74864 Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations 

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. 

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 (§§ 158.101– 

158.102) 

2. Definitions (§ 158.103) 

C. Subpart A—Disclosure and Reporting 

1. Reporting Requirements (§ 158.110) 

2. Aggregate Reporting (§ 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 (§ 158.121) 

4. Premium Revenue (§ 158.130) 

5. Reimbursement for Clinical Services 

Provided to Enrollees (§ 158.140) 

6. Expenditures on Activities To Improve 

Quality (§§ 158.150–158.151) 

7. Other Non-Claims Activities (§ 158.160) 

8. Federal and State Taxes and Licensing 

and Regulatory Fees (§§ 158.161– 

158.162) 

9. Allocation of Expenses (§ 158.170) 

D. Subpart B—Calculating and Providing 

the Rebate 

1. Applicable MLR and States With Higher 

MLR (§§ 158.210–158.211) 

2. Calculating an Issuer’s MLR (§§ 158.220– 

158.221) 

3. Credibility Adjustment (§§ 158.230– 

158.232) 

4. Rebating Premium if MLR Standard Not 

Met (§ 158.240) 

5. Form of Rebate (§ 158.241) 

6. Recipients of Rebates (§ 158.242) 

7. De Minimis Rebates (§ 158.243) 

8. Unclaimed Rebates (§ 158.244) 

9. Notice of Rebates to Enrollees 

(§ 158.250) 

10. Reporting Rebates to the Secretary 

(§ 158.260) 

11. Effect of Rebate Payments on Solvency 

(§ 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 (§§ 158.310–158.311) 

4. Required Information (§§ 158.320– 

158.323) 

5. Assessment Criteria (158.330) 

6. Process (§§ 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 (§§ 158.101– 

158.170) 

B. ICRs Regarding Notice to Enrollees 

(§ 158.250) 


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C. ICRs Regarding Retention of Records 

(§§ 158.501–158.502) 

D. ICRs Regarding State Request for MLR 

Adjustment (§§ 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 


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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 minimed 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 


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Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations 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 §§ 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 § 158.110. The way in 

which issuers are to aggregate data in 

the required reports is explained in 

§ 158.120. The special circumstances of 

mini-med plans and expatriate plans are 

also included in § 158.120. Newer 

experience is addressed in § 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 § 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 § 158.211. Section 158.220 

explains which MLR reporting year’s 

data is to be used to calculate an issuer’s 

MLR, and § 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 § 158.230, and the 

details as to how to calculate them are 

addressed in § 158.231 and § 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 § 158.243. Section 

158.250 establishes a requirement for 

issuers to provide rebate recipients with 

an explanatory notice, while § 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 (§§ 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 

§§ 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 (§ 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 § 158.120, 

‘‘incurred claims’’ is defined in 

§ 158.140, and ‘‘quality improving 

activities’’ is defined in § 158.150. Each 

of these terms is discussed in the 

section of the preamble regarding the 

regulation pertaining to it. 


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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 

§ 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 § 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 planspecific 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 


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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 (§ 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 § 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 § 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 

§ 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, § 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 § 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 (§ 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, qualityimprovement expenditures, and nonclaims 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 § 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 nonclaims 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 highdeductible 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 


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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-ofissue 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 Statelevel 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-ofnetwork 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 


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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 § 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 selfinsured 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 ‘‘minimed’’ 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 nonU.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 § 158.120(d)(4), 

and the calculation of claims and 

quality improving activities is to be 


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multiplied by a factor of two, as 

provided in § 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 § 158.221(b)(4) for 2011 

will be required to report MLR data on 

a quarterly schedule under § 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 § 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 

§ 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 § 158.221(b)(3) for 2011 

will be required to report MLR data on 

a quarterly schedule under § 158.110(b). 

We will revisit the special filing 

circumstances for mini-med plans after 

reviewing the quarterly filings. 

3. Newer Experience (§ 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. 


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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 § 158.121, the NAIC’s 

method for recognizing the special 

circumstances of issuers that have 

substantial new business. 

4. Premium Revenue (§ 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 § 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 § 158.130(a)(1). Earned 

premium is addressed in § 158.130 and 

includes any fees or other contributions 

associated with the health plan. 

Adjustments to premium revenue are 

addressed in § 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 

§ 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 

§ 158.130(b)(4). 

We have adopted the NAIC’s 

approach to assumption and indemnity 

reinsurance, in § 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 §§ 158.161 and 

158.162, separate from but immediately 

following the requirements set forth in 

§ 158.160 related to reporting of nonclaims 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, § 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 

§ 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 


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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 (§ 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 § 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 

§ 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 § 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 stoploss 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 

§ 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 


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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 (§§ 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 postdischarge 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 nonclaims 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 evidencebased 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 ‘‘populationdirected’’ and may not involve face-toface 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 nonquality 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 

§ 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 § 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 prorated 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); 


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(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 § 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 qualityimproving 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 § 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 § 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 § 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 


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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 

§ 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 (§ 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 nonclaims costs and has followed it in 

§ 158.160 of this interim final 

regulation. For example, direct sales 

salaries and work force salaries and 

benefits should be allocated as nonclaims 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 § 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 

(§§ 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 nonclaims 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 


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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 § 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 notfor-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 nonprofit 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 § 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, 

§ 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-forprofit 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 § 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 § 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 (§ 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 


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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 § 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 

§ 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 § 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 § 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 § 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 § 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 

§ 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 

(§§ 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, § 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 § 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 

(§§ 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, minimed plans, expatriate plans, and issuers 


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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 § 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 

§ 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 §§ 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 § 158.120(d)(3) and an 

expatriate plan reporting separately 

under § 158.120(d)(4), that the 

numerator amount specified in 

§ 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 § 158.130 and the 

reporting of data regarding Federal and 

State taxes and licensing and regulatory 

fees is set forth in §§ 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 § 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 § 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 (§§ 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 § 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 


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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: 

• 0.9 percent or more in 1 out of 

every 4 years if it insures 75,000 lives, 

• 2.6 percent or more in 1 out of 

every 4 years if it insures 10,000 lives, 

and 

• 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 § 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 

§ 158.230(c)(3), designating as ‘‘noncredible’’ any reported MLR that is 

based on experience from fewer than 

1,000 life-years. Thus, § 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 lifeyears, and this definition is adopted, as 

provided in § 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 lifeyears is ‘‘partially credible’’ and entitled 

to a credibility adjustment, as stated in 

§ 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 

§ 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 § 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. 


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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. 

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 § 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 × (.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 

§ 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 § 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 


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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 (§ 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 § 158.210 and, if applicable, 

§ 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 

§§ 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 § 158.250. 

5. Form of Rebate (§ 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 


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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, § 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 § 158.250. 

6. Recipients of Rebates (§ 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 

§ 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 (§ 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, 

§ 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 (§ 158.244) 

The Affordable Care Act does not 

specifically address the situation of 

rebates being unclaimed. This situation 


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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 § 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 

(§ 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 

(§ 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, § 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 § 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 § 158.260 should be available to 

issuers at the time they submit the 

report required under § 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 § 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 § 158.110 for the subsequent MLR 

reporting year. 

11. Effect of Rebate Payments on 

Solvency (§ 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 


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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 § 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 §§ 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 


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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 statespecific 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 

(§§ 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 (§§ 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: 

› 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. 

› Any requirements that an issuer 

seeking to withdraw from the State’s 

individual health insurance market 

must meet before doing so. 

› Any limitations imposed by the 

State on issuers regarding rating based 

on health status. 

› 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-lastresort requirement or a State-operated 

high-risk pool. 

› 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, § 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 (§ 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 § 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 


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issuers that may not be required to pay 

rebates pursuant to § 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 (§§ 158.340 Through 158.350) 

Section 158.340 provides that the 

request for adjustment must be 

submitted in electronic format, and 

§ 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, § 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 


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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 (§ 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 (§ 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 


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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: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 


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• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements 

(ICRs): 

A. ICRs Regarding MLR and Rebate 

Reporting Requirement (§ 158.101 

Through § 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 

§§ 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 (§ 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 § 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 

(§§ 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 § 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 §§ 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 (§§ 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 §§ 158.321, 158.322, 

and158.323, the data elements that a 

requesting State must provide include: 

• The applicable State minimum 

required MLR, if any; 

• State individual market withdrawal 

requirements, if any; 


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1Estimates 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. 

• Any mechanisms to provide options 

to consumers in case of issuer 

withdrawal; 

• Information on issuers in the State’s 

individual market; 

• The State’s proposed adjustment to 

the minimum MLR for the State’s 

individual market; and 

• 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. 

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 Email: OIRA_submission@omb.eop.gov. 

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 MLRrelated 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 


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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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2 Dafny, Leemore S.. 2010. ‘‘Are Health Insurance 

Markets Competitive?’’ American Economic Review, 

100(4): 1399–1431. 

3Bernstein, 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. 

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. 

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, lowvalue 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. 

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. 

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/ 

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5Comprehensive 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. 

6This 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. 

7These exclusions reflect the restriction to Health 

and Life Blank companies, which drops 22 

Fraternal and Property and Casualty companies 

from the analysis. 

8This 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. 

9As 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. 

10The 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. 

precise NAIC data sources used for this 

analysis. 

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. 

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. 

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. 

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). 

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

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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. 


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11For 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. 

12The 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. 

13This 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. 

14The 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. 

15Carriers 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. 

16Ohio Revised Code § 3923.022, accessed at 

http://codes.ohio.gov/orc/3923. 

17Adamczak, 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. 

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 MLRrelated 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. 

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. 

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


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18As 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. 

19For 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. 

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: 

• 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; 

• 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; 

• Activities That Improve Quality— 

Issuers may increase their qualityimproving 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; 

• 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; 

• 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 

• 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

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. 

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 


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20The 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. 

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 lowrebate 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. 

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

Adjusted MLR = (c)/(p¥t¥f) + (b * d) 

+ u, 

p = 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 


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21As 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. 

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. 

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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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 noncredible 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 lowrange 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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e. Estimated Range of MLR Rebates 

As shown in Table VI.7, in the midrange 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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22The 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. 

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

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 


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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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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. 


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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 pernotification 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. 


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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 midrange 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 


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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 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

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 noncredible 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 onetime 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 


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BILLING CODE 4150–03–C 


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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 

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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. 

■ 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.) 

§ 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. 

§ 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 

§ 147.140 of this subpart. 

§ 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 


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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 

§ 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 

§ 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 

§ 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. 

§ 158.120 Aggregate reporting. 

(a) General requirements. For 

purposes of submitting the report 

required in § 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 § 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 


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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. 

§ 158.121 Newer experience. 

If, for any aggregation as defined in 

§ 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 § 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. 

§ 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. 

§ 158.140 Reimbursement for clinical 

services provided to enrollees. 

(a) General requirements. The report 

required in § 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 § 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 stoploss 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 


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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] 

§ 158.150 Activities that improve health 

care quality. 

(a) General requirements. The report 

required in § 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 § 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 


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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. 

§ 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 § 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 § 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] 

§ 158.160 Other non-claims costs. 

(a) General requirements. The report 

required in § 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 § 158.110 of this subpart 

must include any expenses for 

administrative services that do not 

constitute adjustments to premium 

revenue as provided in § 158.130 of this 

subpart, reimbursement for clinical 

services to enrollees as defined in 

§ 158.140 of this subpart, or 

expenditures on quality improvement 

activities as defined in §§ 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 § 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. 

§ 158.161 Reporting of Federal and State 

licensing and regulatory fees. 

(a) Federal taxes. The report required 

in § 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 § 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. 


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(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-forprofit 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. 

§ 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 § 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 § 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 § 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 § 158.110 of this 

subpart. 

Subpart B—Calculating and Providing 

the Rebate 

§ 158.210 Minimum medical loss ratio. 

Subject to the provisions of § 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 


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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 § 158.301 

of this part et seq. must be substituted 

for 80 percent in paragraph (c) of this 

section. 

§ 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 

§ 158.210, the State’s higher percentage 

must be substituted for the percentage 

stated in § 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 § 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. 

§ 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 § 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 § 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 

§ 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. 

§ 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 § 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 § 158.140 of this part, plus 

the issuer’s expenditures for activities 

that improve health care quality, as 

defined in § 158.150 and § 158.151 of 

this part, that are reported for the years 

specified in § 158.220 of this subpart. 

(1) The numerator of the MLR for the 

2012 MLR reporting year may include 

any rebate paid under § 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 § 158.230 of this subpart. 

(2) The numerator of the MLR for the 

2013 MLR reporting year may include 

any rebate paid under § 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 § 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 § 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 

§ 158.130, minus the issuer’s Federal 

and State taxes and licensing and 

regulatory fees, described in 

§§ 158.161(a) and 158.162(a)(1) and 

(b)(1) of this part. 

§ 158.230 Credibility adjustment. 

(a) General rule. An issuer may add to 

the MLR calculated under § 158.221(a) 

of this subpart the credibility 

adjustment specified by § 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 § 158.110 of 

this part, divided by 12. 

(c) Credible experience. (1) An MLR 

calculated under § 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 

§ 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 

§ 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 

§ 158.210 or § 158.211 of this subpart. 

§ 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 


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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. 

§ 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 lifeyears included in the aggregation, as 

determined under § 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 § 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 

§ 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 § 158.232: DEDUCTIBLE

FACTOR

Health plan deductible 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 § 158.210 in this subpart. 

§ 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 

§§ 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 § 158.161(a), § 158.162(a)(1) 

and § 158.162(b)(1) of this part, 

multiplied by the difference between 

the MLR required by § 158.210 or 

§ 158.211 of this subpart, and the 

issuer’s MLR as calculated under 

§ 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 

§ 158.161(a), § 158.161(a)(1) and 

§ 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. 

§ 158.241 Form of rebate. 

(a) Current enrollees. (1) An issuer 

may choose to provide any rebates 

owing to current enrollees in the form 


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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. 

§ 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] 

§ 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. 

§ 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. 

§ 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 

§ 158.130, minus any Federal and State 

taxes and licensing and regulatory fees 

that may be excluded from premium 

revenue as described in §§ 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. 

§ 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 § 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 § 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 

§ 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 § 158.110 for the 

subsequent MLR reporting year. 


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74930 Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations 

§ 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 

§ 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. 

§ 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. 

§ 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. 

§ 158.320 Information supporting a 

request for adjustment to the medical loss 

ratio. 

A State must submit in electronic 

format the information required by 

§§ 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. 

§ 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 § 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 

§ 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 

§ 158.221 and § 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. 

§ 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 


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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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 


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§ 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 

§ 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. 

§ 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 § 158.240(d) of this part. 

§ 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 

§ 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. 

§ 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 § 158.501 of this 

subpart. 

Subpart F—Federal Civil Penalties 

§ 158.601 General rule regarding the 

imposition of civil penalties. 

If any issuer fails to comply with the 

requirements of this part, civil penalties, 


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as described in this subpart, may be 

imposed. 

§ 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 § 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 noncompliance. 

(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. 

§ 158.603 Notice to responsible entities. 

If HHS learns of a potential violation 

described in § 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. 

§ 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 

§ 158.602 of this subpart. 

§ 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. 

§ 158.606 Amount of penalty—general. 

A civil monetary penalty for each 

violation of § 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. 

§ 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. 

§ 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 § 158.606 of this subpart to 

reflect that fact. As guidelines for taking 

into account the factors listed in 

§ 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 § 158.603 of this subpart, 

implemented and followed a 

compliance plan as described in 

§ 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 


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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. 

§ 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 § 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. 

§ 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. 

§ 158.611 Settlement authority. 

Nothing in § 158.606 through 

§ 158.610 of this subpart limits the 

authority of HHS to settle any issue or 

case described in the notice furnished in 

accordance with § 158.603 of this 

subpart or to compromise on any 

penalty provided for in §§ 158.606 

through 158.610 of this subpart. 

§ 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. 

§ 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 

§ 158.607 through § 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 § 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. 

§ 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 

§ 150.400 et seq. 

§ 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 § 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 § 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 

§ 150.405 of this subchapter, unless the 

responsible entity can show good cause, 

as determined at § 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 


jlentini on DSKJ8SOYB1PROD with RULES3