operational change.
    In Sec.  156.420(b), we proposed that QHP issuers submit to the 
Exchange the zero cost sharing plan variation and limited cost sharing 
plan variation for each of the QHPs (at any level of coverage) that it 
intends to offer on the Exchange. The zero cost sharing plan 
variation--addressing cost-sharing reductions under section 1402(d)(1) 
of the Affordable Care Act and available to Indians with expected 
household incomes that do not exceed 300 percent of the FPL, as 
determined under Sec.  155.350(a)--must have all cost sharing 
eliminated. The limited cost sharing plan variation--addressing cost-
sharing reductions under section 1402(d)(2) of the Affordable Care Act 
and available to all Indians as determined in Sec.  155.350(b)--must 
have no cost sharing on any item or service furnished directly by the 
IHS, an Indian Tribe, Tribal Organization, Urban Indian Organization, 
or through referral under contract health services, as defined in 25 
U.S.C. 1603. We noted that unlike silver plan variations, zero cost 
sharing plan variations and limited cost sharing plan variations must 
only be submitted for certification when the standard plan is submitted 
for QHP certification.
    In Sec.  156.420(d), we proposed language similar to that proposed 
in Sec.  156.420(c) for silver plan variations--that the zero cost 
sharing plan variations and limited cost sharing plan variations cover 
the same benefits and include the same providers as the standard QHP, 
and require the same out-of-pocket spending for benefits other than 
EHB. We also proposed that a limited cost sharing plan variation, which 
would have no cost sharing on any item or service furnished directly by 
the IHS, Indian Tribe, Tribal Organization, or Urban Indian 
Organization, or through referral under contract health services, must 
have the same cost sharing on items or services not described in Sec.  
156.420(b)(2) as the QHP with no cost-sharing reductions.
    Lastly, we proposed that zero cost sharing plan variations and 
limited cost sharing plan variations be subject to all standards 
applicable to the standard QHP (except for the requirement that the 
plan have an AV as set forth in Sec.  156.140(b)). We are finalizing 
these provisions as proposed with two modifications. With regard to the 
submission of plan variations under Sec.  156.420(b), we are revising 
the language to align with the language in Sec.  156.420(a), and Sec.  
156.470(a) and (b) as finalized. We are also adding paragraph (g) to 
Sec.  156.420 to clarify the applicability of these provisions to 
multi-State plans.
    Comment: We received a comment stating that QHP issuers should not 
be required to count the cost sharing that an enrollee in a zero cost 
sharing plan variation would have paid towards the annual limitation on 
cost sharing, stating that this would require a manual process which 
would be resource-intensive and result in errors.
    Response: We clarify that for purposes of administering the plan 
variations and providing cost-sharing reductions, QHP issuers are not 
required to apply any cost sharing that an enrollee would have been 
required to pay under the standard plan but was not required to pay 
under the plan variation to the annual limitation on cost sharing. 
However, any cost sharing that an enrollee is required to pay (for 
example, for those in the limited cost sharing plan variation, cost 
sharing for services provided by non-IHS or related providers), would 
count towards the annual limitation on cost sharing. This would also 
apply to silver health plans when there is no cost sharing for a 
benefit or service.
    Comment: We received a comment in relation to the policy proposed 
at Sec.  156.410(a), requiring QHP issuers to ensure than an individual 
eligible for cost-sharing reductions pay only the cost sharing required 
of an eligible individual when the cost sharing is collected. The 
commenter suggested that this language might be confusing since in many 
cases, individuals assigned to a zero cost sharing plan variation or a 
limited cost sharing plan variation will have no cost sharing. The 
commenter also suggested that QHP issuers should provide information 
electronically to providers concerning an individual's cost-sharing 
protections.
    Response: We are finalizing the regulation as proposed without 
modification, though we clarify that a QHP issuer would be required to 
ensure that an individual assigned to a zero cost sharing plan 
variation must not be required to pay any cost sharing at the time when 
cost sharing would normally be collected. Similarly, a QHP issuer must 
ensure that an individual assigned to a limited cost sharing plan 
variation must not be required to pay any cost sharing at the time when 
cost sharing would normally be collected if the individual receives 
services or items from IHS or a related provider.
    Comment: Several commenters stated that cost-sharing reductions for 
Indians should not be limited to EHB. Commenters stated that the cost-
sharing exemptions for Indians in section 1402(d) of the Affordable 
Care Act were enacted as distinct, special provisions for Indians and 
are not subject to the general cost sharing limitation to EHB in 
section 1402(c)(4) of the Affordable Care Act.
    Response: We interpreted and implemented section 1301(c) of the 
Affordable Care Act to limit the definition of cost sharing to EHB when 
finalizing Sec.  155.20 of the Exchange Establishment Rule. The 
regulation defines ``cost sharing'' as any expenditure required by or 
on behalf of an enrollee with respect to EHB.

[[Page 15494]]

Further, section 1402(c)(4) of the Affordable Care Act provides that 
all cost-sharing reductions under that section are applicable only to 
cost-sharing for EHB and not for additional benefits.
    Comment: Several commenters raised concerns that providers would be 
confused regarding the payment they can expect from QHP issuers when an 
Indian is referred through the contract health services program to an 
out-of-network provider, or when an Indian is not enrolled in a QHP. 
Some commenters requested further clarification on the definition of 
``contract health services.''
    Response: We are working to ensure that referrals through the 
contract health services program are processed in accordance with the 
standards in this final rule in a manner that is clear to providers and 
QHP issuers. In addition, we note that ``contract health services'' is 
defined under 25 U.S.C. section 1603, and we do not propose to codify 
this definition in the final rule.
    In addition, we note that the proposed Medicaid and Exchange 
Eligibility Appeals and Notices Rule proposes to codify a prohibition 
in section 1916(j) of the Social Security Act on imposing premiums or 
cost sharing on an Indian who is eligible to receive or has received 
and item or service furnished directly by the Indian Health Service, an 
Indian Tribe, Tribal Organization, or Urban Indian Organization, or 
through referral under contract health services. We note the similarity 
in the statutory language, but note the different income levels and 
benefits provided under the respective statutes. We intend to continue 
to review this issue and anticipate issuing guidance to address the 
operational concerns raised by the commenters.
    Comment: Several commenters suggested that issuers should be 
permitted to submit zero cost sharing plan variations at only one metal 
level, unless there are significant differences in plan design such as 
prescription drug formularies, provider networks or covered benefits 
between metal levels. These commenters noted that it is unlikely that 
an individual will choose a higher cost plan in that situation because 
the lower metal level plan will provide the same benefits and networks, 
at a lower premium and with no cost sharing. One commenter suggested 
that QHP issuers could administer cost-sharing reductions for Indians 
regardless of income on a case-by-case basis.
    Response: We recognize that there is no practical need to ensure 
that eligible Indians have access to higher metal level plans if a 
lower metal level plan offers identical benefits and networks, at a 
lower premium and with no cost sharing. We also recognize the burden on 
QHP issuers of developing plan variations that provide no additional 
benefit to enrollees. Finally, we do not wish to unnecessarily task 
Exchanges with certifying such plan variations. Therefore, we clarify 
that HHS will deem an Exchange to be adequately enforcing the 
requirements of Sec.  156.420(b)(1) if, within a set of standard plans 
offered by an issuer that differ only by the cost sharing or premium 
(that is, the benefits, networks, and all other aspects of the standard 
plans are exactly the same), the Exchange allows the issuer to submit 
one zero cost sharing plan variation for only the standard plan within 
the set with the lowest premium. If an issuer offers standard plans 
with different benefits or networks, each set of standard plans must 
have a zero cost sharing plan variation. We do not propose to extend 
this interpretation to the submission of limited cost sharing plan 
variations because these variations may still have cost sharing, which 
could vary among standard plans. We note that for 2014, for operational 
reasons, the FFE will still require QHP issuers to submit a zero cost 
sharing plan variation for any level of coverage that the QHP issuer 
seeks certification. While this operational limitation for 2014 does 
present additional data inputs, we do not expect it to require 
additional analysis by issuers because the content of the submissions 
would be identical except for cost sharing, which would be eliminated 
for the zero cost sharing plan variation. We will consider changing 
this approach in later benefit years through future rulemaking.
    Section 1402(d)(3) of the Affordable Care Act directs the Secretary 
to pay a QHP issuer the amount necessary to reflect the increase in AV 
of a QHP required by reason of the changes in cost sharing for Indians 
under section 1402(d) of the Affordable Care Act. We proposed to use 
the same payment approach to reimburse cost-sharing reductions for 
Indians under section 1402(d) of the Affordable Care Act as we proposed 
to use for cost-sharing reductions provided to eligible individuals 
with household incomes between 100 and 250 percent of the FPL under 
section 1402(a) of the Affordable Care Act. That is, we proposed that 
QHP issuers submit estimates for the dollar value of the cost-sharing 
reductions to be provided under the zero cost sharing plan variation 
and limited cost sharing plan variations in order to receive advance 
payments, and then reconcile the advance payments to the actual cost-
sharing reduction amounts. This unified approach satisfies both the 
requirement for ``periodic and timely payments equal to the value of 
the reductions'' under section 1402(c)(3) of the Affordable Care Act, 
and payment of ``the amount necessary to reflect the increase in AV of 
the plan'' under section 1402(d)(3) of the Affordable Care Act. We are 
finalizing the payment approach as proposed, with one amendment at 
Sec.  156.430(g) relating to compensation for items and services 
provided directly by the Indian Health Service, an Indian Tribe, Tribal 
Organization, or Urban Indian Organization, or through referral under 
contract health services.
    In Sec.  156.430(a)(1)(ii), we proposed that for each metal level 
QHP that an issuer offers, or intends to offer in the individual market 
on the Exchange, the issuer must provide to the Exchange annually prior 
to the benefit year, for approval by HHS, estimates, and supporting 
documentation validating the estimates, of the per member per month 
dollar value of cost-sharing reductions to be provided under the zero 
cost sharing plan variation. These estimates must be developed using 
the methodology specified by HHS in the applicable annual HHS notice of 
benefit and payment parameters. We proposed that issuers use the same 
methodology described above for estimating advance payments for the 
cost-sharing reductions provided under silver plan variations for 
estimating advance payments for the cost-sharing reductions provided 
under the zero cost sharing plan variation. This methodology would 
utilize data that QHP issuers submit for other requirements, such as 
Sec.  156.420 and Sec.  156.470. As a result, QHP issuers would not be 
required under the proposal to submit separate estimates or supporting 
documentation to receive advance payments in benefit year 2014 for the 
value of the cost-sharing reductions that would be provided under the 
zero cost sharing plan variation.
    As in the case of silver plan variations, the following formula 
would be used:

Per Enrollee Per Month Advance Payment
= Monthly Expected Allowed Claims Costs for Zero Cost Sharing Plan 
Variation
x (Zero Cost Sharing Plan Variation AV--Standard Plan AV)

    In this formula, the monthly expected allowed claims cost for the 
zero cost sharing plan variation would equal one-twelfth of the 
expected allowed claims

[[Page 15495]]

costs allocated to EHB, other than services described in Sec.  
156.280(d)(1), for the standard plan, multiplied by a factor to account 
for the increased utilization that may occur under the zero cost 
sharing plan variation due to the elimination of the cost-sharing 
requirements. As proposed at Sec.  156.470, the QHP issuer would submit 
the expected allowed claims cost information to the Exchange annually. 
The Exchange would then review this allocation, and submit the approved 
allocation to HHS, as described in Sec.  155.1030(b)(2), for use in the 
advance payment calculation. HHS would then multiply the monthly 
expected allowed claims cost by the induced utilization factor, to 
arrive at the monthly expected allowed claims cost for the zero cost 
sharing plan variation. We proposed the following induced utilization 
factors for the zero cost sharing plan variation, based on our analysis 
of the HIC database from calendar year 2010.

   Table 24--Induced Utilization Factors for Advance Payments of Cost-
                     Sharing Reductions for Indians
------------------------------------------------------------------------
                                                   Induced utilization
       Zero cost sharing plan variation                  factor
------------------------------------------------------------------------
Zero Cost Sharing Plan Variation of Bronze QHP                     1.15
Zero Cost Sharing Plan Variation of Silver QHP                     1.12
Zero Cost Sharing Plan Variation of Gold QHP..                     1.07
Zero Cost Sharing Plan Variation of Platinum                       1.00
 QHP..........................................
------------------------------------------------------------------------

    In the second half of the formula, we proposed to multiply the 
monthly expected allowed claims cost for the zero cost sharing plan 
variation by the difference in AV between the standard plan and the 
plan variation. The AV of the zero cost sharing plan variation would be 
100, because all cost sharing is eliminated for this plan variation. 
Lastly, the per enrollee per month estimate will be multiplied by the 
number of individuals assigned to the zero cost sharing plan variation 
(based on the most recent confirmed enrollment data) in a given month 
to arrive at the total advance payment that will be provided to the 
issuer for each QHP. We are finalizing these provisions as proposed.
    Comment: One commenter requested clarification on the induced 
utilization factors for cost-sharing reductions for Indians, and 
whether these factors would ensure that QHP issuers are ``made whole'' 
for the value of the cost-sharing reductions.
    Response: As in the case of the silver plan variations, we 
incorporated an induced utilization factor into the advance payment 
formula to ensure that QHP issuers are compensated for the elimination 
of cost sharing for any increase in utilization resulting from the 
modification of the cost-sharing requirements. In addition, we 
developed an induced utilization adjustment for the risk adjustment 
model, to further offset the higher costs that enrollees eligible for 
cost-sharing reductions might incur, as described in section III.B.3.b. 
of this final rule. We believe this approach ensures that issuers are 
appropriately compensated for the value of the cost-sharing reductions.
    In Sec.  156.430(a)(2), we proposed the process for estimating the 
value of cost-sharing reductions to be provided under the limited cost 
sharing plan variation open to Indians regardless of household income. 
We proposed that QHP issuers have the option to forgo submitting an 
estimate of the value of these cost-sharing reductions if they believe 
the operational cost of developing the estimate is not worth the value 
of the advance payment. If a QHP issuer chooses to not submit an 
estimate, the issuer would provide the cost-sharing reductions as 
required, and would be reimbursed by HHS after the close of the benefit 
year, as proposed in Sec.  156.430(c). If a QHP issuer does seek 
advance payments for the these cost-sharing reductions, the issuer 
would provide to the Exchange annually prior to the benefit year, for 
approval by HHS, an estimate and supporting documentation validating 
the estimate, of the per member per month dollar value of the cost-
sharing reductions to be provided under the limited cost sharing plan 
variation of the QHP. Under our proposal, the estimate would be 
developed using the methodology specified by HHS in the applicable 
annual HHS notice of benefit and payment parameters. For the 2014 
benefit year, we simply proposed that issuers submit a reasonable 
estimate of the value of the reductions, developed by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies, and that the estimate should be 
no higher than the corresponding estimate for the zero cost sharing 
plan variation. We did not propose a standardized methodology because, 
unlike other plan variations, these cost-sharing reductions are to be 
provided for only a specific subset of providers, and the Affordable 
Care Act does not prescribe an AV for these reductions. As noted above, 
because the actuarial value calculator is based on a standard 
population, it will not have the functionality to generate an accurate 
AV for these plan variations.
    We are finalizing both our proposal for annual rulemaking in the 
notice of benefits and payment provisions to establish a methodology 
for advance payments for cost-sharing reductions under the limited cost 
sharing plan variation, and our proposal of a specific methodology for 
the 2014 benefit year. As in the case of the other plan variations, we 
plan to review the methodology for calculating the advance payments 
once more data is available, and future notices of benefits and payment 
parameters may include different methodologies. We welcome comments to 
consider as part of this process. We are also clarifying the language 
at Sec.  156.430(a)(2) by replacing the phrase ``[an issuer] offers or 
seeks to offer'' from the proposed rule with the phrase ``[an issuer] 
offers, or intends to offer'' in the final rule, to align with the 
language in Sec.  156.430(a)(1).
    As described above, the Exchange will collect the estimate and 
supporting documentation, and submit the estimate and supporting 
documentation to HHS for review, as finalized under Sec.  155.1030. If 
HHS finds the estimate to be reasonable, HHS will make advance payments 
to a QHP issuer following the same procedure as for the other plan 
variations, under Sec.  156.430(b), as finalized in this rule.
    In Sec.  156.430(c) through (e), we proposed that QHP issuers 
submit to HHS the amount of cost-sharing reductions provided under each 
plan variation. These amounts would then be reconciled against any 
advance payments. As explained in more detail in section III.E.4.e, we 
are modifying the reporting provisions described in Sec.  156.430(c), 
and finalizing as proposed the reconciliation process described in 
Sec.  156.430(d) and (e). We are also publishing an interim final rule 
with comment elsewhere in this issue of the Federal Register providing 
an

[[Page 15496]]

alternative methodology for reporting the value of the cost-sharing 
reductions provided. We expect that QHP issuers would be able to use 
this alternative methodology, if they so choose, for reporting the 
value of cost-sharing reductions provided under the zero cost sharing 
plan variation and the limited cost sharing plan variation.
    Comment: In general, commenters supported HHS's proposal to use the 
same payment approach to reimburse cost-sharing reductions for Indians 
under section 1402(d) as we proposed to use for cost-sharing reductions 
provided to eligible individuals with household incomes between 100 and 
250 percent of the FPL under section 1402(a) of the Affordable Care 
Act. One commenter, however, stated that due to demographics, very few 
individuals will be assigned to the limited cost sharing plan 
variation, and as a result, QHP issuers should simply receive a 
capitated payment for the value of these cost-sharing reductions, and 
not be required to submit information for the reconciliation of 
payments.
    Response: At this time, we believe it would be difficult for 
issuers and HHS to accurately estimate the ``increase in AV of the 
plan'' resulting from the cost-sharing reductions provided under 
section 1402(d)(2) of the Affordable Care Act. Relevant data on Indian 
populations' cost sharing is not easily available, and issuers would 
not be able to use the AV calculator to estimate Indian-only cost-
sharing features of a plan because the calculator is based on a 
standard population. Therefore, we finalize the approach set forth in 
the proposed rule for QHP issuers to submit data on the dollar value of 
cost-sharing reductions provided to eligible Indians under zero cost 
sharing and limited cost sharing plan variations, which will be 
reconciled against any advance payments.
    Comment: Another commenter was concerned about the prohibition on 
cost sharing under the limited cost sharing plan variation for services 
or items provided through referral under the contract health services 
program. The commenter suggested that until an accurate, online 
verification system for contract health services referrals can be 
established, QHP issuers should be able to rely on the information they 
receive from providers, and be held harmless for these cost-sharing 
reductions in the reconciliation process.
    Response: We recognize issuers' concerns about this provision, and 
plan to issue guidance on this topic in the future.
    In the proposed rule, we noted that section 1402(d)(2)(B) of the 
Affordable Care Act states that QHP issuers cannot reduce payments to 
the relevant facility or provider for an item or service by the amount 
of any cost sharing that would be due from an Indian but for the 
prohibition on cost sharing set forth in section 1402(d)(2) of the 
Affordable Care Act. We proposed not to codify this provision in 
regulation because we believed it is clear and self-enforcing, and 
because we believe that it would also be impermissible for an issuer to 
reduce payments to a provider for any cost-sharing reductions required 
under sections 1402(a) or 1402(d)(1) of the Affordable Care Act--
particularly because these cost-sharing reductions are to be reimbursed 
by HHS. We also noted that nothing in this section exempts an issuer 
from section 206 of the Indian Health Care Improvement Act, which 
provides that the United States, an Indian Tribe, Tribal organization, 
or urban Indian organization has the right to recover from third party 
payers, including QHPs, up to the reasonable charges billed for 
providing health services, or, if higher, the highest amount an insurer 
would pay to other providers.
    Comment: Commenters asserted that regulation text is needed to 
ensure there are no reductions in payments to the relevant facility or 
provider for an item or service by the amount of any cost sharing that 
would be due from an Indian but for the prohibition on cost sharing set 
forth in section 1402(d)(2) of the Affordable Care Act.
    Response: We have codified this provision by adding Sec.  
156.430(g) to the final rule. Regardless of the contracting 
relationship between a QHP issuer and the Indian health provider, the 
issuer may not reduce payments to the provider by the amount of any 
cost sharing that would be due from the Indian under this final rule.

F. Provisions on User Fees for a Federally-Facilitated Exchange (FFE)

    Section 1311(d)(5)(A) of the Affordable Care Act contemplates an 
Exchange charging assessments or user fees to participating health 
insurance issuers to generate funding to support its operations. If a 
State does not elect to operate an Exchange or does not have an 
approved Exchange, section 1321(c)(1) of the statute directs HHS to 
operate an Exchange within the State. In addition, 31 U.S.C. 9701 
permits a Federal agency to establish a charge for a service provided 
by the agency. Circular No. A-25R establishes Federal policy regarding 
user fees, and specifies that a user charge will be assessed against 
each identifiable recipient of special benefits derived from Federal 
activities beyond those received by the general public. We proposed to 
revise Sec.  156.50(b) and to add paragraph (c) to provide for a user 
fee from participating issuers (as defined in Sec.  156.50(a)) to 
support the operation of FFEs under these authorities.
    Circular No. A-25R states that user charges should generally be set 
at a level so that they are sufficient to recover the full cost to the 
Federal government of providing the service when the government is 
acting in its capacity as sovereign (as is the case when HHS operates a 
FFE). However, Circular No. A-25R also allows for exceptions to this 
policy, if approved by OMB. Because we wish to encourage issuers to 
offer plans on FFEs and to align with the administrative cost structure 
of State-based Exchanges, and because we believe that growing 
enrollment is likely to increase user fee receipts in future years, we 
are seeking an exception to the policy for 2014.
    We proposed to revise Sec.  156.50(b) so that it would apply only 
to user fees to support State-based Exchanges. In Sec.  156.50(c), we 
proposed that a participating issuer offering a plan through a FFE 
remit a user fee to HHS each month, in the time and manner established 
by HHS, equal to the product of the billable members enrolled through 
the Exchange in the plan offered by the issuer, and the monthly user 
fee rate specified in the annual HHS notice of benefit and payment 
parameters for the applicable benefit year. For the 2014 benefit year, 
we proposed a monthly user fee rate equal to 3.5 percent of the monthly 
premium charged by the issuer for a particular policy under the plan. 
We note that this user fee would apply to plans offered through FF-
SHOPs, as well as individual market FFEs. We noted that additional 
guidance on user fee collection processes would be provided in the 
future. We anticipate collecting user fees by deducting the user fee 
from Federally-administered Exchange-related program payments. If a QHP 
issuer does not receive any Exchange-related program payments, the 
issuer would be invoiced for the user fee on a monthly basis.
    In addition, we welcomed comments on a policy that we were 
considering that would provide for the pooling of Exchange user fees, 
distribution costs, or all administrative costs across a particular 
market (in the case of the FFE, however, the user fee would be 
collected only from issuers participating in the FFE). We note that our 
proposed rule, ``Coverage of Certain Preventive Services under the 
Affordable Care Act'' (78 FR 8457), contemplates a proposal

[[Page 15497]]

to reduce the amount of the FFE user fee for QHP issuers that provide 
coverage for contraceptive services for participants of a self-insured 
plan that is established or maintained by an eligible organization (or 
have an affiliated issuer that does so).\30\ Comments are separately 
welcome on that proposed regulation on or before April 8, 2013.
---------------------------------------------------------------------------

    \30\ See 78 FR 8474.
---------------------------------------------------------------------------

    Based on the comments we received, we are finalizing the proposal 
and the regulation text with the following modification: we are 
clarifying the calculation of the user fee so that the user fee rate is 
applied directly to the premium set by the issuer for a policy and is 
charged on each policy with enrollment through the FFE.
    Comment: A number commenters expressed concern that our proposed 
FFE user fee would increase coverage costs for consumers; however, 
other commenters expressed support for the proposed FFE user fee.
    Response: We do not believe that the FFE user fee rate, set at 3.5 
percent of premiums, would increase the cost of coverage or discourage 
consumers from purchasing health insurance through an FFE. We 
anticipate that the user fee will account for the cost of many of the 
Exchange-related administrative functions that issuers would otherwise 
have to perform, such as consumer assistance and enrollment support, 
and that the cost of the user fee will be outweighed by the many 
benefits that result from participation in an Exchange. The Exchanges 
are expected to enhance competition among issuers in the non-group 
market, which should lower premiums due to the elimination of medical 
underwriting and the associated issuer administrative costs. Exchanges 
will also create larger purchasing pools, which should create economies 
of scale, lowering administrative costs for QHP issuers, and further 
reducing premiums.
    Comment: Several commenters requested that we provide more details 
regarding our user fee calculations and a breakdown of costs by 
jurisdiction. Several commenters suggested that we calculate the FFE 
user fee amount on a per capita basis rather than as a percent of 
premiums, and a few other commenters supported the percent of premium 
approach.
    Response: We are finalizing our policy to calculate the FFE user 
fee as a percentage of premium; however, we are modifying the proposed 
rule to clarify that the FFE user fee amount is set as a percent of 
premium, without regard to the number of billable members on a policy. 
This clarification does not change the value of the user fee. We 
appreciate commenters' concerns that FFE operating costs be minimized 
and transparent, and will take those comments into consideration in our 
approach to FFE operating costs.
    Comment: One commenter noted that basing the user fee amount on a 
percent of premium for a particular policy was confusing.
    Response: We are clarifying that an issuer's monthly user fee 
amount is equal to the product of the monthly user fee rate specified 
in the annual HHS notice of benefit and payment parameters for the 
applicable benefit year--which for 2014 is 3.5 percent--and the monthly 
premium charged by the issuer for each policy offered through a 
Federally-facilitated Exchange.
    Comment: One commenter expressed concern about HHS's proposal to 
align the FFE user fee rate with the user fee rate assessed by State-
based Exchanges. Other commenters urged HHS to ensure that the overall 
amount of the FFE user fee reflected only HHS's actual costs related to 
FFE operations.
    Response: We are clarifying that we are establishing the FFE user 
fee rate for 2014 only, with the intent of keeping the user fee as low 
as possible. Independent of final SBE user fee rates, we clarify that 
we are not considering raising the FFE user fee beyond our operating 
costs in the future.
    Comment: We received several comments on our proposal to pool user 
fees across all plans in a market within a State. Some commenters 
suggested that this policy would unfairly increase costs for members 
that are not enrolled on an Exchange. However, other commenters 
supported the pooling Exchange user fees. A few commenters requested 
clarification on how issuers would be permitted to account for user 
fees on their members' bills, specifically whether issuers would be 
able to account for user fees in their premium amounts or whether user 
fees would be billed separately.
    Response: We believe that including Exchange user fees in the 
single risk pool requirement will help prevent adverse selection 
against QHPs on Exchanges. In the final Market Reform Rule at Sec.  
156.80, we require issuers to pool all user fee costs across their 
applicable market in a State. We refer readers to the discussion 
associated with Sec.  156.80 of the Market Reform Rule for additional 
details on this policy.

G. Distributed Data Collection for the HHS-operated Risk Adjustment and 
Reinsurance Programs

1. Background
    In the proposed rule, we proposed to amend 45 CFR part 153 by 
adding subpart H, entitled ``Distributed Data Collection for HHS-
Operated Programs,'' which set forth the data collection process that 
HHS would use when operating a risk adjustment or reinsurance program 
on behalf of a State. We proposed to use a distributed approach to data 
collection for the risk adjustment and reinsurance programs when HHS 
operates those programs on behalf of a State. In the proposed rule, we 
described a distributed approach as one in which each issuer formats 
its own data in a manner consistent with the applicable database, and 
then passes the relevant information to the entity responsible for 
making payments and charges for the program. We believe that this 
approach minimizes issuer burden while protecting enrollees' privacy. 
We received a number of comments supporting the proposed distributed 
data approach, and are finalizing the provisions as proposed.
2. Issuer Data Collection and Submission Requirements
    Under the HHS-operated risk adjustment and reinsurance programs, we 
proposed to use a distributed data collection approach to run software 
on enrollee-level and claims-level data that reside on an issuer's 
dedicated data environment. This approach requires close technological 
coordination between issuers and HHS.
a. Distributed Data Environments
    In Sec.  153.700(a), we proposed that an issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State where 
HHS is operating the risk adjustment or reinsurance program on behalf 
of the State establish a dedicated data environment and provide data 
access to HHS, in a manner and timeframe specified by HHS, for risk 
adjustment and reinsurance operations. To accomplish the distributed 
data collection approach for both the reinsurance and risk adjustment 
programs, issuers would establish secure, dedicated, electronic server 
environments to house medical and pharmacy claims, encounter data, and 
enrollment information. Issuers would be directed to make this data 
accessible to HHS in HHS-specified electronic formats, and to provide 
HHS with access to the data environment to install, update, and operate 
common software and specific reference tables

[[Page 15498]]

for the purpose of executing risk adjustment and reinsurance program 
operations. Issuers would also be directed to correct submitted files 
to resolve problems detected by HHS during file processing. Except for 
purposes of data validation and audit, HHS will not store any 
personally identifiable enrollee information or individual claim-level 
information.
    We note that HHS will store, in a private and secure HHS computing 
environment, aggregate plan summary data and reports based on 
activities performed on each issuer's dedicated server environment.
    Comment: Several commenters expressed concern that the distributed 
approach would have limited use because it would not track the same 
enrollee across multiple years.
    Response: The distributed data approach would not constrain the 
risk adjustment methodology when HHS operates risk adjustment because 
the concurrent model does not require tracking of enrollees over 
multiple years
    Comment: We received a few comments requesting clarification as to 
what information from the distributed data environments would be shared 
with States. A few commenters asked for States to have access to data 
on the distributed data environments.
    Response: We are considering ways to provide States with 
information about HHS-operated programs, and welcome feedback about the 
types of summary information would be most useful to States. In doing 
so, we must balance program transparency with protection of potentially 
sensitive information, including consumer health information. We will 
provide further information in subsequent guidance, as appropriate.
    Comment: A number of commenters requested technical details about 
the distributed data environment. Several commenters requested the 
specific requirements for the necessary enrollment, claims and 
encounter data, applicable software and testing schedule for risk 
adjustment data submissions. One commenter asked that issuers be 
permitted to provide two separate data sets on the distributed data 
environment--one for risk adjustment in the individual and small group 
markets, and a second for the reinsurance that will only include data 
for the individual market. One commenter asked for further details on 
the types of accepted information and recommended that chart reviews be 
considered acceptable data.
    Response: HHS has provided a list of required data for the HHS-
operated distributed data approach in the PRA package approved under 
OMB Control Number 0938-1155. HHS will make available the data formats, 
definitions, and technical standards applicable to the HHS-operated 
distributed data approach in future guidance, including standards 
relating to data from chart reviews.
    Comment: We received comments requesting further clarification 
about the uses of data collected through the distributed data approach.
    Response: We intend to provide further guidance on this issue. We 
do note that data use will be consistent with HHS's commitment to 
protecting the privacy and security of enrollees. As a result, we would 
not store any personally identifiable enrollee information or 
individual claim-level information in connection with this data 
collection, except for the purposes of data validation and audit. We 
believe that this approach minimizes issuer burden while protecting 
enrollees' privacy.
    Comment: One commenter requested that the recalibrations of the 
risk adjustment models not be based on data from the distributed data 
environment, but asked that HHS conduct a separate data collection 
designed specifically for the recalibration of the risk adjustment 
models.
    Response: We are exploring using data from the distributed data 
environment for future recalibration of the HHS risk adjustment models. 
We will provide further details on model recalibration in future 
rulemaking and guidance.
b. Timeline
    We proposed in Sec.  153.700(b) that issuers must establish the 
dedicated data environment (and confirm proper establishment through 
successfully testing the environment to conform with HHS standards for 
such testing) three months prior to the first date of full operation.
    Comment: A few commenters sought clarification on when HHS would 
conduct testing of the distributed data environment in order to develop 
the distributed data environment for full operation.
    Response: To ensure accuracy in the application of the distributed 
data approach, HHS will work with issuers to establish robust systems. 
Issuers will have the opportunity to submit data files to a test 
environment. HHS will provide support for issuers who conduct such 
testing as well as provide ongoing support for the duration of the 
programs. As testing and implementation will be ongoing, we note that 
an issuer must establish the dedicated data environment (and confirm 
proper establishment through successfully testing the environment to 
conform with applicable HHS standards for such testing) three months 
prior to full operation, that is, three months prior to the first date 
the plan could accrue claims for risk adjustment and reinsurance 
purposes. Even after an issuer's dedicated data environment is fully 
operational, further testing and modifications may be necessary. 
Further details and specifications for such testing will be provided in 
future guidance.
c. Enrollment, Claims and Encounter Data
    In Sec.  153.710(a), we proposed that an issuer of a risk 
adjustment covered plan or reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, provide to HHS, through the dedicated data environment, 
access to the enrollee-level plan enrollment data, enrollee claims 
data, and enrollee encounter data specified by HHS.
    Comment: Several commenters sought clarification on whether claims 
will be dated by the date of admission or the date of discharge. One 
commentator requested clarification on how claims that straddle the 
benefit year would be handled. Several commenters requested that claims 
be dated by date of admission rather than date of discharge, to address 
the issue of claims that straddle multiple years. Another commenter 
recommended that risk adjustment scores be based on claims with dates 
of service from January 1 through December 31.
    Response: The proposed rule stated that data should be submitted 
for the applicable benefit year by April 30 of the year following the 
end of the applicable benefit year. The discharge date would be used to 
date claims, because we believe that the discharge date best ensures 
that services provided across benefit years will be considered in their 
entirety rather than being partially or fully excluded from 
consideration as a result of the data submission timing requirements. 
For example, if an individual is admitted to a hospital in December 
2014 and is discharged in January 2015, the incurred costs that 
occurred in both December 2014 and January 2015 would be considered in 
the 2015 benefit year for both reinsurance payments and calculation of 
enrollee risk scores for risk adjustment when HHS operates either of 
those programs.
    Comment: We received several comments requesting clarification on 
HHS' data storage requirements.

[[Page 15499]]

    Response: Under Sec.  153.620(b), an issuer that offers risk 
adjustment covered plans would be required to retain any information 
requested to support risk adjustment data validation for a period of at 
least ten years after the date of the report. We will provide further 
guidance on the data storage requirements for reinsurance-eligible 
plans and risk adjustment covered plans in forthcoming rulemaking and 
guidance.
d. Data Requirements
    In the proposed rule, we described the types of data that would be 
acceptable for the reinsurance and risk adjustment programs when HHS 
operates these programs on behalf of a State.
    When HHS is operating reinsurance on behalf of a State, we proposed 
that medical and pharmacy claims with discharge dates or through dates 
of service (when no discharge date is applicable, as is often the case 
for professional services) that fall in the applicable benefit year 
would be eligible for reinsurance payments for that benefit year.
    When HHS is operating risk adjustment on behalf of a State, we 
proposed that institutional and medical claims and encounter data with 
discharge dates or through dates of service that fall in the applicable 
benefit year would be eligible for risk adjustment payments and charges 
for that benefit year. The data to calculate enrollee risk scores for 
purposes of risk adjustment would include diagnoses reported on 
institutional and medical claims that result in final payment action or 
encounters that result in final accepted status. Only the diagnoses 
reported on certain hospital inpatient facility, hospital outpatient, 
and physician provider claims will be acceptable when HHS operates risk 
adjustment. The risk adjustment model discussed earlier in this 
preamble provides a description of HHS's criteria for identifying and 
excluding claims from providers.
    Comment: We received a comment requesting clarification on the 
acceptable provider types.
    Response: Diagnoses will only be acceptable for risk adjustment 
enrollee risk score calculations if they meet criteria that are 
acceptable for HHS risk adjustment data collection. Generally, for both 
inpatient and outpatient services, diagnoses are acceptable if from a 
qualified provider, but only if the procedure code was not for 
diagnostic laboratory or diagnostic radiology services. HHS will 
release the full list of acceptable provider types and criteria in 
forthcoming guidance.
    Comment: One commenter recommended that unpaid claims be included 
in the calculation of enrollee risk scores.
    Response: While there may be some advantages to inclusion of unpaid 
claims, we do not plan to accept claims where services were denied or 
not covered because HHS risk adjustment models were calibrated on paid 
claims. However, if services were approved and an issuer incurred no 
expenses because the claim was fully paid through cost sharing, then 
those claims would be acceptable for consideration (for example, if the 
allowable cost of a service provided was $15 and the enrollee's co-pay 
was $15).
e. Claims Data
    We proposed in Sec.  153.710(b) that all claims data submitted by 
an issuer of a risk adjustment covered plan or reinsurance-eligible 
plan in a State in which HHS is operating the risk adjustment or 
reinsurance program, as applicable, must have resulted in payment by 
the issuer (payment of cost sharing by the enrollee). The enrollee-
level data must include information from claims and encounter data 
(including data related to cost-sharing reductions, to permit HHS to 
calculate enrollee paid claims net of cost-sharing reductions) as 
sourced from all medical and pharmacy providers, suppliers, physicians, 
or other practitioners who furnished items or services to the issuer's 
health plan members for all permitted paid medical and pharmacy 
services during the benefit period. All data must be provided at the 
level of aggregation specified by HHS.
    Comment: Several commenters asked HHS to notify issuers when HHS 
identifies errors with data submitted to distributed data environments. 
One commenter requested that HHS flag claims with derived costs that 
have not been accepted for payment.
    Response: We intend to provide each issuer with a periodic report 
on data functions performed in each issuer's distributed data 
environment, and to identify reinsurance-eligible claims. The reports 
would indicate whether HHS accepted or rejected submitted files and 
data, and would identify errors detected by HHS. Issuers would need to 
provide corrected files and data to address errors identified in HHS-
provided reports for those files and data to be eligible for 
reinsurance processing. Timeframes for the processing and reporting of 
these reports, including for receipt of corrected files and discrepancy 
resolution, will be provided in future guidance.
    Comment: Several commenters requested that HHS provide interim 
estimates for reinsurance payments and risk adjustment scores. These 
comments noted that interim estimates will assist issuers in completing 
financial statements and developing rates for the next calendar year.
    Response: We recognize that both the risk adjustment and 
reinsurance programs are important programs in stabilizing premiums in 
the individual and small group markets. We will provide further detail 
on our approach to interim reporting in forthcoming guidance.
f. Claims Data From Capitated Plans
    In Sec.  153.710(c), we proposed that an issuer that does not 
generate claims in the normal course of business must derive costs on 
all applicable provider encounters using their principal internal 
methodology for pricing those encounters. If a plan has no such 
methodology, or has an incomplete methodology, we proposed that the 
plan be permitted to implement a methodology or supplement the 
methodology in a manner that yields derived claims that are reasonable 
in light of the specific market that the plan is serving.
    Comment: Commenters generally supported HHS's inclusion of 
capitated plans' data in the reinsurance and risk adjustment programs. 
We received many comments asking HHS to provide additional guidance on 
deriving claims costs or methodological examples of how different types 
of capitation arrangements would derive their costs, including deriving 
costs for value-based strategies. Commenters also requested that the 
State and HHS approve fee schedules to ensure compliance with the 
reinsurance program.
    Response: The proposed approach allows capitated plans the 
flexibility to use current pricing methodologies, if applicable. Many 
capitated plans have methods in place for deriving the costs of 
encounters for participation in other State and Federal programs. If a 
plan has no such methodology, or has an incomplete methodology, the 
plan would be permitted to implement a methodology or supplement the 
methodology in a manner that yields derived claims that are reasonable 
in light of the specific market that the plan is serving. We believe 
that permitting flexibility, rather than setting forth specific 
methodologies or fee schedules, better enables issuers to determine 
methodologies which are reasonable for the issuer's market.
    Comment: One commenter stated that some health plans that sub-
capitate

[[Page 15500]]

payments to providers may face difficulty in collecting comprehensive 
and accurate data on a timely basis.
    Response: HHS initially considered a claims submission deadline of 
March 31 but extended the deadline to April 30 to allow issuers more 
time to submit the necessary enrollment and claim data. The claims 
submission deadline of April 30 of the year following the applicable 
benefit year is the latest possible date for HHS to meet our payment 
processing and reporting obligations codified in the Premium 
Stabilization Rule. Reinsurance and risk adjustment payment reporting 
obligations must be completed before the calculations for the risk 
corridors and MLR programs, and consequently require claims to be 
submitted by April 30.
    Comment: Commenters requested that HHS set forth in regulatory text 
that capitated plans' derived cost claims will be subject to audit.
    Response: Capitated plans, like all plans that submit reinsurance 
payment requests, or data to be considered for reinsurance payments or 
risk adjustment, would be subject to validation and audit. We have 
included data validation language in Sec.  153.240(a)(3) for State-
operated reinsurance programs, and in Sec.  153.350 and Sec.  153.630 
for State- and HHS-operated risk adjustment programs, respectively. We 
will issue further rulemaking with regard to HHS-operated reinsurance 
program oversight for all claims, including those from capitated plans.
g. Establishment and Usage of Masked Enrollee Identification Numbers
    We proposed in Sec.  153.720(a) that an issuer of a risk adjustment 
covered plan or reinsurance-eligible plan in a State in which HHS 
operates risk adjustment or reinsurance, as applicable, must establish 
a unique masked enrollee identification number for each enrollee, in 
accordance with HHS-defined requirements as described in this section, 
and maintain the same masked enrollee identification number for an 
enrollee across enrollments or plans within the issuer, within the 
State, during a benefit year. In Sec.  153.720(b), we proposed that an 
issuer of a risk adjustment covered plan or reinsurance-eligible plan 
in a State in which HHS is operating the risk adjustment or reinsurance 
program, as applicable, may not include an enrollee's personally 
identifiable information in the masked enrollee identification number 
or use the same masked enrollee identification number for different 
enrollees enrolled with the issuer. As discussed in OMB Memorandum M-
07-16, the term ``personally identifiable information'' is a broadly 
used term across Federal agencies, and has been defined in the Office 
of Management and Budget Memorandum M-07-16 (May 22, 2007).\31\
---------------------------------------------------------------------------

    \31\ Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf.
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    Comment: We received several comments in support of using a masked 
enrollee number. However one commenter expressed concern that the 
provisions may not be sufficiently protective.
    Response: HHS has taken several steps to ensure robust privacy and 
security standards. A distributed data approach protects consumer 
health data in a number of ways. First, a distributed data approach 
eliminates the need to transmit sensitive data. Data can be 
particularly vulnerable during transmission, so this approach 
eliminates this risk. HHS expects that information provided to HHS will 
be limited to information reasonably necessary for use in the risk 
adjustment and reinsurance programs. Also, with this approach, we are 
better able to limit the amount of data needed for program operations. 
We will be releasing, in forthcoming rulemaking, compliance standards 
for privacy and security standards, as applicable.
h. Deadline for Submission of Data
    We proposed in Sec.  153.730 that an issuer of a risk adjustment 
covered plan or reinsurance-eligible plan in a State in which HHS 
operates risk adjustment or reinsurance, as applicable, submit data to 
be considered for risk adjustment payments and charges and reinsurance 
payments for the applicable benefit year by April 30 of the year 
following the end of the applicable benefit year. In order for HHS to 
provide periodic reports on data functions performed in each issuer's 
distributed data environment, HHS recommends issuers submit data at 
least quarterly throughout the benefit year to support the calculation 
of reinsurance payments and risk adjustment payments and charges.
    Comment: We received a comment requesting clarification on the 
penalty for non-compliant data submission.
    Response: Compliance requirements will be forthcoming. We note, 
however, that one consequence of an issuer failing to timely submit 
claims and enrollment data would be that the information needed to 
calculate risk scores and reinsurance allowable amounts would not be 
available, potentially resulting in a loss of risk adjustment or 
reinsurance payments for the issuer.
    Comment: Several commenters requested clarification on the claims 
run out period.
    Response: An issuer of a risk adjustment covered plan or 
reinsurance eligible plan in a State in which HHS operates risk 
adjustment or reinsurance should submit data by April 30 of the year 
following the applicable benefit year. For example, claims incurred in 
the 2014 benefit year must be submitted to HHS by April 30, 2015. The 
submission deadline will allow issuers time to process claims and 
submit data to their distributed data systems for HHS evaluation, and 
will provide HHS adequate time to calculate payments and charges.

H. Small Business Health Options Program

1. Employee Choice in the Federally-Facilitated SHOP (FF-SHOP)
    In our proposed rule, we proposed that qualified employers in FF-
SHOPs will choose a level of coverage (bronze, silver, gold, or 
platinum) and a contribution, and employees can then choose any QHP at 
that level.
    In stakeholder consultations following the publication of the 
Exchange Establishment Rule, some issuers expressed openness to 
allowing the employee to ``buy up'' to certain plans at the next higher 
level of coverage, thereby offering employees a broader range of health 
plans. We sought comments on whether FF-SHOPs should offer an 
additional employer option that would allow a qualified employer to 
make available to employees all QHPs at the level of coverage selected 
by the employer plus any QHPs at the next higher level of coverage that 
a QHP issuer agrees to make available under this option. QHP issuers 
could decide whether or not to make available QHPs at the next higher 
level of coverage above the level of coverage selected by the employer.
    We also sought comments on a transitional policy in which a 
Federally-facilitated SHOP (FF-SHOP) would allow or direct employers to 
choose a single QHP from those offered through the FF-SHOP. We received 
the following comments regarding the proposed provisions of choice in 
the Federally-facilitated SHOP:
    Comment: A few commenters opposed offering employers the single QHP 
option, suggesting that each SHOP should focus on providing employee 
choice. Most commenters on this issue supported offering a single QHP 
option for employers, either as an additional

[[Page 15501]]

option or as the only option in the initial years of each SHOP. The 
commenters who supported allowing a qualified employer only the option 
of offering a single QHP in the initial years of SHOP operation cited 
several concerns, including whether issuers could complete enrollment 
and accounting system changes required to interact with the SHOP 
enrollment and premium aggregation systems required by employee choice; 
and whether there would be adequate time to educate employers, 
employees, brokers about the employer and employee choices available in 
the SHOP. They further suggested that tying Exchange participation to 
SHOP participation could lead some issuers to participate in neither 
the Exchange nor the SHOP.
    Response: Each SHOP has the option to allow employers to offer 
employees a single QHP. We have concluded for the reasons identified by 
the commenters that, as a transition to broader employer adoption of 
employee choice models, each FF-SHOP should exercise this option, 
providing employers the option of offering a single QHP to employees, 
as the small group market customarily does today. This employer option 
will allow employers who prefer to offer employees a single QHP to 
participate in an FF-SHOP and retain potential eligibility for the 
small business tax credit, which is only available through a SHOP 
Exchange beginning in 2014.
    We have also concluded that effective implementation of employee 
choice in the federally-facilitated SHOP will not be possible in 2014 
because of operational challenges noted by the commenters. Therefore, 
we are proposing in the Small Business Health Options Program proposed 
rule issued simultaneously with this final rule and published elsewhere 
in this issue of the Federal Register that: (1) The effective date of 
the employee choice requirements (Sec.  155.705(b)(2)) and the premium 
aggregation requirements (Sec.  155.705(b)(4)) will be January 1, 2015; 
(2) SHOP Exchanges may offer employee choice and perform premium 
aggregation for plan years beginning on or after January 1, 2014; and 
(3) an FF-SHOP will not offer employee choice and premium aggregation 
until plan years beginning on or after January 1, 2015.
    Comment: A few commenters supported a single QHP option but only if 
linked to the required use of composite premiums.
    Response: We believe the decision about the use of calculated 
composite premiums should remain an employer decision, unless State law 
requires that premiums be presented to employers as composite premiums, 
and have not adopted the linkage suggested by the commenters.
    Comment: The employer option of broader, two-level plan choice was 
supported by a number of commenters, either as proposed or as two-level 
plan choice among all plans at those levels, without the QHP issuer's 
choice whether to offer as a buy-up. Several commenters characterized 
employee choice as a key distinguishing feature of the SHOP, and one 
suggested considering full employee choice. Many commenters, however, 
cited the adverse selection that may occur with choices across levels 
of coverage and recommended restricting employee choice to a single 
level of coverage chosen by the employer. One commenter noted the 
operational complexity of a buy-up option.
    Response: We are not finalizing the rule with provisions for the 
FF-SHOPs to accommodate the two-level plan choice because of concerns 
about adverse selection in the first year of SHOP operation. We note 
that broader employee choice is a desirable feature of a FF-SHOP that 
will be explored in subsequent years. Further, the final rule at Sec.  
155.705(b)(3)(i) permits each SHOP the flexibility to offer qualified 
employers choices beyond making one metal level available to employees. 
Although we are not exercising this flexibility for the FF-SHOPs, we 
anticipate that some State-based SHOPs may do so.
    Comment: One commenter asked that the final notice reflect that 
employer offerings may also be subject to collective bargaining 
agreements.
    Response: We concur with that comment and note here that employer 
offers of benefits may be subject to the provisions of collective 
bargaining agreements.
    We are finalizing the rule for the FF-SHOPs with some modifications 
from the proposal. Under Sec.  155.705(b)(3) as finalized, each FF-SHOP 
will allow qualified employers the choice of offering employees either 
all QHPs at a single level of coverage selected by the employer or a 
single QHP selected by the employer. However, we are proposing 
elsewhere in this issue of the Federal Register that, as a matter of 
transition, each SHOP have the option to choose whether to implement 
employee choice and premium aggregation beginning January 1, 2014 or 
January 1, 2015, with each FF-SHOP exercising the January 1, 2015 
implementation option.
2. Methods for Employer Contributions in an FF-SHOP
    Employers may elect a variety of ways to contribute toward health 
coverage that are consistent with Federal law. Because employees in the 
SHOP may be choosing their own coverage and will need to know the net 
cost to them after the employer's contribution, each employer will need 
to choose a contribution method before its employees select their 
qualified health plans. To facilitate this, we proposed in Sec.  
155.705 (b)(11)(i) that each SHOP could define a standard method by 
which employers would contribute toward the employee coverage. We also 
proposed in Sec.  155.705 (b)(11)(ii) a specific, standardized method 
for the FF-SHOPs--a method that reflects a meaningful employer choice 
and that conforms to existing Federal law.\32\
---------------------------------------------------------------------------

    \32\ See 77 FR 73184-85.
---------------------------------------------------------------------------

    Comment: A broad range of commenters supported our proposal. One 
commenter expressed concern about the effect on older employees, but 
recognized the need to match the outside market options. Two commenters 
suggested requiring a calculated composite premium as the only 
allowable method.
    Response: The choice of contribution method offered in each FF-SHOP 
reflects a meaningful choice available to employers in 2014, absent a 
provision in State law to the contrary. We note that the premium 
differential effect on older employees is limited by the maximum 3:1 
ratio for adults. As noted in the proposal, we believe the decision 
about whether to use a calculated composite premium is best made by the 
employer so long as that choice is consistent with applicable State 
law.
    Comment: One commenter suggested addressing the contribution method 
by allowing employers to offer only a single QHP as a transition, which 
would also give issuers time to adopt SHOP per member rating rules.
    Response: Whether an employer offers a single QHP or all QHPs at a 
given level of coverage, an FF-SHOP will still need to adopt an 
approach to employer contributions. The approach proposed in the draft 
Notice and finalized in this rule will allow employers options 
regarding how they and their employees contribute toward coverage that 
applies to both single QHP and single level of coverage offers.
    Comment: One commenter stated that an issuer should not be involved 
in employer decisions about allocation of premium between employer and 
employee.

[[Page 15502]]

    Response: We do not believe that either the proposed rule or the 
final rule involves the QHP issuer in employer decisions about the 
employer contribution toward the premium. The FF-SHOP standard 
contribution method, as proposed and finalized, does establish a method 
by which the employer can contribute in a standardized, non-
discriminatory way. The QHP issuer is not involved in the FF-SHOP 
policy nor is the issuer involved in employer decisions about the 
allocation of premium between employer and employee.
    Comment: One commenter asked for clarification about how mid-year 
turnover would be handled with a calculated composite premium method.
    Response: In future guidance, we will discuss mid-year changes in 
group composition and how a SHOP might address the resulting changes in 
the average premium for the group.
    We proposed at Sec.  155.705(b)(11)(ii)(D) to permit a qualified 
employer participating in an FF-SHOP to establish, to the extent 
allowed by Federal and State law, different contribution percentages 
for different employee categories. We have concluded that this 
provision is inconsistent with the uniformity provisions established in 
Internal Revenue Service Notice 2010-82, which require employers to 
contribute a uniform percentage to all employees in order to claim a 
small business tax credit for health insurance premiums paid. Although 
the provisions in Notice 2010-82 apply only to employers claiming the 
tax credit in tax years through December 31, 2013, the use of a uniform 
percentage for all employees helps assure that the employer 
contributions do not violate other anti-discrimination provisions. We 
therefore are not finalizing the proposal at Sec.  
155.705(b)(11)(ii)(D) and the final rule redesignates the proposed 
paragraphs (b)(11)(ii)(E) and (F) as paragraphs (b)(11)(ii)(D) and (E). 
We are otherwise finalizing the rule as proposed.
3. Linking Issuer Participation in an FFE to Participation in an FF-
SHOP
    We proposed standards that we believe will help ensure that 
qualified employers and qualified employees enrolling through an FF-
SHOP are offered a robust set of QHP choices in a competitive small 
group marketplace. We believe that a competitive marketplace offering 
qualified individuals, qualified employers, and qualified employees a 
choice of issuers and QHPs is a central goal of the Affordable Care 
Act, and that the SHOP can provide an effective way for small employers 
to offer their employees a choice of issuers and QHPs. We proposed in 
Sec.  156.200(g) to leverage issuers' participation in an FFE to ensure 
participation in the corresponding FF-SHOP, provided that no issuer 
would be required to begin offering small group market products as a 
result of this provision. We sought comments on this issue and whether 
or not the policy meets three intended goals: Enhancing employer and 
employee choice, assuring similar effects on single issuers and issuer 
groups, and not requiring any issuer to begin offering coverage in the 
small group market in order to meet this provision.
    Comment: A substantial number of commenters supported the tying 
provision and the issuer group definition, concluding that the 
provision would enhance consumer choice in FF-SHOPs.
    Many commenters opposed the tying provision, arguing that plans 
should have full choice about participation and that requiring 
participation may make it harder to meet the timeline for QHP 
submission in the individual market FFE. Several commenters 
specifically suggested that the tying provision might result in 
decreased issuer participation in the individual market FFE in some 
states. Several commenters noted the extensive efforts that would be 
required to offer plans in the SHOP, even if the issuer were already 
participating in the State's small group market.
    Response: We have considered the concerns about the tying provision 
and conclude that adopting the provision will help assure that small 
group market QHPs are available to employers and employees. We have 
also considered comments that tying would lead to issuers declining 
participation in both the FFE and the FF-SHOP, and concluded that it is 
more likely to result in that outcome among issuers with relatively low 
market shares for whom the administrative costs to modify systems to 
enable SHOP participation may outweigh the value of increased 
enrollment. Finally, we considered how these issuer concerns about 
tying might relate to issuer concerns about the effects of employee 
choice, and whether those concerns might be reduced by our concurrent 
proposal to allow SHOPs to delay the implementation of employee choice 
by a year.
    Adoption of a tying standard that applies only to issuers with more 
than a threshold market share will serve the goal of assuring that QHPs 
are available in each FF-SHOP in 2014 without unduly burdening issuers. 
We examined small group market share data based on earned premiums 
reported to HHS in conjunction with evaluations of issuer minimum loss 
ratios and have concluded that using a 20 percent market share to 
determine whether a small group market issuer is subject to the tying 
provision will result in sufficient competition and the ability to 
offer a robust set of QHPs in the FF-SHOPs, while minimizing the burden 
on small issuers. We are finalizing the rule accordingly.
    Comment: One commenter objected because OPM does not require multi-
State plans to offer SHOP products until 2017, and CO-OPs are not 
subject to a similar provision.
    Response: In a final rule published elsewhere in this issue of the 
Federal Register, OPM establishes a similar tying provision for multi-
State plans based on market share. CO-OPs operate under a different 
tying provision. We direct the commenter's attention to Sec.  
156.515(c)(2), which requires CO-OPs to comply with a strict tying 
provision with no market share exception. If a CO-OP participates in a 
State's small group market, it must offer silver and gold plans on the 
SHOP.
    Comment: One commenter suggested implementing the tying provision 
but reevaluating the policy in two years. A second commenter suggested 
the possibility of delaying introduction of the tying provision.
    Response: We will be evaluating on an ongoing basis the 
effectiveness of the tying provision in enhancing employer and employee 
choice in FF-SHOPs without adversely affecting participation in the 
FFEs.
    We are finalizing these provisions as proposed, with a modification 
to limit the tying rule to at the applicant issuer itself or an issuer 
member of the same issuer group that has a 20 percent share of the 
small group market in the State, based on the most recent earned 
premium data reported under Sec.  158.110 to fulfill minimum loss ratio 
reporting requirements.
4. Broker Compensation for Coverage Sold Through an FFE or FF-SHOP
    In a new paragraph Sec.  156.200(f), we proposed that QHP 
certification by an FFE and an FF-SHOP be conditioned on the QHP issuer 
paying similar broker compensation for QHPs offered through an FFE or 
FF-SHOP that it would pay for similar health plans offered outside an 
FFE and an FF-SHOP. We requested comments on whether ``similar health 
plans'' is a sufficient standard and if not, which factors should be 
considered in identifying ``similar health plans.'' We also requested 
comments on how this standard might apply when small

[[Page 15503]]

group market product commissions are calculated on a basis other than 
an amount per employee or covered life or a percentage of premium.
    Comment: Multiple commenters representing both consumer groups and 
issuers supported the compensation proposal, with several recommending 
that ``similar'' be more clearly defined. One commenter proposed that 
``similar'' be defined by the issuer. One commenter opposed the 
proposal, recommending that the issuer be allowed to set different 
compensation on and off the Exchange.
    Response: For the reasons outlined in the preamble to the proposed 
rule, we are finalizing these provisions as proposed. We do not at this 
time propose a specific definition of ``similar.'' We expect to issue 
further guidance at a later date.
5. Minimum Participation Rate in FF-SHOPs
    As discussed the preamble to the proposed rule, we aim to minimize 
the potential for risk selection in the small group market and in 
SHOPs. In the final Market Reform Rule, we discussed this issue in 
connection with section 2702 of the PHS Act, which requires issuers in 
the individual and group markets to accept every employer and 
individual that applies for such coverage but permits issuers to limit 
enrollment in coverage to only open and special enrollment periods. 
That final rule implements this provision by permitting an issuer 
offering health insurance coverage in the small group market to limit 
its offering of coverage to the limited open enrollment periods 
described in Sec.  147.104(b)(1) in the case of an employer that fails 
to meet contribution or minimum participation requirements. In 
connection with the SHOP, the Exchange Establishment final rule permits 
a SHOP to authorize minimum participation requirements for qualified 
employers participating in the SHOP so long as the participation is 
measured at the SHOP level and not based on enrollment in a single QHP.
    We proposed a minimum participation rate for an FF-SHOP of 70 
percent, calculated at the level of the participation of the employees 
of the qualified employer in the FF-SHOP and not enrollment in a single 
QHP. We based the proposed rate on consultations with issuer 
organizations and regulators about customary minimum participation 
rates and proposed that it apply to all qualified employers in the FF-
SHOP serving a given State. Because State law, regulation, and market 
practices vary from State to State, we also proposed an option for an 
FF-SHOP to adopt a different uniform minimum participation rate in a 
State with a FF-SHOP if there is evidence that:
    (1) A State law sets the rate; or
    (2) A higher or lower rate is customarily used by the majority of 
QHP issuers in that State for products in the State's small group 
market outside the SHOP. In addition, we proposed to exclude employees 
with certain types of alternative coverage from the calculation of the 
minimum participation rate:
    (1) A group health plan offered by another employer; or
    (2) A governmental program such as Medicare, Medicaid, or TRICARE. 
The preamble, and the proposed regulation text, also acknowledged that 
imposition of any minimum participation rate would have to be subject 
to the exception to the guaranteed issue requirements of section 2702 
of the PHS Act and the then-pending proposed rule implementing 
guaranteed issue.
    We sought comments on the default minimum participation rate and 
the exceptions that will help ensure alignment with current State 
practice and standards inside and outside the SHOP.
    Comment: Many commenters were supportive of both setting a default 
and allowing flexibility to adapt to different states.
    Response: We are retaining both the default and the flexibility, as 
proposed.
    Comment: One commenter questioned the necessity of a minimum 
participation rate given market reforms and suggested using minimum 
contribution instead.
    Response: While the degree of risk segmentation is substantially 
reduced by market reform, we conclude that a minimum participation rate 
should be applied, at least in the early years of an FF-SHOP. We have 
no authority under the Exchange Establishment Rule to set a minimum 
contribution rate for an FF-SHOP. We note, however, that a minimum 
participation rate encourages employers to set their contributions 
toward coverage high enough that the minimum participation rate is 
achieved.
    We are finalizing the provisions as proposed, with minor revisions 
to the text consistent with the discussion in the preamble. The 
introductory text at Sec.  155.705(b)(10), as well as the text at 
subparagraph (b)(10)(i), is amended to include the phrase ``Subject to 
Sec.  147.104 of this title'' to clarify when and how a minimum 
participation rate may be imposed under applicable law. Under this 
final rule, when an FF-SHOP makes the employee choice model available 
to qualified employers, it will use a consistent minimum participation 
rate across issuers.
6. Determining Employer Size for Purposes of SHOP Participation
    We proposed to amend the definitions of ``small employer'' and 
``large employer'' in Sec.  155.20 to specify the method for 
determining employer size for Exchange purposes and to add the 
definition of large employer to Sec.  157.20. In determining whether an 
employer is a small employer for purposes related to the SHOP, we 
proposed that the full-time equivalent method used in section 
4980H(c)(2)(e) of the Code, as added by section 1513 of the Affordable 
Care Act, be used. We sought comments on the proposed definition.
    Comment: Some commenters suggested that each SHOP, including FF-
SHOPs, should use State counting methods permanently. Other commenters 
supported an immediate move to a federal standard counting method that 
takes all employees into account. One commenter noted that the more 
comprehensive reference for the counting method used in the IRC would 
be Section 4980H(c)(2), which includes a provision to exclude certain 
seasonal employees when determining whether an employer is subject to 
the shared responsibility provisions.
    Response: We believe that the Affordable Care Act requires the use 
of a counting method that takes part time employees into account, and 
that the full-time equivalent method used in section 4980H(c)(2)(e) of 
the IRC is a reasonable method to apply with regard to Exchanges. We 
have changed the IRC reference from section 4980H(c)(2)(e) to 
4980H(c)(2) in response to the comment. We believe that the broader 
cross-reference is appropriate because it brings here the limit in 
Sec.  49080H(c)(2)(B) on how certain seasonal employees are counted. We 
believe that excluding certain seasonal employees when determining 
whether an employer has more than 50 employees would be closer to 
counting provisions used in many states and that employers should be 
able to use the same method to determine SHOP eligibility that they 
will use to determine whether they will be subject to section 4980H. 
This method of determining SHOP eligibility will be reevaluated before 
2016, when the small group market in all states will consist of 
employers with from 1 to 100 employees rather than 1 to 50 employees.
    Comment: Several commenters recommended that any counting method 
used to define employer size and thus the corresponding group market 
should

[[Page 15504]]

apply for all ACA purposes, not just for purposes relating to 
Exchanges.
    Response: Based on the scope of the proposed regulations, we are 
unable to adopt definitions in this Notice that apply beyond the 
Exchange regulations.
    We are finalizing the provisions as proposed, changing the 
reference to section 4980H(c)(2) of the IRC.
7. Definition of a Full-Time Employee for Purposes of Exchanges and 
SHOPs
    We proposed to add to Sec.  155.20 a definition of full-time 
employee that cross-references section 4980H(c)(4) of the Code, which 
provides that a full-time employee with respect to any month is 
generally an employee who is employed an average at least 30 hours of 
service per week, subject to the transitional policies discussed in the 
next paragraph. Under our proposal, this definition would control for 
purposes of the section 1312(f)(2)(A) requirement that qualified 
employers offer coverage to all full-time employees.
    Comment: Only one commenter addressed the definition of full time 
employee, suggested that full-time employee be defined as an employee 
working more than 1300 hours in the past year.
    Response: We find no rationale for adopting that definition of a 
full time employee, and retain instead the definition based on 30 hours 
a week used elsewhere in the Affordable Care Act.
    We are finalizing the definition as proposed.
8. Transitional Policies
    With our proposed definitions of large and small employer and full-
time employee, for purposes of Exchange and SHOP administration, we 
proposed policies to provide for a transition from different, existing 
State law. With respect to State-operated SHOPs for 2014 and 2015 only, 
we proposed that HHS will not take any enforcement actions against a 
State-operated SHOP for including a group in the small group market 
based on a State definition that does not include part-time employees 
when the group should have been classified as part of the large group 
market based on the Federal definition. Our proposal did not address 
application of State-specific definitions or counting rules that would 
exclude a small group health plan from protections provided under 
federal law. Similarly, during 2014 and 2015, an employer and a State-
operated SHOP may adopt a reasonable basis for their determination of 
whether they have met the SHOP requirement to offer coverage to all 
full-time employees, such as the definition of full-time employee from 
the State's small group market definition or the Federal definition 
from section 4980H of Chapter 43 of the Code.
    Under our proposal, however, each FF-SHOP would use a counting 
method that takes part-time employees into account. We proposed that 
these definitions will be effective October 1, 2013 for each FF-SHOP. 
We requested comments on the proposed definitions and on the proposed 
transition policies.
    Comment: Most commenters supported using State methods, either long 
term or as a transitional method in 2014-2015. Two commenters supported 
an immediate move to a federal standard counting method that takes all 
employees into account.
    Response: We conclude that, for purposes relating to the Exchange 
regulations, the definition of ``full-time employee'' and the 
definitions of ``small employer'' and ``large employer'' and their 
associated counting methods using a full-time equivalent (FTE) 
methodology should be effective for plan years beginning on or after 
January 1, 2016. During 2014 and 2015, when states have the discretion 
to choose whether the upper limit of small employer size is 50 or 100, 
we will exercise enforcement discretion, relying on State methods of 
determining group size and status as a full-time employee. However, in 
operating the FF-SHOPs, we do not have the same discretion; for plan 
years beginning on or after January 1, 2014 and in connection with open 
enrollment activities beginning October 1, 2013, we will use 
definitions of full-time employee, small employer, and large employer 
based on the FTE method of determining group size. Thus, prior to 2016, 
an FF-SHOP will use the State's choice of 50 or 100 employees, but will 
count those employees using the full-time equivalent method referenced 
in the definitions.
    We are finalizing the effective dates of the definitions of ``full-
time employee,'' ``small employer,'' and ``large employer'' as 
proposed, with a minor modification to clarify that the definitions 
will apply to plan years beginning on or after January 1, 2014 and in 
connection with open enrollment activities beginning October 1, 2013. 
As the SHOP, including FF-SHOPs, will not provide access to coverage 
until January 1, 2014, we believe the proposed text may have been 
subject to unintended ambiguity and are finalizing revised text to 
eliminate that concern.
9. Web Site Disclosures Relating to Agents and Brokers
    We proposed modifications to the Web site disclosure standards 
relating to brokers in Sec.  155.220(b). Specifically, we proposed a 
new paragraph (b)(1) that would allow an Exchange or SHOP to limit the 
display of agent and broker information to include only those licensed 
agents and brokers who are registered with the Exchange or SHOP and a 
new paragraph (b)(2) that would specifically adopt this provision for 
an FFE and an FF-SHOP. We believed that listing only brokers who have 
registered with the Exchange is in the best interest of the consumer, 
both because the registration and training helps assure that the agent 
or broker is familiar with the Exchange policies and application 
process and because the proposed listing will not contain large numbers 
of licensed brokers who are not active in the market. We welcomed 
comments on these proposals.
    Comment: Several commenters expressed strong support for the 
authority to list only registered brokers. One suggested the broader 
authority to list only those actually selling exchange QHPs. None 
opposed the proposal.
    Response: We are finalizing the regulation as proposed. At this 
time, we do not propose further limiting the listing based on actual 
sales.
10. QHP Issuer Standards Specific to SHOP
    We proposed modifications to the QHP issuer standards specific to 
SHOP for enrollment in Sec.  156.285. Specifically, we proposed a 
technical correction in paragraph (c)(7) such that QHP issuers 
participating in the SHOP must enroll qualified employees if they are 
eligible for coverage. This correction aligns SHOP enrollment standards 
to Exchange enrollment standards.
    Comment: One commenter supported the proposed regulation. No other 
comments were received.
    Response: We are finalizing the regulation as proposed.

I. Medical Loss Ratio Requirements Under the Patient Protection and 
Affordable Care Act

1. Treatment of Premium Stabilization Payments, and Timing of Annual 
MLR Reports and Distribution of Rebates
    In the December 2012 HHS Notice of Benefit and Payment Parameters 
for 2014 proposed rule (77 FR 73187), we proposed to modify the 
definition of premium revenue in Sec.  158.130, the formula in Sec.  
158.221(c) for calculating an issuer's MLR, and the formula in Sec.  
158.240(c) for calculating an issuer's

[[Page 15505]]

rebate if the MLR standard is not met, in the current MLR regulation to 
account for payments and receipts related to the premium stabilization 
programs. Specifically, we proposed to account for all premium 
stabilization amounts in a way that would not have a net impact on the 
adjusted earned premium used in calculating the MLR denominator and 
rebates. Additionally, we proposed to amend Sec.  158.140(b) to include 
all premium stabilization amounts (positive or negative) as adjustments 
to incurred claims in calculating the MLR numerator as provided in 
Sec.  158.221. We invited comment on this approach. We also indicated 
in the proposed rule that we considered adopting a methodology under 
which premium stabilization amounts would have a net impact on the MLR 
denominator, and invited public comment on that approach as well.
    In addition, as discussed in the proposed rule, we proposed to 
amend Sec.  158.110(b), Sec.  158.240(d), and Sec.  158.241(a)(2) to 
change the MLR reporting and rebate deadlines, beginning with the 2014 
MLR reporting year, to coordinate them with the reporting cycles of the 
premium stabilization programs. Comments on the proposed timeline were 
welcomed.
    Comment: Most commenters supported our proposal to include risk 
corridors amounts and reinsurance payments as adjustments to the MLR 
numerator, but many commenters suggested a change in our proposed 
approach with respect to reinsurance contributions and all risk 
adjustment amounts, which these commenters recommended be applied as 
adjustments to the MLR denominator. With respect to the reinsurance 
contributions, most commenters expressed the view that these are 
assessments on issuers that are more properly regarded as assessments 
or regulatory fees, and consequently should be deducted from premium in 
MLR and rebate calculations. With respect to risk adjustment, several 
commenters asserted that because State average premium is used to 
calculate risk adjustment amounts, MLR and rebate calculations should 
treat these transfer amounts as adjustments to premium. Two commenters 
expressed concern that including any premium stabilization amounts in 
the MLR numerator would reduce rebates. One commenter also suggested 
that we clarify the rebate calculation example in Sec.  158.240(c)(2) 
to make it clear that the rebate calculations account for premium 
stabilization amounts at the aggregation level, rather than at an 
individual enrollee level.
    Response: We recognize commenters' concerns regarding inclusion of 
risk adjustment amounts in the MLR numerator. However, as noted in the 
proposed rule, while PHS Act section 2718 provides that premium revenue 
should ``account for'' collections or receipts for the premium 
stabilization programs, section 1342(c) of the Affordable Care Act 
requires that risk corridors calculations treat reinsurance and risk 
adjustment payments as adjustments to allowable cost. Because the MLR 
and the risk corridors programs are closely related and rely on the 
same definitions, there should be consistency between these two 
programs. Proper functioning of the MLR and premium stabilization 
programs will be especially important in 2014-2016, the initial years 
the health insurance market will undergo significant changes. Thus, 
with respect to premium stabilization amounts other than reinsurance 
contributions (that is, risk adjustment amounts, risk corridors 
amounts, and reinsurance payments), we are adopting our proposed 
approach that these adjustments have a net impact on the MLR numerator. 
However, we agree with those commenters that stated that reinsurance 
contributions could reasonably be characterized as fees or assessments 
deductible from premium in MLR and rebate calculations, and this final 
rule amends Sec.  158.161(a) accordingly. Additionally, we are making 
clarifying changes to the rebate calculation example in Sec.  
158.240(c)(2) in response to comments.
    In sum, this final rule amends the formula for calculating the MLR 
as follows:

MLR = [(i + q - s + n - r)/{(p + s - n + r) - t - f - (s - n + 
r){time} ] + c

Where,

i = incurred claims
q = expenditures on quality improving activities
p = earned premiums
t = Federal and State taxes and assessments
f = licensing and regulatory fees, including transitional 
reinsurance contributions
s = issuer's transitional reinsurance receipts
n = issuer's risk corridors and risk adjustment related payments
r = issuer's risk corridors and risk adjustment related receipts
c = credibility adjustment, if any.

    Issuers must provide rebates to enrollees if their MLRs fall short 
of the applicable MLR standard for the reporting year. Rebates for a 
company whose MLR falls below the minimum MLR standard in a given State 
market will be calculated using the following amended formula:

Rebates = (m-a) * [(p + s - n + r) - t - f - (s - n + r)]

Where,

m = the applicable minimum MLR standard for a particular State and 
market
a = issuer's MLR for a particular State and market.

    The amendments made by this final rule will be effective for MLR 
reporting years beginning in 2014.
    Comment: Three commenters recommended that HHS include the 
Federally-facilitated Exchange user fees and user fees assessed on 
issuers participating in the HHS-operated risk adjustment programs as 
regulatory fees deductible from premium in MLR and rebate calculations. 
Two commenters recommended that issuer costs associated with operating 
risk adjustment data validation systems also be deducted for MLR 
purposes, either as an addition or offset to the payments or receipts 
related to the premium stabilization programs, or as regulatory fees or 
assessments deducted from premium. Three commenters further suggested 
that fees and/or operational costs related to the premium stabilization 
programs and Exchanges, that are priced into premium for policy years 
spanning 2013-2014, and consequently will be partially reflected in 
2013 premium, be either deducted or excluded from 2013 premium.
    Response: We have previously addressed the deductibility of State 
and Federal Exchange user fees in sub-regulatory guidance issued on 
April 20, 2012.\33\ We agree with the commenters' suggestion regarding 
the deductibility of the risk adjustment user fees, and we interpret 
Sec.  158.161(a) as allowing these user fees to be deducted from 
premium in MLR and rebate calculations. However, we do not agree with 
commenters that issuer expenditures on risk adjustment data validation 
systems, or any other operational costs related to the premium 
stabilization programs, constitute a regulatory fee or assessment or a 
transfer under the premium stabilization programs. We do not think that 
these types of expenditures can be distinguished from issuers' other 
administrative costs involved in compliance with laws and regulations. 
We also do not agree with comments suggesting that it would be 
appropriate to reduce rebates to 2013 enrollees by applying estimated 
2014 regulatory fees

[[Page 15506]]

priced into 2013 premium to 2013 MLR and rebate calculations. PHS Act 
section 2718 does not provide for estimated regulatory fees for future 
years to be deducted from premium used in MLR and rebate calculations 
for the reporting year.
---------------------------------------------------------------------------

    \33\ 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.
---------------------------------------------------------------------------

    Comment: We received several comments supporting our proposal to 
extend the MLR and rebate deadlines. Two commenters opposed extending 
the rebate deadline.
    Response: We appreciate the comments regarding the proposed 
deadlines. As noted in the proposed rule, we recognize both consumers' 
and policyholders' interests in maintaining the dates for MLR reporting 
and rebates as close to the June 1 and August 1 dates as possible, as 
well as issuers' interests in having the necessary data to submit their 
annual MLR reports and having sufficient time to disburse any rebates. 
We believe that the proposed deadlines strike a balance between these 
competing interests. Therefore, this final rule extends the MLR and 
rebate deadlines in Sec.  158.110(b), Sec.  158.240(d), and Sec.  
158.241(a)(2) as proposed in the December 2012 HHS Notice of Benefit 
and Payment Parameters for 2014 proposed rule (77 FR 73187).
2. Deduction of Community Benefit Expenditures
    In the December 2012 HHS Notice of Benefit and Payment Parameters 
for 2014 proposed rule (77 FR 73187), we proposed to amend Sec.  
158.162(b)(1)(vii) to allow an issuer exempt from Federal income tax to 
deduct both State premium taxes and community benefit expenditures from 
earned premium in MLR and rebate calculations. The proposal limited the 
community benefit expenditure deduction available to a tax exempt 
issuer to the higher of (1) the highest premium tax rate in the State; 
or (2) 3 percent of premium, ensuring a level playing field. The 
proposed amendment would not change the treatment of State premium 
taxes and community benefit expenditures for those issuers that are not 
exempt from paying Federal income tax.
    Comment: Several commenters suggested that the proposed treatment 
is unnecessary and would give Federal income tax exempt entities a 
competitive advantage. These commenters suggested that tax-exempt 
entities have sufficient advantages stemming from their favored tax 
treatment. These commenters further asserted that the deduction of 
community benefit expenditures should not depend on an issuer's tax 
status because such funds are not available to be used on subscribers' 
claims. The commenters proposed either allowing any issuer to deduct 
all taxes and community benefit expenditures, or eliminating the 
community benefit expenditure deduction.
    In contrast, most other commenters agreed that a Federal income tax 
exempt issuer is required to make community benefit expenditures to 
maintain its Federal income tax exempt status and supported the 
deduction of both State premium taxes and community benefit 
expenditures from earned premium for such issuers. These commenters 
agreed that the proposed treatment levels the MLR playing field and 
would allow a Federal income tax exempt issuer to deduct its community 
benefit expenditures in the same manner that a for-profit issuer is 
allowed to deduct its Federal income taxes.
    Response: We agree that, because an issuer that is exempt from 
Federal income taxes must make community benefit expenditures, such an 
issuer should be allowed to deduct community benefit expenditures and 
State premium taxes. This final rule allows a Federal income tax exempt 
issuer to deduct its community benefit expenditures in the same manner 
that another issuer is allowed to deduct its Federal income taxes. This 
rule does not alter the community benefit expenditure deduction 
currently available to an issuer that is not exempt from Federal income 
taxes. Such issuers are allowed to deduct the higher of (1) their State 
premium taxes or (2) their community benefit expenditures limited to 
the highest premium tax rate charged to an issuer in the State. This 
final rule accordingly amends Sec.  158.162(b)(1)(vii) as proposed in 
the December 2012 HHS Notice of Benefit and Payment Parameters for 2014 
proposed rule (77 FR 73187). We note that the amount of community 
benefit expenditures deducted is not allowed to exceed the amount of 
actual community benefit expenditures in the reporting year.
    Comment: One commenter suggested that the proposed community 
benefit expenditure deduction could lead to abuse, while another 
suggested that the deduction limit was speculative. However, most 
commenters agreed with the proposed community benefit expenditure 
limit.
    Response: In its MLR model rule, the National Association of 
Insurance Commissioners (NAIC) adopted and limited the community 
benefit deduction to the State premium tax rate. We adopted the NAIC 
methodology in the December 1, 2010 interim final rule (75 FR 74864, as 
amended), and comments in response to it noted that some States do not 
subject every type of issuer to State premium taxes and the community 
benefit deduction might not be available to those tax exempt issuers. 
In balancing the availability of the deduction and the potential for 
abuse, this final rule implements the community benefit expenditure 
deduction cap of the highest of (1) 3 percent of premium, or (2) the 
highest premium tax rate charged in the State, as proposed in the 
December 2012 HHS Notice of Benefit and Payment Parameters for 2014 
proposed rule (77 FR 73187).
3. Summary of Errors in the MLR Regulation
    In the December 2012 HHS Notice of Benefit and Payment Parameters 
for 2014 proposed rule (77 FR 73187), we proposed to correct three 
errors in the December 1, 2010 interim final rule (75 FR 74864, as 
amended): the date by which issuers must define the formula they use 
for the blended rate adjustment, described in Sec.  158.140(b)(5)(i); 
the date after which partially-credible issuers that consistently fail 
to meet the MLR standard will not be allowed to use a credibility 
adjustment, described in Sec.  158.232(d); and the calculation of the 
per-person deductible described in Sec.  158.232(c)(1)(i).
    Comment: We received one comment regarding our proposed correction 
to Sec.  158.232(d). The commenter recommended that an issuer that 
fails to meet the MLR standard for four or more consecutive years be 
penalized only once every three years. The commenter stated that after 
an issuer fails to meet the MLR standard for three consecutive years 
(the statistical probability of which is generally 50 percent x 50 
percent x 50 percent, or 12.5 percent), the probability of it failing 
to meet the MLR standard for the fourth consecutive year is 50 percent.
    Response: We disagree with the commenter's calculation. The 
commenter is correct that the statistical probability of an issuer 
failing to meet the MLR standard in any given year may be 50 percent. 
However, the probability of an issuer failing to meet the MLR standard 
for a number of consecutive years is 50 percent - n, where n is the 
number of years. Consequently, the probability of an issuer failing to 
meet the MLR standard for four consecutive years is 6.25 percent, and 
for five consecutive years it is 3.125 percent. With each additional 
year, the probability of an issuer failing to meet the MLR standard due 
to statistical fluctuations continues to shrink, increasingly 
indicating an intentional pricing below the MLR standard.

[[Page 15507]]

    This final rule therefore implements the technical corrections to 
Sec.  158.140(b)(5)(i), Sec.  158.232(d), and Sec.  158.232(c)(1)(i) as 
proposed in the December 2012 HHS Notice of Benefit and Payment 
Parameters for 2014 proposed rule (77 FR 73187).
    Comment: We received several comments suggesting that HHS clarify 
the MLR treatment of State high-risk pool assessments, events occurring 
after MLR reporting deadlines, and cost-sharing reductions. We also 
received one comment suggesting a larger adjustment for fraud 
prevention activities, an extension of allowable ICD-10 costs to the 
2013 reporting year, and inclusion of all-payer claims databases in 
quality improving activities.
    Response: The matters discussed in these comments are not within 
the scope of this final rule. However, we will continue to consider the 
need to issue clarifying guidance regarding the various accounting and 
actuarial elements affecting MLR and rebate calculations.

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:

A. Provisions for the State Notice of Benefit and Payment Parameters

     We are not amending Sec.  153.100(c) to provide that, if a 
State is required to publish an annual State notice of benefit and 
payment parameters for benefit year 2014, it must do so by the 30th day 
following the publication of the final HHS notice of benefit and 
payment parameters.

B. Provisions and Parameters for the Permanent Risk Adjustment Program

     We are modifying the requirement at Sec.  153.360 to 
clarify that small group market plans will be risk adjusted in the 
State in which the employer's policy was filed and approved.
     We are adding Sec.  153.610(f) to describe the risk 
adjustment user fees.

C. Provisions and Parameters for the Transitional Reinsurance Program

     We are amending the definition of ``contributing entity'' 
in Sec.  153.20 to include clarifying language that a contributing 
entity is a health insurance issuer or a self-insured group health 
plan.
     We are amending Sec.  153.100(a)(2) by replacing the 
cross-reference to Sec.  153.220(d) with Sec.  153.220(d)(1). We are 
making corresponding revisions in Sec.  153.100(d)(2); and Sec.  
153.110(b); 153.400(a).
     We are deleting Sec.  153.220(d)(2), which required a 
State to notify HHS within 30 days after publication of the draft 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year of the additional contribution rate that it elects to 
collect.
     We are revising Sec.  153.230(a) by replacing non-
grandfathered individual market plan with reinsurance-eligible plan.
     We are revising Sec.  153.230(c) to clarify that national 
reinsurance payments are calculated as the product of the national 
coinsurance rate multiplied by the health insurance issuer's claims 
costs for an individual enrollee's covered benefits that the health 
insurance issuer incurs in the applicable benefit year.
     We are revising Sec.  153.232(c) by replacing non-
grandfathered individual market plan with reinsurance-eligible plan and 
clarifying that the incurred claims costs for an individual enrollee's 
covered benefits are those incurred in the applicable benefit year.
     We are revising Sec.  153.232(d) by clarifying that 
reinsurance payments will be calculated with respect to an issuer's 
incurred claims costs for an individual enrollee's covered benefits 
incurred in the applicable benefit year.
     We are revising Sec.  153.235(a) to provide that HHS will 
allocate and disburse to each State operating reinsurance (and will 
distribute directly to issuers if HHS is operating reinsurance on 
behalf of a State), reinsurance contributions collected from 
contributing entities under the national contribution rate for 
reinsurance payments. The disbursed funds would be based on the total 
requests for reinsurance payments made under the national reinsurance 
payment parameters in all States and submitted under Sec.  153.410, net 
of any adjustment under Sec.  153.230(d).
     We are amending Sec.  153.240(b)(2) to clarify that a 
State must provide to an issuer of a reinsurance-eligible plan the 
calculation of the total reinsurance payments requested, on a quarterly 
basis during the applicable benefit year in a timeframe and manner 
determined by HHS, made under the national reinsurance payment 
parameters and State supplemental reinsurance payment parameters.
     We are amending Sec.  153.400 to clarify that each 
contributing entity must make reinsurance contributions annually at the 
national contribution rate for all reinsurance contribution enrollees, 
in a manner specified by HHS.
     We are amending Sec.  153.400(a)(1)(iii) to exclude from 
reinsurance contributions expatriate health coverage, as defined by the 
Secretary.
     We are amending Sec.  153.400(a)(1) by adding paragraph 
(iv) to exempt employer-provided health coverage, when such coverage 
applies to individuals with respect to which benefits under Title XVIII 
of the Social Security Act (Medicare) are primary under the Medicare 
Secondary Payor rules under section 1862(b) of the Social Security Act.
     We are amending Sec.  153.400(a)(2) by adding paragraph 
(xiii) to exempt a self-insured group health plan or health insurance 
coverage that is limited to prescription drug benefits from reinsurance 
contributions.
     We are revising Sec.  153.405(a)(1), Sec.  153.405(b) and 
Sec.  153.405(d) by deleting ``average'' to clarify that reinsurance 
contributions are calculated by multiplying the number of covered lives 
of reinsurance contribution enrollees during the applicable benefit 
year for all contributing entities by the national contribution rate, 
pursuant to Sec.  153.405(a).
     We are amending Sec.  153.405(c) to provide that HHS will 
notify contributing entities of the reinsurance contribution amount to 
be paid for the applicable benefit year within 30 days of submission of 
the annual enrollment count.
     We are amending Sec.  153.405(f) to revise the procedures 
for counting covered lives for group health plans with a self-insured 
coverage option and an insured coverage option.
     We are amending Sec.  153.405(g) to revise the aggregation 
of multiple group health plans maintained by the same plan sponsor.
     We are amending Sec.  153.405(g)(3) to clarify that a plan 
sponsor is not required to include as part of a single group health 
plan any group health plan that consists solely of excepted benefits, 
that only provide prescription drugs benefits, or that is an HRA, HSA, 
or FSA.
     We are amending Sec.  153.410(a) to clarify that an issuer 
of a reinsurance-eligible plan may make requests for reinsurance 
payments when an issuer's claims costs for an enrollee of that 
reinsurance-eligible plan has met the criteria for reinsurance payments 
in 45 CFR subpart B and this final rule and where applicable the State 
notice of benefit and payment parameters.

D. Provisions for the Temporary Risk Corridors Program

     We are modifying our proposed definition of ``taxes'' in 
Sec.  153.500, by

[[Page 15508]]

replacing the term ``taxes'' with the term ``taxes and regulatory 
fees.'' We are clarifying that reinsurance contributions are included 
within the definition of ``taxes and regulatory fees'' in Sec.  
153.500.
     We are amending Sec.  153.520 to remove references to 
reinsurance contributions in paragraph (d).
     We are also deleting Sec.  153.530(b)(1)(ii) and amending 
Sec.  153.530(b)(1) to eliminate the adjustment to allowable costs for 
reinsurance contributions made by an issuer, and are clarifying the 
treatment of community benefit expenditures within the risk corridors 
calculation.

E. Provisions for the Advance Payment of the Premium Tax Credit and 
Cost-Sharing Reduction Programs

     We are finalizing the provisions in Sec.  155.330(g) 
substantially as proposed, with modifications to the language to 
increase clarity.
     We are adding additional language at Sec.  155.340(e) to 
allow Exchanges greater flexibility in allocating the advance payment 
of the premium tax credit if one or more individuals in a tax household 
enroll in more than one policy through the Exchange. We also clarify 
our language in regard to tax filers covered by the same plan(s). In 
addition, we are adding paragraph (f) in which we specify the 
methodology that will be used for allocating advance payments of the 
premium tax credit provided through Federally-facilitated Exchanges.
     We are relabeling Sec.  155.340(f) as Sec.  155.340(g).
     We are making a minor technical correction at Sec.  
155.1030(a).
     We are making clarifying revisions to the provisions at 
Sec.  155.1030(a) and (b)(2), Sec.  156.420(a) and (b), Sec.  
156.430(a)(2), and 156.470(a), (b), and (e) to standardize language 
across the final rule.
     We are adding paragraph (c) to Sec.  155.1030, paragraph 
(g) to Sec.  156.420, paragraph (a)(4) to Sec.  156.430, and paragraph 
(f) to Sec.  156.470 to clarify the application of these provisions to 
issuers of multi-State plans.
     We are substituting Sec.  156.140(c) for Sec.  
156.140(c)(1) as the cross-reference for the term ``de minimis 
variation'' in Sec.  156.400.
     We are making a clarifying revision to the provision at 
Sec.  156.410(a).
     We are modifying the provisions at Sec.  156.430(b) to 
permit HHS to adjust the cost-sharing reduction advance payments if the 
QHP issuer demonstrates that the cost-sharing reductions provided are 
likely to differ significantly from the advance payment amounts.
     We are modifying paragraph (c)(1) and (2) of Sec.  
156.430, reserving paragraphs (c)(3) and (4), and adding paragraph 
(c)(5). The modified structure of Sec.  156.430(c) will allow for the 
amendments established in the interim final rule with comment published 
elsewhere in this issue of the Federal Register.
     We are adding paragraph (g) to Sec.  156.430 to provide 
that if an Indian is enrolled in a QHP in the individual market through 
an Exchange and is furnished an item or service directly by the Indian 
Health Service, an Indian Tribe, Tribal Organization, or Urban Indian 
Organization, or through referral under contract health services, the 
QHP issuer may not reduce the payment to any such entity for such item 
or service by the amount of any cost sharing that would be due from the 
Indian but for the prohibitions on cost sharing set forth in Sec.  
156.410(b)(2) and (3).
     We are making minor technical corrections to paragraphs 
(a) and (c) of Sec.  156.440 to clarify the cross-references.
     We are deleting paragraphs (d)(2) through (4) of Sec.  
156.470, relating to certain allocation standards for stand-alone 
dental plans.

F. Provisions on User Fees for a Federally-Facilitated Exchange (FFE)

     We are removing the reference to billable enrollees, so 
that the user fee rate is applied directly to the premium set by the 
issuer.

G. Distributed Data Collection for the HHS-Operated Risk Adjustment and 
Reinsurance Programs

     We are finalizing the proposed provisions.

H. Small Business Health Options Program

     In Sec.  155.20, the definitions of ``full-time 
employee,'' ``small employer,'' and ``large employer,'' we are 
clarifying the effective date for use of these definitions. In 
addition, in the definition of ``large employer,'' we are correcting 
the word ``larger'' to ``large.''
     In Sec.  155.705(b)(3)(ii), we are adding a provision 
requiring each FF-SHOP to allow qualified employers the choice of 
offering employees either all QHPs at a single level of coverage 
selected by the employer or, as a transition policy, a single QHP 
selected by the employer.
     We are revising Sec.  155.705(b)(10) to include language 
limiting authority to impose a minimum participation rate subject to 45 
CFR 147.104.
     In Sec.  155.705(b)(11)(ii), we are deleting a provision 
at subparagraph (D) requiring each FF-SHOP to allow employers to define 
different contribution percentages for different employee categories 
and relabeling the remaining subparagraphs accordingly.
     We are finalizing Sec.  156.200(g) with modifications in 
new subparagraph (g)(3) so that the QHP certification standard relating 
to participation in the FFE and FF-SHOP does not apply if neither the 
issuer nor any other issuer in the issuer group has a market share of 
the State's small group market greater than 20 percent, as determined 
using information submitted pursuant to 45 CFR 158.110.

I. Medical Loss Ratio Requirements Under the Patient Protection and 
Affordable Care Act

     We are amending the MLR formula to subtract reinsurance 
contributions from earned premium as regulatory fees, instead of 
treating them as an addition to incurred claims.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. To 
fairly evaluate whether an information collection should be approved by 
OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 
requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The following sections of this document contain estimates of 
paperwork burden; however, not all of these estimates are subject to 
the information collection requirements (ICRs) under the PRA for the 
reasons noted.

A. Collections Related to State Operation of Reinsurance & Risk 
Adjustment Programs (Sec.  153.210 Through Sec.  153.240, Sec.  
153.310)

    In sections Sec.  153.210 through Sec.  153.240 and Sec.  153.310 
of the proposed rule, we estimated the cost of collecting data for 
State-operated reinsurance and risk adjustment. Fewer than 10 States 
have told HHS that they will operate reinsurance or risk adjustment for 
the

[[Page 15509]]

2014 benefit year. Since collections from fewer than 10 persons are 
exempt from the PRA under 44 U.S.C. 3502(3)(A)(i), we are not seeking 
PRA approval for these information collection requirements. However, if 
more than nine States elect to operate risk adjustment in the future, 
we will seek PRA approval for these information collections.
    Comment: One commenter stated that our administrative cost 
estimates for these provisions were too low to be credible. Another 
commenter stated that we underestimated the cost to States of 
administering supplemental reinsurance payment parameters and 
monitoring fund balances. In particular, the commenter stated that 
establishing a governing board, engaging with stakeholders, and hiring 
independent actuaries would be expensive. One commenter believed that 
the cost to submit a report should include the State's costs for 
executive-level review to determine whether to operate reinsurance, and 
that HHS was confusing regulatory cost with the PRA's information 
collection burden.
    Response: We limited our estimates in the proposed rule to the 
incremental information collection associated with the requirements of 
these provisions. In the ``Supporting Statement for Paperwork Reduction 
Act submissions: Standards related to Reinsurance, Risk Corridors, and 
Risk Adjustment'' (Premium Stabilization Rule Supporting Statement), we 
estimated a baseline cost for the development of the State notice of 
benefit and payment. Therefore, we believe that there will only be a 
small incremental cost to States as a result of the reporting 
requirements at Sec.  153.210 through Sec.  153.240, Sec.  153.310. 
However, for reasons described earlier in this Collection of 
Information section, we are not seeking PRA approval for these 
collections. We have moved our discussion of the administrative costs 
associated with these provisions to the Regulatory Impact Analysis 
section of this final rule.

B. ICRs Regarding Calculation of Reinsurance Contributions (Sec.  
153.405)

    In Sec.  153.405, we finalize the rules related to an annual 
enrollment count of covered lives by contributing entities using 
counting methods derived from the PCORTF Rule. We are requiring 
contributing entities to provide annual counts of their enrollment and 
remit reinsurance contributions to HHS based on that enrollment count. 
The work associated with this requirement is the time and effort 
required by an issuer or self-insured group health plan to derive an 
annual enrollment count. Because issuers or self-insured group health 
plans will already be obligated to determine a count of covered lives 
using a PCORTF counting method, the cost associated with this 
requirement is conducting these counts using the slightly modified 
counting methods specified in this final rule. In this final rule, we 
are modifying our estimate of the number of contributing entities from 
the proposed rule. We estimate that 22,900 contributing entities will 
be subject to this requirement, based on the Department of Labor's 
estimated count of self-insured plans and the number of fully insured 
issuers that we estimate will make reinsurance contributions.\34\ On 
average, we estimate it will take each issuer or self-insured group 
health plan 1 hour (at a wage rate of $55 for an operations analyst) to 
calculate and submit final enrollment counts to HHS. Therefore, we 
estimate an aggregate cost of $1,259,500 for 22,900 reinsurance 
contributing entities as a result of this requirement. We will revise 
the Premium Stabilization Rule Supporting Statement to include the 
required data elements that issuers or self-insured group health plans 
will need to submit their annual enrollment counts in accordance with 
the counting methodology established in this final rule.
---------------------------------------------------------------------------

    \34\ We use an estimate of self-insured entities published by 
the Department of Labor in the April 2012 ``Report to Congress: 
Annual Report of Self-insured Group Health Plans,'' which reflects 
only those self-insured health plans (including 14,800 self-insured 
plans and 6,300 plans that mixed self-insurance and insurance) that 
are required to file a Form 5500 with the Department of Labor.
---------------------------------------------------------------------------

C. Requests for Reinsurance Payment (Sec.  153.410)

    As described in Sec.  153.410, issuers of reinsurance-eligible 
plans seeking reinsurance payments must make requests in accordance 
with the requirements of this final rule or the State notice of benefit 
and payment parameters, as applicable. To be eligible for reinsurance 
payments, issuers of reinsurance-eligible plans must submit or make 
accessible to HHS or the State, as applicable, all necessary data to be 
considered for reinsurance payments for the applicable benefit year.
    To minimize burden on issuers, HHS intends to collect data in an 
identical manner for HHS-operated reinsurance programs and HHS-operated 
risk adjustment. Although we clarified the data elements issuers would 
be required to submit as part of the reinsurance payment request 
process, the burden associated with this requirement is already 
accounted for under the Premium Stabilization Rule Supporting Statement 
with an October 31, 2015 expiration date, and we will update it to 
reflect these clarified data elements.

D. Upload of Risk Adjustment and Reinsurance Data (Sec.  153.420, Sec.  
153.700, Sec.  153.710, Sec.  153.720)

    Under the HHS-operated risk adjustment and reinsurance programs, 
HHS will use a distributed data collection approach for enrollee-level 
enrollment, claims and encounter data that reside on an issuer's 
dedicated data environment. Under Sec.  153.710(a), an issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State where 
HHS is operating the risk adjustment or reinsurance on behalf of the 
State, as applicable, must provide HHS, through the dedicated data 
environment, access to enrollee-level plan enrollment data, enrollee 
claims data, and enrollee encounter data, as specified by HHS. Under 
Sec.  153.710(b), all claims data submitted by an issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating risk adjustment or reinsurance, as applicable, 
must have resulted in payment by the issuer. Under Sec.  153.710(c), an 
issuer of a risk adjustment covered plan or a reinsurance-eligible plan 
in a State in which HHS is operating risk adjustment or reinsurance, as 
applicable, that does not generate individual enrollee claims in the 
normal course of business must derive costs on all applicable provider 
encounters using its principal internal methodology for pricing those 
encounters.
    Issuers will be directed to make risk adjustment and reinsurance 
data accessible to HHS in a way that conforms to HHS-established 
guidelines and applicable standards for electronic data collection and 
submission, storage, privacy and security, and processing. In Sec.  
153.720(a), we require these issuers to establish a unique masked 
enrollee identification number for each enrollee, in accordance with 
HHS-defined requirements and maintain the same masked enrollee 
identification number for enrollees that enroll in different plans 
within the issuer, within the State, during a benefit year. Issuers 
must provide all data to HHS in the specified formats, and must correct 
submitted files to resolve problems detected by HHS during file 
processing. The cost associated with this requirement is the time and 
effort to ensure that information in the dedicated data environment 
complies with HHS requirements. We estimate this will affect 1,800 
issuers and will cost each issuer approximately $178 per year, 
reflecting three hours of work by a

[[Page 15510]]

technical employee at $59.39 per hour. Therefore, we estimate an 
aggregate cost of $320,706 for all issuers as a result of these 
provisions.
    In addition, we discussed in the proposed rule an updating 
amendment to the Premium Stabilization Rule Supporting Statement that 
was approved with an October 31, 2015 expiration date reflecting 
updated cost estimates for implementing the distributed data approach. 
We are making a slight modification to the labor estimate we assumed in 
our proposed rule by assuming Federal holidays and two weeks of 
vacation time for full time employees. In this final rule, we estimate 
that this data submission requirement will affect 1,800 issuers, and 
will cost each issuer approximately $342,086 in total labor costs. This 
cost reflects an estimate of three full-time equivalent employees 
(5,760 hours per year) at an average hourly rate of $59.39 per hour. We 
anticipate that approximately 400 data processing servers will be 
established across the market in 2014 (at an average cost of $15,000), 
and these servers will process approximately 9 billion claims and 
enrollment files. Therefore, we estimate an aggregate cost that 
includes labor and capital of $621,754,800 for all issuers as a result 
of these provisions. Although we had previously accounted for this 
estimate as a new administrative cost to issuers in the proposed rule, 
we are not doing so in this final rule because it is not an incremental 
cost that issuers will incur as a result of the provisions in this 
final rule. We had previously estimated the costs associated with these 
risk adjustment and reinsurance enrollment data submission requirements 
in the Premium Stabilization Rule Supporting Statement that was 
approved with an October 31, 2015 expiration date. We will revise that 
supporting statement to reflect our updated estimate. We are also 
amending the tables in the Collection of Information section and 
Regulatory Impact Analysis section of this final rule so that the 
tables reflect only those incremental costs that result from provisions 
of this final rule.
    Comment: One commenter stated that there was no basis for the 
proposed estimate and that the values seemed low considering the 
importance and complexity of the tasks involved. The commenter also 
believed that the estimate did not account for costs associated with 
overhead, administrative tasks, and employee benefits.
    Response: We believe that our proposed estimate is reasonable for 
first year operations. The estimate reflects average labor and capital 
costs associated with standing up a dedicated data environment, as well 
as average claims volume. Some issuers will have appropriate staff and 
infrastructure in place to support the data collection and other 
issuers will need to acquire resources. While we anticipate an initial 
concentrated effort for set-up of the dedicated data environment, we 
believe that three full-time equivalents would cover the number of 
hours needed (on average) for set-up and maintenance in the first year 
of operations. The average hourly rate of $59.39 is based on the Bureau 
of Labor Statistics, U.S. Department of Labor, National Compensation 
Survey: Occupational Earnings in the United States, 2011. We note that 
it approximates the lower range of hourly wages, $60, estimated by 
respondents to a recent industry survey,\35\ and that industry 
respondents' cost estimates ranged widely to reflect different pricing 
and conditions. Our aggregate cost estimate also includes costs 
associated with capital purchases, overhead, and fringe benefits.
---------------------------------------------------------------------------

    \35\ ``Health Plans' Estimated Costs of Compliance with Expanded 
Federal Rate Review and with Data Collection for Risk Adjustment and 
Reinsurance,'' Center for Policy Research, America's Health 
Insurance Plans, December 2012.
---------------------------------------------------------------------------

E. ICR Regarding User Fee When HHS Operates Risk Adjustment (Sec.  
153.610)

    Under Sec.  153.610(f), we establish a user fee to support Federal 
operation of risk adjustment. This per capita monthly fee will be 
charged to issuers of risk adjustment covered plans based on enrollment 
estimates provided to HHS in the distributed data environment. HHS will 
calculate user fees owed, and issuers will remit the fee owed only 
once, in June of the year following the benefit year, in connection 
with processing of payments and charges for risk adjustment.
    We estimate that 1,800 issuers will be required to pay risk 
adjustment user fees, and the additional cost associated with this 
requirement is the time and effort for an issuer to provide monthly 
enrollment data and remit fees. Because HHS will utilize existing data 
collection and payments and charges processing, we do not anticipate 
that this provision will alter the collection cost that is already 
approved in the Premium Stabilization Rule Supporting Statement under 
OMB control number 0938-1155 with an October 31, 2015 expiration date.

F. ICRs Regarding Data Validation Requirements When HHS Operates Risk 
Adjustment (Sec.  153.630)

    Under Sec.  153.630(b), an issuer that offers at least one risk 
adjustment covered plan in a State where HHS is operating risk 
adjustment on behalf of the State for the applicable benefit year must 
have an initial validation audit performed on its risk adjustment data. 
The cost associated with this requirement is the issuer's time and 
effort to provide HHS with source claims, records, and enrollment 
information to validate enrollee demographic information for initial 
and second validation audits and the issuer's cost to employ an 
independent auditor to perform the initial validation audit on a 
statistically valid sample of enrollees.
    The statistically valid sample of enrollees provided to each issuer 
will consist of enrollees both with and without HCCs. We estimate that 
each issuer sample will consist of approximately 300 enrollees, with 
approximately two-thirds of the sample consisting of enrollees with 
HCCs. We anticipate that this audit will affect approximately 1,800 
issuers.
    Based on Truven Health Analytics 2010 MarketScan[supreg] data, we 
have determined that for enrollees with HCCs, the average number of 
HCCs to be reviewed by an auditor per enrollee is approximately two. 
Additionally, based on HHS audit experience, we estimate that it will 
cost approximately $180 ($90 per hour for two hours) for an auditor to 
review the medical record documentation for one enrollee with two HCCs. 
In the proposed rule, we did not estimate the cost of reviewing medical 
records for enrollees without HCCs. HHS intends to require the review 
of medical records for all sample enrollees in the initial validation 
audit. Therefore, we are revising our estimate to align with the policy 
finalized in this rule. We expect that it may cost approximately $60 
per enrollee ($90 per hour for 40 minutes) to validate demographic 
information and review medical records for all enrollees in the audit 
sample, totaling approximately $210 per enrollee with HCCs ($90 per 
hour for two hours and 20 minutes) and $60 per enrollee with no HCCs. 
We assume that an initial validation audit will be performed on 180,000 
enrollees without HCCs, and 360,000 enrollees with HCCs. Based on the 
information above, we estimate that the total cost per issuer to retain 
initial validation auditors to perform the initial validation would 
cost approximately $48,000. Therefore, for 1,800 issuers, the total 
cost of conducting initial validation audits will be $86.4 million. We 
will revise the information collection currently approved OMB Control 
Number 0938-1155 with an October 31,

[[Page 15511]]

2015 expiration date to account for this additional burden.
    Under Sec.  153.630(d), issuers will have the opportunity to appeal 
errors identified through the second validation audit process. Because 
we intend to provide further detail on this process in later guidance 
and rulemaking, we currently cannot estimate the number of issuers that 
will appeal HCC findings, or the cost per issuer for doing so. 
Therefore, we will seek OMB approval and solicit public comment on the 
information collection requirements established under Sec.  153.630(d) 
at a future date.

G. ICRs Regarding QHP Certification Standards Related to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions (Sec.  
155.1030)

    In Sec.  155.1030(a)(1) of this final rule, we establish that the 
Exchange must ensure that each issuer that offers or intends to offer a 
QHP in the individual market on the Exchange submit the required plan 
variations, as set forth in Sec.  156.420, for each of its health plans 
proposed to be offered as a QHP in the individual market on the 
Exchange. Further, the Exchange must certify that the plan variations 
meet the requirements detailed in Sec.  156.420. We expect that an 
Exchange will collect prior to each benefit year the information 
necessary to validate that the issuer meets the requirements for silver 
plan variations, as detailed in Sec.  156.420(a), and collect as part 
of QHP certification the information necessary to validate that the 
issuer meets the requirements for zero and limited cost sharing plan 
variations, as detailed in Sec.  156.420(b). We expect that this data 
collection would include the cost-sharing requirements for the plan 
variations, such as the annual limitation on cost sharing, and any 
reductions in deductibles, copayments or coinsurance. In addition, the 
Exchange will collect or calculate the actuarial values of each QHP and 
silver plan variation, calculated under Sec.  156.135 of the final EHB/
AV Rule. We proposed in Sec.  155.1030(a)(2) that the Exchange provide 
the actuarial values of the QHPs and silver plan variations to HHS. As 
set forth in Sec.  155.1030(b)(4), HHS may use this information in 
connection with approving estimates for advance payment of cost-sharing 
reductions submitted by issuers under Sec.  156.430 finalized here. 
Because HHS will already have this information for Federally-
facilitated Exchanges, the burden associated with this requirement is 
the time and effort for a State participating in each State Partnership 
and for a State-based Exchange to submit this information to HHS. We 
estimate that the submission from each of these entities will take 
approximately 3.5 hours to collect, validate, and submit to HHS (3 
hours by a database administrator at $47.70 per hour, and 0.5 hours by 
a manager at $75.15 per hour). We estimate that this will cost each 
submitting entity approximately $181 per year. We plan to revise the 
supporting statement published under CMS form number 10433, which is 
pending OMB approval, to account for this additional burden.
    In paragraph (b)(1) and (2), we established that the Exchange 
collect, review, and submit the rate or expected premium allocation, 
the expected allowed claims cost allocation, and the actuarial 
memorandum that a metal level health plan or stand-alone dental plan 
issuer submits under Sec.  156.470. This collection will allow for the 
calculation of the advance payments of cost-sharing reductions and the 
premium tax credit. The Exchange must ensure that such allocations meet 
the standards set forth in Sec.  156.470(c) and (d). This allocation 
information must be collected and approved before a health plan or 
stand-alone dental plan can be certified for participation in the 
Exchange. We expect that the Exchange will collect the allocation 
information in conjunction with the rate and benefit information that 
the issuer submits under Sec.  156.210 or the rate information that the 
QHP issuers submits through the Effective Rate Review program. 
Therefore, we believe that the cost for Partnership Exchanges or State-
based Exchanges to submit to HHS this information collected from QHPs 
is generally part of the cost that is accounted for in the PRA approved 
under OMB Control Number 0938-1141 or the cost that is accounted for in 
the supporting statement published under CMS form number 10433, which 
is pending OMB approval. We estimate that Partnership and State-based 
Exchanges will incur additional cost to submit allocation information 
to HHS for stand-alone dental plans. We estimate that it will take each 
Exchange 30 minutes to submit this information for each stand-alone 
dental plan, and assume that this submission will be performed at the 
hourly wage rate of $38.49 for an insurance analyst. Assuming 20 stand-
alone dental plans across the market, we estimate an aggregate cost of 
approximately $385 for all Partnership or State-based Exchanges to 
submit this information to HHS. We plan to revise the supporting 
statement published under CMS form number 10433, which is pending OMB 
approval, to account for this additional burden.
    In subparagraph (b)(3), we establish that the Exchange must collect 
any estimates and supporting documentation that a QHP issuer submits to 
receive advance payments of certain cost-sharing reductions, as 
described in Sec.  156.430(a), and submit, in the manner and timeframe 
established by HHS, the estimates and supporting documentation to HHS 
for review. Because HHS will already have this information for 
Federally-facilitated Exchanges, the burden associated with this 
requirement is the time and effort for each Partnership or State-based 
Exchange to submit this information. We believe that this provision 
will impose minimal burden, and that it will take an insurance analyst 
five minutes (at an hourly wage rate of $38.49), to collect and submit 
this information to HHS for each Partnership or State-based Exchange. 
Therefore, we estimate a cost of $3.21 for each Partnership or State-
based Exchange as a result of this requirement.

H. ICRs Regarding Plan Variations (Sec.  156.420)

    In Sec.  156.420, we set forth standards for issuers to submit to 
the Exchange for certification the variations of the health plans that 
they offer or propose to offer in the individual market on the Exchange 
that include the required levels of cost-sharing reductions. We provide 
an overview of the submission process associated with this requirement 
in this final rule. In paragraph (a), we establish that, for each 
silver health plan that an issuer offers or intends to offer in the 
individual market on the Exchange, the QHP issuer must submit to the 
Exchange for certification the standard silver plan and three 
variations of the standard silver plan. In paragraph (b), we further 
establish that a QHP issuer must, for each of its health plans at any 
metal level of coverage, submit a zero cost sharing plan variation and 
a limited cost sharing plan variation of each health plan offered or 
proposed to be offered in the individual market on the Exchange. 
However, in this final rule, we clarify that an Exchange is adequately 
enforcing this requirement if, within a set of standard plans offered 
by an issuer that differ only by the cost sharing or premium, it allows 
an issuer to submit one zero cost sharing plan variation for only the 
standard plan with the lowest premium within the set. Although this 
approach will likely reduce the burden on issuers and Exchanges, it is 
unclear how many Exchanges will adopt this approach, and

[[Page 15512]]

as a result, we have not adjusted our burden estimates below.
    We estimate that 1,200 issuers will participate in an Exchange 
nationally, and that each issuer will offer one QHP per metal level 
with four zero cost sharing plan variations and four limited cost 
sharing plan variations (one per metal level QHP) and three plan 
variations for low-income populations, for a total of four standard 
plans and eleven plan variations. Our estimate assumes that each issuer 
will submit these plan variations as part of their electronic QHP 
application, which is described in further detail in the ``Supporting 
Statement for Initial Plan Data Collection to Support QHP Certification 
and other Financial Management and Exchange Operations,'' which was 
provided for public comment on November 21, 2012 (77 FR 69846). We 
estimate that it will take approximately 1.5 hours to submit the 
requisite information for a plan variation (0.75 hours by an actuary at 
a wage rate of $56.89, 0.5 hours by an insurance analyst at a wage rate 
of $38.49, and 0.25 hours by an insurance manager at a wage rate of 
$67.44). Based on the figures above, we estimate it will cost each 
issuer approximately $866 to submit 11 plan variations annually, for an 
aggregate cost of $1,039,698 for all issuers participating in the 
Exchanges. We plan to revise the supporting statement published under 
CMS form number 10433, which is pending final OMB approval, to account 
for this additional burden.

I. ICRs Regarding Payment of Cost-Sharing Reductions (Sec.  156.430)

    In Sec.  156.430(a)(1), we establish that for each silver plan 
variation and zero cost sharing plan variation that an issuer offers or 
proposes to offer in the individual market on the Exchange, the QHP 
issuer must provide to the Exchange, for approval by HHS, estimates, 
and supporting documentation validating the estimates, of the dollar 
value of cost-sharing reductions to be provided. However, as described 
in the preamble to this final rule, we are finalizing a simplified 
methodology for calculating the advance payments for the initial years 
of the cost-sharing reduction program. This methodology will utilize 
data that QHP issuers submit for other requirements, such as Sec.  
156.420 and Sec.  156.470. As a result, there will be no additional 
burden associated with this requirement for QHP issuers.
    In Sec.  156.430(a)(2), we discuss the process for estimating the 
value of cost-sharing reductions to be provided under the limited cost 
sharing plan variation open to Indians with a household income above 
300 percent of the FPL, described in Sec.  156.420(b)(2). If a QHP 
issuer seeks advance payments for these cost-sharing reductions, the 
issuer must provide to the Exchange, for approval by HHS, an estimate, 
and supporting documentation validating the estimate, of the dollar 
value of the cost-sharing reductions to be provided under the limited 
cost sharing plan variation of the QHP. We estimate that 1,200 issuers 
will participate in Exchanges nationally, and that each issuer will 
offer one QHP per metal level, with one limited cost sharing plan 
variation for each metal level. For each plan variation, the issuer may 
submit an estimate and supporting documentation of the dollar value of 
the cost-sharing reductions. We expect estimates and supporting 
documentation will be submitted as part of the electronic QHP 
application, which is described in further detail in the ``Supporting 
Statement for Initial Plan Data Collection to Support QHP Certification 
and other Financial Management and Exchange Operations,'' which was 
provided for public comment on November 21, 2012 (77 FR 69846). We 
estimate that it will take approximately one hour to submit each 
response for a plan variation (0.5 hours by an actuary at a wage rate 
of $56.89 and 0.5 hours by an insurance analyst at a wage rate of 
$38.49.) We estimate that each response for a plan variation will cost 
an issuer $47.69, for an estimated total issuer cost to submit 
responses for four plan variations of $228,912 for the year. We plan to 
revise the supporting statement published under CMS form number 10433, 
which is pending final OMB approval, to account for this additional 
burden.
    In Sec.  156.430(c)(1), (c)(2), and (c)(5), we finalize a standard 
that directs a QHP issuer to submit to HHS, in the manner and 
timeframes established by HHS, the actual amount of cost-sharing 
reductions provided to each enrollee. This information is necessary so 
that HHS can reconcile advance payments made throughout the year to the 
actual cost-sharing reduction amounts. Based upon preliminary 
discussions with the issuer and vendor community regarding the costs 
associated with implementing the standard methodology, we assume that 
the information technology necessary to implement the standard 
methodology will be developed by three vendors at a cost of 
approximately $6 million per vendor, for total costs of approximately 
$18 million. We also expect that each issuer will need to spend 
approximately $100,000 to customize the vendor solution technology and/
or modify their claims system. Therefore, we estimate total 
administrative costs of approximately $138 million. While these 
information collection requirements are subject to the Paperwork 
Reduction Act, the information collection process and instruments 
associated with this requirement are currently under development. We 
will seek OMB approval and solicit public comments upon their 
completion. We note that we have not included our initial cost estimate 
of this approach in Table 25 or Table 26.
    As discussed in section III.E.4.e, we are issuing an interim final 
rule with comment elsewhere in this issue of the Federal Register to 
provide QHP issuers with the option to submit data about the actual 
amount of cost-sharing reductions using an alternate methodology for 
purposes of payment reconciliation. We address the burden associated 
with this alternate approach in the Collection of Information section 
of the interim final rule with comment.

J. ICRs Regarding Reduction of an Enrollee's Share of Premium To 
Account for Advance Payment of the Premium Tax Credit (Sec.  156.460)

    Under Sec.  156.460(a)(2), if a QHP issuer receives an advance 
payment of the premium tax credit on behalf of an individual, the QHP 
issuer must notify the Exchange of any reduction in premium through the 
standard enrollment acknowledgment in accordance with Sec.  156.265(g). 
Because this notification will occur through the enrollment 
acknowledgment process that already exists under the final Exchange 
Establishment Rule (77 FR 18310), at Sec.  156.265(g), we believe that 
this requirement will impose minimal burden on QHP issuers, and that it 
will take an insurance analyst five minutes (at an hourly wage of 
$38.49), to collect and submit this information to each Exchange. 
Therefore, we estimate a cost of approximately $3.21 for each QHP 
issuer, and an aggregate cost of approximately $3,849 for all 1,200 QHP 
issuers, as a result of this requirement.

K. ICRs Regarding Allocation of Rates and Claims Costs for Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions (Sec.  
156.470)

    In Sec.  156.470(a), we establish that an issuer provide to the 
Exchange annually for approval, for each metal level health plan 
offered or intended to be offered in the individual market on the 
Exchange, an allocation of the rate and the expected allowed claims 
costs for the plan, for EHB, other than services described in Sec.  
156.280(d)(1), and any

[[Page 15513]]

other services or benefits offered by a health plan that do not meet 
the definition of EHB. In Sec.  156.470(b), we establish that an issuer 
of a stand-alone dental plan provide to the Exchange for approval a 
dollar allocation required by the expected premium for the plan to the 
pediatric dental essential health benefit. In Sec.  156.470(c), we are 
finalizing standards for QHP issuers for calculating the allocation 
required by paragraph (a). As discussed above, we are modifying Sec.  
156.470(d) and finalizing one standard for issuers of stand-alone 
dental plans for calculating the allocation in paragraph (b). Lastly, 
in Sec.  156.470(e), we are finalizing the requirement that an issuer 
of a metal level health plan or stand-alone dental plan offered, or 
intended to be offered, in the individual market on the Exchange, 
submit an actuarial memorandum with a detailed description of the 
methods and specific bases used to perform the allocations that would 
be required under paragraphs (a) and (b) of that section, demonstrating 
that the allocations meet the standards set forth in paragraphs (c) and 
(d).
    QHP issuers will submit these allocations and justifications 
through the Effective Rate Review program (as finalized in the Market 
Reform Rule at Sec.  154.215(d)(3)-(4), and detailed in the 
accompanying PRA package with OMB Control Number 0938-1141) or directly 
to the Exchange if the issuer is not required to submit rates to the 
Effective Rate Review program. The Rate Increase Disclosure and Review 
Rule establishes a process to ensure the public disclosure of all 
information and justifications relating to unreasonable rate increases. 
To that end, the regulation establishes various reporting requirements 
for health insurance issuers, including a Preliminary Justification for 
a proposed rate increase, a Final Justification for any rate increase 
determined by a State or HHS to be unreasonable, and a notification 
requirement for unreasonable rate increases that will not be 
implemented. The Preliminary Justification includes data supporting the 
potential rate increase as well as a written explanation of the rate 
increase. For those rates HHS will be reviewing, issuers' submissions 
also will include data and information that HHS will need to make a 
valid actuarial determination regarding whether a rate increase is 
unreasonable. Therefore, there will be no additional burden on QHP 
issuers that submit their rates through the Effective Rate Review 
program. The burden for the Effective Rate Review submission is already 
accounted for in OMB Control Number 0938-1141. We are also revising the 
supporting statement of the information collection approved under OMB 
Control Number 0938-1141 to clarify that we will be collecting this 
allocation information from metal plans to be offered on an Exchange, 
whether they are new or existing.
    This requirement will result in additional burden for stand-alone 
dental plans. We estimate that it will take each stand-alone dental 
plan five hours to prepare and submit this information to the Exchange. 
We assumed that this requirement will require three hours of labor by 
an insurance analyst (at an hourly wage rate of $38.49) and two hours 
of labor by an actuary (at an hourly wage rate of $56.89). Assuming 20 
stand-alone dental plans across the market, we estimate an aggregate 
cost of approximately $4,585 for all stand-alone dental plans to submit 
these allocations and justifications to the Exchange. We plan to revise 
the supporting statement published under HHS form number 10433, which 
is pending final OMB approval, to account for this additional burden.

L. ICRs Regarding QHP Participation Standards in SHOP (Sec.  156.200)

    In Sec.  156.200(g)(1), we establish a QHP certification standard 
for the FFE. If the issuer of a QHP in an FFE also participates in the 
State's small group market, the QHP certification standard would be met 
if the issuer offers at least one small group market QHP at the silver 
level of coverage and one QHP at the gold level of coverage in a FF-
SHOP serving that State. We also propose that, if neither the issuer 
nor any issuer in the same issuer group has a share of the State's 
small group market greater than 20 percent, the standard would be met. 
Therefore, no issuer would be required to begin offering small group 
market plans to meet this requirement. The burden associated with this 
requirement is the time and effort for an issuer to prepare a QHP 
certification application for a SHOP for at least one silver level and 
one gold level plan design. This burden would be incurred by issuers 
who, absent this requirement, would otherwise not have participated in 
a SHOP. We describe the burden associated with this requirement in the 
30-day Federal Register Notice for the Initial Plan Data Collection 
published on November 21, 2012 (77 FR 69846). The market share 
determination is based on earned premiums already submitted by all 
issuers in the State's small group market under Sec.  158.110, and thus 
poses no additional reporting burden.

M. ICRs Regarding Medical Loss Ratio Reporting (Sec.  158.130, Sec.  
158.140, Sec.  158.162, Sec.  158.221, Sec.  158.240)

    This final rule directs issuers to include all payments and receipt 
amounts related to the reinsurance, risk corridors and risk adjustment 
programs in the annual MLR report.
    The existing information collection requirement is approved under 
OMB Control Number 0938-1164. This includes the annual reporting form 
that is currently used by issuers to submit MLR information to HHS. 
Prior to the deadline for the submission of the annual MLR report for 
the 2014 MLR reporting year, and in accordance with the PRA, HHS plans 
to solicit public comment and seek OMB approval for an updated annual 
form that will include reporting of the premium stabilization payments 
and will reflect the changes in deduction for community benefit 
expenditures for Federal income tax exempt not-for-profit issuers.

                                        Table 25--Estimated Fiscal Year Reporting Recordkeeping and Cost Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Hourly
                                                                                 Burden per     Total    labor cost     Total       Total
     Regulation sections        OMB Control No./CMS    Respondents   Responses    response     annual        of      labor cost    capital/   Total cost
                                     Form No.                                     (hours)      burden     reporting      ($)     maintenance      ($)
                                                                                               (hours)    \36\ ($)                costs ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   153.405..............  0938-1155.............        22,900      22,900         1.00      22,900       55.00   1,259,500            0   1,259,500
Sec.   153.630(b)...........  0938-1155.............         1,800     540,000         1.78     960,000       90.00  86,400,000            0  86,400,000
Sec.   153.720(a)...........  0938-1155.............         1,800       1,800         3.00       5,400       59.39     320,706            0     320,706
Sec.   155.1030(a)..........  0938-NEW/CMS-10433....            51          51         3.50         179       51.62       9,240            0       9,240
Sec.   155.1030(b)(2).......  0938-NEW/CMS-10433....            20          20         0.50          10       38.49         385            0         385
Sec.   155.1030(b)(3).......  0938-NEW/CMS-10433....            51          51         0.08        4.25       38.49         164            0         164
Sec.   156.420..............  0938-NEW/CMS-10433....         1,200      13,200         1.50      19,800       52.51   1,039,698            0   1,039,698
Sec.   156.430(a)(2)........  0938-NEW/CMS-10433....         1,200       4,800         1.00       4,800       47.69     228,912            0     228,912
Sec.   156.460(a)(2)........  0938-NEW/CMS 10433....         1,200       1,200         0.08         100       38.49       3,849            0       3,849
Sec.   156.470..............  0938-NEW/CMS-10433....            20          20         5            100       45.85       4,585            0       4,585
                                                     ---------------------------------------------------------------------------------------------------

[[Page 15514]]

 
    Total...................  ......................        24,171  ..........  ...........  ..........  ..........  89,267,039            0  89,267,039
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Regulatory Impact Statement (or Analysis)

A. Statement of Need

    This final rule implements standards related to premium 
stabilization programs (reinsurance, risk adjustment, and risk 
corridors), consistent with the Affordable Care Act. This final rule 
also includes provisions governing the cost-sharing reductions program, 
the advance payment of the premium tax credit program, the medical loss 
ratio program, the SHOP Exchange, and user fees for Federally-
facilitated Exchanges. The purpose of the three premium stabilization 
programs is to prevent adverse selection and to protect consumers from 
increases in premiums due to issuer uncertainty. The Premium 
Stabilization Rule explained that further details on the implementation 
of these programs, including the specific parameters applicable to 
these programs, would be included in this rule.
---------------------------------------------------------------------------

    \36\ Bureau of Labor Statistics, U.S. Department of Labor, 
National Compensation Survey: Occupational Earnings in the United 
States, 2011. United States Government Printing Office. May 2011. 
Retrieved from http://www.bls.gov/ncs/ncswage2010.htm.
---------------------------------------------------------------------------

B. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 202 of the Unfunded Mandates Reform Act 
of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on 
Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 
804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. A regulatory impact analysis (RIA) must be prepared for 
rules with economically significant effects ($100 million or more in 
any 1 year).
    OMB has determined that this Payment Notice is ``economically 
significant'' within the meaning of section 3(f)(1) of Executive Order 
12866, because it is likely to have an annual effect of $100 million in 
at least one year. Accordingly, we have prepared a regulatory impact 
analysis that presents the costs and benefits of this final rule.
    The overarching goal of the premium stabilization and Exchange-
related provisions and policies in the Affordable Care Act is to make 
affordable health insurance available to individuals who do not have 
access to affordable employer-sponsored coverage. The provisions within 
this final rule are integral to the goal of expanding coverage. For 
example, the premium stabilization programs (risk adjustment, 
reinsurance, and risk corridors) decrease the risk of financial loss 
that health insurance issuers might otherwise expect in 2014. The cost-
sharing reductions program and advance payments of the premium tax 
credit assist low- and moderate-income consumers in purchasing health 
insurance. The combined impacts of these provisions affect the private 
sector, issuers, and consumers, through increased access to health care 
services including preventive services, decreased uncompensated care, 
lower premiums, and increased plan (and thereby cost) transparency. 
Through the reduction of financial uncertainty for issuers and 
increased affordability for consumers, the provisions are expected to 
increase access to health coverage.
    Recent research \37\ analyzed the effects of increased insurance 
coverage. The analysis studied the health effects of expanded Medicaid 
eligibility in three States (New York, Maine, and Arizona) with 
comparable States that did not expand Medicaid over a multiyear time 
period. The study found that increased coverage resulted in:
---------------------------------------------------------------------------

    \37\ Sommers, Ben et al ``Mortality and Access to Care among 
Adults after State Medicaid Expansions'' New England Journal of 
Medicine No: 367 20121025-1034.
---------------------------------------------------------------------------

     Significant reduction in mortality (19.6 deaths per 
100,000) during the period of study;
     Increased rate of self-reported health status (by three 
percent); and
     Reduction in cost-related delays in care (by 21 percent).
    While these results may not be entirely generalizable given the 
population and coverage type, they do replicate other research findings 
\38\ of the importance of health coverage in improving health and 
delaying mortality.
---------------------------------------------------------------------------

    \38\ Finkelstein, A et al. ``The Oregon Health Insurance 
Experiment: Evidence from the First Year.'' NBER Working Paper No. 
17190, July 2011.
---------------------------------------------------------------------------

    There are administrative costs to States to administer these 
programs, although Federal grants are available through 2014 for States 
seeking to establish State-based Exchanges, and to support certain 
State activities related to the establishment of FFEs or State 
Partnership Exchanges.
    Issuers making reinsurance contributions but not receiving 
reinsurance payments may receive indirect benefits in the form of lower 
uncompensated care costs. There are also reporting costs for issuers to 
submit data and financial information. This regulatory impact analysis 
discusses the benefits and costs of the provisions in this final rule.
    In this analysis, we discuss programs and standards newly 
implemented by the final rule, such as certain provisions related to 
the cost-sharing reductions program, the advance payment of the premium 
tax credit program, the medical loss ratio program, the SHOP Exchange, 
and user fees for a Federally-facilitated Exchange, as well as new 
regulatory provisions for the three premium stabilization programs 
(reinsurance, risk adjustment, and risk corridors) which were 
introduced in the Premium Stabilization Rule (77 FR 17220). In addition 
to building on the regulatory impact analysis for that earlier rule, we 
are able, for the analysis of much of the final rule, to use the 
Congressional Budget Office's estimates of the Affordable Care Act's 
impact on Federal spending, revenue collection, and insurance 
enrollment.

[[Page 15515]]

    Comment: Two commenters urged further analysis of the costs and 
benefits of the rule. Specifically, one commenter asked HHS to provide 
analysis showing how this rule would affect consumer premiums, employer 
costs, and taxpayer subsidies. The commenter asked HHS to project how 
increased use of health care would impact employers and wages for 
lower-income workers.
    Response: While we cannot precisely predict the price of insurance, 
the premium stabilization programs are designed to mitigate premium 
increases for all consumers. In the individual and small group markets, 
the advance payment of the premium tax credit and cost-sharing 
reduction programs are intended to make health insurance affordable for 
low-income individuals. CBO's estimates remain the most comprehensive 
accounting of all the interacting provisions pertaining to the 
Affordable Care Act, and contain Federal budget impact estimates of 
some provisions that have not been independently estimated by CMS. 
Table 26 shows accounting projections on the costs and transfers of 
this rule. We are unable to project either the potential economic and 
social benefit from a more productive workforce that could result from 
access to health care or the potential economic and social cost when 
more people use health care. HHS relied on the Bureau of Labor 
Statistics, U.S. Department of Labor, National Compensation Survey 
Occupational Earnings in the United States, 2011, for estimates of most 
job descriptions and wages. We believe that our analysis reflects our 
best estimate of the costs associated with the proposed rule. 
Therefore, we are not modifying the proposed estimates of regulatory 
impact in this final rule.

C. Impact Estimates of the Payment Notice Provisions and Accounting 
Table

    In accordance with OMB Circular A-4, Table 26 below depicts an 
accounting statement summarizing HHS's assessment of the benefits, 
costs, and transfers associated with this rule.
    This final rule implements standards for programs that will have 
numerous effects, including providing consumers with affordable health 
insurance coverage, reducing the impact of adverse selection, and 
stabilizing premiums in the individual and small group health insurance 
markets and in an Exchange. We are unable to quantify the benefits of 
the final rule, such as improved health, longevity, and national 
productivity due to increased insurance enrollment, and some of its 
costs, such as the cost of providing additional medical services to 
newly-enrolled individuals. Direct costs in the Table 26 below reflect 
administrative costs to States (including those costs associated with 
operating risk adjustment and reinsurance), health insurance issuers, 
and Exchanges, but do not include administrative costs incurred by the 
Federal government. As discussed earlier, we estimate costs associated 
with establishing a dedicated data environment in the Premium 
Stabilization Rule Supporting Statement, and do not include those costs 
in Table 26. The effects in Table 26 reflect estimated cost-sharing 
reduction payments, which are transfers from the General Fund of the 
U.S. Treasury to consumers who qualify for cost-sharing reductions. 
These transfer estimates are based on the Congressional Budget Office's 
March 2012 baseline estimates, and have been annualized over the five-
year period from fiscal years (FYs) 2013 through 2017. Estimated 
transfers do not reflect any user fees paid by insurance issuers for 
the Federally-facilitated Exchange. Estimated transfers from health 
insurance issuers resulting from risk adjustment user fees are included 
in the table below.

                                           TABLE 26--Accounting Table
----------------------------------------------------------------------------------------------------------------
                                                                                           Units
                                                                          --------------------------------------
                          Category                             Estimates                  Discount
                                                                               Year         rate        Period
                                                                              dollar     (percent)     covered
----------------------------------------------------------------------------------------------------------------
                                                    Benefits
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year).......................                     Not Estimated
                                                                                 Not Estimated
----------------------------------------------------------------------------------------------------------------
                                                      Costs
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year).......................       $68.95         2013            7    2013-2017
                                                                   $70.37         2013            3    2013-2017
----------------------------------------------------------------------------------------------------------------
                                                    Transfers
----------------------------------------------------------------------------------------------------------------
Federal Annualized Monetized ($millions/year)...............    $6,529.29         2013            7    2013-2017
                                                                $6,803.02         2013            3    2013-2017
----------------------------------------------------------------------------------------------------------------

    This impact analysis for the premium stabilization programs 
references estimates from CBO and CMS. CBO's estimates remain the most 
comprehensive accounting of all the interacting provisions pertaining 
to the Affordable Care Act, and contain Federal budget impact estimates 
of some provisions that have not been independently estimated by CMS. 
Based on our review, we expect that the provisions of this final rule 
will not significantly alter CBO's estimates of the budget impact of 
the reinsurance, risk corridors, and risk adjustment programs. The 
requirements of these programs are well within the parameters used by 
CBO in the modeling of the Affordable Care Act. Our review and analysis 
of the requirements indicate that the impacts are likely within the 
model's margin of error.
    For this regulatory impact analysis, we are shifting the estimates 
for the reinsurance and risk adjustment programs to reflect the four-
year period from FYs 2014 through 2017. Table 27 includes the CBO 
estimates for outlays and receipts for the reinsurance and risk 
adjustment programs from FYs 2014 through 2017. These estimates for 
reinsurance and risk adjustment reflect CBO's scoring of these 
provisions. CBO assumed risk adjustment payments and charges would 
begin to be made in 2014, when in fact these payments and

[[Page 15516]]

charges will begin in 2015, as discussed in section III.B. of this 
final rule; therefore, the estimates are assigned one year later in 
Table 27 than they were in the original CBO report.
    CBO did not separately estimate the program costs of risk 
corridors, but assumed aggregate collections from some issuers would 
offset payments made to other issuers. Table 27 summarizes the effects 
of the risk adjustment and reinsurance programs on the Federal budget, 
with the additional, societal effects of this rule discussed in this 
regulatory impact analysis. We note that transfers associated with risk 
adjustment and reinsurance were previously estimated in the Premium 
Stabilization Rule; therefore, to avoid double-counting, we do not 
include them in the accounting statement for this rule (Table 26).

  TABLE 27--Estimated Federal Government Outlays and Receipts for the Reinsurance and Risk Adjustment Programs
                                               From FYs 2014-2017
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                      Year                           2014         2015         2016         2017      2014- 2017
----------------------------------------------------------------------------------------------------------------
Reinsurance and Risk Adjustment Program          ...........           11           18           18           47
 Payments *....................................
Reinsurance and Risk Adjustment Program          ...........           12           16           18           46
 Receipts *....................................
----------------------------------------------------------------------------------------------------------------
* Risk adjustment program payments and receipts lag by one quarter. Receipt will fully offset payments over
  time. The CBO estimates do not reflect the $5 billion in reinsurance contributions that are submitted to the
  U.S. Treasury.
Source: Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010.

Risk Adjustment
    Risk adjustment is a permanent program that may be administrated by 
States that operate an HHS-approved Exchange. States have the option of 
proposing alternative methodologies. Risk adjustment is generally 
applied to non-grandfathered health plans offered in the individual and 
small group markets, both inside and outside of the Exchange. The 
Exchange may operate risk adjustment, although a State may also elect 
to have an entity other than the Exchange perform the risk adjustment 
functions, provided that the State is approved by HHS to operate risk 
adjustment. Similar to the approach for reinsurance, multiple States 
may contract with a single entity to administer risk adjustment, 
provided that transfers do not occur between States and that each State 
is approved to operate their risk adjustment program. Having a single 
entity administer risk adjustment in multiple States may provide 
administrative efficiencies. In this final rule, we establish a risk 
adjustment State approval process. We estimate it will take each State 
approximately 180 hours to complete the initial risk adjustment entity 
approval process. We estimate it will take an operations analyst 72 
hours (at $55 an hour), a contract administrator 72 hours (at $40 per 
hour), a senior manager 24 hours (at $77 an hour), and an attorney 12 
hours (at $77 an hour) to meet the initial approval requirements. 
Therefore, we estimate administrative costs of approximately $9,612 for 
each entity, as a result of these approval requirements.\39\
---------------------------------------------------------------------------

    \39\ For purposes of Table 26, we assume that one State will 
operate risk adjustment.
---------------------------------------------------------------------------

    The details of the HHS-developed risk adjustment methodology are 
specified in this final rule. The HHS-developed risk adjustment 
methodology is based on a model that is concurrent and uses demographic 
and diagnosis information in a benefit year to predict total plan 
liability in the benefit year. The national payment transfer 
methodology is based on the State average premium to ensure that 
payments and charges net to zero.
    States may use this methodology or develop and propose alternate 
risk adjustment methodologies that meet Federal standards. Once HHS 
approves an alternate risk adjustment methodology, it will be 
considered a Federally certified risk adjustment methodology that any 
State may elect to use. In this final rule, we lay out the criteria 
that HHS will use to evaluate alternate risk adjustment methodologies. 
Approved Federally certified risk adjustment methodologies will be 
published annually in the HHS notice of benefit and payment parameters.
    States that elect to develop their own risk adjustment 
methodologies are likely to have increased administrative costs. 
Developing a risk adjustment methodology requires complex data 
analysis, including population simulation, predictive modeling, and 
model calibration. States that elect to use the HHS-developed 
methodology would likely reduce administrative costs. We describe these 
administrative costs in the Collection of Information Requirements 
section of this final rule.
    In the Premium Stabilization Rule, we defined a risk adjustment 
covered plan as any health insurance coverage offered in the individual 
or small group market with the exception of grandfathered health plans, 
group health insurance coverage described in Sec.  146.145(c) of this 
subchapter, individual health insurance coverage described in Sec.  
148.220 of this subchapter, and any other plan determined not to be a 
risk adjustment covered plan in the annual HHS notice of benefit and 
payment parameters. In this final rule, we clarify that plans not 
subject to certain market reforms and student health plans will not be 
subject to the issuer requirements in subparts G and H of 45 CFR part 
153. Under Section 1312(c)(3) of the Affordable Care Act, States have 
the flexibility to merge the individual and small group markets into a 
single risk pool, or keep them separate. In this final rule, we clarify 
that HHS will merge markets when operating risk adjustment on behalf of 
a State if the State elects to do the same for single risk pool 
purposes.
    Developing the technology infrastructure required for data 
submission will likely require an administrative investment. The risk 
adjustment process will require significant amounts of demographic and 
diagnostic data to run through a risk assessment model to determine 
individual risk scores that form the basis for plan and State averages. 
The Premium Stabilization Rule requires States to collect or calculate 
individual risk scores at a minimum. States may vary the amount and 
type of data collected, provided that States meet specified data 
collection standards.
    Administrative costs will vary across States and health insurance 
issuers depending on the type of data collection approach used in the 
State. In States opting to operate risk adjustment using a distributed 
model of data collection, the costs associated with mapping and storing 
the required data and, in some cases, the costs associated with running

[[Page 15517]]

the risk adjustment software will likely be borne by the issuer.
    States and issuers that already have systems in place for data 
collection and reporting will have reduced administrative costs. For 
example, issuers that already report data for Medicare Advantage (MA) 
or Medicaid Managed Care may see minimal additional administrative cost 
for risk adjustment. Additionally, some States risk-adjust their 
Medicaid Managed Care programs. States with all-payer or multi-payer 
claims databases may need to modify their systems to meet the 
requirements of risk adjustment. However, these costs of modification 
will be less than the costs of establishing these systems. States and 
issuers that do not have existing technical capabilities will have 
larger administrative costs related to developing necessary 
infrastructure.
    Issuer characteristics, such as size and payment methodology, will 
also affect administrative costs. In general, national issuers will 
likely be better prepared for the requirements of risk adjustment than 
small issuers.
    In this final rule, we provide more details on the data collection 
approach when we operate risk adjustment on behalf of a State. The 
Premium Stabilization Rule established that when HHS operates risk 
adjustment on behalf of a State, it will use a distributed approach. We 
believe that this approach minimizes issuer burden while protecting 
enrollee privacy. Under a distributed approach, issuers will need to 
format risk adjustment data, and maintain that data in compliance with 
HHS-established guidelines and applicable standards. We describe these 
administrative costs in the Collection of Information Requirements 
section of this final rule.
    The Premium Stabilization Rule directs States to audit a sample of 
data from each issuer and to ensure proper implementation of risk 
adjustment software by all issuers that participate in risk adjustment. 
States may extrapolate results from the sample to adjust the average 
actuarial risk for the plan. This approach is consistent with the 
approach now used in Medicare Advantage, where audit sample error rates 
will be extrapolated to contract-level payments to recoup overpayment 
amounts.
    In this final rule, we establish data validation standards for when 
HHS operates risk adjustment on behalf of a State. HHS will conduct a 
data validation program consisting of six stages: (1) Sample selection; 
(2) initial validation audit; (3) second validation audit; (4) error 
estimation; (5) appeals; and (6) payment adjustments. Issuers will 
engage independent initial auditors to conduct an initial audit of an 
HHS-selected sample of risk adjustment data. HHS will retain a second 
validation auditor to verify the findings of the initial validation 
audit and provide error estimates. However, in this final rule we note 
that there will be no adjustments to payments and charges based on the 
error estimates for benefit years 2014 and 2015. We describe these 
administrative costs in the Collection of Information Requirements 
section of this final rule. We also describe a process to appeal data 
validation findings. Issuers will have an opportunity to appeal 
findings from both the initial validation audit and second validation 
audit. In addition, HHS will collect approximately $20 million in user 
fees to support the Federally operated risk adjustment program.
    Risk adjustment transfers dollars from health plans with lower-risk 
enrollees to health plans with higher-risk enrollees. We are updating 
the cost estimates for this RIA to include 2017, using CBO 
estimates.\40\ From 2014 through 2017, we estimated that there will be 
$45 billion transferred among issuers.
---------------------------------------------------------------------------

    \40\ Congressional Budget Office. 2011. Letter to Hon. Nancy 
Pelosi. March 20, 2010. We note that these estimates include only 
risk adjustment transfers whereas Table 27 shows transfer estimates 
for risk adjustment and reinsurance.
---------------------------------------------------------------------------

    Risk adjustment protects against adverse selection by allowing 
insurers to set premiums according to the average actuarial risk in the 
individual and small group market without respect to the type of risk 
selection the insurer would otherwise expect to experience with a 
specific product offering in the market. This should lower the risk 
premium and allow issuers to price their products closer to the average 
actuarial risk in the market. In addition, it mitigates the incentive 
for health plans to avoid unhealthy members.
    The risk adjustment program also serves to level the playing field 
inside and outside of the Exchange, as payments and charges are applied 
to non-grandfathered individual and small group plans inside and 
outside of the Exchange. This mitigates the potential for excessive 
premium growth within the Exchange due to anticipated adverse 
selection.
    Comment: One commenter disagreed with the $600 million in aggregate 
administrative costs estimated in the Collection of Information section 
of the proposed rule, and reflected in this regulatory impact analysis. 
The commenter stated that the cost associated with this rule would be 
much higher than the $600 million estimated in the proposed rule.
    Response: The cost to States of developing their own risk 
adjustment and reinsurance programs was addressed in the Premium 
Stabilization Rule, Standards Related to Reinsurance, Risk Corridors, 
and Risk Adjustment, published March 23, 2012. We recognize States may 
require significant analysis to assess whether to operate risk 
adjustment or reinsurance programs. Many states received grants 
available under the Affordable Care Act to underwrite such analyses 
(although we note that these grants would affect who bears the cost of 
the rule, not the amount incurred by society as a whole). States 
choosing in the future to operate risk adjustment may benefit from 
methodologies developed by other States and approved by HHS. The cost 
of reporting data to HHS should decline once systems are in place.
    We have limited our estimate to the incremental information 
collection associated with the requirements of the proposed rule. HHS 
relied on the Bureau of Labor Statistics, U.S. Department of Labor, 
National Compensation Survey Occupational Earnings in the United 
States, 2011, for estimates of most job descriptions and wages. We 
believe that our analysis reflects our best estimate of the costs 
associated with the proposed rule. We also note we have modified some 
estimates from our proposed rule to better reflect the most current 
agency estimates.
Reinsurance
    The Affordable Care Act creates a transitional reinsurance program 
for benefit years 2014, 2015, and 2016. Each State is eligible to 
operate reinsurance. If a State operates reinsurance, the State must 
enter into a contract with an applicable reinsurance entity to carry 
out the program. If a State does not elect to operate reinsurance, HHS 
will carry out reinsurance for that State.
    The Affordable Care Act requires a reinsurance pool of $10 billion 
in 2014, $6 billion in 2015, and $4 billion in 2016. It also requires 
annual contributions payable to the U.S. Treasury of $2 billion, $2 
billion, and $1 billion for those years, respectively. These 
contributions are funded by health insurance issuers and self-insured 
group health plans. Section 1341(b)(3) of the Affordable Care Act 
directs the Secretary of HHS to establish the method for determining 
contribution levels for the program. In this final rule, HHS 
establishes a national per capita contribution rate designed to collect 
the $12.02 billion in 2014 to cover the

[[Page 15518]]

required $10 billion in reinsurance payments, the $2 billion 
contribution to the U.S. Treasury, and the additional $20.3 million to 
cover the Federal administrative expenses of operating reinsurance in 
2014. We estimate that we will collect these authorized amounts from 
2014 through 2016.
    HHS will collect the required contributions under the national 
contribution rate from health insurance issuers and self-insured group 
health plans.\41\ States operating reinsurance may collect additional 
contributions for administrative costs, reinsurance payments, or both. 
Section 1341(a)(3)(B) of the Affordable Care Act requires that the 
reinsurance contribution amount for each issuer reflect each issuer's 
fully insured commercial book of business for all major medical 
products. In this final rule, we clarify which types of health 
insurance coverage and self-insured group health plans are to make 
reinsurance contributions, and which are not. This clarification does 
not affect the amounts authorized to be collected for reinsurance.
---------------------------------------------------------------------------

    \41\ The Department of Labor has reviewed this rule and advised 
that paying required reinsurance contributions would constitute a 
permissible expense of the plan for purposes of Title I of the 
Employee Retirement Income Security Act (ERISA) because the payment 
is required by the plan under the Affordable Care Act as interpreted 
in this rule. (See generally, Advisory Opinion 2001-01A to Mr. Carl 
Stoney, Jr., available at www.dol.gov/ebsa discussing settlor versus 
plan expenses.)
---------------------------------------------------------------------------

    A State that establishes the reinsurance program may elect to 
collect additional contributions to provide funding for administrative 
expenses or supplemental reinsurance payments. Additional contributions 
for administrative expenses may be collected by the State's applicable 
reinsurance entity, at the State's election. Any additional 
contributions for reinsurance payments must be collected by the State's 
applicable reinsurance entity. In this final rule, we establish that 
HHS will collect administrative expenses for HHS-operated reinsurance 
programs. A State that operates the reinsurance program bears the 
administrative costs of the applicable reinsurance entity, and must 
ensure that the applicable reinsurance entity complies with program 
requirements. HHS will share some of its collections for administrative 
costs with States that run the program. If a State operates 
reinsurance, HHS would retain $0.055 per capita per year to offset the 
costs of contributions collection, and would allocate $0.055 per capita 
per year towards administrative expenses for reinsurance payments. The 
total amounts allocated towards administrative expenses for reinsurance 
payments would be distributed to States operating reinsurance (or 
retained by HHS where HHS is operating the reinsurance program) in 
proportion to the State-by-State total requests for reinsurance 
payments made under the uniform payment parameters. A State may have 
more than one applicable reinsurance entity, and two or more States may 
jointly enter into an agreement with the same applicable reinsurance 
entity to carry out reinsurance functions in their State. 
Administrative costs will likely increase if multiple applicable 
reinsurance entities are established within a State, whereas 
administrative efficiencies may be found if multiple States contract 
with one applicable reinsurance entity.
    We also finalize an annual collections and payment cycle in this 
final rule. We considered a quarterly collections and payment cycle, as 
envisioned by the Premium Stabilization Rule. However, a quarterly 
cycle would impose significant costs on contributing entities. 
Additionally, because HHS and States operating reinsurance would likely 
need to hold back a significant portion of reinsurance funds until the 
end of the year to ensure equitable payment of requests for reinsurance 
payments, issuers would receive only limited benefits from a quarterly 
payment cycle.
    Under Sec.  153.100(a), a State operating reinsurance must issue an 
annual notice of benefit and payment parameters specific to that State 
if it elects to: (i) Modify the data requirements from the HHS-operated 
reinsurance program; (ii) collect additional reinsurance contributions, 
under Sec.  153.220(d); or (iii) use more than one applicable 
reinsurance entity.
    States that establish the reinsurance program will also maintain 
any records associated with the reinsurance program, as set forth in 
Sec.  153.240(c) of the Premium Stabilization Rule. The Premium 
Stabilization Rule established that reinsurance contributions will be 
based on a per capita amount. The per capita approach will be less 
complex to administer in comparison to the percent of premium approach 
that HHS considered but ultimately decided not to pursue. Further, the 
per capita approach will better enable HHS to maintain the goals of the 
reinsurance program by providing issuers with a more straightforward 
approach to reinsurance contributions. States will be permitted to 
collect additional contributions towards supplemental reinsurance 
payments. We estimate that it will take an operations analyst 8 hours 
(at $55 an hour) and a senior manager 2 hours (at $77 an hour) to 
ensure that reinsurance contributions collected and funds used are 
reasonably calculated to cover additional reinsurance payments that are 
projected to be made only under the supplemental reinsurance payment 
parameters. We believe that it will cost each State choosing to collect 
additional contributions approximately $594 to comply with this 
requirement. Additionally, under Sec.  153.232(e), if all requested 
reinsurance payments under the State supplemental reinsurance 
parameters exceed all reinsurance contributions collected under the 
additional State contribution rate for the benefit year, the State must 
determine a uniform pro rata adjustment to be applied to all requests 
for supplemental reinsurance payments. The State or the applicable 
reinsurance entity must reduce all such requests for supplemental 
reinsurance payments for the applicable benefit year by that 
adjustment. We estimate it will take an operations analyst 40 hours (at 
$55 an hour) and a senior manager 12 hours (at $77 an hour) to 
determine appropriate payment calculations and, if necessary, a pro 
rata adjustment. Therefore, we estimate that it will cost each State 
choosing to collect additional contributions approximately $3,124 to 
comply with this requirement.\42\
---------------------------------------------------------------------------

    \42\ For purposes of Table 26, we assume that two States will 
operate reinsurance.
---------------------------------------------------------------------------

    In this final rule, we establish the methodology to be used for 
counting covered lives for purposes of calculating reinsurance 
contributions. This methodology offers contributing entities a choice 
similar to counting methods permitted under the PCORTF Rule. We believe 
that relying on a previously established process set forth in the 
PCORTF Rule for counting enrollees will minimize issuer burden for 
conducting these counts. In the Collection of Information Requirements 
section of this final rule, we describe the administrative costs for 
issuers associated with the data requirements in Sec.  153.400(b) for 
all contributing entities both inside and outside the Exchange. The 
contributing entities will provide enrollment data to HHS to 
substantiate contribution amounts.
    Reinsurance payments will be made to issuers of individual market 
insurance coverage for high claims costs for enrollees. In this final 
rule, we establish a national attachment point, national reinsurance 
cap, and national coinsurance rate. In the Premium Stabilization Rule, 
we established that payments will be made on a portion of claims costs 
for enrollees in reinsurance

[[Page 15519]]

eligible plans incurred above an attachment point, subject to a 
reinsurance cap.
    Use of a reinsurance cap, as well as the requirement for health 
insurance issuer cost sharing above the attachment point and below the 
cap, is designed to incentivize health insurance issuers to control 
costs. This approach based on claims costs is simpler to implement and 
more familiar to health insurance issuers, and therefore will likely 
result in savings in administrative costs as compared to a condition-
based reinsurance approach.
    A State operating reinsurance may supplement the reinsurance 
payment parameters proposed by HHS only if the State elects to collect 
additional contributions for supplemental reinsurance payments or use 
additional State funds for supplemental reinsurance payments, and must 
specify these supplemental payment parameters in its State notice of 
benefit and payment parameters. We estimate that it will take an 
operations analyst 2 hours (at $55 an hour) to gather the relevant 
information, for a total burden of $110 per State electing to run 
reinsurance. Note that a State may develop a separate reinsurance 
program using entirely its own design.
    In this final rule, we require States to provide a process through 
which a reinsurance-eligible plan that does not generate individual 
enrollee claims in its normal course of business may derive costs to 
request reinsurance payments. In addition, we clarify that when HHS 
operates the reinsurance program on behalf of a State that these plans 
may price encounters in accordance with their existing principal, 
internal encounter pricing methodology. Additionally, in Sec.  
153.240(b) of this final rule, States operating the reinsurance program 
must notify issuers annually of reinsurance payments to be made, as 
well as provide reinsurance-eligible plans quarterly estimates of 
requests for reinsurance payments. Moreover, we establish that for both 
State- and HHS-operated reinsurance programs, only plans subject to the 
2014 market reform rules are eligible for reinsurance payment.
    We estimate it will take an operations analyst 40 hours (at $55 an 
hour), 10 hours per quarter, and a senior manager 12 hours (at $77 an 
hour), 3 hours per quarter, to determine appropriate quarterly 
estimates of expected reinsurance payments and to notify plans. 
Additionally, we expect it will take an operations analyst 40 hours (at 
$55 an hour) and a senior manager 12 hours (at $77 an hour) to 
determine the total amount of reinsurance payments for each 
reinsurance-eligible plan. Therefore, we estimate that it will cost 
each State choosing to run reinsurance approximately $6,248 to comply 
with this requirement.
    We also believe that these provisions will result in a small 
administrative cost to States associated with determining a format for 
submission of reinsurance payment data and notifying capitated plans of 
the acceptable method and format of data collection. We anticipate that 
a State will only need to establish this process once. On average, we 
estimate that it will take each State approximately 50 hours to comply 
with this requirement. We estimate it will take an operations analyst 
40 hours (at $55 an hour) and a senior manager 10 hours (at $77 an 
hour) to determine an appropriate format for submission of reinsurance 
payment data for capitated plans and to notify plans of the acceptable 
method and format for data collection. Therefore, we estimate that it 
will cost each State choosing to run reinsurance approximately $2,970 
to comply with these requirements.
    In this final rule, we also provide more details on the data 
collection approach for HHS-operated reinsurance programs. HHS plans to 
use the same distributed data collection approach used for risk 
adjustment; however, only data elements necessary for reinsurance claim 
selection will be considered for the purpose of determining reinsurance 
payments. In the Collection of Information Requirements section, we 
describe the administrative costs required in Sec.  153.410 for issuers 
of reinsurance-eligible plans in States where HHS is operating 
reinsurance to receive reinsurance payments. We believe details on the 
reinsurance data collection approach finalized in this rule are 
reflected in these cost estimates.
    A wide range of health insurance issuers and self-insured group 
health plans contribute to the reinsurance pool because successful 
implementation of this rule, in combination with the range of 
Affordable Care Act reforms starting in 2014, benefit all of their 
enrollees; for example, those reforms should lead to fewer unreimbursed 
health costs, lowering the costs for issuers and group health plans. 
Providing reinsurance payments to health insurance issuers with plans 
in the individual market serves to stabilize premiums in the individual 
market. Reinsurance will put downward pressure on individual market 
rates as new enrollees with unknown risk join the market. It will also 
help prevent insurers from building in risk premiums to their rates 
given the unknown health of their new enrollees. It is expected that 
the cost of reinsurance contributions will be roughly equal to 1 
percent of premiums in the total market in 2014, less in 2015 and 2016, 
and will end in 2017. In contrast, it is anticipated that reinsurance 
payments will result in premium decreases in the individual market of 
between 10 and 15 percent.
    Evidence from the Healthy New York (Healthy NY) program \43\ 
supports the magnitude of these estimates. In 2001, the State of New 
York began operating Healthy NY and required all HMOs in the State to 
offer policies for which small businesses and low-income individuals 
would be eligible. The program contained a ``stop-loss'' reinsurance 
provision designed to lower premiums for enrollees. Under the program, 
if any enrollee incurred $30,000 in annual claims, his or her insurer 
was reimbursed for 90 percent of the next $70,000 in claims. Premiums 
for Healthy NY policies were about 15 percent to 30 percent less than 
those for comparable HMO policies in the small group market.
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    \43\ Swartz, K. ``Health New York: Making Insurance More 
Affordable for Low-Income Workers.'' The Commonwealth Fund. November 
2001.
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    Comment: One commenter asked how HHS derived the estimate that 
reinsurance contributions would increase total market premiums paid by 
1 percent, and that reinsurance payments to issuers would reduce 
premiums in the individual market by between 10 percent and 15 percent.
    Response: This is an HHS estimate for the effects of reinsurance in 
2014 that relied in part on a 2009 analysis of health insurance 
premiums by the Congressional Budget Office.
Risk Corridors
    The Affordable Care Act creates a temporary risk corridors program 
for the years 2014, 2015, and 2016 that applies to QHPs. The risk 
corridors program creates a mechanism for sharing risk for allowable 
costs between the Federal government and QHP issuers. The Affordable 
Care Act establishes the risk corridors program as a Federal program; 
consequently, HHS will operate the risk corridors program under Federal 
rules with no State variation. The risk corridors program will help 
protect against inaccurate rate setting in the early years of the 
Exchanges by limiting the extent of issuer losses and gains.
    QHP issuers must submit to HHS data on premiums earned, allowable 
claims and quality costs, and allowable administrative costs, 
reflecting data categories required under the Medical Loss Ratio 
Interim Final Rule (75 FR

[[Page 15520]]

74918). In designing the program, HHS has sought to leverage existing 
data reporting for Medical Loss Ratio purposes as much as possible.
    As noted above, the risk corridors program is intended to protect 
QHP issuers in the individual and small group markets against 
inaccurate rate setting. Due to uncertainty about the population during 
the first years of Exchange operation, issuers may not be able to 
predict their risk accurately, and their premiums may reflect costs 
that are ultimately lower or higher than predicted. To determine 
whether an issuer pays into, or receives payments from, the risk 
corridors program, HHS will compare allowable costs (essentially, 
claims costs subject to adjustments for health care quality, health IT, 
risk adjustment payments and charges and reinsurance payments) and the 
target amount--the difference between a plan's earned premiums and 
allowable administrative costs. In this final rule, we have provided 
for adjustments to the risk corridors calculation to account for taxes 
and profits within its allowable administrative costs. The threshold 
for risk corridor payments and charges is reached when a QHP issuer's 
allowable costs exceed, or fall short of, the target amount by at least 
three percent. A QHP with allowable costs that are at least three 
percent less than its target amount will pay into the risk corridors 
program. Conversely, a QHP with allowable costs that exceed its target 
amount by at least 3 percent will receive payments. Risk corridor 
payments and charges are a percentage of the difference between 
allowable costs and target amount and therefore are not on a ``first 
dollar'' basis.
    In this final rule, HHS also specifies the annual schedule for the 
risk corridors program, including dates for claims run-out, data 
submission, and notification of risk corridors payments and charges.
    We believe the proposals on the risk corridors program in this 
final rule have a negligible effect on the impact of the program 
established by and described in the Premium Stabilization Rule.
Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
    The impact analysis for Payment Notice provisions relating to 
advance payments of the premium tax credit and cost-sharing reductions 
references estimates from the CBO's March 2012 baseline projections. 
Based on our review, we expect that those provisions will not alter 
CBO's March 2012 baseline estimates of the budget impact of those two 
programs. The requirements are well within the parameters used in the 
modeling of the Affordable Care Act. Our review and analysis of the 
requirements indicate that the impacts are likely within the model's 
margin of error. The Affordable Care Act provides for premium tax 
credits and the reduction or elimination of cost sharing for certain 
individuals enrolled in QHPs offered through the Exchanges. This 
assistance will help many low- and moderate-income individuals and 
families obtain health insurance--for many people, cost sharing is a 
barrier to obtaining needed health care.\44\
---------------------------------------------------------------------------

    \44\ Brook, et al.
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    Section 1402(a)-(c) of the Affordable Care Act directs issuers to 
reduce cost sharing for essential health benefits for individuals with 
household incomes between 100 and 400 percent of the FPL who are 
enrolled in a QHP offered at the silver level of coverage in the 
individual market on the Exchange and are eligible for a premium tax 
credit or advance payment of premium tax credits. The Affordable Care 
Act, at section 1402(d), also directs issuers to eliminate cost sharing 
for Indians (as defined in Sec.  155.300) with a household income at or 
below 300 percent of the FPL who are enrolled in a QHP of any metal 
level in the individual market on the Exchange, and prohibits issuers 
from requiring cost sharing for Indians, regardless of household 
income, for items or services furnished directly by the IHS, an Indian 
Tribe, a Tribal Organization, or an Urban Indian Organization or 
through referral under contracted health services. Finally, the 
Affordable Care Act, at section 1412, provides for the advance payments 
of the premium tax credit and cost-sharing reductions.
    A subset of the persons who enroll in QHPs in the individual market 
through the Exchanges beginning in 2014 will be affected by the 
provisions relating to advance payments of premium tax credit and cost-
sharing reductions (those with household incomes below 400 percent of 
the FPL and Indians enrolled in QHPs). In March 2012, CBO estimated 
that there will be approximately 20 million enrollees in Exchange 
coverage by 2016, including approximately 16 million Exchange enrollees 
who will be receiving subsidies.\45\ Participation rates are expected 
to be lower in the first few years of Exchange availability as 
employers and individuals adjust to the features of the Exchanges.\46\
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    \45\ ``Updated Estimates for the Insurance Coverage Provisions 
of the Affordable Care Act,'' Congressional Budget Office, March 
2012.
    \46\ Congressional Budget Office, ``Letter to the Honorable Evan 
Bayh: An Analysis of Health Insurance Premiums under the Patient 
Protection and Affordable Care Act,'' Washington, DC, 2009.
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    In this final rule, we provide additional details for Exchanges and 
QHP issuers on the administration of advance payments of premium tax 
credit and cost-sharing reductions for individuals and families. We 
clarify the approach to providing for cost-sharing reductions to 
eligible individuals who purchase a family policy. We also establish 
standards applicable to Exchanges when collecting premiums from 
enrollees and administering advance payments of cost-sharing reductions 
and the premium tax credit. We describe these administrative costs in 
the Collection of Information Requirements section of this final rule.
    Finally, we direct QHP issuers to enroll individuals in the plan 
variation with the correct cost-sharing structure, and to provide those 
individuals with the cost-sharing reductions for which they are 
eligible. QHP issuers are responsible for submitting plan variations 
containing the cost-sharing structures proposed by HHS as required by 
the Affordable Care Act. We also clarify which plans are eligible for 
cost-sharing reductions, and we set forth standards relating to advance 
payments of cost-sharing reductions and reconciliation of those advance 
payments against actual cost-sharing reduction provided. In addition, 
we establish standards for QHP issuers to reduce an enrollee's share of 
premium to account for advance payments of the premium tax credit, and 
submit allocations of rates and claims costs to allow for the 
calculation of advance payments of cost-sharing reductions and the 
premium tax credit. We describe these administrative costs in the 
Collection of Information Requirements section of this final rule.
    The cost-sharing reductions and advance payments of the premium tax 
credit policies will apply to all issuers that choose to seek 
certification to offer QHPs through the Exchanges for the individual 
market. QHP issuers will experience costs related to preparing and 
submitting to HHS data to support the administration of cost-sharing 
reductions and advance payments of the premium tax credit. We 
anticipate that the provisions for advance payments of the premium tax 
credit and cost-sharing reductions will result in transfers from the 
General Fund of the Treasury to those individuals who qualify for those 
programs.
User Fees
    To support certain Federal operations of Federally-facilitated 
Exchanges, we

[[Page 15521]]

establish in this final rule, under section 1311(d)(5)(A) of the 
Affordable Care and 31 U.S.C. 9701, that a participating issuer 
offering a plan through a Federally-facilitated Exchange must remit a 
user fee to HHS each month equal to the product of the monthly user fee 
rate specified in the annual HHS notice of benefit and payment 
parameters for the applicable benefit year and the monthly premium 
charged by the issuer for each policy under the plan offered through a 
Federally-facilitated Exchange. For the 2014 benefit year, we establish 
a monthly user fee rate equal to 3.5 percent.
SHOP
    The SHOP facilitates the enrollment of small businesses into small 
group health insurance plans. A qualitative analysis of the costs and 
benefits of establishing a SHOP was included in the regulatory impact 
analysis published in conjunction with the Exchange Establishment 
Rule.\47\ This impact analysis addresses the additional costs and 
benefits of the proposed modifications in this rule to the SHOP 
sections of the Exchange Establishment Rule.
---------------------------------------------------------------------------

    \47\ Available at: http://cciio.cms.gov/resources/files/Files2/03162012/hie3r-ria-032012.pdf.
---------------------------------------------------------------------------

    In this final rule, we implement policies for FF-SHOPs designed to 
prevent significant adverse selection while promoting QHP choice for 
employees. These policies include methods a qualified employer may use 
to make QHPs available to its employees, rules to ensure parity with a 
market's group participation requirements, rules to permit the display 
of agent and broker information on FF-SHOP Web sites, alignment of 
market definitions with other applicable rules, and incentives for 
issuers to participate in FF-SHOPs. Many of these proposed policies are 
expected to create no significant new costs.
    Section 1312 of the Affordable Care Act permits a qualified 
employer participating in a SHOP to select a metal level of coverage 
and make all plans in that level of coverage available to its 
employees. Permitting employers to choose a single level of coverage 
reduces potential adverse selection within the group and therefore any 
additional cost due to expanded choice. In the Exchanges Establishment 
final rule, we provided each SHOP the flexibility to choose additional 
means by which a qualified employer could make QHPs available to 
qualified employees. In this final rule, we add an FF-SHOP option to 
allow qualified employers to offer qualified employees only a single 
QHP. This employer option is designed to further reduce adverse 
selection, although it may reduce the benefit to the employee resulting 
from broader choice. In the Exchange Establishment Rule, we did not 
quantify either the small risk premium or the modest additional 
consumer benefit resulting from employee choice at a single level of 
coverage, and we do not quantify the reduction in risk premium or 
consumer benefit resulting from this change.
    The Exchange Final Rule permits a SHOP to set a minimum 
participation rate; such authority is limited to the extent a minimum 
participation rate is permissible under the PHS Act and applicable 
State law. Minimum participation rates require participation in the 
health plan by a substantial portion of the employer's group, thereby 
assuring a more representative risk pool and reducing adverse 
selection. Setting a minimum participation rate that is too low would 
make it ineffective, while setting it too high would reduce the number 
of employers offering coverage. This final rule establishes, subject to 
permissibility under the PHS Act, that FF-SHOPs use a default 
participation rate of 70 percent that may be modified if there is 
evidence that a higher or lower rate is either customary in the State 
or required by State statute. Because this policy results in no change 
in market dynamics, it places no additional costs on employers or 
issuers.
    This final rule establishes that health insurance issuers with 
shares of a State's small group market greater than 20 percent will 
participate in the FF-SHOP if they also seek to participate in the FFE 
in the State. This policy promotes robust issuer participation in the 
FF-SHOP which will help qualified employers offer their employees a 
broad choice of health plan. The benefits of broad plan choice are 
quite significant. One study suggests expanding plan choice while 
holding premiums constant for employees results in a median increase in 
value to consumers (``consumer surplus'') of 20 percent of the premium 
cost of coverage.\48\ Some of this benefit is due to expanded choice in 
plan type and health insurance issuer. There are two additional impacts 
associated with this policy. The first is the cost for the QHP issuer 
of submitting plans for certification in the FF-SHOP, which is 
described in the 30-day Federal Register Notice for the Initial Plan 
Data Collection published on November 21, 2012 (77 FR 69846). The 
second is the transfer associated with user fees for additional 
enrollees in QHPs in the FF-SHOP.
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    \48\ Dafny, L., Ho, K., & Varela, M. (2010). Let them have 
choice: Gains from shifting away from employer-sponsored health 
insurance and toward an individual exchange (No. w15687). National 
Bureau of Economic Research.
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Medical Loss Ratio
    This final rule amends the MLR and rebate calculation methodologies 
to include payments and receipts related to the premium stabilization 
programs. The definition of premium revenue is modified to account for 
these payments and receipts. When the MLR annual reporting form is 
updated for the reporting year 2014 and later, premium stabilization 
payment and receipt amounts will be considered a part of gross earned 
premium reported to the Secretary, similar to other elements involved 
in the derivation of earned premium. Gross earned premium will not be 
reduced by the amount of contributions under the transitional 
reinsurance program. The MLR annual reporting form will then account 
for premium stabilization payment and receipt amounts other than the 
reinsurance contributions by removing them from adjusted earned 
premium, so that these amounts do not have a net impact on the adjusted 
earned premium used in calculating the MLR denominator and rebates. 
Contributions under the transitional reinsurance program will be 
included with the Federal assessments that are deducted from earned 
premium in MLR and rebate calculations. Additionally, this final rule 
amends the MLR calculation methodology to add or subtract premium 
stabilization payment and receipt amounts, other than reinsurance 
contributions, in the MLR numerator, consistent with the way the 
statute prescribes the calculation methodology for risk corridors. 
These adjustments will reduce or increase issuers' MLRs, and may 
increase or reduce issuers' rebates, respectively. The amended 
methodology will result in a more accurate calculation of MLR and 
rebate amounts, since it will reflect issuers' actual claims-related 
expenditures. This approach will also support the effectiveness of both 
the MLR and the premium stabilization programs by correctly offsetting 
the premium stabilization payment and receipt amounts against rebates, 
consistently with the risk corridors calculation methodology adopted in 
Sec.  153.530.
    Based on HHS's experience with the 2011 MLR reporting year, there 
are 466 health insurance issuers \49\ offering

[[Page 15522]]

coverage in the individual and group markets to almost 80 million 
enrollees that will be affected by the proposed amendment to account 
for premium stabilization payments in MLR and rebate calculations. In 
2012, an estimated 54 issuers paid $396 million in rebates for the 2011 
MLR reporting year to approximately 4 million enrollees in the 
individual markets, while 59 issuers in the small group market provided 
approximately $289 million in rebates to policyholders and subscribers 
on behalf of over 3 million enrollees, and 47 issuers in the large 
group market provided approximately $403 million in rebates to 
policyholders and subscribers on behalf of almost 6 million enrollees. 
Lack of data makes it difficult to predict how high-risk enrollees will 
be distributed among issuers and, therefore, how MLRs and total rebates 
would be affected. Issuers with relatively low-risk enrollees are 
likely to have positive net premium stabilization payments (that is, 
payments would be greater than receipts) and, if so, their MLRs will 
increase as a result of the amended MLR calculation methodology. If any 
of these issuers fail to meet the MLR standard, taking the premium 
stabilization payments and receipts into account in the MLR 
calculations will result in lower rebate payments. Issuers with 
relatively high-risk enrollees are likely to have positive net receipts 
(that is, receipts would be greater than payments) and, if so, their 
MLRs would decrease as a result. If any such issuer fails to meet the 
MLR standard, its rebate amount will increase. Since such issuers are 
likely to have high claims expenditures and therefore, high MLRs, they 
would be less likely to owe rebates. So we do not anticipate that 
rebates will go up for such issuers.
---------------------------------------------------------------------------

    \49\ Issuers represent companies (for example, NAIC company 
code). These estimates do not include issuers of plans with total 
annual limits of $250,000 or less (sometimes referred to as ``mini-
med'' plans) or expatriate plans.
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    This final rule also changes the deadlines for MLR report 
submission and rebate payments so that the deadlines occur after all 
the premium stabilization payment and receipt amounts are determined. 
The change in the deadlines will allow issuers to calculate the MLR and 
rebate amounts based on actual calculated payments and receipts rather 
than estimated amounts and will improve the accuracy of the rebate 
payments and reports. This will also reinforce the effectiveness of the 
premium stabilization programs, since issuers are less likely to pay 
higher or lower rebates based on inaccurate payment and receipt 
estimations. Accordingly, this final rule changes the date of MLR 
reporting to the Secretary from June 1 to July 31, and the rebate due 
date from August 1 to September 30.
    Issuers will also have to report their payments and receipts 
related to the premium stabilization programs in the annual MLR report 
beginning in the 2014 MLR reporting year. Once issuers calculate these 
amounts, which they will be required to do regardless of the MLR 
reporting requirements, the administrative cost of including these 
amounts in the report will be minimal.
    The previous MLR calculation methodology allowed an issuer to 
deduct from premiums in the calculation of an issuer's MLR and rebates 
either the amount it paid in State premium taxes, or the amount of its 
community benefit expenditures up to a maximum of the highest premium 
tax rate in the State, whichever is greater, as provided in the final 
rule with comment period (76 FR 76574) published on December 7, 2011. 
This final rule amends the MLR methodology to allow a Federal income 
tax exempt not-for-profit issuer to deduct from premium both community 
benefit expenditures and State premium taxes, limited to the higher of 
the State's highest premium tax rate or 3 percent of premium. Other 
issuers will continue to use the previous methodology. This will create 
a level playing field for Federal income tax exempt not-for-profit 
issuers, who are required to make community benefit expenditures to 
maintain their Federal income tax exempt status and will not discourage 
community benefit expenditures. This is likely to increase the MLRs for 
tax exempt not-for-profit issuers. If any of these issuers fail to meet 
the MLR standard, then this will result in lower rebate payments.
    Based on MLR annual reports submitted by issuers for the 2011 MLR 
reporting year, we estimate that there are 132 not-for-profit issuers 
that will be affected by this amendment. In the absence of data on tax 
exempt not-for-profit issuers, we use the estimates for not-for-profit 
issuers in our analysis. Therefore, the actual impact is likely to be 
lower. For the 20 not-for-profit issuers that submitted data on 
community benefit expenditures, such expenditures as a percentage of 
earned premiums ranged from 0.04 percent to 4.11 percent with an 
average of 1.57 percent, which is likely to be less than the current 
limit for most of the issuers and is less than the proposed limit as 
well. We assume that in 2012 issuers will maintain the level of 
community benefit expenditures as reported in their MLR annual reports 
for the 2011 MLR reporting year. Therefore, we estimate that under the 
current policy, in the 2012 MLR reporting year, 17 not-for-profit 
issuers will owe approximately $182 million in rebates to approximately 
1.5 million enrollees, which is the same as the experience in the 2011 
MLR reporting year. The adopted change in treatment of community 
benefit expenditures for such issuers will have minimal effect on their 
MLRs and rebates under this assumption, since their current 
expenditures are below the current deduction limits.
    Issuers with lower rebate payments as a result of these adjustments 
will need to send fewer rebate notices, and therefore, will have lower 
administrative costs related to rebates and rebate notices.

D. Alternatives Considered

Risk Adjustment
    We considered State flexibility for risk adjustment. This option 
would have allowed States to develop State-specific characteristics but 
it would have resulted in few Federal standards by which to compensate 
for risk. This final rule describes a HHS risk adjustment methodology 
but allows States to seek HHS approval for alternate methodologies 
based on criteria established in this final rule. This compromise gives 
States some flexibility but also reduces the burden on multi-State 
issuers and the Federal government.
Reinsurance
    We proposed State flexibility to establish the reinsurance program 
in the Premium Stabilization Rule. This option would have allowed for 
State innovation, but it would have greatly increased the 
administrative burden on self-insured group health plans, multi-State 
issuers and the Federal government. A national approach is more 
efficient and less expensive. Moreover, we believe that uniform 
reinsurance payment parameters deliver payments where they are most 
needed--to issuers with high cost claims in the individual market. 
Centralized collection of contributions, an annual contribution and 
payment schedule, as well as a national contribution rate provide a 
more effective approach to stabilize premiums, while decreasing 
administrative burden.
Risk Corridors
    Elsewhere in this issue of the Federal Register, we are 
implementing an alternative to our current policy, under which the risk 
corridor calculation

[[Page 15523]]

methodology compares plan-specific allowable costs (adjusted claims) to 
a target amount (adjusted premiums). In order to align the risk 
corridor calculation methodology with the single risk pool requirements 
finalized at Sec.  156.80, we are modifying the definition of 
``allowable costs'' for the risk corridors calculation at Sec.  153.500 
such that ``allowable costs'' are calculated in a manner consistent 
with the single risk pool requirement for premiums. We believe that 
this approach will better align risk sharing under the program with how 
issuers will be required to set rates. We address the burden associated 
with this approach in the Collection of Information Section of the 
interim final rule with comment ``Amendments to the HHS Notice of 
Benefit and Payment Parameters for 2014'', published elsewhere in this 
issue of the Federal Register.
Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
    As discussed in section III.E.4.i, we considered requiring QHP 
issuers to provide cost-sharing reductions to Indians by waiving the 
cost sharing as appropriate, rather than assigning the eligible Indian 
to a particular plan variation. However, we believe this alternative 
approach would be too burdensome for issuers to implement in the short 
term. As discussed in section III.E.4.e, we are issuing an interim 
final rule with comment to provide QHP issuers with the option to 
submit data about the actual amount of cost-sharing reductions using an 
alternate methodology for purposes of payment reconciliation. This 
alternative will provide greater flexibility to issuers and may reduce 
the reporting burden for some issuers. We describe the burden 
associated with this alternative in the Collection of Information 
Section of the interim final rule with comment ``Amendments to the HHS 
Notice of Benefit and Payment Parameters for 2014'', published 
elsewhere in this issue of the Federal Register.
User Fees
    We considered calculating user fees on a per capita basis, but that 
approach fails to adjust for premium variation and geographic wage 
differences, and commenters suggest that most issuers and stakeholders 
prefer that such costs be calculated as a percentage of premium.
SHOP
    We considered making no change to the employer options in the FF-
SHOP, but concluded that allowing employers the option of offering a 
single QHP to employees would simplify the transition from current 
market practices to the SHOP. We will be proposing further rulemaking 
to ease the transition from the current market to the SHOP.
    We considered a range of threshold values for determining which 
issuers would be subject to the QHP certification requirement linking 
FFE and FF-SHOP participation and chose a threshold (20 percent market 
share) that minimized the number of issuers affected by the 
certification requirement while still ensuring that at least one large 
issuer in each State would offer QHPs in the FF-SHOP.

E. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
requires agencies to prepare a final regulatory flexibility analysis to 
describe the impact of the final rule on small entities, unless the 
head of the agency can certify that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The RFA generally defines a ``small entity'' as (1) A proprietary firm 
meeting the size standards of the Small Business Administration (SBA), 
(2) a not-for-profit organization that is not dominant in its field, or 
(3) a small government jurisdiction with a population of less than 
50,000. States and individuals are not included in the definition of 
``small entity.'' HHS uses a change in revenues of more than three to 
five percent as its measure of significant economic impact on a 
substantial number of small entities.
    This final rule contains rules for premium stabilization programs 
required of health plan issuers and self-insured group health plans. 
These programs include the risk adjustment program, the transitional 
reinsurance program and the temporary risk corridors programs. Because 
we believe that few insurance firms offering comprehensive health 
insurance policies fall below the size thresholds for ``small 
entities'' established by the SBA, we do not believe that a final 
regulatory flexibility analysis is required with respect to such firms.
    For purposes of the RFA, we expect the following types of entities 
to be affected by this final rule: (1) Health insurance issuers; (2) 
health insurance plan sponsors; (3) applicable reinsurance entities; 
(4) risk adjustment entities; (5) self-insured group health plans and 
(6) third-party administrators. We believe that health insurance 
issuers and plan sponsors would be classified under the North American 
Industry Classification System (NAICS) code 524114 (Direct Health and 
Medical Insurance Carriers); applicable reinsurance entities, risk 
adjustment entities and third party administrators would be classified 
under NAICS codes 524130 (Reinsurance Carriers), 524298 (Actuarial 
Services) and 524292 (Third Party Administration of Insurance). 
According to SBA size standards, entities with average annual receipts 
of $7 million or less would be considered small entities for these 
NAICS codes. Issuers could possibly be classified in 621491 (HMO 
Medical Centers) and, if this is the case, the SBA size standard would 
be $10 million or less.
    Based on data from Medical Loss Ratio annual report submissions for 
the 2011 MLR reporting year, there are 22 small entities (companies), 
each with less than $7 million in earned premiums, that offer 
individual or group health insurance coverage and would therefore be 
subject to the provisions related to MLR. Thirty six percent of these 
small issuers belong to holding groups, and many if not all of these 
small issuers are likely to have other lines of business that would 
result in their revenues exceeding $7 million.
    We believe that a number of sponsors of self-insured group health 
plans could qualify as ``small entities.'' This final rule specifies 
that third-party administrators may incur the operational costs 
associated with submitting reinsurance contributions to HHS. We do not 
believe that the reinsurance contribution amount or the operational 
cost associated with submitting the contribution are likely to result 
in a change in revenues of more than 3 to 5 percent for a substantial 
number of self-insured group health plans or third-party administrators 
that meet the definition of a small entity. We requested comment on 
whether the small entities affected by the proposed rule have been 
fully identified. We also requested comment and information on 
potential costs for these entities and on any alternatives that we 
should consider.
    Comment: We received no comments on whether the small entities 
described in this rule have been fully identified or on potential costs 
to them. However, one State expressed concern that the number of small 
self-insured entities is expected to grow and could cause an uneven 
playing field if not included in reinsurance contribution assessments. 
The State said maintaining a level playing field is desirable so as not 
to provide additional incentive to self-insure and thereby deny 
employees the consumer protection applicable to insured products on the 
Exchange.

[[Page 15524]]

    Response: We are aware that a growing number of small entities may 
consider self-insuring since self-insured groups are exempt from 
community ratings and minimum health care benefits. HHS will collect 
reinsurance contributions on a per enrollee basis from all self-insured 
group health plans regardless of their size. This will help ensure that 
entities are not incentivized to self-insure in order to avoid making 
reinsurance contributions. Because these contributions will be 
calculated on a per capita basis, we believe that is it unlikely that 
the amount of these contributions (or the operational costs associated 
with making these contributions) will result in a significant change in 
revenue for a substantial number of small entities.
    In this final rule, we establish requirements on employers that 
choose to participate in a SHOP Exchange. As discussed above, the SHOP 
is limited by statute to employers with at least one but not more than 
100 employees. For this reason, we expect that many employers would 
meet the SBA standard for small entities. We do not believe that the 
regulation imposes requirements on employers offering health insurance 
through SHOP that are more restrictive than the current requirements on 
small employers offering employer-sponsored coverage. For example, the 
FF-SHOP will generally match existing minimum participation rates in 
the outside market. Additionally, as discussed in the regulatory impact 
analysis, we believe the employee choice option will ultimately provide 
greater choice for the employee among QHPs and issuers, benefitting 
both employer and employee and simplifying the process for the employer 
of administering multiple health benefit plans while allowing a SHOP to 
let an employer choose one plan eases the transition from the current 
marketplace. We believe the processes that we have established 
constitute the minimum amount of requirements necessary to implement 
statutory mandates and accomplish our policy goals, and that no 
appropriate regulatory alternatives could be developed to further 
lessen the compliance burden.

F. Unfunded Mandates

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal governments, in the aggregate, or by the 
private sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2013, that threshold is approximately $141 million. 
Although we have not been able to quantify the user fees that will be 
associated with this rule, the combined administrative cost and user 
fee impact on State, local, or Tribal governments and the private 
sector may be above the threshold. Earlier portions of this RIA 
constitute our UMRA analysis.

G. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct costs on State and local governments, pre-empts 
State law, or otherwise has Federalism implications. Because States 
have flexibility in designing their risk adjustment, reinsurance, and 
Exchange-related programs, State decisions will ultimately influence 
both administrative expenses and overall premiums. States are not 
required to establish a risk adjustment or reinsurance program, or an 
Exchange.
    In HHS's view, while this final rule does not impose substantial 
direct requirement costs on State and local governments, this 
regulation has Federalism implications due to direct effects on the 
distribution of power and responsibilities among the State and Federal 
governments relating to determining standards relating to health 
insurance that is offered in the individual and small group markets. 
Each State electing to establish a risk adjustment or reinsurance 
program or an Exchange must adopt the Federal standards contained in 
the Affordable Care Act and in this final rule, or have in effect a 
State law or regulation that implements these Federal standards. 
However, HHS anticipates that the Federalism implications (if any) are 
substantially mitigated because under the statute, States have choices 
regarding the structure and governance of these programs. Additionally, 
the Affordable Care Act does not require States to establish these 
programs; if a State elects not to establish these programs (or the 
State's risk adjustment program or Exchange is not approved), HHS must 
establish and operate these programs in that State.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policy making discretion of the States, HHS 
has engaged in efforts to consult with and work cooperatively with 
affected States, including participating in conference calls with and 
attending conferences of the National Association of Insurance 
Commissioners, and consulting with State insurance officials on an 
individual basis.
    Throughout the process of developing this final rule, HHS has 
attempted to balance the States' interests in regulating health 
insurance issuers, and Congress' intent to provide access to Affordable 
Insurance Exchanges for consumers in every State. By doing so, it is 
HHS's view that we have complied with the requirements of Executive 
Order 13132.

List of Subjects

45 CFR Part 153

    Administrative practice and procedure, Adverse selection, Health 
care, Health insurance, Health records, Organization and functions 
(Government agencies), Premium stabilization, Reporting and 
recordkeeping requirements, Reinsurance, Risk adjustment, Risk 
corridors, Risk mitigation, State and local governments.

45 CFR Part 155

    Administrative practice and procedure, Health care access, Health 
insurance, Reporting and recordkeeping requirements, State and local 
governments, Cost-sharing reductions, Advance payments of premium tax 
credit, Administration and calculation of advance payments of the 
premium tax credit, Plan variations, Actuarial value.

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, 
American Indian/Alaska Natives, Individuals with disabilities, Loan 
programs-health, Organization and functions (Government agencies), 
Medicaid, Public assistance programs, Reporting and recordkeeping 
requirements, State and local governments, Sunshine Act, Technical 
assistance, Women, and Youth.

45 CFR Part 157

    Employee benefit plans, Health insurance, Health maintenance 
organization (HMO), Health records, Hospitals, Indians, Individuals 
with disabilities, Organization and functions (Government agencies), 
Medicaid, Public assistance programs, Reporting and recordkeeping 
requirements, Safety,

[[Page 15525]]

State and local governments, Sunshine Act, Technical Assistance, Women, 
and Youth.

45 CFR Part 158

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, penalties, Reporting and recordkeeping 
requirements, Premium revenues, Medical loss ratio, Rebating.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services amends 45 CFR parts 153, 155, 156, 157 and 158 as 
set forth below:

PART 153--STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS, AND 
RISK ADJUSTMENT UNDER THE AFFORDABLE CARE ACT

0
1. The authority citation for part 153 continues to read as follows:

    Authority:  Secs. 1311, 1321, 1341-1343, Pub. L. 111-148, 24 
Stat. 119.


0
2. Section 153.20 is amended by revising the definitions of 
``Contributing entity'', ``Risk adjustment covered plan'' and ``Risk 
adjustment data collection approach'' to read as follows:


Sec.  153.20  Definitions.

* * * * *
    Contributing entity means a health insurance issuer or self-insured 
group health plan. A self-insured group health plan is responsible for 
the reinsurance contributions, though it may elect to use a third party 
administrator or administrative services only contractor for transfer 
of the reinsurance contributions.
* * * * *
    Risk adjustment covered plan means, for the purpose of the risk 
adjustment program, any health insurance coverage offered in the 
individual or small group market with the exception of grandfathered 
health plans, group health insurance coverage described in Sec.  
146.145(c) of this subchapter, individual health insurance coverage 
described in Sec.  148.220 of this subchapter, and any plan determined 
not to be a risk adjustment covered plan in the applicable Federally 
certified risk adjustment methodology.
* * * * *
    Risk adjustment data collection approach means the specific 
procedures by which risk adjustment data is to be stored, collected, 
accessed, transmitted, and validated and the applicable timeframes, 
data formats, and privacy and security standards.
* * * * *

0
3. Section 153.100 is amended by--
0
A. Revising paragraph (a)(1).
0
B. Removing paragraph (a)(2).
0
C. Redesignating paragraphs (a)(3) and (4) as paragraphs (a)(2) and 
(3).
0
D. Revising newly designated paragraph (a)(2).
0
E. Removing paragraph (a)(5).
0
F. Revising paragraph (d)(1).
0
G. Removing paragraph (d)(2).
0
H. Redesignating paragraphs (d)(3) and (4) as paragraphs (d)(2) and 
(3).
0
I. Revising newly designated paragraph (d)(2).
0
J. Removing paragraph (d)(5).
0
K. Redesignating paragraph (d)(6) as paragraph (d)(4).
0
The revisions read as follows:


Sec.  153.100  State notice of benefit and payment parameters.

    (a) * * *
    (1) Modify the data requirements for health insurance issuers to 
receive reinsurance payments from those specified in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year;
    (2) Collect additional reinsurance contributions under Sec.  
153.220(d)(1) or use additional funds for reinsurance payments under 
Sec.  153.220(d)(2); or
* * * * *
    (d) * * *
    (1) Adhere to the data requirements for health insurance issuers to 
receive reinsurance payments that are specified in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year;
    (2) Forgo the collection of additional reinsurance contributions 
under Sec.  153.220(d)(1) and the use of additional funds for 
reinsurance payments under Sec.  153.220(d)(2);
* * * * *
0
4. Section 153.110 is amended by:
0
A. Revising paragraph (a).
0
B. Removing paragraph (b).
0
C. Redesignating paragraph (c) as paragraph (b) and revising newly 
designated paragraph (b).
0
D. Redesignating paragraph (d) as paragraph (c).
0
E. Removing newly designated paragraph (c)(2).
0
F. Redesignating paragraph (c)(3) as paragraph (c)(2).
0
G. Removing newly designated paragraph (c)(4).
0
H. Removing newly designated paragraph (c)(5).
0
I. Redesignating paragraph (c)(6) as paragraph (c)(3).
0
J. Removing paragraph (e).
0
K. Redesignating paragraph (f) as paragraph (d).
    The revisions read as follows:


Sec.  153.110  Standards for the State notice of benefit and payment 
parameters.

    (a) Data requirements. If a State that establishes a reinsurance 
program elects to modify the data requirements for health insurance 
issuers to receive reinsurance payments from those specified in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year, the State notice of benefit and payment parameters must 
specify those modifications.
    (b) Additional collections. If a State that establishes a 
reinsurance program elects to collect additional funds under Sec.  
153.220(d)(1) or use additional funds for reinsurance payments under 
Sec.  153.220(d)(2), the State must publish in the State notice of 
benefit and payment parameters the following:
    (1) A description of the purpose of the additional collection, 
including whether it will be used to cover reinsurance payments made 
under Sec.  153.232, administrative costs, or both;
    (2) The additional contribution rate at which the funds will be 
collected; and
    (3) If the purpose of the additional collection includes 
reinsurance payments (or if the State is using additional funds for 
reinsurance payments under Sec.  153.220(d)(2)), the State supplemental 
reinsurance payment parameters required under Sec.  153.232.
* * * * *

0
5. Section 153.210 is amended by revising paragraph (a)(2) and adding 
paragraph (e) to read as follows:


Sec.  153.210  State establishment of a reinsurance program.

    (a) * * *
    (2) If a State contracts with or establishes more than one 
applicable reinsurance entity, the State must ensure that each 
applicable reinsurance entity operates in a distinct geographic area 
with no overlap of jurisdiction with any other applicable reinsurance 
entity.
* * * * *
    (e) Reporting to HHS. Each State that establishes a reinsurance 
program must ensure that each applicable reinsurance entity provides 
information regarding requests for reinsurance payments under the 
national contribution rate made under Sec.  153.410 for all 
reinsurance-eligible plans for each quarter during the applicable 
benefit year in a manner and timeframe established by HHS.

0
6. Section 153.220 is amended by--
0
A. Revising paragraph (a).
0
B. Removing paragraph (b).
0
C. Redesignating paragraph (c) as paragraph (b).
0
D. Removing paragraph (d).

[[Page 15526]]

0
E. Redesignating paragraph (e) as paragraph (c).
0
F. Revising newly designated paragraph (c)(2).
0
G. Removing paragraph (f).
0
H. Redesignating paragraph (g) as paragraph (d).
0
I. Revising newly designated paragraph (d).
0
J. Removing paragraph (h).
    The revisions read as follows:


Sec.  153.220  Collection of reinsurance contribution funds.

    (a) Collections. If a State establishes a reinsurance program, HHS 
will collect all reinsurance contributions from all contributing 
entities for that State under the national contribution rate.
* * * * *
    (c) * * *
    (2) Payments to the U.S. Treasury as described in paragraph (b)(2) 
if this section; and
* * * * *
    (d) Additional State collections. If a State establishes a 
reinsurance program:
    (1) The State may elect to collect more than the amounts that would 
be collected based on the national contribution rate set forth in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year to provide:
    (i) Funding for administrative expenses of the applicable 
reinsurance entity; or
    (ii) Additional funds for reinsurance payments.
    (2) A State may use additional funds which were not collected as 
additional reinsurance contributions under this part for reinsurance 
payments under the State supplemental payment parameters under Sec.  
153.232.
* * * * *

0
7. Section 153.230 is revised to read as follows:


Sec.  153.230  Calculation of reinsurance payments made under the 
national contribution rate.

    (a) Eligibility for reinsurance payments under the national 
reinsurance parameters. A health insurance issuer of a reinsurance-
eligible plan becomes eligible for reinsurance payments from 
contributions under the national contribution rate when its claims 
costs for an individual enrollee's covered benefits in a benefit year 
exceed the national attachment point.
    (b) National reinsurance payment parameters. The national 
reinsurance payment parameters for each benefit year commencing in 2014 
and ending in 2016 set forth in the annual HHS notice of benefit and 
payment parameters for each applicable benefit year will apply with 
respect to reinsurance payments made from contributions received under 
the national contribution rate.
    (c) National reinsurance payments. Each reinsurance payment made 
from contributions received under the national contribution rate will 
be calculated as the product of the national coinsurance rate 
multiplied by the health insurance issuer's claims costs for an 
individual enrollee's covered benefits that the health insurance issuer 
incurs in the applicable benefit year between the national attachment 
point and the national reinsurance cap.
    (d) Uniform adjustment to national reinsurance payments. If HHS 
determines that all reinsurance payments requested under the national 
payment parameters from all reinsurance-eligible plans in all States 
for a benefit year will exceed all reinsurance contributions collected 
under the national contribution rate in all States for an applicable 
benefit year, HHS will determine a uniform pro rata adjustment to be 
applied to all such requests for reinsurance payments for all States. 
Each applicable reinsurance entity, or HHS on behalf of a State, must 
reduce all requests for reinsurance payments for the applicable benefit 
year by any adjustment required under this paragraph (d).

0
8. Section 153.232 is added to read as follows:


Sec.  153.232  Calculation of reinsurance payments made under a State 
additional contribution rate.

    (a) State supplemental reinsurance payment parameters. (1) If a 
State establishes a reinsurance program and elects to collect 
additional contributions under Sec.  153.220(d)(1)(ii) or use 
additional funds for reinsurance payments under Sec.  153.220(d)(2), 
the State must set supplemental reinsurance payment parameters using 
one or more of the following methods:
    (i) Decreasing the national attachment point;
    (ii) Increasing the national reinsurance cap; or
    (iii) Increasing the national coinsurance rate.
    (2) The State must ensure that additional reinsurance contributions 
and funds projected to be received under Sec.  153.220(d)(1)(ii) and 
Sec.  153.220(d)(2), as applicable, for any applicable benefit year are 
reasonably calculated to cover additional reinsurance payments that are 
projected to be made only under the State supplemental reinsurance 
payment parameters (that will not be paid under the national payment 
parameters) for the given benefit year.
    (3) All applicable reinsurance entities in a State collecting 
additional reinsurance contributions must apply the State supplemental 
reinsurance payment parameters established under paragraph (a)(1) of 
this section when calculating reinsurance payments.
    (b) General requirement for payments under State supplemental 
reinsurance parameters. Contributions collected under Sec.  
153.220(d)(1)(ii) or funds under Sec.  153.220(d)(2), as applicable, 
must be applied towards requests for reinsurance payments made under 
the State supplemental reinsurance payments parameters for each benefit 
year commencing in 2014 and ending in 2016.
    (c) Eligibility for reinsurance payments under State supplemental 
reinsurance parameters. If a State establishes State supplemental 
reinsurance payment parameters under Sec.  153.232(a)(1), a 
reinsurance-eligible plan becomes eligible for reinsurance payments 
from contributions under Sec.  153.220(d)(1)(ii) or funds under Sec.  
153.220(d)(2), as applicable, if its incurred claims costs for an 
individual enrollee's covered benefits in the applicable benefit year:
    (1) Exceed the State supplemental attachment point set forth in the 
State notice of benefit and payment parameters for the applicable 
benefit year if a State has established such a supplemental attachment 
point under Sec.  153.232(a)(1)(i);
    (2) Exceed the national reinsurance cap set forth in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year if a State has established a State supplemental reinsurance cap 
under Sec.  153.232(a)(1)(ii); or
    (3) Exceed the national attachment point set forth in the annual 
HHS notice of benefit and payment parameters for the applicable benefit 
year if a State has established a supplemental coinsurance rate under 
Sec.  153.232(a)(1)(iii).
    (d) Payments under State supplemental reinsurance parameters. Each 
reinsurance payment made from contributions received under Sec.  
153.220(d)(1)(ii) or funds under Sec.  153.220(d)(2), as applicable, 
will be calculated with respect to an issuer's incurred claims costs 
for an individual enrollee's covered benefits in the applicable benefit 
year as the sum of the following:
    (1) If the State has established a State supplemental attachment 
point, to the extent the issuer's incurred claims costs for such 
benefits in the applicable benefit year exceed the State

[[Page 15527]]

supplemental attachment point but do not exceed the national attachment 
point, the product of such claims costs between the State supplemental 
attachment point and the national attachment point multiplied by the 
national coinsurance rate (or, if the State has established a State 
supplemental coinsurance rate, the State supplemental coinsurance 
rate);
    (2) If the State has established a State supplemental reinsurance 
cap, to the extent the issuer's incurred claims costs for such benefits 
in the applicable benefit year exceed the national reinsurance cap but 
do not exceed the State supplemental reinsurance cap, the product of 
such claims costs between the national reinsurance cap and the State 
supplemental reinsurance cap multiplied by the national coinsurance 
rate (or, if the State has established a State supplemental coinsurance 
rate, the State supplemental coinsurance rate); and
    (3) If the State has established a State supplemental coinsurance 
rate, the product of the issuer's incurred claims costs for such 
benefits in the applicable benefit year between the national attachment 
point and the national reinsurance cap multiplied by the difference 
between the State supplemental coinsurance rate and the national 
coinsurance rate.
    (e) Uniform adjustment to payments under State supplemental 
reinsurance payment parameters. If all requested reinsurance payments 
under the State supplemental reinsurance parameters calculated in 
accordance with paragraph (a)(1) of this section from all reinsurance-
eligible plans in a State for a benefit year will exceed all 
reinsurance contributions collected under Sec.  153.220(d)(1)(ii) or 
funds under Sec.  153.220(d)(2) for the applicable benefit year, the 
State must determine a uniform pro rata adjustment to be applied to all 
such requests for reinsurance payments. Each applicable reinsurance 
entity in the State must reduce all such requests for reinsurance 
payments for the applicable benefit year by that adjustment.
    (f) Limitations on payments under State supplemental reinsurance 
parameters. A State must ensure that:
    (1) The payments made to issuers must not exceed the issuer's total 
paid amount for the reinsurance-eligible claim(s); and
    (2) Any remaining additional funds for reinsurance payments 
collected under Sec.  153.220(d)(1)(ii) must be used for reinsurance 
payments under the State supplemental reinsurance payment parameters in 
subsequent benefit years.

0
9. Section 153.234 is added to read as follows:


Sec.  153.234  Eligibility under health insurance market rules.

    A reinsurance-eligible plan's covered claims costs for an enrollee 
incurred prior to the application of the following provisions do not 
count towards either the national reinsurance payment parameters or the 
State supplemental reinsurance payment parameters: 45 CFR 147.102, 
147.104 (subject to 147.145), 147.106 (subject to 147.145), 156.80, and 
subpart B of part 156.

0
10. Section 153.235 is added to read as follows:


Sec.  153.235  Allocation and distribution of reinsurance contributions

    (a) Allocation of reinsurance contributions. HHS will allocate and 
disburse to each State operating reinsurance (and will distribute 
directly to issuers if HHS is operating reinsurance on behalf of a 
State), reinsurance contributions collected from contributing entities 
under the national contribution rate for reinsurance payments. The 
disbursed funds would be based on the total requests for reinsurance 
payments made under the national reinsurance payment parameters in all 
States and submitted under Sec.  153.410, net of any adjustment under 
Sec.  153.230(d).
    (b) Excess reinsurance contributions. Any reinsurance contributions 
collected from contributing entities under the national contribution 
rate for reinsurance payments for any benefit year but unused for the 
applicable benefit year will be used for reinsurance payments under the 
national reinsurance payment parameters for subsequent benefit years.

0
11. Section 153.240 is amended by revising paragraphs (a) and (b) and 
by adding a new paragraph (d) to read as follows:


Sec.  153.240  Disbursement of reinsurance payments.

    (a) Data collection. If a State establishes a reinsurance program, 
the State must ensure that the applicable reinsurance entity:
    (1) Collects data required to determine reinsurance payments as 
described in Sec.  153.230 and Sec.  153.232, as applicable, from an 
issuer of reinsurance-eligible plans or is provided access to such 
data, according to the data requirements specified by the State in the 
State notice of benefit and payment parameters described in subpart B 
of this part.
    (2) Makes reinsurance payments to the issuer of a reinsurance-
eligible plan after receiving a valid claim for payment from that 
health insurance issuer in accordance with the requirements of Sec.  
153.410.
    (3) Provides a process through which an issuer of a reinsurance-
eligible plan that does not generate individual enrollee claims in the 
normal course of business may use estimated claims costs to make a 
request for payment (or to submit data to be considered for reinsurance 
payments) in accordance with the requirements of Sec.  153.410. The 
State must ensure that such requests for reinsurance payment (or a 
subset of such requests) are subject to validation.
    (b) Notification of reinsurance payments. For each applicable 
benefit year,
    (1) A State, or HHS on behalf of the State, must notify issuers 
annually of:
    (i) Reinsurance payments under the national payment parameters, and
    (ii) Reinsurance payments under the State supplemental payment 
parameters if applicable, to be made for the applicable benefit year no 
later than June 30 of the year following the applicable benefit year.
    (2) A State must provide to each issuer of a reinsurance-eligible 
plan the calculation of total reinsurance payment requests, on a 
quarterly basis during the applicable benefit year in a timeframe and 
manner specified by HHS, made under:
    (i) The national reinsurance payment parameters, and
    (ii) State supplemental reinsurance payments parameters if 
applicable.
* * * * *
    (d) Privacy and security. (1) If a State establishes a reinsurance 
program, the State must ensure that the applicable reinsurance entity's 
collection of personally identifiable information is limited to 
information reasonably necessary for use in the calculation of 
reinsurance payments, and that use and disclosure of personally 
identifiable information is limited to those purposes for which the 
personally identifiable information was collected (including for 
purposes of data validation).
    (2) If a State establishes a reinsurance program, the State must 
ensure that the applicable reinsurance entity implements security 
standards that provide administrative, physical, and technical 
safeguards for the personally identifiable information consistent with 
the security standards described at 45 CFR 164.308, 164.310, and 
164.312.

0
12. Section 153.310 is amended by:
0
A. Redesignating paragraphs (c) and (d) as paragraphs (e) and (f), 
respectively.
0
B. Adding new paragraphs (a)(4), (c) and (d).

[[Page 15528]]

    The additions read as follows:


Sec.  153.310  Risk adjustment administration.

    (a) * * *
    (4) Beginning in 2015, any State that is approved to operate an 
Exchange and elects to operate risk adjustment but has not been 
approved by HHS to operate risk adjustment prior to publication of its 
State notice of benefit and payment parameters for the applicable 
benefit year, will forgo implementation of all State functions in this 
subpart, and HHS will carry out all of the provisions of this subpart 
on behalf of the State.
* * * * *
    (c) State responsibility for risk adjustment. (1) A State operating 
a risk adjustment program for a benefit year must administer the 
applicable Federally certified risk adjustment methodology through an 
entity that--
    (i) Is operationally ready to implement the applicable Federally 
certified risk adjustment methodology and process the resulting 
payments and charges; and
    (ii) Has experience relevant to operating the risk adjustment 
program.
    (2) The State must ensure that the risk adjustment entity complies 
with all applicable provisions of subpart D of this part in the 
administration of the applicable Federally certified risk adjustment 
methodology.
    (3) The State must conduct oversight and monitoring of its risk 
adjustment program.
    (d) Certification for a State to operate risk adjustment. (1) To be 
approved by HHS to operate risk adjustment under a particular Federally 
certified risk adjustment methodology for a benefit year, a State must 
establish that it and its risk adjustment entity meet the standards set 
forth in paragraph (c) of this section.
    (2) To obtain such approval, the State must submit to HHS, in a 
form and manner specified by HHS, evidence that its risk adjustment 
entity meets these standards.
* * * * *

0
13. Section 153.320 is amended by revising paragraphs (a)(1) and (a)(2) 
to read as follows:


Sec.  153.320  Federally certified risk adjustment methodology.

    (a) * * *
    (1) The risk adjustment methodology is developed by HHS and 
published in the applicable annual HHS notice of benefit and payment 
parameters; or
    (2) An alternate risk adjustment methodology is submitted by a 
State in accordance with Sec.  153.330, reviewed and certified by HHS, 
and published in the applicable annual HHS notice of benefit and 
payment parameters.
* * * * *

0
14. Section 153.330 is amended by--
0
A. Redesignating paragraph (b) as paragraph (c).
0
B. Adding new paragraph (b).
    The additions read as follows:


Sec.  153.330  State alternate risk adjustment methodology.

* * * * *
    (b) Evaluation criteria for alternate risk adjustment methodology. 
An alternate risk adjustment methodology will be certified by HHS as a 
Federally certified risk adjustment methodology based on the following 
criteria:
    (1) The criteria listed in paragraph (a)(2) of this section;
    (2) Whether the methodology complies with the requirements of this 
subpart D;
    (3) Whether the methodology accounts for risk selection across 
metal levels; and
    (4) Whether each of the elements of the methodology are aligned.
* * * * *

0
15. Section 153.340 is amended by revising paragraph (b)(3) to read as 
follows:


Sec.  153.340  Data collection under risk adjustment.

* * * * *
    (b) * * *
    (3) If a State is operating a risk adjustment program, the State 
must ensure that any collection of personally identifiable information 
is limited to information reasonably necessary for use in the 
applicable risk adjustment model, calculation of plan average actuarial 
risk, or calculation of payments and charges. Except for purposes of 
data validation, the State may not collect or store any personally 
identifiable information for use as a unique identifier for an 
enrollee's data, unless such information is masked or encrypted by the 
issuer, with the key to that masking or encryption withheld from the 
State. Use and disclosure of personally identifiable information is 
limited to those purposes for which the personally identifiable 
information was collected (including for purposes of data validation).
* * * * *

0
16. Section 153.360 is added to subpart D to read as follows:


Sec.  153.360  Application of risk adjustment to the small group 
market.

    Enrollees in a risk adjustment covered plan must be assigned to the 
applicable risk pool in the State in which the employer's policy was 
filed and approved.

0
17. Section 153.400 is revised to read as follows:


Sec.  153.400  Reinsurance contribution funds.

    (a) General requirement. Each contributing entity must make 
reinsurance contributions annually: at the national contribution rate 
for all reinsurance contribution enrollees, in a manner specified by 
HHS; and at the additional State supplemental contribution rate if the 
State has elected to collect additional contributions under Sec.  
153.220(d)(1), in a manner specified by the State.
    (1) A contributing entity must make reinsurance contributions for 
its self-insured group health plans and health insurance coverage 
except to the extent that:
    (i) Such plan or coverage is not major medical coverage;
    (ii) In the case of health insurance coverage, such coverage is not 
considered to be part of an issuer's commercial book of business;
    (iii) Such plan or coverage is expatriate health coverage, as 
defined by the Secretary; or
    (iv) In the case of employer-provided health coverage, such 
coverage applies to individuals with respect to which benefits under 
Title XVIII of the Act (Medicare) are primary under the Medicare 
Secondary Payor rules under section 1862(b) of the Act and the 
regulations issued thereunder.
    (2) Accordingly, as specified in paragraph (a)(1) of this section, 
a contributing entity is not required to make contributions on behalf 
of the following:
    (i) A self-insured group health plan or health insurance coverage 
that consists solely of excepted benefits as defined by section 2791(c) 
of the PHS Act;
    (ii) Coverage offered by an issuer under contract to provide 
benefits under any of the following titles of the Act:
    (A) Title XVIII (Medicare);
    (B) Title XIX (Medicaid); or
    (C) Title XXI (Children's Health Insurance Program);
    (iii) A Federal or State high-risk pool, including the Pre-Existing 
Condition Insurance Plan Program;
    (iv) Basic health plan coverage offered by issuers under contract 
with a State as described in section 1331 of the Affordable Care Act;
    (v) A health reimbursement arrangement within the meaning of IRS 
Notice 2002-45 (2002-2 CB 93) or any subsequent applicable guidance, 
that is integrated with a self-insured group health plan or health 
insurance coverage;

[[Page 15529]]

    (vi) A health savings account within the meaning of section 223(d) 
of the Code;
    (vii) A health flexible spending arrangement within the meaning of 
section 125 of the Code;
    (viii) An employee assistance plan, disease management program, or 
wellness program that does not provide major medical coverage;
    (ix) A stop-loss policy or an indemnity reinsurance policy;
    (x) TRICARE and other military health benefits for active and 
retired uniformed services personnel and their dependents;
    (xi) A plan or coverage provided by an Indian Tribe to Tribal 
members and their spouses and dependents (and other persons of Indian 
descent closely affiliated with the Tribe), in the capacity of the 
Tribal members as Tribal members (and not in their capacity as current 
or former employees of the Tribe or their dependents);
    (xii) Health programs operated under the authority of the Indian 
Health Service; or
    (xiii) A self-insured group health plan or health insurance 
coverage that consists solely of benefits for prescription drugs.
    (b) Data requirements. Each contributing entity must submit to HHS 
data required to substantiate the contribution amounts for the 
contributing entity, in the manner and timeframe specified by HHS.

0
18. Section 153.405 is added to read as follows:


Sec.  153.405  Calculation of reinsurance contributions.

    (a) In general. The reinsurance contribution required from a 
contributing entity for its reinsurance contribution enrollees during a 
benefit year is calculated by multiplying:
    (1) The number of covered lives of reinsurance contribution 
enrollees during the applicable benefit year for all plans and coverage 
described in Sec.  153.400(a)(1) of the contributing entity; by
    (2) The contribution rate for the applicable benefit year.
    (b) Annual enrollment count. No later than November 15 of benefit 
year 2014, 2015, or 2016, as applicable, a contributing entity must 
submit an annual enrollment count of the number of covered lives of 
reinsurance contribution enrollees for the applicable benefit year to 
HHS. The count must be determined as specified in paragraphs (d) or (e) 
of this section, as applicable.
    (c) Notification and payment. (1) Within 30 days of the submission 
of the annual enrollment count described in paragraph (b) of this 
section or by December 15 of the applicable benefit year, whichever is 
later, HHS will notify the contributing entity of the reinsurance 
contribution amount to be paid for the applicable benefit year.
    (2) A contributing entity must remit reinsurance contributions to 
HHS within 30 days after the date of the notification.
    (d) Procedures for counting covered lives for health insurance 
issuers. To determine the number of covered lives of reinsurance 
contribution enrollees under a health insurance plan for a benefit 
year, a health insurance issuer must use one of the following methods:
    (1) Adding the total number of lives covered for each day of the 
first nine months of the benefit year and dividing that total by the 
number of days in the first nine months;
    (2) Adding the total number of lives covered on any date (or more 
dates, if an equal number of dates are used for each quarter) during 
the same corresponding month in each of the first three quarters of the 
benefit year, and dividing that total by the number of dates on which a 
count was made. For this purpose, the same months must be used for each 
quarter (for example January, April and July) and the date used for the 
second and third quarter must fall within the same week of the quarter 
as the corresponding date used for the first quarter; or
    (3) Multiplying the average number of policies in effect for the 
first nine months of the benefit year by the ratio of covered lives per 
policy in effect, calculated using the prior National Association of 
Insurance Commissioners (NAIC) Supplemental Health Care Exhibit (or a 
form filed with the issuer's State of domicile for the most recent time 
period).
    (e) Procedures for counting covered lives for self-insured group 
health plans. To determine the number of covered lives of reinsurance 
contribution enrollees under a self-insured group health plan for a 
benefit year, a plan must use one of the following methods:
    (1) One of the methods specified in either paragraph (d)(1) or 
paragraph (d)(2) of this section;
    (2) Adding the total number of lives covered on any date (or more 
dates, if an equal number of dates are used for each quarter) during 
the same corresponding month in each of the first three quarters of the 
benefit year (provided that the date used for the second and third 
quarters must fall within the same week of the quarter as the 
corresponding date used for the first quarter), and dividing that total 
by the number of dates on which a count was made, except that the 
number of lives covered on a date is calculated by adding the number of 
participants with self-only coverage on the date to the product of the 
number of participants with coverage other than self-only coverage on 
the date and a factor of 2.35. For this purpose, the same months must 
be used for each quarter (for example, January, April, and July); or
    (3) Using the number of lives covered for the benefit year 
calculated based upon the ``Annual Return/Report of Employee Benefit 
Plan'' filed with the Department of Labor (Form 5500) for the last 
applicable time period. For purposes of this paragraph (e)(3), the 
number of lives covered for the benefit year for a plan offering only 
self-only coverage equals the sum of the total participants covered at 
the beginning and end of the benefit year, as reported on the Form 
5500, divided by 2, and the number of lives covered for the benefit 
year for a plan offering self-only coverage and coverage other than 
self-only coverage equals the sum of the total participants covered at 
the beginning and the end of the benefit year, as reported on the Form 
5500.
    (f) Procedures for counting covered lives for group health plans 
with a self-insured coverage option and an insured coverage option.
    (1) To determine the number of covered lives of reinsurance 
contribution enrollees under a group health plan with a self-insured 
coverage option and an insured coverage option for a benefit year, a 
plan must use one of the methods specified in either paragraph (d)(1) 
or paragraph (d)(2) of this section.
    (2) Notwithstanding paragraph (f)(1), a plan with multiple coverage 
options may use any of the counting methods specified for self-insured 
coverage or insured coverage, as applicable to each option, if it 
determines the number of covered lives under each option separately as 
if each coverage option provided major medical coverage (not including 
any coverage option that consists solely of excepted benefits as 
defined by section 2791(c) of the PHS Act, that only provides benefits 
related to prescription drugs, or that is a health reimbursement 
arrangement, health savings account, or health flexible spending 
arrangement).
    (g) Multiple group health plans maintained by the same plan 
sponsor.
    (1) General rule. If a plan sponsor maintains two or more group 
health plans (including one or more group health plans that provide 
health insurance coverage) that collectively provide major medical 
coverage for the same covered lives simultaneously, then

[[Page 15530]]

those multiple plans must be treated as a single group health plan for 
purposes of calculating any reinsurance contribution amount due under 
this section. However, a plan sponsor may treat the multiple plans as 
separate group health plans for purposes of calculating any reinsurance 
contribution due under this section if it determines the number of 
covered lives under each separate group health plan as if the separate 
group health plan provided major medical coverage.
    (2) Plan sponsor. For purposes of this paragraph (g), the term 
``plan sponsor'' means:
    (i) The employer, in the case of a plan established or maintained 
by a single employer;
    (ii) The employee organization, in the case of a plan established 
or maintained by an employee organization;
    (iii) The joint board of trustees, in the case of a multiemployer 
plan (as defined in section 414(f) of the Code);
    (iv) The committee, in the case of a multiple employer welfare 
arrangement;
    (v) The cooperative or association that establishes or maintains a 
plan established or maintained by a rural electric cooperative or rural 
cooperative association (as such terms are defined in section 3(40)(B) 
of ERISA);
    (vi) The trustee, in the case of a plan established or maintained 
by a voluntary employees' beneficiary association (meaning that the 
association is not merely serving as a funding vehicle for a plan that 
is established or maintained by an employer or other person);
    (vii) In the case of a plan, the sponsor of which is not described 
in paragraph (g)(2)(i) through (g)(2)(vi) of this section, the person 
identified by the terms of the document under which the plan is 
operated as the plan sponsor, or the person designated by the terms of 
the document under which the plan is operated as the plan sponsor, 
provided that designation is made, and that person has consented to the 
designation, by no later than the date by which the count of covered 
lives for that benefit year is required to be provided, after which 
date that designation for that benefit year may not be changed or 
revoked, and provided further that a person may be designated as the 
plan sponsor only if the person is one of the persons maintaining the 
plan (for example, one of the employers that is maintaining the plan 
with one or more other employers or employee organizations); or
    (viii) In the case of a plan, the sponsor of which is not described 
in paragraph (g)(2)(i) through (g)(2)(vi) of this section, and for 
which no identification or designation of a plan sponsor has been made 
under paragraph (g)(2)(i)(vii) of this section, each employer that 
maintains the plan (with respect to employees of that employer), each 
employee organization that maintains the plan (with respect to members 
of that employee organization), and each board of trustees, cooperative 
or association that maintains the plan.
    (3) Exception. A plan sponsor is not required to include as part of 
a single group health plan as determined under paragraph (g)(1) of this 
section any group health plan that consists solely of excepted benefits 
as defined by section 2791(c) of the PHS Act, that only provides 
benefits related to prescription drugs, or that is a health 
reimbursement arrangement, health savings account, or health flexible 
spending arrangement.
    (4) Procedures for counting covered lives for multiple group health 
plans treated as a single group health plan. The rules in this 
paragraph (g)(4) govern the determination of the average number of 
covered lives in a benefit year for any set of multiple self-insured 
group health plans or health insurance plans (or a combination of one 
or more self-insured group health plans and one or more health 
insurance plans) that are treated as a single group health plan under 
paragraph (g)(1) of this section.
    (i) Multiple group health plans including an insured plan. If at 
least one of the multiple plans is an insured plan, the average number 
of covered lives of reinsurance contribution enrollees must be 
calculated using one of the methods specified in either paragraph 
(d)(1) or paragraph (d)(2) of this section, applied across the multiple 
plans as a whole. The following information must be determined by the 
plan sponsor and reported to HHS, in a manner and timeframe specified 
by HHS:
    (A) The average number of covered lives calculated;
    (B) The counting method used; and
    (C) The names of the multiple plans being treated as a single group 
health plan as determined by the plan sponsor and reported to HHS.
    (ii) Multiple group health plans not including an insured plan. If 
each of the multiple plans is a self-insured group health plan, the 
average number of covered lives of reinsurance contribution enrollees 
must be calculated using one of the methods specified either in 
paragraph (e)(1) or paragraph (e)(2) of this section, applied across 
the multiple plans as a whole. The following information must be 
determined by the plan sponsor and reported to HHS, in a manner and 
timeframe specified by HHS:
    (A) The average number of covered lives calculated;
    (B) The counting method used; and
    (C) The names of the multiple plans being treated as a single group 
health plan as determined by the plan sponsor.

0
19. Section 153.410 is amended by revising paragraph (a) as follows:


Sec.  153.410  Requests for reinsurance payments.

    (a) General requirement. An issuer of a reinsurance-eligible plan 
may make a request for payment when that issuer's claims costs for an 
enrollee of that reinsurance-eligible plan has met the criteria for 
reinsurance payment set forth in subpart B of this part and the HHS 
notice of benefit and payment parameters and State notice of benefit 
and payment parameters for the applicable benefit year, if applicable.
* * * * *

0
20. Section 153.420 is added to subpart E to read as follows:


Sec.  153.420  Data collection.

    (a) Data requirement. To be eligible for reinsurance payments, an 
issuer of a reinsurance-eligible plan must submit or make accessible 
all required reinsurance data in accordance with the reinsurance data 
collection approach established by the State, or by HHS on behalf of 
the State.
    (b) Deadline for submission of data. An issuer of a reinsurance-
eligible plan must submit or make accessible data to be considered for 
reinsurance payments for the applicable benefit year by April 30 of the 
year following the end of the applicable benefit year.

0
21. Section 153.500 is amended by--
0
A. Revising the definitions of ``Administrative costs'' and ``Allowable 
administrative costs.''
0
B. Adding the definitions of ``After-tax premiums earned,'' 
``Profits,'' and ``Taxes and regulatory fees'' in alphabetical order.
    The revisions and additions read as follows:


Sec.  153.500  Definitions.

* * * * *
    Administrative costs mean, with respect to a QHP, total non-claims 
costs incurred by the QHP issuer for the QHP, including taxes and 
regulatory fees.
    After-tax premiums earned mean, with respect to a QHP, premiums 
earned with respect to the QHP minus taxes and regulatory fees.
    Allowable administrative costs mean, with respect to a QHP, the sum 
of administrative costs of the QHP, other than taxes and regulatory 
fees, plus profits earned by the QHP, which sum is limited to 20 
percent of after-tax

[[Page 15531]]

premiums earned with respect to the QHP (including any premium tax 
credit under any governmental program), plus taxes and regulatory fees.
* * * * *
    Profits mean, with respect to a QHP, the greater of:
    (1) Three percent of after-tax premiums earned, and
    (2) Premiums earned of the QHP minus the sum of allowable costs and 
administrative costs of the QHP.
* * * * *
    Taxes and regulatory fees mean, with respect to a QHP, Federal and 
State licensing and regulatory fees paid with respect to the QHP as 
described in Sec.  158.161(a) of this subchapter, and Federal and State 
taxes and assessments paid with respect to the QHP as described in 
Sec.  158.162(a)(1) and (b)(1) of this subchapter.
* * * * *

0
22. Section 153.510 is amended by adding new paragraph (d) to read as 
follows:


Sec.  153.510  Risk corridors establishment and payment methodology.

* * * * *
    (d) Charge submission deadline. A QHP issuer must remit charges to 
HHS within 30 days after notification of such charges.

0
23. Section 153.520 is amended by revising paragraph (d) to read as 
follows:


Sec.  153.520  Attribution and allocation of revenue and expense items.

* * * * *
    (d) Attribution of reinsurance and risk adjustment to benefit year. 
A QHP issuer must attribute reinsurance payments and risk adjustment 
payments and charges to allowable costs for the benefit year with 
respect to which the reinsurance payments or risk adjustment 
calculations apply.
* * * * *

0
24. Section 153.530 is amended by--
0
A. Revising paragraphs (a), (b) introductory text, (b)(1), (b)(2)(iii), 
and (c).
0
B. Adding new paragraph (d).
    The revisions and additions read as follows:


Sec.  153.530  Risk corridors data requirements.

    (a) Premium data. A QHP issuer must submit to HHS data on the 
premiums earned with respect to each QHP that the issuer offers in a 
manner specified by HHS.
    (b) Allowable costs. A QHP issuer must submit to HHS data on the 
allowable costs incurred with respect to each QHP that the QHP issuer 
offers in a manner specified by HHS. For purposes of this subpart, 
allowable costs must be--
    (1) Increased by any risk adjustment charges paid by the issuer for 
the QHP under the risk adjustment program established under subpart D 
of this part.
    (2) * * *
    (iii) Any cost-sharing reduction payments received by the issuer 
for the QHP to the extent not reimbursed to the provider furnishing the 
item or service.
    (c) Allowable administrative costs. A QHP issuer must submit to HHS 
data on the allowable administrative costs incurred with respect to 
each QHP that the QHP issuer offers in a manner specified by HHS.
    (d) Timeframes. For each benefit year, a QHP issuer must submit all 
information required under this section by July 31 of the year 
following the benefit year.

0
25. Section 153.610 is amended by adding paragraph (f) to read as 
follows:


Sec.  153.610  Risk adjustment issuer requirements.

* * * * *
    (f) Assessment and collection of user fees for HHS risk adjustment 
operations. Where HHS is operating risk adjustment on behalf of a 
State, an issuer of a risk adjustment covered plan (other than a 
student health plan or a plan not subject to 45 CFR 147.102, 147.104, 
147.106, 156.80, and subpart B of part 156) must, for each benefit 
year--
    (1) Submit or make accessible to HHS its monthly enrollment for the 
risk adjustment covered plan for the benefit year through the risk 
adjustment data collection approach established at Sec.  153.610(a), in 
a manner and timeframe specified by HHS; and
    (2) Remit to HHS an amount equal to the product of its monthly 
enrollment in the risk adjustment covered plan multiplied by the per-
enrollee-per-month risk adjustment user fee specified in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year.

0
26. Section 153.630 is added to subpart G to read as follows:


Sec.  153.630  Data validation requirements when HHS operates risk 
adjustment.

    (a) General requirement. An issuer of a risk adjustment covered 
plan in a State where HHS is operating risk adjustment on behalf of the 
State for the applicable benefit year must have an initial and second 
validation audit performed on its risk adjustment data as described in 
this section.
    (b) Initial validation audit. (1) An issuer of a risk adjustment 
covered plan must engage one or more independent auditors to perform an 
initial validation audit of a sample of its risk adjustment data 
selected by HHS.
    (2) The issuer must ensure that the initial validation auditors are 
reasonably capable of performing an initial data validation audit 
according to the standards established by HHS for such audit, and must 
ensure that the audit is so performed.
    (3) The issuer must ensure that each initial validation auditor is 
reasonably free of conflicts of interest, such that it is able to 
conduct the initial validation audit in an impartial manner and its 
impartiality is not reasonably open to question.
    (4) The issuer must ensure validation of the accuracy of risk 
adjustment data for a sample of enrollees selected by HHS. The issuer 
must ensure that the initial validation audit findings are submitted to 
HHS in a manner and timeframe specified by HHS.
    (c) Second validation audit. HHS will select a subsample of the 
risk adjustment data validated by the initial validation audit for a 
second validation audit. The issuer must comply with, and must ensure 
the initial validation auditor complies with, standards for such audit 
established by HHS, and must cooperate with, and must ensure that the 
initial validation auditor cooperates with, HHS and the second 
validation auditor in connection with such audit.
    (d) Data validation appeals. An issuer may appeal the findings of a 
second validation audit or the application of a risk score error rate 
to its risk adjustment payments and charges.
    (e) Adjustment of payments and charges. HHS may adjust payments and 
charges for issuers that do not comply with audit requirements and 
standards, as specified in paragraphs (b) and (c) of this section.
    (f) Data security and transmission. (1) An issuer must submit the 
risk adjustment data and source documentation for the initial and 
second validation audits specified by HHS to HHS or its designee in the 
manner and timeframe specified by HHS.
    (2) An issuer must ensure that it and its initial validation 
auditor comply with the security standards described at 45 CFR 164.308, 
164.310, and 164.312 in connection with the initial validation audit, 
the second validation audit, and any appeal.

0
27. Subpart H is added to read as follows:

[[Page 15532]]

Subpart H--Distributed Data Collection for HHS-Operated Programs

Sec.
153.700 Distributed data environment.
153.710 Data requirements.
153.720 Establishment and usage of masked enrollee identification 
numbers.
153.730 Deadline for submission of data.

Subpart H--Distributed Data Collection for HHS-Operated Programs


Sec.  153.700  Distributed data environment.

    (a) Dedicated distributed data environments. For each benefit year 
in which HHS operates the risk adjustment or reinsurance program on 
behalf of a State, an issuer of a risk adjustment covered plan or a 
reinsurance-eligible plan in the State, as applicable, must establish a 
dedicated data environment and provide data access to HHS, in a manner 
and timeframe specified by HHS, for any HHS-operated risk adjustment 
and reinsurance program.
    (b) Timeline. An issuer must establish the dedicated data 
environment (and confirm proper establishment through successfully 
testing the environment to conform with applicable HHS standards for 
such testing) three months prior to the first date of full operation.


Sec.  153.710  Data requirements.

    (a) Enrollment, claims, and encounter data. An issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, must provide to HHS, through the dedicated data 
environment, access to enrollee-level plan enrollment data, enrollee 
claims data, and enrollee encounter data as specified by HHS.
    (b) Claims data. All claims data submitted by an issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, must have resulted in payment by the issuer (or payment of 
cost sharing by the enrollee).
    (c) Claims data from capitated plans. An issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, that does not generate individual enrollee claims in the 
normal course of business must derive the costs of all applicable 
provider encounters using its principal internal methodology for 
pricing those encounters. If the issuer does not have such a 
methodology, or has an incomplete methodology, it must supplement the 
methodology in a manner that yields derived claims that are reasonable 
in light of the specific service and insurance market that the plan is 
serving.


Sec.  153.720  Establishment and usage of masked enrollee 
identification numbers.

    (a) Enrollee identification numbers. An issuer of a risk adjustment 
covered plan or a reinsurance-eligible plan in a State in which HHS is 
operating the risk adjustment or reinsurance program, as applicable, 
must--
    (1) Establish a unique masked enrollee identification number for 
each enrollee; and
    (2) Maintain the same masked enrollee identification number for an 
enrollee across enrollments or plans within the issuer, within the 
State, during a benefit year.
    (b) Prohibition on personally identifiable information. An issuer 
of a risk adjustment covered plan or a reinsurance-eligible plan in a 
State in which HHS is operating the risk adjustment or reinsurance 
program on behalf of the State, as applicable, may not--
    (1) Include enrollee's personally identifiable information in the 
masked enrollee identification number; or
    (2) Use the same masked enrollee identification number for 
different enrollees enrolled with the issuer.


Sec.  153.730  Deadline for submission of data.

    A risk adjustment covered plan or a reinsurance-eligible plan in a 
State in which HHS is operating the risk adjustment or reinsurance 
program, as applicable, must submit data to be considered for risk 
adjustment payments and charges and reinsurance payments for the 
applicable benefit year by April 30 of the year following the 
applicable benefit year.

PART 155--EXCHANGE ESTABLISHMENT STANDARDS AND OTHER RELATED 
STANDARDS UNDER THE AFFORDABLE CARE ACT

0
28. The authority citation for part 155 continues to read as follows:

    Authority:  Secs. 1301, 1302, 1303, 1304, 1311, 1312, 1313, 
1321, 1322, 1331, 1334, 1401, 1402, 1411, 1412, 1413.


0
29. Section 155.20 is amended by--
0
A. Revising the definitions of ``Large employer'' and ``Small 
employer.''
0
B. Adding definitions of ``Federally-facilitated Exchange,'' 
``Federally-facilitated SHOP,'' and ``Full-time employee'' in 
alphabetical order.
    The revisions and additions read as follows:


Sec.  155.20  Definitions.

* * * * *
    Federally-facilitated Exchange means an Exchange established and 
operated within a State by the Secretary under section 1321(c)(1) of 
the Affordable Care Act.
    Federally-facilitated SHOP means a Small Business Health Options 
Program established and operated within a State by the Secretary under 
section 1321(c)(1) of the Affordable Care Act.
    Full-time employee has the meaning given in section 4980H (c)(4) of 
the Code effective for plan years beginning on or after January 1, 
2016, except for operations of a Federally-facilitated SHOP for which 
it is effective for plan years beginning on or after January 1, 2014 
and in connection with open enrollment activities beginning October 1, 
2013.
* * * * *
    Large employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 101 employees on business days during the preceding 
calendar year and who employs at least 1 employee on the first day of 
the plan year. In the case of plan years beginning before January 1, 
2016, a State may elect to define large employer by substituting ``51 
employees'' for ``101 employees.'' The number of employees shall be 
determined using the method set forth in section 4980H(c)(2) of the 
Code, effective for plan years beginning on or after January 1, 2016, 
except for operations of a Federally-facilitated SHOP for which the 
method shall be used for plan years beginning on or after January 1, 
2014 and in connection with open enrollment activities beginning 
October 1, 2013.
* * * * *
    Small employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 1 but not more than 100 employees on business days 
during the preceding calendar year and who employs at least 1 employee 
on the first day of the plan year. In the case of plan years beginning 
before January 1, 2016, a State may elect to define small employer by 
substituting ``50 employees'' for ``100 employees.'' The number of 
employees shall be determined using the method set forth in section 
4980H(c)(2) of the Code, effective for plan years beginning on or after 
January 1, 2016, except for operations of a Federally-facilitated SHOP 
for which the method shall be used for plan years beginning on or after 
January 1, 2014 and in connection with

[[Page 15533]]

open enrollment activities beginning October 1, 2013.
* * * * *

0
30. Section 155.220 is amended by revising paragraph (b) to read as 
follows--


Sec.  155.220  Ability to States to permit agents and brokers to assist 
qualified individuals, qualified employers, or qualified employees 
enrolling in QHPs.

* * * * *
    (b)(1) Web site disclosure. The Exchange or SHOP may elect to 
provide information regarding licensed agents and brokers on its Web 
site for the convenience of consumers seeking insurance through that 
Exchange and may elect to limit the information to information 
regarding licensed agents and brokers who have completed any required 
Exchange or SHOP registration and training process.
    (2) A Federally-facilitated Exchange or SHOP will limit the 
information provided on its Web site regarding licensed agents and 
brokers to information regarding licensed agents and brokers who have 
completed registration and training.
* * * * *

0
31. Section 155.305 is amended by revising paragraph (g)(3) to read as 
follows:


Sec.  155.305  Eligibility standards.

* * * * *
    (g) * * *
    (3) Special rule for family policies. To the extent that an 
enrollment in a QHP in the individual market offered through an 
Exchange under a single policy covers two or more individuals who, if 
they were to enroll in separate individual policies would be eligible 
for different cost sharing, the Exchange must deem the individuals 
under such policy to be collectively eligible only for the category of 
eligibility last listed below for which all the individuals covered by 
the policy would be eligible:
    (i) Individuals not eligible for changes to cost sharing;
    (ii) Individuals described in Sec.  155.350(b) (the special cost-
sharing rule for Indians regardless of income);
    (iii) Individuals described in paragraph (g)(2)(iii) of this 
section;
    (iv) Individuals described in paragraph (g)(2)(ii) of this section;
    (v) Individuals described in paragraph (g)(2)(i) of this section; 
and
    (vi) Individuals described in Sec.  155.350(a) (the cost-sharing 
rule for Indians with household incomes under 300 percent of the FPL).
* * * * *

0
32. Section 155.330 is amended by adding paragraph (g) to read as 
follows:


Sec.  155.330  Eligibility redetermination during a benefit year.

* * * * *
    (g) Recalculation of advance payments of the premium tax credit and 
cost-sharing reductions. (1) When an eligibility redetermination in 
accordance with this section results in a change in the amount of 
advance payments of the premium tax credit for the benefit year, the 
Exchange must recalculate the amount of advance payments of the premium 
tax credit in such a manner as to--
    (i) Account for any advance payments already made on behalf of the 
tax filer for the benefit year for which information is available to 
the Exchange, such that the recalculated advance payment amount is 
projected to result in total advance payments for the benefit year that 
correspond to the tax filer's total projected premium tax credit for 
the benefit year, calculated in accordance with 26 CFR 1.36B-3; and
    (ii) Ensure that the advance payment provided on the tax filer's 
behalf is greater than or equal to zero and is calculated in accordance 
with 26 CFR 1.36B-3(d).
    (2) When an eligibility redetermination in accordance with this 
section results in a change in cost-sharing reductions, the Exchange 
must determine an individual eligible for the category of cost-sharing 
reductions that corresponds to his or her expected annual household 
income for the benefit year (subject to the special rule for family 
policies set forth in Sec.  155.305(g)(3)).

0
33. Section 155.340 is amended by adding paragraphs (e), (f), and (g) 
to read as follows:


Sec.  155.340  Administration of advance payments of the premium tax 
credit and cost-sharing reductions.

* * * * *
    (e) Allocation of advance payments of the premium tax credit among 
policies. If one or more advance payments of the premium tax credit are 
to be made on behalf of a tax filer (or two tax filers covered by the 
same plan(s)), and individuals in the tax filers' tax households are 
enrolled in more than one QHP or stand-alone dental plan, then the 
advance payment must be allocated as follows:
    (1) That portion of the advance payment of the premium tax credit 
that is less than or equal to the aggregate adjusted monthly premiums, 
as defined in 26 CFR 1.36B-3(e), for the QHP policies properly 
allocated to EHB must be allocated among the QHP policies in a 
reasonable and consistent manner specified by the Exchange; and
    (2) Any remaining advance payment of the premium tax credit must be 
allocated among the stand-alone dental policies in a reasonable and 
consistent manner specified by the Exchange.
    (f) Allocation of advance payments of the premium tax credit among 
policies offered through a Federally-facilitated Exchange. If one or 
more advance payments of the premium tax credit are to be made on 
behalf of a tax filer (or two tax filers covered by the same plan(s)), 
and individuals in the tax filers' tax households are enrolled in more 
than one QHP or stand-alone dental plan offered through a Federally-
facilitated Exchange, then that portion of the advance payment of the 
premium tax credit that is less than or equal to the aggregate adjusted 
monthly premiums, as defined in 26 CFR 1.36B-3(e), properly allocated 
to EHB for the QHP policies, will be allocated among the QHP policies, 
as described in Sec.  155.340(f)(1); and any remaining advance payment 
of the premium tax credit will be allocated among the stand-alone 
dental policies based on the methodology described in Sec.  
155.340(f)(2).
    (1) That portion of the advance payment(s) of the premium tax 
credit to be allocated among QHP policies will be allocated based on 
the number of enrollees covered under the QHP, weighted by the age of 
the enrollees, using the default uniform age rating curve established 
by the Secretary of HHS under 45 CFR 147.102(e), with the portion 
allocated to any single QHP policy not to exceed the portion of the 
QHP's adjusted monthly premium properly allocated to EHB. If the 
portion of the advance payment(s) of the premium tax credit allocated 
to a QHP under this subparagraph exceeds the portion of the same QHP's 
adjusted monthly premium properly allocated to EHB, the remainder will 
be allocated evenly among all other QHPs in which individuals in the 
tax filers' tax households are enrolled.
    (2) That portion of the advance payment(s) of the premium tax 
credit to be allocated among stand-alone dental policies will be 
allocated based on the number of enrollees covered under the stand-
alone dental policy, weighted by the age of the enrollees, using the 
default uniform age rating curve established by the Secretary of HHS 
under 45 CFR 147.102(e), with the portion allocated to any single 
stand-alone dental policy not to exceed the portion of the stand-alone 
dental policy premium properly allocated to EHB. If the portion of the 
advance payment(s) of the premium tax credit allocated to a stand-alone 
dental policy under this

[[Page 15534]]

subparagraph exceeds the portion of the same policy's premium properly 
allocated to EHB, the remainder will be allocated evenly among all 
other stand-alone dental policies in which individuals in the tax 
filers' tax households are enrolled.
    (g) Reduction of enrollee's portion of premium to account for 
advance payments of the premium tax credit. If an Exchange is 
facilitating the collection and payment of premiums to QHP issuers and 
stand-alone dental plans on behalf of enrollees under Sec.  155.240, 
and if a QHP issuer or stand-alone dental plan has been notified that 
it will receive an advance payment of the premium tax credit on behalf 
of an enrollee for whom the Exchange is facilitating such functions, 
the Exchange must--
    (1) Reduce the portion of the premium for the policy collected from 
the individual for the applicable month(s) by the amount of the advance 
payment of the premium tax credit; and
    (2) Include with each billing statement, as applicable, to or for 
the individual the amount of the advance payment of the premium tax 
credit for the applicable month(s) and the remaining premium owed for 
the policy.

0
34. Section 155.705 is amended by revising paragraph (b)(3), (b)(10), 
and (b)(11) to read as follows:


Sec.  155.705  Functions of a SHOP.

* * * * *
    (b) * * *
    (3)(i) SHOP options with respect to employer choice requirements. 
With regard to QHPs offered through the SHOP, the SHOP may allow a 
qualified employer to make one or more QHPs available to qualified 
employees by a method other than the method described in paragraph 
(b)(2) of this section.
    (ii) A Federally-facilitated SHOP will only permit a qualified 
employer to make available to qualified employees either:
    (A) All QHPs at the level of coverage selected by the employer as 
described in paragraph (b)(2) of this section, or
    (B) A single QHP.
* * * * *
    (10) Participation rules. Subject to Sec.  147.104 of this 
subchapter, the SHOP may authorize uniform group participation rules 
for the offering of health insurance coverage in the SHOP. If the SHOP 
authorizes a minimum participation rate, such rate must be based on the 
rate of employee participation in the SHOP, not on the rate of employee 
participation in any particular QHP or QHPs of any particular issuer.
    (i) Subject to Sec.  147.104 of this subchapter, a Federally-
facilitated SHOP must use a minimum participation rate of 70 percent, 
calculated as the number of qualified employees accepting coverage 
under the employer's group health plan, divided by the number of 
qualified employees offered coverage, excluding from the calculation 
any employee who, at the time the employer submits the SHOP 
application, is enrolled in coverage through another employer's group 
health plan or through a governmental plan such as Medicare, Medicaid, 
or TRICARE.
    (ii) Notwithstanding paragraph (b)(10)(i) of this section, a 
Federally-facilitated SHOP may utilize a different minimum 
participation rate in a State if there is evidence that a State law 
sets a minimum participation rate or that a higher or lower minimum 
participation rate is customarily used by the majority of QHP issuers 
in that State for products in the State's small group market outside 
the SHOP.
    (11) Premium calculator. In the SHOP, the premium calculator 
described in Sec.  155.205(b)(6) must facilitate the comparison of 
available QHPs after the application of any applicable employer 
contribution in lieu of any advance payment of the premium tax credit 
and any cost sharing reductions.
    (i) To determine the employer and employee contributions, a SHOP 
may establish one or more standard methods that employers may use to 
define their contributions toward employee and dependent coverage.
    (ii) A Federally-facilitated SHOP must use the following method for 
employer contributions:
    (A) The employer will select a level of coverage as described in 
paragraph (b)(2) and (b)(3) of this section.
    (B) The employer will select a QHP within that level of coverage to 
serve as a reference plan on which contributions will be based.
    (C) The employer will define a percentage contribution toward 
premiums for employee-only coverage under the reference plan and, if 
dependent coverage is offered, a percentage contribution toward 
premiums for dependent coverage under the reference plan.
    (D) Either State law or the employer may require that a Federally-
facilitated SHOP base contributions on a calculated composite premium 
for the reference plan for employees, for adult dependents, and for 
dependents below age 21.
    (E) The resulting contribution amounts for each employee's coverage 
may then be applied toward the QHP selected by the employee.

0
35. Section 155.1030 is added to read as follows:


Sec.  155.1030  QHP certification standards related to advance payments 
of the premium tax credit and cost-sharing reductions.

    (a) Review of plan variations for cost-sharing reductions. (1) An 
Exchange must ensure that each issuer that offers, or intends to offer 
a health plan at any level of coverage in the individual market on the 
Exchange submits the required plan variations for the health plan as 
described in Sec.  156.420 of this subchapter. The Exchange must 
certify that the plan variations meet the requirements of Sec.  
156.420.
    (2) The Exchange must provide to HHS the actuarial values of each 
QHP and silver plan variation, calculated under Sec.  156.135 of this 
subchapter, in the manner and timeframe established by HHS.
    (b) Information for administering advance payments of the premium 
tax credit and advance payments of cost-sharing reductions. (1) The 
Exchange must collect and review annually the rate allocation, the 
expected allowed claims cost allocation, and the actuarial memorandum 
that an issuer submits to the Exchange under Sec.  156.470 of this 
subchapter, to ensure that such allocations meet the standards set 
forth in Sec.  156.470(c) and (d).
    (2) The Exchange must submit, in the manner and timeframe 
established by HHS, to HHS the approved allocations and actuarial 
memorandum underlying the approved allocations for each health plan at 
any level of coverage or stand-alone dental plan offered, or intended 
to be offered in the individual market on the Exchange.
    (3) The Exchange must collect annually any estimates and supporting 
documentation that a QHP issuer submits to receive advance payments of 
certain cost-sharing reductions, under Sec.  156.430(a) of this 
subchapter, and submit, in the manner and timeframe established by HHS, 
the estimates and supporting documentation to HHS for review.
    (4) HHS may use the information provided to HHS by the Exchange 
under this section for the approval of the estimates that an issuer 
submits for advance payments of cost-sharing reductions, as described 
in Sec.  156.430 of this subchapter, and the oversight of the advance 
payments of cost-sharing reductions and premium tax credits programs.
    (c) Multi-State plans. The U.S. Office of Personnel Management will 
ensure

[[Page 15535]]

compliance with the standards referenced in this section for multi-
State plans, as defined in Sec.  155.1000(a).

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

0
36. The authority citation for part 156 is revised to read as follows:

    Authority:  Title I of the Affordable Care Act, sections 1301-
1304, 1311-1312, 1321-1322, 1324, 1334, 1342-1343, 1401-1402, and 
1412, Pub. L. 111-148, 124 Stat. 119 (42 U.S.C. 18021-18024, 18031-
18032, 18041-18042, 18044, 18054, 18061, 18063, 18071, 18082, 26 
U.S.C. 36B, and 31 U.S.C. 9701).


0
37. Section 156.20 is amended by adding definitions for ``Federally-
facilitated SHOP'' and ``Issuer group'' in alphabetical order to read 
as follows:


Sec.  156.20  Definitions.

* * * * *
    Federally-facilitated SHOP has the meaning given to the term in 
Sec.  155.20 of this subchapter.
* * * * *
    Issuer group means all entities treated under subsection (a) or (b) 
of section 52 of the Internal Revenue Code of 1986 as a member of the 
same controlled group of corporations as (or under common control with) 
a health insurance issuer, or issuers affiliated by the common use of a 
nationally licensed service mark.
* * * * *


0
38. Section 156.50 is amended by revising paragraph (b) and by adding 
paragraph (c) to read as follows:


Sec.  156.50  Financial support.

* * * * *
    (b) Requirement for State-based Exchange user fees. A participating 
issuer must remit user fee payments, or any other payments, charges, or 
fees, if assessed by a State-based Exchange under Sec.  155.160 of this 
subchapter.
    (c) Requirement for Federally-facilitated Exchange user fee. To 
support the functions of Federally-facilitated Exchanges, a 
participating issuer offering a plan through a Federally-facilitated 
Exchange must remit a user fee to HHS each month, in the timeframe and 
manner established by HHS, equal to the product of the monthly user fee 
rate specified in the annual HHS notice of benefit and payment 
parameters for the applicable benefit year and the monthly premium 
charged by the issuer for each policy under the plan where enrollment 
is through a Federally-facilitated Exchange.

0
39. Section 156.200 is amended by adding paragraphs (f) and (g) to read 
as follows:


Sec.  156.200  QHP issuer participation standards.

* * * * *
    (f) Broker compensation in a Federally-facilitated Exchange. A QHP 
issuer must pay the same broker compensation for QHPs offered through a 
Federally-facilitated Exchange that the QHP issuer pays for similar 
health plans offered in the State outside a Federally-facilitated 
Exchange.
    (g) Certification standard specific to a Federally-facilitated 
Exchange. A Federally-facilitated Exchange may certify a QHP in the 
individual market of a Federally-facilitated Exchange only if the QHP 
issuer meets one of the conditions below:
    (1) The QHP issuer also offers through a Federally-facilitated SHOP 
serving that State at least one small group market QHP at the silver 
level of coverage and one at the gold level of coverage as described in 
section 1302(d) of the Affordable Care Act;
    (2) The QHP issuer does not offer small group market products in 
that State, but another issuer in the same issuer group offers through 
a Federally-facilitated SHOP serving that State at least one small 
group market QHP at the silver level of coverage and one at the gold 
level of coverage; or
    (3) Neither the issuer nor any other issuer in the same issuer 
group has a share of the small group market, as determined by HHS, 
greater than 20 percent, based on the earned premiums submitted by all 
issuers in the State's small group market, under Sec.  158.110 of this 
subchapter, on the reporting date immediately preceding the due date of 
the application for QHP certification.

0
40. Section 156.215 is added to read as follows:


Sec.  156.215  Advance payments of the premium tax credit and cost-
sharing reduction standards.

    (a) Standards relative to advance payments of the premium tax 
credit and cost-sharing reductions. In order for a health plan to be 
certified as a QHP initially and to maintain certification to be 
offered in the individual market on the Exchange, the issuer must meet 
the requirements related to the administration of cost-sharing 
reductions and advance payments of the premium tax credit set forth in 
subpart E of this part.
    (b) [Reserved]

0
41. Section 156.285 is amended by adding paragraph (c)(7) to read as 
follows:


Sec.  156.285  Additional standards specific to SHOP.

* * * * *
    (c) * * *
    (7) A QHP issuer must enroll a qualified employee only if the SHOP 
--
    (i) Notifies the QHP issuer that the employee is a qualified 
employee; and
    (ii) Transmits information to the QHP issuer as provided in Sec.  
155.400(a) of this subchapter.
* * * * *

0
42. Subpart E is added to read as follows:
Subpart E--Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
Sec.
156.400 Definitions.
156.410 Cost-sharing reductions for enrollees.
156.420 Plan variations.
156.425 Changes in eligibility for cost-sharing reductions.
156.430 Payment for cost-sharing reductions.
156.440 Plans eligible for advance payments of the premium tax 
credit and cost-sharing reductions.
156.460 Reduction of enrollee's share of premium to account for 
advance payments of the premium tax credit.
156.470 Allocation of rates and claims costs for advance payments of 
cost-sharing reductions and the premium tax credit.

Subpart E--Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing 
Reductions


Sec.  156.400  Definitions.

    The following definitions apply to this subpart:
    Advance payments of the premium tax credit has the meaning given to 
the term in Sec.  155.20 of this subchapter.
    Affordable Care Act has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Annual limitation on cost sharing means the annual dollar limit on 
cost sharing required to be paid by an enrollee that is established by 
a particular qualified health plan.
    De minimis variation means the allowable variation in the AV of a 
health plan that does not result in a material difference in the true 
dollar value of the health plan as established in Sec.  156.140(c).
    De minimis variation for a silver plan variation means a single 
percentage point.
    Federal poverty level or FPL has the meaning given to the term in 
Sec.  155.300(a) of this subchapter.
    Indian has the meaning given to the term in Sec.  155.300(a) of 
this subchapter.

[[Page 15536]]

    Limited cost sharing plan variation means, with respect to a QHP at 
any level of coverage, the variation of such QHP described in Sec.  
156.420(b)(2).
    Maximum annual limitation on cost sharing means the highest annual 
dollar amount that qualified health plans (other than QHPs with cost-
sharing reductions) may require in cost sharing for a particular year, 
as established for that year under Sec.  156.130.
    Most generous or more generous means, between a QHP (including a 
standard silver plan) or plan variation, and one or more other plan 
variations of the same QHP, the QHP or plan variation designed for the 
category of individuals last listed in Sec.  155.305(g)(3) of this 
subchapter.
    Plan variation means a zero cost sharing plan variation, a limited 
cost sharing plan variation, or a silver plan variation.
    Reduced maximum annual limitation on cost sharing means the dollar 
value of the maximum annual limitation on cost sharing for a silver 
plan variation that remains after applying the reduction, if any, in 
the maximum annual limitation on cost sharing required by section 1402 
of the Affordable Care Act as announced in the annual HHS notice of 
benefit and payment parameters.
    Silver plan variation means, with respect to a standard silver 
plan, any of the variations of that standard silver plan described in 
Sec.  156.420(a).
    Stand-alone dental plan means a plan offered through an Exchange 
under Sec.  155.1065 of this subchapter.
    Standard plan means a QHP offered at one of the four levels of 
coverage, defined at Sec.  156.140, with an annual limitation on cost 
sharing that conforms to the requirements of Sec.  156.130(a). A 
standard plan at the bronze, silver, gold, or platinum level of 
coverage is referred to as a standard bronze plan, a standard silver 
plan, a standard gold plan, and a standard platinum plan, respectively.
    Zero cost sharing plan variation means, with respect to a QHP at 
any level of coverage, the variation of such QHP described in Sec.  
156.420(b)(1).


Sec.  156.410  Cost-sharing reductions for enrollees.

    (a) General requirement. A QHP issuer must ensure that an 
individual eligible for cost-sharing reductions, as demonstrated by 
assignment to a particular plan variation, pays only the cost sharing 
required of an eligible individual for the applicable covered service 
under the plan variation. The cost-sharing reduction for which an 
individual is eligible must be applied when the cost sharing is 
collected.
    (b) Assignment to applicable plan variation. If an individual is 
determined to be eligible to enroll in a QHP in the individual market 
offered through an Exchange and elects to do so, the QHP issuer must 
assign the individual under enrollment and eligibility information 
submitted by the Exchange as follows--
    (1) If the individual is determined eligible by the Exchange for 
cost-sharing reductions under Sec.  155.305(g)(2)(i), (ii), or (iii) of 
this subchapter (subject to the special rule for family policies set 
forth in Sec.  155.305(g)(3) of this subchapter) and chooses to enroll 
in a silver health plan, the QHP issuer must assign the individual to 
the silver plan variation of the selected silver health plan described 
in Sec.  156.420(a)(1), (2), or (3), respectively.
    (2) If the individual is determined eligible by the Exchange for 
cost-sharing reductions for Indians with lower household income under 
Sec.  155.350(a) of this subchapter (subject to the special rule for 
family policies set forth in Sec.  155.305(g)(3) of this subchapter), 
and chooses to enroll in a QHP, the QHP issuer must assign the 
individual to the zero cost sharing plan variation of the selected QHP 
with all cost sharing eliminated described in Sec.  156.420(b)(1).
    (3) If the individual is determined by the Exchange to be eligible 
for cost-sharing reductions for Indians regardless of household income 
under Sec.  155.350(b) of this subchapter (subject to the special rule 
for family policies set forth in Sec.  155.305(g)(3) of this 
subchapter), and chooses to enroll in a QHP, the QHP issuer must assign 
the individual to the limited cost sharing plan variation of the 
selected QHP with the prohibition on cost sharing for benefits received 
from the Indian Health Service and certain other providers described in 
Sec.  156.420(b)(2).
    (4) If the individual is determined by the Exchange not to be 
eligible for cost-sharing reductions (including eligibility under the 
special rule for family policies set forth in Sec.  155.305(g)(3) of 
this subchapter), and chooses to enroll in a QHP, the QHP issuer must 
assign the individual to the selected QHP with no cost-sharing 
reductions.


Sec.  156.420  Plan variations.

    (a) Submission of silver plan variations. For each of its silver 
health plans that an issuer offers, or intends to offer in the 
individual market on an Exchange, the issuer must submit annually to 
the Exchange for certification prior to each benefit year the standard 
silver plan and three variations of the standard silver plan, as 
follows--
    (1) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(i) of this subchapter, a variation of the standard 
silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 94 percent plus or minus the de minimis variation for 
a silver plan variation;
    (2) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(ii) of this subchapter, a variation of the standard 
silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 87 percent plus or minus the de minimis variation for 
a silver plan variation; and
    (3) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(iii) of this subchapter, a variation of the 
standard silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 73 percent plus or minus the de minimis variation for 
a silver plan variation (subject to Sec.  156.420(h)).
    (b) Submission of zero and limited cost sharing plan variations. 
For each of its health plans at any level of coverage that an issuer 
offers, or intends to offer in the individual market on an Exchange, 
the issuer must submit to the Exchange for certification the health 
plan and two variations of the health plan, as follows--
    (1) For individuals eligible for cost-sharing reductions under 
Sec.  155.350(a) of this subchapter, a variation of the health plan 
with all cost sharing eliminated; and
    (2) For individuals eligible for cost-sharing reductions under 
Sec.  155.350(b) of this subchapter, a variation of the health plan 
with no cost sharing on any item or service that is an EHB furnished 
directly by the Indian Health Service, an Indian Tribe, Tribal 
Organization, or

[[Page 15537]]

Urban Indian Organization (each as defined in 25 U.S.C. 1603), or 
through referral under contract health services.
    (c) Benefit and network equivalence in silver plan variations. A 
standard silver plan and each silver plan variation thereof must cover 
the same benefits and providers, and require the same out-of-pocket 
spending for benefits other than essential health benefits. Each silver 
plan variation is subject to all requirements applicable to the 
standard silver plan (except for the requirement that the plan have an 
AV as set forth in Sec.  156.140(b)(2)).
    (d) Benefit and network equivalence in zero and limited cost 
sharing plan variations. A QHP and each zero cost sharing plan 
variation or limited cost sharing plan variation thereof must cover the 
same benefits and providers, and require the same out-of-pocket 
spending for benefits other than essential health benefits. A limited 
cost sharing plan variation must have the same cost sharing on items or 
services not described in paragraph (b)(2) of this section as the QHP 
with no cost-sharing reductions. Each zero cost sharing plan variation 
or limited cost sharing plan variation is subject to all requirements 
applicable to the QHP (except for the requirement that the plan have an 
AV as set forth in Sec.  156.140(b)).
    (e) Decreasing cost sharing in higher AV silver plan variations. 
The cost sharing required of enrollees under any silver plan variation 
of a standard silver plan for an essential health benefit from a 
provider (including a provider outside the plan's network) may not 
exceed the corresponding cost sharing required in the standard silver 
plan or any other silver plan variation thereof with a lower AV.
    (f) Minimum AV differential between 70 percent and 73 percent 
silver plan variations. Notwithstanding any permitted de minimis 
variation in AV for a health plan or permitted de minimis variation for 
a silver plan variation, the AVs of a standard silver plan and the 
silver plan variation thereof described in paragraph (a)(3) of this 
section must differ by at least 2 percentage points.
    (g) Multi-state plans. The U.S. Office of Personnel Management will 
determine the time and manner for multi-State plans, as defined in 
Sec.  155.1000(a) of this subchapter, to submit silver plan variations, 
zero cost sharing plan variations, and limited cost sharing plan 
variations.


Sec.  156.425  Changes in eligibility for cost-sharing reductions.

    (a) Effective date of change in assignment. If the Exchange 
notifies a QHP issuer of a change in an enrollee's eligibility for 
cost-sharing reductions (including a change in the individual's 
eligibility under the special rule for family policies set forth in 
Sec.  155.305(g)(3) of this subchapter due to a change in eligibility 
of another individual on the same policy), then the QHP issuer must 
change the individual's assignment such that the individual is assigned 
to the applicable standard plan or plan variation of the QHP as 
required under Sec.  156.410(b) as of the effective date of eligibility 
required by the Exchange.
    (b) Continuity of deductible and out-of-pocket amounts. In the case 
of a change in assignment to a different plan variation (or standard 
plan without cost-sharing reductions) of the same QHP in the course of 
a benefit year under this section, the QHP issuer must ensure that any 
cost sharing paid by the applicable individual under previous plan 
variations (or standard plan without cost-sharing reductions) for that 
benefit year is taken into account in the new plan variation (or 
standard plan without cost-sharing reductions) for purposes of 
calculating cost sharing based on aggregate spending by the individual, 
such as for deductibles or for the annual limitations on cost sharing.


Sec.  156.430  Payment for cost-sharing reductions.

    (a) Estimates of value of cost-sharing reductions for purposes of 
advance payments. (1) For each health plan that an issuer offers, or 
intends to offer, in the individual market on an Exchange as a QHP, the 
issuer must provide to the Exchange annually prior to the benefit year, 
for approval by HHS, an estimate of the dollar value of the cost-
sharing reductions to be provided over the benefit year. The estimate 
must:
    (i) If the QHP is a silver health plan, identify separately the per 
member per month dollar value of the cost-sharing reductions to be 
provided under each silver plan variation identified in Sec.  
156.420(a)(1), (2), and (3);
    (ii) Regardless of the level of coverage of the QHP, identify the 
per member per month dollar value of the cost-sharing reductions to be 
provided under the zero cost sharing plan variation;
    (iii) Be accompanied by supporting documentation validating the 
estimate; and
    (iv) Be developed using the methodology specified by HHS in the 
applicable annual HHS notice of benefit and payment parameters.
    (2) If an issuer seeks advance payments for the cost-sharing 
reductions to be provided under the limited cost sharing plan variation 
of a health plan it offers, or intends to offer, in the individual 
market on the Exchange as a QHP at any level of coverage, the issuer 
must provide to the Exchange annually prior to the benefit year, for 
approval by HHS, an estimate of the per member per month dollar value 
of the cost-sharing reductions to be provided over the benefit year 
under such limited cost sharing plan variation. The estimate must:
    (i) Be accompanied by supporting documentation validating the 
estimate; and
    (ii) Be developed using the methodology specified by HHS in the 
annual HHS notice of benefit and payment parameters.
    (3) HHS's approval of the estimate will be based on whether the 
estimate is made consistent with the methodology specified by HHS in 
the annual HHS notice of benefit and payment parameters.
    (4) Issuers of multi-State plans, as defined in Sec.  155.1000(a) 
of this subchapter, must provide the estimates described in paragraphs 
(a)(1) and (2) of this section to the U.S. Office of Personnel 
Management, in the time and manner established by the U.S. Office of 
Personnel Management.
    (b) Advance payments for cost-sharing reductions. (1) A QHP issuer 
will receive periodic advance payments based on the approved advance 
estimates provided under paragraph (a) of this section and the actual 
enrollment in the applicable plan variation.
    (2) HHS may adjust the advance payment amount for a particular QHP 
during the benefit year if the QHP issuer provides evidence, certified 
by a member of the American Academy of Actuaries in accordance with 
generally accepted actuarial principles and methodologies, that the 
advance payments for a particular QHP are likely to be substantially 
different than the cost-sharing reduction amounts that the QHP provides 
that will be reimbursed by HHS.
    (c) Submission of actual amounts. (1) General. For each plan 
variation that a QHP issuer offers on the Exchange, it must submit to 
HHS, in the manner and timeframe established by HHS, for each policy, 
the total allowed costs for essential health benefits charged for the 
policy for the benefit year, broken down by all of the following:
    (i) The amount the issuer paid.
    (ii) The amount the enrollee(s) paid.
    (iii) The amount the enrollee(s) would have paid under the standard 
plan without cost-sharing reductions.
    (2) Standard methodology. A QHP issuer must calculate the value of 
the amount the enrollee(s) would have paid

[[Page 15538]]

under the standard plan without cost-sharing reductions by applying the 
actual cost-sharing requirements for the standard plan to the allowed 
costs for essential health benefits under the enrollee's policy for the 
benefit year.
    (3) [Reserved]
    (4) [Reserved]
    (5) Reimbursement of providers. In the case of a benefit for which 
the QHP issuer compensates an applicable provider in whole or in part 
on a fee-for-service basis, allowed costs associated with the benefit 
may be included in the calculation of the amount that an enrollee(s) 
would have paid under the standard plan without cost-sharing reductions 
only to the extent the amount was either payable by the enrollee(s) as 
cost sharing under the plan variation or was reimbursed to the provider 
by the QHP issuer.
    (d) Reconciliation of amounts. HHS will perform periodic 
reconciliations of any advance payments of cost-sharing reductions 
provided to a QHP issuer under paragraph (b) of this section against--
    (1) The actual amount of cost-sharing reductions provided to 
enrollees and reimbursed to providers by the QHP issuer for benefits 
for which the QHP issuer compensates the applicable providers in whole 
or in part on a fee-for-service basis; and
    (2) The actual amount of cost-sharing reductions provided to 
enrollees for benefits for which the QHP issuer compensates the 
applicable providers in any other manner.
    (e) Payment of discrepancies. If the actual amounts of cost-sharing 
reductions described in paragraphs (d)(1) and (2) of this section are--
    (1) More than the amount of advance payments provided and the QHP 
issuer has timely provided the actual amounts of cost-sharing 
reductions as required under paragraph (c) of this section, HHS will 
reimburse the QHP issuer for the difference; and
    (2) Less than the amount of advance payments provided, the QHP 
issuer must repay the difference to HHS in the manner and timeframe 
specified by HHS.
    (f) Cost-sharing reductions during special periods. (1) 
Notwithstanding the cost-sharing reduction reconciliation process 
described in paragraphs (c) through (e) of this section, a QHP issuer 
will not be eligible for reimbursement of any cost-sharing reductions 
provided following a termination of coverage effective date with 
respect to a grace period as described in Sec.  155.430(b)(2)(ii)(A) or 
(B) of this subchapter. However, the QHP issuer will be eligible for 
reimbursement of cost-sharing reductions provided prior to the 
termination of coverage effective date. Advance payments of cost-
sharing reductions will be paid to a QHP issuer prior to a 
determination of termination (including during any grace period, but 
the QHP issuer will be required to repay any advance payments made with 
respect to any month after any termination of coverage effective date 
during a grace period).
    (2) Notwithstanding the cost-sharing reduction reconciliation 
process described in paragraphs (c) through (e) of this section, if the 
termination of coverage effective date is prior to the determination of 
termination other than in the circumstances described in paragraph 
(f)(1) of this section, and if the termination (or the late 
determination thereof) is the fault of the QHP issuer, as reasonably 
determined by the Exchange, the QHP issuer will not be eligible for 
advance payments and reimbursement for cost-sharing reductions provided 
during the period following the termination of coverage effective date 
and prior to the determination of the termination.
    (3) Subject to the requirements of the cost-sharing reduction 
reconciliation process described in paragraphs (c) through (e) of this 
section, if the termination of coverage effective date is prior to the 
determination of termination other than in the circumstances described 
in paragraph (f)(1) of this section, and if the reason for the 
termination (or late determination thereof) is not the fault of the QHP 
issuer, as reasonably determined by the Exchange, the QHP issuer will 
be eligible for advance payments and reimbursement for cost-sharing 
reductions provided during such period.
    (4) Subject to the requirements of the cost-sharing reduction 
reconciliation process described in paragraphs (c) through (e) of this 
section, a QHP issuer will be eligible for advance payments and 
reimbursement for cost-sharing reductions provided during any period of 
coverage pending resolution of inconsistencies in information required 
to determine eligibility for enrollment under Sec.  155.315(f) of this 
subchapter.
    (g) Prohibition on reduction in payments to Indian health 
providers. If an Indian is enrolled in a QHP in the individual market 
through an Exchange and is furnished an item or service directly by the 
Indian Health Service, an Indian Tribe, Tribal Organization, or Urban 
Indian Organization, or through referral under contract health 
services, the QHP issuer may not reduce the payment to any such entity 
for such item or service by the amount of any cost sharing that would 
be due from the Indian but for the prohibitions on cost sharing set 
forth in Sec.  156.410(b)(2) and (3).


Sec.  156.440  Plans eligible for advance payments of the premium tax 
credit and cost-sharing reductions.

    Except as noted in paragraph (a) through (c) of this section, the 
provisions of this subpart apply to qualified health plans offered in 
the individual market on the Exchange.
    (a) Catastrophic plans. The provisions of this subpart do not apply 
to catastrophic plans described in Sec.  156.155.
    (b) Stand-alone dental plans. The provisions of this subpart, to 
the extent relating to cost-sharing reductions, do not apply to stand-
alone dental plans. The provisions of this subpart, to the extent 
relating to advance payments of the premium tax credit, apply to stand-
alone dental plans.
    (c) Child-only plans. The provisions of this subpart apply to 
child-only QHPs, described in Sec.  156.200(c)(2).


Sec.  156.460  Reduction of enrollee's share of premium to account for 
advance payments of the premium tax credit.

    (a) Reduction of enrollee's share of premium to account for advance 
payments of the premium tax credit. A QHP issuer that receives notice 
from the Exchange that an individual enrolled in the issuer's QHP is 
eligible for an advance payment of the premium tax credit must--
    (1) Reduce the portion of the premium charged to or for the 
individual for the applicable month(s) by the amount of the advance 
payment of the premium tax credit;
    (2) Notify the Exchange of the reduction in the portion of the 
premium charged to the individual in accordance with Sec.  156.265(g); 
and
    (3) Include with each billing statement, as applicable, to or for 
the individual the amount of the advance payment of the premium tax 
credit for the applicable month(s), and the remaining premium owed.
    (b) Delays in payment. A QHP issuer may not refuse to commence 
coverage under a policy or terminate coverage on account of any delay 
in payment of an advance payment of the premium tax credit on behalf of 
an enrollee if the QHP issuer has been notified by the Exchange under 
Sec.  155.340(a) of this subchapter that the QHP issuer will receive 
such advance payment.

[[Page 15539]]

Sec.  156.470  Allocation of rates and claims costs for advance 
payments of cost-sharing reductions and the premium tax credit.

    (a) Allocation to additional health benefits for QHPs. An issuer 
must provide to the Exchange annually for approval, in the manner and 
timeframe established by HHS, for each health plan at any level of 
coverage offered, or intended to be offered, in the individual market 
on an Exchange, an allocation of the rate and the expected allowed 
claims costs for the plan, in each case, to:
    (1) EHB, other than services described in Sec.  156.280(d)(1), and
    (2) Any other services or benefits offered by the health plan not 
described paragraph (a)(1) of this section.
    (b) Allocation to additional health benefits for stand-alone dental 
plans. An issuer must provide to the Exchange annually for approval, in 
the manner and timeframe established by HHS, for each stand-alone 
dental plan offered, or intended to be offered, in the individual 
market on the Exchange, a dollar allocation of the expected premium for 
the plan, to:
    (1) The pediatric dental essential health benefit, and
    (2) Any benefits offered by the stand-alone dental plan that are 
not the pediatric dental essential health benefit.
    (c) Allocation standards for QHPs. The issuer must ensure that the 
allocation described in paragraph (a) of this section--
    (1) Is performed by a member of the American Academy of Actuaries 
in accordance with generally accepted actuarial principles and 
methodologies;
    (2) Reasonably reflects the allocation of the expected allowed 
claims costs attributable to EHB (excluding those services described in 
Sec.  156.280(d)(1));
    (3) Is consistent with the allocation applicable to State-required 
benefits to be submitted by the issuer under Sec.  155.170(c) of this 
subchapter, and the allocation requirements described in Sec.  
156.280(e)(4) for certain services; and
    (4) Is calculated under the fair health insurance premium standards 
described at 45 CFR 147.102, the single risk pool standards described 
at 45 CFR 156.80, and the same premium rate standards described at 45 
CFR 156.255.
    (d) Allocation standards for stand-alone dental plans. The issuer 
must ensure that the dollar allocation described in paragraph (b) of 
this section is performed by a member of the American Academy of 
Actuaries in accordance with generally accepted actuarial principles 
and methodologies.
    (e) Disclosure of attribution and allocation methods. An issuer of 
a health plan at any level of coverage or a stand-alone dental plan 
offered, or intended to be offered, in the individual market on the 
Exchange must submit to the Exchange annually for approval, an 
actuarial memorandum, in the manner and timeframe specified by HHS, 
with a detailed description of the methods and specific bases used to 
perform the allocations set forth in paragraphs (a) and (b), and 
demonstrating that the allocations meet the standards set forth in 
paragraphs (c) and (d) of this section, respectively.
    (f) Multi-State plans. Issuers of multi-State plans, as defined in 
Sec.  155.1000(a) of this subchapter, must submit the allocations and 
actuarial memorandum described in this section to the U.S. Office of 
Personnel Management, in the time and manner established by the U.S. 
Office of Personnel Management.

PART 157--EMPLOYER INTERACTIONS WITH EXCHANGES AND SHOP 
PARTICIPATION

0
43. The authority citation for part 157 continues to read as follows:

    Authority: Title I of the Affordable Care Act, sections 1311, 
1312, 1321, 1411, 1412, Pub. L. 111-148, 124 Stat. 199.


0
44. Section 157.20 is amended by adding the definitions for 
``Federally-facilitated SHOP,'' ``Full-time employee,'' and ``Large 
employer'' in alphabetical order to read as follows:


Sec.  157.20  Definitions.

* * * * *
    Federally-facilitated SHOP has the meaning given to the term in 
Sec.  155.20 of this subchapter.
    Full-time employee has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Large employer has the meaning given to the term in Sec.  155.20 of 
this subchapter.
* * * * *

PART 158--ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE 
REQUIREMENTS

0
45. The authority citation for part 158 continues to read as follows:

    Authority: Section 2718 of the Public Health Service Act (42 
U.S.C. 300gg-18), as amended.


0
46. Section 158.110 is amended by revising paragraph (b) to read as 
follows:


Sec.  158.110  Reporting requirements related to premiums and 
expenditures.

* * * * *
    (b) Timing and form of report. The report for each of the 2011, 
2012, and 2013 MLR reporting years must be submitted to the Secretary 
by June 1 of the year following the end of an MLR reporting year, on a 
form and in the manner prescribed by the Secretary. Beginning with the 
2014 MLR reporting year, the report for each MLR reporting year must be 
submitted to the Secretary by July 31 of the year following the end of 
an MLR reporting year, on a form and in the manner prescribed by the 
Secretary.
* * * * *

0
47. Section 158.130 is amended by adding paragraph (b)(5) to read as 
follows:


Sec.  158.130  Premium revenue.

* * * * *
    (b) * * *
    (5) Account for the net payments or receipts related to risk 
adjustment, risk corridors, and reinsurance programs under sections 
1341, 1342, and 1343 of the Patient Protection and Affordable Care Act, 
42 U.S.C. 18061, 18062, 18063.

0
48. Section 158.140 is amended by adding paragraph (b)(4)(ii) and 
revising paragraph (b)(5)(i) to read as follows:


Sec.  158.140  Requirements for clinical services provided to 
enrollees.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Receipts related to the transitional reinsurance program and 
net payments or receipts related to risk adjustment and risk corridors 
programs under sections 1341, 1342, and 1343 of the Patient Protection 
and Affordable Care Act, 42 U.S.C. 18061, 18062, 18063.
    (5) * * *
    (i) Affiliated issuers that offer group coverage at a blended rate 
may choose whether to make an adjustment to each affiliate's incurred 
claims and activities to improve health care quality, to reflect the 
experience of the issuer with respect to the employer as a whole, 
according to an objective formula that must be defined by the issuer 
prior to January 1 of the MLR reporting year, so as to result in each 
affiliate having the same ratio of incurred claims to earned premium 
for that employer group for the MLR reporting year as the ratio of 
incurred claims to earned premium calculated for the employer group in 
the aggregate.
* * * * *

0
49. Section 158.161 is amended by revising paragraph (a) to read as 
follows:


Sec.  158.161  Reporting of Federal and State licensing and regulatory 
fees.

    (a) Licensing and regulatory fees included. The report required in 
Sec.  158.110 must include statutory

[[Page 15540]]

assessments to defray operating expenses of any State or Federal 
department, transitional reinsurance contributions assessed under 
section 1341 of the Patient Protection and Affordable Care Act, 42 
U.S.C. 18061, and examination fees in lieu of premium taxes as 
specified by State law.
* * * * *

0
50. Section 158.162 is amended by revising paragraph (b)(1)(vii) and 
adding paragraph (b)(1)(viii) to read as follows:


Sec.  158.162  Reporting of Federal and State taxes.

* * * * *
    (b) * * *
    (1) * * *
    (vii) Payments made by a Federal income tax exempt issuer for 
community benefit expenditures as defined in paragraph (c) of this 
section, limited to the highest of either:
    (A) Three percent of earned premium; or
    (B) The highest premium tax rate in the State for which the report 
is being submitted, multiplied by the issuer's earned premium in the 
applicable State market.
    (viii) In lieu of reporting amounts described in paragraph 
(b)(1)(vi) of this section, an issuer that is not exempt from Federal 
income tax may choose to report payment for community benefit 
expenditures as described in paragraph (c) of this section, limited to 
the highest premium tax rate in the State for which the report is being 
submitted multiplied by the issuer's earned premium in the applicable 
State market.
* * * * *

0
51. Section 158.221 is amended by revising paragraph (c) to read as 
follows:


Sec.  158.221  Formula for calculating an issuer's medical loss ratio.

* * * * *
    (c) Denominator. The denominator of an issuer's MLR must equal the 
issuer's premium revenue, as defined in Sec.  158.130, excluding the 
issuer's Federal and State taxes and licensing and regulatory fees, 
described in Sec. Sec.  158.161(a) and 158.162(a)(1) and (b)(1), and 
after accounting for payments or receipts related to risk adjustment, 
risk corridors, and reinsurance, described in Sec.  158.130(b)(5).

0
52. Section 158.232 is amended by revising paragraph (c)(1)(i) and 
paragraph (d) introductory text to read as follows:


Sec.  158.232  Calculating the credibility adjustment.

* * * * *
    (c) * * *
    (1) * * *
    (i) The per person deductible for a policy that covers a subscriber 
and the subscriber's dependents shall be the lesser of: the deductible 
applicable to each of the individual family members; or the overall 
family deductible for the subscriber and subscriber's family divided by 
two (regardless of the total number of individuals covered through the 
subscriber).
* * * * *
    (d) No credibility adjustment. Beginning with the 2013 MLR 
reporting year, the credibility adjustment for and MLR based on 
partially credible experience is zero if both of the following 
conditions are met:
* * * * *

0
53. Section 158.240 is amended by revising paragraphs (c) and (d) to 
read as follows:


Sec.  158.240  Rebating premium if the applicable medical loss ratio 
standard is not met.

* * * * *
    (c) Amount of rebate to each enrollee. (1) For each MLR reporting 
year, an issuer must rebate to the enrollee the total amount of premium 
revenue, as defined in Sec.  158.130, received by the issuer from the 
enrollee, after subtracting Federal and State taxes and licensing and 
regulatory fees as provided in Sec. Sec.  158.161(a) and 158.162(a)(1) 
and (b)(1), and after accounting for payments or receipts for risk 
adjustment, risk corridors, and reinsurance as provided in Sec.  
158.130(b)(5), multiplied by the difference between the MLR required by 
Sec.  158.210 or Sec.  158.211, and the issuer's MLR as calculated 
under Sec.  158.221.
    (2) For example, an issuer must rebate a pro rata portion of 
premium revenue if it does not meet an 80 percent MLR for the 
individual market in a State that has not set a higher MLR. If an 
issuer has a 75 percent MLR for the coverage it offers in the 
individual market in a State that has not set a higher MLR, the issuer 
must rebate 5 percent of the premium paid by or on behalf of the 
enrollee for the MLR reporting year after subtracting a pro rata 
portion of taxes and fees and accounting for payments or receipts 
related to reinsurance, risk adjustment and risk corridors. If the 
issuer's total earned premium for the MLR reporting year in the 
individual market in the State is $200,000, the issuer received 
transitional reinsurance payments of $2,500, and made net payments 
related to risk adjustment and risk corridors of $20,000, the issuer's 
gross earned premium in the individual market in the State would be 
$200,000 plus $2,500 minus $20,000, for a total of $182,500. If the 
issuer's Federal and State taxes and licensing and regulatory fees, 
including reinsurance contributions, that may be excluded from premium 
revenue as described in Sec. Sec.  158.161(a), 158.162(a)(1) and 
158.162(b)(1), allocated to the individual market in the State are 
$15,000, and the net payments related to risk adjustment and risk 
corridors, reduced by reinsurance receipts, that must be accounted for 
in premium revenue as described in Sec. Sec.  158.130(b)(5), 158.221 
and 158.240, are $17,500 ($20,000 reduced by $2,500), then the issuer 
would subtract $15,000 and add $17,500 to gross premium revenue of 
$182,500, for a base of $185,000 in premium. The issuer would owe 
rebates of 5 percent of $185,000, or $9,250 in the individual market in 
the State. In this example, if an enrollee of the issuer in the 
individual market in the State paid $2,000 in premiums for the MLR 
reporting year, or 1/100 of the issuer's total premium in that State 
market, then the enrollee would be entitled to 1/100 of the total 
rebates owed by the issuer, or $92.50.
    (d) Timing of rebate. For each of the 2011, 2012, and 2013 MLR 
reporting years, an issuer must provide any rebate owing to an enrollee 
no later than August 1 following the end of the MLR reporting year. 
Beginning with the 2014 MLR reporting year, an issuer must provide any 
rebate owing to an enrollee no later than September 30 following the 
end of the MLR reporting year.
* * * * *

0
54. Section 158.241 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  158.241  Form of rebate.

    (a) * * *
    (2) For each of the 2011, 2012, and 2013 MLR reporting years, any 
rebate provided in the form of a premium credit must be provided by 
applying the full amount due to the first month's premium that is due 
on or after August 1 following the MLR reporting year. If the amount of 
the rebate exceeds the premium due for August, then any overage shall 
be applied to succeeding premium payments until the full amount of the 
rebate has been credited. Beginning with the 2014 MLR reporting year, 
any rebate provided in the form of a premium credit must be provided by 
applying the full amount due to the first month's premium that is due 
on or after September 30 following the MLR reporting year. If the 
amount of the rebate exceeds the premium due for October, then any 
overage shall be

[[Page 15541]]

applied to succeeding premium payments until the full amount of the 
rebate has been credited.
* * * * *

    Dated: February 25, 2013.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: February 27, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-04902 Filed 3-1-13; 11:15 am]
BILLING CODE 4120-01-P