[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Rules and Regulations]
[Pages 74864-74934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29596]



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Part III





Department of Health and Human Services





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45 CFR Part 158



Health Insurance Issuers Implementing Medical Loss Ratio (MLR) 
Requirements Under the Patient Protection and Affordable Care Act; 
Interim Final Rule

Federal Register / Vol. 75 , No. 230 / Wednesday, December 1, 2010 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 158

[OCIIO-9998-IFC]
RIN 0950-AA06


Health Insurance Issuers Implementing Medical Loss Ratio (MLR) 
Requirements Under the Patient Protection and Affordable Care Act

AGENCY: Office of Consumer Information and Insurance Oversight, 
Department of Health and Human Services.

ACTION: Interim final rule with request for comments.

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SUMMARY: This document contains the interim final regulation 
implementing medical loss ratio (MLR) requirements for health insurance 
issuers under the Public Health Service Act, as added by the Patient 
Protection and Affordable Care Act (Affordable Care Act).

DATES: Effective date: This interim final regulation is effective 
January 1, 2011.
    Comment date: Comments are due on or before January 31, 2011.
    Applicability dates: This interim final regulation generally 
applies beginning January 1, 2011, to health insurance issuers offering 
group or individual health insurance coverage.

ADDRESSES: Written comments may be submitted to the address specified 
below.
    All comments will be made available to the public. Warning: Do not 
include any personally identifiable information (such as name, address, 
or other contact information) or confidential business information that 
you do not want publicly disclosed. All comments are posted on the 
Internet exactly as received, and can be retrieved by most Internet 
search engines. No deletions, modifications, or redactions will be made 
to the comments received, as they are public records. Comments may be 
submitted anonymously.
    In commenting, please refer to file code OCIIO-9998-IFC. Because of 
staff and resource limitations, we cannot accept comments by facsimile 
(FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address only: Office of Consumer Information and Insurance Oversight, 
Department of Health and Human Services, Attention: OCIIO-9998-IFC, 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address only: Office of Consumer Information and 
Insurance Oversight, Department of Health and Human Services, 
Attention: OCIIO-9998-IFC, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue, SW., Washington, DC 20201.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to the following address: Office of Consumer Information and Insurance 
Oversight, Department of Health and Human Services, Attention: OCIIO-
9998-IFC, Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the OCIIO drop slots located in the main lobby of the building. A 
stamp-in clock is available for persons wishing to retain a proof of 
filing by stamping in and retaining an extra copy of the comments being 
filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.

FOR FURTHER INFORMATION CONTACT: Carol Jimenez, Office of Consumer 
Information and Insurance Oversight, Department of Health and Human 
Services, at (301) 492-4457.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will also be available for public inspection as they 
are received, generally beginning approximately three weeks after 
publication of a document, at the headquarters of the Centers for 
Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 
Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 
p.m. To schedule an appointment to view public comments, phone 1-800-
743-3951.
    Customer Service Information: Individuals interested in obtaining 
information on health reform can be found http://www.healthcare.gov.

Table of Contents

I. Background
II. Provisions of the Interim Final Rule
    A. Introduction and Overview
    B. Scope, Applicability and Definitions
    1. Scope and Applicability (Sec. Sec.  158.101-158.102)
    2. Definitions (Sec.  158.103)
    C. Subpart A--Disclosure and Reporting
    1. Reporting Requirements (Sec.  158.110)
    2. Aggregate Reporting (Sec.  158.120)
    a. Attribution of State-of-Issue
    b. Attribution to Health Insurance Markets Within States
    c. Associations or Trusts
    d. Expatriate Plans
    e. ``Mini-med'' Plans
    3. Newer Experience (Sec.  158.121)
    4. Premium Revenue (Sec.  158.130)
    5. Reimbursement for Clinical Services Provided to Enrollees 
(Sec.  158.140)
    6. Expenditures on Activities To Improve Quality (Sec. Sec.  
158.150-158.151)
    7. Other Non-Claims Activities (Sec.  158.160)
    8. Federal and State Taxes and Licensing and Regulatory Fees 
(Sec. Sec.  158.161-158.162)
    9. Allocation of Expenses (Sec.  158.170)
    D. Subpart B--Calculating and Providing the Rebate
    1. Applicable MLR and States With Higher MLR (Sec. Sec.  
158.210-158.211)
    2. Calculating an Issuer's MLR (Sec. Sec.  158.220-158.221)
    3. Credibility Adjustment (Sec. Sec.  158.230-158.232)
    4. Rebating Premium if MLR Standard Not Met (Sec.  158.240)
    5. Form of Rebate (Sec.  158.241)
    6. Recipients of Rebates (Sec.  158.242)
    7. De Minimis Rebates (Sec.  158.243)
    8. Unclaimed Rebates (Sec.  158.244)
    9. Notice of Rebates to Enrollees (Sec.  158.250)
    10. Reporting Rebates to the Secretary (Sec.  158.260)
    11. Effect of Rebate Payments on Solvency (Sec.  158.270)
    E. Subpart C--Potential Adjustment to the Medical Loss Ratio for 
a State's Individual Market
    1. Introduction
    2. Subpart C's Approach and Framework
    3. Who May Request Adjustment to the MLR (Sec. Sec.  158.310-
158.311)
    4. Required Information (Sec. Sec.  158.320-158.323)
    5. Assessment Criteria (158.330)
    6. Process (Sec. Sec.  158.340-158.350)
    7. Public Comments
    F. Subparts D-F--HHS Enforcement, Additional Requirements on 
Issuers, and Federal Civil Penalties
III. Response to Comments
IV. Waiver of Proposed Rulemaking
V. Collection of Information Requirements
    A. ICRs Regarding MLR and Rebate Reporting Requirement 
(Sec. Sec.  158.101-158.170)
    B. ICRs Regarding Notice to Enrollees (Sec.  158.250)

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    C. ICRs Regarding Retention of Records (Sec. Sec.  158.501-
158.502)
    D. ICRs Regarding State Request for MLR Adjustment (Sec. Sec.  
158.301-158.350)
VI. Regulatory Impact Analysis
    A. Summary
    B. Executive Order 12866
    1. Need for Regulatory Action
    2. Summary of Impacts
    3. Qualitative Discussion of Anticipated Benefits, Costs, and 
Transfers
    a. Benefits
    b. Costs
    c. Transfers
    4. Overview of Data Sources, Methods, and Limitations
    5. Estimated Number of Affected Entities Subject to the MLR 
Provisions
    6. Estimated Transfers Related to MLR Rebate Payments
    a. Data Limitations and Modeling Assumptions
    b. Methods for Estimating MLR Rebates
    c. Estimated Number of Issuers and Individuals Affected by the 
MLR Rebate Requirements
    d. Impact of Adjustments on MLRs
    e. Estimated Range of MLR Rebates
    f. Potential Impact of Destabilization Adjustment Requests on 
MLR Rebates
    7. Estimated Costs
    a. Methodology and Assumptions for Estimating Administrative 
Costs
    b. Estimated Costs Related to MLR Reporting
    c. Estimated Costs Related to MLR Record Retention
    d. Estimated Costs Related to MLR Rebate Notifications and 
Payments
    C. Regulatory Alternatives
    1. Credibility Adjustment
    2. Federal Taxes
    3. Activities That Improve Quality
    4. Level of Aggregation
    D. Regulatory Flexibility Act
    E. Unfunded Mandates Reform Act
    F. Federalism
    G. Congressional Review Act

I. Background

    The Patient Protection and Affordable Care Act (Pub. L. 111-148, 
was enacted on March 23, 2010); the Health Care and Education 
Reconciliation Act (Pub. L. 111-152, was enacted on March 30, 2010). In 
this preamble we refer to the two statutes collectively as the 
Affordable Care Act. The Affordable Care Act reorganizes, amends, and 
adds to the provisions of Part A of title XXVII of the Public Health 
Service Act (PHS Act) relating to group health plans and health 
insurance issuers in the group and individual markets.
    The Department of Health and Human Services (HHS, or the 
Department) is issuing regulations in several phases in order to 
implement revisions to the PHS Act made by the Affordable Care Act. All 
of the previous regulations were issued jointly with the Departments of 
Labor and the Treasury. A request for information relating to the 
medical loss ratio (MLR) provisions of PHS Act section 2718 was 
published in the Federal Register on April 14, 2010 (75 FR 19297) 
(notice, or request for information). Additionally, a series of interim 
final regulations were published earlier this year implementing PHS Act 
provisions added by the Affordable Care Act. Specifically, interim 
final rules were published implementing (1) section 2714 (requiring 
dependent coverage of children to age 26) (75 FR 27122 (May 13, 2010)); 
(2) section 1251 of the Affordable Care Act (relating to status as a 
grandfathered health plan) (75 FR 34538 (June 17, 2010)); (3) sections 
2704 (prohibiting preexisting condition exclusions), 2711 (regarding 
lifetime and annual dollar limits on benefits), 2712 (regarding 
restrictions on rescissions), and 2719A (regarding patient protections) 
(75 FR 37188 (June 28, 2010)); (4) section 2713 (regarding preventive 
health services) (75 FR 41726 (July 19, 2010)); and (5) section 2719 
(regarding internal claims and appeals and external review processes) 
(75 FR 43330 (July 23, 2010)). Most recently, HHS, Department of Labor, 
and Department of the Treasury published an amendment to the interim 
final regulations relating to status as a grandfathered health plan 
(regarding change in health insurance issuers) in the Federal Register 
on November 17, 2010 (75 FR 70114). The Departments have also published 
sub-regulatory guidance regarding various issues related to the 
implementation of the Affordable Care Act, available at http://www.dol.gov/ebsa and http://www.hhs.gov/ociio.
    This interim final regulation adopts and certifies in full all of 
the recommendations in the model regulation of the National Association 
of Insurance Commissioners (NAIC) regarding MLRs. It is being published 
to implement section 2718(a) through (c) of the PHS Act, relating to 
bringing down the cost of health care coverage through a new MLR 
standard. Subpart A implements the requirements for reporting the data 
to be considered in determining that ratio. Subpart B addresses the 
requirements for health insurance issuers (issuers) in the group or 
individual market, including grandfathered health plans, to provide an 
annual rebate to enrollees, if the issuer's MLR fails to meet minimum 
requirements: Generally, 85 percent in the large group market and 80 
percent in the small group or individual market. In Subpart C, this 
interim final regulation provides a process and criteria for the 
Secretary of Health and Human Services (the Secretary) to determine 
whether application of the 80 percent MLR in the individual market in a 
State may destabilize that individual market. Finally, enforcement of 
the reporting and rebate requirements of section 2718(a) and (b) are 
addressed in Subparts D-F, as specifically authorized in section 
2718(b)(3). This interim final regulation is generally applicable for 
plan years beginning on or after January 1, 2011. Self-insured plans 
are not a health insurance issuer, as defined by section 2791(b)(2) of 
the PHS Act, and thus are not subject to this interim final regulation.

II. Provisions of the Interim Final Rule

A. Introduction and Overview

    Section 2718 of the PHS Act includes two provisions designed to 
achieve the objective in the section title: ``Bringing down the cost of 
health care coverage.'' The first is the establishment of greater 
transparency and accountability around the expenditures made by health 
insurance issuers. The law requires that issuers publicly report on 
major categories of spending of policyholder premium dollars, such as 
clinical services provided to enrollees and activities that will 
improve health care quality. The second is the establishment of MLR 
standards for issuers, which are intended to help ensure policyholders 
receive value for their premium dollars. Issuers will provide rebates 
to enrollees when their spending for the benefit of policyholders on 
reimbursement for clinical services and quality improving activities, 
in relation to the premiums charged, is less than the MLR standards 
established pursuant to the statute. The rebate provisions of section 
2718 are designed not just to provide value to policyholders, but also 
to create incentives for issuers to become more efficient in their 
operations. Section 2718 also contains provisions which allow for 
modifications to the standards under certain circumstances, which are 
described in this regulation. To inform decisions about definitions and 
methodologies for calculating MLRs, the Affordable Care Act directed 
the NAIC to make recommendations to the Secretary, subject to 
certification by the Secretary. As described below, this interim final 
regulation adopts to these recommendations.
    As to the reporting provisions, section 2718(a) requires health 
insurance issuers to ``submit to the Secretary a report concerning the 
ratio of the incurred loss (or incurred claims) plus the loss 
adjustment expense (or change in contract reserves) to earned 
premiums.'' The statute, as implemented by this interim final 
regulation, requires health insurance issuers to submit data

[[Page 74866]]

to the Secretary that will allow enrollees of health plans, consumers, 
regulators, and others to take into consideration MLRs as a measure of 
health insurance performance as described in section 2718 of the PHS 
Act. More specifically, this interim final regulation is intended to 
provide consumers with information needed to better understand how much 
of the premium paid to the issuer is used to reimburse providers for 
covered services, to improve health care quality, and to pay for the 
``non-claims,'' or administrative expenses, incurred by the issuer. The 
caption of subsection (a) reflects this purpose, which is to provide 
the Secretary and other parties with a ``clear accounting for costs.''
    As quoted above, the statute requires issuers to submit a report 
that ``concerns'' the ratio of the ``incurred loss'' to ``earned 
premium.'' The statute does not simply require the issuer to report the 
numeric ratio of the incurred loss to earned premium. In addition, 
subsection (a)(3) requires issuers to provide an explanation of the 
``nature'' of ``non-claims costs.'' This interim final regulation 
accordingly describes the type of information that is to be included in 
the report to the Secretary and made available to consumers, in 
addition to the numerical ratio. To increase transparency and avoid 
confusion, this interim final regulation provides that the data to be 
reported according to section 2718(a) of the PHS Act will include all 
of the elements of revenue and expenditures that will be needed to 
calculate the amount of rebates under subsection 2718(b).
    For this information to be meaningful to consumers, the report 
provided to the Secretary and made available to the public must include 
the amount of premium revenue received as well as the amount expended 
on each of the types of activity identified in subparagraphs (1), (2), 
and (3) of section 2718(a) of the PHS Act:
    (1) Reimbursement for clinical services provided to enrollees under 
the health insurance plan (subparagraph (1));
    (2) Activities that improve health care quality for enrollees 
(subparagraph (2));
    (3) All other ``non-claims'' costs (subparagraph (3)); and
    (4) Federal and State taxes and licensing or regulatory fees 
(subparagraph (3)).
    In addition, the rebate requirements established by section 2718(b) 
allow for a State to provide for higher ratios than those required by 
section 2718(b)(1)(A)(i) and (ii) of the PHS Act. In order to allow a 
State to do so, the reporting required of health insurance issuers 
under subsection (a) must be done on a State level. Section 2718(b) 
also requires a separate calculation of the MLR for the large group 
market, the small group market, and the individual market. 
Consequently, the data required under subsection (a) must be reported 
for the large group market, the small group market, and the individual 
market within each State.
    NAIC model regulation and recommendations. Section 2718(c) of the 
PHS Act directs the NAIC, subject to certification by the Secretary, to 
establish:
    (1) Uniform definitions of the activities reported under section 
2718(a);
    (2) standardized methodologies for calculating measures of the 
activities reported under section 2718(a); and
    (3) definitions of which activities and in what regard such 
activities constitute activities that improve health care quality.
    Section 2718(c) also directs that the standardized methodologies 
for calculating measures of the activities reported under section 
2718(a) ``shall be designed to take into account the special 
circumstances of smaller plans, different types of plans, and newer 
plans.''
    The NAIC provided its recommendations to the Secretary on October 
27, 2010 regarding the above three areas, and made additional 
recommendations regarding other aspects of section 2718, in the form of 
a model regulation entitled Regulation for Uniform Definitions and 
Standardized Methodologies for Calculation of the Medical Loss Ratio 
for Plan Years 2011, 2012 and 2013 per Section 2718(b) of the Public 
Health Service Act (hereinafter ``NAIC model regulation'') (http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf). The 
NAIC model regulation is discussed in more detail in connection with 
the specific provisions of this interim final regulation. The NAIC, in 
discharging its statutory obligations, conducted a thorough and 
transparent process in which the views of regulators and stakeholders 
were discussed, analyzed, addressed and documented in numerous open 
forums held by staff from State insurance departments, by NAIC staff, 
and by the commissioners, directors, and superintendents of insurance 
from the States. This interim final regulation certifies and adopts the 
NAIC's model regulation in full.
    The NAIC model regulation includes definitions to be used for 
purposes of reporting the types of activities mandated by section 
2718(a), and standardized methodologies for calculating measures of 
such activities including those that improve health care quality. This 
interim final regulation certifies and adopts these definitions in the 
NAIC model regulation. Consistent with the mandate of section 2718(b), 
the NAIC and this interim final regulation require that health 
insurance issuers aggregate data at the State level by the large group 
market, small group market, and individual market, and define these 
markets. The reporting requirements, which follow NAIC's 
recommendations, are discussed in connection with Subpart A.
    The NAIC model regulation addresses in several different ways, as 
does this interim final regulation, the statutory requirement that the 
methodologies used to calculate the measures of the activities reported 
``shall be designed to take into account the special circumstances of 
smaller plans, different types of plans, and newer plans.'' The NAIC 
recommendations address the special circumstance of newer plans and 
smaller plans. They address newer plans by adjusting when newer plans' 
experience is to be reported, which is addressed in Subpart A. The 
special circumstance of smaller plans, which do not have sufficient 
experience to be statistically valid for purposes of the rebate 
provisions, are addressed by the NAIC through credibility adjustments 
to the calculation of the MLR. Because credibility adjustments are 
necessary to calculate the rebates under section 2718(b), they are 
addressed in Subpart B of this interim final regulation. The NAIC model 
regulation does not address the special circumstances of different 
types of plans such as so-called mini-med plans or expatriate plans, 
although it does address expatriate plans in a letter to the Secretary. 
HHS addresses both mini-med plans and expatriate plans in this interim 
final regulation, and discusses them in connection with Subpart A.
    The NAIC model regulation details the MLR rebate calculation for 
each of the next three MLR reporting years and notes the incurred 
claims and expenses related to improving health care quality that may 
be included. HHS has adopted these provisions in Subpart B.
    As noted above, the statute directs the NAIC, subject to 
certification by the Secretary, to establish uniform definitions and 
methodologies for calculating measures of activities that are used to 
calculate an issuer's MLR. HHS has reviewed these recommended 
definitions and methodologies and has decided to certify and adopt the 
NAIC recommendations in its October 27 model regulation. The NAIC held 
public, weekly meetings for several months during which interested 
parties

[[Page 74867]]

were encouraged to provide both written and oral comments, and the 
details surrounding the reporting requirements were thoroughly 
analyzed. In making the determination to certify the NAIC's 
recommendations, HHS also considered the NAIC's Issue Resolution 
Documents, which were produced as a result of the NAIC's process and 
which contain the NAIC's position regarding numerous related issues. In 
addition, HHS considered the public comments received by the NAIC as 
well as comments submitted to HHS in response to its request for 
information published on April 14, 2010 in the Federal Register. HHS 
also considered the letters submitted by the NAIC to the Secretary with 
respect to MLR issues, which are also public records.
    Organization of this regulation. The basis, scope, applicability, 
and definitions for this interim final regulation are set forth in 
Sec. Sec.  158.101 through 158.103. The structure of Subpart A of this 
interim final regulation follows the organization of section 2718(a). 
The obligation to report is established in Sec.  158.110. The way in 
which issuers are to aggregate data in the required reports is 
explained in Sec.  158.120. The special circumstances of mini-med plans 
and expatriate plans are also included in Sec.  158.120. Newer 
experience is addressed in Sec.  158.121. Section 158.130 addresses 
provisions that relate to premium revenue. Section 158.140 clarifies 
what may be reported as reimbursement for clinical services provided to 
enrollees, also known as incurred claims. Sections 158.150 through 
158.151 explain the criteria for determining whether expenditures are 
for activities that improve health care quality, allocation of such 
expenses, and treatment of health information technology (HIT) expenses 
required to accomplish such activities. Section 158.160 clarifies 
reporting of non-claims costs. Sections 158.161 and 158.162 address the 
Federal and State taxes and licensing or regulatory fees that may be 
excluded from non-claims costs pursuant to PHS Act section 2718(a)(3). 
Section 158.170 addresses allocation of expenses among categories 
reported as well as an issuer's lines of business.
    Similarly, the structure of Subpart B of this interim final 
regulation follows the organization of section 2718(b). The applicable 
MLR standards for the large group, small group and individual markets 
are addressed in Sec.  158.210. States are permitted to establish a 
higher MLR standard than provided by the Affordable Care Act, and if a 
State has done so, the State's standard applies, as stated in Sec.  
158.211. Section 158.220 explains which MLR reporting year's data is to 
be used to calculate an issuer's MLR, and Sec.  158.221 directs which 
data elements should be in the ratio's numerator and which should be in 
the denominator. Credibility adjustments are delineated in Sec.  
158.230, and the details as to how to calculate them are addressed in 
Sec.  158.231 and Sec.  158.232. Sections 158.240 through 158.242 
provide that enrollees must receive a rebate if the applicable MLR 
standard is not met, and establish who receives the rebate in certain 
circumstances, and the manner in which the rebate must be made. The de 
minimis amount below which a rebate need not be provided and how to 
handle de minimis rebates are addressed in Sec.  158.243. Section 
158.250 establishes a requirement for issuers to provide rebate 
recipients with an explanatory notice, while Sec.  158.260 establishes 
a requirement for issuers to report to the Secretary data regarding 
rebate payments.
    Subpart C of this interim final regulation addresses the 
Secretary's discretion in section 2718(b)(A)(ii) to adjust the MLR 
percentage for the individual market in a State if the Secretary 
determines that application of an 80 percent MLR standard may 
destabilize the individual market in such State. This interim final 
regulation provides that such determinations will be made pursuant to a 
State request and based on standards that include recommendations made 
to HHS in a letter from the NAIC on October 13, 2010.
    Subparts D, E and F of this interim final regulation implement 
section 2718(b)(3), Enforcement, which directs the Secretary to 
promulgate regulations for enforcing section 2718, and allows for 
providing appropriate penalties as part of the enforcement scheme. 
Subpart D addresses the enforcement scheme. Subpart E sets forth the 
requirements for maintaining records and information. Subpart F, 
Federal Civil Penalties, details the basis for imposing civil 
penalties, factors that HHS will consider in assessing civil penalties, 
the amount of the penalties, and the process for assessing them.

B. Scope, Applicability and Definitions

1. Scope and Applicability (Sec. Sec.  158.101 Through 158.102)
    Section 158.101 sets forth the topics and issues covered in Part 
158 of this interim final regulation.
    Section 158.102 provides that Part 158 applies to health insurance 
issuers offering group or individual health insurance coverage. Section 
2718(a) of the PHS Act expressly provides that this includes 
grandfathered health plans. Grandfathered health plans are defined in 
26 CFR 54.9815-1251T, 29 CFR Sec. Sec.  2590.715 through 1251, and 45 
CFR 147.140, which implements the provisions in the Affordable Care Act 
regarding status as a grandfathered health plan (see Interim Final 
Rules for Group Health Plans and Health Insurance Coverage Relating to 
Status as a Grandfathered Health Plan Under the Affordable Care Act, 75 
FR 34538 (June 17, 2010), as amended, 75 FR 70114 (November 17, 2010)).
    Although Section 2718(a) of the PHS Act does not exempt specific 
categories of plans from its requirements, subparagraph (c) requires 
that the reporting requirements and methodologies for calculating 
measures of the activities reported ``be designed to take into account 
the special circumstances of smaller plans, different types of plans, 
and newer plans.'' Smaller plans, different types of plans, and newer 
plans are subject to this interim final rule, and their special 
circumstances are addressed through the reporting requirements and 
calculation of the MLR provisions in Subparts A and B.
2. Definitions (Sec.  158.103)
    Section 2718(c) of the PHS Act directs the NAIC, subject to 
certification by the Secretary, to ``establish uniform definitions of 
the activities reported under subsection (a) and standardized 
methodologies for calculating measures of such activities, including 
definitions of which activities, and in what regard such activities, 
constitute activities described in section (a)(2).''
    The NAIC model regulation includes definitions of the activities 
reportable under section 2718(a) of the PHS Act and this interim final 
regulation adopts those definitions. Many of the terms defined in the 
NAIC model regulation refer to specific lines on NAIC financial 
reporting forms that are broader than the reporting required for the 
PHS Act MLR provisions.
    Any defined term that is used in only one section of this Subpart 
is defined in that section and is not also contained in the 
``Definitions'' section of the regulation. Such terms include 
``aggregation,'' ``incurred claims,'' and ``quality improving 
activities.'' Thus, these terms are discussed in the preamble section 
regarding that topic, rather than here. For example, ``aggregation'' is 
addressed in Sec.  158.120, ``incurred claims'' is defined in Sec.  
158.140, and ``quality improving activities'' is defined in Sec.  
158.150. Each of these terms is discussed in the section of the 
preamble regarding the regulation pertaining to it.

[[Page 74868]]

    Definitions that are used in the regulation as commonly used in the 
health care industry are not of particular note and therefore are not 
discussed here. We do discuss several definitions that are unique to 
this regulation or that may be of particular interest to enrollees, 
health plans, consumers, regulators and others. The definitions in 
Sec.  158.103 apply to all of Part 158. Also, in the public comments 
regarding uniform definitions for activities reported on under section 
2718(a) of the PHS Act, the only definition we received any significant 
amount of comments on is ``plan year.'' Those comments are discussed 
below with regard to MLR reporting year. Finally, we note that the 
interim final regulation uses the term ``market'' as it is used in the 
statute, to differentiate the small group, large group, and individual 
market, even if in some contexts these are also referred to as ``market 
segments.''
    ``MLR reporting year.'' Section 2718(a) requires each health 
insurance issuer to submit a report to the Secretary ``with respect to 
each plan year.'' The NAIC has recommended, and HHS concurs, that for 
purposes of MLR reporting and calculation, the term ``plan year'' in 
section 2718 should be interpreted to refer to the calendar year for 
that plan, and not necessarily the plan year that applies for other 
purposes. In adopting the NAIC's definition, HHS uses the term ``MLR 
reporting year.'' Accordingly, this regulation interprets ``plan 
year,'' as used in section 2718(a), as referring to the ``MLR reporting 
year,'' and defines the MLR reporting year as the calendar year. We 
recognize that this definition is different than the definition of the 
term ``plan year'' currently in the regulations implementing the PHS 
Act. This current regulatory definition of ``plan year'' would continue 
to apply for all purposes other than the period to be used for MLR 
reporting and rebate calculation. Specifically, for purposes other than 
the period for MLR reporting and rebate calculation, the term plan year 
is defined as ``the year that is designated as the plan year in the 
plan document of a group health plan,'' although the plan year may 
under certain conditions be the deductible year, the policy year, the 
employer's tax year, or the calendar year. We also note that, in the 
case of individual health insurance coverage, a similar term--``policy 
year''--is defined. Under these definitions, the ``plan year'' or 
``policy year'' is specific to the group or individual policy, and can 
be determined by the issuer. The NAIC recognized that requiring 
reporting of MLR data for each plan year under this generally 
applicable definition would be problematic. Meaningful reporting of the 
data required by section 2718 of the PHS Act requires aggregation of an 
issuer's experience across health insurance policies and policy forms 
in each State's large group, small group, and individual markets.
    As stated above, the NAIC recommends and requires calendar-year 
reporting and we adopt this recommendation and require reporting on a 
calendar-year basis. Issuers will report the premium earned, claims, 
quality improvement expenses and other non-claims costs incurred under 
health insurance that is in force during the calendar year. Calendar 
year reporting will increase the reliability of the experience data 
that will be reported and that will be used as the basis for rebate 
calculations. It will reduce the reporting burden on issuers, as they 
will be required to prepare and file a single loss ratio report and to 
calculate and pay rebates only once each calendar year. All enrollees 
under any of the health insurance coverage whose experience is 
reflected in the report to the Secretary will be eligible for rebates 
on the premiums paid during that calendar year. To avoid confusion with 
other uses of the term ``plan year,'' and to make for a clearer 
presentation and discussion of the MLR reporting requirements, we have 
adopted the term ``MLR reporting year'' to refer to the ``plan year'' 
referenced in section 2718 for use in the regulation.
    The Secretary invited the public to comment on uniform definitions 
for activities to be reported to the Secretary pursuant to section 
2718(a). The only comments received regarding the terms defined in 
Sec.  158.103 were with respect to ``plan year.''
    Since section 2718 of the PHS Act uses the term ``plan year'' 
without specifying whether it means a plan-specific year or a generally 
applicable reporting period, several commenters requested that we 
simply clarify its meaning. As explained above, we have done so. A 
minority of commenters preferred reporting to correspond to the 
effective dates of each health plan, arguing that non-calendar year 
plans may have difficulty gathering data on a calendar year basis as 
health plans are issued at various times throughout the calendar year. 
However, the calendar year reporting method used in this regulation was 
supported by several State regulators, health insurance issuers and 
others because it allows issuers to combine experiences across all 
policies and will therefore produce more uniform and reliable premium, 
claims and cost data. They also supported such a calendar-year based 
reporting period because it is consistent with current industry 
financial reporting practices, is simpler for consumers to comprehend, 
and allows States to get the data at one time.
    ``Enrollee.'' Section 158.103 defines the term ``enrollee'' as ``an 
individual who is enrolled, within the meaning of 45 CFR 144.103, in 
group health insurance coverage, or an individual who is covered by 
individual insurance coverage, at any time during an MLR reporting 
year.'' The NAIC does not define the term ``enrollee.'' However, we 
believe it is important to clarify that, for reporting purposes, 
``enrollee'' refers to anyone covered by a group plan, including 
dependents of the subscriber or employee, as well as anyone covered by 
an individual policy, despite the fact that this term is not ordinarily 
used in the individual market.
    ``Small group market'' and ``Large group market.'' The reporting 
regulations require in general that issuers report data for the large 
group market, small group market, and individual market, as that 
separation of data will be required in order to calculate the ratios 
and rebates provided for in PHS Act section 2718(b). There is currently 
more than one option for how to distinguish the small group market and 
the large group market. The small and large group markets, 
respectively, refer to coverage sold to a ``small employer'' or a 
``large employer.'' The determination of whether an employer is large 
or small depends on how many employees it has at particular times. 
Prior to the Affordable Care Act, the PHS Act defined a small group in 
terms of 2-50 employees, and a large group in terms of 51 or more 
employees, while a group with only one employee was considered to be in 
the individual market. However, the States were permitted to regulate 
very small groups (``groups of one'') in the small group market rather 
than the individual market. While most States used the statutory 
definition, several States have chosen to regulate these very small 
groups in the small group market.
    Section 1304(b) of the Affordable Care Act amended the definitions 
of large and small employer in the PHS Act, defining a small employer 
as 1-100 employees and a large employer as 101 or more employees. 
However, section 1304(b)(3) of the Affordable Care Act also allows 
States to continue to define an employer with up to 50 employees as a 
``small employer'' until 2016.
    This interim final regulation provides that for purposes of section 
2718 of the PHS Act, consistent with the provisions

[[Page 74869]]

in the Affordable Care Act, until 2016 a State may continue to provide 
a definition of small group as having a maximum of 50 members, and that 
for States that do so, that definition shall apply to the MLR reporting 
and rebate requirements set forth in section 2718. This regulation does 
not address the definition of the term ``small employer'' as used in 
ERISA or the Internal Revenue Code, or how the definition in these 
statutes interact with the definition in the PHS Act for purposes other 
than the MLR provisions in section 2718. We anticipate that these 
provisions will be addressed in future guidance.

C. Subpart A--Disclosure and Reporting

1. Reporting Requirements (Sec.  158.110)
    Section 2718(a) of the statute requires issuers to submit a report 
to the Secretary for each plan year concerning information related to 
earned premiums and expenditures in various categories, including 
reimbursement for clinical services provided to enrollees, activities 
that improve health care quality, and all other non-claims costs. In 
Sec.  158.110 of this interim final regulation, HHS requires that the 
report be submitted to the Secretary by June 1 of the year following 
the end of an MLR reporting year. This allows issuers to include in the 
report claims for services provided during the MLR reporting year that 
are processed and paid in the three months following the end of the MLR 
reporting year, as provided in Sec.  158.140(a)(1), and gives issuers 
another two months to compile and submit the required data. As 
discussed in sections 4. and 5. below, mini-med plans and expatriate 
plans wishing to receive the ``special circumstances'' adjustment 
discussed in those sections would be required under Sec.  158.110(b)(1) 
to submit data on an accelerated schedule.
    The precise form and content of the data that issuers must report 
to the Secretary will be announced in a subsequent Federal Register 
notice. It is anticipated that the data to be submitted will be closely 
coordinated with the data included on the Supplemental MLR Exhibit that 
is filed by issuers with State departments of insurance as part of 
their Annual Statement.
    A common practice in insurance is the sale or transfer of blocks of 
policies between issuers. This practice creates two issues for the 
reporting requirements under section 2718 of the PHS Act. Consistent 
with the NAIC's recommendation, Sec.  158.110(c) requires an issuer 
that has ceded all of the risk associated with a block of policies to 
another issuer to exclude any experience under those policies from its 
report. As specified in Sec.  158.110(c), the issuer acquiring the 
policies must report all of the claims, premium and expenses associated 
with the acquired policies, including claims and costs incurred and 
premiums earned during the MLR reporting year by the ceding issuer 
prior to the effective date of the agreement to transfer responsibility 
for the policies. The ceding issuer must not include experience under 
these policies in its report to the Secretary. A second practice in 
insurance with implications for the reporting requirements under 
section 2718 of the PHS Act is the use of so-called ``assumption 
reinsurance'' to transfer a block of business or group of insurance 
policies from one issuer to another.
2. Aggregate Reporting (Sec.  158.120)
    Section 158.120 of this interim final regulation requires issuers 
to report premium, claims and other expenses for all group and 
individual health insurance coverage (as defined above) on an aggregate 
basis by State and health insurance market. This follows the approach 
recommended by the NAIC. That is, a health insurance issuer will 
submit, for each State in which it writes coverage, data on the 
aggregate premiums, claims experience, quality-improvement 
expenditures, and non-claims costs it incurs in connection with the 
policies it issues in the large group, small group, and individual 
markets. HHS believes that reporting by State is clearly intended in 
section 2718 of the PHS Act, which allows a State to set a higher MLR 
standard than the 80 or 85 percent required by the statute. Reporting 
by health insurance market--i.e., by large group, small group, and 
individual markets--is also required by section 2718 of the PHS Act, 
which requires that MLR standards be met for each such market. The 
experience for group coverage issued by a single issuer that covers 
employees in multiple States must be attributed to the State that 
regulates the insurance contract between the employer and the issuer, 
as stated in Sec.  158.120(b) of this interim final regulation. Section 
158.120(d) also (1) specifies how to attribute experience related to 
policies sold through associations and trusts, (2) establishes special 
rules that should be followed in reporting experience under group 
health insurance coverage offered by multiple affiliated issuers in 
connection with a single group health plan that gives participants a 
choice of coverage options, and (3) provides for separate reporting in 
2011 for mini-med plans that have a total annual limit of $250,000 or 
less and for expatriate plans.
    The aggregation rules adopted in the regulation are designed to 
accomplish several objectives. First, the data that are reported and 
subsequently used to calculate MLRs and rebates should be based on 
sufficient experience to provide a reliable estimate of the issuer's 
administrative performance and pricing strategy. To the extent 
possible, the data used to calculate the MLRs and rebates should not 
simply represent unpredictable fluctuations in use of services by those 
covered by the issuer. Second, the reported data should reflect the 
responsibility of State insurance departments to (1) license issuers to 
sell insurance within a State (and, where applicable, to approve the 
products that can be offered in the State by the issuer), and (2) 
exercise oversight over the premium amounts that are charged for 
coverage. Third, HHS sought to minimize the burden associated with 
reporting MLR data, including the quality-improvement expense and non-
claims costs that would be reported in connection with each 
``aggregation.''
    In developing the regulation, a rule was considered that would 
disaggregate products by type of coverage--for example, HMO, PPO, and 
high-deductible coverage--even if offered by the same licensed issuer. 
The purpose of such a disaggregation would be to have the reported MLRs 
and rebates reflect experience under more uniform product designs, and 
to reduce possible inequities in the treatment of different types of 
plans. However, disaggregation would increase the number of reporting 
aggregations since one licensed issuer could have to report multiple 
aggregations, thus reducing the reliability of reported experience and 
rebates. HHS agrees with the NAIC and has decided against this type of 
disaggregation. In response to the Request for Comments, commenters 
generally supported aggregation by State and, within State, by the 
three market segments identified in the statute: The large group 
market, the small group market, and the individual market. Consumer 
advocacy groups generally noted that aggregation would tend to mask 
variations in MLRs across products. However, other commenters noted 
that aggregation across policies is needed to calculate reliable MLRs 
and to reflect the pooling of risk across policies or policy forms. 
After considering the arguments presented by the commenters, as well as 
public comments submitted to the NAIC, HHS decided to follow the 
recommendations submitted to the Secretary by the NAIC

[[Page 74870]]

and aggregate at the market level within each State, for reasons 
described below.
a. Attribution to State-of-Issue
    The regulation requires issuers to report experience based on the 
State-of-issue for each policy that it writes. This requirement is 
intended to result in a report that describes experience under policies 
whose benefits and premiums either are regulated, or could be 
regulated, by a State, since it is at the State level that insurance 
regulation occurs. The regulation generally defines the State-of-issue 
based on the ``situs'' of the insurance contract between the issuer and 
the policyholder. HHS defines ``situs'' as the State in which the 
contract is issued or delivered as stated in the contract. Consistent 
with NAIC guidance, HHS interprets this as the State that has primary 
jurisdiction over, or governs, the policy. Special rules that apply to 
determining the ``situs'' of a policy marketed to individuals and 
employers through associations or trusts are discussed below.
    The NAIC concluded, and the Department agrees with its conclusion, 
that the State is the appropriate level of geographic aggregation. 
Regulation of insurance has been and continues to be primarily the 
responsibility of States. Benefits offered, premiums, and marketing 
activities are all regulated under State law. It is the States that 
review and approve rates, and oversee solvency, and rebates are 
essentially a retrospective adjustment or correction to premiums. In 
addition, the statute specifically provides an opportunity for 
individual States to adopt loss ratio standards that are higher than 
those required by section 2718(b). It also allows for State-by-State 
adjustments to the medical loss ratio standard when justified by 
potential destabilization in the individual market. Applying State-
level and State-specific MLR standards would be difficult if experience 
were aggregated across States that may have different MLR standards. 
Adopting the State as the basic unit of geographic aggregation will 
make the reports submitted under section 2718 more meaningful to the 
exchanges. The Department agrees with the NAIC determination and has 
decided not to aggregate the experience of a single issuer across 
States. A rule that would permit aggregation of experience across 
issuers with common ownership was also considered. Under such a rule, 
the experience of all issuers owned by a common holding company or 
corporate group would be combined. Aggregation across such affiliated 
issuers would have two possible advantages: It would increase the total 
experience used to prepare the report, thereby increasing the 
reliability of the data for smaller issuers; and it would combine 
similar coverage provided in the same market by two related companies. 
However, aggregation across affiliated issuers might also combine the 
experience of issuers offering dissimilar coverage or that use 
different pricing policies. HHS has concluded, as did the NAIC, that 
reporting should not be done at the level of the holding company in 
this interim final regulation.
    In response to both the April request for information notice and 
the NAIC's solicitation of comments, extensive comments were received 
from issuers, regulators, and consumers. In general, comments received 
from regulators and consumers supported aggregation at no higher than 
the State level. The reasons given for State aggregation included 
consistency with the statute, greater meaningfulness of State-level 
information to consumers and purchasers, consistency with the 
responsibility of the States for regulation of issuers and oversight of 
insurance premiums, and the calculation of rebates that appropriately 
reflect the relationship between premium and claims experience. Many 
health issuers also recommended aggregation at the State level, 
although some recommended aggregation at the national level for 
coverage sold to large employers. Advocates of aggregation at a 
national level pointed to the greater reliability of reported loss 
ratios when based on the experience of the combined national enrollment 
of an issuer and, in the case of large group coverage, the use of 
experience rating for national or regional employers, and the 
complexity of allocating certain expenses, particularly Federal taxes, 
to experience within a single State. Several comments addressed 
aggregation at a geographic region smaller than a State. Reasons 
identified for regional aggregation within a State included claims of 
geographic variations within States of utilization and expenditure 
patterns and differences across issuers in geographic adjustments that 
are used to set premiums.
    The NAIC considered the arguments made for different approaches to 
geographic aggregation, including the issues related to multi-State 
level employers, and decided that aggregation should be at the State 
level. HHS agrees with and adopts the NAIC's approach. As discussed 
previously, particularly as to the individual and small group markets, 
State aggregation is most consistent with the requirements of the 
statute, particularly provisions permitting State-level exceptions to 
the minimum loss ratio, and will result in information that is more 
meaningful to consumers. In addition, aggregation at a national level 
would preclude States' flexibility to set higher MLR standards as 
prescribed in the Affordable Care Act. Aggregation at the State level 
will also ensure value for their health care dollars for consumers in 
every State.
    Some issuers have expressed concern that the reporting and rebate 
requirements recommended by the NAIC, and adopted in this regulation, 
would disadvantage large or multi-state employers, including those with 
a small number of employees in one State and a larger presence in 
another. This regulation does not require these businesses to change 
the manner in which they operate, and accommodates issuers that provide 
coverage to such employers in a number of ways.
    First, where an issuer insures employees of a business located in 
multiple States, the NAIC recommended and HHS agrees that MLR reporting 
should be based on the ``situs of the contract.'' Under this approach, 
incorporated in this regulation, the premiums and claims experience 
attributable to employees in multiple States are combined and reported 
by the issuer in the MLR report for the State identified in the 
insurance policy or certificate as having primary jurisdiction over the 
policy--often the headquarters of the company. This avoids separating 
the experience of employees from a single company in multiple States.
    Second, the NAIC recommended, and HHS adopts, combined reporting 
across affiliates for ``dual contracts.'' Under these types of 
insurance contracts, a single group health plan obtains coverage from 
two affiliated issuers, one providing in-network coverage, and a second 
affiliate providing out-of-network benefits to the plan. The experience 
of these two affiliated issuers providing coverage to a single employer 
can be combined and reported on a consolidated basis as if it were 
entirely provided by the in-network issuer. This maintains the 
experience of employees in a single reporting entity.
    Thirdly, where affiliated issuers offer blended insurance rates to 
an employer--rates based on the combined experience of the affiliates 
serving the employer--the NAIC recommended and HHS agrees that the 
incurred claims and expenses for quality improving activities can be 
adjusted among affiliates to reflect the experience of the employer as 
a whole.
    Taken together, these provisions recommended by the NAIC and 
adopted by HHS are a reasonable

[[Page 74871]]

accommodation of the needs of affiliated issuers and the multi-state 
employers for which the issuers provide coverage.
b. Attribution to Health Insurance Markets Within States
    The interim final regulation requires issuers to report experience 
within a State for each of the three markets referenced by the statute: 
The individual market, the small group market and the large group 
market. Experience under a health insurance policy or certificate is to 
be attributed to the individual market if the policy is not offered in 
connection with a group health plan, as defined by the PHS Act.
    In response to the April request for information notice, HHS 
received extensive comments on a separate aggregation question: Whether 
to combine the small group and individual markets. In general, comments 
supported separate reporting for the individual, small group, and large 
group markets. Concern was expressed that merging any of these markets 
would tend to conceal differences in medical loss ratios and perpetuate 
the pricing of individual or small group policies to achieve a medical 
loss ratio substantially below the minimums specified in the statue. On 
the other hand, HHS received comments from both regulators and industry 
supporting the consolidation of the individual and small group markets, 
and some comments recommended giving issuers the option of combining or 
not combining the individual and small group markets. Consolidated 
reporting could increase the reliability of reported loss ratios by 
reflecting a larger base of experience. However, it could also deprive 
consumers in one of these markets of the value of the statutory MLR 
standard.
    The NAIC, in its model regulation, permits an issuer to combine the 
individual and small group markets for purposes of calculating the MLR 
rebate if the State in which the coverage is issued requires that the 
two markets be combined for rating purposes. HHS adopts this approach. 
This exception is consistent with section 1312(c)(3) of the Affordable 
Care Act, which allows a State to require the merger of the individual 
and small group markets. Under such a merger, risk is pooled between 
individuals and small groups, and it would be appropriate to base 
rebates on the combined experience in the two markets. While we agree 
with this approach, it is important that the experience of the small 
group and individual markets be reported separately even if experience 
is combined for purposes of calculating the MLR, for a number of 
reasons. The statute allows the Secretary to adjust the MLR percentage 
in the individual market of a State if the Secretary determines that 
the application of the 80 percent MLR may destabilize the individual 
market in that State. Also, the law states that the Secretary may 
adjust the MLR ``if the Secretary determines appropriate on account of 
the volatility of the individual market due to the establishment of 
State Exchanges.'' In order for the Secretary to make these 
determinations, reporting of data for the individual market is needed. 
Separately reported data will also enable HHS to evaluate the impact of 
the MLR standards on the market, consumers, and the industry, and to 
consider making changes to the interim final regulation as appropriate 
based on actual experience.
    HHS has considered the arguments made for different approaches to 
aggregation across markets. It has decided to follow the recommendation 
to the Secretary submitted by the NAIC and require separate reporting 
of experience by the three markets.
c. Associations or Trusts
    The aggregation rules, in Sec.  158.120(d), adopts the NAIC's 
approach and also provide guidance for insurance coverage offered 
through associations or trusts. Under the definition of ``group health 
insurance coverage,'' only coverage offered to individuals through 
associations or trusts that are offered in connection with a group 
health plan should be attributed to the group market. Coverage obtained 
through an association or trust that is not offered in connection with 
a group health plan should be attributed to the individual market. 
Although such coverage is generally considered to be ``group'' coverage 
under the conventions of statutory accounting, it is to be reported as 
individual coverage consistent with the requirements of the PHS Act. 
This is consistent with ERISA's definition of group health plan, as 
incorporated in title XXVII of the PHS Act, as well as the NAIC's 
recommended approach. Although such coverage is generally considered to 
be ``group'' coverage for other purposes (for example, the conventions 
of statutory accounting), this interim final regulation requires non-
employment based coverage to be reported as individual coverage 
consistent with the requirements of the PHS Act. As noted earlier, this 
interim final regulation does not apply to self-insured plans, 
including self-insured plans offered through an association or trust.
d. Expatriate Plans
    The NAIC model regulation does not address the special 
circumstances of different types of plans, such as expatriate plans and 
plans with low annual limits, commonly called ``mini-med'' plans. 
However, in a letter dated October 13, 2010 to the Secretary of Health 
and Human Services, the NAIC expressed its opinion that expatriate 
plans should be excluded from the requirements of section 2718. HHS has 
considered the NAIC's views, as well as the public comments received by 
HHS and by the NAIC regarding these types of plans. Expatriate policies 
generally cover: Employees working outside their country of 
citizenship; employees working outside of their country of citizenship 
and outside the employer's country of domicile; and citizens working in 
their home country. Their unique nature results in a higher percentage 
of administrative costs in relation to premiums than plans that provide 
coverage primarily within the United States, for two reasons. One, 
administrative costs are related to identifying and credentialing 
providers worldwide in countries with different licensing and other 
requirements from those found in the United States, processing claims 
submitted in various languages that follow various billing procedures 
and standards, providing translation and other services to enrollees, 
and helping subscribers locate qualified providers in different 
countries. Two, because these plans primarily cover care in other 
countries, issuers are less able to provide quality improving 
activities.
    We note initially that some expatriate plans are not subject to the 
provisions of the Affordable Care Act, including the MLR reporting and 
rebate provisions of section 2718. Policies issued by non-U.S. issuers 
for services rendered outside of the U.S. are not subject to the 
Affordable Care Act. Therefore, if an expatriate policy is written on a 
form that was not filed and approved by any State insurance department, 
or its equivalent, experience under that policy would not be reported 
for purposes of calculating an issuer's MLR.
    HHS agrees with the NAIC that expatriate policies that are issued 
by U.S. domestic issuers on forms approved by a State insurance 
department have special circumstances that should be addressed in this 
interim final regulation. Therefore, the experience of these expatriate 
policies is to be reported separately from other coverage, as provided 
in Sec.  158.120(d)(4), and the calculation of claims and quality 
improving activities is to be

[[Page 74872]]

multiplied by a factor of two, as provided in Sec.  158.221(b). HHS 
believes that this factor is sufficient to account for the special 
circumstances of expatriate plans, while still requiring that they meet 
the statutory MLR standards. However, because HHS thinks additional 
data is necessary to inform this adjustment, this special circumstance 
adjustment applies for 2011 only. Also, in order to determine whether, 
and if so what type of, an adjustment may be appropriate for 2012, 
expatriate plans that wish to avail themselves of this special 
circumstances adjustment in Sec.  158.221(b)(4) for 2011 will be 
required to report MLR data on a quarterly schedule under Sec.  
158.110(b). We will revisit the special filing circumstances for 
expatriate plans after reviewing the quarterly filings.
e. ``Mini-med'' Plans
    HHS has received requests from issuers of so-called mini-med plans 
to be exempted entirely from the MLR and rebate provisions of section 
2718. The term ``mini-med'' plan does not have a statutory basis, and 
we use it here to generally refer to policies that often cover the same 
types of medical services as comprehensive medical plans but have 
unusually low annual benefit limits, often capping coverage on an 
annual basis for one or more benefits at $5,000 or $10,000, although 
some have limits above $50,000 or even $250,000. Our analysis of this 
segment of the insurance market suggests that a large majority of such 
plans have limits at or below $250,000. As discussed below, we 
therefore are using this figure as a proxy for capturing this type of 
plan.
    Issuers of mini-med plans assert that their administrative costs 
are higher as a percentage of the premium collected than is the case 
for plans having higher annual limits and thus a higher premium base. 
They assert that they have special administrative burdens because the 
populations they serve generally have high turnover rates. This high 
turnover rate may also result in lower claims costs. Mini-med plans are 
also less likely to spend as much on quality improving activities 
because of their lower annual limits. Both of these factors would 
result in administrative costs being a higher percentage of premium 
dollars than for plans with higher amounts of coverage. These issuers 
therefore ask that mini-med coverage be exempted entirely from the 
requirements of section 2718, and have indicated that in the absence of 
an exemption some may no longer be able to offer coverage. Some 
consumer groups have disagreed, suggesting that mini-med plans have 
higher profit margins than do traditional plans with significantly 
higher limits and should not be exempt from the MLR standards. The Blue 
Cross and Blue Shield Association sent a letter to Secretary Sebelius 
on November 1, 2010 in which it urged that HHS not grant ``any MLR 
exceptions for particular companies or product types.'' However, an 
issuer, which according to company materials has a relationship with 
the Blue Cross and Blue Shield system and provides coverage to at least 
one large employer, asserted that the company would be forced to drop 
this coverage without an exemption.
    The application of the Affordable Care Act to mini-med plans has 
already arisen in the context of restrictions on annual benefit limits 
under section 2711 of the PHS Act. HHS has established a process under 
which certain health plans with annual limits below those established 
in the interim final regulation implementing section 2711 may be 
granted a temporary waiver from the application of higher limits if 
compliance with the standards would result in a significant decrease in 
access to benefits or a significant increase in premiums. See 26 CFR 
54.9815-2711T; 29 CFR 2590.715-2711; 45 CFR 147.126; and OCIIO Sub-
Regulatory Guidance (OCIIO 2010-1), September 3, 2010. Data from the 
applications for waivers described above suggest that over one million 
individuals have coverage in mini-med plans. There are little publicly 
available data on these plans because current financial reporting to 
the States does not separate mini-med experience from other experience 
on which issuers report.
    HHS is concerned about the possibility of the over one million 
individuals who have coverage through mini-med plans losing that 
coverage. Based on this concern and the limited data that indicate 
mini-med plans may have a higher percentage of administrative costs due 
to lower claims and quality improving activities, HHS has decided to 
exercise its authority in section 2718(c) to ``take into account the 
special circumstances of smaller plans, different types of plans, and 
newer plans.''
    Therefore, for the reporting year 2011, HHS will apply a 
methodological change to address the special circumstances of mini-med 
plans. The mini-med issuers, for policies that have a total of $250,000 
or less in annual limits, will be permitted to apply an adjustment to 
their reported experience to address the unusual expense and premium 
structure of these plans. Specifically, under Sec.  158.221(b)(3), in 
the case of a plan with a total of $250,000 or less in annual limits, 
the total of the incurred claims and expenditures for activities that 
improve health care quality reported under Sec.  158.221(b) are 
multiplied by a factor of two. We believe this factor is sufficient to 
account for the special circumstances of mini-med plans based on the 
limited data available.
    Because little information is available to inform this adjustment, 
this special circumstances adjustment applies for 2011 only. Also, in 
order to determine whether, and if so what type of, an adjustment may 
be appropriate for 2012, mini-med plans that wish to avail themselves 
of this special circumstances adjustment in Sec.  158.221(b)(3) for 
2011 will be required to report MLR data on a quarterly schedule under 
Sec.  158.110(b). We will revisit the special filing circumstances for 
mini-med plans after reviewing the quarterly filings.
3. Newer Experience (Sec.  158.121)
    Section 2718(c) specifically charges the NAIC with establishing 
methodologies that take into consideration the special circumstances of 
newer plans. HHS follows the NAIC's approach in the model regulation, 
which allows an issuer to defer the experience associated with newly 
issued health insurance policies under certain circumstances. 
Specifically, an issuer may defer to the next MLR reporting year the 
premium and claims experience, as well as the life-years, associated 
with policies first issued after the start of the MLR reporting period 
if these policies account for more than half of the issuer's experience 
in a market segment for an individual State. This condition means that 
more than half of an issuer's overall premium revenue for a market 
sector within a State would have to be from newly issued policies that 
are issued after the first of the year.
    The rationale for this provision, as set forth by the NAIC and 
certified and adopted herein by HHS, has two parts: (1) The rationale 
for deferring experience under newly issued policies; and (2) the 
rationale for limiting the deferral of experience to issuers that 
derive more than half of their premium revenue from newly issued 
policies. The rationale for deferring experience under newly issued 
policies is that claims experience is generally expected to be 
substantially less than the premium revenue from those policies during 
the year in which the coverage is issued. This is particularly true for 
policies with substantial deductibles. Applying the rebate provision to 
these policies would create a substantial barrier to the entry of new 
issuers into a market.

[[Page 74873]]

    The rationale for allowing the deferral of experience only when 
more than half of the premium revenue is derived from newly issued 
policies is twofold. First, if newly issued policies account for a 
small percentage of an issuer's total experience in a market, they 
would have a very limited effect on the aggregated MLR for an issuer. 
Second, the principal purpose of allowing the deferral of newly issued 
business in the MLR calculation is to reduce barriers to market entry. 
Because claims experience is generally low compared to premiums under 
newly issued policies, including new business would generally result in 
lowering an issuer's MLR simply because of the new business. Deferral 
of reporting new business encourages companies to enter new markets, 
and new companies to enter the market.
    In response to the HHS notice requesting public comments regarding 
section 2718 of the PHS Act, HHS received comments from issuers, 
consumer advocates, and providers urging that special consideration be 
given to newer plans. Reasons for this included concern both about the 
effect on the market if newer plans are not given special 
consideration, and about the impact on the reliability of reported MLRs 
if newer plans' experience is included. HHS agrees with these concerns 
and addresses them by adopting, in Sec.  158.121, the NAIC's method for 
recognizing the special circumstances of issuers that have substantial 
new business.
4. Premium Revenue (Sec.  158.130)
    Section 2718(a) of the PHS Act requires health insurance issuers to 
report information concerning ``earned premium,'' and section 2718(b) 
provides that these reported data would be used in determining rebates 
to enrollees. Section 2718(c) charges the NAIC with establishing a 
uniform definition of premium revenue, subject to certification by the 
Secretary. HHS is adopting the NAIC definition of premium revenue, as 
described below.
    The NAIC defines ``earned premium'' as the sum of all monies paid 
by a policyholder as a condition of receiving coverage from a health 
insurance issuer subject to section 2718, including any fees or other 
contributions associated with the health plan, and accounting for 
unearned premiums. HHS is adopting this NAIC approach in Sec.  
158.130(a), and these adjustments to earned premium are discussed 
below. The NAIC calls for reporting of premium on a direct basis as set 
forth in Sec.  158.130(a)(1). Earned premium is addressed in Sec.  
158.130 and includes any fees or other contributions associated with 
the health plan.
    Adjustments to premium revenue are addressed in Sec.  158.130. 
Unearned premium is that portion of the premium paid in the MLR 
reporting year for coverage during a period beyond the MLR reporting 
year. Any premium for a period outside of the MLR reporting year must 
not be reported in earned premium for the MLR reporting year. Earned 
premium is net of premiums associated with group conversion charges 
that the issuer collects in connection with transfers between group and 
individual lines of business. Group conversion charges are the portion 
of earned premium allocated to providing the privilege for a 
certificate holder terminated from a group health plan to purchase 
individual health insurance without providing evidence of insurability. 
In addition, earned premium excludes premium assessments paid to or 
subsidies received from Federal and State high risk pools. High risk 
pool subsidies include grants provided under section 2745 of the PHS 
Act. Earned premium excludes adjustments for experience rating refunds, 
as provided in Sec.  158.130(b). Experience rating refunds are 
retrospective premium adjustments arising from retrospectively rated 
contracts.
    Earned premium is to be reported prior to deducting premium refunds 
to enrollees for health and wellness promotion. These refunds are 
considered quality improvement expenditures, so they should not be 
double counted as a reduction in premium, as provided in Sec.  
158.130(b)(4).
    We have adopted the NAIC's approach to assumption and indemnity 
reinsurance, in Sec.  158.130(a)(2) and (3). Earned premium for 
policies that originally were issued by one entity and later assumed by 
another entity via assumption reinsurance are to be reported as direct 
earned premium by the assuming entity and are to be excluded from 
premium revenue reported by the ceding entity. Similarly, if a block of 
business was subject to indemnity reinsurance and administrative 
agreements effective prior to the effective date of the Affordable Care 
Act, such that the assuming entity is responsible for 100 percent of 
the ceding entity's financial risk and takes on all of the 
administration of the block, then the assuming entity and not the 
ceding entity should report the reinsured earned premium as part of its 
premium revenue.
    Section 2718 makes specific reference to ``Federal and State taxes 
and licensing or regulatory fees'' in two places: First, in the 
reporting requirements of subsection (a) it excludes these items from 
``all other non-claims costs''; second, it excludes these costs from 
premium revenue in determining the ratio of expenditures on claims and 
activities to improve quality health care to premium revenue. For 
reporting purposes, therefore, taxes are excluded from ``all other non-
claims costs,'' and are addressed in Sec. Sec.  158.161 and 158.162, 
separate from but immediately following the requirements set forth in 
Sec.  158.160 related to reporting of non-claims costs. Taxes are also 
discussed in the section of this preamble describing calculation of the 
MLR.
    The PHS Act section 2718(a) requires reporting of ``premium 
revenue, after accounting for collections or receipts for risk 
adjustment and risk corridors and payments of reinsurance.'' Because 
this language so closely parallels the three programs added by the 
Affordable Care Act (the transitional reinsurance program established 
by section 1341; the risk-corridor program established by section 1342; 
and risk-adjustments under section 1343 of the Affordable Care Act), we 
interpret this requirement as applying exclusively to payments under 
those provisions, which are not effective until 2014. HHS anticipates 
providing guidance on these provisions at a later time. Consistent with 
the statute, Sec.  158.130(b)(v) of this interim final regulation 
treats payments and collections under these provisions of the 
Affordable Care Act as adjustments to premium revenue.
    In response to the HHS notice requesting public comments regarding 
section 2718 of the PHS Act, HHS received a number of comments from the 
industry regarding premium revenue. A few industry commenters 
recommended adjusting premium revenue for the change in unearned 
premium reserves. HHS agrees that changes in unearned premium reserves 
should be reflected in premium revenue, and has provided for this in 
Sec.  158.130(a). A few industry commenters recommended adjusting 
premium revenue for commercial reinsurance ceded and assumed. HHS is 
not adjusting premium revenue for commercial reinsurance (with the 
exception of 100 percent assumption reinsurance) because this largely 
would provide a tool for issuers to manipulate reported premiums.
    The NAIC considered allowing an adjustment to premium for 
commercial stop-loss or similar reinsurance, but rejected allowing such 
adjustments. We adopt the reasoning and recommendation of the NAIC. The 
argument for allowing such adjustments

[[Page 74874]]

for reinsurance was that it might increase the reliability of the 
medical loss ratio that is used for purposes of calculating rebates. 
However, the NAIC concluded that allowing adjustments for reinsurance 
created too much of an opportunity for manipulation of the reported 
loss ratio and would require extensive and complex regulation of the 
use of reinsurance. An industry commenter suggested subtracting 
experience rating refunds from premium revenue. The NAIC recommended, 
and HHS agrees, that there should be an adjustment for experience 
rating refunds. A consumer advocate suggested that total revenue 
(including investment income) be used in place of premium revenue, so 
consumers would know the universe of funds available to be spent on 
medical services. However, the commenter points out--and both the NAIC 
and we agree--that the statute instructs issuers to report ``premium 
revenue'' and not total revenue.
5. Reimbursement for Clinical Services Provided to Enrollees (Sec.  
158.140)
    Section 2718(a)(1) of the PHS Act requires reporting of 
``reimbursement for clinical services provided to enrollees under such 
coverage.'' The Affordable Care Act charges the NAIC with establishing 
a uniform definition of reimbursement for clinical services. The NAIC 
defines reimbursement for clinical services as direct claims paid and 
incurred claims during the applicable MLR reporting year. In this 
interim final regulation, HHS is adopting this NAIC approach, at Sec.  
158.140. The definition and guidance regarding adjustments to claims 
are discussed below.
    The interim final regulation defines incurred claims as the sum of 
direct paid claims incurred in the MLR reporting year, unpaid claim 
reserves associated with claims incurred during the MLR reporting year, 
the change in contract reserves, reserves for contingent benefits, the 
claim portion of lawsuits, and any experience rating refunds paid or 
received. Experience rating refunds exclude rebates based on an 
issuer's MLR, as required by Sec.  158.140. If there are any group 
conversion charges for a health plan, the conversion charges should be 
subtracted from the incurred claims for the aggregation that includes 
the conversion policies, and this same amount should be added to 
incurred claims for the aggregation that provides coverage that is 
intended to be replaced by the conversion policies. Incurred claims 
must not include claims recovered as a result of fraud and abuse 
programs. Treatment of the amount expended to reduce fraudulent claims 
is discussed below in the section regarding quality improving 
activities. Additionally, if the issuer transfers portions of earned 
premium associated with group conversion privileges between group and 
individual lines of business in its Annual Statement accounting, these 
amounts should be added to or subtracted from incurred claims.
    Unpaid claims reserves are included in incurred claims. Unpaid 
claim reserves are the reserves for claims that were incurred during 
the reporting period but that had not been paid by the date on which 
the report was prepared. To minimize reliance on estimates for the 
amount of the reserve, unpaid claim reserves shall be calculated based 
on claims that have been processed within three months after the end of 
the MLR reporting year. This claims collection period provides a better 
estimate of outstanding liability than the reserve established at the 
end of the MLR reporting year. Claims reserves are included in incurred 
claims in order for claims to be paid effectively and to allow for the 
insurance company to continue operating year after year.
    The NAIC includes the change in contract reserves in reimbursement 
for clinical services, and HHS has followed this approach. The NAIC and 
this interim final regulation define contract reserves as reserves that 
are established which, due to the gross premium pricing structure at 
the time of issue, account for the value of the future benefits that at 
any time exceeds the value of any appropriate future valuation of net 
premiums at that time. In the early years of a new product being 
introduced, reserves are established to cover losses in the future, but 
as reserves are drawn down to cover current losses the amount collected 
from reserves will be deducted from claims. An issuer may establish 
contract reserves to reduce the need to increase premiums for a newly 
introduced product as the experience under that policy matures. As a 
policy matures, the reserves that were set aside in the beginning of 
the policy's existence are used to cover claims that are incurred in 
the future.
    Contract reserves must not include premium deficiency reserves. 
Premium deficiency reserves are reserves that are established when 
premium is no longer adequate to cover losses. They are excluded 
because contract reserves would provide for these future losses over 
time to the extent that such losses were anticipated and factored into 
the premiums charged during the reporting period. Contract reserves 
shall not include reserves for expected MLR rebates.
    Guidance is also provided as to types of expenses or revenue that 
are to be treated as adjustments to claims. The NAIC recommended that 
prescription drug costs should be included in incurred claims and 
prescription drug rebates should be deducted from incurred claims. 
Prescription drug rebates are rebates that pharmaceutical companies pay 
to issuers based upon the drug utilization of the issuer's enrollees at 
participating pharmacies. We agree with the NAIC that drug rebates 
should be accounted for, and under Sec.  158.140(b)(1)(i) we treat such 
rebates as an adjustment to incurred claims.
    The NAIC allows an adjustment to claims for State stop loss, market 
stabilization, and claims/census based assessments. HHS agrees that 
these types of expenses should be allowed as an adjustment to incurred 
claims. These assessments include:
    (1) Any market stabilization payments or receipts by issuers that 
are directly tied to claims incurred and other claims based or census 
based assessments;
    (2) State subsidies based on a stop-loss payment methodology; and
    (3) unsubsidized State programs designed to address distribution of 
health risks across health issuers via charges to low risk issuers that 
are distributed to high risk issuers.
    The NAIC also considered but rejected the inclusion of an 
adjustment to incurred claims for so-called ``large claim pooling'' as 
a means of reducing the need for and magnitude of credibility 
adjustments. NAIC rejected large claim pooling for two reasons. First, 
it would not have not addressed the needs of issuers that either are 
not part of a holding company or company group or that are operate in a 
single State. Second, it would require extensive and complex 
regulations and close oversight. We have accepted the NAIC's 
recommendations.
    Incurred medical incentive pools and bonuses to incurred claims are 
also allowed as an adjustment to incurred claims, and this is reflected 
in Sec.  158.140(b)(2)(iii) of the interim final regulation. Medical 
incentive pools are arrangements with providers and other risk sharing 
arrangements whereby the reporting entity agrees to either share 
savings or make incentive payments to providers. These payments may not 
be counted under quality improvement expenditures.
    HHS received numerous comments from consumer groups, issuers, and 
regulators regarding whether, and to what extent, reserves should be 
included in incurred claims. A consumer advocacy group felt that only

[[Page 74875]]

paid claims should be used, arguing that the use of actual claims paid 
is reasonable because the review is historical; this would avoid the 
possibility of issuers gaming the system by manipulating reserves. 
However, several issuers and regulators support the inclusion of unpaid 
claims reserves in incurred claims. A State regulator indicates that 
the advantage of such inclusion is that it deals only with data for the 
one year in which claims are incurred, and avoids any distortion due to 
possible errors in the estimate of the unpaid claim reserve as of the 
beginning of the year. The disadvantage is that the result is unduly 
influenced by the unpaid claim reserve as of the end of the year.
    HHS acknowledges the consumer group concern for the potential that 
reserves can be manipulated, and in particular overstated, and can thus 
produce a reported MLR for a given calendar year that is higher than 
the true MLR for that year. Nevertheless, over the long run such over-
reserving for one year necessarily results in a reduction, or 
``releasing,'' of reserves in future years. HHS concurs with the NAIC 
that including contract reserves in claims is fair to consumers over 
the long run, and has adopted this approach.
6. Activities That Improve Health Care Quality (Sec. Sec.  158.150 
Through 158.151)
    Section 2718(a)(2) of the PHS Act requires health insurance issuers 
to submit an annual report to the Secretary concerning the percent of 
total premium revenue that is spent on activities that improve health 
care quality. Section 2718(c) of the PHS Act directs the NAIC, subject 
to certification by the Secretary, to establish uniform definitions of 
activities that improve health care quality. In developing the 
definition of a quality improvement activity, the NAIC has relied upon 
section 2717 of the PHS Act. HHS concurs with the NAIC in this approach 
and has followed the recommendations of the NAIC.
    Section 2717 provides for the development of ``reporting 
requirements for use by a group health plan, and a health insurance 
issuer offering group or individual health insurance coverage, with 
respect to plan or coverage benefits and health care provider 
reimbursement structures that--

    (A) improve health outcomes through the implementation of 
activities such as quality reporting, effective case management, 
care coordination, chronic disease management, and medication and 
care compliance initiatives, including through the use of the 
medical homes model as defined for purposes of section 3602 of the 
Patient Protection and Affordable Care Act, for treatment or 
services under the plan or coverage;
    (B) implement activities to prevent hospital readmissions 
through a comprehensive program for hospital discharge that includes 
patient-centered education and counseling, comprehensive discharge 
planning, and post-discharge reinforcement by an appropriate health 
care professional;
    (C) implement activities to improve patient safety and reduce 
medical errors through the appropriate use of best clinical 
practices, evidence-based medicine, and health information 
technology under the plan or coverage; and
    (D) implement wellness and health promotion activities.

    The NAIC model regulation contains definitions of activities that 
improve health care quality that track the categories set forth in 
section 2717. After considering the NAIC's definitions, and public 
comments thereon, HHS has decided to certify and adopt them. In 
addition, the NAIC provided examples to illustrate activities that 
qualify as quality improving activities and these are also certified 
and adopted in toto in this interim final regulation. Finally, the NAIC 
designated certain activities as not qualifying as quality improving, 
and we certify and adopt these exclusions as well.
    As recommended by the NAIC, this interim final regulation allows a 
non-claims expense incurred by a health insurance issuer to be 
accounted for as a quality improvement activity only if the activity 
falls into one of the categories set forth in section 2717 and meets 
all of the following requirements:
    (1) It must be designed to improve health quality;
    (2) It must be designed to increase the likelihood of desired 
health outcomes in ways that are capable of being objectively measured 
and of producing verifiable results and achievements;
    (3) It must be directed toward individual enrollees or incurred for 
the benefit of specified segments of enrollees or provide health 
improvements to the population beyond those enrolled in coverage as 
long as no additional costs are incurred due to the non-enrollees; and
    (4) It must be grounded in evidence-based medicine, widely accepted 
best clinical practice, or criteria issued by recognized professional 
medical associations, accreditation bodies, government agencies or 
other nationally recognized health care quality organizations. These 
criteria are recommended by the NAIC in its model regulation.
    In this interim final regulation HHS recognizes that some quality 
improvement activities may be what are sometimes referred to as 
``population-directed'' and may not involve face-to-face interaction 
between an employee of the health insurance issuer (or a contractor of 
the issuer) and the enrollee. However, such activities must be directed 
to identified segments of the issuer's enrollees. The issuer must be 
able to measure the level of engagement with these enrollees in 
addition to tracking the effect(s) of these activities on health 
outcomes in this population through a process that is well defined, 
well developed, and utilized.
    Any quality improvement activity that results in cost savings to an 
issuer should not, by itself, cause expenditures on that activity to be 
classified as non-quality improving expenditures, if they meet the 
criteria set forth in this interim final regulation. However, if the 
activity is designed primarily to control or contain costs, then 
expenditures for it may not be included as a quality improvement 
activity, as provided in Sec.  158.150(d). This approach follows the 
NAIC's model regulation.
    As many quality improvement activities are fluid in nature, they 
may properly be classified in more than one quality improvement 
activity category. However, following the recommendation of the NAIC, 
the interim final regulation does not permit issuers to count any 
occurrence of a quality improvement activity more than once, as 
explained in Sec.  158.170(a). Moreover, shared expenses among related 
entities as well as expenses that are for or benefit lines of business 
or products other than those being reported, including self-funded 
plans, must be apportioned among the entities and among the lines of 
business or products. For example, a quality improvement program that 
is developed and implemented for self-funded plans and fully insured 
plans must be pro-rated among the lines of business, and the portion of 
expenditures for the program that are for the self-funded plans may not 
be included in quality improvement activities reported under section 
2718(a) of the PHS Act.
    The NAIC recommended, and HHS adopts in its entirety, the list of 
activities that are not to be reported as a quality improving activity. 
Section 158.150(c) sets forth types of activities that are not to be 
reported as a quality improvement activity. These include:
    (1) Those activities which are designed primarily to control or 
contain costs;
    (2) Concurrent and retrospective Utilization Review;
    (3) Fraud Prevention activities (beyond the scope of those 
activities which recover incurred claims);

[[Page 74876]]

    (4) Development, execution, and management of a provider network;
    (5) Provider credentialing;
    (6) Marketing expenses;
    (7) Costs associated with calculating/administering individual 
enrollee or employee incentives;
    (8) Clinical data collection without any subsequent data analysis;
    (9) Establishment and/or maintenance of a claims adjudication 
system; and
    (10) 24-hour customer service/or health care professional hotline 
addressing non-clinical member questions.
    HHS requested public comments regarding the types of activities 
that would improve the quality of health care. Numerous consumer 
advocacy groups, issuers, State regulators, and other interested 
parties responded with various suggestions as to the type of activities 
that should be included in the definition of quality improving 
activities.
    Many issuers and interest groups advocated for a broad definition 
for ``quality improving activities'' that allows for future 
innovations. However, numerous providers and consumer advocacy groups 
asserted that HHS should develop a definition for `quality improving 
activities' that is not so broad that issuers may improperly classify 
administrative activities as improving quality. Several commenters also 
advocated for a definition that requires issuers to clearly articulate 
the activity's purpose and to provide detailed accounts of the 
underlying activity with measurable evidence as to the effects of the 
activity on the quality of care received by enrollees.
    This interim final regulation provides a set of criteria in Sec.  
158.150 which issuers must comply with in order for the activity in 
question to be treated as improving quality. The definition, or 
foundational criteria, of a quality improvement activity should be 
specific enough so as to provide clear guidance without overly 
prescribing acceptable activities and possibly stifling future 
innovative quality improving activities; the NAIC's definition which we 
have adopted achieves these goals.
    Numerous consumer groups advocated for a definition that includes 
only evidence-based quality improving initiatives, and excludes alleged 
quality-improving activities that have not been demonstrated to improve 
quality. Some consumers and providers want issuers to provide specific 
data illustrating the success of a proposed quality improving measure 
prior to HHS acknowledging the validity of such an activity. Issuers 
argue, however, that imposing a specific data requirement prior to 
engaging in a quality improvement activity will stifle development in 
future innovations, as data demonstrating the effectiveness of such 
activity may not yet be available.
    The NAIC recommended and HHS agreed that, as provided in Sec.  
158.150, a quality improvement activity is ``grounded in evidence-based 
medicine, widely accepted best clinical practice, or criteria issued by 
recognized medical associations, accreditation bodies, government 
agencies, or other nationally recognized health care quality 
organizations.'' This interim final regulation further requires any 
proposed quality improving activities to be designed to improve the 
quality of care received by an enrollee and capable of being 
objectively measured (taking into account the individual needs of the 
patient) and of producing verifiable results and achievements. While an 
issuer does not have to present initial evidence proving the 
effectiveness of a quality improvement activity, the issuer will have 
to show measurable results stemming from the executed quality 
improvement activity.
    A consumer advocacy group called for issuers to be required to 
spend a specified percentage of premiums on preventive and health-
lifestyle promotional activities. Several interested parties, including 
issuers, other interest groups and providers, asserted that capping or 
limiting quality improvement initiatives would deter issuers from 
engaging in such activities. Issuers further commented that although 
these types of activities ``add value to the health care system,'' 
issuers would be deterred from engaging in such activities if HHS 
limited the amount an issuer could spend on quality improving 
activities.
    The Affordable Care Act does not dictate the amount an issuer must 
expend on quality improving activities, nor did the NAIC make a 
recommendation in this regard, nor does this interim final regulation. 
Section 158.150 requires that a quality improvement activity be 
provided by an issuer or through a third party to whom it delegated 
such responsibilities by contract in connection with which the issuer 
remains ultimately responsible for the underlying insurance policy. In 
calculating its MLR, an issuer may allocate any percentage of its 
expenses to quality improvement activities, so long as the activities 
comply with the criteria established under Sec.  158.150.
    Some industry groups argued that network fees associated with third 
party provider networks should be classified as quality improving 
activities, because they increase enrollees' access to providers. 
Consumer groups argued that these fees are traditional administrative 
expenses which should not be classified as improving quality. While HHS 
agrees that administrative expenses such as network fees should not be 
counted as quality improving, some traditional administrative 
activities can qualify as quality improving if they meet the criteria 
set forth in Sec.  158.150. For example, expenses for prospective 
utilization review and fraud recovery activities up to the amount of 
fraudulent claims recovered may be classified as expenses for quality 
improving activities. Prospective utilization review is considered a 
quality improving activity because it is rendered before care is given 
and can help ensure that the most appropriate medical treatment is 
given in the most appropriate setting. In contrast, the network fees 
associated with third party provider networks do not stem from a 
quality improving activity and therefore only count as an 
administrative expense.
    Issuers pointed out that the recovery of fraudulently paid claims 
reduces their MLR. They argued, therefore, that costs of preventing and 
discovering fraud should be counted as a quality improving activity; 
otherwise, there would be a reduced incentive to incur these costs. We 
agree with this concern. The NAIC model regulation addresses this 
concern by allowing fraud recovery expenses as a quality improving 
activity expense up to the amount of fraudulent claims recovered. This 
treatment would help mitigate whatever disincentive might occur if 
fraud recovery expenses were treated solely as non-claims and non-
quality improving expenses. We adopt the NAIC's approach.
    HHS also adopts the NAIC's recommendation to exclude the conversion 
of International Classification of Disease code sets from ICD-9 to ICD-
10 as a quality improvement activity with the following qualification. 
As a general matter, the development and maintenance of claims 
adjudication systems are not designed primarily to improve the quality 
of care received by an individual and, therefore, are not classified as 
a quality improvement activity. However, there is general recognition 
that the conversion to ICD-10 will enhance the provision of quality 
care through the collection of better and more refined data. The 
difficulty is in parsing expenses associated with ICD-10 conversions 
that may be solely ``development and maintenance of claims adjudication 
systems'' as opposed to those that are uniquely conversion costs. As 
with some other reporting categories defined in this regulation, little 
public data currently exist to guide decision making

[[Page 74877]]

regarding this distinction. Although the NAIC excluded these costs as a 
quality improving activity, the NAIC supplemental forms allow for the 
collection of data relating to the conversion for the calendar year 
2010 that will be reported in 2011. HHS intends to examine the reported 
conversion costs along with other quality activity costs and other 
administrative costs in the NAIC supplemental form in 2011 to determine 
whether the policy in this regulation should be revisited. HHS solicits 
further comments on whether ICD-10 expenses should be included as a 
quality improving activity.
    Health Information Technology (Section 158.151). Section 158.151 of 
this interim final regulation provides guidance on the use of Health 
Information Technology (``HIT'') in conjunction with quality improving 
activities. Although HIT is not specifically addressed in section 
2718(a) of the PHS Act, it is addressed in other provisions within the 
Affordable Care Act, and HHS has determined that it is important to 
address HIT's role in quality improvement activity. HHS recognizes HIT 
as its own separate category of quality improving activities, provided 
that the use of HIT meets certain requirements. In doing so, HHS has 
followed the approach of the NAIC.
    HIT offers providers, issuers and patients the capability to share 
clinical information in a real-time setting. Any HIT expenditure that 
is attributable to improving health care, preventing hospital 
readmissions, improving patient safety and reducing errors, or 
promoting health activities and wellness to an individual or an 
identified segment of the population, is classified as a quality 
improvement activity. HIT resources that are designed to improve the 
quality of care received by an enrollee include the provision of 
electronic health records and patient portals, as well as the 
monitoring, measuring, and reporting of clinical effectiveness 
measures. As indicated in Sec.  158.151, HIT expenses that are 
consistent with Medicare/Medicaid meaningful use requirements may be 
treated as an expenditure to improve health care quality. This 
treatment of HIT is also recommended by the NAIC.
7. Other Non-Claims Costs (Sec.  158.160)
    The report required by section 2718(a) of the PHS Act must include 
information on expenditures for ``all other non-claims costs, including 
an explanation of the nature of such costs, and excluding Federal and 
State taxes and licensing or regulatory fees.'' ``Other non-claims 
costs'' refers to expenditures that are not used to adjust premiums, 
incurred claims, or activities that improve quality care. HHS 
interprets this to mean that issuers must account for the use of all 
premium revenue, not just claims expenses and expenses to improve 
quality. The NAIC includes in these non-claims expenses sales expenses, 
agents' and brokers' fees and commissions, other taxes, community 
benefit expenditures, and general administrative expenses. HHS supports 
the NAIC approach to defining non-claims costs and has followed it in 
Sec.  158.160 of this interim final regulation. For example, direct 
sales salaries and work force salaries and benefits should be allocated 
as non-claims costs unless a specific position can be directly 
correlated with an activity that improves health care quality, as 
defined in this regulation. The NAIC's inclusion of ``other taxes'' as 
non-claims expenses does not refer to taxes that section 2718(a) of the 
PHS Act excludes from ``all other non-claims costs'' and which section 
2718(b) allows to be excluded from premium revenue. Rather, ``other 
taxes'' refers to taxes that may not be excluded from premium revenue, 
such as taxes of a foreign country and sales taxes (excluding State 
sales taxes) if an issuer does not exercise the option of including 
such taxes with the cost of goods and services produced. Another type 
of expense included in non-claims costs is cost containment expenses 
not included as an expenditure related to a quality improving activity 
under Sec.  158.150.
    Notably, in correspondence with HHS, the NAIC raised concerns 
regarding the potential impact of this regulation on agents' and 
brokers' fees and commissions. Some companies in some States may be 
particularly reliant on producers to distribute their products. Agents 
and brokers perform a range of functions on behalf of consumers and 
companies. In some cases, issuers may have entered into longer term 
compensation arrangements with agents and brokers which the MLR 
standard may stress. The NAIC considered, but declined to incorporate 
in the model regulation, special treatment for such expenses in the MLR 
calculations. The NAIC opted instead to establish a working group with 
HHS to address the impact of the Affordable Care Act on agents and 
brokers, especially during years leading up to 2014. As discussed 
below, the potential impact of the MLR standard on agents and brokers 
merits recognition, and in this regulation the impact of the MLR 
standard on agents and brokers will be a factor in considering whether 
a particular individual markets would be destabilized. HHS seeks 
comments on the approach taken in this regulation and on the issues 
related to agents and brokers during years leading up to 2014.
    Loss adjustment expense is part of other non-claims costs that 
cannot be excluded from premium revenue and cannot be considered part 
of reimbursement for clinical services to enrollees or a quality 
improving activity. Loss adjustment expense is referred to as ``claims 
adjustment expenses'' in the forms the NAIC has developed for reporting 
by issuers. Claims adjustment expenses are not reported as an 
adjustment to premium revenue or as an adjustment to claims. Instead, 
they are expenses associated with claims and are reported as ``other 
non-claims costs.'' One type of claims adjustment expenses is cost 
containment expenses. Such expenses reduce either the number of health 
services provided or the cost of such services. They may include: Post 
and concurrent claim case management activities associated with past or 
ongoing specific care; utilization review; detection and prevention of 
payment for fraudulent requests for reimbursement; expenses for 
internal and external appeals processes; and network access fees to 
preferred provider organizations and other network-based health plans 
(including prescription drug networks), and allocated internal salaries 
and related costs associated with network development and/or provider 
contracting.
    Examples of other types of claims adjustment expenses include: 
Estimating the amounts of losses and disbursing loss payments; 
maintaining records, general clerical, and secretarial; office 
maintenance, occupancy costs, utilities, and computer maintenance; 
supervisory and executive duties; and supplies and postage. As 
previously explained, claims adjustment expenses are other non-claims 
costs.
8. Federal and State Taxes and Licensing and Regulatory Fees 
(Sec. Sec.  158.161-158.162)
    Section 2718 of the PHS Act requires that Federal and State taxes 
and licensing and regulatory fees be reported. Section 2718(a) lists 
these expenses as an exclusion from non-claims costs. Section 
2718(b)(1)(A) requires that Federal and State taxes and licensing or 
regulatory fees be excluded from the total amount of premium revenue 
when calculating an issuer's MLR. Section 2718(b)(1)(B)(i)(II) also 
requires that such taxes and fees be excluded from the total amount of 
premium revenue when determining

[[Page 74878]]

any rebates. However, section 2718 does not specifically define what is 
included in Federal and State taxes.
    The NAIC defines Federal taxes as all Federal taxes and assessments 
allocated to health insurance coverage reported under section 2718 of 
the PHS Act, excluding Federal income taxes on investment income and 
capital gains. This interim final regulation adopts the NAIC 
recommendation that Federal income taxes on investment income and 
capital gains are not taxes based on premium revenues, and thus should 
not be used to adjust premium revenues, as specified in Sec.  158.162, 
while all other Federal taxes allocated to health insurance coverage 
should be excluded from non-claims costs for purposes of the report 
required by section 2718. Section 158.162 also makes clear that Federal 
taxes which are excluded from non-claims costs are to be excluded from 
premium revenue when calculating an issuer's MLR.
    We have adopted the NAIC's recommended approach to reporting State 
taxes and assessments. State taxes and assessments that must be 
separately identified and reported to the Secretary include: Any 
industry-wide (or subset) assessments (other than surcharges on 
specific claims) paid to the State directly, or premium subsidies that 
are designed to cover the costs of providing indigent care or other 
access to health care throughout the State; assessments of State 
industrial boards or other boards for operating expenses or for 
benefits to sick unemployed persons in connection with disability 
benefit laws or similar taxes levied by States; advertising required by 
law, regulation or ruling, except advertising associated with 
investments; State income, excise, and business taxes other than 
premium taxes; State premium taxes plus State taxes based on policy 
reserves, if in lieu of premium taxes; State sales taxes, if the issuer 
does not exercise the option of including such taxes with the cost of 
goods and services purchased; and any portion of commissions or 
allowances on reinsurance assumed that represents specific 
reimbursement of premium taxes.
    The NAIC has interpreted the language in section 2718(a)(3) that 
refers to ``excluding Federal and State taxes and licensing or 
regulatory fees'' from non-claims costs as encompassing the community 
benefit expenditures by not-for-profit health plans that they are 
required to make in lieu of State and Federal taxes. As discussed 
below, we adopt the NAIC's approach.
    Under the NAIC's recommendation, ``community benefit expenditures'' 
are limited to expenditures that the non-profit issuer is required to 
make under State law in lieu of State taxes that would otherwise apply, 
or that the Federal government requires them to make in order to 
preserve their Federal tax exempt status, and that they report to the 
Federal government. The proceeds of such expenditures fund activities 
or programs that seek to achieve the objectives of improving access to 
health services, enhancing public health and relief of government 
burden.
    Under the NAIC's interpretation, these mandated community benefit 
expenditures are essentially deemed to be the equivalent of State and 
Federal taxes for non-profit issuers for purposes of the exclusion in 
section 2718(a)(3). The NAIC recommended that non-profit issuers be 
permitted to report community benefit expenditures as a deduction from 
premium revenue, and further recommended that they be permitted to 
split such expenditures between Federal and State taxes as applicable, 
but not to report them more than once.
    HHS believes that NAIC's interpretation avoids an inequity between 
for-profit and non-profit plans, and that it is reasonable to interpret 
community benefit expenditures by non-profits that they are required by 
the State or Federal government to make as the equivalent of taxes for 
purposes of the exclusion in section 2718(a)(3). Thus, in Sec.  
158.162(c) and (e), HHS has adopted the NAIC's approach and allows such 
mandatory community benefit expenditures by not-for-profit plans, made 
in lieu of income taxes, to be excluded from premium revenue to the 
same extent as State taxes. In order to implement the NAIC-recommended 
approach that community benefit expenditures may be split between 
Federal and State taxes as applicable, Sec.  158.162(e) of this interim 
final regulation provides that the NAIC's approach applies equally to 
Federal and to State taxes, and that community benefit expenditures 
made in lieu of income taxes, whether Federal or State, may be reported 
as a deduction from premium revenue.
    A commenter representing not-for-profit plans asserted that 
community benefit expenditures should be more broadly recognized in the 
MLR calculation, and not be limited to the amount required to be paid 
in lieu of taxes. This commenter pointed out that not all States impose 
a premium tax, that the amount of premium tax varies among States, and 
that the NAIC rule would discourage not-for-profits from making these 
contributions to the community.
    Although the NAIC did not recognize community benefit expenditures 
beyond the amount of taxes that would have been paid, we share the 
concern that the MLR standard should not create a disincentive for not-
for-profits to make community benefit expenditures beyond those 
required in lieu of taxes. Thus, we invite comments on the proper 
treatment of community benefit expenses.
    The NAIC defines and specifies the licensing and regulatory fees 
that must be reported and whether they may be included as an adjustment 
to premium revenue. In Sec.  158.161, we adopted the NAIC approach 
under which statutory assessments to defray operating expenses of any 
State or Federal department, and examination fees in lieu of premium 
taxes as specified by State law are included in the licensing and 
regulatory fees that may be used as an adjustment to premium revenue. 
HHS believes that, consistent with the Affordable Care Act, examination 
fees under State law should also be included as an adjustment to 
premium revenue, and Sec.  158.161 of the interim final regulation has 
such a provision. Fines and penalties of regulatory authorities and 
fees for examinations by State and Federal departments other than 
referenced above must be separately reported, but may not be used as an 
adjustment to premium revenue.
9. Allocation of Expenses (Sec.  158.170)
    Section 2718(a)(3) of the PHS Act requires health insurance issuers 
to submit an annual report to the Secretary concerning the percentage 
of total premium revenue spent ``on all other non-claims costs, 
including an explanation of the nature of such costs, and excluding 
Federal and State taxes and licensing or regulatory fees.'' However, 
section 2718(a) does not provide a standardized method for allocating 
such expenditures. Section 2718(c) directs the NAIC to develop 
definitions and methodologies, which are subject to the certification 
of the Secretary, to assist issuers in reporting the information 
stipulated under section 2718(a). The NAIC's model regulation and this 
interim final regulation require issuers to report their expenses by 
State and by line of business. Section 158.170 of this interim final 
regulation addresses the allocation of claims and non-claim related 
expenses as well as expenses stemming from quality improving 
activities. Issuers operating within the individual market, small group 
market, and large group market who also offer products, such as 
Medicare supplemental insurance, or services, such as administration of 
group health

[[Page 74879]]

plans, must report and properly allocate all related expenses stemming 
from each individual line of business.
    There are several different methods for allocating costs incurred 
by health issuers allowable under statutory accounting principles. The 
NAIC model regulation requires issuers to allocate costs consistent 
with these principles. HHS has therefore not prescribed a standardized 
method for allocating costs beyond the allocation method designated in 
Sec.  158.170. All costs reported by issuers must be allocated 
according to generally accepted accounting methods that yield the most 
accurate results and are well documented. An issuer's allocation method 
must illustrate the costs associated with a specific activity and any 
resulting effect the activity has had on a particular line of business. 
Section 158.170(d) further provides that issuers must maintain records 
containing an explanation of all incurred expenditures allocated as 
non-claims costs and quality improving activities. If the expense is 
related to a specific activity, the allocation of such expenditure must 
be on a direct basis. If an expense is not easily attributable to a 
specific activity, then the expenses must be apportioned based on 
pertinent factors or ratios, such as studies of employment activities, 
salary ratios or similar analyses. Section 158.170(b) provides that any 
shared expenses between two or more affiliated entities must be 
``apportioned pro rata to the entities incurring the expense'' even if 
the expense has been paid solely by one of the incurring entities.
    Each expense that is allocated by an issuer for each State in which 
it is licensed to conduct an insurance business must be appropriately 
attributed using a generally accepted accounting method to each line of 
business in each State, as designated in Sec.  158.170(b). However, all 
Federal taxes paid by a health insurance issuer must be attributed 
proportionately and appropriately to each State in which the issuer 
reports. While Federal taxes are not typically allocated to health 
insurance issuers on a State-by-State basis, for purposes of complying 
with the reporting requirements in Sec.  158.110 all health insurance 
issuers are required to report some percentage of Federal taxes paid on 
their behalf.
    HHS received a number of comments regarding allocation issues in 
response to the April Federal Register solicitation. Several State 
regulators and issuers noted that issuers currently have considerable 
flexibility in establishing and utilizing product and State-by-State 
allocation methods and that such flexibility should be maintained. 
Numerous regulators and issuers also advocated for allowing multiple 
methods of approved allocation, including the current financial 
reporting requirements provided by statutory accounting principles. A 
few State regulators, medical providers and other interested parties 
called for a standardized methodology for allocating administrative and 
quality improvement expenses among States and lines of business. In 
contrast, issuers stated that a revamped reporting methodology would be 
costly, administratively burdensome and less efficient in 
distinguishing a subcontractor's medical versus administrative 
expenses. A few industry groups also indicated that HHS should not 
develop an allocation methodology that is inflexible and inconsistent 
with current statutory accounting requirements and the accounting 
guidance provided under generally accepted accounting principles.
    The NAIC did not mandate the use of a specific methodology for 
apportioning non-claims costs to health insurance issuers. Section 
158.170 adopts this flexible approach and requires health insurance 
issuers to explain how premium revenue is used to pay for non-claims 
expenditures (as provided for in Sec.  158.160). Health insurance 
issuers are required to allocate their non-claims and quality improving 
expenses on a State-by-State basis, and further allocate such expenses 
to each line of business within a State, as stated in Sec.  158.170. If 
an expense is attributable to a specific activity, then an issuer 
should allocate the expense to that particular activity. However, if it 
is not feasible for an issuer to allocate such expenditure to a 
specific activity, then the issuer must apportion the costs using a 
generally accepted accounting method that yields the most accurate 
results. Each reporting health insurance issuer must identify in its 
required report under Sec.  158.110 the specific basis used to allocate 
to each State its reported expenses, and within each State, to each 
line of business which the issuer operates. HHS believes that a clear 
allocation method for all expenses stemming from services provided by 
issuers includes allocation to each line of business as designated in 
Sec.  158.170(c). This level of detailed expense reporting is crucial 
in order to verify that issuers are properly allocating and reporting 
such expenses.

D. Subpart B--Calculating and Providing the Rebate

1. Applicable MLR Standard and States With Higher MLR Standards 
(Sec. Sec.  158.210-158.211)
    Section 158.210 mirrors PHS Act section 2718(b)(1)(A)(i) and (ii) 
by stating the general requirement that issuers must provide their 
enrollees a rebate if their MLR is less than 85 percent in the large 
group market or less than 80 percent in the small group market and 
individual market. While explained in greater detail in subsequent 
sections of Subpart B of this interim final regulation, this means that 
issuers must spend at least 85 or 80 percent, respectively, of each 
premium dollar, as adjusted for taxes and regulatory and licensing 
fees, on reimbursement for clinical services provided to enrollees and 
activities that improve health care quality. Additionally, Sec.  
158.210 acknowledges that the Secretary may, in her discretion, adjust 
the MLR standard that applies in the individual market in a State if 
the Secretary determines, upon application by the State, that the 
application of the 80 percent MLR may destabilize the individual market 
in such State. The requirements related to that statutory provision are 
delineated in Subpart C of this interim final regulation.
    Section 158.211 provides that in States that have established under 
State law a higher MLR standard than that prescribed by section 2718, 
such higher percentage applies to issuers in that State and should be 
substituted for the percentages set forth in Sec.  158.210. In States 
that have established, under State law, a lower MLR standard than that 
of section 2718, the higher percentage set forth in section 2718 
applies to issuers.
2. Calculating an Issuer's MLR (Sec. Sec.  158.220 Through 158.221)
    The NAIC model regulation addresses the calculation of an issuer's 
MLR, and HHS has certified and adopted the NAIC's uniform definitions 
and methodologies. The NAIC, in its model regulation, combines 
calculating the MLR with instructions related to how an issuer should 
aggregate data in certain instances, such as in connection with 
employer groups with blended rates, newer experience (deferring 
reporting of business with less than 12 months' experience), and other 
related issues such as a credibility, or statistical adjustment for 
smaller issuers. The requirements for reporting data and handling 
special circumstances, such as group policies with blended rates, mini-
med plans, expatriate plans, and issuers

[[Page 74880]]

with newer experience, are set forth in Subpart A of this interim final 
regulation. These special circumstances are discussed in section II.B 
of the preamble.
    Sections 158.220 and 158.221 of this interim final regulation 
contain the instructions for calculating an issuer's MLR for each MLR 
reporting year for purposes of determining whether any rebate is owed 
and, if so, in what amount. In the 2013 MLR reporting year, an issuer's 
MLR is calculated using the data for a three-year period, consisting of 
the MLR reporting year whose MLR is being calculated, and the data for 
the two prior MLR reporting years. Numerous commenters strongly support 
the use of a three year, rolling average MLR calculation in determining 
rebates, and some also support beginning it with the first MLR 
reporting year, or 2011. One commenter questioned whether the three 
year MLR was based on averaging three different one-year MLR values or 
based on accumulating experiences over the three-year period and 
calculating an MLR for that three-year period. The Department adopts 
the recommendation that the data should consist of the accumulated 
experience, rather than the average three MLRs.
    For the 2011 and 2012 MLR reporting years, there will not be 
sufficient data reported to use a three-year average. The NAIC has 
addressed this in its model regulation, and in Sec.  158.220(b), HHS 
has adopted the NAIC's approach. For the 2011 MLR reporting year, an 
issuer's MLR will be calculated using only the data reported for the 
2011 MLR reporting year. For the 2012 MLR reporting year, the data that 
should be used in calculating an issuer's MLR depends in part upon 
whether the issuer's experience is credible. Credible experience refers 
to whether an issuer insures a sufficiently large number of lives to be 
statistically valid, and is defined and discussed later in this 
preamble. If an issuer's experience for the 2012 MLR reporting year is 
fully credible, then its MLR for that year is calculated using only the 
data reported for the 2012 MLR reporting year. If an issuer's 
experience for the 2012 MLR reporting year is partially credible or 
non-credible, then its MLR is calculated using the data reported for 
both the 2011 and 2012 MLR reporting years. To prevent double counting, 
an adjustment will be made to incurred claims when any rebate owed for 
the 2012 and 2013 MLR reporting years is calculated using data from 
2011 or 2012, as provided in Sec.  158.221(b)(1).
    With respect to the issue of which portions of the data reported by 
an issuer are to be used to determine the numerator of the MLR and 
which portions of the data reported are to be used to determine the 
denominator of the MLR, the numerator equals the issuer's incurred 
claims and expenditures for activities that improve health care 
quality, and the reporting of data for these categories of expenses is 
detailed in Sec. Sec.  158.140, 158.150 and 158.151. As discussed 
above, Section 158.221(b)(3) provides, for 2011 only, in the case of a 
mini-med plan reporting separately under Sec.  158.120(d)(3) and an 
expatriate plan reporting separately under Sec.  158.120(d)(4), that 
the numerator amount specified in Sec.  158.221(b) shall be multiplied 
by a factor of two. The purpose of this adjustment is to recognize the 
``special circumstances'' applicable to these plans by restating claims 
and quality improvement expense (if any) associated with these types of 
plans so that they are commensurate with the higher administrative 
expenses of these plans relative to premium. These types of plans are 
discussed at greater length under Subpart A.
    The denominator of the MLR equals the issuer's premium revenue 
minus the issuer's Federal and State taxes and licensing and regulatory 
fees. The reporting of data for premium revenue is detailed in Sec.  
158.130 and the reporting of data regarding Federal and State taxes and 
licensing and regulatory fees is set forth in Sec. Sec.  158.161 and 
158.162. Section 2718(b)(1)(A) also provides that the total amount of 
premium revenue used for the denominator of the MLR shall take into 
account payments or receipts for risk adjustment, risk corridors, and 
reinsurance. However, in the reporting requirements related to premium 
revenue in Sec.  158.130, the Department has provided that the premium 
revenue reported be adjusted for these types of payments or expenses. 
Because these issues have been addressed in the cited earlier sections 
of this interim final regulation, there is no need to address them 
again in Sec.  158.221 regarding the calculation of an issuer's MLR.
    This interim final regulation also provides that an issuer's MLR 
must be rounded to the nearest one-tenth of one percentage point, after 
dividing the numerator by the denominator when calculating the MLR. HHS 
has adopted the NAIC's approach in this regard.
3. Credibility Adjustment (Sec. Sec.  158.230-158.232)
    Section 2718(c) of the PHS Act charges the NAIC with developing 
uniform methodologies for calculating measures of the expenditures that 
make up the MLR calculation, and provides that ``such methodologies 
shall be designed to take into account the special circumstances of 
smaller plans, different types of plans, and newer plans.'' To address 
the special circumstances of smaller plans, the NAIC model regulation 
allows smaller plans to adjust their MLRs by applying a so-called 
``credibility adjustment.'' HHS adopts this method of ``credibility 
adjustment'' in Sec.  158.230.
    A credibility adjustment is a method to address the impact of 
claims variability on the experience of smaller plans. All issuers 
experience some random claims variability, where actual claims 
experience deviates from expected claims experience. In a health plan 
with a large customer base the impact of such random deviations is less 
than in plans with fewer insureds. One source of variability is the 
impact of large claims, which are infrequent, but have greater impact 
on financial experience than average or typical claims. Large claims 
have a disproportionate impact on small plans because the higher claim 
cost is spread across a smaller premium base. These random variations 
in the claims experience for enrollees in a smaller plan may cause an 
issuer's reported MLR to be below or above the statutory standard in 
any particular year, even though the issuer estimated in good faith 
that the combination of the premium it projected it would collect and 
the claims it projected would produce an MLR that meets the statutory 
standard.
    The credibility adjustment is a method to address the problem 
associated with this random variation. A credibility adjustment serves 
to modify the reported MLR of an issuer by adding to the reported 
percentage additional percentage points in recognition of the 
statistical unreliability of the reported number. A number of 
stakeholders in the NAIC proceedings have supported credibility 
adjustments in concept, including the American Academy of Actuaries and 
a number of the consumer representatives to the NAIC.
    In evaluating the desirability of including a credibility 
adjustment, it is important to emphasize that health insurance rates 
are the product of assumptions, estimates, and projections, and not of 
calculations based entirely on hard data. When an actuary projects that 
the rate it has calculated will produce an 80 percent MLR, whether in 
fact it will produce an 80 percent MLR depends on whether the 
assumptions the actuary has made--such as those concerning the mix of 
business it will attract, the intensity and frequency with

[[Page 74881]]

which its insureds will use health care services, and unit costs--turn 
out to be correct. All things being equal, it is more likely that those 
assumptions will turn out to be correct when an issuer insures a large 
number of risks rather than a small number.
    Credibility adjustments have advantages and disadvantages. Issuers 
benefit from credibility adjustments because such adjustments--and thus 
the ability to report a higher MLR than what the issuer's MLR would be 
using the methodology that applies to other plans--make it less likely 
that an issuer will be required to pay a rebate. For consumers, on the 
other hand, credibility adjustments eliminate some rebates that would 
otherwise have been paid.
    In general, the smaller the size of the insured population whose 
experience is used to calculate the MLR, the more variable the reported 
MLR will be. Statistical analysis conducted for the NAIC by an 
independent actuarial consulting firm based on historical data for 
companies offering coverage in the group and individual markets 
examined the statistical variation that would be expected in reported 
MLR. The consultants concluded that if a company estimates that its 
premium will produce an MLR of 80 percent, random variation would cause 
the company to pay a rebate of:
    <bullet> 0.9 percent or more in 1 out of every 4 years if it 
insures 75,000 lives,
    <bullet> 2.6 percent or more in 1 out of every 4 years if it 
insures 10,000 lives, and
    <bullet> 8.8 percent or more in 1 out of every 4 years if it 
insures only 1,000 lives.
    After extensive analysis and public discussion, the NAIC adopted a 
credibility adjustment table designed to result in an issuer that 
charges premiums intended to produce an 80 percent MLR to pay a rebate 
less than 25 percent of the time. Toward the conclusion of its public 
proceedings on these issues, the NAIC gave some consideration to 
setting the base credibility factors so that such an issuer would be 
required to pay a rebate less than ten percent of the time. The 
credibility factors in that case would have been roughly twice as large 
as the factors the NAIC adopted. The argument made in favor of making 
this change is that it would reduce the likelihood of requiring a plan 
to pay a rebate simply because of chance variation in claims 
experience. However, it would also have increased the likelihood that a 
plan setting premiums to achieve an MLR that is less than the 
applicable MLR standard would avoid paying a rebate, and it would have 
reduced the size of the rebates that plans pricing below the MLR 
standard would have to pay. The NAIC concluded, and HHS agrees, that 
the credibility factors it adopted more equitably balance the 
consumers' interest in requiring plans that should pay rebates to pay 
rebates against the issuers' interest in minimizing the risk of paying 
rebates as a result of chance variations.
    HHS adopts the NAIC credibility adjustment methodology in Sec.  
158.230. The NAIC recommends that the credibility factors be evaluated 
and updated as the Affordable Care Act reforms are implemented over the 
next several years. HHS concurs with this recommendation and notes its 
intention both to monitor the effects of the credibility adjustment 
and, as appropriate, to update the credibility adjustment method.
    This interim final regulation adopts the approach taken by the NAIC 
by, in Sec.  158.230(c)(3), designating as ``non-credible'' any 
reported MLR that is based on experience from fewer than 1,000 life-
years. Thus, Sec.  158.240(a)(1) provides that issuers with non-
credible experience do not owe rebates because there is no valid data 
to determine that the issuer has failed to meet the MLR standard.
    This interim final regulation also adopts the NAIC's assumption 
that variations of less than approximately one percent are reasonably 
to be expected based on ordinary variation in claims experience of very 
large plans. The experience of such plans is ``fully credible,'' and 
such a plan therefore should be required to pay a rebate based on its 
reported MLR. The model regulation designates as ``fully credible'' any 
reported MLR that is based on experience from 75,000 or more life-
years, and this definition is adopted, as provided in Sec.  
158.230(b)(1) of this interim final regulation.
    The NAIC model regulation provides that a reported MLR that is 
based on experience from 1,000 to 75,000 life-years is ``partially 
credible'' and entitled to a credibility adjustment, as stated in Sec.  
158.230(b)(2) of the interim final regulation. The magnitude of the 
``credibility adjustment'' for ``partially credible'' aggregations is 
intended to represent the amount by which an issuer's reported MLR 
would be expected to vary as a result of random variation in claims 
experience. Under the credibility provisions of the NAIC model 
regulation, which HHS adopts in Sec.  158.232 of the interim final 
regulation, the ``credibility adjustment'' for a specific issuer is the 
product of two components: A ``base credibility factor,'' determined by 
the number of life-years of experience used to calculate the issuer's 
reported MLR; and a ``deductible factor,'' determined by the average 
deductible of the policies whose experience went into the reported MLR. 
The credibility adjustment will be added to the reported MLR, as 
provided in Sec.  158.221(a), before calculating rebates. As stated 
above, the credibility adjustment applies to partially credible 
issuers.
    The base credibility factor recommended by the NAIC is based on an 
actuarial analysis of anticipated claims experience. The results of 
this analysis are summarized in Table 1, below.

[[Page 74882]]

[GRAPHIC] [TIFF OMITTED] TR01DE10.062

    The deductible factor recommended by the NAIC is also based on the 
independent actuarial consulting firm's analysis. It is intended to 
recognize that the variability of claims experience is greater under 
health insurance policies with higher deductibles than under policies 
with lower deductibles. Few people incur claims above $10,000, which 
means that high cost claims represent a much larger portion of the 
total claims experience in a higher deductible policy than in a lower 
deductible policy. As a result, issuers who write a small number of 
high deductible policies are more likely to report a low MLR than an 
issuer who covers the same number of lives under a low deductible 
policy, even if the premium they establish is set to achieve the MLR 
required by section 2718. Therefore, the deductible factor takes into 
account greater variability among high deductible plans. The deductible 
factors recommended by the NAIC are shown in Table 2.
[GRAPHIC] [TIFF OMITTED] TR01DE10.063

    Under the NAIC model regulation, an issuer would use the deductible 
factors from Table 2 to determine a deductible factor for the average 
deductible of the coverage whose experience was used to calculate the 
reported MLR. The factors included in Table 2 were developed by the 
actuarial consultants to the NAIC using methods consistent with 
standards of professional actuarial practice.
    NAIC methodology uses ``linear interpolation'' to determine life 
year factors for experience between the life year categories in table 
1. HHS adopts this methodology in Sec.  158.230. When the number of 
life-years reported by an issuer falls between two numbers on Table 1, 
the base credibility factor is calculated by first determining where, 
by percentage of the difference between those two numbers, the reported 
number of lives falls. Thus if Issuer X reports 4,000 life-years, its 
number of life-years falls 60 percent of the way between 2,500 and 
5,000. To calculate the interpolated adjustment factor it is necessary 
to determine the base credibility factor for the number of lives 60 
percent of the way between 2,500 and 5,000. Therefore, this percentage 
is multiplied by the difference between the base credibility factor 
corresponding to the number of life-years on Table 1; 0.60 x 
(.052-.037) = .009. To find the base credibility factor, this amount is 
then subtracted from the factor corresponding to the lower number of 
lives on Table 1. Thus, 0.052 - .09 is equal to .043, which is the base 
credibility factor for an issuer covering 4,000 lives.
    The deductible factor is based on the average deductible of all 
policies whose experience is included in the reported MLR. When the 
average deductible is greater than $2,500 and is between two of the 
deductible categories shown in Table 2, the NAIC model regulation calls 
for the deductible adjustment to be calculated by linear interpolation. 
In Sec.  158.232 of this interim final regulation, HHS adopts the 
methodology using linear interpolation.
    The NAIC specifies that the number of life-years used to calculate 
the base credibility factor matches the number of life-years that 
comprise an issuer's experience as reported under subpart A. HHS adopts 
this approach in Sec.  158.231. An issuer's credibility adjustment for 
the 2011 MLR reporting year is based on the life-years and weighted-
average deductible for the 2011 MLR reporting year. An issuer's 2012 
MLR reporting year credibility adjustment is based on experience from 
the 2012 MLR reporting year, unless issuer experience for 2012 is less 
than 75,000 life-years. In that circumstance, the 2012 MLR reporting 
year experience is combined with 2011 MLR reporting year experience to 
calculate the 2012 credibility adjustment.
    An issuer's credibility adjustment for 2013 is based on three 
years' experience, comprised of the current MLR reporting year and the 
two previous MLR reporting years. In 2013, an issuer is not eligible 
for a credibility adjustment if (1) the MLR (prior to any

[[Page 74883]]

credibility adjustment) in each of the three MLR reporting years was 
below the MLR standard for each year, and (2) each of the three MLR 
reporting years included 1,000 life-years or more. This exception 
prevents issuers from receiving a credibility adjustment when the 
issuer consistently sets its prices to produce an MLR below the 
statutory 80 percent MLR standard.
    In responding to HHS's request for comments, many issuers, industry 
associations, and State departments of insurance emphasize that to 
avoid requiring issuers to pay rebates due to statistical variations, 
rather than due to their underlying pricing and benefits structure, it 
is important to assess MLRs on sufficient numbers of lives for 
statistical credibility. Commenters also argue that requiring issuers 
to pay rebates when statistical variations lead to surpluses (low MLRs) 
but requiring issuers to absorb losses when statistical variations lead 
to losses (high MLRs) will lead to product volatility, market exit, and 
inadequate levels of surplus to ensure solvency. HHS agrees that 
rebates should be based on the underlying premium pricing, rather than 
chance variation in claims experience. But as noted above, any 
credibility adjustment can also serve to deprive insureds of rebates to 
which they would otherwise be entitled under the Affordable Care Act. 
HHS has concluded that the NAIC credibility adjustment methodology 
provides an acceptable balance between the interests issuers have in 
not paying rebates when a low MLR is the result of ordinary variation 
in claims experience, and the interests consumers have in receiving 
rebates when issuers provide coverage and establish prices that do not 
result in MLRs, and therefore the value, required by the Affordable 
Care Act.
4. Rebating Premium if MLR Standard Not Met (Sec.  158.240)
    Section 158.240, subsections (a), (b) and (c), delineates the 
general requirement regarding rebates, the calculation of the rebate 
amount, and the time frame for payment of any rebate that may be due. 
Section 158.240(a) simply provides that if an issuer does not meet the 
applicable MLR standard set forth in Sec.  158.210 and, if applicable, 
Sec.  158.211, then the issuer must provide a rebate to each enrollee 
unless the issuer has too little experience to calculate a reliable 
MLR. As discussed above, because an issuer that has fewer than 1,000 
covered lives does not have sufficiently credible data to determine 
that the MLR standard has not been met, a non-credible issuer is not 
required to pay any rebates.
    Section 158.240 explains the amount of the rebate due to enrollees. 
The Affordable Care Act provides a rebate that is the amount by which 
the applicable MLR standard exceeds the issuer's actual MLR multiplied 
by ``the total amount of premium revenue (excluding Federal and State 
taxes and licensing or regulatory fees and after accounting for 
payments or receipts for risk adjustment, risk corridors, and 
reinsurance * * *).'' This language describing premium revenue as the 
premium paid minus taxes and other adjustments is the same as statutory 
language describing the denominator of the MLR. The NAIC model 
regulation matches the statutory methodology, and HHS adopts this 
methodology. Therefore, the rebate paid to each enrollee is based on 
the earned premium paid by or on behalf of the enrollee minus taxes and 
other permissible adjustments.
    The Affordable Care Act requires the issuer to ``provide an annual 
rebate to each enrollee under such coverage, on a pro rata basis.'' The 
NAIC determined, and the Department concurs, that this requirement is 
most simply met by requiring the rebate returned to the enrollee to be 
proportional to the amount of premium paid by or on behalf of the 
enrollee. As noted above, the total rebate owed by the issuer is 
required, by statute, to be a percentage of the issuer's total earned 
premium. An individual who was covered by an issuer for only three 
months would have paid substantially less than an individual who was 
covered by the issuer for the entire MLR reporting year. It would be 
unfair to pay both individuals the same dollar rebate. Similarly, an 
individual or group that purchases coverage from the issuer that has a 
higher deductible but lower premium should not receive the same dollar 
rebate as an individual or group that paid a higher premium for a 
product with a lower deductible. The rebate paid to a policyholder or 
enrollee would be based upon the amount of premium paid minus taxes and 
other permissible adjustments, multiplied by the amount by which the 
issuer MLR is below the applicable MLR standard; the result is the 
actual rebate.
    For example, take an issuer who owes a five percent rebate to its 
enrollees in the individual market. An enrollee may have paid $2,000 in 
premiums for the MLR reporting year. If the Federal and State taxes and 
licensing and regulatory fees that may be excluded from premium revenue 
as provided in Sec. Sec.  158.161(a), 158.162(a)(1) and 158.162(b)(1) 
are $150 for a premium of $2,000, then the issuer would subtract $150 
from premium revenue, for a base of $1,850 in premium. The enrollee 
would be entitled to a rebate of five percent of $1,850, or $92.50.
    Section 158.240(d) requires issuers to provide any rebates that are 
due no later than August 1 following the end of the MLR reporting year. 
Since the report is due by June 1 of the year following the MLR 
reporting year, this allows issuers two full months (a) to provide any 
rebate that may be due, (b) for the group market, to notify their 
employer clients to arrange for the distribution of the rebates, if 
applicable, and (c) to prepare and send the notice of rebate that is 
required by Sec.  158.250.
5. Form of Rebate (Sec.  158.241)
    While the NAIC model regulation does not specifically address some 
of the administrative details of section 2718(b)(1)(A) of the PHS Act, 
which requires an issuer offering group or individual health insurance 
coverage to provide an annual rebate to each enrollee if the issuer's 
MLR is less than the statutory minimum, the NAIC advisory group's 
proposals in this regard have been adopted. The statute does not 
specify the particular form of rebate that is to be provided to 
enrollees. For example, must the rebate be provided in the form of cash 
or check, or may it be provided through a credit to premium? Does the 
requirement differ based on whether the enrollee to whom a rebate is 
owed is a current or former enrollee? Section 158.241 of this interim 
final regulation addresses the method by which an issuer must provide 
any rebate owing to enrollees and the issuer has the choice as to form 
of the rebate for then-current enrollees but not for former enrollees, 
who must receive an actual payment.
    Several commenters addressed the administrative expenses involved 
in distributing rebates. Although the NAIC model regulation does not 
specifically address the form in which an issuer must disburse rebates, 
an NAIC advisory group suggested that an issuer should be able to 
choose whether to disburse rebate payments to current enrollees as a 
premium credit or a cash lump sum. The NAIC advisory group also 
proposed that an issuer should have to disburse rebate checks to former 
enrollees. HHS considered the comments it received and has concluded 
that the proposals made by the NAIC advisory group may reduce the 
administrative burden felt by an issuer in providing rebates to its 
enrollees.
    Section 158.241(a) of this interim final regulation thus states 
that an issuer may choose to provide current enrollees with a rebate in 
the form of a premium credit (i.e., reduction in a premium

[[Page 74884]]

owed), lump-sum check, or, if an enrollee paid by credit card or debit 
card, by lump-sum reimbursement to the same account that the enrollee 
used to pay the premium. We believe that this ensures that enrollees 
receive any rebate owing while giving issuers the ability to provide 
the rebate in a way that has the least administrative burden. If an 
issuer chooses to provide a premium credit to a recipient, the issuer 
must apply the full amount of the rebate owing to the first premium due 
on or after August 1. If the rebate exceeds the amount of the first 
premium due on or after August 1, the issuer must apply any overage to 
succeeding premium payments until the entire rebate has been credited. 
With respect to rebates owing to former enrollees, Sec.  158.241(b) 
requires the rebate to be made in a lump-sum, but allows an issuer the 
flexibility to provide it by check or using the same method that was 
used for payment of the premium, such as credit card or debit card. 
Regardless of the method used to pay rebates, all enrollees eligible 
for rebates must be notified as required by Sec.  158.250.
6. Recipients of Rebates (Sec.  158.242)
    Section 2718(b) requires an issuer to provide a rebate to each 
enrollee on a pro rata basis if the issuer has not met the applicable 
MLR standard. However, it does not prescribe how rebates must be 
distributed. This interim final regulation establishes methods for 
distributing rebates that are efficient and cost-effective, and that 
ensure that enrollees receive any rebate to which they may be entitled.
    The NAIC, in an Issue Resolution Document on which it did not vote, 
discussed that the rebates should be provided to the group policyholder 
and that the group policyholder should be advised that enrollees may 
have a claim to some or all of the rebate to the extent that they have 
contributed to the premium. Numerous commenters also suggested that any 
rebate should go to the company or person who actually paid the 
premium, and not to the enrollee. They point out that under a group 
policy the employer often pays a portion, or even all, of the premium. 
In addition, when an employee pays a portion of the premium, it is 
generally the employee and not every enrollee in the employee's family 
who makes payment. This concept applies in the individual market as 
well; it is often one family member who pays the premium on behalf of 
all enrollees in the family. The Department agrees with the NAIC's and 
the commenters' concerns. A technical reading of section 2718(b)(1)(A) 
requires that the rebate shall be provided ``to each enrollee under 
such coverage, on a pro rata basis.'' However, the purpose of the 
section 2718 is to ensure that value is achieved for the premium paid. 
It would frustrate the purpose of the section to deprive those who 
actually paid premiums of the rebate, and to instead provide a windfall 
to those who did not pay premiums with the ``value'' that was returned 
by the issuer. Consistent with the NAIC discussion, HHS therefore 
interprets this provision as requiring any rebate be provided on a pro 
rata basis to the person or entity that paid the premium on behalf of 
the enrollee. This requirement is addressed in Sec.  158.242.
    Several comments HHS received in response to its April request for 
information pertaining to this regulation also pointed out that group 
policyholders may be in a better position to determine the rebate 
amount each individual enrollee should receive. They suggested that 
issuers be permitted to pay rebates to group policyholders for 
distribution to enrollees. The Department agrees that group 
policyholders and subscribers are in a better position than issuers to 
fairly distribute rebates to individual enrollees given that it is the 
group policyholders and subscribers, and not the issuers, who know the 
extent to which the enrollees made the original premium payments. 
However, the statute provides that it is the issuer's obligation to 
provide the rebate, if any.
    HHS has adopted an approach which satisfies both the statutory 
requirement that an issuer provide any rebates and the practical 
reality that group policyholders and subscribers are in a better 
position to distribute any rebates. Section 158.242 of this interim 
final regulation allows an issuer to enter into an agreement with a 
group policyholder to distribute the rebates on behalf of the issuer. 
HHS invites public comment on to whom rebates should be paid.
    The regulation specifies that, regardless of whether an issuer 
provides rebates to enrollees directly or indirectly through a group 
policyholder, an issuer must take steps to ensure that each enrollee 
receives a rebate that is proportional to the amount of premium paid by 
that enrollee and that the group policyholder does not retain more of 
the rebate than is proportional to the amount of premium it paid.
    Therefore, this interim final regulation allows an issuer to 
delegate its rebate distribution functions to a group policyholder, but 
provides that the issuer remains liable for complying with all of its 
obligations under the statute and maintains records received from the 
group policyholder demonstrating that rebates were accurately 
distributed.
    7. De Minimis Rebates (Sec.  158.243)
    Although the NAIC model regulation does not specifically address de 
minimis rebate payments because the distribution of rebates was outside 
the scope of the NAIC's statutory mandate, an NAIC actuarial subgroup 
suggested that issuers should not be required to provide rebates in 
minimal amounts that are largely of symbolic value. It argued that 
setting the minimum threshold somewhere in the range of $1 to $20 
should be sufficient to avoid requiring largely symbolic rebates to 
enrollees. HHS agrees with this approach.
    Section 2718(b) is also silent on the subject of whether there is a 
de minimis amount below which issuers need not pay a rebate to an 
enrollee. Without a minimum threshold, each enrollee would receive the 
rebate owed to him or her, but the cost of processing and distributing 
the rebate might be greater than the amount of the rebate.
    The Department received several comments from issuers and others 
who recommended that HHS set a minimum threshold for issuer payment of 
rebates because of this potential for relatively high administrative 
expenses associated with the provision of very small rebates.
    We agree that it does not make sense for issuers to provide rebates 
when the administrative cost of providing them exceeds their value to 
enrollees. Thus, Sec.  158.243 provides that an issuer need not provide 
rebates when the combined dollar amount of a rebate owed to the 
policyholder and subscribers under a group policy, or to the subscriber 
in the individual market, is less than five dollars per subscriber 
covered by the policy. Five dollars is an amount that is commonly used 
by States when setting de minimis levels for issuer refunds.
    Although each de minimis rebate may seem insignificant, the 
aggregate amount of such rebates by market type may be quite 
substantial. Thus, consistent with the rebate requirements of the 
Affordable Care Act, issuers should not be allowed to retain these 
unpaid rebate funds, which belong to enrollees. Furthermore, if issuers 
retained the unpaid rebate funds, it would in essence lower their MLR. 
Instead, issuers must aggregate the de minimis rebates and distribute 
them in equal amounts to all then-current enrollees who receive a 
premium credit.
8. Unclaimed Rebates (Sec.  158.244)
    The Affordable Care Act does not specifically address the situation 
of rebates being unclaimed. This situation

[[Page 74885]]

is likely to occur either because an issuer has not been able to locate 
certain enrollees, or enrollees have not redeemed their rebate 
payments.
    Some consumer representatives recommended that an issuer be 
required to make all reasonable efforts to provide a rebate to an 
enrollee and that an issuer be prohibited from keeping any unclaimed 
funds. At least one consumer group recommended that such funds be 
directed to a State consumer assistance program that has been approved 
by the Department, or if such a program is unavailable, to the 
Department itself. Another group recommended that rebates for any 
individuals who cannot be located should be applied toward reduction of 
premiums for all policyholders in the subsequent plan year.
    We agree that an issuer should be required to make a good faith 
effort to locate enrollees and to distribute to them any rebate that is 
owed. This requirement is reflected in Sec.  158.244. We also believe 
that an issuer should be prohibited from retaining unclaimed rebates. 
However, unclaimed rebates will be subject to relevant State law 
provisions.
9. Notice of Rebates to Enrollees (Sec.  158.250)
    The Affordable Care Act and the NAIC model regulation provide that 
an issuer must provide enrollees with rebates if its MLR falls below 
the statutory standard, but neither specifies what information should 
accompany a rebate. Section 158.250 of this interim final regulation 
requires issuers to provide enrollees with a rebate notification along 
with any rebate check or premium credit.
    There are several reasons for this notification. Enrollees may not 
understand why they are receiving a rebate and may not be familiar with 
the significance of the MLR and the rebate requirement in the 
Affordable Care Act. Without the information provided by this 
notification, enrollees have no explanation as to how rebates are 
calculated. In addition, MLR transparency is a way to educate consumers 
and promote informed decision-making in the purchasing of health 
insurance.
    The rebate notification must accompany the rebate check or be sent 
at the same time as the premium credit is applied. The rebate 
notification must include a brief explanation of what an MLR is, why 
the Affordable Care Act created the policy (for example, increased 
transparency, incentive to lower premiums), and why the enrollee is 
receiving a rebate. It must also include the aggregate amount of 
premium revenue reported by the issuer during the MLR reporting year, 
the issuer's MLR (taking into account any adjustment allowed by the 
regulation), the required MLR threshold, the percentage of premium 
being rebated, and the total amount being paid or credited to 
enrollees, including the amount paid or credited to an employer based 
on its having paid all or a portion of the premium. In addition, the 
notification to enrollees must explain that rebates to current 
enrollees are being provided in the form of premium credit, and that 
rebates to former enrollees are being provided either by check or in 
the same form as the premium was paid. For example, an issuer has the 
option of reimbursing enrollees who paid the premium by credit card or 
debit card by applying the rebate amount back to the credit or debit 
card. The form of the rebate notification will be established by the 
Secretary and published in guidance.
    HHS is not requiring issuers who do not have to provide a rebate to 
provide notification to enrollees about the MLR and the fact that no 
rebate is owed. However, issuers who do meet the MLR standard may 
choose to provide such notice to their enrollees.
10. Reporting Rebates to the Secretary (Sec.  158.260)
    Section 2718(b) of the PHS Act is meant to ensure that consumers 
receive value for their premium payments, and does so by requiring an 
issuer that does not meet a specified MLR to rebate a portion of the 
premium to enrollees. In order to provide for appropriate oversight and 
enforcement for which regulations are specifically authorized by 
section 2718(b)(3), HHS needs the ability to validate an issuer's 
calculation and distribution of rebates. Accordingly, the interim final 
regulation prescribes certain data retention, data access, and 
reporting requirements.
    Subpart A of this interim final regulation requires an issuer to 
report to the Secretary data concerning premium revenue, how premium 
revenue is spent, and the various categories of expenses that go into 
determining the issuer's MLR. In Subpart B, the Department implements 
the statutory requirement for rebates to enrollees, and as part of this 
implementation, requires issuers to report to the Secretary certain 
information regarding rebates.
    The interim final regulation requires issuers to report, for each 
MLR reporting year, information regarding the rebates it makes to 
enrollees. Consistent with the reporting requirements in Subpart A, 
Sec.  158.260(b) requires that the information reported regarding 
rebates be aggregated by State, and by the large group, small group, 
and individual markets within a State. The information required 
includes:
    (1) the number and percent of enrollees who receive a rebate;
    (2) the amount of rebates provided to enrollees, including a 
breakdown of how much of the rebates were paid to policyholders and how 
much of the rebates were paid to subscribers;
    (3) the amount of de minimis rebates that were aggregated and a 
breakdown of how they were disbursed to enrollees; and
    (4) the amount of unclaimed rebates, a description of the good 
faith efforts that were made to locate the applicable enrollees, and a 
description of how the unclaimed rebates were disbursed.
    HHS considered several options for the timing of reporting the 
information required by Sec.  158.260. In doing so, HHS has tried to 
balance the need for timely information and the desire to minimize the 
administrative burden on issuers. Almost all of the information 
required by Sec.  158.260 should be available to issuers at the time 
they submit the report required under Sec.  158.110 for each MLR 
reporting year. Thus, for that set of information, the Department is 
requiring that it be submitted with the report required under Sec.  
158.110. The amount of unclaimed rebates would be the only information 
that would not be available to the issuer at the time it reports its 
data for the MLR reporting year, since the issuer needs time to make a 
good faith effort to locate former enrollees and to know if certain 
enrollees fail to cash their rebate checks. HHS is requiring that this 
information be submitted with the report required under Sec.  158.110 
for the subsequent MLR reporting year.
11. Effect of Rebate Payments on Solvency (Sec.  158.270)
    Section 158.270 addresses concerns expressed in some comments that 
the obligation to pay rebates might cause an issuer's surplus to 
decline to levels threatening its solvency. The NAIC also raised 
concerns about issuer solvency in its October 13, 2010 letter to the 
Secretary. Issuer solvency is, of course, an important consideration 
and is a major focus of State insurance regulators. Consistent with the 
NAIC's concern, this interim final regulation provides, therefore, that 
the Secretary may permit the payment of rebates by an issuer to be 
deferred if the insurance commissioner in its State of domicile informs 
the Secretary that the timely payment of rebates would cause the 
issuer's risk based capital (RBC) level to

[[Page 74886]]

fall to a level that causes concern about its solvency.
    Section 158.270 provides that a State's insurance commissioner, 
superintendent, or other responsible official must notify the Secretary 
if the payment of rebates by a domestic issuer will cause the issuer's 
RBC level to fall below specific regulatory thresholds. The State must 
provide the Secretary with the domestic issuer's RBC reports for the 
current year and the prior two years, along with a calculation of the 
amount of rebates that would be owed by the issuer.
    Section 158.270 provides that the Secretary will review this 
information, along with any other information requested from the 
issuer, and will determine whether the timely payment of rebates would 
cause the issuer's RBC level to fall below the specified regulatory 
action level. When the Secretary makes this determination, the 
Secretary will provide that the issuer must pay these rebates, with 
interest, in a future year in which payment of the rebates would not 
cause the issuer's RBC level to fall below the specified regulatory 
action level.

E. Subpart C--Potential Adjustment to the Medical Loss Ratio for a 
State's Individual Market

1. Introduction
    Section 2718(b)(1)(A) of the PHS Act establishes MLR standards for 
insurance coverage sold in the individual market, the small group 
market, and the large group market. For the small group and individual 
markets, the MLR standard is 80 percent. For the large group market, 
the MLR standard is 85 percent. However, if a State sets a higher MLR 
within its State, that higher MLR must be met.
    Section 2718(b)(1)(A)(ii) also provides that ``the Secretary may 
adjust'' the 80 percent level with respect to the individual market of 
a State ``if the Secretary determines that the application of such 80 
percent may destabilize the individual market in such State.'' The PHS 
Act does not, however, define ``destabilize the individual market'' or 
provide the process or criteria for making a determination regarding 
potential destabilization of that market. In addition, the section does 
not specify the kind or amount of adjustment the Secretary may make.
    Subpart C of this interim final regulation implements this 
provision of section 2718(b)(1)(A)(ii) by addressing these important 
considerations, and adopts the recommendations of the NAIC on this 
issue. It sets forth the process by which the Secretary may exercise 
the authority provided under section 2718(b)(1)(A)(ii). It also 
establishes the criteria the Secretary will apply in determining 
whether to lower the MLR standard applicable to the individual market 
in a State.
2. Subpart C's Approach and Framework
    HHS has received comments from many interested parties regarding 
the application of MLR standards in the individual market and the 
process for granting requests to adjust the required standard.
    Notably, in an October 13, 2010 letter to the Secretary, the NAIC 
observed that the MLR standard ``may enhance the value of plans for 
consumers and improve carrier accountability for spending and pricing 
decisions,'' but also that improper application of it ``could threaten 
the solvency of insurers or significantly reduce competition in some 
insurance markets.'' The NAIC further stated that ``the threshold 
consumer protection is ensuring a health insurance company is 
solvent.'' HHS agrees with the NAIC on the importance of maintaining 
issuer solvency. If an insurance company does not have enough money to 
pay claims, then any MLR standard becomes irrelevant.
    Further, while the focal point of any market destabilization 
analysis must be the manner in which any requested MLR adjustment may 
affect consumers, as the NAIC points out, consumers have numerous 
interests that extend beyond whether they will receive rebates, 
including an interest in multiple health insurance options. To that 
end, this interim final regulation adopts the recommendation the NAIC 
Consumer Representatives made in an October 25, 2010 letter to the 
Secretary, that the Secretary ``establish a formal process that 
provides ample opportunity for consumers and consumer advocate input 
and involvement in determining whether and to what extent adjustments 
should be made in any State.'' The Department believes the 
recommendation by the Consumer Representatives should apply to all 
stakeholders, including issuers, agents and brokers, health care 
providers, as well as consumers, and has therefore established a 
process by which all stakeholders may provide information and input.
    This interim final regulation does not require the Secretary to 
find that adherence to the 80 percent MLR standard is certain to result 
in market destabilization in order to grant an adjustment from it. Nor 
does it allow the Secretary to grant an adjustment in the case where 
market destabilization is a remote possibility. Rather, this interim 
final regulation both allows and requires an adjustment to a State's 
MLR to be granted when there is a reasonable likelihood that market 
destabilization, and thus harm to consumers, will occur.
    Subpart C establishes the procedure and criteria the Secretary will 
use to assess requests to adjust the MLR standard that applies in the 
individual market in a State. We note that the law allows adjustments 
of the MLR for the individual market in a State and does not apply to 
the small group market or to the large group market.
    Section 158.301 states the criteria the Secretary will apply in 
considering requests to adjust the minimum individual market MLR 
standard applicable to a State. Subpart C then proceeds to address the 
four major issues that HHS believes are relevant to any potential 
requests for adjustments to the statutory MLR standard. The first is 
who may submit a request and the duration of such a request. The second 
is the information the submitter of such a request will be required to 
supply. The third is the criteria the Secretary will use in making her 
decision regarding the request. The fourth is the process by which the 
Secretary will receive information and make her determination. Each of 
those issues is discussed separately below.
    Finally, in its October 13, 2010 letter, the NAIC did not recommend 
a national transition, but instead wrote that ``while some states seek 
national relief from the 2011 MLR, all states recognize that 
transitional relief may be appropriate for some state insurance 
markets.'' (Emphasis added.) Commenters in the industry have also 
advocated for a ``national'' transition or ``national'' relief from the 
MLR standards. As indicated above, the Affordable Care Act does not 
contemplate or provide for such relief in the context of Sec.  158.301 
which, as required by section 2718(b)(1)(A)(ii), provides for State-
specific relief.
    However, it is clear that other sections of this regulation do in 
fact provide for national rather than State-specific relief from the 
immediate application of the MLR standards, and not just in the 
individual market. The credibility adjustments provided for in 
Sec. Sec.  158.230-158.231 are national in scope and apply without 
regard to State-specific market conditions. First, the credibility 
adjustments result in many issuers being presumed to meet the MLR 
standards altogether because of their small size. Second, the 
adjustments add up to 8.3 percent to an issuer's reported MLR for 
smaller plans that are not

[[Page 74887]]

presumed to meet the MLR standard already. Third, issuers with policies 
that have large deductibles may receive an additional adjustment of up 
to 6.1 percent on top of the 8.3 percent. Other components of the MLR 
formula, such as treatment of expenses for quality improving activities 
and treatment of Federal and State taxes, also better enable issuers to 
meet the MLR standard. In addition, the process set out in Subpart C 
provides further opportunity to modify MLR standards in the individual 
market to address state-specific circumstances. The rationale for a 
national transition--which is to provide accommodation for issuers to 
meet the MLR standards--we believe is satisfied by these many 
adjustments.
3. Who May Request Adjustment to the MLR and Duration of Request 
(Sec. Sec.  158.310-158.311)
    Section 158.310 provides that a request for an adjustment to the 
MLR standard for a State must be submitted by that State's insurance 
commissioner or other applicable State official. State insurance 
commissioners have valuable local knowledge of their State's insurance 
market and share a responsibility to protect consumers, which makes 
them best qualified to attest to the impact of the MLR standard on 
consumers within their State. State insurance regulators also often 
have considerable power to compel or influence issuers to take steps 
that may reduce the risk of market destabilization.
    It is appropriate for three reasons that requests for an adjustment 
to the MLR standard come from State insurance commissioners on behalf 
of the State individual insurance market as a whole. First, the statute 
allows such an adjustment only for all issuers in the individual market 
in a State; it does not allow an adjustment for specific issuers. 
Second, only the State commissioner has knowledge of all issuers' 
experience and market conduct in the State and as to any action the 
State might deem appropriate to address any potential for market 
destabilization. Third, State insurance commissioners have 
responsibility for protecting the interests of the general public, 
policyholders, and enrollees within their respective States.
    Section 158.311 provides that a request for an adjustment to the 
MLR standard may be for one, two, or three MLR reporting years. This 
permits a State to request an adjustment for up to three years, as 
deemed appropriate by the State, based on the condition of its 
individual health insurance market. Allowing for multi-year 
adjustments, when necessary, will provide certainty to issuers within 
the State regarding the applicable MLR standard, which in turn enhances 
stability of the market.
4. Required Information (Sec. Sec.  158.320-158.323)
    Subpart C requires the applicable State official to provide the 
Secretary with information on the applicant State and the market that 
is the subject of the request. Section 158.323 requests contact 
information for the person submitting the State's request. This 
information is needed because the Secretary anticipates working closely 
with individual States regarding their requests.
    The remaining information requested by Subpart C falls into two 
general categories. The first is information about how the individual 
health insurance market is organized and functions in the State. 
Section 158.321 requests the following structural and operational 
information about the submitting State's individual health insurance 
market:
    [dec221] The State's current MLR standard for the individual 
market, if any. Such an MLR is relevant to determining the effect the 
statute's 80 percent MLR may have in the State.
    [dec221] Any requirements that an issuer seeking to withdraw from 
the State's individual health insurance market must meet before doing 
so.
    [dec221] Any limitations imposed by the State on issuers regarding 
rating based on health status.
    [dec221] Mechanisms available in the State to provide consumers 
with options in the event an issuer in the individual market withdraws 
from the State, such as a guaranteed-issue or issuer-of-last-resort 
requirement or a State-operated high-risk pool.
    [dec221] Operational and financial information about the issuers 
operating in the State's individual market, including the capacity of 
incumbent issuers to write additional business, the premiums such 
issuers charge and the benefits they offer, and the amount they pay to 
agents and brokers.
    Notably, in its October 13, 2010 letter to the Secretary, the NAIC 
stated that among the factors State regulators would consider in making 
their own determinations as to whether application of the statutory 80 
percent MLR standard would destabilize the individual market are the 
``potential impact on premiums paid by current policyholders,'' the 
``potential impact on benefits and cost-sharing of existing products,'' 
and ``the potential impact on consumer access to agents and brokers.'' 
This information will assist the Secretary in understanding the 
insurance market in the State submitting a request and will enable her 
to better address the criteria for assessing the request set forth in 
this subpart.
    The second general category of information a State must provide is 
its own assessment of how best to address any risk of destabilization 
through an adjustment to the MLR standard. In its October 13 letter, 
the NAIC stated that ``when recommending to HHS that a transitional 
exception should be applied to a state or insurance market, the 
regulator shall also propose a solution to the factors on which the 
recommendation is based.'' The NAIC also suggested that HHS give 
deference to its analysis and recommendations. HHS agrees with the NAIC 
that, just as a State commissioner is best qualified to request an 
adjustment to the MLR standard, a State commissioner seeking an MLR 
adjustment is also best qualified to suggest an appropriate alternative 
MLR standard for each of the reporting years for which the State is 
requesting an adjustment. Thus, Sec.  158.322 further requires any 
request for an MLR adjustment to estimate the rebates that would be 
paid under the 80 percent individual market MLR standard and under the 
alternate proposal a State official submits for each year for which the 
State is requesting an adjustment.
    Section 158.320 also provides some flexibility in the event certain 
data are unavailable or collection of certain data is unduly 
burdensome. In such situations, a State may provide notice of this to 
the Secretary and the Secretary may request alternative supporting data 
or move forward with her determination on the State's request without 
the data the State is unable to provide.
5. Assessment Criteria (Sec.  158.330)
    Section 158.330 sets forth the criteria the Secretary will use in 
determining the risk of destabilization. It does not set forth a single 
test for determining that risk, but rather states that the Secretary 
may consider five main criteria in assessing such risk.
    The first criterion the Secretary will consider, as set forth in 
Sec.  158.330(a), is the number of issuers reasonably likely to exit 
the individual market or cease offering specific products in a State 
absent an adjustment to the 80 percent MLR and the resulting impact on 
competition in the State. In making this determination, the Secretary 
may consider (1) each issuer's MLR relative to an 80 percent MLR, (2) 
each issuer's profitability and risk-based capital level, (3) the 
requirements and limitations within the State with respect to market 
withdrawals, and (4) the number of

[[Page 74888]]

issuers that may not be required to pay rebates pursuant to Sec.  
158.240.
    Second, the Secretary may consider the number of individual market 
enrollees covered by issuers that are reasonably likely to exit the 
State absent the adjustment. All other things being equal, the greater 
the number of policyholders in a market who are enrollees of issuers 
reasonably likely to exit the market, the greater the likelihood of 
market destabilization.
    Third, the Secretary will consider whether, absent an adjustment to 
the MLR standard, consumers may be unable to access insurance agents or 
brokers. Access could be restricted if, in order to comply with MLR 
standards, issuers reduced compensation to agents or brokers to the 
point where agents or brokers were not available to assist consumers in 
finding coverage and other options for consumers were limited. In its 
October 13th letter, the NAIC noted the important role that agents and 
brokers will play in the next four years as markets transition to 
Exchanges, and encouraged HHS to ``recognize the essential role served 
by producers and accommodate producer compensation arrangements in any 
MLR regulation promulgated.'' This criterion recognizes that role.
    Fourth, the Secretary will consider the alternate coverage options 
available within the State for enrollees of issuers that are reasonably 
likely to exit the market--or as the NAIC puts it in its October 13 
letter, she will consider ``the ability of consumers to find easily 
affordable products in the State should their carrier leave the State 
market.'' Section 158.330(d) provides that, in assessing alternative 
coverage options, the Secretary will take into account (1) any 
requirement that issuers who exit the State's individual market must 
have their block(s) of business assumed by another issuer, (2) which 
issuers may remain in the State if the adjustment request were denied, 
and the breadth and price of the products offered by such issuers, (3) 
the capacity of incumbent issuers to write additional business, (4) the 
mechanisms, such as guaranteed-issue products, an issuer of last 
resort, or a State high risk pool, available to the State to provide 
coverage to consumers to the extent, if any, that issuers withdraw from 
the market, and (5) any authority the insurance commissioner might have 
that would help stabilize the State's individual insurance market.
    Fifth, the Secretary will consider the impact on premiums charged, 
the benefits offered, and the cost-sharing provided to consumers by 
issuers remaining in the market in the event one or more issuers were 
to withdraw from the market. For example, premiums may rise if the loss 
of one or more issuers reduced competition to an extent that allowed 
remaining issuers to increase premiums beyond what competitive 
conditions would have allowed.
    Section 158.330 also states that the Secretary will consider any 
other relevant information submitted by the State's insurance 
commissioner, superintendent, or comparable official in the State's 
request.
6. Process (Sec. Sec.  158.340 Through 158.350)
    Section 158.340 provides that the request for adjustment must be 
submitted in electronic format, and Sec.  158.340(a) provides that all 
the information that Subpart C requires in support of a request must be 
submitted electronically. HHS has determined that these requirements 
are necessary if, as the PHS Act envisions and the public interest 
demands, State requests for MLR adjustments are to be handled as 
expeditiously as possible. Section 158.340(b) permits a State, solely 
at its option and only if it wishes, also to submit to the Secretary a 
copy of its request by regular or express mail.
    Section 158.341 provides that the State's request will be promptly 
posted on the Secretary's healthcare.gov website. In addition, Sec.  
158.342 states that the Secretary will invite public comment upon the 
request when it is posted, and will, when assessing the request, 
consider any comments filed by the public within 10 days of that 
posting. Section 158.343 provides that any State that submits a request 
may, at its option, hold a public hearing and create an evidentiary 
record with respect to its request. If the State does so, the Secretary 
will consider the evidentiary record of the hearing in making her 
determination as to the State's request for an adjustment. Section 
158.344 provides that the Secretary may also hold a public hearing with 
respect to a State's request, at the Secretary's discretion. HHS 
believes that a transparent yet expeditious process will allow all 
interested parties to provide input while satisfying the need to come 
to a prompt determination.
    Once the Secretary determines that the request has sufficiently 
satisfied the information required by the interim final regulation and 
the public comment period has expired, the Secretary will make a 
determination within 30 days as to whether to grant a State's request 
for an adjustment to the MLR standard. Section 158.345 also allows the 
Secretary to extend that 30-day period up to an additional 30 days at 
her discretion. The Secretary believes that it is in the interests of 
both issuers and consumers in a State to have certainty about the 
applicable MLR for the individual market in the State at the earliest 
practicable date.
    Section 158.350 provides that a State submitting a subsequent 
request for an adjustment shall ``submit information as to what steps 
the State has taken since its initial and other prior requests, if any, 
to increase the likelihood that enrollees who have health coverage 
through issuers that are considered likely to exit the State's 
individual market will receive coverage at a comparable price and with 
comparable benefits if the issuer does exit the market.''
    A State that disagrees with the Secretary's initial decision 
regarding its request for an adjustment to the statutory 80 percent MLR 
standard may request reconsideration of a denial if it does so in 
writing within 10 days of the initial decision. Section 158.345(b) 
provides that the Secretary will issue her determination on the request 
for reconsideration within 20 days of receiving the request. Section 
158.345(a) makes clear that a State may include any additional 
information it wishes in support of its reconsideration request.
    The process established in Subpart C seeks to give States and 
interested parties full opportunity to present all information 
necessary and helpful to a determination of requests for adjustments to 
the statutory 80 percent MLR standard while ensuring that States and 
issuers will know as early as possible the standard that issuers in the 
State will be required to meet.
7. Public Comments
    In creating this framework for considering a State's request for an 
adjustment of the MLR for the individual market, HHS reviewed and took 
into consideration the public comments submitted in response to its 
Notice. Only a relatively few of the comments received mentioned the 
authority granted to the Secretary regarding potential destabilization 
in a State's individual market and offered suggestions with respect to 
the process and criteria for determining destabilization.
    Commenters specifically suggested that markets may become 
destabilized if issuers choose to withdraw from the market or terminate 
or materially change existing policies. Commenters also suggested that 
markets may become destabilized if customers losing coverage have 
insufficient product choice or are unable to find new

[[Page 74889]]

coverage that covers pre-existing conditions. The determination whether 
to adjust the MLR standard should, commenters suggested, take into 
account guaranteed issue options, issuers of last resort, requirements 
that issuers offer individual coverage, and eligibility flexibility 
under State high risk pools. HHS agrees that these are important 
considerations, and has incorporated into this Subpart consideration of 
both the potential causes of destabilization and the systems in place 
that mitigate destabilization risks.
    Other commenters suggested potential warning signals of market 
destabilization. These included volatility in premium rates, decreases 
in issuers' reported capital levels, increases in assumption 
reinsurance, changes in marketing, increases in complaints from brokers 
or consumers, declines in insurance coverage, increases in applications 
to State high risk pools, and significant changes in benefit design. 
State insurance commissioners may wish to further comment on these 
factors and other local trends in their requests for an adjustment.
    One insurance issuer's comment letter suggested that whether at 
least 10 percent of enrollees are impacted by exiting issuers or at 
least 10 percent of products are withdrawn from the marketplace may be 
valid criteria for determining market destabilization. While HHS agrees 
that market destabilization could not occur absent a significant impact 
on consumer welfare, HHS believes it is difficult to generalize and 
create a single numeric test given the different characteristics of 
State insurance markets, different State laws, and different types of 
issuers.
    As the NAIC Consumer Representatives noted in their letter, the 
NAIC addressed market destabilization in an ``issue resolution 
document.'' That document suggested the Secretary consider existing 
State laws and historic MLRs in each State. The Secretary seeks 
information regarding existing State laws and issuers' MLRs in order to 
consider them in connection with a State's request for an adjustment of 
the MLR standard in the individual market. HHS notes that although 
State MLR standards are, in general, lower than the 80 percent MLR 
standard, many issuers are currently above both the 80 percent MLR 
standard and the applicable State regulatory standard. HHS also 
received comments suggesting that the MLR standard in all States be 
adjusted to historic MLR levels and increased to 80 percent over a 
three year period until 2014. The NAIC did not recommend a national 
transition. Instead, while noting in its October 13th letter that 
``some states seek national relief from the 2011 MLR, all states 
recognize that transitional relief may be appropriate for some State 
insurance markets.'' (Emphasis added.)
    Finally, an NAIC advisory subgroup suggested that the Secretary may 
consider State laws and regulations regarding cancellation and non-
renewal of health insurance and the cost to issuers of withdrawing from 
the individual health insurance market. HHS agrees that in making a 
determination regarding market destabilization, alternatives available 
to a State and to an issuer should be considered, and has provided that 
these are factors to be considered in assessing whether to grant an 
adjustment to the 80 percent MLR for a State's individual market.

F. Subparts D-F--HHS Enforcement, Additional Requirements on Issuers, 
and Federal Civil Penalties

    Section 2718 of the PHS Act created two requirements for health 
insurance issuers. Under section 2718(a) of the PHS Act, all health 
insurance issuers in the group and individual markets are required to 
report to the Secretary certain data concerning the amount of premium 
revenue as well as the amounts spent on clinical care, quality 
improvement activities, and adjusted non-claims expenses. Section 
2718(b) requires the calculation of MLR and payments of rebates to 
enrollees if the MLR standard is not met.
    The data that must be reported to the Secretary under section 
2718(a) of the PHS Act are addressed in Subpart A of this interim final 
regulation. The calculation of rebates is addressed in Subpart B. 
Subparts D through F of this interim final regulation implement 
enforcement authority in section 2718(b)(3) and provide for enforcement 
of the reporting obligations set forth in section 2718(a) and rebate 
requirements in section 2718(b).
    Section 2718(b)(3) of the PHS Act [as added by the Affordable Care 
Act] specifically requires the Secretary to promulgate regulations to 
enforce the provisions of section 2718. It makes HHS responsible for 
direct enforcement of the reporting and rebate provisions of section 
2718. This interim final regulation implements this statutory mandate.
    Section 2718(a) requires issuers to report the data specified 
directly to the Secretary, rather than to the States. HHS is thus best 
situated, consistent with the mandate in section 2718(b)(3), to 
directly enforce the requirement that data be reported to it. This does 
not mean, however, that the States should play no role in enforcement 
of these provisions.
    States are currently responsible for solvency and, in many States, 
rate oversight as well. In performing these functions, many states 
collect and review data and conduct audits of issuer information 
related to MLRs. In addition, some twenty-nine States already have 
experience in regulating MLRs either prospectively through rate filing 
or retrospectively through rebate requirements. States already receive 
detailed financial reporting from issuers for solvency purposes. 
Finally, section 2718 of the PHS Act gives States the discretion to 
impose a higher MLR standard than that prescribed in section 2718. 
Taking all of these factors into consideration, together with the 
historical role that States have had in regulating insurance, it is 
appropriate for the States to have an oversight role with respect to 
the reporting provisions of section 2718(a), even though the statute 
gives HHS direct enforcement authority.
    Under the regulation, while HHS is responsible for enforcing the 
reporting provisions and for conducting audits to test the validity and 
accuracy of the data reported (Sec.  158.401), HHS may also, in its 
discretion, accept the findings of audits conducted by State 
regulators, so long as certain specified conditions are met (Sec.  
158.403). In particular, HHS may accept the findings of audits from a 
State which report on:
    (1) The validity of data on expenses and premiums reported to the 
Secretary, including the appropriateness of the allocations of 
expenses, taxes, and revenues used in such reporting;
    (2) Whether the activities associated with the issuer's reported 
expenditures for quality improving activities meet the definition of 
such activities; and
    (3) The accuracy of rebate calculations and the timeliness and 
accuracy of rebate payments.
    In addition, in order to accept the findings of audits from a 
State, the State's laws must permit the public release of the audit 
findings of health insurance issuers and the State must submit its 
audit findings to HHS within 30 days of finalization and submit all 
preliminary or draft reports within six months of the completion of 
audit field work unless the audit findings have already been finalized 
and reported to HHS.
    While this interim final regulation provides that HHS may accept 
audit findings from a State, it makes clear that pursuant to the 
statutory requirement in section 2718(b)(3), HHS is responsible

[[Page 74890]]

for direct enforcement of the MLR reporting and rebate provisions, and 
retains the discretion to conduct its own audits of issuers, including 
in States that have acceptable audit programs as defined in the 
regulation. This approach recognizes that although States have 
traditionally conducted financial examinations for the purpose of 
determining solvency, the type of audit needed to assess whether the 
data reported pursuant to section 2718 is accurate and valid is quite 
different. As HHS and the States develop greater experience and 
expertise in conducting these audits, it is likely that the States' 
role will increase.
    This interim final regulation sets forth the procedure to be 
followed by HHS when it conducts an audit of an issuer to determine 
whether the reports it has submitted pursuant to this regulation are 
accurate and valid. The procedure set forth is comparable to the 
procedures used by HHS when conducting audits of Medicare Advantage 
plans pursuant to 42 CFR Part 422.
    This interim final regulation contains provisions requiring issuers 
to retain documentation relating to the data reported, and requiring 
issuers to provide access to that data to HHS or its outside auditors. 
These provisions are intended to make it possible for HHS or the 
relevant State to have access to the information needed to determine 
whether the reports submitted are accurate and valid.
    Finally, this interim final regulation provides for the imposition 
of civil monetary penalties in the event an issuer fails to comply with 
the reporting and rebate requirements set forth in the regulation. It 
provides criteria and a process for determining whether and in what 
amount such penalties should be imposed. While HHS's intent is not to 
be punitive to issuers, given the importance of receiving timely and 
accurate reporting and making appropriate rebates, and given the desire 
to bring down the cost of health care for consumers as soon as 
practicable following the effective date of the Affordable Care Act, 
this regulation strikes a balance between penalties that are severe 
enough so as to encourage compliance with the requirements of the 
regulations but not so severe as to be punitive. The civil monetary 
penalties provided for are identical to those for violations of title 
XXVII that are set forth in the current regulations on enforcement, 45 
CFR 150.301 et seq. They provide for a penalty for each violation of 
$100 per entity, per day, per individual affected by the violation. HHS 
is interested in public comments as to the proper amount or range of 
penalties for violations of various provisions of this interim final 
rule. This interim final regulation also adopts the provisions in the 
existing enforcement regulation regarding factors in aggravation and 
mitigation that HHS will take into account in determining whether to 
impose civil monetary penalties and if so, in what amount.
    The interim final regulation also provides that if a State has 
assessed a penalty against an issuer, then HHS will take that into 
account in considering whether it should assess any penalty for 
violation of the requirements of this Part.

III. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

IV. Waiver of Proposed Rulemaking and Delay of Effective Date

    Section 2792 of the PHS Act authorizes the Secretary to promulgate 
any interim final rules determined to be appropriate to carry out the 
provisions of Part A of title XXVII of the PHS Act. The provisions of 
these interim final regulation requirements in section 2718, and the 
foregoing interim final rule authority applies to this interim final 
regulation.
    In addition, under section 553(b) of the Administrative Procedure 
Act (APA) (5 U.S.C. 551 et seq.) a general notice of proposed 
rulemaking is not required when an agency, for good cause, finds that 
notice and public comment thereon are impracticable, unnecessary, or 
contrary to the public interest. Although the provisions of the APA 
that ordinarily require a notice of proposed rulemaking do not apply 
here because of the specific authority granted by section 2792 of the 
PHS Act, even if the APA were applicable, the Secretary has determined 
that it would be impracticable and contrary to the public interest to 
delay putting the provisions of this interim final regulation in place 
until a public notice and comment process was completed.
    Prior notice and comment in this situation is impracticable because 
section 2718 of the PHS Act directs the NAIC, not later than December 
31, 2010, and subject to certification by the Secretary, to establish 
uniform definitions of the activities reported as reimbursement for 
clinical services, activities that improve health care quality, and 
non-claims costs. However, the reporting required by section 2718 of 
the PHS Act applies to plan years beginning not later than January 1, 
2011. The NAIC transmitted its recommendations to the Secretary on 
October 27, 2010, in the form of a model regulation. The regulation 
implementing the reporting requirements must be in effect on or before 
January 1, 2011, so that issuers, regulators, and consumers know what 
information must be reported and how to aggregate it prior to the time 
period which they must report. There are fewer than 60 days between 
when HHS would be able to review the NAIC's recommendations, certify 
them, and issue an implementing regulation.
    Therefore, we find good cause to waive the notice of proposed 
rulemaking and to issue this final rule on an interim basis. We are 
providing a 60-day public comment period.
    In addition, the Congressional Review Act, at 5 U.S.C. 801(a)(3), 
ordinarily requires that the effective date of a ``major rule'' such as 
this interim final rule be at least 60 days after publication. However, 
under 5 U.S.C. 808(2), this delay of effective date may be modified 
when an agency ``for good cause finds (and incorporates the finding and 
a brief statement of reasons therefore in the rule issued) that notice 
and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest.'' Specifically, where ``good cause'' 
is found to waive prior notice and comment, the rule may ``take effect 
at such time as the Federal agency promulgating the rule determines.'' 
5 U.S.C. 808. Given the exigencies discussed above, and the fact that 
the provisions of this rule apply, by statute, on January 1, 2011, we 
find good cause under section 808 to make this interim final rule 
effective on that date.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.

[[Page 74891]]

    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding MLR and Rebate Reporting Requirement (Sec.  158.101 
Through Sec.  158.170)

    This interim final regulation describes the information that will 
be reported by health insurance issuers on an annual basis to the 
Secretary starting in 2012, and quarterly in 2011 only for certain 
plans. Issuers' submissions will include information regarding 
reimbursement for clinical services, expenditures for activities that 
improve health care quality, other non-claim costs, earned premiums, 
and Federal and State taxes and regulatory fees, among other data 
elements. Issuers will be required to calculate MLRs and rebates as 
part of their submission to the Secretary.
    Generally, the data and methodologies that the regulation instructs 
issuers to use follow the NAIC 2010 blank, approved August 17, 2010 and 
the NAIC MLR model regulation, which was finalized on October 27, 2010. 
Most issuers file information with the NAIC on a regular basis, in 
accordance with State laws; it is expected that issuers who typically 
file information with the NAIC will file the supplemental exhibit and 
the rebate reporting documents that the NAIC created in fulfilling its 
mandate in section 2718. We expect the NAIC to collect MLR and rebate 
information beginning for plan year 2010 and to continue collecting 
such data for the foreseeable future.
    HHS's data collection requirements described in this interim final 
regulation are very similar to the NAIC's. One exception is that we are 
requiring health insurance issuers who sell expatriate plans or mini-
med plans to disaggregate that business from the rest of their business 
in that market segment and report the MLR data separately. As discussed 
above in the impact analysis section, HHS estimates that approximately 
442 entities will submit reports for each of the States and markets in 
which they operate; further, we estimate that approximately 25 health 
insurance issuers will report data for expatriate plans and 50 health 
insurance issuers will report data for mini-med plans.
    At this time, HHS has not developed the MLR and rebate forms that 
health insurance issuers will have to complete on an annual basis 
beginning for plan years starting January 1, 2011. In addition, as 
described above, we are requiring issuers who opt to separately report 
the experience for expatriate plans and mini-med plans to submit 
quarterly reports in 2011, so that we can better understand these 
products. We will revisit the special filing circumstances for 
expatriate plans and mini-med plans after reviewing the quarterly 
filings. We plan to publish the instructions and forms that issuers 
must file for all plans in future guidance. At that time we will 
solicit public comments on both the forms the estimated burden imposed 
on health insurance issuers for complying with the provisions of this 
interim final regulation. The information collection requirements 
associated with Sec. Sec.  158.101-158.170 will become effective upon 
OMB approval. HHS will publish a notice in the Federal Register 
notifying the public of OMB approval at the appropriate time.

B. ICRs Regarding Notice of Rebates to Enrollees (Sec.  158.250)

    Within Subpart B of this interim final regulation, we describe the 
obligation of health insurance issuers to calculate and pay rebates to 
consumers in years when the issuer's MLR does not meet the applicable 
minimum MLR threshold. In addition, the interim final regulation 
requires issuers to provide information to consumers about the rebate 
they are receiving. At this time, HHS has not developed the model 
disclosure language for the rebate notice to enrollees that issuers 
will be required to send beginning August 1, 2012, based upon plan 
years starting January 1, 2011. In the near future, HHS will publish 
the model disclosure language and will solicit public comment. At that 
time, and per the requirements outlined in the Paperwork Reduction Act, 
we will estimate the burden on health insurance issuers of complying 
with this provision of this interim final regulation. The information 
collection requirements associated with Sec.  158.250 will become 
effective upon OMB approval. HHS will publish a notice in the Federal 
Register notifying the public of OMB approval at the appropriate time.

C. ICRs Regarding Retention of Records (Sec. Sec.  158.501-158.502)

    Subpart E of the interim final regulations establishes the 
Secretary's enforcement authority regarding the reporting requirements 
under section 2718. Issuers must maintain all documents and other 
evidence necessary to enable HHS to verify that the data required to be 
submitted comply with the definitions and criteria set forth in this 
interim final regulation, and that the MLR is calculated and any 
rebates owing are calculated and provided in accordance with this 
interim final regulation. The interim final regulation requires issuers 
to maintain all of the documents and other evidence for the current 
year and six prior years, unless a longer period is required under 
Sec.  158.501.
    We expect all issuers will have to retain data relating to the 
calculation of MLRs; we expect only some issuers will have to retain 
information regarding the payment of rebates and the notice to 
enrollees. We believe that the burdens associated with our record 
retention requirements do not exceed standard record retention 
practices in that issuers are already required to retain the records 
and information required by this interim final regulation in order to 
comply with the legal requirements of their States' departments of 
insurance. For that reason, we are assigning a minimal burden to these 
requirements. We estimate that 442 issuers must comply with the 
aforementioned requirements. We further estimate that it will take each 
issuer a total of one hour to file and maintain both the data for MLR 
calculations and the information regarding payment of rebates and 
notices to enrollees. The total estimated annual burden associated with 
the requirements in Sec. Sec.  158.501 through 158.502 is 442 hours at 
a cost of $10,045.
    However, we welcome comments regarding the burden associated with 
maintaining the information described in subpart E of this interim 
final regulation.

D. ICRs Regarding State Request for MLR Adjustment (Sec. Sec.  158.301-
158.350)

    Subpart C of this interim final regulation implements the 
provisions of section 2718(b)(1)(A)(ii). The interim final regulation 
describes the data and narratives which States must submit that are 
seeking an adjustment to the applicable MLR in the individual market 
for their State. There is no standardized application form associated 
with a State's request. As discussed in Sec. Sec.  158.321, 158.322, 
and158.323, the data elements that a requesting State must provide 
include:
    <bullet> The applicable State minimum required MLR, if any;
    <bullet> State individual market withdrawal requirements, if any;

[[Page 74892]]

    <bullet> Any mechanisms to provide options to consumers in case of 
issuer withdrawal;
    <bullet> Information on issuers in the State's individual market;
    <bullet> The State's proposed adjustment to the minimum MLR for the 
State's individual market; and
    <bullet> The contact information for the State representative.
    In addition, a State whose request for adjustment to the MLR 
standard has been denied by the Secretary may request reconsideration 
of that determination. A request for reconsideration must be submitted 
in writing to the Secretary within 10 days of her decision to deny the 
State's request for an adjustment, and may include any additional 
information in support of its request.
    Based on preliminary data analysis and indications by a few States 
that they may apply for an adjustment, the Department estimates that 
approximately 20 States will submit applications and that it will take 
approximately ten working days for a State to complete the application. 
An exact time burden estimate is uncertain because some States may have 
better access to the required application information elements than 
others; some States may have to seek some of the required information 
from health insurance issuers in their States, which could increase 
their burden. Some States may, if providing the requested information 
is an undue burden, have the Secretary consider their application 
without some of the information elements.
    The Department estimates that it will take a State 94 hours to 
complete an application including gathering data, developing data 
analyses, synthesizing information, and developing the adjusted MLR 
threshold. For the purposes of this estimate, the Department assumes 
that this application will take various professional staff 
approximately 75 hours (at an average rate of $125 an hour), an 
associate general counsel 10 hours (at $175 an hour), a senior general 
counsel 5 hours (at $350 an hour), and the Commissioner 4 hours (at 
$450 an hour) to assemble and review the various components of the 
application.\1\ The Department estimates that the total cost burden 
associated with the submission of a MLR adjustment application to be 
approximately $14,675 per response for a total estimated burden of 
$293,500.
---------------------------------------------------------------------------

    \1\ Estimates were developed by interviewing two former 
insurance commissioners, a former insurance department actuary, and 
a former health plan employee familiar with the burden of submitting 
financial data to health insurance departments.
---------------------------------------------------------------------------

    The Department is soliciting public comments for 60 days concerning 
the process described in subpart C of the preamble whereby a State may 
request an adjustment of the minimum MLR applicable in the individual 
market. The Department has submitted a copy of these interim final 
regulations to OMB in accordance with 44 U.S.C. 3507(d) for review of 
the information collections. If you comment on this information 
collection and recordkeeping requirements, please do either of the 
following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Office, 
9998-IFC. Fax: (202) 395-6974; or E-mail: <a href="/cdn-cgi/l/email-protection#f0bfb9a2b1af8385929d998383999f9eb09f9d92de959f80de979f86"><span class="__cf_email__" data-cfemail="5817110a19072b2d3a35312b2b3137361837353a763d3728763f372e">[email protected]</span></a>.

VI. Regulatory Impact Analysis

A. Summary

    As stated earlier in this preamble, this interim final regulation 
implements sections 2718(a) through (c) of the PHS Act, which set forth 
requirements for reporting of certain medical loss ratio (MLR)-related 
data to the Secretary on an annual basis by issuers offering coverage 
in the individual and group markets, and calculating and providing 
rebates to policyholders in the event that an issuer's MLR fails to 
meet the minimum statutory requirements. This interim final rule also 
establishes uniform definitions and standardized methodologies for 
calculating MLR-related data; provides a process and criteria for the 
Secretary to determine whether application of the 80 percent minimum 
MLR threshold may destabilize the individual market in a given State; 
and addresses enforcement of the reporting and rebate requirements. 
These provisions are generally effective for plan years beginning 
January 1, 2011.
    The Department is publishing this interim final regulation to 
implement the protections intended by Congress in the most economically 
efficient manner possible. We have examined the effects of this rule as 
required by Executive Order 12866 (58 FR 51735, September 1993, 
Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social 
Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), 
Executive Order 13132 on Federalism, and the Congressional Review Act 
(5 U.S.C. 804(2). In accordance with OMB Circular A-4, the Department 
has quantified the benefits, costs and transfers where possible, and 
has also provided a qualitative discussion of some of the benefits, 
costs and transfers that may stem from this interim final regulation.

B. Executive Order 12866

    Executive Order 12866 (58 FR 51735) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects; distributive impacts; and equity).
    Section 3(f) of the Executive Order defines a ``significant 
regulatory action'' as an action that is likely to result in a rule (1) 
having an annual effect on the economy of $100 million or more in any 
one year, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year); and a ``significant'' regulatory action is subject to review by 
the Office of Management and Budget (OMB). As discussed below, we have 
concluded that this rule is likely to have economic impacts of $100 
million or more in any one year, and therefore meets the definition of 
``significant rule'' under Executive Order 12866. Therefore, the 
Department has provided an assessment of the potential costs, benefits, 
and transfers associated with this interim final regulation. 
Accordingly, OMB has reviewed this interim final regulation pursuant to 
the Executive Order.
1. Need for Regulatory Action
    Consistent with the provisions in Section 2718 of the PHS Act, this 
interim final rule requires health insurance issuers offering coverage 
in

[[Page 74893]]

the individual and group markets to provide a rebate to consumers if 
they do not spend a specified portion of premium income on 
reimbursement for clinical services (i.e., incurred claims) and 
activities that improve quality. Section 2718(a) of the PHS Act 
(captioned ``clear accounting of costs'') requires health insurance 
issuers to ``submit to the Secretary a report concerning the ratio of 
the incurred loss (or incurred claims) plus the loss adjustment expense 
(or change in contract reserves) to earned premiums.'' Section 2718(b) 
of the PHS Act (captioned ``ensuring that consumers receive value for 
their premium payments'') requires issuers to provide an annual rebate 
to each enrollee if the ratio of the amount of premium revenue expended 
on reimbursement for clinical services and activities that improve 
quality is less than the applicable minimum standards, specifies how 
the rebate is to be calculated, and allows the Secretary to adjust the 
80 percent minimum MLR threshold if the Secretary determines that 
applying this standard may destabilize the individual market in a given 
State. Section 2718(c) of the PHS Act directs the NAIC to establish 
uniform definitions and calculation methodologies subject to 
certification by the Secretary. As discussed elsewhere in this 
preamble, after considering the NAIC's recommendations, HHS in this 
interim final regulation certifies and adopts them in full. Consistent 
with Section 2718(b)(3) of the PHS Act, which requires the Secretary to 
promulgate regulations, this interim final regulation sets forth the 
provisions in Sections 2718(a) through (c) and is needed for their 
implementation to provide rules that issuers can use to implement 
effective processes for reporting the required data and calculating and 
paying applicable rebates.
2. Summary of Impacts
    In accordance with OMB Circular A-4, Table VI.1 below depicts an 
accounting statement summarizing the Department's assessment of the 
benefits, costs, and transfers associated with this regulatory action. 
The Department limited the period covered by the regulatory impact 
analysis (RIA) to 2011-2013 Estimates are not provided for subsequent 
years both because there will be significant changes in the marketplace 
in 2014 related to the offering of new individual and small group plans 
through the exchanges, and because there will be statutorily required 
adjustments to the MLR formula to account for payments or receipts for 
risk adjustment, risk corridors, and reinsurance under sections 1341, 
1342, and 1343 of the Affordable Care Act that are not effective until 
2014. Those provisions require additional regulations that have not yet 
been promulgated.
    The Department anticipates that the transparency and 
standardization of MLR reporting in this interim final regulation will 
help consumers to ensure that they receive good value for their premium 
dollars. Additionally, the inclusion of activities that improve quality 
in calculating the MLR could help to increase the level of investment 
in and implementation of effective quality improving activities, which 
could result in improved quality outcomes and lead to a healthier 
population. The Department estimates that issuers' total one-time 
administrative costs related to the MLR reporting, record retention, 
and rebate payment and notification requirements represent less than 
0.02 percent of their total premiums for accident and health coverage, 
and their total annual ongoing administrative costs related to these 
requirements represent less than 0.01 percent of their total premiums 
for accident and health coverage. Executive Order 12866 also requires 
consideration of the ``distributive impacts'' and ``equity'' of a 
regulation. As described in this RIA, this regulatory action will help 
ensure that issuers spend at least a specified portion of premium 
income on reimbursement for clinical services and quality improving 
activities and will result in a decrease in the proportion of health 
insurance premiums spent on administration and profit. It will require 
issuers to pay rebates to consumers if this standard is not met. As the 
table shows, although we are unable to quantify benefits, the transfers 
(rebates from issuers to consumers) could be substantial--estimated 
monetized rebates of $0.6 billion to $1.4 billion annually. As noted, 
Executive Order 12866 requires consideration of ``distributive 
impacts'' and ``equity.'' The rebates will help insure that issuers 
spend at least a specified portion of premium income on reimbursement 
for clinical services and quality improvement, resulting in less 
disparate MLRs and value to consumers across issuers and States. In 
accordance with Executive Order 12866, the Department believes that the 
benefits of this regulatory action justify the costs.
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[[Page 74895]]

3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
    The medical loss ratio (MLR) is an accounting statistic that, 
stated simply, measures the percentage of total premiums that insurance 
companies spend on health care and quality initiatives, versus what 
they spend on administration, marketing and profit. In the following 
sections, we discuss some of the anticipated benefits, costs and 
transfers associated with the Affordable Care Act MLR requirements.
a. Benefits
    In developing this interim final regulation, the Department 
carefully considered its potential effects including both costs and 
benefits. Because of data limitations, the Department did not attempt 
to quantify the benefits of this regulation. Nonetheless, the 
Department was able to identify several potential benefits which are 
discussed below.
    Health insurance markets in the United States are often not highly 
competitive. The share of the US population living in areas where 
markets are least competitive has been increasing.\2\ Even in markets 
with multiple competing plans, lack of transparency in pricing may 
prevent adequate competition based on the value of product, since it is 
difficult to ascertain if a low premium is due to high efficiency, low 
coverage of medical claims, or a healthy underlying population of 
enrollees. As a result, insurers can provide an inefficient, low-value 
product without consumers being fully aware of what they are 
purchasing. A potential benefit to this regulation is greater market 
transparency and improved ability of consumers to make informed 
insurance choices. The uniform reporting required under this 
regulation, along with other programs required by Affordable Care Act 
such as http://www.HealthCare.gov, a Web site with plan-level 
information, will mean that consumers will have better data to inform 
their choices, enabling the market to operate more efficiently.
---------------------------------------------------------------------------

    \2\ Dafny, Leemore S.. 2010. ``Are Health Insurance Markets 
Competitive?'' American Economic Review, 100(4): 1399-1431.
---------------------------------------------------------------------------

    In addition, issuers that would not otherwise meet the MLR minimum 
defined by this regulation may increase spending on quality-promoting 
activities. These programs, which include case management, care 
coordination, chronic disease management and medication compliance, 
have the potential to create a societal benefit by improving outcomes 
and population health.
    Issuers that would not otherwise meet the MLR minimum may also 
expand covered benefits or reduce cost sharing. To the extent that 
these changes result in increased consumption of effective health 
services, the regulation could result in improved health outcomes, 
thereby creating a societal benefit.
b. Costs
    The Department has identified the primary sources of costs 
associated with this regulation as the costs associated with reporting, 
recordkeeping, rebate notifications and payments, and other costs.
    The Department estimates that issuers will incur approximately $33 
million to $67 million in one-time administrative costs, and $11 
million to $29 million in annual ongoing administrative costs related 
to complying with the requirements of this interim final regulation 
from 2011 through 2013. Additional details relating to these costs are 
discussed later in this regulatory impact analysis.
    Other Costs--There are two other potential types of costs 
associated with this regulation: Costs of potential increases in 
medical care use, the cost of additional quality-improving activities, 
and costs to consumers if some issuers decide to limit offered products 
as a result of this interim final regulation.
    As discussed under benefits, there may be increases in quality-
improving activities or in consumption of medical care due to this 
regulation. Both of these very likely have some benefit to enrollees 
but they also represent an additional cost to issuers and society.
    It is also possible that some issuers in particular areas or 
markets will not be able to operate profitably when required to comply 
with the requirements of this regulation. They may respond by changing 
or reducing the number of products they offer. The Department 
anticipates that issuers' decisions regarding whether to limit offered 
products will not be governed solely by short-term profitability. 
Issuers are likely to consider whether they expect to be successful 
competitors in Exchanges in 2014 and beyond.\3\ Some low MLR plans may 
decide to leave a given market entirely or be acquired by a larger 
company, while other low MLR plans (particularly those that are 
subsidiaries of larger organizations) may find ways to achieve higher 
MLRs through increased efficiencies.
---------------------------------------------------------------------------

    \3\ Bernstein, Jill, ``Recognizing Destabilization in the 
Individual Health Insurance Market,'' Changes in Health Care 
Financing and Organization (HCFO) Issue Brief, July 2010, accessed 
at http://www.hcfo.org/files/hcfo/HCFO%20Policy%20Brief%20July%202010.pdf.
---------------------------------------------------------------------------

    To the extent that issuers do decide to limit product offerings, 
group purchasers or individual enrollees in these plans may bear some 
costs associated with searching for and enrolling in a new insurance 
plan. For employers, particularly small employers, these costs may 
include increased administrative expenses. For consumers, this may lead 
to reduced choice, the inability to purchase similar coverage, and 
higher search costs related to finding affordable insurance coverage. 
States may apply for an adjustment of the MLR threshold in the 
individual market if the Secretary concurs that the adjustment is 
necessary to prevent market destabilization. This could mitigate the 
potential costs.
c. Transfers
    To the extent that insurers' MLR experience falls short of the 
minimum thresholds, they must provide rebates to enrollees. These 
rebates would reflect transfers of income from the insurers or their 
shareholders to the policy holders. Based on the methods described 
above, we have estimated ranges for the rebates that may occur during 
2011-2013. These estimates are discussed later in this regulatory 
impact analysis (see Tables VI.7, VI.8, and VI.9).
4. Overview of Data Sources, Methods, and Limitations
    The most complete source of data on the number of licensed entities 
offering fully insured, private comprehensive major medical coverage in 
the individual and group markets is the National Association of 
Insurance Commissioners (NAIC) Annual Financial Statements and Policy 
Experience Exhibits database. These data contain multiple years of 
information on issuers' revenues, expenses, and enrollment collected on 
various NAIC financial exhibits called ``Blanks'' that issuers submit 
to the NAIC through State insurance regulators. The NAIC has four 
different Blanks for different types of insurers: Health, Life, 
Property & Casualty, and Fraternal issuers.\4\ A Technical Appendix for 
this analysis, available at http://www.hhs.gov/ociio/regulations/index.html, provides more detail on the

[[Page 74896]]

precise NAIC data sources used for this analysis.
---------------------------------------------------------------------------

    \4\ If a company's premiums and reserve ratios for its health 
insurance products equals 95 percent or more of their total business 
for both the current and prior reporting years, a company files its 
annual statement using the Health Blank. Otherwise, a company files 
the annual statement associated with the type of license held in its 
domiciliary State, i.e. it files either the Life, Property& 
Casualty, or Fraternal Blank.
---------------------------------------------------------------------------

    A total of 618 insurers offering comprehensive major medical 
coverage filed annual financial statements in 2009, with the Health and 
Life Blank filers accounting for approximately 99 percent of all 
comprehensive major medical premiums earned. It is for this reason that 
we have restricted our analysis to Health and Life Blank companies. 
Comprehensive major medical coverage \5\--including both coverage 
offered in the individual and group markets that is subject to this 
interim final regulation--accounted for approximately 47.8 percent of 
all Accident and Health (A&H) premiums in 2009.
---------------------------------------------------------------------------

    \5\ Comprehensive major medical coverage sold to associations 
and trusts has been included in individual comprehensive major 
medical coverage for purposes of the RIA. The Department's estimates 
exclude Medigap, which is reported separately in the NAIC data from 
comprehensive major medical coverage offered in the individual and 
group markets. The NAIC data do not allow us to identify mini-med 
plans or expatriate plans.
---------------------------------------------------------------------------

    Although the NAIC data represent the best available data source 
with which to estimate impacts of the MLR regulation, the data contain 
certain limitations that should be noted. For example, the NAIC data do 
not include issuers regulated by California's Department of Managed 
Health Care (DMHC) as well as small, single-State insurers that are not 
required by State regulators to submit NAIC annual financial 
statements. When we compare the NAIC enrollment data to InterStudy 
data, we estimate that these limitations cause the NAIC data to exclude 
approximately 9 percent of the total fully insured, private 
comprehensive major medical market.\6\ Additionally, the NAIC data do 
not break out small and large group coverage at the State level, and 
administrative expenses such as taxes are reported at the national 
level for all A&H lines of business. We developed imputation methods to 
account for these limitations. Finally, we made several edits to the 
data that led us to exclude from the analysis 176 of the companies that 
the NAIC data identify as reporting comprehensive major medical 
coverage.\7\ However, these excluded companies represent a small 
portion of the overall comprehensive major medical market (3 percent of 
life years and 2 percent of earned premiums). The Technical Appendix 
(available at  http://www.hhs.gov/ociio/regulations/index.html) 
contains a detailed description of the limitations of the NAIC data, 
and the data edits that were made by the Department. We use the 
remaining 442 companies to estimate the regulatory impacts discussed 
below.
---------------------------------------------------------------------------

    \6\ This estimate is based on a comparison of 2008 NAIC and 
InterStudy data. Interstudy data report 79.7 million enrollees for 
comprehensive major medical coverage in 2008 whereas NAIC data 
report approximately 72.9 million enrollees. The NAIC enrollment 
number represents 91 percent of the Interstudy total enrollment 
figure.
    \7\ These exclusions reflect the restriction to Health and Life 
Blank companies, which drops 22 Fraternal and Property and Casualty 
companies from the analysis.
---------------------------------------------------------------------------

5. Estimated Number of Affected Entities Subject to the MLR Provisions
    Section 2718(a) of the PHS Act specifies that the MLR provisions 
apply to health insurance issuers offering group or individual health 
insurance coverage, including grandfathered health plans. As discussed 
earlier in this preamble, in this context, the term ``issuer'' has the 
same meaning provided in 45 CFR 144.103, which states that an issuer is 
``an insurance company, insurance service, or insurance organization 
(including an HMO) that is required to be licensed to engage in the 
business of insurance in a State and that is subject to State law that 
regulates insurance (within the meaning of section 514(b)(2) of 
ERISA).'' As discussed elsewhere in this preamble, and consistent with 
the NAIC recommendations, the MLR provisions in this interim final rule 
apply to issuers that offer comprehensive major medical coverage, and 
these issuers will be required to report these data and determine if 
rebates are owed at the company, State, and market level (e.g., 
individual, small group, and large group).\8\ The following sections 
summarize the Department's estimates of the number of entities that 
will be affected by the requirements of this interim final regulation.
---------------------------------------------------------------------------

    \8\ This includes some issuers that offer mini-med plans which, 
as discussed elsewhere in the preamble, often cover the same types 
of medical services as comprehensive medical plans, but have low 
annual benefit limits and typically have lower premiums than plans 
providing higher ceilings on benefits. Data for mini-med plans are 
not broken out separately from other data that issuers reported to 
NAIC in 2009. Therefore, the regulatory impact analysis does not 
include separate estimates relating to mini-med plans.
---------------------------------------------------------------------------

a. Estimated Number of Affected Entities
    The MLR provisions will apply to all health insurance issuers 
offering comprehensive major medical coverage in the individual and 
group markets. For purposes of the regulatory impact analysis, we have 
estimated the total number of issuers that will be affected by the 
requirements of this interim final regulation at the company level 
because this is the level at which issuers currently submit their 
annual financial reports to the NAIC (including both company- and 
State-level exhibits where appropriate). However, because issuers will 
be required to report MLRs and calculate any rebates that are owed at 
the company/State level for each market in which they offer coverage 
(for example, individual, small group, large group), we have estimated 
rebates by ``licensed entity'' (company/State combination) for each 
market.
    Table VI.2 shows the estimated distribution of issuers offering 
coverage in the individual, small group and large group markets for the 
analytic sample used in this RIA.\9\ Approximately 70 percent (311) of 
these issuers offer coverage in the individual market, 77 percent (342) 
offer coverage in the small group market, and 77 percent (338) offer 
coverage in the large group market. Approximately half (224) of these 
issuers offer coverage in all three markets that are subject to the MLR 
requirements, while the other half offer coverage in one or two of the 
markets that are subject to the requirements (118 and 100, 
respectively).
---------------------------------------------------------------------------

    \9\ As noted above, the analytic sample excludes companies that 
are regulated by the Department of Managed Health Care in 
California, as well as small, single-State insurers that are not 
required by State regulators to submit NAIC annual financial 
statements.
---------------------------------------------------------------------------

    Additionally, the Department estimates that there are 74.8 million 
enrollees in the analytic sample in coverage that is subject to the 
requirements in this interim final rule, including approximately 10.6 
million enrollees in individual market coverage (estimated based on 
``life years'' for 2009 NAIC Health and Life Blank filers, which as 
discussed earlier excludes data for companies that are not required to 
file annual statements with the NAIC), 24.2 million enrollees in small 
group coverage, and 40.0 million enrollees in large group coverage 
(excluding enrollees in companies that did not file annual financial 
statements on the NAIC's Health or Life Blanks in 2009).\10\
---------------------------------------------------------------------------

    \10\ The estimate provided here of the size of the individual 
market differs from estimates provided in previous rulemaking for a 
number of reasons. First, as discussed in this regulatory impact 
assessment, issuers that are regulated by the Department of Managed 
Health Care in California do not file with the NAIC. Second, and 
more importantly, the estimate provided here is of enrollment at an 
average point in time, while previous estimates included people who 
were enrolled at some point during the year. Third, the Current 
Population Survey, which was the source of previous estimates, is 
thought by some analysts to overestimate the number of people 
purchasing individual coverage.
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[[Page 74897]]

[GRAPHIC] [TIFF OMITTED] TR01DE10.065

b. Characteristics of the Affected Entities
    Table VI.3 provides additional information about the 
characteristics of the issuers that are subject to the MLR 
requirements. Most (80 percent) of these companies are subsidiaries of 
larger carriers, and more than two thirds (315) only offer coverage in 
a single State. A third (143) of the issuers that are subject to the 
MLR requirements collected less than $50 million in earned premiums for 
individual and group comprehensive major medical coverage in 2009, 21 
percent (92) collected $50 to $149 million, 31 percent (138) collected 
$150 to $999 million, and 16 percent (69) collected $1 billion or more 
in earned premiums that year. Meanwhile, 80 percent of the affected 
issuers also offer other types of accident and health coverage that is 
not subject to the requirements of this interim final regulation.

[[Page 74898]]

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BILLING CODE 4150-03-C

[[Page 74899]]

    While all 442 of these issuers will be subject to the requirements 
of this interim final regulation, the Department estimates only a 
subset of these companies will be required to pay MLR-related rebates 
to policyholders during any given year. The following section contains 
estimates of the number of entities whose coverage will not meet the 
applicable minimum MLR thresholds, the estimated MLR rebate payments, 
and the estimated number of enrollees that would receive the MLR 
rebates.
6. Estimated MLR Rebate Payments
    To date, there have been few published studies that document MLRs 
for comprehensive major medical coverage offered in the individual, 
small group and large group markets at the State and company levels 
nationwide.\11\ Additionally, as discussed earlier, there are a number 
of challenges related to using the 2009 NAIC data. Despite these 
limitations, the Department believes that the 2009 NAIC data provide a 
reasonable basis for developing a model to be used for estimating the 
universe of entities that are likely to be affected by the MLR 
requirements, and estimating a potential range of other impacts 
including rebate amounts.\12\ Specifically, the Department believes 
that a reasonable range of assumptions can be applied to the 2009 NAIC 
data making it the best available source for estimating the potential 
impacts of this interim final regulation. Therefore, using data from 
NAIC annual financial statements, the Department summarized data on 
traditional or unadjusted MLR values prior to the enactment of 
Affordable Care Act and estimated the impact of the Affordable Care 
Act's MLR provisions on the market.
---------------------------------------------------------------------------

    \11\ For example, the Senate Commerce Committee used NAIC data 
to report on nationwide MLRs for selected companies, but did not 
analyze MLRs at the State level (see ``Implementing Health Insurance 
Reform: New Medical Loss Ratio Information for Policymakers and 
Consumers: Staff Report For Chairman Rockefeller,'' U. S. Senate, 
Committee on Commerce, Science and Transportation, April 15, 2010, 
accessed at http://commerce.senate.gov/public/index.cfm?p=Reports). 
It is also important to note that MLRs calculated for other purposes 
may not provide an accurate picture of MLRs under the Affordable 
Care Act, which includes adjustments for administrative expenses 
related to quality improving activities and small plans.
    \12\ The NAIC has developed a ``Supplemental Blank'' that will 
be used to collect 2010 comprehensive major medical data by company, 
State and market that are consistent with the uniform definitions 
and standardized calculation methodologies that NAIC was required to 
develop under Section 2718(c) of the PHS Act (subject to 
certification by the Secretary). However, this information will not 
be available until the Spring of 2011.
---------------------------------------------------------------------------

    In considering how to model the MLR impacts, the Department 
examined State experience with various types of related policies. Some 
States have traditionally used MLR standards for reviewing rate 
filings, others have set minimum standards, a few States require 
rebates to be made if minimum standards are not met, and many States 
have no requirements. The Department estimates that prior to the 
enactment of the Affordable Care Act, approximately 32 States 
(including the District of Columbia) had enacted requirements relating 
to minimum MLR standards or administrative expense limits for coverage 
in at least some segments of the individual and group markets,\13\ 
primarily in the context of submitting historical and anticipated loss 
ratios as part of their rate filings; approximately 19 States did not 
have any minimum MLR requirements for individual or group coverage 
prior to the enactment of the Affordable Care Act. State-level MLR 
requirements, where they existed, often varied by the type of coverage 
being offered, were sometimes optional, and lacked standardization in 
the way that the MLRs were to be calculated. In addition, States' 
minimum MLR requirements were often quite low--approximately 10 States 
had loss ratio requirements that were as low as 55 percent for at least 
some segments of the market, and another 13 States had minimum MLR 
thresholds between 60 and 75 percent for at least some segments of the 
market. The Department estimates that nine States have enacted minimum 
MLR thresholds or administrative expense limits requiring that at least 
80 percent of premiums be spent on clinical services in at least some 
segments of the individual and group markets.
---------------------------------------------------------------------------

    \13\ This is consistent with America's Health Insurance Plans 
(AHIP) data, which suggest that there are 32 States that have 
established MLR guidelines or imposed limitations on administrative 
expenses for comprehensive major medical insurance (excluding States 
that require filing of loss ratios, but have not established minimum 
standards), see ``State Mandatory Medical Loss Ratio (MLR) 
Requirements for Comprehensive, Major Medical Coverage: Summary of 
State Laws and Regulations, as of April 15, 2010'', AHIP, accessed 
at http://www.naic.org/documents/committees_lhatf_ahwg_100426_AHIP_MLR_Chart.pdf.
---------------------------------------------------------------------------

    For several reasons, the State experience with MLR requirements was 
not useful for modeling the effects of imposing an 80 percent MLR 
requirement nationwide for the individual and small group markets, and 
an 85 percent MLR requirement nationwide for the large group market. 
First, as described above, the States varied considerably in terms of 
MLR definitions and policy implementation. The experience of the nine 
States that have enacted 80 percent or higher MLR thresholds for at 
least a portion of the affected market may have been relevant, but 
there was not sufficient data available to estimate the impact of their 
policies and generalize to the national level. For example, in five of 
these States, the 80 percent or higher thresholds only apply to a 
portion of the market.\14\ Additionally, there is limited data 
available for several of these States; for example, there is limited 
availability of California HMO data because they do not file with the 
NAIC; New Jersey first imposed its 80 percent requirement for the 
individual and small group markets in 2009 (prior to that, the State 
had a 75 percent minimum MLR standard for individual and small group 
coverage); \15\ and New Mexico's 80 percent and 85 percent standards 
for the small group and large group markets, respectively, were just 
enacted on March 3, 2010 (prior to that, the State had a 55 percent 
minimum MLR standard for small group coverage, and no minimum MLR 
standard for the large group market). Additionally, in New York and New 
Jersey, the market for individual unsubsidized insurance is extremely 
small, largely as a result of rating rules. Finally, Ohio's provision 
limiting the administrative expenses that an insurer can spend to no 
more than 20 percent applies to the insurance company as a whole (e.g., 
the State does not have separate requirements for coverage offered in 
the individual, small group and large group markets, as required by the 
Affordable Care Act).\16\ The State's regulators estimate that carriers 
will be close to the Affordable Care Act's minimum MLR thresholds for 
small group and large group coverage, but that some carriers will have 
to ``raise the bar'' in order to meet the standards for the individual 
market.\17\
---------------------------------------------------------------------------

    \14\ The 80 percent or higher minimum MLR requirements apply 
only to HMOs in California, only to HMO point of service plans in 
Arkansas, only to small group special health care plans in 
Connecticut, only to small group plans assessed 3 percent or more of 
the total annual amount assessed by the State's high risk pool in 
Minnesota, and only for nonprofit medical and dental indemnity or 
health and hospital service corporation individual direct payment 
contracts in New York.
    \15\ Carriers in New Jersey are required to pay rebates if they 
have a loss ratio below the minimum standard. In 2008, total 
standard and non-standard market refunds paid by carriers in the 
State were approximately $850,000. New Jersey Department of Banking 
and Insurance, ``SEH Loss Ratio and Refund Reports for 2008,'' April 
19, 2010, accessed at http://www.pdcbank.state.nj.us/dobi/division_insurance/ihcseh/sehrpts/seh08lossratiorpt.pdf.
    \16\ Ohio Revised Code Sec.  3923.022, accessed at http://codes.ohio.gov/orc/3923.
    \17\ Adamczak, Rick, ``New Regs Unlikely to Have Much Impact on 
Ohio Insurers,'' Dayton Legal News, November 1, 2010, accessed at 
https://www.dailycourt.com/articles/index/id/7284.

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

[[Page 74900]]

    It is difficult to draw general lessons from the experience in 
these nine States about the likely results of imposing an 80 percent 
MLR requirement for the individual and small group market nationwide--
relevant data are not available in many of the States, the level of 
aggregation is not consistent in one of the States, and rating rules in 
two of the States are so different than in most of the rest of the 
country that results are not likely to be generalizable. Most 
importantly, in all nine States data were not available over a 
sufficient time period to establish causality between State policies 
and observed MLRs.
a. Data Limitations and Modeling Assumptions
    As discussed earlier in section VI.B.4 of this regulatory impact 
analysis, and in a Technical Appendix that is available at http://www.hhs.gov/ociio/regulations/index.html, the available data are less 
than perfect for the task at hand. Among the larger imperfections: The 
data do not measure quality improving activities as defined by this 
interim final regulation; the data for some issuers and States are 
clearly in error; and the data capture administrative expenses at the 
national level, but do not allocate them to States or to markets 
(individual, small group, and large group).
    The Department expects that as a result of this interim final 
regulation that issuer behavior may well change, and even if the data 
could precisely measure MLRs in 2009, MLRs in 2011 may well be 
different as a result of issuer behavioral change. However, for 
purposes of this analysis we do not explicitly model these behavioral 
changes in our estimates. Potential behavioral changes as a result of 
this regulation and impact on our estimates are discussed below, 
including:
    <bullet> Insurer Pricing Policy--Companies will likely consider a 
number of responses in pricing 2011 policies (e.g., reducing premium 
increases or increase health care expenditures) that would minimize or 
avoid rebates. As a result of these anticipated responses, estimates 
based on the 2009 data would result in upwardly biased estimates of 
potential rebates;
    <bullet> Allocation of Expenses Across States and Markets and 
Affiliates--Issuers were not previously required to allocate company-
level expenses by State and by line of business in their annual 
financial report submissions to the NAIC. However, companies are likely 
to focus more attention on the methodologies that they use for 
allocating administrative expenses now that this information will be 
used in determining if they owe rebates for a given company/State/
market. The choices issuers make in determining allocation methods 
could have a material impact on MLR rebates;
    <bullet> Activities That Improve Quality--Issuers may increase 
their quality-improving activities given the financial incentive to do 
so, or newly describe existing activities as such, and spending on 
these activities may vary significantly by State or company;
    <bullet> Other Changes in Categorization--Companies are expected to 
carefully scrutinize all of their expenditures to determine whether 
some could legitimately be categorized as expenditures for clinical 
services or quality improvement based on the definitions implemented by 
this regulation;
    <bullet> Other Behavioral Changes--It is unclear to what extent 
companies may make other behavioral changes that could affect MLR 
rebates (e.g., expanding coverage to increase medical claims, limiting 
premium increases, consolidation, etc.); and
    <bullet> Potential Impact of Destabilization Policy--It is unknown 
to what extent State Commissioners of Insurance will request 
adjustments of the 80 percent individual market minimum MLR threshold 
under the destabilization policy, and unknown whether the 
justifications provided with these requests will be sufficient to allow 
the Secretary to grant the adjustments. Thus, it is unknown how these 
potential adjustments will affect the size of MLR rebates.
b. Methods for Estimating MLR Rebates
    The analysis includes estimates that are based on both unadjusted 
and adjusted MLRs. Information on unadjusted MLRs, which are simply 
incurred claims divided by earned premiums, is included to assess the 
impact of the adjustments allowed by the regulation on companies' 
State-level MLRs.\18\
---------------------------------------------------------------------------

    \18\ As discussed earlier, data for mini-med plans are not 
broken out separately from other data that issuers reported to NAIC 
in 2009. Therefore, this regulatory impact analysis does not include 
separate estimates relating to mini-med plans.
---------------------------------------------------------------------------

    The adjusted MLRs include three sets of adjustments for: (1) Taxes 
and fees; (2) credibility adjustments; and (3) quality improvements. 
First, the adjustments include deductions for Federal and State taxes 
and licensing and regulatory fees from premiums. These adjustments 
follow the policy described in the regulation.
    Second, they apply estimates of the credibility adjustments for 
licensed entities that have partially credible experience, that is, 
issuers with life years that are greater than or equal to 1,000 life 
years but less than 75,000 life years, based on the 2009 NAIC data.\19\ 
Section D of the preamble describes the rationale and method for 
calculating credibility adjustments. As stated in this section, there 
are two components to the credibility adjustment: A base factor that 
depends on the number of life years a company has in a particular 
market and State and a factor that depends on average per person 
deductible for the experience reported in the MLR for a particular 
market and State. The total credibility adjustment to the MLR equals 
the base factor times the deductible factor. We used linear 
interpolation to calculate the base credibility adjustment factor for 
life years that fall between the values in Table 1 of the preamble.
---------------------------------------------------------------------------

    \19\ For purposes of this analysis, the Department has not made 
any assumptions relating to the potential for annual fluctuations in 
the estimated number of issuers with non-credible and partially 
credible experience.
---------------------------------------------------------------------------

    Third, the adjusted MLRs reported in this analysis also incorporate 
assumptions about the size of expenses for quality improvement 
activities, as well as assumptions about other actions that insurers 
might take to increase their reported MLR. Because the definitions of 
quality improving activities are new to this rule, the NAIC data 
collected in 2009 cannot be used to directly estimate how much insurers 
spent on quality improving activities in 2009 or how much they are 
expected to spend on these activities in 2011. The closest category in 
the NAIC data is ``cost containment expenses'', which averaged 
approximately 1 percent of premiums in 2009, but the definition of 
quality improving activities includes many activities that were not 
included in cost containment expenses. Discussions with industry 
experts suggest that quality improving activities are likely to account 
for an average of approximately 3 percent of premium, but there is 
substantial uncertainty concerning this estimate. Few observers think 
that quality improving activities will be greater than 5 percent of 
premium, and few expect that they will be less than 1 percent of 
premium. In the mid-range estimate, the Department assumes that quality 
improving activities will account for 3 percent of premium, and uses 
the 1 percent and 5 percent estimates as the range in a sensitivity 
analysis.
    In addition to uncertainty about the magnitude of quality improving 
activities, as discussed above, there are many other sources of 
uncertainty about how insurers will respond to this

[[Page 74901]]

interim final regulation, and the effects of these responses on MLRs 
and rebate amounts.
    Given the combination of data imperfections and behavioral 
uncertainties, the Department has chosen to provide a range of 
estimates, based on a range of assumptions. A reasonable range of 
assumptions is that, in the mid-range estimate, MLRs will increase by 1 
percentage point relative to the data reported in 2009, with a 
reasonable bound for this assumption being on one end, no change from 
the 2009 data, and, on the other end, an assumption that MLRs will 
increase by 2 percentage points relative to the 2009 data.
    Combined with the low-rebate assumption that quality improving 
activities will increase MLRs by 5 percentage points, the assumption 
that other behavioral changes may increase MLRs by an additional 2 
percentage points will result in estimated MLRs in the low-rebate 
scenario being 7 percentage points higher than they would be with no 
allowance for either quality improving activities or other behavioral 
changes. Consultation with industry experts suggests that this is a 
reasonable upper bound for the low-rebate assumption as an average for 
the industry. It is possible that some issuers may invest greater than 
5 percent of premium in quality improving activities, or change their 
behavior in ways that result in a greater than 2 percentage point 
increase in MLR, but the Department thinks it is unlikely that the 
changes across the industry for quality improving activities and 
behavioral changes will be greater than 7 percentage points.
    The Department further assumes that issuers with an MLR that is 
already above the minimum threshold (80 percent in the individual and 
small group markets, 85 percent in the large group market) will have 
less incentive to change their behavior in an attempt to increase their 
MLR than will issuers with lower MLRs that would require them to pay 
rebates. In the mid-range and low-rebate scenarios, the Department 
assumes that issuers whose adjusted MLR is above the minimum threshold 
after an assumed 3 percent increase for quality improving activities 
will not further increase the MLR with additional quality improving 
activities or other behavioral changes.
    Table VI.4 summarizes the values that are added to the base MLR to 
adjust for quality improving expenses and other behavioral 
uncertainties.
[GRAPHIC] [TIFF OMITTED] TR01DE10.067

    These three sets of adjustments are combined to produce the 
following formula for estimating companies' adjusted MLRs for the 
individual, small group, and large group markets by State, rounded to 
the nearest thousandth decimal place as dictated in the regulation: 
\20\
---------------------------------------------------------------------------

    \20\ The text states that in the mid-range assumption, quality 
improving activities will account for 3 percent of premium. In the 
formula above, quality improving (and other behavioral change 
assumptions) are expressed as percentage point increases in the MLR 
amount. That is, in the mid-range assumption, we assume that quality 
improvement expenses will add 3 percentage points to the MLR. As a 
practical matter, because Federal and State taxes and licensing and 
regulatory fees are quite small, there is virtually no difference 
between assuming that quality improvement expenses account for 3 
percent of premium or assuming that they will add 3 percentage 
points to the MLR.

---------------------------------------------------------------------------
Adjusted MLR = (c)/(p-t-f) + (b * d) + u,

where c = incurred claimsp = earned premiums
t = Federal and State taxes
f = licensing and regulatory fees
b = base credibility adjustment factor
d = deductible credibility adjustment factor
u = low, medium, or high assumptions to account for quality 
improving activities, unknown behavioral changes and data 
measurement error

We then calculate rebates for a company whose adjusted MLR value in a 
State falls below the minimum MLR standard in a given market using the 
following formulas:

Rebates = [(m-a) * (p-t-f)]

where m = minimum MLR standard for a particular market
a = adjusted State MLR for that market

    Finally, to estimate impacts for each year covered by the 
regulation, we assume that the number of issuers, enrollment, and 
experience are stable over time. This interim final regulation requires 
that experience be combined across multiple years for issuers that are 
not fully credible based on a single year of data. Given the assumption 
that enrollment is stable over time, the Department estimates that 
issuers which are not fully credible in 2011 will have twice as much 
enrollment in the combined experience for 2011 and 2012, and three 
times as much enrollment in the combined 2011 through 2013 data. As a 
result, the magnitude of the credibility adjustment in 2012 will be 
smaller than in 2011, and smaller again in 2013. The Department is 
unable to model the impact of losing the MLR

[[Page 74902]]

credibility adjustment beginning in 2013 if licensed entities report 
partially credible experience for the current year and the two previous 
years and have MLRs below the minimum standard in all three years. 
Rebates are estimated in 2011 through 2013 by applying the projected 
growth rate in private health insurance premiums from the National 
Health Expenditures Accounts to the 2009 NAIC adjusted premiums. 
However, the analysis does simulate the impact of doubling life years 
in 2012 or tripling life years in 2013 for licensed entities that have 
non-credible or partially credible experience using a single year of 
data to estimate how this affects the portion of insurers that are 
deemed to have credible experience as well as their associated MLR 
values in those years. Additionally, rebates are estimated in 2011 
through 2013 by applying the projected growth rate in private health 
insurance premiums from the National Health Expenditures Accounts (per 
privately insured) to the 2009 NAIC adjusted premiums.
c. Estimated Number of Issuers and Individuals Affected By the MLR 
Rebate Requirements
    As shown in Table VI.5, the Department estimates that 68 percent of 
the licensed entities (State/company combinations) nationwide selling 
comprehensive major medical insurance in the individual market in 2011 
will have fewer than 1,000 enrollees in at least one State, and will be 
designated as ``non-credible'' according to the standards of this 
interim final regulation, 30 percent of licensed entities will be 
partially credible, and 2 percent will be fully credible.\21\ As 
discussed elsewhere in this preamble, issuers with non-credible 
experience in a given State, for a given market, during a given MLR 
reporting year are not required to provide any rebate to enrollees in 
that State/market because the issuer does not insure a sufficiently 
large number of lives to yield a statistically valid MLR.
---------------------------------------------------------------------------

    \21\ As described above, insurers with non-credible experience 
are those with less than 1,000 life years in a particular State 
market and they are not subject to the rebate requirements. Insurers 
with partially credible experience are those with 1,000 or more life 
years but fewer than 75,000 life years. These insurers receive a 
credibility adjustment to their adjusted MLRs to account for 
statistical variability that is inherent in smaller blocks of 
business. Finally, insurers with fully credible experience are those 
with 75,000 life years or more. Reported MLR values for fully 
credible insurers are used without a credibility adjustment in a 
given reporting year to determine their rebate obligation.
---------------------------------------------------------------------------

    Although the Department estimates that more than two-thirds of 
licensed entities (State-company combinations) have non-credible 2011 
experience for the individual market, and will not be required to 
provide rebates to their enrollees, there are relatively few enrollees 
in licensed entities that are non-credible--the non-credible licensed 
entities account for 68 percent of all entities, but only 1 percent of 
enrollees and 2 percent of earned premiums in the individual market. 
Fully credible licensed entities, accounting for only 2 percent of 
licensed entities, account for 50 percent of enrollees and 49 percent 
of premiums.
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[[Page 74903]]

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[[Page 74904]]


BILLING CODE 4150-03-C
    Non-credible entities account for a smaller share of total 
entities, and a smaller share of enrollees and premiums in the small 
group market than in the individual market, and an even smaller share 
in the large group market than in the small group market. Conversely, 
fully credible entities are a larger share of the market in both the 
small group and large group markets than in the individual market.
    As described above, the Department assumes that MLRs and enrollment 
are constant in 2012 and 2013. As a result of this assumption, the 
number of non-credible entities declines somewhat in 2012 and again in 
2013, because experience is combined across multiple years.
d. Impact of Adjustments on MLRs
    As shown in Table VI.6, the estimated average unadjusted MLR among 
all fully or partially credible entities in the individual market in 
2011 is expected to be 79.5 percent--very close, on average, to the 80 
percent minimum threshold required under the Affordable Care Act. When 
adjustments are made for taxes, licensing and regulatory fees, quality 
improving activities, and assumed behavioral changes, the Department's 
mid-range estimate is that the average MLR in the individual market in 
2011 will be 86.5 percent, with a low-range estimate (where low-range 
refers to low-range for the rebate estimate) of 87.2 percent, and a 
high-range rebate estimate of 84.2 percent. The mid-range estimate is 
approximately 7 percentage points above the unadjusted estimate. Of 
this difference, 3.5 percentage points results from the assumption made 
about quality improving and other behavior assumptions (3 percentage 
points for quality improving activities and 0.5 percentage points for 
other behavioral assumptions), and 3.6 of the percentage point 
difference comes from the other adjustments, primarily the exclusion of 
Federal and State taxes and licensing and regulatory fees from the 
denominator, as well as the credibility adjustment.
    The average adjusted MLR in the small group market in 2011 is 
estimated to be 90.8 percent for the mid-range estimate, and is 
estimated at 94.2 percent for the mid-range estimate in the large group 
market.
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[[Page 74905]]

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BILLING CODE 4150-03-C

[[Page 74906]]

e. Estimated Range of MLR Rebates
    As shown in Table VI.7, in the mid-range estimate in the individual 
market, rebates in 2011 are estimated to be $521 million. The $521 
million accounts for approximately 7 percent of premium revenue at 
companies required to pay a rebate--that is, the average rebate at 
companies required to pay a rebate in the individual market is 
estimated to be 7 percent of premium. The $521 million accounts for 
approximately 2 percent of all premiums written in the individual 
market. Approximately 3.2 million people, accounting for approximately 
30 percent of enrollees in the individual market are estimated to 
receive a rebate, and the average rebate per person receiving a rebate 
is estimated as $164.
    Over the 2011-2013 period, the Department's mid-range estimate is 
that rebates will total $1.8 billion in the individual market, $770 
million in the small group market, and $440 million in the large group 
market. Additionally, the Department estimates that 9.9 million 
enrollees in the individual market, 2.3 million enrollees in the small 
group market, and 2.7 million enrollees in the large group market will 
receive rebates over the 2011-2013 period under the mid-range estimate. 
Summing across all three markets, the mid-range estimate is a total of 
$3.0 billion in rebates over the 2011-2013 period. The low rebate 
estimate across all three markets for 2011-2013 is $2.0 billion, and 
the high rebate estimate is $4.9 billion.
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[[Page 74907]]

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[[Page 74908]]


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[[Page 74909]]


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BILLING CODE 4150-03-C

[[Page 74910]]

    In the low-rebate estimate, total rebates in the individual market 
are estimated at $337 million, with 21 percent of enrollees in the 
individual market estimated to receive a rebate, and in the high-rebate 
scenario, $839 million, with 50 percent of enrollees.\22\
---------------------------------------------------------------------------

    \22\ The average rebate per person receiving a rebate is 
slightly lower in the high rebate scenario than in the mid-range 
scenario because in the high rebate scenario there are a larger 
number of issuers and enrollees with MLRs that are close to the 80 
percent threshold, and average rebates for these enrollees are 
relatively low.
---------------------------------------------------------------------------

    Estimated rebates in the small group market range from $166 million 
to $359 million, with a mid-range estimate of $226 million (Table 
VI.8), and from $84 million to $258 million in the large group market, 
with a mid-range estimate of $121 million. In both the small group and 
large group (Table VI.9) markets a small fraction of enrollees are 
estimated to receive rebates--in the mid-range scenario, 3 percent in 
the small group market and 2 percent in large group.
f. Potential Impact of State Destabilization Adjustment Requests on MLR 
Rebates
    Section 2718(b)(1)(A)(ii) provides that the Secretary may adjust 
the 80 percent level with respect to the individual market of a State 
``if the Secretary determines that the application of such 80 percent 
may destabilize the individual market in such State.'' Subpart C of 
this interim final regulation implements this provision by setting 
forth who may apply, how to apply, the criteria used in assessing an 
application, and how the adjustment would be made. It proposes that 
States apply for a specific adjustment to the individual market 
threshold that would be approved only if, according to information 
provided to the Secretary and assessed by the proposed criteria, there 
is a reasonable likelihood that market destabilization would occur in 
the absence of such an adjustment.
    Prior to the publication of this interim final regulation, several 
States have indicated their interest in an adjustment to the MLR 
threshold for their individual markets. However, this interest was 
expressed before the NAIC recommendations and proposed rules that may 
lessen the need for such an adjustment. For example, the credibility 
adjustments, newer plan adjustments, and treatment of Federal taxes may 
lessen what they had projected would be the impact of the MLR rules. In 
addition, as described earlier, the behavioral response of issuers to 
the proposed rules is uncertain. As such, the Department has not 
produced quantitative estimates of the potential impact of this 
authority.
    However, if this authority is exercised, by definition, there would 
be fewer issuers and enrollees to whom rebates in the individual market 
apply. There would also be fewer benefits as well as costs than 
previously described. While the benefit of transparency would persist 
regardless of whether a rebate is made, issuers may have less of an 
incentive to improve quality or benefits if the MLR threshold were 
lower than 80 percent. At the same time, the goal of the adjustment is 
prevent disruption, so individuals in States whose MLR threshold has 
been adjusted would have more health insurance options than they 
otherwise would.
7. Estimated Administrative Costs Related to MLR Provisions
    As stated earlier in this preamble, this interim final regulation 
implements the reporting requirements of section 2718(a), describing 
the type of information that is to be included in the report to the 
Secretary and made available to consumers, as well as the rebate 
calculation, payment and enforcement provisions of section 2718(b). The 
Department has quantified the primary sources of start-up costs that 
issuers in the individual and group markets will incur to bring 
themselves into compliance with this interim final regulation, as well 
as the ongoing annual costs that they will incur related to these 
requirements. These costs and the methodology used to estimate them are 
discussed below and in the Technical Appendix available at http://www.hhs.gov/ociio/regulations/index.html. Additional detail on these 
estimates can be found in the Paperwork Reduction Act section of this 
preamble and we welcome comment on them.
a. Methodology and Assumptions for Estimating Administrative Costs
    The Affordable Care Act MLR reporting requirements will affect 
health insurance issuers offering coverage in the individual and group 
markets, including both the small group and large group markets. As 
discussed earlier, most of the affected issuers currently report 
similar data to the NAIC as part of their annual financial statements. 
However, this interim final regulation includes requirements related to 
calculating some additional data elements, and allocating data by 
company, State and market.
    As discussed earlier in this impact analysis, in order to assess 
the potential administrative burden relating to the requirements in 
this interim final regulation, the Department consulted with the NAIC 
and an industry expert to gain insight into the tasks and level of 
effort required. Based on these discussions, the Department estimates 
that issuers will incur one-time start-up costs associated with 
developing teams to review the requirements in this interim final 
regulation, and developing processes for capturing the necessary data 
(e.g., automating systems; writing new policies for tracking expenses 
in the general ledger; developing methodologies for allocating expenses 
by State, company and market; etc.). The Department estimates that 
issuers will also incur ongoing annual costs relating to data 
collection, populating the MLR reporting forms, conducting a final 
internal review, submitting the reports to the Secretary, internal 
audit, record retention, and preparing and mailing rebate 
notifications/payments (where appropriate).
    The Department anticipates that the level of effort relating to 
these activities will vary depending on the scope of an issuer's 
operations. Each issuer's estimated reporting burden is likely to be 
affected by a variety of factors that will affect the level of 
complexity of its filing--including the number of markets in which it 
operates (e.g., individual, small group, large group), the number of 
States and licensed entities through which it offers coverage, the 
degree to which it currently captures relevant data at the State/
company/market level, firm size (e.g., claims, premiums, covered 
lives), whether it offers other types of A&H coverage, whether it is a 
Health Blank or Life Blank filer, and whether it is a subsidiary of a 
larger carrier. The assumptions used by the Department to estimate the 
administrative burden of reporting data needed to calculate MLRs, and 
information about the uncertainties associated with these assumptions 
is provided in the Technical Appendix, available at http://www.hhs.gov/ociio/regulations/index.html.
b. Estimated Costs Related to MLR Reporting
    For each MLR reporting year (defined as a calendar year for 
purposes of this interim final regulation), issuers offering coverage 
in the individual and group markets must submit a report to the 
Secretary by June 1 of the following year that complies with the 
requirements of this interim final rule on a form and in the manner 
prescribed by the Secretary. For purposes of these impact estimates, 
the Department assumes that there will be a single MLR data submission 
for purposes of both the NAIC annual report and reporting to the 
Secretary, and that this report would include data

[[Page 74911]]

relating to both the amounts expended on reimbursement for clinical 
services, activities that improve quality and other non-clinical costs, 
as well as information relating to rebates.
    The estimated total number of MLR data reports that issuers subject 
to the MLR reporting requirements will be required to submit to the 
Secretary under the provisions of this interim final regulation is 
3,317. This is an upper-bound estimate, assuming that all issuers 
offering coverage in both the individual and small group markets will 
be submitting separate reports to the Secretary for this coverage. 
However, as discussed elsewhere in this preamble, the provisions of 
this interim final regulation allow issuers offering coverage in States 
requiring that the individual and small group markets be combined to 
submit consolidated reports for these two markets.
    Table VI.10 shows that the Department estimates that issuers will 
incur one-time costs relating to the MLR reporting requirements in this 
interim final rule of approximately $75,018 to $151,507 per issuer on 
average, and annual ongoing costs of about $17,261 to $32,259 per 
issuer annually thereafter.
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[[Page 74912]]

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[[Page 74913]]


c. Estimated Costs Related to MLR Record Retention Requirements
    Consistent with the assumptions discussed above, MLR record 
retention costs are assumed to be relatively negligible, since issuers 
already retain similar data for State audits. Table VI.11 shows that 
the Department estimates that issuers will incur annual ongoing costs 
relating to the MLR reporting requirements in this interim final rule 
of approximately $17 to $29 per issuer on average.

[[Page 74914]]

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[[Page 74915]]


d. Estimated Costs Related to MLR Rebate Notifications and Payments
    Consistent with the assumptions discussed above, rebate 
notification and payment costs are expected to be relatively negligible 
on a per-notification and per-check basis, in particular because 
issuers have the option of paying rebates through premium withholds. 
However, the estimated total costs relating to rebate notifications and 
payments reflect the relatively large numbers of enrollees that could 
potentially receive rebates during any given year, and will be 
sensitive to annual fluctuations in the number of licensed entities 
that owe rebates for a given State and market.
    Table VI.12 shows that the Department estimates that in 2011, 
approximately 60 to 119 issuers (companies) will pay rebates for at 
least one licensed entity/State/market combination, and that annual 
ongoing costs relating to the MLR rebate payment and notification 
requirements in this interim final rule will be approximately $58,010 
to $122,891 per affected issuer during that year on average. This 
number will be sensitive to annual fluctuations in the number of 
licensed entities that owe rebates for a given State and market.

[[Page 74916]]

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BILLING CODE 4150-03-C

[[Page 74917]]

C. Regulatory Alternatives

    Under the Executive Order, the Department is required to consider 
alternatives to issuing regulations and alternative regulatory 
approaches. The Department considers a variety of regulatory 
alternative below.
1. Credibility Adjustment
    Section 2718(c) requires the NAIC to develop uniform definitions 
and calculation methodologies subject to certification by the 
Secretary. This section directs the NAIC to take into account the 
special circumstances of smaller plans. In response to this direction, 
the NAIC recommended a credibility adjustment for smaller plans. After 
considering the NAIC's recommendation on credibility adjustments, HHS 
has decided to certify and adopt it in full.
    One alternative to the credibility adjustment in this interim final 
regulation would be to not make any adjustment for credibility, and to 
require smaller plans to make rebate payments on the same terms as 
larger plans. If the Department had not adopted a credibility 
adjustment, the estimated mid-range rebate in the individual market in 
2011 would be approximately $682 million, or approximately $161 million 
larger than the estimate shown in Table VI.7 including the credibility 
adjustment. The mid-range estimated rebate in the small group market 
would be $292 million, $66 million larger than the estimate in Table 
VI.8, and the mid-range estimate for the large group market would be 
$178 million, $57 million larger than the estimate in Table VI.9. As 
described elsewhere in this preamble, the Department has concluded that 
the credibility adjustment as proposed will best balance the goals of 
providing value to consumers assuring that issuers with relatively few 
subscribers will be able to function effectively.
2. Federal Taxes
    As described elsewhere in this preamble, after considering the 
NAIC's recommendation on treatment of Federal taxes in the denominator 
of the MLR calculation, HHS has decided to certify and adopt it in 
full. An alternative would have been to adopt a narrower definition of 
the Federal taxes to be excluded. If the Department had decided that 
payroll and Social Security taxes should be included in the 
denominator, rather than excluded from the denominator as provided in 
this interim final regulation, the estimated rebate in the mid-range 
scenario in the individual market would have been $552 million, or $31 
million higher than in the estimate shown in Table VI.7. Similarly, the 
effect of this regulatory alternative in the small group and large 
group markets would have been to increase the estimated rebate by $9 
million in each of these two markets. As described elsewhere in this 
preamble, the Department has concluded that excluding payroll taxes and 
Social Security taxes from the denominator balances the legitimate 
needs of insurers with the needs of consumers.
3. Quality Improving Activities
    Section 2718(a)(2) of the PHS Act requires health insurance issuers 
to submit an annual report to the Secretary concerning the percent of 
total premium revenue that is spent on activities that improve health 
care quality, and Section 2718(c) of the PHS Act directs the NAIC, 
subject to certification by the Secretary, to establish uniform 
definitions of activities that improve health care quality.
    As discussed elsewhere in this preamble, the NAIC recommended 
definitions of quality improving activities that are consistent with 
the categories set forth in Section 2717 of the PHS Act. After 
considering the NAIC's recommendation on the definition of quality 
improving activities, HHS has decided to certify and adopt it in full. 
As discussed elsewhere in this preamble, potential alternatives would 
have been to adopt narrower or broader definitions of quality improving 
activities. These distinctions can be made based on the criteria for 
selecting quality improving activities and/or the specific types of 
activities included in the definition.
    This interim final regulation defines quality-improving activities 
as being grounded in evidence-based medicine, designed to improve the 
quality of care received by an enrollee, and capable of being 
objectively measured and producing verifiable results and achievements. 
A narrower definition might include only evidence-based quality 
improving initiatives, while excluding activities that have not been 
demonstrated to improve quality. Similarly, a narrower definition would 
not allow for inclusion of future innovations before data are available 
demonstrating their effectiveness.
    Conversely, a broader definition might allow additional types of 
administrative expenses to be counted as activities that improve 
quality--such as network fees associated with third party provider 
networks or costs associated with converting International 
Classification of Disease (ICD) code sets from ICD-9 to ICD-10. As 
discussed elsewhere in this preamble, while the Department agrees that 
certain administrative expenses should not be counted as quality 
improving, some traditional administrative activities can qualify as 
quality improving if they meet the criteria set forth in this interim 
final regulation.
    The Department does not have data available to estimate the effects 
of alternative definitions of quality improving activities on MLRs, 
although it should be clear that if a broader definition of quality 
improving activities had been adopted that estimated rebates would be 
smaller, and if a narrowed definition had been adopted, estimated 
rebates would be larger.
4. Level of Aggregation
    As discussed elsewhere in this preamble, the NAIC could have 
recommended that MLRs be aggregated to the national level for multi-
State companies, rather than be calculated separately in each State. If 
MLRs were calculated at the national level for multi-State companies, 
estimated rebates in the individual market in the mid-range scenario 
would have been $461 in 2011, or $60 million less than the estimates 
provided in Table VI.7. The estimated effects of national-level 
aggregation on the small group and large group markets are 
proportionally larger: in the small group market, estimated rebates in 
the mid-range scenario fall from $226 million to $97 million in 2011, 
and in the large group market, from $121 to $42 million.
    Requiring issuers to aggregate their individual, small group and 
large group experience at the national level, rather than by State 
could reduce the administrative burden associated with these 
requirements because nearly a third of the issuers that would be 
affected by the requirements of this interim final regulation offer 
coverage in multiple States. For example, under the Department's mid-
range estimates, the estimated number of MLR reports to the Secretary 
would decrease by 29 percent (from 3,317 to 972), and the estimated 
one-time and annual ongoing costs associated with MLR reporting would 
decrease by approximately 49 percent compared with what is shown in 
Table VI.10.
    Because insurance is regulated primarily at the State level, and 
because it is important for consumers in each State to receive value 
for their insurance premium, the Department has concluded that MLRs 
should be calculated at the issuer/market/State level, rather than 
aggregating results to

[[Page 74918]]

the national level. After considering the NAIC's recommendation on the 
level of aggregation for purposes of MLR reporting and rebate 
calculation, HHS has decided to certify and adopt it in full.
    We welcome comments on the likely costs and benefits of this rule 
as presented, on alternatives that would improve the consumer and small 
business purchaser information to be provided, and on our quantitative 
estimates of burden.

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies that issue a 
regulation to analyze options for regulatory relief of small businesses 
if a rule has a significant impact on a substantial number of small 
entities. The RFA generally defines a ``small entity'' as (1) a 
proprietary firm meeting the size standards of the Small Business 
Administration (SBA), (2) a nonprofit organization that is not dominant 
in its field, or (3) a small government jurisdiction with a population 
of less than 50,000 (States and individuals are not included in the 
definition of ``small entity''). HHS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent.
    The Regulatory Flexibility Act only requires an analysis to be 
conducted for those final rules for which a Notice of Proposed Rule 
Making was required. Accordingly, we have determined that a regulatory 
flexibility analysis is not required for this interim final rule. 
However, the Department has considered the likely impact of this 
interim final rule on small entities.
    As discussed in the Web Portal interim final rule (75 FR 24481), 
HHS examined the health insurance industry in depth in the Regulatory 
Impact Analysis we prepared for the proposed rule on establishment of 
the Medicare Advantage program (69 FR 46866, August 3, 2004). In that 
analysis the Department determined that there were few if any insurance 
firms underwriting comprehensive health insurance policies (in 
contrast, for example, to travel insurance policies or dental discount 
policies) that fell below the size thresholds for ``small'' business 
established by the SBA (currently $7 million in annual receipts for 
health insurers).\23\
---------------------------------------------------------------------------

    \23\ ``Table of Size Standards Matched To North American 
Industry Classification System Codes,'' effective November 5, 2010, 
U.S. Small Business Administration, available at http://www.sba.gov.
---------------------------------------------------------------------------

    The Department has used the data set created from 2009 NAIC Health 
and Life Blank annual financial statement data to develop an updated 
estimate of the number of small entities that offer comprehensive major 
medical coverage in the individual and small group markets, and are 
therefore subject to the MLR reporting requirements. For purposes of 
this analysis, the Department is using total Accident and Health (A&H) 
earned premiums as a proxy for annual receipts. These estimates may 
overstate the actual number of small health insurance issuers that 
would be affected, since they do not include receipts from these 
companies' other lines of business.
    The Department estimates that there are 28 small entities with less 
than $7 million in A&H earned premiums that offer individual or group 
comprehensive major medical coverage, and would therefore be subject to 
the requirements of this interim final regulation. These small entities 
account for 6 percent of the estimated 442 total issuers that the 
Department estimates will be affected by these requirements. The 
Department estimates that 86 percent of these small issuers are 
subsidiaries of larger carriers, 75 percent only offer coverage in a 
single State, 68 percent only offer individual or group comprehensive 
coverage in a single market, 46 percent also offer other types of A&H 
coverage, and 29 percent are Life Blank filers.
    As discussed elsewhere in this preamble, Section 2718(c) of the PHS 
Act directed the NAIC to take the special circumstances of small plans 
into account in developing uniform definitions and calculation 
methodologies relating to the data being reported to the Secretary in 
Section 2718(a). This has been accomplished through the credibility 
adjustment, which provides that issuers with non-credible experience in 
a given market, based on definitions established by the NAIC, are not 
required to provide any rebate to enrollees in that State/market 
because the issuer does not insure a sufficiently large number of lives 
to yield a statistically valid MLR. Additionally, issuers with 
partially credible experience in a given State/market are allowed to 
make a credibility adjustment to their MLR during that year.
    The Department estimates that the 28 small issuers that are subject 
to the requirements of this interim final regulation offer individual 
and group coverage through 73 licensed entities (company/State 
combinations). For example, the Department estimates that all of the 
total 85 company/State/market combinations offered by small entities 
will be either non-credible (92 percent) or partially credible (8 
percent) in 2011.
    The Department estimates that small entities will owe approximately 
$435,000 to $656,000 in rebates in 2011, accounting for 0.5 to 0.7 
percent of their total A&H premiums during that year. By comparison, 
the Department estimates that small entities will owe approximately 
$1.8 to $3.0 million in rebates in 2013, accounting for 1.9 to 2.9 
percent of their total A&H premiums during that year.
    Additionally, the Department estimates that small entities will 
spend $44,656 to $62,518 per issuer in one-time costs (accounting for 
1.3 to 1.9 percent of their total A&H premiums), and $10,240 to $14,031 
per issuer in annual ongoing costs (accounting for 0.3 to 0.4 percent 
of their total A&H premiums) related to the MLR reporting, record 
retention, and rebate payment and notification requirements.
BILLING CODE 4150-03-P

[[Page 74919]]

[GRAPHIC] [TIFF OMITTED] TR01DE10.076

BILLING CODE 4150-03-C

[[Page 74920]]

    As discussed earlier, the Department believes that these estimates 
overstate the number of small entities that will be affected by the 
requirements in this interim final regulation, as well as the relative 
impact of these requirements on these entities because the Department 
has based its analysis on issuers' total A&H earned premiums (rather 
than their total annual receipts). Therefore, the Secretary certifies 
that these interim final regulations will not have significant impact 
on a substantial number of small entities. In addition, section 1102(b) 
of the Social Security Act requires us to prepare a regulatory impact 
analysis if a rule may have a significant economic impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. This 
interim final rule would not affect small rural hospitals. Therefore, 
the Secretary has determined that this rule would not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.

E. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that includes a Federal mandate that could result in 
expenditure in any one year by State, local or tribal governments, in 
the aggregate, or by the private sector, of $100 million in 1995 
dollars, updated annually for inflation. In 2010, that threshold level 
is approximately $135 million.
    UMRA does not address the total cost of a rule. Rather, it focuses 
on certain categories of cost, mainly those ``Federal mandate'' costs 
resulting from: (1) Imposing enforceable duties on State, local, or 
tribal governments, or on the private sector; or (2) increasing the 
stringency of conditions in, or decreasing the funding of, State, 
local, or tribal governments under entitlement programs.
    This interim final regulation is not subject to the Unfunded 
Mandates Reform Act, because it is being issued as an interim final 
regulation. However, consistent with policy embodied in UMRA, this 
interim final regulation has been designed to be the least burdensome 
alternative for State, local and tribal governments, and the private 
sector while achieving the objectives of the Affordable Care Act.
    This interim final regulation contains MLR reporting, data 
retention and rebate notification and payment requirements for private 
sector firms (for example, health insurance issuers offering coverage 
in the individual and group markets), but these will not cost more than 
the approximately $32 million to $68 million in one-time administrative 
costs, and $11 million to $29 million in annual ongoing administrative 
costs related to complying with the requirements of this interim final 
regulation that we have estimated. This interim final rule also 
contains requirements related to rebates paid by issuers to enrollees 
for coverage offered in the individual, small group, and large group 
markets that does not meet the minimum MLR standards. The Department's 
estimates that approximately 2.8 million to 9.6 million enrollees could 
receive $0.6 to $1.8 billion in rebates during any individual year 
between 2011 and 2013. It includes no mandates on State, local, or 
tribal governments. Under Section 2718 of the Affordable Care Act, 
issuers are required to submit MLR data reports directly to the 
Secretary. States may voluntarily choose to review the MLR data that 
issuers submit through the NAIC supplemental blank; develop or modify 
their regulations relating to MLR definitions and calculation 
methodologies, reporting and rebates; request adjustments of the 80 
percent individual market minimum MLR threshold under the 
destabilization policy; or modify their audit methodologies to include 
a more comprehensive review of MLR data reported under Section 2718. 
However, if they choose not to do so, the Secretary has direct 
enforcement authority relating to this provision. Thus, the law and 
this regulation do not impose an unfunded mandate on States.

F. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. In the Department's view, while this interim final rule 
does not impose substantial direct requirement costs on State and local 
governments, this interim final regulation has Federalism implications 
due to direct effects on the distribution of power and responsibilities 
among the State and Federal governments relating to determining and 
enforcing minimum MLR standards, reporting and rebate requirements 
relating to coverage that State-licensed health insurance issuers offer 
in the individual and group markets.
    However, the Department anticipates that the Federalism 
implications (if any) are substantially mitigated because the 
Affordable Care Act does not provide any role for the States in terms 
of receiving or analyzing the data or enforcing the requirements of 
Section 2718 of the PHS Act. The enforcement provisions of this interim 
final rule state that the Secretary has enforcement authority and does 
not require the States to do anything. The States already require 
issuers to report the NAIC Annual Statement (Blanks) and audit those 
data. The regulation does contemplate that if a State includes MLR in 
its audit of issuers, the Secretary has the discretion to accept that 
audit. But, again, the regulation does not require the States to do 
anything and, in fact, it is not clear that we even have statutory 
authority to require them to do anything with respect to the MLR. It is 
HHS' responsibility to do the audits and enforce the statutory 
requirements.
    States may continue to apply State law requirements except to the 
extent that such requirements prevent the application of the Affordable 
Care Act requirements that are the subject of this rulemaking. State 
insurance laws that are more stringent than the Federal requirements 
are unlikely to ``prevent the application of'' the Affordable Care Act, 
and be preempted. Additionally, States have an opportunity to request 
adjustments of the 80 percent individual market minimum MLR threshold 
under the destabilization policy, subject to the Secretary's approval. 
Accordingly, States have significant latitude to impose requirements on 
health with respect to health insurance issuers, insurance issuers that 
are more restrictive than the Federal law.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policy making discretion of the States, the 
Department has engaged in efforts to consult with and work 
cooperatively with affected States, including participating in 
conference calls with and attending conferences of the National 
Association of Insurance Commissioners, and consulting with State 
insurance officials on an individual basis.
    Throughout the process of developing this interim final regulation, 
to the extent feasible within the specific preemption provisions of 
HIPAA as it applies to the Affordable Care Act, the Department has 
attempted to balance the States' interests in regulating health 
insurance issuers, and Congress' intent to provide uniform minimum 
protections to consumers in every State.

[[Page 74921]]

By doing so, it is the Department's view that we have complied with the 
requirements of Executive Order 13132. Pursuant to the requirements set 
forth in section 8(a) of Executive Order 13132, and by the signatures 
affixed to this regulation, the Department certifies that the Office of 
Consumer Information and Insurance Oversight has complied with the 
requirements of Executive Order 13132 for the attached interim final 
regulation in a meaningful and timely manner.

G. Congressional Review Act

    This interim final regulation is subject to the Congressional 
Review Act provisions of the Small Business Regulatory Enforcement 
Fairness Act of 1996 (5 U.S.C. 801 et seq.) and have been transmitted 
to Congress and the Comptroller General for review.
    In accordance with the provisions of Executive Order 12866, this 
interim final rule was reviewed by the Office of Management and Budget.

List of Subjects in 45 CFR Part 158

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


0
For the reasons stated in the preamble, the Department of Health and 
Human Services amends 45 CFR subtitle A, subchapter B, by adding a new 
part 158 to read as follows:

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

Sec.
158.101 Basis and scope.
158.102 Applicability.
158.103 Definitions.
Subpart A--Disclosure and Reporting
158.110 Reporting requirements related to premiums and expenditures.
158.120 Aggregate reporting.
158.121 Newer experience.
158.130 Premium revenue.
158.140 Reimbursement for clinical services provided to enrollees.
158.150 Activities that improve health care quality.
158.151 Expenditures related to Health Information Technology and 
meaningful use requirements.
158.160 Other non-claims costs.
158.161 Reporting of Federal and State licensing and regulatory 
fees.
158.162 Reporting of Federal and State taxes.
158.170 Allocation of expenses.
Subpart B--Calculating and Providing the Rebate
158.210 Minimum medical loss ratio.
158.211 Requirement in States with a higher medical loss ratio.
158.220 Aggregation of data in calculating an issuer's medical loss 
ratio.
158.221 Formula for calculating an issuer's medical loss ratio.
158.230 Credibility adjustment.
158.231 Life-years used to determine credible experience.
158.232 Calculating the credibility adjustment.
158.240 Rebating premium if the applicable medical loss ratio 
standard is not met.
158.241 Form of rebate.
158.242 Recipients of rebates.
158.243 De minimis rebates.
158.244 Unclaimed rebates.
158.250 Notice of rebates.
158.260 Reporting of rebates.
158.270 Effect of rebate payments on solvency.
Subpart C--Potential Adjustment to the MLR for a State's Individual 
Market
158.301 Standard for adjustment to the medical loss ratio.
158.310 Who may request adjustment to the medical loss ratio.
158.311 Duration of adjustment to the medical loss ratio.
158.320 Information supporting a request for adjustment to the 
medical loss ratio.
158.321 Information regarding the State's individual health 
insurance market.
158.322 Proposal for adjusted medical loss ratio.
158.323 State contact information.
158.330 Criteria for assessing request for adjustment to the medical 
loss ratio.
158.340 Process for submitting request for adjustment to the medical 
loss ratio.
158.341 Treatment as a public document.
158.342 Invitation for public comments.
158.343 Optional State hearing.
158.344 Secretary's discretion to hold a hearing.
158.345 Determination on a State's request for adjustment to the 
medical loss ratio.
158.346 Request for reconsideration.
158.350 Subsequent requests for adjustment to the medical loss 
ratio.
Subpart D--HHS Enforcement
158.401 HHS enforcement.
158.402 Audits.
158.403 Circumstances in which a State is conducting audits of 
issuers.
Subpart E--Additional Requirements on Issuers
158.501 Access to facilities and records.
158.502 Maintenance of records.
Subpart F--Federal Civil Penalties
158.601 General rule regarding the imposition of civil penalties.
158.602 Basis for imposing civil penalties.
158.603 Notice to responsible entities.
158.604 Request for extension.
158.605 Responses to allegations of noncompliance.
158.606 Amount of penalty--general.
158.607 Factors HHS uses to determine the amount of penalty.
158.608 Determining the amount of the penalty--mitigating 
circumstances.
158.609 Determining the amount of the penalty--aggravating 
circumstances.
158.610 Determining the amount of the penalty--other matters as 
justice may require.
158.611 Settlement authority.
158.612 Limitations on penalties.
158.613 Notice of proposed penalty.
158.614 Appeal of proposed penalty.
158.615 Failure to request a hearing.

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


Sec.  158.101  Basis and scope.

    (a) Basis. This Part implements section 2718 of the Public Health 
Service Act (PHS Act).
    (b) Scope. Subpart A of this Part establishes the requirements for 
health insurance issuers (``issuers'') offering group or individual 
health insurance coverage to report information concerning premium 
revenues and the use of such premium revenues for clinical services 
provided to enrollees, activities that improve health care quality, and 
all other non-claims costs. Subpart B describes how this information 
will be used to determine, with respect to each medical loss ratio 
(MLR) reporting year, whether the ratio of the amount of adjusted 
premium revenue expended by the issuer on permitted costs to the total 
amount of adjusted premium revenue (MLR) meets or exceeds the 
percentages established by section 2718(b)(1) of the PHS Act. Subpart B 
also addresses requirements for calculating any rebate amounts that may 
be due in the event an issuer does not meet the applicable MLR 
standard. Subpart C implements the provision of section 2718(b)(A)(ii) 
of the PHS Act allowing the Secretary to adjust the MLR standard for 
the individual market in a State if requiring issuers to meet that 
standard may destabilize the individual market. Subparts D through F 
provide for enforcement of this part, including requirements for 
issuers to maintain records and civil monetary penalties that may be 
assessed against issuers who violate the requirements of this Part.


Sec.  158.102  Applicability.

    General requirements. The requirements of this Part apply to 
issuers offering group or individual health insurance coverage, 
including a grandfathered health plan as defined in Sec.  147.140 of 
this subpart.


Sec.  158.103  Definitions.

    For the purposes of this Part, the following definitions apply 
unless specified otherwise.
    Contract reserves means reserves that are established by an issuer 
which, due

[[Page 74922]]

to the gross premium pricing structure at issue, account for the value 
of the future benefits that at any time exceeds the value of any 
appropriate future valuation of net premiums at that time. Contract 
reserves must not include premium deficiency reserves. Contract 
reserves must not include reserves for expected MLR rebates.
    Direct paid claims means claim payments before ceded reinsurance 
and excluding assumed reinsurance except as otherwise provided in this 
Part.
    Enrollee means an individual who is enrolled, within the meaning of 
Sec.  144.103 of this title, in group health insurance coverage, or an 
individual who is covered by individual insurance coverage, at any time 
during an MLR reporting year.
    Experience rating refund means the return of a portion of premiums 
pursuant to a retrospectively rated funding arrangement when the sum of 
incurred losses, retention and margin are less than earned premium.
    Group conversion charges means the portion of earned premium 
allocated to providing the privilege for a certificate holder 
terminated from a group health plan to purchase individual health 
insurance without providing evidence of insurability.
    Health Plan means health insurance coverage offered through either 
individual coverage or a group health plan.
    Individual market has the meaning given the term in section 
2791(e)(1) of the PHS Act and section 1304(a)(2) of the Affordable Care 
Act.
    Large Employer has the meaning given the term in section 2791(e)(2) 
of the PHS Act and section 1304(b)(1) of the Affordable Care Act, 
except that as provided by section 1304(b)(3) of the Affordable Care 
Act, until 2016 a State may substitute ``51'' employees for ``101'' 
employees in the definition.
    Large group market has the meaning given the term in section 
2791(e)(3) of the PHS Act and section 1304(a)(3) of the Affordable Care 
Act.
    MLR reporting year means a calendar year during which group or 
individual health insurance coverage is provided by an issuer.
    Multi-State blended rate means a single rate charged for health 
insurance coverage provided to a single employer through two or more of 
an issuer's affiliated companies for employees in two or more States.
    Policyholder means any entity that has entered into a contract with 
an issuer to receive health insurance coverage as defined in section 
2791(b) of the PHS Act.
    Situs of the contract means the jurisdiction in which the contract 
is issued or delivered as stated in the contract.
    Small Employer has the meaning given the term in section 2791(e)(4) 
of the PHS Act and section 1304(b)(2) of the Affordable Care Act, 
except that as provided by section 1304(b)(3) of the Affordable Care 
Act, until 2016 a State may substitute ``50'' employees for ``100'' 
employees in the definition.
    Small group market has the meaning in section 2791(e)(5) of the PHS 
Act and section 1304(a)(3) of the Affordable Care Act.
    Subscriber refers to both the group market and the individual 
market. In the group market, subscriber means the individual, generally 
the employee, whose eligibility is the basis for the enrollment in the 
group health plan and who is responsible for the payment of premiums. 
In the individual market, subscriber means the individual who purchases 
an individual policy and who is responsible for the payment of 
premiums.
    Unearned premium means that portion of the premium paid in the MLR 
reporting year that is intended to provide coverage during a period 
which extends beyond the MLR reporting year.
    Unpaid Claim Reserves means reserves and liabilities established to 
account for claims that were incurred during the MLR reporting year but 
had not been paid within 3 months of the end of the MLR reporting year.

Subpart A--Disclosure and Reporting


Sec.  158.110  Reporting requirements related to premiums and 
expenditures.

    (a) General requirements. For each MLR reporting year, an issuer 
must submit to the Secretary a report which complies with the 
requirements of this Part, concerning premium revenue and expenses 
related to the group and individual health insurance coverage that it 
issued.
    (b) Timing and form of report. (1) Except as provided in paragraph 
(b)(2) of this section, the report for each MLR reporting year 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.
    (2) An issuer that reports its experience separately under Sec.  
158.120(d)(3) or (4) of this subpart must submit a report for each 
quarter of the 2011 MLR reporting year, on the same form and in the 
same manner as described in paragraph (b)(1) of this section, as 
follows:
    (i) By May 1 for the quarter ending March 31;
    (ii) By August 1 for the quarter ending June 30; and
    (ii) By November 1 for the quarter ending September 30.
    (c) Transfer of Business. Issuers that purchase a line or block of 
business from another issuer during an MLR reporting year are 
responsible for submitting the information and reports required by this 
Part for the assumed business, including for that part of the MLR 
reporting year that was prior to the purchase.


Sec.  158.120  Aggregate reporting.

    (a) General requirements. For purposes of submitting the report 
required in Sec.  158.110 of this subpart, the issuer must submit a 
report for each State in which it is licensed to issue health insurance 
coverage that includes the experience of all policies issued in the 
State during the MLR reporting year covered by the report. The report 
must aggregate data for each entity licensed within a State, aggregated 
separately for the large group market, the small group market and the 
individual market. Experience with respect to each policy must be 
included on the report submitted with respect to the State where the 
contract was issued, except as specified in Sec.  158.120(d) of this 
subpart.
    (b) Group Health Insurance Coverage in Multiple States. Group 
coverage issued by a single issuer that covers employees in multiple 
States must be attributed to the applicable State based on the situs of 
the contract. Group coverage issued by multiple affiliated issuers that 
covers employees in multiple States must be attributed by each issuer 
to each State based on the situs of the contract.
    (c) Group Health Insurance Coverage With Dual Contracts. Where a 
group health plan involves health insurance coverage obtained from two 
affiliated issuers, one providing in-network coverage only and the 
second providing out-of-network coverage only, solely for the purpose 
of providing a group health plan that offers both in-network and out-
of-network benefits, experience may be treated as if it were all 
related to the contract provided by the in-network issuer. However, if 
the issuer chooses this method of aggregation, it must apply it for a 
minimum of 3 MLR reporting years.
    (d) Exceptions. (1) For individual market business sold through an 
association, the experience of the issuer must be included in the State 
report for the State that has jurisdiction over the certificate of 
coverage.
    (2) For employer business issued through a group trust or multiple 
employer welfare association, the

[[Page 74923]]

experience of the issuer must be included in the State report for the 
State where the employer or the association has its principal place of 
business.
    (3) For the 2011 MLR reporting year, an issuer with policies that 
have a total annual limit of $250,000 or less must report the 
experience from such policies separately from other policies.
    (4) For the 2011 MLR reporting year, an issuer with group policies 
that provide coverage for employees working outside their country of 
citizenship, employees working outside of their country of citizenship 
and outside the employer's country of domicile, and citizens working in 
their home country, must aggregate the experience from these policies 
but report the experience from such policies separately from other 
policies.


Sec.  158.121  Newer experience.

    If, for any aggregation as defined in Sec.  158.120, 50 percent or 
more of the total earned premium for an MLR reporting year is 
attributable to policies newly issued and with less than 12 months of 
experience in that MLR reporting year, then the experience of these 
policies may be excluded from the report required under Sec.  158.110 
of this subpart for that same MLR reporting year. If an issuer chooses 
to defer reporting of newer business as provided in this section, then 
the excluded experience must be added to the experience reported in the 
following MLR reporting year.


Sec.  158.130  Premium revenue.

    (a) General requirements. An issuer must report to the Secretary 
earned premium for each MLR reporting year. Earned premium means all 
monies paid by a policyholder or subscriber as a condition of receiving 
coverage from the issuer, including any fees or other contributions 
associated with the health plan.
    (1) Earned premium is to be reported on a direct basis except as 
provided in paragraph (b) of this section.
    (2) All earned premium for policies issued by one issuer and later 
assumed by another issuer must be reported by the assuming issuer for 
the entire MLR reporting year during which the policies were assumed 
and no earned premium for that MLR reporting year must be reported by 
the ceding issuer.
    (3) Reinsured earned premium for a block of business that was 
subject to indemnity reinsurance and administrative agreements 
effective prior to March 23, 2010, for which the assuming entity is 
responsible for 100 percent of the ceding entity's financial risk and 
takes on all of the administration of the block, must be reported by 
the assuming issuer and must not be reported by the ceding issuer.
    (b) Adjustments. Earned premium must include adjustments to:
    (1) Account for assessments paid to or subsidies received from 
Federal and State high risk pools.
    (2) Account for portions of premiums associated with group 
conversion charges.
    (3) Account for any experience rating refunds paid or received, 
excluding any rebate paid based upon an issuer's MLR.
    (4) Account for unearned premium.


Sec.  158.140  Reimbursement for clinical services provided to 
enrollees.

    (a) General requirements. The report required in Sec.  158.110 of 
this subpart must include direct claims paid to or received by 
providers, including under capitation contracts with physicians, whose 
services are covered by the policy for clinical services or supplies 
covered by the policy. In addition, the report must include claim 
reserves associated with claims incurred during the MLR reporting year, 
the change in contract reserves, reserves for contingent benefits and 
the claim portion of lawsuits, and any experience rating refunds paid 
or received. Reimbursement for clinical services as defined in this 
section are referred to as ``incurred claims.''
    (1) If there are any group conversion charges for a health plan, 
the conversion charges must be subtracted from the incurred claims for 
the aggregation that includes the conversion policies and this same 
amount must be added to the incurred claims for the aggregation that 
provides coverage that is intended to be replaced by the conversion 
policies.
    (2) Incurred claims must include changes in unpaid claims between 
the prior year's and the current year's unpaid claims reserves, 
including claims reported in the process of adjustment, percentage 
withholds from payments made to contracted providers, claims that are 
recoverable for anticipated coordination of benefits (COB), and claim 
recoveries received as a result of subrogation.
    (3) Incurred claims must include the change in claims incurred but 
not reported from the prior year to the current year. Except where 
inapplicable, the reserve should be based on past experience, and 
modified to reflect current conditions such as changes in exposure, 
claim frequency or severity.
    (4) Incurred claims must include changes in other claims-related 
reserves.
    (5) Incurred claims must include experience rating refunds and 
exclude rebates paid as required by Sec.  158.240 based upon prior MLR 
reporting year experience.
    (b) Adjustments to incurred claims. (1) Adjustments that must be 
deducted from incurred claims:
    (i) Prescription drug rebates received by the issuer.
    (ii) Overpayment recoveries received from providers.
    (2) Adjustments that may be included in incurred claims:
    (i) Market stabilization payments or receipts by issuers that are 
directly tied to claims incurred and other claims based or census based 
assessments.
    (ii) State subsidies based on a stop-loss payment methodology.
    (iii) The amount of incentive and bonus payments made to providers.
    (3) Adjustments that must not be included in incurred claims:
    (i) Amounts paid to third party vendors for secondary network 
savings.
    (ii) Amounts paid to third party vendors for network development, 
administrative fees, claims processing, and utilization management. For 
example, if an issuer contracts with a behavioral health, chiropractic 
network, or high technology radiology vendor, or a pharmacy benefit 
manager, and the vendor reimburses the provider at one amount but bills 
the issuer a higher amount to cover its network development, 
utilization management costs, and profits, then the amount that exceeds 
the reimbursement to the provider must not be included in incurred 
claims.
    (iii) Amounts paid, including amounts paid to a provider, for 
professional or administrative services that do not represent 
compensation or reimbursement for covered services provided to an 
enrollee. For example, medical record copying costs, attorneys' fees, 
subrogation vendor fees, compensation to paraprofessionals, janitors, 
quality assurance analysts, administrative supervisors, secretaries to 
medical personnel and medical record clerks must not be included in 
incurred claims.
    (4) Adjustments that can be either included in or deducted from 
incurred claims:
    (i) Payment to and from unsubsidized State programs designed to 
address distribution of health risks across issuers via charges to low 
risk issuers that are distributed to high risk issuers must be included 
in or deducted from incurred claims, as applicable.
    (ii) [Reserved]
    (5) Other adjustments to incurred claims:
    (i) Affiliated issuers that offer group coverage at a blended rate 
may choose

[[Page 74924]]

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 will be defined prior to January 1, 2011, 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.
    (ii) [Reserved]


Sec.  158.150  Activities that improve health care quality.

    (a) General requirements. The report required in Sec.  158.110 of 
this subpart must include expenditures for activities that improve 
health care quality, as described in this section.
    (b) Activity requirements. Activities conducted by an issuer to 
improve quality must meet the following requirements:
    (1) The activity must be designed to:
    (i) Improve health quality.
    (ii) Increase the likelihood of desired health outcomes in ways 
that are capable of being objectively measured and of producing 
verifiable results and achievements.
    (iii) Be directed toward individual enrollees or incurred for the 
benefit of specified segments of enrollees or provide health 
improvements to the population beyond those enrolled in coverage as 
long as no additional costs are incurred due to the non-enrollees.
    (iv) Be grounded in evidence-based medicine, widely accepted best 
clinical practice, or criteria issued by recognized professional 
medical associations, accreditation bodies, government agencies or 
other nationally recognized health care quality organizations.
    (2) The activity must be primarily designed to:
    (i) Improve health outcomes including increasing the likelihood of 
desired outcomes compared to a baseline and reduce health disparities 
among specified populations.
    (A) Examples include the direct interaction of the issuer 
(including those services delegated by contract for which the issuer 
retains ultimate responsibility under the insurance policy), providers 
and the enrollee or the enrollee's representative (for example, face-
to-face, telephonic, web-based interactions or other means of 
communication) to improve health outcomes, including activities such 
as:
    (1) Effective case management, care coordination, chronic disease 
management, and medication and care compliance initiatives including 
through the use of the medical homes model as defined in section 3606 
of the Affordable Care Act.
    (2) Identifying and addressing ethnic, cultural or racial 
disparities in effectiveness of identified best clinical practices and 
evidence based medicine.
    (3) Quality reporting and documentation of care in non-electronic 
format.
    (4) Health information technology to support these activities.
    (5) Accreditation fees directly related to quality of care 
activities.
    (B) [Reserved]
    (ii) Prevent hospital readmissions through a comprehensive program 
for hospital discharge. Examples include:
    (A) Comprehensive discharge planning (for example, arranging and 
managing transitions from one setting to another, such as hospital 
discharge to home or to a rehabilitation center) in order to help 
assure appropriate care that will, in all likelihood, avoid readmission 
to the hospital;
    (B) Patient-centered education and counseling.
    (C) Personalized post-discharge reinforcement and counseling by an 
appropriate health care professional.
    (D) Any quality reporting and related documentation in non-
electronic form for activities to prevent hospital readmission.
    (E) Health information technology to support these activities.
    (iii) Improve patient safety, reduce medical errors, and lower 
infection and mortality rates.
    (A) Examples of activities primarily designed to improve patient 
safety, reduce medical errors, and lower infection and mortality rates 
include:
    (1) The appropriate identification and use of best clinical 
practices to avoid harm.
    (2) Activities to identify and encourage evidence-based medicine in 
addressing independently identified and documented clinical errors or 
safety concerns.
    (3) Activities to lower the risk of facility-acquired infections.
    (4) Prospective prescription drug Utilization Review aimed at 
identifying potential adverse drug interactions.
    (5) Any quality reporting and related documentation in non-
electronic form for activities that improve patient safety and reduce 
medical errors.
    (6) Health information technology to support these activities.
    (B) [Reserved]
    (iv) Implement, promote, and increase wellness and health 
activities:
    (A) Examples of activities primarily designed to implement, 
promote, and increase wellness and health activities, include--
    (1) Wellness assessments;
    (2) Wellness/lifestyle coaching programs designed to achieve 
specific and measurable improvements;
    (3) Coaching programs designed to educate individuals on clinically 
effective methods for dealing with a specific chronic disease or 
condition;
    (4) Public health education campaigns that are performed in 
conjunction with State or local health departments;
    (5) Actual rewards, incentives, bonuses, reductions in copayments 
(excluding administration of such programs), that are not already 
reflected in premiums or claims should be allowed as a quality 
improvement activity for the group market to the extent permitted by 
section 2705 of the PHS Act;
    (6) Any quality reporting and related documentation in non-
electronic form for wellness and health promotion activities;
    (7) Coaching or education programs and health promotion activities 
designed to change member behavior and conditions (for example, smoking 
or obesity); and
    (8) Health information technology to support these activities.
    (B) [Reserved]
    (v) Enhance the use of health care data to improve quality, 
transparency, and outcomes and support meaningful use of health 
information technology consistent with Sec.  158.151 of this subpart.
    (c) Exclusions. Expenditures and activities that must not be 
included in quality improving activities are:
    (1) Those that are designed primarily to control or contain costs;
    (2) The pro rata share of expenses that are for lines of business 
or products other than those being reported, including but not limited 
to, those that are for or benefit self-funded plans;
    (3) Those which otherwise meet the definitions for quality 
improvement activities but which were paid for with grant money or 
other funding separate from premium revenue;
    (4) Those activities that can be billed or allocated by a provider 
for care delivery and which are, therefore, reimbursed as clinical 
services;
    (5) Establishing or maintaining a claims adjudication system, 
including costs directly related to upgrades in health information 
technology that are designed primarily or solely to improve claims 
payment capabilities or to meet regulatory requirements for processing 
claims (for example, costs of implementing new administrative 
simplification standards and code sets

[[Page 74925]]

adopted pursuant to the Health Insurance Portability and Accountability 
Act (HIPAA), 42 U.S.C. 1320d-2, as amended, including the new ICD-10 
requirements);
    (6) That portion of the activities of health care professional 
hotlines that does not meet the definition of activities that improve 
health quality;
    (7) All retrospective and concurrent utilization review;
    (8) Fraud prevention activities, other than fraud detection/
recovery expenses up to the amount recovered that reduces incurred 
claims;
    (9) The cost of developing and executing provider contracts and 
fees associated with establishing or managing a provider network, 
including fees paid to a vendor for the same reason;
    (10) Provider credentialing;
    (11) Marketing expenses;
    (12) Costs associated with calculating and administering individual 
enrollee or employee incentives;
    (13) That portion of prospective utilization that does not meet the 
definition of activities that improve health quality; and
    (14) Any function or activity not expressly included in paragraph 
(c) of this section, unless otherwise approved by and within the 
discretion of the Secretary, upon adequate showing by the issuer that 
the activity's costs support the definitions and purposes in this Part 
or otherwise support monitoring, measuring or reporting health care 
quality improvement.


Sec.  158.151  Expenditures related to Health Information Technology 
and meaningful use requirements.

    (a) General requirements. An issuer may include as activities that 
improve health care quality such Health Information Technology (HIT) 
expenses as are required to accomplish the activities allowed in Sec.  
158.150 of this subpart and that are designed for use by health plans, 
health care providers, or enrollees for the electronic creation, 
maintenance, access, or exchange of health information, as well as 
those consistent with Medicare and/or Medicaid meaningful use 
requirements, and which may in whole or in part improve quality of 
care, or provide the technological infrastructure to enhance current 
quality improvement or make new quality improvement initiatives 
possible by doing one or more of the following:
    (1) Making incentive payments to health care providers for the 
adoption of certified electronic health record technologies and their 
``meaningful use'' as defined by HHS to the extent such payments are 
not included in reimbursement for clinical services as defined in Sec.  
158.140 of this subpart;
    (2) Implementing systems to track and verify the adoption and 
meaningful use of certified electronic health records technologies by 
health care providers, including those not eligible for Medicare and 
Medicaid incentive payments;
    (3) Providing technical assistance to support adoption and 
meaningful use of certified electronic health records technologies;
    (4) Monitoring, measuring, or reporting clinical effectiveness 
including reporting and analysis of costs related to maintaining 
accreditation by nationally recognized accrediting organizations such 
as NCQA or URAC, or costs for public reporting of quality of care, 
including costs specifically required to make accurate determinations 
of defined measures (for example, CAHPS surveys or chart review of 
HEDIS measures and costs for public reporting mandated or encouraged by 
law.
    (5) Tracking whether a specific class of medical interventions or a 
bundle of related services leads to better patient outcomes.
    (6) Advancing the ability of enrollees, providers, issuers or other 
systems to communicate patient centered clinical or medical information 
rapidly, accurately and efficiently to determine patient status, avoid 
harmful drug interactions or direct appropriate care, which may include 
electronic Health Records accessible by enrollees and appropriate 
providers to monitor and document an individual patient's medical 
history and to support care management.
    (7) Reformatting, transmitting or reporting data to national or 
international government-based health organizations for the purposes of 
identifying or treating specific conditions or controlling the spread 
of disease.
    (8) Provision of electronic health records, patient portals, and 
tools to facilitate patient self-management.
    (b) [Reserved]


Sec.  158.160  Other non-claims costs.

    (a) General requirements. The report required in Sec.  158.110 of 
this subpart must include non-claims costs described in paragraph (b) 
of this section and must provide an explanation of how premium revenue 
is used, other than to provide reimbursement for clinical services 
covered by the benefit plan, expenditures for activities that improve 
health care quality, and Federal and State taxes and licensing or 
regulatory fees as specified in this part.
    (b) Non-claims costs other than taxes and regulatory fees. (1) The 
report required in Sec.  158.110 of this subpart must include any 
expenses for administrative services that do not constitute adjustments 
to premium revenue as provided in Sec.  158.130 of this subpart, 
reimbursement for clinical services to enrollees as defined in Sec.  
158.140 of this subpart, or expenditures on quality improvement 
activities as defined in Sec. Sec.  158.150 and 158.151 of this 
subpart.
    (2) Expenses for administrative services include the following:
    (i) Cost-containment expenses not included as an expenditure 
related to an activity at Sec.  158.150 of this subpart.
    (ii) Loss adjustment expenses not classified as a cost containment 
expense.
    (iii) Direct sales salaries, workforce salaries and benefits.
    (iv) Agents and brokers fees and commissions.
    (v) General and administrative expenses.
    (vi) Community benefit expenditures.


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

    (a) Federal taxes. The report required in Sec.  158.110 of this 
subpart must separately report:
    (1) Federal taxes excluded from premium under subpart B which 
include all Federal taxes and assessments allocated to health insurance 
coverage reported under section 2718 of the PHS Act.
    (2) Federal taxes not excluded from premium under subpart B which 
include Federal income taxes on investment income and capital gains as 
other non-claims costs.
    (b) State taxes and assessments. The report required in Sec.  
158.110 of this subpart must separately report:
    (1) State taxes and assessments excluded from premium under subpart 
B which include:
    (i) Any industry-wide (or subset) assessments (other than 
surcharges on specific claims) paid to the State directly, or premium 
subsidies that are designed to cover the costs of providing indigent 
care or other access to health care throughout the State.
    (ii) Guaranty fund assessments.
    (iii) Assessments of State industrial boards or other boards for 
operating expenses or for benefits to sick employed persons in 
connection with disability benefit laws or similar taxes levied by 
States.
    (iv) Advertising required by law, regulation or ruling, except 
advertising associated with investments.

[[Page 74926]]

    (v) State income, excise, and business taxes other than premium 
taxes.
    (vi) State premium taxes plus State taxes based on policy reserves, 
if in lieu of premium taxes.
    (vii) One of the following types of payments:
    (A) Payments to a State, by not-for-profit health plans, of premium 
tax exemption values in lieu of State premium taxes limited to the 
State premium tax rate applicable to for-profit entities subject to 
premium tax multiplied by the allocated premiums earned for individual, 
small group and large group;
    (B) Payment by not-for-profit health plans for community benefit 
expenditures as described in paragraph (c) of this section limited to 
the State premium tax rate applicable to for-profit entities subject to 
premium tax multiplied by the allocated premiums earned for individual, 
small group and large group. These payments must be State based 
requirement to qualify for inclusion in this line item; or
    (C) Payments made by (Federal income) tax exempt health plans for 
community benefit expenditures as defined in paragraph (c) of this 
section limited to the State premium tax rate applicable to for-profit 
entities subject to premium tax multiplied by the allocated premiums 
earned for individual, small group, and large group.
    (2) State taxes and assessments not excluded from premium under 
subpart B which include:
    (i) State sales taxes if the issuer does not exercise options of 
including such taxes with the cost of goods and services purchased.
    (ii) Any portion of commissions or allowances on reinsurance 
assumed that represent specific reimbursement of premium taxes.
    (iii) Any portion of commissions or allowances on reinsurance ceded 
that represents specific reimbursement of premium taxes.
    (c) Community benefit expenditures. (1) A not-for-profit issuer 
exempt from Federal or State taxes and assessments, but required to 
make community benefit expenditures in lieu of taxes, must report to 
the Secretary such community benefit expenditures, multiplied by the 
allocated premiums earned for individual, small group and large group, 
but not to exceed the amount of the taxes they would otherwise be 
required to pay. Each expenditure must not be reported more than once, 
but may be split between Federal and State taxes as applicable.
    (2) Community benefit expenditures means expenditures for 
activities or programs that seek to achieve the objectives of improving 
access to health services, enhancing public health and relief of 
government burden. This includes any of the following activities that:
    (i) Are available broadly to the public and serve low-income 
consumers;
    (ii) Reduce geographic, financial, or cultural barriers to 
accessing health services, and if ceased to exist would result in 
access problems (for example, longer wait times or increased travel 
distances);
    (iii) Address Federal, State or local public health priorities such 
as advancing health care knowledge through education or research that 
benefits the public;
    (iv) Leverage or enhance public health department activities such 
as childhood immunization efforts; and
    (v) Otherwise would become the responsibility of government or 
another tax-exempt organization.


Sec.  158.170  Allocation of expenses.

    (a) General requirements. Each expense must be reported under only 
one type of expense, unless a portion of the expense fits under the 
definition of or criteria for one type of expense and the remainder 
fits into a different type of expense, in which case the expense must 
be pro-rated between types of expenses. Expenditures that benefit lines 
of business or products other than those being reported, including but 
not limited to those that are for or benefit self-funded plans, must be 
reported on a pro rata share.
    (b) Description of the methods used to allocate expenses. The 
report required in Sec.  158.110 of this subpart must include a 
detailed description of the methods used to allocate expenses, 
including incurred claims, quality improvement expenses, Federal and 
State taxes and licensing or regulatory fees, and other non-claims 
costs, to each health insurance market in each State. A detailed 
description of each expense element must be provided, including how 
each specific expense meets the criteria for the type of expense in 
which it is categorized, as well as the method by which it was 
aggregated.
    (1) Allocation to each category should be based on a generally 
accepted accounting method that is expected to yield the most accurate 
results. Specific identification of an expense with an activity that is 
represented by one of the categories above will generally be the most 
accurate method. If a specific identification is not feasible, the 
issuer should provide an explanation of why it believes the more 
accurate result will be gained from allocation of expenses based upon 
pertinent factors or ratios such as studies of employee activities, 
salary ratios or similar analyses.
    (2) Many entities operate within a group where personnel and 
facilities are shared. Shared expenses, including expenses under the 
terms of a management contract, must be apportioned pro rata to the 
entities incurring the expense.
    (3) Any basis adopted to apportion expenses must be that which is 
expected to yield the most accurate results and may result from special 
studies of employee activities, salary ratios, premium ratios or 
similar analyses. Expenses that relate solely to the operations of a 
reporting entity, such as personnel costs associated with the adjusting 
and paying of claims, must be borne solely by the reporting entity and 
are not to be apportioned to other entities within a group.
    (c) Disclosure of allocation methods. The issuer must identify in 
the report required in Sec.  158.110 of this subpart the specific basis 
used to allocate expenses reported under this Part to States and, 
within States, to lines of business including the individual market, 
small group market, large group market, supplemental health insurance 
coverage, health insurance coverage offered to beneficiaries of public 
programs (such as Medicare and Medicaid), and group health plans as 
defined in Sec.  145.103 of this chapter and administered by the 
issuer.
    (d) Maintenance of records. The issuer must maintain and make 
available to the Secretary upon request the data used to allocate 
expenses reported under this Part together with all supporting 
information required to determine that the methods identified and 
reported as required under paragraph (b) of this section were 
accurately implemented in preparing the report required in Sec.  
158.110 of this subpart.

Subpart B--Calculating and Providing the Rebate


Sec.  158.210  Minimum medical loss ratio.

    Subject to the provisions of Sec.  158.211 of this subpart:
    (a) Large group market. For all policies issued in the large group 
market in a State during the MLR reporting year, an issuer must provide 
a rebate to enrollees if the issuer has an MLR of less than 85 percent, 
as determined in accordance with this part.
    (b) Small group market. For all policies issued in the small group 
market in a State during the MLR reporting year, an issuer must provide 
a rebate to enrollees if the issuer has an

[[Page 74927]]

MLR of less than 80 percent, as determined in accordance with this 
part.
    (c) Individual market. For all policies issued in the individual 
market in a State during the MLR reporting year, an issuer must provide 
a rebate to enrollees if the issuer has an MLR of less than 80 percent, 
as determined in accordance with this Part.
    (d) Adjustment by the Secretary. If the Secretary has adjusted the 
percentage that issuers in the individual market in a specific State 
must meet, then the adjusted percentage determined by the Secretary in 
accordance with Sec.  158.301 of this part et seq. must be substituted 
for 80 percent in paragraph (c) of this section.


Sec.  158.211  Requirement in States with a higher medical loss ratio.

    (a) State option to set higher minimum loss ratio. For coverage 
offered in a State whose law provides that issuers in the State must 
meet a higher MLR than that set forth in Sec.  158.210, the State's 
higher percentage must be substituted for the percentage stated in 
Sec.  158.210 of this subpart.
    (b) Considerations in setting a higher minimum loss ratio. In 
adopting a higher minimum loss ratio than that set forth in Sec.  
158.210, a State must seek to ensure adequate participation by health 
insurance issuers, competition in the health insurance market in the 
State, and value for consumers so that premiums are used for clinical 
services and quality improvements.


Sec.  158.220  Aggregation of data in calculating an issuer's medical 
loss ratio.

    (a) Aggregation by State and by market. In general, an issuer's MLR 
must be calculated separately for the large group market, small group 
market and individual market within each State. However, if, pursuant 
to section 1312(c)(3) of the Affordable Care Act, a State requires the 
small group market and individual market to be merged, then the data 
reported separately under subpart A for the small group and individual 
market in that State may be merged for purposes of calculating an 
issuer's MLR and any rebates owing.
    (b) Years of data to include in calculating MLR. Subject to 
paragraph (c) of this section, an issuer's MLR for an MLR reporting 
year is calculated according to the formula in Sec.  158.221 of this 
subpart and aggregating the data reported under this Part for the 
following 3-year period:
    (1) The data for the MLR reporting year whose MLR is being 
calculated; and
    (2) The data for the two prior MLR reporting years.
    (c) Requirements for MLR reporting years 2011 and 2012. (1) For the 
2011 MLR reporting year, an issuer's MLR is calculated using the data 
reported under this Part for the 2011 MLR reporting year only.
    (2) For the 2012 MLR reporting year--
    (i) If an issuer's experience for the 2012 MLR reporting year is 
fully credible, as defined in Sec.  158.230 of this subpart, an 
issuer's MLR is calculated using the data reported under this Part for 
the 2012 MLR reporting year.
    (ii) If an issuer's experience for the 2012 MLR reporting year is 
partially credible or non-credible, as defined in Sec.  158.230 of this 
subpart, an issuer's MLR is calculated using the data reported under 
this part for the 2011 MLR reporting year and the 2012 MLR reporting 
year.


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

    (a) Medical loss ratio. (1) An issuer's MLR is the ratio of the 
numerator, as defined in paragraph (b) of this section, to the 
denominator, as defined in paragraph (c) of this section, subject to 
the applicable credibility adjustment, if any, as provided in Sec.  
158.232 of this subpart.
    (2) An issuer's MLR shall be rounded to three decimal places. For 
example, if an MLR is 0.7988, it shall be rounded to 0.799 or 79.9 
percent. If an MLR is 0.8253 or 82.53 percent, it shall be rounded to 
0.825 or 82.5 percent.
    (b) Numerator. The numerator of an issuer's MLR for an MLR 
reporting year must be the issuer's incurred claims, as defined in 
Sec.  158.140 of this part, plus the issuer's expenditures for 
activities that improve health care quality, as defined in Sec.  
158.150 and Sec.  158.151 of this part, that are reported for the years 
specified in Sec.  158.220 of this subpart.
    (1) The numerator of the MLR for the 2012 MLR reporting year may 
include any rebate paid under Sec.  158.240 of this subpart for the 
2011 MLR reporting year if the 2012 MLR reporting year experience is 
not fully credible as defined in Sec.  158.230 of this subpart.
    (2) The numerator of the MLR for the 2013 MLR reporting year may 
include any rebate paid under Sec.  158.240 for the 2011 MLR reporting 
year or the 2012 MLR reporting year.
    (3) The numerator of the MLR for policies that are reported 
separately under Sec.  158.120(d)(3) of this part must be the amount 
specified in paragraph (b) of this section, except that for the 2011 
MLR reporting year the total of the incurred claims and expenditures 
for activities that improve health care quality are then multiplied by 
a factor of two.
    (4) The numerator of the MLR for policies that are reported 
separately under Sec.  158.120(d)(4) of this part must be the amount 
specified in paragraph (b) of this section, except that for the 2011 
MLR reporting year the total of the incurred claims and expenditures 
for activities that improve health care quality are then multiplied by 
a factor of two.
    (c) Denominator. The denominator of an issuer's MLR must equal the 
issuer's premium revenue, as defined in Sec.  158.130, minus 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) of this 
part.


Sec.  158.230  Credibility adjustment.

    (a) General rule. An issuer may add to the MLR calculated under 
Sec.  158.221(a) of this subpart the credibility adjustment specified 
by Sec.  158.232 of this section, if such MLR is based on partially 
credible experience as defined in paragraph (c)(2) of this section. An 
issuer may not apply the credibility adjustment if the issuer's 
experience is fully credible, as defined in paragraph (c)(1) of this 
section, or non-credible, as defined in paragraph (c)(3) of this 
section.
    (b) Life-years. The credibility of an issuer's experience is based 
upon the number of life-years covered by the issuer. Life-years means 
the total number of months of coverage for enrollees whose premiums and 
claims experience is included in the report to the Secretary required 
by Sec.  158.110 of this part, divided by 12.
    (c) Credible experience. (1) An MLR calculated under Sec.  
158.221(a) through (c) of this subpart is fully credible if it is based 
on the experience of 75,000 or more life-years.
    (2) An MLR calculated under Sec.  158.221(a) through (c) of this 
subpart is partially credible if it is based on the experience of at 
least 1,000 life-years and fewer than 75,000 life-years.
    (3) An MLR calculated under Sec.  158.221(a) through (c) of this 
subpart is non-credible if it is based on the experience of less than 
1,000 life-years.
    (d) If an issuer's MLR is non-credible, it is presumed to meet or 
exceed the minimum percentage required by Sec.  158.210 or Sec.  
158.211 of this subpart.


Sec.  158.231  Life-years used to determine credible experience.

    (a) The life-years used to determine the credibility of an issuer's 
experience are the life-years for the MLR reporting year plus the life-
years for the two prior MLR reporting years.
    (b) For the 2011 MLR reporting year, the life-years used to 
determine

[[Page 74928]]

credibility are the life-years for the 2011 MLR reporting year only.
    (c) For the 2012 MLR reporting year-
    (1) If an issuer's experience for the 2012 MLR reporting year is 
fully credible, the life-years used to determine credibility are the 
life-years for the 2012 MLR reporting year only;
    (2) If an issuer's experience for the 2012 MLR reporting year only 
is partially credible, the life-years used to determine credibility are 
the life-years for the 2011 MLR reporting year plus the life-years for 
the 2012 MLR reporting year.


Sec.  158.232  Calculating the credibility adjustment.

    (a) Formula. An issuer's credibility adjustment, if any, is the 
product of the base credibility factor, as determined under paragraph 
(b) of this section, multiplied by the deductible factor, as determined 
under paragraph (c) of this section.
    (b) Base credibility factor. (1) The base credibility factor for 
fully credible experience or for non-credible experience is zero.
    (2) The base credibility factor for partially credible experience 
is determined based on the number of life-years included in the 
aggregation, as determined under Sec.  158.231 of this subpart, and the 
factors shown in Table 1. When the number of life-years used to 
determine credibility exactly matches a life-year category listed in 
Table 1, the value associated with that number of life-years is the 
base credibility factor. The base credibility factor for a number of 
life-years between the values shown in Table 1 is determined by linear 
interpolation.

           Table 1 to Sec.   158.232: Base Credibility Factors
------------------------------------------------------------------------
              Life-years                     Base credibility factor
------------------------------------------------------------------------
< 1,000...............................  No Credibility.
1,000.................................  8.3%.
2,500.................................  5.2%.
5,000.................................  3.7%.
10,000................................  2.6%.
25,000................................  1.6%.
50,000................................  1.2%.
>= 75,000.............................  0.0% (Full Credibility).
------------------------------------------------------------------------

    (c) Deductible factor. (1) The deductible factor is based on the 
average per person deductible of policies whose experience is included 
in the aggregation, as determined under Sec.  158.231 of this subpart. 
When the weighted average deductible, as determined in accordance with 
this section, exactly matches a deductible category listed in Table 2, 
the value associated with that deductible is the deductible factor. The 
deductible factor for an average weighted deductible between the values 
shown in Table 2 is determined by linear interpolation.
    (i) The per person deductible for a policy that covers a subscriber 
and the subscriber's dependents shall be calculated as follows: The 
lesser of the sum of the individual family members' deductibles or the 
overall family deductible for the subscriber and subscriber's family, 
shall be divided by the total number of individuals covered through the 
subscriber (including the subscriber).
    (ii) The average deductible for an aggregation is calculated 
weighted by the life-years of experience for each deductible level of 
policies included in the aggregation.
    (2) An issuer may choose to use a deductible factor of 1.0 in lieu 
of calculating a deductible factor based on the average of policies 
included in the aggregation.

              Table 2 to Sec.   158.232: Deductible Factor
------------------------------------------------------------------------
                                                            Deductible
                 Health plan deductible                       factor
------------------------------------------------------------------------
$2,500..................................................           1.000
$2,500..................................................           1.164
$5,000..................................................           1.402
>= $10,000..............................................           1.736
------------------------------------------------------------------------

     (d) No credibility adjustment. For the 2013 MLR reporting year, 
the credibility adjustment for an MLR based on partially credible 
experience is zero if both of the following conditions are met:
    (1) The current MLR reporting year and each of the two previous MLR 
reporting years included experience of at least 1,000 life-years; and
    (2) Without applying any credibility adjustment, the issuer's MLR 
for the current MLR reporting year and each of the two previous MLR 
reporting years were below the applicable MLR standard for each year as 
established under Sec.  158.210 in this subpart.


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

    (a) General requirement. For each MLR reporting year, an issuer 
must provide a rebate to each enrollee if the issuer's MLR does not 
meet or exceed the minimum percentage required by Sec. Sec.  158.210 
and 158.211 of this subpart.
    (b) Definition of enrollee for purposes of rebate. For the sole 
purpose of determining whom is entitled to receive a rebate pursuant to 
this part, the term ``enrollee'' means the subscriber, policyholder, 
and/or government entity that paid the premium for health care coverage 
received by an individual during the respective MLR reporting year.
    (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 received by the issuer from the enrollee after subtracting 
Federal and State taxes and licensing and regulatory fees as provided 
in Sec.  158.161(a), Sec.  158.162(a)(1) and Sec.  158.162(b)(1) of 
this part, multiplied by the difference between the MLR required by 
Sec.  158.210 or Sec.  158.211 of this subpart, and the issuer's MLR as 
calculated under Sec.  158.221 of this subpart.
    (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 small 
group 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 small group 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 premium and subtracting taxes and fees 
as provided in paragraph (c) of this section. In this example, an 
enrollee may have paid $2,000 in premiums for the MLR reporting year. 
If the Federal and State taxes and licensing and regulatory fees that 
may be excluded from premium revenue as described in Sec.  158.161(a), 
Sec.  158.161(a)(1) and Sec.  158.162(b)(1) of this subpart are $150 
for a premium of $2,000, then the issuer would subtract $150 from 
premium revenue, for a base of $1,850 in premium. The enrollee would be 
entitled to a rebate of 5 percent of $1,850, or $92.50.
    (d) Timing of rebate. An issuer must provide any rebate owing to an 
enrollee no later than August 1 following the end of the MLR reporting 
year.
    (e) Late payment interest. An issuer that fails to pay any rebate 
owing to an enrollee or subscriber in accordance with paragraph (d) of 
this section or to take other required action within the time periods 
set forth in this Part must, in addition to providing the required 
rebate to the enrollee, pay the enrollee interest at the current 
Federal Reserve Board lending rate or ten percent annually, whichever 
is higher, on the total amount of the rebate, accruing from the date 
payment was due under paragraph (d) of this section.


Sec.  158.241  Form of rebate.

    (a) Current enrollees. (1) An issuer may choose to provide any 
rebates owing to current enrollees in the form

[[Page 74929]]

of a premium credit, lump-sum check, or, if an enrollee paid the 
premium using a credit card or direct debit, by lump-sum reimbursement 
to the account used to pay the premium.
    (2) 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.
    (b) Former enrollees. Rebates owing to former enrollees must be 
paid in the form of lump-sum check or lump-sum reimbursement using the 
same method that was used for payment, such as credit card or direct 
debit.


Sec.  158.242  Recipients of rebates.

    (a) Individual market. An issuer must meet its obligation to 
provide any rebate due to an enrollee in the individual market by 
providing it to the enrollee. For individual policies that cover more 
than one person, one lump-sum rebate may be provided to the subscriber 
on behalf of all enrollees covered by the policy.
    (b) Large group and small group markets. An issuer must meet its 
obligation to provide any rebate to persons covered under a group 
health plan by providing it to the enrollee, in amounts proportionate 
to the amount of premium the policyholder and each subscriber paid.
    (1) Arrangement with policyholder to distribute rebates. An issuer 
may meet its obligation to provide any rebate owing to a large group or 
small group enrollee by entering into an agreement with the group 
policyholder to distribute the rebate on behalf of the issuer, subject 
to all of the following conditions:
    (i) The issuer must remain liable for complying with all of its 
obligations under this part.
    (ii) The issuer must obtain and retain records and documentation 
evidencing accurate distribution of any rebate owing, sufficient to 
demonstrate compliance with its obligations under this subpart, subpart 
D, and subpart E. Such records and documentation include:
    (A) The amount of the premium paid by each subscriber;
    (B) The amount of the premium paid by the group policyholder;
    (C) The amount of the rebate provided to each subscriber;
    (D) The amount of the rebate retained by the group policyholder; 
and
    (E) The amount of any unclaimed rebate and how and when it was 
distributed.
    (2) [Reserved]


Sec.  158.243  De minimis rebates.

    (a) Minimum threshold. An issuer is not required to provide a 
rebate to an enrollee based upon the premium that enrollee paid, under 
the following circumstances:
    (1) For a group policy, if the total rebate owed to the 
policyholder and the subscribers is less than $5 per subscriber covered 
by the policy for a given MLR reporting year.
    (2) In the individual market, if the total rebated owed to the 
subscriber is less than $5.
    (b) Distribution. (1) An issuer must aggregate and distribute any 
rebates not provided because they did not meet the minimum threshold 
set forth in paragraph (a) of this section by aggregating the unpaid 
rebates by individual market, small group market and large group market 
in a State and use them to increase the rebates provided to enrollees 
who receive rebates based upon the same MLR reporting year as the 
aggregated unpaid rebates. An issuer must distribute such aggregated 
rebates by providing additional premium credit or payment divided 
evenly among enrollees who are being provided a rebate.
    (2) For example, an issuer in the individual market has aggregated 
unpaid rebates totaling $2,000, and the issuer has 10,000 enrollees who 
are entitled to be provided a rebate above the minimum threshold for 
the applicable MLR reporting year. The $2,000 must be redistributed to 
the 10,000 and added on to their existing rebate amounts. The $2,000 is 
divided evenly among the 10,000 enrollees, so the issuer increases each 
enrollee's rebate by $0.20.


Sec.  158.244  Unclaimed rebates.

    An issuer must make a good faith effort to locate and deliver to an 
enrollee any rebate required under this Part. If, after making a good 
faith effort, an issuer is unable to locate a former enrollee, the 
issuer must comply with any applicable State law.


Sec.  158.250  Notice of rebates.

    For each MLR reporting year, at the time any rebate of premium is 
provided in accordance with this Part, an issuer must provide each 
enrollee who receives a rebate the following information in a form 
prescribed by the Secretary:
    (a) A general description of the concept of an MLR;
    (b) The purpose of setting a MLR standard;
    (c) The applicable MLR standard;
    (d) The issuer's MLR, adjusted in accordance with the provisions of 
this subpart;
    (e) The issuer's aggregate premium revenue as reported in 
accordance with Sec.  158.130, minus any Federal and State taxes and 
licensing and regulatory fees that may be excluded from premium revenue 
as described in Sec. Sec.  158.161(a) and 158.162(a)(1) and (b)(1); and
    (f) The rebate percentage and amount owed to enrollees based upon 
the difference between the issuer's MLR and the applicable MLR 
standard.


Sec.  158.260  Reporting of rebates.

    (a) General requirement. For each MLR reporting year, an issuer 
must submit to the Secretary a report concerning the rebates provided 
to and on behalf of enrollees pursuant to this subpart.
    (b) Aggregation of information in the report. The information in 
the report must be aggregated in the same manner as required by Sec.  
158.120.
    (c) Information to report. The report required by this section must 
include the total:
    (1) Number and percentage of enrollees who received a rebate;
    (2) Number and amount of rebates provided:
    (i) As premium credit; and
    (ii) As lump sum check or lump-sum reimbursement to a subscriber's 
credit card or direct payment to a subscriber's bank account;
    (3) Amount of rebates that were provided to enrollees, including a 
breakdown of the amounts provided based upon the portion of premiums 
paid by group policyholders and amounts provided based upon the portion 
of premium paid by subscribers;
    (4) Amount of rebates that were de minimis, as provided in Sec.  
158.243, and a detailed description of how these rebates were 
disbursed; and
    (5) Amount of unclaimed rebates, a description of the methods used 
to locate the applicable enrollees, and a detailed description of how 
the unclaimed rebates were disbursed.
    (d) Timing and form of report. The data required by paragraphs 
(c)(1) through (4) of this section must be submitted with the report 
under Sec.  158.110, on a form and in the manner prescribed by the 
Secretary. The data required by paragraph (c)(5) of this section must 
be submitted with the report under Sec.  158.110 for the subsequent MLR 
reporting year.

[[Page 74930]]

Sec.  158.270  Effect of rebate payments on solvency.

    (a) If a State's insurance commissioner, superintendent, or other 
responsible official determines that the payment of rebates by a 
domestic issuer in that State will cause the issuer's risk based 
capital (RBC) level to fall below the Company Action Level RBC, as 
defined in the NAIC's Risk Based Capital (RBC) for Insurers Model Act, 
the commissioner, superintendent, or other responsible official must 
notify the Secretary. In such a circumstance, the commissioner, 
superintendent, or other responsible official may request that the 
Secretary defer all or a portion of the rebate payments owed by the 
issuer.
    (b) In the event an insurance commissioner, superintendent, or 
other responsible official makes the request set forth in paragraph (a) 
of this section, the following should be provided to the Secretary 
along with the notification:
    (1) The domestic issuer's RBC reports for the current calendar year 
and the 2 preceding calendar years; and
    (2) A calculation of the amount of rebates that would be owed by 
the domestic issuer pursuant to this Part.
    (c) Upon receipt of the notification under paragraph (a), the 
Secretary will examine the information provided by the insurance 
commissioner, superintendent, or other responsible official along with 
any other information the Secretary may request from the issuer, and 
determine whether the payment of rebates by the issuer will cause its 
RBC level to fall below the Company Action Level RBC.
    (d) When the Secretary determines that the payment of rebates by an 
issuer will cause its RBC level to fall below the Company Action Level 
RBC, the Secretary may permit a deferral of all or a portion of the 
rebates owed, but only for a period determined by the Secretary in 
consultation with the State. The Secretary will require that the issuer 
must pay these rebates with interest in a future year in which payment 
of the rebates would not cause the issuer's RBC level to fall below the 
Company Action Level RBC.

Subpart C--Potential Adjustment to the MLR for a State's Individual 
Market


Sec.  158.301  Standard for adjustment to the medical loss ratio.

    The Secretary may adjust the MLR standard that must be met by 
issuers offering coverage in the individual market in a State, as 
defined in section 2791 of the PHS Act, for a given MLR reporting year 
if, in her discretion, she determines that application of the 80 
percent MLR standard of section 2718(b)(1)(A)(ii) of the Public Health 
Service Act may destabilize the individual market in that State. 
Application of the 80 percent MLR standard may destabilize the 
individual market in a State only if there is a reasonable likelihood 
that application of the requirement will do so.


Sec.  158.310  Who may request adjustment to the medical loss ratio.

    A request for an adjustment to the MLR standard for a State must be 
submitted by the State's insurance commissioner, superintendent, or 
comparable official of that State in order to be considered by the 
Secretary.


Sec.  158.311  Duration of adjustment to the medical loss ratio.

    A State may request that an adjustment to the MLR standard be for 
up to three MLR reporting years.


Sec.  158.320  Information supporting a request for adjustment to the 
medical loss ratio.

    A State must submit in electronic format the information required 
by Sec. Sec.  158.321 through 158.323 of this subpart in order for the 
request for adjustment to the MLR standard for the State to be 
considered by the Secretary. A State may submit to the Secretary any 
additional information it determines would support its request. In the 
event that certain data are unavailable or that the collection of 
certain data is unduly burdensome, a State may provide written notice 
to the Secretary and the Secretary may, at her discretion, request 
alternative supporting data or move forward with her determination.


Sec.  158.321  Information regarding the State's individual health 
insurance market.

    (a) State MLR standard. The State must describe its current MLR 
standard for the individual market, if any, and the formula used to 
assess compliance with such standard.
    (b) State market withdrawal requirements. The State must describe 
any requirements it has with respect to withdrawals from the State's 
individual health insurance market. Such requirements include, but are 
not limited to, any notice that must be provided and any authority the 
State regulator may have to approve a withdrawal plan or ensure that 
enrollees of the exiting issuer have continuing coverage, as well as 
any penalties or sanctions that may be levied upon exit or limitations 
on re-entry.
    (c) Mechanisms to provide options to consumers. The State must 
describe the mechanisms available to the State to provide consumers 
with options in the event an issuer withdraws from the individual 
market. Such mechanisms include, but are not limited to, a guaranteed 
issue requirement, limits on health status rating, an issuer of last 
resort, or a State-operated high risk pool. A description of each 
mechanism should include detail on the issuers participating in and 
products available under such mechanism, as well as any limitations 
with respect to eligibility, enrollment period, total enrollment, and 
coverage for pre-existing conditions.
    (d) Issuers in the State's individual market. Subject to Sec.  
158.320 of this subpart, the State must provide:
    (1) For each issuer who offers coverage in the individual market in 
the State its number of individual enrollees by product, available 
individual premium data by product, and individual health insurance 
market share within the State; and
    (2) For each issuer who offers coverage in the individual market in 
the State to more than 1,000 enrollees, the following additional 
information:
    (i) Total earned premium on individual market health insurance 
products in the State;
    (ii) Reported MLR pursuant to State law for the individual market 
business in the State;
    (iii) Estimated MLR for the individual market business in the 
State, as determined in accordance with Sec.  158.221 of this part;
    (iv) Total agents' and brokers' commission expenses on individual 
health insurance products;
    (v) Estimated rebate for the individual market business in the 
State, as determined in accordance with Sec.  158.221 and Sec.  158.240 
of this part;
    (vi) Net underwriting profit for the individual market business and 
consolidated business in the State;
    (vii) After-tax profit and profit margin for the individual market 
business and consolidated business in the State;
    (viii) Risk-based capital level; and
    (ix) Whether the issuer has provided notice of exit to the State's 
insurance commissioner, superintendent, or comparable State authority.


Sec.  158.322  Proposal for adjusted medical loss ratio.

    A State must provide its own proposal as to the adjustment it seeks 
to the MLR standard. This proposal must include:
    (a) An explanation and justification of how the proposed adjustment 
to the MLR was determined;
    (b) An explanation of how an adjustment to the MLR standard for the 
State's individual market will permit issuers to adjust current 
business models and practices in order to meet

[[Page 74931]]

an 80 percent MLR as soon as is practicable;
    (c) An estimate of the rebates that would be paid if the issuers 
offering coverage in the individual market in the State must meet an 80 
percent MLR for the applicable MLR reporting years; and
    (d) An estimate of the rebates that would be paid if the issuers 
offering coverage in the individual market in the State must meet the 
adjusted MLR proposed by the State for the applicable MLR reporting 
years.


Sec.  158.323  State contact information.

    A State must provide the name, telephone number, e-mail address, 
and mailing address of the person the Secretary may contact regarding 
the request for an adjustment to the MLR standard.


Sec.  158.330  Criteria for assessing request for adjustment to the 
medical loss ratio.

    The Secretary may consider the following criteria in assessing 
whether application of an 80 percent MLR, as calculated in accordance 
with this subpart, may destabilize the individual market in a State 
that has requested an adjustment to the 80 percent MLR:
    (a) The number of issuers reasonably likely to exit the State or to 
cease offering coverage in the State absent an adjustment to the 80 
percent MLR and the resulting impact on competition in the State. In 
making this determination the Secretary may consider as to each issuer 
that is reasonably likely to exit the State:
    (1) Each issuer's MLR relative to an 80 percent MLR;
    (2) Each issuer's solvency and profitability, as measured by 
factors such as surplus level, risked-based capital ratio, net income, 
and operating or underwriting gain;
    (3) The requirements and limitations within the State with respect 
to market withdrawals; and
    (4) Whether each issuer covers less than 1,000 life-years in the 
State's individual insurance market.
    (b) The number of individual market enrollees covered by issuers 
that are reasonably likely to exit the State absent an adjustment to 
the 80 percent MLR.
    (c) Whether absent an adjustment to the 80 percent MLR standard 
consumers may be unable to access agents and brokers.
    (d) The alternate coverage options within the State available to 
individual market enrollees in the event an issuer exits the market, 
including:
    (1) Any requirement that issuers who exit the State's individual 
market must have their block(s) of business assumed by another issuer;
    (2) The issuers that may remain in the State subsequent to the 
implementation of the 80 percent MLR, as calculated in accordance with 
this Part, and the nature, terms, and price of the products offered by 
such issuers;
    (3) The capacity of remaining issuers to write additional business, 
as measured by their risk based capital ratios;
    (4) The mechanisms, such as guaranteed issue products, an issuer of 
last resort, or a State high risk pool, available to the State to 
provide coverage to consumers in the event of an issuer withdrawing 
from the market, and the affordability of these options compared to the 
coverage provided by exiting or potentially exiting issuers; and
    (5) Any authority the State's insurance commissioner, 
superintendent, or comparable official may exercise with respect to 
stabilization of the individual insurance market.
    (e) The impact on premiums charged, and on benefits and cost-
sharing provided, to consumers by issuers remaining in the market in 
the event one or more issuers were to withdraw from the market.
    (f) Any other relevant information submitted by the State's 
insurance commissioner, superintendent, or comparable official in the 
State's request.


Sec.  158.340  Process for submitting request for adjustment to the 
medical loss ratio.

    (a) Electronic submission. A State must submit electronically, to 
an address and in a format prescribed by the Secretary, all of the 
information required by this subpart in order for its request for an 
adjustment to the MLR standard for its individual market to be 
considered by the Secretary.
    (b) Submission by mail. A State may also submit by overnight 
delivery service or by U.S mail, return receipt requested, to an 
address and in a format prescribed by the Secretary, its request for an 
adjustment to the MLR standard for its individual market.


Sec.  158.341  Treatment as a public document.

    A State's request for an adjustment to the MLR standard, and all 
information submitted as part of its request, will be treated as a 
public document and will be posted promptly on the Secretary's Internet 
Web site devoted to health care coverage.


Sec.  158.342  Invitation for public comments.

    The Secretary will invite public comment regarding a State's 
request for an adjustment to the MLR standard. All public comments must 
be submitted in writing within 10 days of the posting of the request, 
and must be submitted in the manner prescribed by the Secretary. The 
Secretary will consider timely public comments in assessing a State's 
request for an adjustment to the MLR standard.


Sec.  158.343  Optional State hearing.

    Any State that submits a request for adjustment to the MLR standard 
may, at its option, hold a public hearing and create an evidentiary 
record with respect to its application. If a State does so, the 
Secretary will take the evidentiary record of the hearing into 
consideration in making her determination.


Sec.  158.344  Secretary's discretion to hold a hearing.

    The Secretary may, at her discretion, conduct a public hearing with 
respect to a State's request for an adjustment to the MLR standard. All 
testimony and materials received in connection with any public hearing 
will be made part of the public record, and shall be considered by the 
Secretary in assessing a State's request for an adjustment to the MLR 
standard.


Sec.  158.345  Determination on a State's request for adjustment to the 
medical loss ratio.

    (a) General time frame. The Secretary will make a determination as 
to whether to grant a State's request for an adjustment to the MLR 
standard within 30 days after determining that the information required 
by this subpart has been received.
    (b) Extension at the discretion of the Secretary. The Secretary 
may, in her discretion, extend the 30 day time period in paragraph (a) 
of this section for as long a time as necessary not to exceed 30 days.


Sec.  158.346  Request for reconsideration.

    (a) Requesting reconsideration. A State whose request for 
adjustment to the MLR standard has been denied by the Secretary may 
request reconsideration of that determination. A request for 
reconsideration must be submitted in writing to the Secretary within 10 
days of her decision to deny the State's request for an adjustment, and 
may include any additional information in support of its request.
    (b) Reconsideration determination. The Secretary will issue her 
determination on a State's request for reconsideration within 20 days 
of receiving the reconsideration request.

[[Page 74932]]

Sec.  158.350  Subsequent requests for adjustment to the medical loss 
ratio.

    A State that has made a previous request for an adjustment to the 
MLR standard must, in addition to the other information required by 
this subpart, submit information as to what steps the State has taken 
since its initial and other prior requests, if any, to increase the 
likelihood that enrollees who have health coverage through issuers that 
are considered likely to exit the State's individual market will 
receive coverage at a comparable price and with comparable benefits if 
the issuer does exit the market.

Subpart D--HHS Enforcement


Sec.  158.401  HHS enforcement.

    HHS enforces the reporting and rebate requirements described in 
subparts A and B, including but not limited to:
    (a) The requirement that such reports be submitted timely.
    (b) The requirement that the data reported complies with the 
definitions and criteria set forth in this part.
    (c) The requirement that rebates be paid timely and accurately.


Sec.  158.402  Audits.

    (a) Notice of Audit. HHS will provide 30 days advance notice of its 
intent to conduct an audit of an issuer.
    (b) Conferences. All audits will include an entrance conference at 
which the scope of the audit will be presented and an exit conference 
at which the initial audit findings will be discussed.
    (c) Preliminary Audit Findings. HHS will share its preliminary 
audit findings with the issuer, which will then have 30 days to respond 
to such findings. HHS may extend, for good cause, the time for an 
issuer to submit such a response.
    (d) Final Audit Findings. If the issuer does not dispute the 
preliminary findings, the audit findings will become final. 
Alternatively, if the issuer responds to the preliminary findings, HHS 
will review and consider such response and finalize the audit findings.
    (e) Corrective actions. HHS will send a copy of the final audit 
findings to the issuer as well as any corrective actions that issuer 
must undertake as a result of the audit findings.
    (f) Order to pay rebates. If HHS determines as the result of an 
audit that an issuer has failed to pay rebates it is obligated to pay 
pursuant to this part, it may order the issuer to pay those rebates, 
together with interest from the date the rebates were due, in 
accordance with Sec.  158.240(d) of this part.


Sec.  158.403  Circumstances in which a State is conducting audits of 
issuers.

    (a) If a State conducts an audit of an issuer's MLR reporting and 
rebate obligations, HHS may, in the exercise of its discretion, accept 
the findings of that audit if HHS determines the following:
    (1) The laws of the State permit public release of the findings of 
audits of issuers;
    (2) The State's audit reports on the validity of the data regarding 
expenses and premiums that the issuer reported to the Secretary, 
including the appropriateness of the allocations of expenses used in 
such reporting and whether the activities associated with the issuer's 
reported expenditures for quality improving activities meet the 
definition of such activities;
    (3) The State's audit reports on the accuracy of rebate 
calculations and the timeliness and accuracy of rebate payments;
    (4) The State submits final audit reports to HHS within 30 days of 
finalization; and
    (5) The State submits preliminary or draft audit reports to HHS 
within 6 months of the completion of audit field work unless they have 
already been finalized and reported under paragraph (a)(4) of this 
section.
    (b) If HHS accepts an audit conducted by a State, and if the issuer 
makes additional rebate payments as a result of the audit, then HHS 
shall accept those payments as satisfying the issuer's obligation to 
pay rebates pursuant to this part.

Subpart E--Additional Requirements on Issuers


Sec.  158.501  Access to facilities and records.

    (a) Each issuer subject to the reporting requirement of this part 
must allow access and entry to its premises, facilities and records, 
including computer and other electronic systems, to HHS, the 
Comptroller General, or their designees to evaluate, through 
inspection, audit, or other means, compliance with the requirements for 
reporting and calculation of data submitted to HHS, and the timeliness 
and accuracy of rebate payments made under this part.
    (b) Each issuer must also allow access and entry to the facilities 
and records, including computer and other electronic systems, of its 
parent organization, subsidiaries, related entities, contractors, 
subcontractors, agents, or a transferee that pertain to any aspect of 
the data reported to HHS or to rebate payments calculated and made 
under this part. To the extent that the issuer does not control access 
to the facilities and records of its parent organization, related 
entities, or third parties, it will be the responsibility of the issuer 
to contractually obligate any such parent organization, related 
entities, or third parties to grant said access.
    (c) The Comptroller General, HHS, or their designees may inspect, 
evaluate, and audit through 6 years from the date of the filing of a 
report required by this part or through 3 years after the completion of 
the audit and for such longer period set forth below provided that any 
of the following occur:
    (1) HHS determines there is a special need to retain a particular 
record or group of records for a longer period and notifies the issuer 
at least 30 days before the disposition date.
    (2) There has been a dispute, or allegation of fraud or similar 
fault by the issuer, in which case the retention may be extended to 6 
years from the date of any resulting final resolution of the dispute, 
fraud, or similar fault.
    (3) HHS determines that there is a reasonable possibility of fraud 
or similar fault, in which case HHS may inspect, evaluate, and audit 
the issuer at any time.


Sec.  158.502  Maintenance of records.

    (a) Basic rule. Each issuer subject to the requirements of this 
part must maintain all documents and other evidence necessary to enable 
HHS to verify that the data required to be submitted in accordance with 
this part comply with the definitions and criteria set forth in this 
part, and that the MLR is calculated and any rebates owing are 
calculated and provided in accordance with this part. This includes but 
is not limited to all administrative and financial books and records 
used in compiling data reported and rebates provided under this part 
and in determining what data to report and rebates to provide under 
this part, electronically stored information, and evidence of 
accounting procedures and practices. This also includes all 
administrative and financial books and records used by others in 
assisting an issuer with its obligations under this part.
    (b) Length of time information must be maintained. All of the 
documents and other evidence required by this part must be maintained 
for the current year and six prior years, unless a longer time is 
required under Sec.  158.501 of this subpart.

Subpart F--Federal Civil Penalties


Sec.  158.601  General rule regarding the imposition of civil 
penalties.

    If any issuer fails to comply with the requirements of this part, 
civil penalties,

[[Page 74933]]

as described in this subpart, may be imposed.


Sec.  158.602  Basis for imposing civil penalties.

    Civil penalties. For the violations listed in this paragraph, HHS 
may impose civil penalties in the amounts specified in Sec.  158.606 of 
this subpart on any issuer who fails to do the following:
    (a) Submit to HHS a report concerning the data required under this 
part by the deadline established by HHS.
    (b) Submit to HHS a substantially complete or accurate report 
concerning the data required under this part.
    (c) Timely and accurately pay rebates owing pursuant to this part.
    (d) Respond to HHS inquiries as part of an investigation of issuer 
non-compliance.
    (e) Maintain records as required under this part for the periodic 
auditing of books and records used in compiling data reported to HHS 
and in calculating and paying rebates pursuant to this Part.
    (f) Allow access and entry to premises, facilities and records that 
pertain to any aspect of the data reported to HHS or to rebates 
calculated and paid pursuant to this part.
    (g) Comply with corrective actions resulting from audit findings.
    (h) Accurately and truthfully represent data, reports or other 
information that it furnishes to a State or HHS.


Sec.  158.603  Notice to responsible entities.

    If HHS learns of a potential violation described in Sec.  158.602 
of this subpart or if a State informs HHS of a potential violation 
prior to imposing any civil monetary penalty HHS must provide written 
notice to the issuer, to include the following:
    (a) Describe the potential violation.
    (b) Provide 30 days from the date of the notice for the responsible 
entity to respond and to provide additional information to refute an 
alleged violation.
    (c) State that a civil monetary penalty may be assessed if the 
allegations are not, as determined by HHS, refuted.


Sec.  158.604  Request for extension.

    In circumstances in which an entity cannot prepare a response to 
HHS within the 30 days provided in the notice, the entity may make a 
written request for an extension from HHS detailing the reason for the 
extension request and showing good cause. If HHS grants the extension, 
the responsible entity must respond to the notice within the time frame 
specified in HHS's letter granting the extension of time. Failure to 
respond within 30 days, or within the extended time frame, may result 
in HHS's imposition of a civil monetary penalty based upon its 
determination of a potential violation described in Sec.  158.602 of 
this subpart.


Sec.  158.605  Responses to allegations of noncompliance.

    In determining whether to impose a civil monetary penalty, HHS may 
review and consider documentation provided in any complaint or other 
information, as well as any additional information provided by the 
responsible entity to demonstrate that it has complied with Affordable 
Care Act requirements. The following are examples of documentation that 
a potential responsible entity may submit for HHS's consideration in 
determining whether a civil monetary penalty should be assessed and the 
amount of any civil monetary penalty:
    (a) Any evidence that refutes an alleged noncompliance.
    (b) Evidence that the entity did not know, and exercising due 
diligence could not have known, of the violation.
    (c) Evidence documenting the development and implementation of 
internal policies and procedures by an issuer to ensure compliance with 
the Affordable Care Act requirements regarding MLR. Those policies and 
procedures may include or consist of a voluntary compliance program. 
Any such program should do the following:
    (1) Effectively articulate and demonstrate the fundamental mission 
of compliance and the issuer's commitment to the compliance process.
    (2) Include the name of the individual in the organization 
responsible for compliance.
    (3) Include an effective monitoring system to identify practices 
that do not comply with Affordable Care Act requirements regarding MLRs 
and to provide reasonable assurance that fraud, abuse, and systemic 
errors are detected in a timely manner.
    (4) Address procedures to improve internal policies when 
noncompliant practices are identified.
    (d) Evidence documenting the entity's record of previous compliance 
with Affordable Care Act requirements regarding MLRs.


Sec.  158.606  Amount of penalty--general.

    A civil monetary penalty for each violation of Sec.  158.602 of 
this subpart may not exceed $100 for each day, for each responsible 
entity, for each individual affected by the violation. Penalties 
imposed under this Part are in addition to any other penalties 
prescribed or allowed by law.


Sec.  158.607  Factors HHS uses to determine the amount of penalty.

    In determining the amount of any penalty, HHS may take into account 
the following:
    (a) The entity's previous record of compliance. This may include 
any of the following:
    (1) Any history of prior violations by the responsible entity, 
including whether, at any time before determination of the current 
violation(s), HHS or any State found the responsible entity liable for 
civil or administrative sanctions in connection with a violation of 
Affordable Care Act requirements regarding minimum loss ratios.
    (2) Evidence that the responsible entity has never had a complaint 
for noncompliance with Affordable Care Act requirements regarding MLRs 
filed with a State or HHS.
    (3) Such other factors as justice may require.
    (b) The gravity of the violation. This may include any of the 
following:
    (1) The frequency of the violation, taking into consideration 
whether any violation is an isolated occurrence, represents a pattern, 
or is widespread.
    (2) The level of financial and other impacts on affected 
individuals.
    (3) Other factors as justice may require.


Sec.  158.608  Determining the amount of the penalty--mitigating 
circumstances.

    For every violation subject to a civil monetary penalty, if there 
are substantial or several mitigating circumstances, the aggregate 
amount of the penalty is set at an amount sufficiently below the 
maximum permitted by Sec.  158.606 of this subpart to reflect that 
fact. As guidelines for taking into account the factors listed in Sec.  
158.607 of this subpart, HHS considers the following:
    (a) Record of prior compliance. It should be considered a 
mitigating circumstance if the responsible entity has done any of the 
following:
    (1) Before receipt of the notice issued under Sec.  158.603 of this 
subpart, implemented and followed a compliance plan as described in 
Sec.  158.605(c) of this subpart.
    (2) Had no previous complaints against it for noncompliance.
    (b) Gravity of the violation(s). It should be considered a 
mitigating circumstance if the responsible entity has done any of the 
following:
    (1) Made adjustments to its business practices to come into 
compliance with the requirements of this Part so that the following 
occur:
    (i) Each enrollee adversely affected by the violation has been paid 
any amount

[[Page 74934]]

of rebate owed so that, to the extent practicable, that enrollee is in 
the same position that he, she, or it would have been in had the 
violation not occurred.
    (ii) The rebate payments are completed in a timely manner.
    (2) Discovered areas of noncompliance without notice from HHS and 
voluntarily reported that noncompliance, provided that the responsible 
entity submits the following:
    (i) Documentation verifying that the rights and protections of all 
individuals adversely affected by the noncompliance have been restored; 
and
    (ii) A plan of correction to prevent future similar violations.
    (3) Demonstrated that the violation is an isolated occurrence.
    (4) Demonstrated that the financial and other impacts on affected 
individuals is negligible or nonexistent.
    (5) Demonstrated that the noncompliance is correctable and that a 
high percentage of the violations were corrected.


Sec.  158.609  Determining the amount of penalty--aggravating 
circumstances.

    For every violation subject to a civil monetary penalty, if there 
are substantial or several aggravating circumstances, HHS may set the 
aggregate amount of the penalty at an amount sufficiently close to or 
at the maximum permitted by Sec.  158.606 of this subpart to reflect 
that fact. HHS considers the following circumstances to be aggravating 
circumstances:
    (a) The frequency of violation indicates a pattern of widespread 
occurrence.
    (b) The violation(s) resulted in significant financial and other 
impacts on the average affected individual.
    (c) The entity does not provide documentation showing that 
substantially all of the violations were corrected.


Sec.  158.610  Determining the amount of penalty--other matters as 
justice may require.

    HHS may take into account other circumstances of an aggravating or 
mitigating nature if, in the interests of justice, they require either 
a reduction or an increase of the penalty in order to assure the 
achievement of the purposes of this Part, and if those circumstances 
relate to the entity's previous record of compliance or the gravity of 
the violation.


Sec.  158.611  Settlement authority.

    Nothing in Sec.  158.606 through Sec.  158.610 of this subpart 
limits the authority of HHS to settle any issue or case described in 
the notice furnished in accordance with Sec.  158.603 of this subpart 
or to compromise on any penalty provided for in Sec. Sec.  158.606 
through 158.610 of this subpart.


Sec.  158.612  Limitations on penalties.

    (a) Circumstances under which a civil monetary penalty is not 
imposed. HHS does not impose any civil monetary penalty on any failure 
for the period of time during which none of the responsible entities 
knew, or exercising reasonable diligence would have known, of the 
failure. HHS also may not impose a civil monetary penalty for the 
period of time after any of the responsible entities knew, or 
exercising reasonable diligence would have known of the failure, if the 
failure was due to reasonable cause and not due to willful neglect and 
the failure was corrected within 30 days of the first day that any of 
the entities against whom the penalty would be imposed knew, or 
exercising reasonable diligence would have known, that the failure 
existed.
    (b) Burden of establishing knowledge. The burden is on the 
responsible entity or entities to establish to HHS's satisfaction that 
no responsible entity knew, or exercising reasonable diligence would 
have known, that the failure existed.


Sec.  158.613  Notice of proposed penalty.

    (a) Contents of notice. If HHS proposes to assess a penalty in 
accordance with this Part, it must provide the issuer written notice of 
its intent to assess a penalty, which includes the following:
    (1) A description of the requirements under this Part that HHS has 
determined the issuer violated.
    (2) A description of the information upon which HHS based its 
determination, including the basis for determining the number of 
affected individuals and the number of days or weeks for which the 
violations occurred.
    (3) The amount of the proposed penalty as of the date of the 
notice.
    (4) Any considerations described in Sec.  158.607 through Sec.  
158.610 of this subpart that were taken into account in determining the 
amount of the proposed penalty.
    (5) A specific statement of the issuer's right to a hearing.
    (6) A statement that failure to request a hearing within 30 days 
after the date of the notice permits the assessment of the proposed 
penalty without right of appeal in accordance with Sec.  158.615 of 
this subpart.
    (b) Delivery of Notice. This notice must be either hand delivered, 
sent by certified mail, return receipt requested, or sent by overnight 
delivery service with signature upon delivery required.


Sec.  158.614  Appeal of proposed penalty.

    Any issuer against which HHS has assessed a penalty under this Part 
may appeal that penalty in accordance with Sec.  150.400 et seq.


Sec.  158.615  Failure to request a hearing.

    If the issuer does not request a hearing within 30 days of the 
issuance of the notice described in Sec.  158.613 of this subpart, HHS 
may assess the proposed civil monetary penalty indicated in such notice 
and may impose additional penalties as described in Sec.  158.606 of 
this subpart. HHS must notify the issuer in writing of any penalty that 
has been assessed and of the means by which the issuer may satisfy the 
penalty. The issuer has no right to appeal a penalty with respect to 
which it has not requested a hearing in accordance with Sec.  150.405 
of this subchapter, unless the responsible entity can show good cause, 
as determined at Sec.  150.405(b) of this subchapter, for failing to 
timely exercise its right to a hearing.

    Dated: November 18, 2010.
Jay Angoff,
Director, Office of Consumer Information and Insurance Oversight.
    Dated: November 18, 2010.
Kathleen Sebelius,
Secretary.
[FR Doc. 2010-29596 Filed 11-22-10; 8:45 am]
BILLING CODE 4150-03-P


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