81004 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

45 CFR Part 154 

[OCIIO–9999–P; Docket No. HHS–OS–2010– 

0029] 

RIN 0950–AA03 

Rate Increase Disclosure and Review 

AGENCY: Office of Consumer Information 

and Insurance Oversight (OCIIO), 

Department of Health and Human 

Services (HHS). 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: This document contains 

proposed regulations implementing the 

rules for health insurance issuers 

regarding the disclosure and review of 

unreasonable premium increases under 

section 2794 of the Public Health 

Service Act. The proposed rule would 

establish a rate review program to 

ensure that all rate increases that meet 

or exceed an established threshold are 

reviewed by a State or HHS to 

determine whether the rate increases are 

unreasonable. 

DATES: Send your comments on or 

before February 22, 2011. 

ADDRESSES: 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–9999–P. Because of staff 

and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments using any 

of the following methods (please choose 

only one of the ways listed): 

• Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the instructions under the ‘‘More Search 

Options’’ tab. 

• 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–9999–P, 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. 

• 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–9999–P, 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 address 

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 information on viewing public 

comments, see the beginning of the 

‘‘ADDITIONAL INFORMATION’’ 

section. 

FOR FURTHER INFORMATION CONTACT: 

For questions concerning this 

proposed rule, contact Sally McCarty, 

Office of Consumer Information and 

Insurance Oversight, Department of 

Health and Human Services, by phone 

at (301) 492–4489 OR by e-mail at 

ratereview@hhs.gov. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://regulations.gov. 

Follow the search instructions on that 

Web site to view public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 

8:30 a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

Table of Contents 

I. Background 

II. Provisions of the Proposed Rule 

A. Introduction and Overview 

B. Definitions (§ 154.102) 

C. Applicability (§ 154.103) 

D. Rate Increases Subject to Review 

(§ 154.200) 

E. Review of Rate Increases Subject to 

Review by HHS or by a State (§ 154.210) 

F. Effective Rate Review Program 

(§ 154.301) 

G. Unreasonable Rate Increases 

H. Issuer Disclosure Required Under 

Part 154 

III. Collection of Information Requirements 

IV. Response to Comments 

V. Regulatory Impact Analysis 

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. 

Most of the previous regulations were 

issued jointly with the Departments of 

Labor and the Treasury. A request for 

comments 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 

comments). A request for comments 

relating to the premium review 

provisions of PHS Act section 2794 was 

also published by HHS in the Federal 

Register on April 14, 2010 (75 FR 

19335) (notice, or request for 

comments). 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 

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1There are two sections numbered 2794 in the 

Public Health Service Act. The Section 2794 that is 

the basis for this rule is entitled ‘‘Ensuring That 

Consumers Get Value For Their Dollars.’’ 

(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)); (5) section 

2719 (regarding internal claims and 

appeals and external review processes) 

(75 FR 43330 (July 23, 2010)). HHS 

published interim final regulations 

implementing PHS Act section 2718 

(regarding medical loss ratio (75 FR 

74864 (December 1, 2010)). HHS, 

Department of Labor, and Department of 

the Treasury also 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. 

These proposed regulations are being 

published to implement section 2794 of 

the PHS Act, relating to the disclosure 

and review of unreasonable premium 

increases.1

II. Provisions of the Proposed Rule 

A. Introduction and Overview 

Section 1003 of the Affordable Care 

Act adds a new PHS Act section 2794 

which directs the Secretary, in 

conjunction with the States, to establish 

a process for the annual review of 

‘‘unreasonable increases in premiums 

for health insurance coverage.’’ The 

statute provides that this process shall 

require health insurance issuers to 

submit to the Secretary and the 

applicable State a justification for an 

unreasonable premium increase prior to 

the implementation of the increase. 

The review process required under 

section 2794 does not preempt or 

supplant any existing State laws or 

processes governing the review of 

insurance premiums, including any 

State authority to prevent the 

implementation of unreasonable rates. 

Many States’ laws already provide that 

rates may not be approved, or may not 

remain in effect, if they are excessive or 

unreasonable in relation to the benefits 

provided or fail to satisfy other statutory 

standards. Specifically, our review of 

State law indicates that 43 of the 50 

States currently have some rate review 

process, in either the individual or 

small group markets, or both. 

This proposed regulation recognizes 

the traditional role of the States in 

regulating insurance rates and builds on 

existing State-based rate review 

processes. In circumstances where HHS 

is reviewing rates rather than a State, 

which we believe will be a minority of 

States that have not yet established 

effective rate review programs as 

discussed below, a determination by 

HHS that a rate increase is 

‘‘unreasonable’’ under section 2794 

would not prevent any health insurance 

issuer from implementing a rate 

increase permitted by State law. In this 

regard, this proposed regulation 

preserves the opportunity for insurers to 

implement a proposed rate that is 

consistent with State law. Moreover, the 

process established by this proposed 

regulation would not result in any delay 

in an issuer’s ability to implement a 

proposed rate increase. In other words, 

the requirements of Section 2794 only 

supplement and complement, rather 

than supplant, and do not interfere 

with, existing State laws and processes 

for rate review. 

Section 2794 of the PHS Act directs 

the Secretary, in conjunction with the 

States, to establish a process for the 

annual review of unreasonable increases 

in ‘‘premiums.’’ ’’Premium’’ is the final 

amount charged to a specific insured. 

For those States that currently review 

proposed increases in ‘‘premiums,’’ it is 

the underlying rates and methods that 

are the subject of the actuarial review 

conducted by these States. 

To determine rates for a specific 

insurance product, the issuer must 

estimate future claims costs in 

connection with that product and then 

the revenue needed to pay anticipated 

claims and non-claims expenses, such 

as administrative expenses including 

profits. The costs that will be incurred 

and the revenue that will be received 

are not known at the time the rate is 

established (indeed, the number of 

people that will be covered by the 

product is not known), so the rates must 

be based on an actuarial estimate of 

these costs and of the non-claims 

expenses. It is these estimates, along 

with the methodology used to determine 

them, that are the subject of the 

actuarial review conducted by States 

that have authority to review premium 

or rate increases. 

Once the overall amount of revenue 

needed is established, the premium that 

will be charged to specific insureds is 

determined. Generally, the premium 

charged will vary depending on 

characteristics such as age, geography, 

and in the individual market in many 

States, health status. It will also vary 

based on choices made by the insured, 

such as the amount of deductibles and 

co-pays. The criteria that may be used 

and the differences in premium that 

may be charged are determined by State 

law. 

This proposed regulation, therefore, 

provides a process for the review of 

unreasonable rate increases, based upon 

the practice in States that conduct 

effective reviews of the cost of health 

insurance coverage. 

Section 2794 of the PHS Act does not 

define what makes a rate increase 

‘‘unreasonable,’’ nor does it specify the 

process that should be used for 

determining whether a particular rate 

increase is unreasonable (requiring that 

a review be conducted and a 

justification submitted). Therefore, this 

proposed regulation provides a 

definition of an ‘‘unreasonable’’ rate 

increase, and outlines a process that 

would be used by HHS when reviewing 

rate increases to determine which rates 

are subject to review and among them 

which are ‘‘unreasonable.’’ 

We considered two types of processes 

that arguably could satisfy the 

requirement in 2794 that unreasonable 

rates be reviewed. One would establish, 

by regulation, a standard of 

unreasonableness, based on some 

criteria other than an actuarial standard 

or actual review. For example, any rate 

increase exceeding the average increase 

for similar products during the previous 

year, or any rate increase exceeding a 

rate of inflation of medical costs by a 

specific amount, could be deemed to be 

unreasonable. Under this approach, any 

rate increase over a pre-determined 

percentage would be considered 

‘‘unreasonable’’ and therefore subject to 

review. However, while consumers may 

view any large increase in the cost of 

their health insurance coverage to be 

‘‘unreasonable,’’ it is not possible to 

know whether an increase is 

‘‘unreasonable’’ from an actuarial 

standpoint until the proposed increase, 

and the underlying assumptions, have 

been the subject of actuarial analysis. 

Moreover, while such an approach may 

be relatively easy to administer, for the 

reasons stated above it almost certainly 

would label as ‘‘unreasonable’’ rate 

increases that are not unreasonable from 

an actuarial standpoint. This point was 

made in numerous comments received 

in response to the Request for 

Comments published on April 14, 2010 

in the Federal Register (75 FR 19335). 

Those comments suggest that HHS 

should not establish a definition of an 

unreasonable rate increase by, for 

example, providing that all rate 

increases greater than a specified 

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percentage would be deemed to be 

unreasonable. 

In addition, this ‘‘literal’’ reading 

under which rates are deemed 

‘‘unreasonable’’ at the outset, in the 

absence of review, would make any 

‘‘review’’ process meaningless, as the 

outcome of any review (that is, whether 

the rate was ‘‘unreasonable’’) would 

have been pre-determined. 

This proposed regulation instead 

proposes an alternative approach that is 

consistent with the language of section 

2794; is more narrowly focused on what 

we interpret to be the purpose of that 

section; and would not involve the 

anomaly of ‘‘pre-determining’’ the 

reasonableness of a rate before it has 

been reviewed. Under this approach, if 

a proposed rate increase equals or 

exceeds a defined threshold, it would be 

considered ‘‘subject to review.’’ The 

review process would then determine if 

the increase is, in fact, unreasonable. 

This approach interprets the statutory 

‘‘process’’ for reviewing unreasonable 

rate increases as a process under which 

rates that may ultimately be determined 

to be unreasonable are reviewed. Under 

this interpretation, identifying 

potentially unreasonable rates for 

review is reasonably an element of a 

broader process for the review of 

proposed rate increases. 

Rates above the threshold would not 

be deemed or otherwise determined to 

be unreasonable in advance of this 

review. As discussed below, for rate 

increases filed in a State on or after July 

1, 2011, or effective on or after July 1, 

2011 in a State that does not require a 

rate increase to be filed, the threshold 

for whether rates are subject to review 

would be whether the average weighted 

increase in the rate filing, alone or in 

combination with prior increases in the 

preceding 12 month period, is 10 

percent or more. 

In establishing the 10 percent 

threshold for determining which rates 

are subject to review, HHS has balanced 

the wide range of available data on rate 

and medical trend increases. HHS 

reviewed available data and literature 

on insurance rate increases in States and 

general trends in health care costs. HHS 

reviewed each State’s applicable Web 

site, and determined that the 

information related to rate trends posted 

on these Web sites is limited. Our 

review of the limited data available 

suggests that the majority of increases in 

the individual market exceeded 10 

percent each year for the past 3 years. 

These yearly increases significantly 

exceed some national measures of 

medical cost inflation, such as the 

medical component of the Consumer 

Price Index, whose inflation has 

typically ranged from 3.7 percent to 4.4 

percent. The Centers for Medicare and 

Medicaid Services’ National Health 

Expenditures (NHE) data is another 

measure of health care cost trends based 

on overall national health care 

spending. The five most recent years of 

available NHE data suggest that overall 

health care expenditures have increased 

at an annual rate between 4.4 percent to 

6.9 percent. Some commenters 

suggested using these indices as 

thresholds for a review of rate increases. 

Another national index, the Standard & 

Poor’s Healthcare Economic 

Commercial Index, also measures 

insurance rate trends. The S & P Index 

measures trends in provider claims 

costs, which encompasses both unit cost 

and utilization changes; the trend in 

that index from September 2009 to 

September 2010 was 8.5 percent. 

The 10 percent threshold established 

in this regulation exceeds these major 

indices and in doing so balances 

industry concerns that any threshold 

would be over-inclusive with the 

competing concern that it would subject 

to review too few rates that may be 

unreasonable. As we discuss below, 

when better and more specific data on 

trends in insurance rates in individual 

States can be collected, State-specific 

thresholds would be established. 

This approach does not provide for 

the review of every proposed rate 

increase, no matter how small, to 

determine whether it is unreasonable. 

We recognize that the choice of any 

threshold makes it inevitable that 

unreasonable rate increases below the 

threshold will not be reviewed, and that 

a proposed increase of less than 10 

percent would be unreasonable if the 

actuarial assumptions underlying the 

increase were invalid or unreasonable. 

In proposing this approach, HHS also 

has taken into consideration the fact 

that many States, as discussed below, 

conduct a rate review process for all rate 

increases without regard to the 

magnitude of the increase. We expect 

the number of States conducting such 

reviews to increase in light of additional 

resources provided under the rate 

review grants and passage of State 

legislation. Therefore, as a practical 

matter, in a growing number of States, 

there is even less likelihood that an 

unreasonable increase below the 

threshold would be implemented. 

In this regulation, HHS proposes an 

approach that balances the regulatory 

burdens that would be imposed on both 

the agency and the industry if every rate 

increase, no matter how small, were to 

be reviewed for unreasonableness 

against the potential harm to consumers 

should a small, but unreasonable, 

increase not be reviewed and the issuer 

not be required to provide a final 

justification for the increase. We invite 

comments on whether 10 percent is a 

reasonable threshold to apply in 

determining which rate increases will 

be subject to review. 

In establishing an initial 10 percent 

threshold for whether a rate increase is 

subject to review, as discussed below, 

HHS recognizes that rates, underlying 

costs, and health care trends vary from 

State to State. Many factors influence 

the magnitude and frequency of 

increases in the States, and a single, 

national filing threshold does not reflect 

all of the local variations. As a 

consequence, HHS would propose, for 

future calendar years, to establish Statespecific thresholds for each future 

calendar year by September 15th of the 

prior year. In determining each Statespecific threshold, HHS would consider 

the State-specific data submitted for 

each rate increase subject to review, and 

also the State-specific data received by 

HHS from those States that have 

received ‘‘premium review grants’’ under 

section 2794(c) of the PHS Act. To the 

extent that a State insurance regulator 

has other data that could serve as the 

basis for a State-specific threshold, that 

would be considered as well. 

As discussed below, the State-specific 

threshold would be based on the same 

analysis used to develop the initial 10 

percent threshold, but would be based 

on data from the specific State, rather 

than the national data we analyzed in 

selecting the proposed 10 percent figure. 

In response to the Request for 

Comments, many commenters also 

suggested that the rate review process 

should not apply to rate increases in the 

large group market. Currently, our 

review of State law indicates that only 

18 States have authority to review rates 

for all or part of the large group market. 

Applying this regulation to the large 

group market would result in a process 

that is not closely aligned with most 

State processes upon which the 

regulation is modeled. In addition, 

many issuers are not accustomed to 

submitting proposed rate increases for 

review in this market. Finally, 

purchasers in the large group market 

have greater leverage than those in the 

individual and small group markets, 

and therefore may be better able to 

avoid imposition of unreasonable rate 

increases. For these reasons, under this 

proposed regulation, rates in the large 

group market would not be subject to 

the rate review process we are 

proposing. HHS solicits specific 

comments on whether, in the future, if 

rate increases in the large group market 

were subject to a review process under 

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Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 81007 

section 2794, if that process should 

differ from the process provided for in 

this proposed regulation for the 

individual and small group markets. 

In recognition of the primary role 

States have in reviewing rates today, 

HHS would defer to the definitions used 

under applicable State rate filing laws 

when determining whether a rate filing 

relates to health insurance coverage 

offered in the individual market, small 

group market, or large group market, 

where such laws differ from the 

definitions of these terms in the PHS 

Act. HHS believes that deferring to the 

definitions employed in State rate filing 

laws ensures that the rate review 

process under this proposed regulation 

would not disrupt current State rate 

filing and review practices; however, we 

are soliciting public comment on 

alternative approaches. We note that 

this is solely for rate filing purposes. 

Federal law distinctions in the 

Affordable Care Act regarding group 

size apply for all other purposes unless 

otherwise specified. As discussed 

below, where State rate filings laws do 

not contain definitions of small and 

large group markets, we propose to 

employ the definitions in the Public 

Health Service Act, with the caveat that 

the number used for a cut-off between 

small and large groups would remain at 

50 employees, as is currently the case in 

all States, even though States have the 

option of using 100 employees prior to 

2016, and a 100 employee cut-off would 

be used after that date. 

Rate increases for health insurance 

coverage for ‘‘excepted benefits,’’ as 

described in paragraph (1) of subsection 

(c) of section 2791 of the PHS Act, or in 

paragraphs (2), (3) or (4) of such 

subsection, if the benefits are provided 

under a separate policy, certificate of 

contract of insurance, would also be 

exempted from review under this 

proposed regulation. Excepted benefits, 

such as dental and vision, do not appear 

to be a principal focus of the Affordable 

Care Act, and the regulatory burden that 

would be imposed on the industry and 

HHS would not justify reviewing rate 

increases for these benefits. 

All rate increases that meet or exceed 

the 10 percent threshold would be 

reviewed, by the relevant State, or by 

HHS in the smaller number of cases 

where States do not yet have an 

effective process in place. The proposed 

regulation would use the definition of 

States set forth in section 2791(d)(14) of 

the PHS Act, which defines States to 

include each of the several States, the 

District of Columbia, Puerto Rico, the 

Virgin Islands, Guam, American Samoa, 

and the Northern Mariana Islands. 

Consistent with the statutory 

requirement in section 2794 that the rate 

review process be established ‘‘in 

conjunction with the States,’’ the 

proposed regulation provides that HHS 

would adopt a State’s determination of 

whether a rate increase is unreasonable 

if the State has an effective rate review 

program for rates filed in a particular 

market. This element of the proposed 

regulation preserves the primary role 

States have today in reviewing rates. So 

long as a State can conduct an effective 

review of proposed rate increases that 

meet or exceed the applicable threshold, 

State determinations will be adopted by 

HHS. 

HHS expects that a significant 

majority of States would currently meet 

the standards for having an effective 

review process in one or both of the 

individual or small group markets, and 

we anticipate the remainder would 

likely establish an effective rate review 

process as they obtain needed statutory 

authority or implement new or 

enhanced review procedures. More than 

10 States indicated in their applications 

for rate review grants they would be 

seeking additional legislative authority 

to enhance their existing processes. 

HHS would evaluate whether a State 

has an effective rate review program 

based on four main factors, all of which 

currently represent the best practices 

among the many States which conduct 

review today. The first factor is whether 

the State receives from health insurance 

issuers’ data and documentation 

sufficient to determine whether a rate 

increase is unreasonable. As noted 

above, many States have these 

provisions today. The second factor is 

whether the State effectively reviews the 

data and documentation submitted by 

health insurance issuers in support of a 

rate increase. The third factor is whether 

the State review examines the 

reasonableness of the assumptions used 

by the issuer in developing its rate 

proposal and the historic data 

underlying those assumptions. The 

proposed regulation also describes the 

areas of analysis that a State’s review 

would be required to include in order 

for it to be deemed effective. The fourth 

factor is whether the State applies a 

standard set forth in statute or 

regulation when making the 

determination of whether a rate increase 

is unreasonable. This proposed 

regulation does not establish a standard 

for unreasonableness that a State must 

use or apply; nor does it require a 

numerical standard to be applied under 

State law to determine whether a rate 

increase is unreasonable. Rather, a State 

regulator would apply the applicable 

standards that exist under State law. 

Finally, we are soliciting public 

comment on whether the public’s ability 

to comment on unreasonable rate 

increases during the review process 

should be considered as one criterion 

for an effective rate review program. 

As noted above, section 2794 does not 

provide a definition of ‘‘unreasonable’’ 

rate increases. The proposed regulation 

provides that States would apply the 

standards set forth in State law or 

regulation when determining whether a 

rate increase is unreasonable. As 

mentioned above, many States’ laws 

provide that rates may not be approved, 

or may not remain in effect, if they are 

excessive or unreasonable in relation to 

the benefits provided or fail to satisfy 

other statutory standards. Specifically, 

our review of States’ laws indicates that 

43 of the 50 States currently have some 

rate review process in either the 

individual or small group markets, or 

both. 16 States and the District of 

Columbia explicitly prohibit insurance 

rates from being excessive, inadequate, 

or unfairly discriminatory. In addition, 

13 States prohibit rates from being both 

unreasonable in relation to the benefits 

provided and excessive, inadequate, or 

unfairly discriminatory. Finally, an 

additional 14 States prohibit rates from 

being unreasonable in relation to the 

benefits provided. For the remaining 8 

States, we did not identify any explicit 

statutory standards that address the 

unreasonableness of rates; however, 

these States may use other legal tools 

available to regulate unreasonable rates. 

In addition, based on the rate review 

grant applications, some Territories 

either have a rate review process in 

place today, or expect to implement a 

process in the future. 

When a State with an effective rate 

review program determines whether a 

rate increase violates the standards set 

forth in State law and therefore whether 

the increase is unreasonable, HHS 

would adopt that determination and 

would not conduct an independent 

review of the State’s determination. 

Given this proposed regulation, and the 

rate review grants made available to 

States under Section 2794 of the PHS 

Act, it is likely that, as States gain rate 

review authority and improve their rate 

review programs, the number of States 

in which HHS would be conducting 

reviews would diminish over time. 

For rate increases filed in markets for 

which a State does not have an effective 

rate review process, HHS would 

conduct a review of the proposed rate 

increases to determine whether they are 

unreasonable until such time as the 

State implements an effective review 

process in that market. This proposed 

regulation provides that where HHS 

conducts rate reviews, the standard for 

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unreasonable would be whether the rate 

increase is ‘‘excessive,’’ ‘‘unjustified,’’ or 

‘‘unfairly discriminatory.’’ The proposed 

regulation lists the factors that HHS 

would consider when determining if a 

rate increase is excessive, unjustified or 

unfairly discriminatory, and therefore, 

unreasonable. 

Consistent with the statutory 

requirement that a ‘‘justification’’ be 

filed before an unreasonable rate may be 

implemented, the regulation also 

proposes to require that for rate 

increases that are subject to review 

(because they meet or exceed the 10 

percent review threshold), a preliminary 

justification would have to be submitted 

to the applicable State in which the 

increase is proposed to be implemented, 

as long as a State accepts such 

submissions, and to HHS. The 

regulation sets out the proposed 

contents of the preliminary justification. 

The preliminary justification would be 

divided into three parts, each part 

having a different purpose. The 

proposed regulation would require 

health insurance issuers to complete 

parts one and two of the preliminary 

justification, regardless of whether a 

State or HHS is reviewing the rate 

increase. The information that would be 

contained in parts one and two of the 

preliminary justification is intended to 

provide consumers with a description of 

the rate increase and the factors 

contributing to the increase, including 

both a descriptive and a quantitative 

analysis. 

The information required to be 

provided in the preliminary justification 

supplements, and does not conflict 

with, State laws specifying what issuers 

must file with the State when they 

propose to increase rates. Those laws 

continue to govern what the issuer must 

file with the State, and would be 

unaffected by this proposed regulation 

and the requirement that the 

preliminary justification must be filed 

with HHS. 

When HHS is reviewing a rate 

increase, issuers would be required to 

submit the additional data required 

under part three of the preliminary 

justification in order to allow HHS to 

conduct a comprehensive actuarial 

review of the increase. The specific data 

reporting requirements in part three of 

the preliminary justification are 

modeled on the actuarial memorandum 

guidelines included in NAIC Model 

Regulation 134–1. In the event the level 

of detail provided by a health insurance 

issuer does not provide a sufficient basis 

for HHS to review a rate increase, HHS 

would request from the health insurance 

issuer the additional information 

necessary to complete its review. 

Parts one and two of the preliminary 

justification would promptly be posted 

to the HHS Web site so that insurance 

consumers are on notice of proposed 

increases and have basic information 

about the factors the issuer asserts are 

causing the increase. HHS will also post 

on its Web site before any information 

contained in part three of the 

preliminary justification that has not 

been designated as ‘‘confidential’’ as 

defined in HHS’s Freedom of 

Information Act regulations, 45 CFR 

§ 5.65. HHS will make a determination 

as to whether to post information 

designated as ‘‘confidential’’ under the 

standards and procedure set forth in 

those regulations, and will post that 

information only after making a 

determination that it is subject to 

disclosure as provided by those 

regulations. 

If HHS reviews a rate increase and 

determines it to be unreasonable, HHS 

would provide its final determination to 

the health insurance issuer. If the issuer 

chooses not to implement the 

unreasonable rate increase, or to 

implement a lower increase than it had 

proposed and such lower increase is 

below the applicable subject to review 

threshold, the issuer would be required 

to provide a final notification to this 

effect to HHS. If the issuer chooses to 

implement a lower increase but the 

lower increase is above the applicable 

subject to review threshold, the lower 

increase would be subject to review and 

the issuer would be required to submit 

a new preliminary justification. If the 

issuer implements an unreasonable rate 

increase, it would have to provide to 

HHS a final justification in response to 

HHS’s determination of 

unreasonableness. HHS would post its 

final determination and the issuer’s 

final notification or final justification on 

its Web site. If the issuer chooses to 

implement the rate increase, it would be 

required to post its preliminary 

justification, HHS’s determination and 

its final justification on its Web site. 

One of the elements of an effective 

rate review program, discussed more 

fully below, is that the State’s review 

would include an analysis of certain 

specific factors set forth in this 

proposed regulation and which are 

based on the common practices that 

States employ today. In addition, the 

State would provide to the issuer and to 

HHS its determination of whether a rate 

increase is unreasonable, along with an 

explanation of how its analysis of the 

factors set forth in the proposed 

regulation caused it to arrive at that 

determination. HHS would adopt 

determinations made by States with 

effective rate review programs. When 

HHS has adopted a State’s 

determination as to whether a rate 

increase is unreasonable, HHS would 

post the State’s final determination on 

its Web site, together with the issuer’s 

final justification in the event that the 

issuer chose to implement a rate 

increase that was determined to be 

unreasonable by the State. 

B. Definitions (§ 154.102) 

The proposed regulation provides the 

following key definitions that would 

apply to the rate review process used by 

HHS, and to its determination regarding 

whether a rate increase is unreasonable. 

The definitions are discussed here 

because they are unique to this 

regulation or may be of particular 

interest to enrollees, health insurance 

issuers, consumers, regulators, and 

others. Defined terms that conform to 

definitions commonly used in the 

health insurance industry, such as 

‘‘insurance,’’ or that have already been 

defined in Federal law, are not 

discussed here. 

1. Individual Market and Small Group 

Market 

As discussed above, in order to ensure 

that the rate review process outlined in 

the proposed regulation is consistent 

with the process used by States in 

performing rate reviews, and in order to 

avoid any disruption to the current State 

rate filing and review practices, the 

definitions of ‘‘individual market’’ and 

‘‘small group market’’ would be defined 

as they are under the applicable State’s 

rate filing laws, if such laws include 

such definitions. For example, several 

States define a small group to include 2 

to 25 employees for rating purposes, and 

the small group rating requirements in 

these States do not apply to groups with 

26 or more employees. Further, certain 

States consider association plans to be 

large employers for rating purposes. In 

such circumstances, and only for this 

purpose, HHS would defer to applicable 

State law when determining whether a 

rate increase in that State relates to the 

small group market. For all other 

purposes the definitions set forth in the 

PHS Act govern as applicable. 

In addition, for purposes of rate 

review under this regulation only, if the 

State rate filing law does not include a 

definition of small or large group, the 

definition under the PHS Act would be 

used, except that a small group would 

be defined to include 1 to 50 employees. 

Currently, under the Affordable Care 

Act definitions, States have the option 

until 2016 of using 50 or 100 as the 

cutoff for a small group, with 100 

applying after that date, and all States 

have elected the 50 option. Thus, if 

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there are no definitions of small and 

large group in a State’s rate filing law, 

this proposed regulation would define 

‘‘small group’’ to include 1 to 50 

employees. 

2. Unreasonable Rate Increase 

The proposed regulation defines a rate 

increase as ‘‘unreasonable’’ if it is 

‘‘unjustified,’’ ‘‘excessive,’’ or ‘‘unfairly 

discriminatory,’’ as these terms are more 

fully described in § 154.205, but this 

proposed definition would apply only 

to rate increases that are reviewed by 

HHS, and would not create a Federal 

standard for States to use when 

determining whether a rate increase is 

unreasonable. These terms are described 

consistently with the standards that are 

most commonly used by States to 

identify rate increases that are not in 

compliance with State law. 

Since HHS would be adopting the 

determinations of States with an 

effective rate review program, the 

proposed regulation includes in the 

definition of ‘‘unreasonable rate 

increase,’’ those rate increases that have 

been determined by a State to be 

excessive, unjustified, unfairly 

discriminatory or otherwise 

unreasonable under applicable State 

law. Accordingly, a State with an 

effective review program would be 

permitted to use any applicable 

standards set forth in statute or 

regulation for determining whether a 

rate increase that is subject to review is 

unreasonable. This serves to preserve 

and recognize existing State laws 

relating to unreasonable rates. HHS 

recognizes that factors other than those 

addressed in the proposed regulation 

may be viewed as potentially impacting 

the reasonableness of a rate, including 

the structure and competitiveness of the 

market, and we are therefore soliciting 

public comment to identify these factors 

and whether they should be considered 

in determining whether a rate increase 

is unreasonable. 

C. Applicability (§ 154.103) 

The requirements of this proposed 

regulation would generally be 

applicable to all health insurance 

issuers offering small group or 

individual health insurance coverage in 

a State. 

Section 2794 of the PHS Act does not 

apply to grandfathered health plan 

coverage (See 45 CFR 147.140 (75 FR 

34538, June 17, 2010, as amended by 75 

FR 70114, November 17, 2010)), so these 

proposed regulations similarly would 

not apply to such coverage. 

In addition, insurance coverage that 

meets the ‘‘excepted benefits’’ definition 

set forth in section 2791(c) of the PHS 

Act and 45 CFR 144.103 would not be 

subject to these proposed regulations. 

While ‘‘excepted benefits’’ are not 

explicitly exempt from section 2794 of 

the PHS Act, they are exempt from other 

provisions of the PHS Act, as added by 

the Affordable Care Act. ‘‘Excepted 

benefits’’ do not appear to be the focus 

of the rate review provisions of the 

Affordable Care Act. Therefore, the 

proposed regulation would exempt 

‘‘excepted benefits,’’ to allow for the 

consistent administration of the PHS 

Act with respect to these defined 

benefits. 

While HHS recognizes that the rate 

review provisions of section 2794 of the 

PHS Act do not specify to which 

particular segments of the insurance 

market the rate review provisions apply, 

and contain no specific exclusion for 

the large group market, HHS proposes 

that these provisions should only apply 

to the small group and individual 

market at this time. The significant 

majority of States focus their efforts on 

review of rates within the small group 

and individual markets. Purchasers in 

the large group market are viewed as 

more sophisticated purchasers, who 

may have greater leverage and therefore 

better ability to avoid the imposition of 

unreasonable rate increases, also 

mitigating the need for more active 

regulation. Many States have limited 

authority over the large group market, so 

under the framework set out in this 

regulation, few States could satisfy the 

standards for an effective review process 

in the large group market. Taking these 

factors into consideration, as noted 

above, these proposed regulations 

would not apply to the large group 

market. HHS may, however, revise these 

regulations at a future date to cover such 

plans, and solicits specific comments on 

whether, in the future, if rate increases 

in the large group market were subject 

to a review process under Section 2794, 

that process should be different than the 

one provided for in this regulation for 

the small and individual group markets. 

Although section 2794 of the PHS Act 

directs that implementation of the 

annual rate review process begin with 

the 2010 plan year, the rate review 

process established in the proposed 

regulation would begin implementation 

with rate increases filed in a State on or 

after July 1, 2011, or effective on or after 

July 1, 2011 in a State that does not 

require rate increases to be filed, due to 

several factors. At the time that the 

Affordable Care Act amendments to the 

PHS Act first became effective, on 

March 23, 2010, many health insurance 

issuers had already implemented rate 

increases for the 2010 plan or policy 

year, and many more had taken 

necessary steps to implement increases 

in the immediate months that followed. 

Since that time, in fulfilling the statute’s 

directive that an effective rate review 

program be developed in conjunction 

with the States, the National 

Association of Insurance Commissioners 

(NAIC) has been working to develop 

appropriate reporting and disclosure 

mechanisms, and HHS has provided 

input into this development process. 

HHS also deemed it appropriate to 

solicit public comments prior to the 

promulgation of this proposed 

regulation, through the Request for 

Comments published on April 14, 2010. 

Finally, this regulation is being issued 

in proposed form, with opportunity for 

further comments which specifically 

address this proposed regulation. 

Therefore, as noted, the rate review 

process outlined in this proposed 

regulation would begin with rate 

increases filed in a State on or after July 

1, 2011 or effective on or after July 1, 

2011 in a State that does not require rate 

increases to be filed. 

D. Rate Increases Subject To Review 

(§ 154.200) 

1. Applicable Threshold for Rate 

Increases Subject To Review 

As explained previously, while 

section 2794 of the PHS Act directs the 

Secretary to establish a process for the 

annual review of unreasonable increases 

in ‘‘premiums,’’ HHS has interpreted this 

as referring to the underlying ‘‘rates’’ that 

are used to develop the premiums. This 

is consistent with how these terms are 

most commonly used by State regulators 

and the insurance industry. Often, the 

rate review process performed by States 

is one that reviews changes to the rating 

structure for a plan or policy, as 

opposed to premium increases within 

the plan or policy that are derived from 

the underlying rating structure. 

Therefore a ‘‘rate increase’’ alters the 

underlying rate structure of a policy 

form, while a ‘‘premium increase’’ can 

occur even without any increase (or 

change) to the underlying rate structure. 

For example, for policies that are agerated, as the duration of the policy 

advances, premium changes that 

correlate with age bands are not ‘‘rate 

increases,’’ since they do not change the 

underlying rate structure. For these 

reasons, the term ‘‘rate’’ is used instead 

of the statutory term ‘‘premium’’ 

throughout the text of the proposed 

regulation. 

Since it is not possible under the 

provisions of this proposed regulation to 

know before conducting a review of a 

proposed rate increase whether it is 

‘‘unreasonable,’’ the process that would 

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81010 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

be established must provide for the 

review of a range of proposed rate 

increases, some of which ultimately 

would be determined to be 

unreasonable, while others would not. 

This proposed regulation therefore 

provides that for health insurance 

coverage offered in the individual or 

small group market all proposed rate 

increases above the defined threshold 

would be ‘‘subject to review.’’ In 

establishing a threshold for rate 

increases subject to review, the 

Secretary has balanced the need to set 

a standard that would effectively 

capture unreasonable increases, while 

avoiding unnecessary filing burdens for 

health insurance issuers with regard to 

increases that are likely to be 

reasonable. 

The review of a rate increase subject 

to review, and the determination of 

whether the rate increase is 

unreasonable, must take into account 

the unique experience of a health 

insurance product and cannot be subject 

to a simple, fixed value. Therefore, 

under the proposed rule, a rate increase 

that is subject to review would not be 

per se unreasonable. For 2011, the 

threshold for whether a rate increase is 

subject to review is a rate increase of 10 

percent or more. This applies not only 

to a single rate increase, but also to 

multiple rate increases of less than 10 

percent that, when added to one or more 

previous increases within the preceding 

12 month period, total 10 percent or 

more. 

In establishing the 10 percent 

threshold, as noted earlier, HHS 

reviewed available data and literature 

on insurance rate increases in States and 

general trends in health care costs. HHS 

reviewed each State’s applicable Web 

site, and determined that the 

information related to rate trends posted 

on these Web sites is limited. A small 

number of States make available data on 

rate increases in different insurance 

market segments in that State. Our 

review of this data suggests that the 

majority of increases in the individual 

market exceeded 10 percent each year 

for the past 3 years. Trends are slightly 

lower in the small group market, but 

over 40 percent of increases still 

exceeded 10 percent. In fact, in the 

States examined, rate increases in the 

individual market and small group 

market typically exceeded 15 percent. 

These yearly increases significantly 

exceed some national measures of 

medical cost inflation, such as the 

medical component of the Consumer 

Price Index, whose inflation has 

typically ranged from 3.7 percent to 4.4 

percent. The Centers for Medicare and 

Medicaid Services’ National Health 

Expenditures (NHE) data is another 

measure of health care cost trends based 

on overall national health care 

spending. The five most recent years of 

available NHE data suggest that overall 

health care expenditures have increased 

at an annual rate between 4.4 percent to 

6.9 percent. Commenters point out that 

the factors which account for the NHE 

or the medical component of the CPI are 

different than the various components 

that account for increases in insurance 

rates. For example, the medical 

component of CPI does not take into 

account utilization of health care 

services, or the risk profiles of specific 

populations but is instead based on 

prices for certain services provided to 

the general population. Health 

insurance rates are affected, not only by 

the prices charged by the providers of 

health care services, but also by changes 

in the rate at which those services are 

accessed and the characteristics of the 

group covered by the insurance. 

Another national index, the Standard & 

Poor’s Healthcare Economic 

Commercial Index, also measures 

insurance rate trends. The S & P Index 

measures trends in provider claims 

costs, which encompasses both unit cost 

and utilization changes; the trend in 

that index from September 2009 to 

September 2010 was 8.5 percent. 

In establishing a 10 percent threshold 

for determining which rates are subject 

to review, HHS has balanced the wide 

range of available data on rate and 

medical trend increases. If, for example, 

the NHE or medical component of the 

CPI represented an accurate measure of 

insurance rate trends, then a threshold 

for review could be established 

consistent with those indices under the 

theory that rate increases in line with 

those trends were reasonable because 

they tracked medical cost trends 

generally, and increases that exceed 

those measures are more likely to be 

unreasonable. However, since neither of 

those particular measures captures the 

many factors that affect insurance rates, 

using those measures as a threshold for 

reviewing rates under section 2794 

would be over-inclusive. Under that 

approach, rather than capturing 

potentially unreasonable or excessive 

rate increases, almost all rate increases 

would be subject to review. Such a 

result would not be consistent with the 

intent of section 2794. For these 

reasons, a 10 percent threshold is a 

reasonable accommodation between the 

observed, but limited data available 

regarding trends in rate increases in the 

States, and the available but not 

precisely comparable data on general 

trends in health care costs and 

spending, and recognizes that other 

factors may justify a larger rate increase. 

As noted earlier, the Secretary would 

seek to establish a State-specific 

threshold for each future calendar year 

no later than September 15th of the 

preceding calendar year, beginning in 

2011, provided applicable State-specific 

trend data is available. If a State-specific 

threshold is not established by the 

Secretary for an applicable calendar 

year, the 10 percent threshold would 

continue to apply. 

A State-specific threshold, to the 

extent it can be developed, would be 

based on the same kind of analysis used 

in establishing the proposed 10 percent 

threshold, but would account for Statespecific variations in rate increases 

based on the cost of health care, 

utilization patterns, and other factors 

affecting health insurance rates in a 

State. HHS would use trend data and 

other information made available to 

HHS from States receiving premium 

review grants and through the reporting 

and notification requirements of this 

proposed regulation to develop Statespecific thresholds, when possible. 

In developing the 10 percent 

threshold, the Secretary considered the 

level of aggregation that should apply 

when determining whether a rate 

increase meets or exceeds the threshold, 

and the Secretary received numerous 

comments on this issue. Comments 

received from issuers, the American 

Academy of Actuaries, and industry 

groups proposed the use of a higher 

level of aggregation of multiple policy 

forms to improve statistical credibility. 

Typically, this aggregation occurs 

within a market segment. Consumer 

groups, on the other hand, generally 

favored lower levels of aggregation. 

Finally, various State regulators sent 

comments describing how individual 

State rate review laws affect the level of 

aggregation used in performing rate 

reviews. 

In considering the broad range of 

perspectives represented by the 

comments on aggregation, the proposed 

regulation requires the consideration of 

rate increases at the ‘‘product’’ level 

when determining whether the increase 

is subject to review. Product would be 

defined under this proposed regulation 

as a package of health insurance 

coverage benefits with a discrete set of 

rating and pricing methodologies that a 

health insurance issuer offers in a State. 

Most States require issuers to submit 

each ‘‘product’’ as a separate form filing 

prior to marketing the ‘‘product’’ in the 

State. While each filed ‘‘product’’ may 

include variable options (such as 

different cost-sharing or deductible 

requirements), this definition, 

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2 Kaiser Family Foundation, ‘‘Rate Review: 

Spotlight on State Efforts to Make Health Insurance 

More Affordable,’’ December 2010, available at 

http://www.kff.org/healthreform/upload/8122.pdf. 

consistent with State law, does not 

consider each variable option as a 

separate ‘‘product.’’ Any rate increase for 

a product that meets or exceeds the 

applicable threshold is subject to 

review. However, if an issuer has rate 

increases that meet or exceed the 

applicable threshold for multiple 

products, the issuer may submit a 

single, combined preliminary 

justification for those products 

combined, provided (i) the experience 

of all combined products has been 

aggregated to calculate the rate 

increases, and (ii) the rate increase is the 

same across all combined products. 

2. Determining Whether a Rate Increase 

Meets or Exceeds the Threshold 

A rate increase would meet or exceed 

the applicable threshold if the weighted 

average increase for all enrollees subject 

to the rate increase meets or exceeds the 

applicable threshold. In this case, the 

weighted average takes into account the 

number of enrollees affected by each 

particular rate increase and represents 

the given increase proportionately. 

Specifically, we assume that different 

subcategories of enrollees will 

experience varying rate increases. The 

weighted average is calculated as 

follows: For each subcategory of 

enrollees subject to the same rate 

increase, we multiply the number of 

enrollees by the respective rate increase. 

The products are then summed over all 

subcategories. The sum is then divided 

by the total number of enrollees to 

arrive at the weighted average rate 

increase. 

A rate increase meets or exceeds the 

threshold either by itself, or when 

considered cumulatively with any 

previous rate increases implemented 

with respect to the product during the 

preceding 12-month period. Therefore, a 

single rate increase which by itself falls 

below the applicable threshold must be 

aggregated with rate increases 

implemented during the 12 month 

period preceding its effective date in 

order to determine whether it is subject 

to review. If a rate increase meets or 

exceeds the threshold when combined 

with a previous increase or increases 

during the 12-month period preceding 

the date on which the rate increase 

would become effective, the rate 

increase is subject to review, and such 

review shall include a review of the 

aggregate rate increases during the 

applicable 12-month period. 

E. Review of Rate Increases Subject To 

Review by a State or by HHS (§ 154.210) 

As noted above, under this proposed 

regulation, States would continue to 

have primary responsibility for the 

review of rate increases. HHS would 

only review rates when a State has not 

yet established a process, including 

adequate legal authority, to do so. While 

not every State is currently equipped to 

conduct an effective review of insurance 

rates, the significant majority of States 

have a review process for some or all of 

the individual or small group markets, 

and many are planning to expand their 

authority to review rates using the 

grants provided in the Affordable Care 

Act detailed below. We fully expect that 

the vast majority of States will be able 

to conduct effective reviews in the 

future, should they choose to. 

A Kaiser Family Foundation survey 

designed to explore what rate review 

authority States have and how they 

exercise it, identifies various reasons 

that explain why there is wide variation 

in the review of rate increases by 

States.2 Some States have no legislative 

authority to approve or disapprove 

rates, while others have the authority to 

approve rates prior to implementation, 

or disapprove rates before or after 

implementation. Among States with 

robust legislative authority, a thorough 

rate review is contingent on State 

resources, staffing, and statutory 

timelines. The effectiveness of a State 

rate review program depends on State 

law as well as insurance department 

resources and practices, and will be 

determined, for purposes of this 

regulation, based on the State’s ability to 

meet the criteria set forth in § 154.301. 

Section 2794(c) of the PHS Act 

established a program to award 

‘‘premium review grants.’’ Section 

2794(c) makes available a total of $250 

million through 2014 for the provision 

of grants to States to support their 

efforts to enhance review of premium 

increases. These grants are available to 

States with the goal of improving 

existing rate review programs, 

developing rate review programs in 

States where none exist, and improving 

the transparency of the rate review 

process for the public. On August 16, 

2010 HHS announced the first cycle of 

grant awards totaling the amount of $46 

million to build upon States’ current 

processes for reviewing, and to the 

extent permitted by State law, 

approving health insurance premium 

increases. Forty-five States and the 

District of Columbia applied for grants, 

and each was awarded $1 million in 

grant funds. 

In applying for the first phase of these 

grants in 2010, some States indicated a 

need for additional resources to make 

the State’s rate review program more 

effective. Many States indicated they 

lacked funding to hire actuaries and to 

secure other resources essential to a 

meaningful rate review program. 

Therefore, the rate review process under 

this proposed regulation, in conjunction 

with the rate review grant program, 

would enhance the quality and quantity 

of review of rate increases that States are 

able to conduct, building on their 

existing efforts and processes. 

By requiring the Secretary to develop 

a rate review process in conjunction 

with the States, Congress also 

recognized that many States have 

significant experience reviewing rate 

increases and understand the local 

market forces driving health insurance 

rate increases. Therefore, HHS is 

proposing a rate review process that 

leverages State experience and 

expertise. 

Section 154.210 of the proposed 

regulation sets forth the factors that 

would determine whether HHS would 

review rate increases that are subject to 

review or whether HHS would adopt the 

determination made by a State regarding 

whether a rate increase is an 

unreasonable rate increase. To the 

extent that a State has an effective rate 

review program in a given market, as 

evaluated by HHS using the criteria set 

forth more fully below, HHS would 

adopt that State’s determinations 

regarding rate increases subject to the 

State’s review in a given market. 

Accordingly, upon receipt of the State’s 

final determination and explanation for 

its determination, HHS would adopt the 

determination of a State that has an 

effective rate review program regarding 

whether a rate increase is unreasonable 

under applicable State law. If a State 

does not have an effective rate review 

program in place for the individual or 

small group markets within the State, 

only then would HHS review rate 

increases and make its own 

determinations of whether the rate 

increases are unreasonable. 

F. Effective Rate Review Program 

(§ 154.301) 

1. General Criteria for an Effective Rate 

Review Program 

This regulation sets out specific 

criteria, set forth in § 154.301(a), for 

evaluating whether a State has an 

effective rate review program in the 

individual and small group markets. 

Specifically defining these criteria 

provides transparency to the rate review 

process as these criteria are readily 

available to the States, health insurance 

issuers, and consumers. These criteria 

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were developed solely for the purpose 

of establishing the standards that HHS 

would use to evaluate, in consultation 

with the States, whether a State’s rate 

review process is effective, or whether 

HHS would conduct rate reviews and 

make a determination as to whether a 

rate increase is unreasonable. Since a 

State may be in the process of 

improving its rate review program, and 

may be using grant funds and other 

resources for this purpose, HHS would 

make its determination based on the 

State’s existing rate review program, 

including any recent changes made that 

would satisfy the criteria for an effective 

rate review program set forth in 

§ 154.301(a). 

Under proposed § 154.301(a)(1), we 

set forth four criteria for an effective rate 

review program. These criteria are 

drawn from common practices that 

States use today for effective reviews. 

Underlying these proposed criteria is 

the principle that the purpose of an 

effective rate review program is to 

affirmatively determine, based on 

substantial evidence on the record as a 

whole, whether a rate increase is an 

unreasonable rate increase. The 

proposed regulation specifies that in 

order for a State’s rate review program 

to be considered effective, the State 

needs to have the legal authority to 

obtain data and documentation that is 

sufficient to conduct an effective 

examination. The State would also be 

required to effectively review data and 

documentation submitted in support of 

rate increases. An effective rate review 

program would have to include an 

examination of both (i) the 

reasonableness of the assumptions used 

by the health insurance issuer in 

developing the rate proposal and the 

validity of historical data underlying 

such assumptions; and (ii) the issuer’s 

data related to past projections and 

actuarial experience. As is the case for 

those States conducting effective review 

today, this examination of assumptions 

and past projections would be required 

to include analyses of at least the 

following twelve areas that typically 

impact rates: 

• Medical trend changes by major 

service categories; 

• Utilization changes by major service 

categories; 

• Cost-sharing changes by major 

service categories; 

• Benefit changes; 

• Changes in enrollee risk profile; 

• Impact of over- or under-estimate of 

medical trend in previous years on the 

current rate; 

• Reserve needs; 

• Administrative costs related to 

programs that improve health care 

quality; 

• Other administrative costs; 

• Applicable taxes, licensing or 

regulatory fees; 

• Medical loss ratio; and 

• The health insurance issuer’s riskbased capital status relative to national 

standards. 

Finally, the State’s determination of 

whether a rate increase is unreasonable 

would be made under a standard that is 

set forth in State statute or regulation. 

As noted above, 43 States have some 

standard under State law that would 

apply to the review of unreasonable 

rates. This proposed regulation does not 

establish a standard that States must 

apply. 

2. HHS’s Determination Whether a State 

Has an Effective Rate Review Program 

We fully expect that the vast majority 

of States will be able to conduct 

effective reviews in the future. HHS 

expects that the majority of States 

would currently meet the standards for 

having an effective review process, and 

many more would become effective 

review States as they obtain needed 

statutory authority or implement new or 

enhanced rate review processes. So long 

as a State can conduct an effective 

review of proposed rate increases that 

meet or exceed the applicable threshold, 

States will not be ‘‘second-guessed’’ by 

HHS. Working with the States, HHS 

would evaluate whether a State’s rate 

review program meets the requirements 

of an effective rate review program set 

forth in § 154.301(a) based on 

documentation and information 

received from the State through the 

grant process, through review of 

applicable State law, and through any 

other information otherwise available to 

HHS. Unless a State were no longer 

conducting reviews in accordance with 

the criteria set forth in proposed 

§ 154.301(a), HHS would not conduct 

reviews for rate filings in that State. If 

after an initial determination has been 

made by HHS that a State’s rate review 

program is not effective, HHS would 

subsequently be able to determine that 

later improvements made by the State to 

its rate review program have made it an 

effective rate review program. HHS 

would post on its Web site a list of those 

States having effective rate review 

programs, and would update this list 

from time to time, as appropriate. 

G. Unreasonable Rate Increases 

(§ 154.205) 

Under the proposed regulation, when 

HHS reviews a rate increase, HHS 

would determine that the rate increase 

is an unreasonable rate increase if the 

increase is an excessive rate increase, an 

unjustified rate increase, or an unfairly 

discriminatory rate increase. The factors 

that make a rate increase excessive, 

unjustified or unfairly discriminatory 

are described in 154.205. HHS would 

consider all of these factors in 

determining whether a rate increase is 

unreasonable. The factors used to 

determine whether a rate increase is 

unreasonable would only apply to rate 

increases that are reviewed by HHS. 

Each State would apply its own State 

standards when reviewing a rate 

increase to determine whether it is 

unreasonable. 

HHS recognizes that factors other than 

those addressed in the proposed 

regulation may be viewed as potentially 

impacting the reasonableness of a rate, 

including the structure and 

competitiveness of the market, and we 

are therefore soliciting public comment 

to identify these factors and whether 

they should be considered in 

determining whether a rate increase is 

unreasonable. 

1. Excessive Rate Increase 

An excessive rate increase is a rate 

increase that is subject to review and 

that causes the premium charged for the 

health insurance coverage to be 

unreasonably high in relation to the 

benefits provided. HHS recognizes that 

identifying objective measures that 

would be considered in determining 

whether a rate increase is excessive 

would be helpful to both issuers and the 

public. The proposed regulation 

therefore would describe several 

objective measures that HHS would 

consider in determining whether a rate 

increase causes the premiums charged 

to be unreasonably high in relation to 

the benefits provided. 

First, HHS would consider whether 

the rate increase results in a projected 

future loss ratio below the Federal 

medical loss ratio (MLR) standard 

determined under section 2718 of the 

PHS Act for the applicable market to 

which the rate increase applies. HHS 

recognizes that under the regulations 

implementing the MLR standards, 75 FR 

74864 (December 1, 2010), generally 

issuers must meet the relevant MLR 

standard in each State by aggregating all 

of their business in a particular market 

segment. The consequence of this 

approach is that an issuer may meet the 

MLR standard in the aggregate even if a 

particular insurance product does not 

meet the relevant standard so long as 

the combination of all products in the 

market by the issuer meets the Federal 

standard. Therefore, while the MLR is 

not a determinative factor, MLR 

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standards serve as a benchmark against 

which the reasonableness of rates are 

measured in the industry and the 

approach that would be adopted under 

this proposed rule is consistent with the 

approach taken in States that have had 

MLR standards under State law. Under 

this proposed approach, if an issuer 

proposed an increase of 10 percent or 

more (an increase that would be subject 

to review) for one or more individual 

market products, and the projected MLR 

for the product or products was below 

80 percent, the increase nonetheless 

would not necessarily be considered 

excessive if the issuer could 

demonstrate that the aggregate MLR for 

all products in the individual market in 

that State would be at or above 80 

percent. 

Notably, the Federal MLR standard 

under the Public Health Service Act also 

takes into account certain adjustments 

such as credibility adjustments to 

account for newer and smaller plans 

and other special cases. HHS would 

consider the issuer’s adjusted Federal 

medical loss ratio in the applicable 

market to which the rate increase 

applies when determining whether an 

increase is excessive. 

Second, in determining whether a rate 

increase is excessive, HHS would 

consider whether one or more of the 

assumptions on which the rate increase 

is based are not supported by 

substantial evidence. Finally, HHS 

would consider whether the choice of 

assumptions or combination of 

assumptions on which the rate increase 

is based is unreasonable. 

2. Unjustified Rate Increase 

Included in this proposed regulation 

are provisions that would require health 

insurance issuers to provide a defined 

set of data and documentation to HHS, 

to permit HHS to determine whether a 

rate increase is ‘‘unjustified.’’ A 

proposed rate increase that is subject to 

review would be ‘‘unjustified’’ if the 

health insurance issuer provides data or 

documentation to HHS in connection 

with the increase that is incomplete, 

inadequate or otherwise does not 

provide a basis upon which the 

reasonableness of an increase may be 

determined. Therefore, issuers would be 

required to provide data and 

documentation that is sufficient for HHS 

to conduct a meaningful review of a rate 

increase. 

3. Unfairly Discriminatory Rate Increase 

Under the proposed regulation, an 

unfairly discriminatory rate increase is 

one that results in premium differences 

for a particular product between 

insureds within similar risk categories 

that are not permissible under 

applicable State law or, if no State law 

applies, do not reasonably correspond to 

differences in expected costs. In this 

context, a risk category is a 

classification of a group of insureds who 

share a common set of descriptive 

characteristics, such as age or 

geographic location, and are covered 

under a single product. Health 

insurance issuers charge different 

premiums to insureds that fall within 

different risk categories. 

More than 25 States prohibit health 

insurance rates from being unfairly 

discriminatory. Therefore, the proposed 

regulation would define an 

unreasonable rate increase to include an 

unfairly discriminatory rate increase. In 

order to develop the factors that would 

make a rate increase an unfairly 

discriminatory rate increase, HHS 

reviewed factors applied by States to 

determine whether a rate increase is 

unfairly discriminatory. 

In our review, we concluded that 

States determine whether a rate increase 

is unfairly discriminatory based on the 

specific rating requirements under 

applicable State law. For example, if a 

State’s rating law prohibits price 

discrimination within a rating cell (a 

subcategory of enrollees with particular 

characteristics in common, such as age, 

geographical location or tobacco status), 

a rate increase in that State would be 

unfairly discriminatory if the increase 

varied between individuals with the 

same characteristics within a given 

rating cell. If a State’s rating law 

requires community rating (the practice 

of charging a common, unadjusted 

premium to all members of a diverse 

pool who may have widely varied 

health spending for the year) or 

prohibits the use of a specific rating 

factor such as geographical location, age 

or tobacco status, a rate increase in that 

State would be unfairly discriminatory 

if the increase was calculated based on 

a prohibited rating factor or does not 

account for pooled experience under the 

State’s community rating requirements. 

Therefore, under the proposed 

regulation, an unfairly discriminatory 

rate increase would be one that results 

in premium differences not permissible 

under applicable State law between 

insureds within similar risk categories 

or, if no State law applies, do not 

reasonably correspond to differences in 

expected costs. This approach would 

give deference to applicable State rating 

laws, and give HHS the ability to 

determine that a rate increase is unfairly 

discriminatory in the absence of 

applicable State law. 

H. Issuer Disclosure Required Under 

Part 154 

1. Preliminary Justification 

The proposed regulation would 

require health insurance issuers to 

submit a preliminary justification for all 

rate increases subject to review, 

regardless of whether a State or HHS is 

reviewing the rate increase. The format 

of the preliminary justification would be 

provided in guidance. In order to 

minimize the burden on health 

insurance issuers to complete the 

preliminary justification, HHS is 

developing a web-based program that 

would allow health insurance issuers to 

complete and submit the preliminary 

justification electronically. The 

information contained in parts one and 

two of the preliminary justification 

would be intended to provide 

consumers with a thorough description 

of the rate increase, including both a 

narrative descriptive and a quantitative 

analysis. Further, parts one and two 

would provide consumers with the 

context necessary to interpret a State’s 

or HHS’s determination as to whether a 

rate increase is unreasonable. HHS is 

sensitive to placing an increased 

reporting burden on health insurance 

issuers, but believes that the majority of 

issuers would have the information 

required in parts one and two of the 

preliminary justification readily 

available, since this is the type of 

information generally used by issuers to 

calculate their rates. 

In developing the requirements for 

parts one and two of the proposed 

preliminary justification, HHS has 

reviewed and incorporated elements 

from a comparable form developed by 

the NAIC over a period of several 

months. For example, State regulators 

expressed the view that consumers need 

more than just quantitative information, 

such as cost and utilization trend 

factors, to interpret a rate increase. 

Regulators recommended that issuers be 

required to provide a narrative 

explanation of applicable rate increases 

that supports and explains the key 

quantitative information associated with 

the increase. The narrative also should 

describe, in a straightforward fashion, 

the rationale for the rate increase. The 

preliminary justification therefore 

would require issuers to provide high 

level quantitative data associated with a 

rate increase along with a written 

narrative explaining the increase. 

If HHS is responsible for reviewing a 

rate increase, HHS would conduct a 

comprehensive actuarial review of the 

increase. In this case, issuers would be 

required to submit additional 

information in part three of the 

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preliminary justification. As noted 

above, the specific proposed data 

reporting requirements in part three of 

the preliminary justification are 

modeled on the actuarial memorandum 

guidelines included in NAIC Model 

Regulation 134–1. These guidelines set 

forth reasonable standards for reporting 

and justifying rate increases, and this 

type of data comprises a typical rate 

filing in those States that require rates 

to be filed. Therefore, HHS anticipates 

that these data would be readily 

available to most issuers. Shortly 

following the release of this proposed 

rule, HHS will release via the Federal 

Register a draft version of the 

preliminary justification for public 

comment. The draft preliminary 

justification will provide the formatting 

and reporting instructions for each of 

the reporting categories listed in the 

regulation. 

Part one of the preliminary 

justification, titled ‘‘rate increase 

summary,’’ would require issuers to 

submit the following data underlying 

the rate increase: 

(1) Historical and projected claims 

experience; 

(2) Trend projections related to 

utilization, and service or unit cost; 

(3) Any claims assumptions related to 

benefit changes; 

(4) Allocation of the overall rate 

increase to claims and non-claims costs; 

(5) Per enrollee per month allocation 

of current and projected premium; 

(6) Current loss ratio and projected 

loss ratio; 

(7) Three year history of rate increases 

for the product associated with the rate 

increase; and 

(8) Employee and executive 

compensation data from the health 

insurance issuer’s annual financial 

statements. 

Under part two of the preliminary 

justification, titled ‘‘written description 

justifying the rate increase,’’ a health 

insurance issuer would be required to 

provide a written description of the rate 

increase, including: (1) An explanation 

of the rating methodology (that is, the 

method used to apply various rating 

factors, such as cost trends or benefit 

design, to the development of an 

insurance rate, as well as the formulae 

employed to apply those factors); (2) an 

explanation of the most significant 

factors causing the rate increase, 

including a brief description of the 

relevant claims and non-claims expense 

increases reported in the rate increase 

summary; and (3) a brief description of 

the overall experience of the policy, 

including historical and projected 

expenses and loss ratios. 

Again, a health insurance issuer 

would be required to complete and 

submit sections one and two of the 

preliminary justification for all rate 

increases subject to review, regardless of 

whether HHS or a State is reviewing the 

rate increase. Issuers would be required 

to complete part three titled, ‘‘rate filing 

documentation,’’ only in the event HHS 

is reviewing the rate increase. The rate 

filing documentation supports parts one 

and two of the preliminary justification, 

and the proposed regulation lists the 

following broad reporting data 

categories that would be required under 

part three, consistent with NAIC model 

requirements: 

(1) Description of the type of policy, 

benefits, renewability, general 

marketing method and issue age limits; 

(2) Scope and reason for the rate 

increase; 

(3) Average annual premium per 

policy, before and after the rate increase; 

(4) Past experience, and any other 

alternative or additional data used; 

(5) A description of how the rate 

increase was determined, including the 

general description and source of each 

assumption used; 

(6) The cumulative loss ratio and a 

description of how it was calculated; 

(7) The projected future loss ratio and 

a description of how it was calculated; 

(8) The projected lifetime loss ratio 

that combines cumulative and future 

experience, and a description of how it 

was calculated; 

(9) The Federal medical loss ratio 

standard in the applicable market to 

which the rate increase applies, 

accounting for any adjustments 

allowable under Federal law; and 

(10) If the result under paragraph 

(e)(7) is less than the standard under 

paragraph (e)(9), a justification for this 

outcome. 

When health insurance issuers 

provide rate filing documentation for 

each category in part three of the 

preliminary justification, they would 

have to be sufficient to permit HHS to 

conduct a thorough actuarial review of 

the rate increase. However, HHS would 

accept a State rate filing in lieu of the 

information required under part three, 

provided the rate filing includes the 

information required under such part. In 

the event a health insurance issuer does 

not provide sufficiently detailed 

information for HHS to review a rate 

increase and determine whether it is 

unreasonable, HHS would request from 

the health insurance issuer the 

information necessary to complete its 

review. HHS proposes to provide further 

details on the format by which the 

specific data elements would be 

required to be submitted by this 

proposed regulation. 

2. Submission of Final Justification or 

Final Notification 

When a State with an effective rate 

review program receives notice of a rate 

increase subject to review, it would 

determine whether the increase is an 

unreasonable rate increase. The State 

would provide its findings and 

conclusions to HHS. In the situations 

when HHS reviews a rate increase, HHS 

would prepare a final determination and 

brief explanation of its analysis. If HHS 

determines that a rate increase is not 

unreasonable, or adopts a determination 

by a State that a rate increase is not 

unreasonable, the health insurance 

issuer would not be obligated to submit 

any additional information to HHS. If 

HHS determines that a rate increase is 

unreasonable, HHS would provide the 

final determination and explanation to 

the health insurance issuer. If HHS 

adopts a determination by a State that 

a rate increase is unreasonable, and the 

health insurance issuer is legally 

permitted to implement the 

unreasonable rate increase under 

applicable State law, HHS would 

provide the State’s final determination 

and explanation to the issuer. 

If the health insurance issuer intends 

to implement an unreasonable rate 

increase, the issuer would be required to 

submit a final justification to HHS. The 

justification would be a brief response 

to HHS’s or the applicable State’s final 

determination. If the issuer chooses not 

to implement the unreasonable rate 

increase, or chooses to implement a 

lower rate increase, it would be required 

to notify HHS to that effect. If the issuer 

implements a lower rate increase that 

does not meet or exceed the applicable 

threshold, the lower increase would not 

be subject to the proposed regulation. 

However if the lower rate increase does 

meet or exceed the applicable threshold, 

the increase would be subject to the 

proposed regulation and the issuer 

would be required to submit to HHS a 

new preliminary justification for the 

increase. The issuer would submit the 

final justification or final notification by 

the later of 10 days after (i) the 

implementation of such increase or (ii) 

the health insurance issuer’s receipt of 

HHS’s final determination that a rate 

increase is an unreasonable rate 

increase. 

The purpose of the final justification 

would be to provide the health 

insurance issuer with an opportunity to 

respond to HHS’s or the State’s 

determination that its rate increase is 

unreasonable and to make the issuer’s 

final justification available to health 

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insurance consumers. Since HHS would 

rely directly on information provided by 

the health insurance issuer when 

making the determination whether a 

rate increase is unreasonable, the health 

insurance issuer’s final justification 

would have to be consistent with and 

based upon the information provided 

under the preliminary justification, and 

could not include new or different 

information that was not provided to 

HHS. Health insurance issuers would be 

required to provide their final 

justifications electronically to HHS 

through the web-based program 

developed by HHS. 

As noted above, HHS’s determination 

that a rate increase is unreasonable 

would not have any effect on the 

issuer’s right to implement the rate 

increase, which is entirely a matter of 

State law. Similarly, HHS’s review of 

rate increases would not delay the 

implementation of those increases; the 

timing of implementation is also a 

matter of State law. 

3. Posting of Information on the HHS 

Web site 

HHS proposes to promptly post on its 

Web site the information contained in 

parts one and two of the preliminary 

justification. Section 2794 requires the 

Secretary to ensure the public 

disclosure of information, including the 

justifications. The statute does not 

specify when this information must be 

posted, but HHS believes that Congress 

intended that the rate review process be 

transparent, and that this objective is 

served by giving consumers immediate 

access to basic information regarding 

the proposed increase that is under 

consideration by HHS or States and 

prior to the implementation of the rates 

that are subject to review. To avoid a 

misperception that these postings 

represent justifications for rate increases 

that are determined to be unreasonable, 

HHS will prominently place a 

disclaimer near the postings that: ‘‘The 

preliminary justification is the initial 

summary information regarding the rate 

increase subject to review and does not 

represent a determination that the rate 

increase subject to review is an 

unreasonable rate increase.’’ We solicit 

public comment on the specific 

language HHS should use in its 

disclaimer. HHS considered disclosing 

this information later in the review 

process, such as when the review of the 

rate increase was completed, but 

determined that posting in this manner 

would reduce transparency and provide 

insufficient opportunity for consumer 

review of information related to these 

rate increases prior to implementation. 

HHS does not consider the 

information contained in the 

preliminary justification to be 

confidential and believes that 

consumers would benefit from this 

information because it provides a basic 

description of the rationale underlying a 

rate increase. HHS also believes that the 

information under part three should be 

made public, but understands that 

issuers may consider certain of this 

information to be confidential. HHS 

would promptly post on its Web site 

any information provided in part three 

of the preliminary justification, as long 

as it has not been designated as 

‘‘confidential’’ as defined in HHS’s 

Freedom of Information Act regulations, 

45 CFR 5.65. HHS will also make a 

determination as to whether to post 

information designated as ‘‘confidential’’ 

under the standards and procedure set 

forth in those regulations, and will post 

that information only after making a 

determination that it is subject to 

disclosure as provided by those 

regulations. 

HHS would also post on its Web site 

the final determinations of both States 

and HHS that a rate increase is either 

unreasonable or not, as well as 

explanations for those determinations. 

In the event that either a State or HHS 

determines that a rate increase is an 

unreasonable rate increase and the 

health insurance issuer chooses to 

implement the rate increase, HHS 

would also post on its Web site the 

health insurance issuer’s final 

justification. 

4. Posting of Information on the Health 

Insurance Issuer’s Web site 

PHS Act section 2794 requires health 

insurance issuers to prominently post 

on their Web sites their justification for 

an unreasonable premium increase. 

Therefore, if HHS determines that a rate 

increase is unreasonable or adopts a 

determination by a State that a rate 

increase is unreasonable, and the health 

insurance issuer implements the rate 

increase, the issuer would be required to 

post on its Web site the information 

contained in the preliminary 

justification; HHS’s final determination 

and explanation; and the issuer’s final 

justification. In an attempt to minimize 

this posting burden, health insurance 

issuers would be able to download from 

HHS an electronic file containing the 

information required to be posted. 

Further, the health insurance issuer 

would have no obligation to post on its 

Web site any information regarding rate 

increases that are not determined to be 

unreasonable or that are not 

implemented. HHS proposes to issue 

further guidance regarding the format of 

posting. 

5. Timing of Submission of Preliminary 

Justification, Final Justification, Final 

Notice, and Issuer Posting 

PHS Act section 2794 requires health 

insurance issuers to provide 

justifications for unreasonable rate 

increases prior to the implementation of 

such increases. As noted above, 

consistent with this requirement, HHS 

is proposing necessary timeframes for 

the completion of the preliminary 

justification by health insurance issuers. 

Specifically, if a State requires a health 

insurance issuer to file a proposed rate 

increase with the State prior to 

implementation of the rate, the issuer 

would be required to submit a 

completed preliminary justification 

when it submits the proposed rate 

increase to the State. This approach 

would allow HHS to receive the 

preliminary justification prior to 

implementation of a rate increase 

without creating an additional burden 

on health insurance issuers to include 

an extensive justification in their initial 

submission to the State. 

If a State does not require a health 

insurance issuer to file a rate increase 

with the State, HHS anticipates that 

such State would not be found to have 

an effective rate review program. 

Therefore, HHS anticipates that it would 

be responsible for reviewing rate 

increases in those States. PHS Act 

section 2794 does not require issuers to 

submit rate filing data prior to 

implementation of a rate increase, and 

accordingly neither would this 

proposed regulation. Therefore, absent 

any State law to the contrary, issuers 

would have the option of completing 

the preliminary justification at the time 

of implementation or prior to that time. 

If HHS requires information in addition 

to the preliminary justification to 

complete its review, then the issuer 

would be required to provide this 

information within five business days 

following its receipt of the request. 

In the event the issuer implements an 

unreasonable rate increase, the issuer 

would be required to submit a final 

justification to HHS and post the 

required information on its Web site 

within the later of 10 days after the 

implementation of the increase or 10 

days after the issuer’s receipt of the final 

determination by HHS that the rate is 

unreasonable. If an issuer determines 

that it will decline to implement or has 

withdrawn an increase determined by 

HHS to be unreasonable, or that it will 

implement a lower increase, it would be 

required to notify HHS of this decision 

within 10 days of its determination. 

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III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60 

days notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. This proposed rule contains 

information collection requirements 

(ICRs) that are subject to review by 

OMB. A description of these provisions 

is given in the following paragraphs 

with an estimate of the annual burden, 

and summarized in table A. Included in 

the estimate is the time for reviewing 

instructions, searching existing data 

sources, gathering and maintaining the 

data needed, and completing and 

reviewing each collection of 

information. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this proposed rule that 

contain information collection 

requirements (ICRs): 

A. Background 

Section 2794 requires the Secretary to 

develop, in conjunction with the States, 

a process for the annual review of 

unreasonable rate increases. The 

proposed regulation would establish a 

rate review program to ensure that all 

rate increases that meet or exceed an 

established threshold are reviewed by a 

State or HHS to determine whether the 

rate increases are unreasonable. Under 

the proposed regulation, if HHS 

determines that a State has an effective 

rate review program in a given market, 

using the criteria set forth in the 

proposed rule, HHS would adopt that 

State’s determinations regarding 

whether rate increases in that market are 

unreasonable, provided that the State 

reports its final determinations to HHS, 

and explains the bases of its 

determinations. For all other States, 

HHS would conduct its own review of 

rates that meet or exceed the applicable 

threshold to determine whether they are 

unreasonable. 

Section 2794 directs the Secretary to 

ensure the public disclosure of 

information on unreasonable rate 

increases and justification for those 

increases. The proposed regulation 

would therefore develop a process to 

ensure the public disclosure of 

information on unreasonable rate 

increases and justifications for those 

increases. Section 2794 also requires 

that health insurance issuers submit a 

justification for an unreasonable rate 

increase to HHS and the relevant State 

prior to its implementation. The 

proposed regulation would therefore 

establish various reporting requirements 

for health insurance issuers, including a 

preliminary justification for a proposed 

rate increase, a final justification for any 

rate increase determined by a State or 

HHS to be unreasonable, and a 

notification requirement for 

unreasonable rate increases which the 

carrier will not implement. 

B. ICRs Regarding the Rate Review 

Preliminary Justification Form 

(§ 154.215 and § 154.220) 

This proposed rule describes the 

preliminary justification that each 

health insurance issuer would be 

required to submit to both HHS and 

States, if it is seeking to implement a 

rate increase that meets or exceeds the 

threshold described in § 154.200. The 

preliminary justification would include 

data supporting the potential rate 

increase as well as a written explanation 

of the rate increase. For those rates HHS 

would be reviewing, issuers’ 

submissions would also include 

supplemental data and information that 

HHS would need to make a valid 

actuarial determination regarding 

whether a rate increase is unreasonable. 

Each health insurance issuer seeking 

to implement a rate increase that meets 

or exceeds the established threshold 

would be required to complete a 

preliminary justification. The 

preliminary justification consists of 

three parts. Part one consists of a 

document (Excel spreadsheet) to be 

completed by issuers for all proposed 

rate increases that meet or exceed the 

threshold. Part two of the preliminary 

justification is a three- to five-page 

written narrative explaining the 

methodology used to derive the rate 

increase. Issuers would be required to 

submit to both HHS and the applicable 

State parts one and two prior to 

implementation of a rate increase, 

regardless of whether HHS is reviewing 

the rate increase or adopting the State’s 

review. Issuers typically calculate these 

figures in order to develop a premium 

and submit a rate filing to State 

regulators. The data elements and 

methodologies are commonly calculated 

by issuers and are often required by 

States that review rates. 

Issuers would be required to complete 

part three of the preliminary 

justification only when HHS is 

reviewing a rate increase to determine 

whether it is unreasonable or not, and 

submit part three to HHS only (and not 

to the applicable State). Part three of the 

preliminary justification defines an 

additional set of information that issuers 

must submit only when HHS is 

reviewing a rate increase. The 

information provided under part three 

would allow HHS to make a valid 

actuarial determination as to whether 

the rate increase is unreasonable or not. 

If an issuer completes and submits part 

three of the preliminary justification, 

but does not provide sufficient 

information for HHS to conduct its 

review, HHS would request the 

additional information necessary to 

make its determination. Issuers would 

have five business days to respond to 

any request for outstanding information 

from HHS. 

Using 2010 data, HHS estimates the 

number of rate filings in 2010 that 

would have been subject to the 

proposed rule had it been in force to be 

between 3,635 and 4,015 in the 

individual and small group markets 

nationwide. HHS estimates that the total 

number of rate filings is expected to 

increase slightly in 2011, due in part to 

an increased number of issuers required 

to file based on those factors discussed 

in the impact analysis section. 

Therefore, HHS estimates that, in 2011, 

there would be 5,343 rate filings subject 

to the proposed rule. As discussed in 

the impact analysis section, HHS 

estimates that approximately 773 of 

these rate filings would require review 

under the proposed rule because they 

meet or exceed the established 

threshold. 

At this time, HHS has not completed 

development of the draft forms for parts 

one, two, and three of the preliminary 

justification that issuers would have to 

submit should their rate increase be 

subject to review because it would meet 

or exceed the threshold. While these are 

new forms, we believe issuers are 

already collecting the data necessary to 

complete any form we develop. Because 

the forms are still under development, 

we cannot assign a complete burden 

estimate at this time. Once the forms are 

available, we will publish a notice in 

the Federal Register to solicit public 

comments on the forms and provide our 

burden estimates associated with this 

requirement. 

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C. ICRs Regarding State Determinations 

(§ 154.210 and § 154.225) 

Under the proposed rule, if HHS 

determines that a State has satisfied 

specific criteria for an effective rate 

review program under § 154.301, HHS 

would adopt the State’s determinations 

regarding whether a rate increase that 

meets or exceeds the established 

threshold is unreasonable, providing the 

State reports its final determinations to 

the Department and explains the bases 

of its determination as required under 

§ 154.210(b)(2). As discussed in the 

impact analysis section, since many 

States are already performing these 

functions, the cost burden to States 

would be small and would largely be 

offset by rate review grants provided by 

the Department to help States improve 

their rate review processes. In those 

cases where a State does not have an 

effective rate review program, HHS 

would make its own determinations 

regarding whether a rate increase that 

meets or exceeds the established 

threshold is unreasonable. 

HHS would post on its Web site the 

information contained in each 

preliminary justification for each rate 

increase subject to review under 

§ 154.200. For consumer clarity, HHS 

would also post on its Web site the final 

disposition of each rate increase 

reviewed by either HHS or a State. 

Therefore, either a State or HHS would 

make a final disposition for all rate 

increases reviewed under the proposed 

rule, similar to current rate filing 

practices under the NAIC System for 

Electronic Rate and Form Filing 

(SERFF) or similar State-based filing 

systems. 

As explained in the impact analysis 

section, HHS estimates that 773 rates 

would be reviewed under the proposed 

rule because they meet or exceed the 

established threshold and that 25 to 35 

States, in whole or in part based on 

market segment, would be reporting to 

HHS and posting dispositions on 

approximately two-thirds of these rates 

(or 515 filings) for at least one market. 

The RIA also estimates that reporting 

information from the State to 

Department will require approximately 

20 minutes per filing. Thus the annual 

burden for this requirement is 

approximately 172 hours. HHS 

estimates that the additional burden of 

posting to the States would be 

negligible, since States currently post 

information about the disposition of 

rates. However, we welcome comments 

regarding the burden associated with 

the State posting burden requirements 

described in § 154.225. 

D. ICRs Regarding the Final Justification 

and Final Notification (§ 154.230) 

The proposed rule would require 

health insurance issuers to submit to 

HHS and the relevant State a final 

justification for any unreasonable rate 

increase that would be implemented 

and to display this information on their 

Internet Web sites. If an issuer is legally 

permitted to implement an 

unreasonable rate increase and declines 

to implement the increase, the issuer 

would provide notice to HHS that it will 

not implement the increase. As 

discussed in the impact analysis 

section, HHS estimates that 417 issuers 

will submit an estimated 371 to 1,396 

rates for review and that it will take 

between 6 to 16 hours to complete the 

entire justification process. HHS 

estimates that 773 rates will meet or 

exceed the threshold and further 

assumes carriers will implement 100 

percent of rates found unreasonable. We 

welcome comments regarding the 

burden associated with the State posting 

burden requirements described in 

§ 154.230. 

E. ICRs Regarding HHS’s 

Determinations of Effective Rate Review 

Programs (§ 154.301) 

As discussed earlier in the preamble, 

HHS would determine whether a State’s 

rate review program meets the 

requirements of an effective rate review 

program set forth in § 154.301(a) based 

on documentation and information 

received from the State through the 

grant process, through review of 

applicable State law, and through any 

other information otherwise available to 

HHS. The information collection for the 

‘‘Grants to States for Health Insurance 

Premium Review’’ is approved under 

OMB Control number 0938–1092. Since 

HHS does not believe additional data 

from States are necessary to make these 

determinations, we assume the 

additional burden from this provision is 

zero. 

TABLE A—ESTIMATED ANNUAL BURDEN

45 CFR Section Type of collection Respondent Number of 

respondents 

Total annual 

responses 

Hours per response Total hours 

§ 154.210 ............................................... Reporting ........ States ......... 25–35 515 0.33 .................... 172 

§ 154.215 and § 154.220 ....................... Reporting ........ Issuers ........ 417 773 TBD ................... TBD 

§ 154.225 ............................................... Disclosure ....... States ......... 25–35 515 Negligible ........... 0 

§ 154.230 ............................................... Reporting ........ Issuers ........ 417 773 .5 ........................ 386 

§ 154.230 ............................................... Disclosure ....... Issuers ........ 417 773 .5 ........................ 386 

In compliance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)), the agency has submitted the 

information collection provisions of this 

proposed rule to OMB for review. 

If you comment on these 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: OCIIO Desk Officer, 

OCIIO–9999–P, Fax: (202) 395–7245; or 

E-mail: OIRA_submission@omb.eop.gov. 

IV. 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. 

V. Regulatory Impact Analysis 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

A. Summary 

As stated earlier in the preamble, this 

notice of proposed rulemaking (NPRM) 

implements Section 2794 of the Public 

Health Service (PHS) Act (as added by 

Section 1003 of the Affordable Care 

Act), which requires the Secretary, in 

conjunction with the States, to establish 

a process for the annual review of 

unreasonable increases in health 

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81018 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

insurance premiums (referred to in the 

NPRM as ‘‘rates’’). This notice of 

proposed rulemaking outlines the 

methodology by which HHS would 

review proposed rate increases. HHS 

has proposed this regulation to 

implement statutory provisions 

designed to help make private health 

insurance more affordable, and to 

increase the transparency of the process 

by which health insurance issuers 

calculate premiums. HHS has quantified 

costs where possible and provided a 

qualitative discussion of the benefits 

and of the transfers and costs that may 

stem from this 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 

proposed rule (1) having an annual 

effect on the economy of $100 million 

or more in any one year, or adversely 

and materially affecting a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local or tribal 

governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating a serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. OMB has determined that this 

proposed rule is a ‘‘significant rule’’ 

under Executive Order 12866. 

Accordingly, OMB has reviewed this 

proposed rule under 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, 

HHS has concluded that this proposed 

rule would likely not have economic 

impacts of $100 million or more in any 

one year, nor would it adversely or 

materially affect a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local or tribal 

governments or communities. This 

assessment is based primarily on the 

administrative costs to issuers of 

completing the preliminary justification 

form they are required to submit when 

proposing rate increases of 10 percent or 

greater, and on the costs to States and 

the Federal government of reviewing 

these justifications. As discussed below, 

HHS is not able to quantify the effect of 

this proposed rule on rates charged by 

issuers, and it is possible that the effect 

on rates will be large enough to cause 

the proposed rule to be considered a 

major rule. HHS invites comments on 

this issue. 

Nevertheless, HHS opted to provide 

an assessment of the potential costs, 

benefits, and transfers associated with 

this proposed regulation. 

1. Need for Regulatory Action 

Consistent with the provisions in 

Section 2794 of the PHS Act, this NPRM 

when finalized would require health 

insurance issuers offering nongrandfathered coverage in the 

individual and small group markets to 

report information concerning rate 

increases to HHS and the applicable 

State if the proposed increase is 10 

percent or higher. Section 2794(a) of the 

PHS Act (captioned ‘‘initial premium 

review process’’) requires the Secretary 

to ‘‘establish a process for the annual 

review of unreasonable increases in 

premiums for health insurance 

coverage.’’ The section further provides 

that issuers ‘‘submit to the Secretary and 

the relevant State a justification for an 

unreasonable premium increase prior to 

the implementation of the increase.’’ 

Many States currently review rate 

filings in all or some portion of the 

insurance market, therefore, the burden 

of implementing this proposed rule on 

States will be small. In the States that 

do not currently conduct effective rate 

review, HHS will initially review those 

rate filings that meet or exceed the 10 

percent threshold. HHS anticipates that 

those States will use the rate review 

grants described in the preamble to 

enhance their capacity for review. 

Moreover, HHS anticipates gradually 

transitioning rate review responsibilities 

to these States as they build their 

capacity and as a result, reducing 

Federal costs over time. 

In addition, this proposed rule 

requires issuers proposing rate increases 

10 percent and above to provide a 

preliminary justification for the 

proposed increase. That preliminary 

justification will use data typically 

assembled by the issuers in computing 

their rate request. Because the 

preliminary justification requires the 

restating of existing data rather than the 

generation of new information, HHS 

expects the burden on issuers in filing 

the justification will be relatively small. 

2. Summary of Impacts 

In accordance with OMB Circular 

A–4, Table 1 below depicts an 

accounting statement summarizing 

HHS’ assessment of the benefits, costs, 

and transfers associated with this 

regulatory action. HHS limited the 

period covered by the regulatory impact 

analysis (RIA) to 2011–2013. Estimates 

are not provided for subsequent years 

because there will be significant 

changes in the marketplace in 2014 

related to the offering of new individual 

and small group plans through the 

health insurance Exchanges, and the 

wide ranging scope of these changes 

makes it difficult to project results for 

2014 and beyond. 

As described in this RIA, HHS 

estimates that this regulatory action 

would result in better information for 

consumers about their health insurance 

premiums and is likely to lower 

premiums. The proposed rule also 

imposes costs on insurers associated 

with preparing and filing proposed rate 

increases, and imposes costs on State 

and Federal governments associated 

with reviewing proposed rate increases. 

In accordance with Executive Order 

12866, HHS believes that the benefits of 

this regulatory action justify the costs. 

TABLE 1—ACCOUNTING TABLE

Benefits: 

Qualitative: 

* Increased transparency in health insurance markets, promoting competition. 

* To the extent that unreasonable rate increases are prevented as a result of this rule, reduction in the deadweight loss to the economy 

from the exercise of monopolistic power by issuers. 

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3The analytic sample excludes companies that 

are regulated by HHS 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. The excluded 

companies are estimated to account for 

approximately 9 percent of the comprehensive 

major medical fully insured market. In addition, 

among the 579 companies that filed with the NAIC, 

137 were excluded because of data anomalies. 

These 137 excluded companies are estimated to 

account for approximately 5 percent of the 

individual market and less than one percent of the 

group market. 

4As noted above, issuers that are regulated by 

HHS of Managed Health Care in California are not 

required to file annual statements with the NAIC, 

and are not included in the estimates provided 

here. 

TABLE 1—ACCOUNTING TABLE—Continued 

Costs: Low 

estimate 

Mid-range 

estimate 

High 

estimate 

Year dollar Discount 

rate percent 

Period 

covered 

Annualized Monetized ($millions/year) 7 12 19 2010 .................... 2011–2013 

6 11 18 2010 .................... 2011–2013 

One-time costs to create systems to report data, and annual costs related to reporting data to the Secretary, providing rate increase justifications, and costs to the States and Federal government of reviewing the justifications. 

Transfers: 

Qualitative: 

* To the extent that rate increases are reduced as a result of this rule, money will be transferred from issuers/shareholders to consumers. 

3. Qualitative Discussion of Anticipated 

Benefits, Costs and Transfers 

a. Benefits 

Reliable information on prices is a 

prerequisite for well-functioning 

competitive markets. Consumers in the 

individual and small-group health 

insurance markets, which are highly 

concentrated, may have difficulty 

knowing whether an increase in their 

premium is actuarially justifiable—for 

example, because it is due to a change 

in the scope of covered services—or 

whether it is the result of insurers 

exercising market power to set rates 

above the level that is actuarially 

justifiable. 

The proposed rule subjects proposed 

rate increases of ten percent or more to 

additional scrutiny in order to safeguard 

against this exercise of market power by 

insurers. The proposed rule’s reporting 

requirements should result in better 

information for consumers about prices, 

promoting competition and potentially 

increasing the volume of trade, thereby 

yielding a net benefit to society. 

b. Costs 

HHS has identified the primary 

sources of costs that would be 

associated with this proposed rule as 

the costs to issuers associated with 

reporting, recordkeeping, notifications, 

and the costs to State and Federal 

governments of conducting reviews of 

the justifications filed by issuers. 

HHS estimates that issuers would 

incur approximately $10 million to $15 

million in one-time administrative 

costs, and $0.4 million to $4.5 million 

in annual ongoing administrative costs 

related to complying with the 

requirements of this proposed rule from 

2011 through 2013. In addition, States 

would incur very small additional costs 

for reporting the results of their reviews 

to the Federal government, and the 

Federal government would incur 

approximately $0.6 million to $4.8 

million in annual costs to conduct 

reviews of justifications filed by issuers 

in States that do not perform effective 

reviews. Additional details relating to 

these costs are discussed later in this 

regulatory impact analysis. 

C. Estimated Number of Affected 

Entities and Number of Rate Filings 

Meeting or Exceeding the Threshold and 

Subject To Review 

Section 2794 of the Public Health 

Service Act specifies that the rate 

review provisions apply to health 

insurance issuers offering individual or 

group health insurance coverage, not 

including grandfathered health plans. 

As discussed earlier in the 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 in the 

preamble, the rate review provisions in 

this proposed rule apply to issuers that 

offer individual and small group 

coverage, and these issuers would be 

required to submit a preliminary 

justification for rate increases meeting 

or exceeding the rate review threshold 

of 10 percent, to file with the Secretary 

and the applicable State a final 

justification for those rate increases 

found unreasonable, and disclose 

information about the proposed 

increase, if implemented, on their Web 

sites. The following sections summarize 

HHS’ estimates of the number of entities 

and rate filings that would be affected 

by the requirements being proposed in 

this rule. 

D. Estimated Number of Affected 

Entities 

The rate review provisions will apply 

to all health insurance issuers offering 

coverage in the individual and small 

group markets except for grandfathered 

plans. The number of issuers is 311 in 

the individual market and 342 in the 

small group market, for a total of 417 

(unduplicated) issuers, as determined 

for the interim final rule for 

implementing the medical loss ratio 

requirements under the Affordable Care 

Act (Federal Register December 1, 

2010). 

Table 2 shows the estimated 

distribution of the 417 issuers offering 

coverage in the individual and small 

group markets for the analytic sample 

used in this RIA.3 Approximately 75 

percent (311) of these issuers offer 

coverage in the individual market and 

82 percent (342) offer coverage in the 

small group market. Additionally, HHS 

estimates that there are 34.8 million 

enrollees in coverage that would be 

subject to the requirements being 

proposed in this rule, including 

approximately 10.6 million enrollees in 

individual market coverage and 24.2 

million enrollees in small group 

coverage (estimated based on ‘‘life years’’ 

for 2009 NAIC Health and Life Blank 

filers, which excludes data for 

companies that are not required to file 

annual statements with NAIC).4

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5According the Kaiser Family Foundation, a 

number of States have already enhanced their rate 

review and filing process under their current 

authority and several other States will seek 

additional authority to review rates from their 

legislature. See Rate Review: Spotlight on State 

Efforts to Make Health Insurance More Affordable, 

Kaiser Family Foundation, December 2010. 

TABLE 2—ESTIMATED NUMBER OF ISSUERS SUBJECT TO THE RATE REVIEW REQUIREMENTS BY MARKET

Description 

Issuers 

(companies) 

offering 

coverage 1 3 % of total 

Enrollees 2

% of total 

Number 

Number 

(in thousands) 

Total (Unduplicated) .................................................................................... 417 100 .0 34,792 100 .0 

Number Offering Coverage In: ........................ .......................... ........................ ..........................

Individual Market .................................................................................. 311 74 .6 10,603 30 .5 

Small Group Market 4 ........................................................................... 342 82 .0 24,189 69 .5 

Notes: 

1 Issuers represents companies (e.g., NAIC company codes). 

2 Enrollment represents ‘‘life years’’ (total member months divided by 12). 3 Total issuers represents 2009 NAIC Health and Life Blank filers with valid data, which excludes approximately 8 percent of comprehensive 

major medical premium among NAIC filers. Also excludes data for companies that are regulated by the California Department of Managed Health 

Care. 4 Small group is defined based on the current definition (e.g., 2 to 50 employees). 

E. Estimated Number of Rate Filings 

This section of the regulatory impact 

assessment provides estimates of the 

number of filings that would be subject 

to review under this proposed rule. 

1. Estimation Methods and Sources of 

Uncertainty 

HHS estimates the total number of 

rate filings using data on the number of 

filings in 2010 made through the NAIC 

System for Electronic Rate and Form 

Filing (SERFF). However, not all issuers 

are required to file through SERFF, and 

HHS is required to make assumptions 

about the total number of filings in 

2010, as well as the expected change in 

the number of filings between 2010 and 

2011. 

HHS conducted research to compile 

information regarding the regulatory 

structure in place by State and market. 

HHS analyzed information provided by 

States in their applications for rate 

review grants, analyzed State 

Department of Insurance Web sites, and 

surveyed State Insurance Department 

staff via telephone to obtain information 

regarding the number of licensed 

carriers and filings in the individual and 

small group markets. In its original 

estimate for the number of filings, HHS 

used ten representative States with 

relatively complete data to estimate the 

average number of filings that could be 

expected per State and by market. Those 

average values were used for all States 

to estimate the total number of filings in 

the individual and small group markets. 

HHS also gathered information from 

State Insurance Departments to obtain 

data for 2008 through 2010 on the 

estimated number of filings processed, 

by market, and approval/rejection rate, 

stratified by the magnitude of the 

increase. Separately HHS received from 

the NAIC an extract showing the final 

disposition for all comprehensive major 

medical filings in SERFF for the first 

three quarters of calendar year 2010, by 

market type. This information was used 

to estimate the total number of filings in 

2010 received and processed by the 49 

States and the District of Columbia 

which use SERFF. 

Another SERFF extract provided the 

number of comprehensive major 

medical filings filed for 2009 by 31 

States. All 19 States that did not use the 

field ‘‘market type’’ were excluded from 

the extract. Using the data pertaining to 

the 31 States included in the 2009 data, 

HHS estimated the proportion of filings 

submitted by quarter, and used that 

distribution, along with the 2010 data, 

to project the number of filings for all 

States using SERFF for the 4th quarter 

of 2010. The increase in the number of 

number of filings from 2009 to 2010, by 

State and market, was added to the 2010 

estimates to trend the number of filings 

forward to 2011. HHS has determined 

that there is insufficient data to estimate 

the number of rate filings beyond 2011. 

Although there is some uncertainty 

concerning the number of filings in 

2011, a much larger source of 

uncertainty is uncertainty about the 

number of filings that will have 

proposed rate increases greater than or 

equal to 10 percent. Data on rate 

requests made by issuers are available 

from a handful of States, and HHS has 

used these data to estimate the 

proportion of rate filings with requested 

rate increases of 10 percent or greater. 

However, given the small number of 

States for which data are available, there 

is substantial uncertainty about the 

number of filings in 2010 with proposed 

rate increases that are greater than or 

equal to 10 percent. Further, even if 

HHS had precise data on the 

distribution of rate increase requests in 

2010, it is unclear to what extent that 

distribution might change in 2011 as a 

result of this proposed rule. Given the 

combination of data imperfections and 

limitations and behavioral uncertainties, 

HHS has chosen to provide a range of 

estimates, based on a range of 

assumptions. 

2. Estimated Number of Rate Filings 

Meeting or Exceeding the Threshold and 

Subject To Review 

Twenty-five States require issuers to 

use the NAIC System for Electronic Rate 

and Form Filing (SERFF) and many 

issuers also use SERFF for filings in 

States that have no SERFF requirement. 

Based on the number of SERFF filings 

from 31 States for the first three quarters 

of 2010, HHS estimates a range of rate 

filings from 3,635 to 4,015 in the 

individual and small group markets for 

all States for all of 2010. 

The total number of filings in 2011 is 

expected to be larger than the number 

of filings in 2010 in part due to an 

increased number of issuers required to 

file and additional filings to meet the 

justification requirements.5 Based on 

actuarial estimates using data from 2009 

and 2010, HHS estimates that the 

number of 2011 rate filings will be in 

the range of from 4,858 to 5,828 (see 

Table 3). 

Issuers are not required to submit 

preliminary justification for their 

grandfathered enrollees. The percentage 

of individuals covered under policies 

that will lose grandfathered status in the 

individual market is estimated to be 40 

to 67 percent, according to 

Grandfathered Health Plan Regulation 

(Federal Register June 17, 2010). The 

percentage of small group plans 

relinquishing their grandfathered status 

in the small group market is estimated 

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6The sources for the rate increases in the 

individual market are: Iowa list of proposed rate 

increases as of October 25, 2010 http://www.iid.

state.ia.us/docs/0_Multi-year%20A&

H%20Rate%20Increase_PPACA%20Types.pdf; 

Illinois list of proposed rate increases as of 

September 2010 http://www.insurance.illinois.gov/

Reports/special_reports/IMMHPRFR.pdf; North 

Carolina rate filings http://infoportal.ncdoi.net/

filelookup.jsp?divtype=3; Oregon list of proposed 

rate increases as of November 30 2010 http://www.

oregoninsurance.org/insurer/rates_forms/health_

rate_filings/health-rate-filing-search.html; 

Pennsylvania announcement of each proposed rate 

increases http://www.pabulletin.com/secure/search.

html, Washington list of proposed rate increases 

from the State. 

7The sources for the rate increases in the small 

group market are: Colorado list of rate increases 

http://www.dora.state.co.us/pls/real/Ins_RAF_

Report.main; Minnesota list of final rate increases 

from the State; and Oregon list of proposed rate 

increases http://www.oregoninsurance.org/insurer/

rates_forms/health_rate_filings/health-rate-filingsearch.html. 

8Rate filings in which each of the products 

covered in the filing are grandfathered plans will 

not be subject to the provisions of this proposed 

rule. However, in the small group market, HHS 

believes that most filings are made for products 

which are still being actively marketed. To the 

extent that there are filings in the individual market 

that include no products which are being actively 

marketed, the estimates provided here of the 

number of filings that will be subject to review are 

overestimates of the true burden that will be 

imposed by this proposed rule. 

to be 20 to 42 percent in 2011. HHS uses 

40 percent, 54 percent, and 67 percent 

for the low, mid, and high estimates of 

the percentage of non-grandfathered rate 

filings in the individual market and 20 

percent, 30 percent and 42 percent in 

the small group market. 

An issuer would be required to 

submit a preliminary justification report 

to the Secretary and the applicable State 

if the rate increase is 10 percent or 

higher. The estimates in this regulatory 

impact analysis are based on this 

provision of the proposed rule. 

Data from a small group of States for 

their individual market show the 

percentage of rate requests at or above 

10 percent ranged from 50 percent to 72 

percent during the time period 2008 to 

2010.6 The fraction of enrollees in plans 

requesting an increase of 10 percent or 

greater ranged from 34 percent to 77 

percent. HHS uses 50 percent, 60 

percent, and 70 percent as the low, mid, 

and high estimates for the percentage of 

rate requests at or above the rate review 

threshold of 10 percent in the 

individual market, and 35 percent, 50 

percent, and 75 percent for the 

percentage of enrollees affected. 

Data on rate requests in the small 

group market are available from three 

States (Colorado and Oregon, data for 

2009 and 2010, and Minnesota, 2007 

through 2010).7 On average, 

approximately 35 percent of rate 

requests were for 10 percent or greater, 

and with, one exception, in each State 

and year combination, between 20 

percent and 40 percent of rate requests 

were above that threshold. HHS uses 20 

percent, 30 percent, and 40 percent for 

the low, medium, and high-range 

estimates of the percentage of rate 

requests at or above the rate review 

threshold of 10 percent in the small 

group market. For the percentage of 

enrollees affected in the small group 

market, HHS estimates 15 percent, 30 

percent, and 50 percent.8

The following table (Table 3) shows 

the low, mid and high range estimates 

(371, 773, and 1,396) of the number of 

filings that will be subject to review and 

require the submission of a justification 

report because the proposed rate 

increase is 10 percent or greater. 

TABLE 3—ESTIMATED NUMBER OF FILINGS SUBJECT TO REVIEW

Individual Small group Total 

Estimated number of filings for 2011: 

Low Range ........................................................................................................................... 1107 3751 4858 

Mid Range ............................................................................................................................ 1247 4097 5343 

High Range ........................................................................................................................... 1386 4442 5828 

Percent of filings subject to review (non-grandfathered): 

Low Range ........................................................................................................................... 40% 20% ........................

Mid Range ............................................................................................................................ 54% 30% 

High Range ........................................................................................................................... 67% 42% ........................

Number of filings subject to review: 

Low Range ........................................................................................................................... 443 750 1193 

Mid Range ............................................................................................................................ 673 1229 1902 

High Range ........................................................................................................................... 929 1866 2794 

Estimated percentage of filings meeting or exceeding threshold: 

Low Range ........................................................................................................................... 50% 20% ........................

Mid Range ............................................................................................................................ 60% 30% ........................

High Range ........................................................................................................................... 70% 40% ........................

Estimated number of filings meeting or exceeding threshold: 

Low Range ........................................................................................................................... 221 150 371 

Mid Range ............................................................................................................................ 404 369 773 

High Range ........................................................................................................................... 650 746 1396 

F. Estimated Administrative Costs 

Related To Rate Review Provisions 

As stated earlier in this preamble, this 

proposed rule would implement the 

reporting requirements of section 2794, 

describing the type of information that 

would be included in the preliminary 

justification to the Secretary and the 

applicable State and the disclosure that 

would be made available to consumers 

on the issuer’s Web site if the rate 

increase is found to be unreasonable. 

HHS has quantified the primary sources 

of start-up costs that issuers in the 

individual and small group market 

would incur to bring themselves into 

compliance with this proposed rule, as 

well as the ongoing annual costs that 

they would incur related to these 

requirements. These costs and the 

methodology used to estimate them are 

discussed below. 

In order to assess the potential 

administrative burden relating to the 

requirements in this proposed rule, HHS 

consulted with the NAIC and industry 

experts to gain insight into the tasks and 

level of effort required. Based on these 

discussions, HHS estimates that issuers 

would incur one-time start-up costs 

associated with developing teams to 

review the requirements in this 

proposed rule, and developing 

processes for capturing the necessary 

data (e.g., automating systems). HHS 

estimates that issuers would also incur 

ongoing annual costs relating to data 

collection, completing the justification 

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81022 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

reports, conducting a final internal 

review, submitting the reports to the 

Secretary and applicable State, record 

retention, and Web site notifications. 

1. One-Time Start-up Costs 

Based on discussions with NAIC and 

industry experts, start-up costs are 

estimated at $25,000 to $35,000 per 

issuer, calculated from assumptions of 

125 to 175 hours at $200 per hour 

(senior actuary fee) to review the 

requirements for this proposed rule and 

developing processes for data collection. 

2. Ongoing Costs Related To Rate 

Review Reporting 

For each rate review reporting year, 

issuers offering coverage in the 

individual and small group markets 

would be required to submit a 

preliminary justification to the Secretary 

and applicable State prior to the 

implementation of a rate increase for 

each proposed rate increase of 10 

percent or greater. 

Ongoing annual costs are estimated at 

6 to 16 hours per justification report at 

$200 per hour or $1,200 to $3,200 per 

report. Most of the hours are for 

populating the justification reports with 

an additional hour for record retention 

and Web site notification. 

HHS estimates that the one-time costs 

relating to the rate review reporting 

requirements in this proposed rule 

would range from $10 million to $15 

million, and that annual costs would be 

between $0.4 million and $4.5 million 

per year (Table 4). 

TABLE 4—ESTIMATED COSTS FOR REPORTING, RECORD RETENTION, AND WEBSITE NOTIFICATION (ACTUAL DOLLARS) 

Description 

Total 

number of 

issuers 

Total 

number of 

reports 

Estimated 

total 

hours (1) 

Estimated 

average 

cost per 

hour (2) 

Estimated 

total 

cost 

Estimated 

average 

cost per 

issuer 

Estimated 

average 

cost per 

report 

LOW RANGE ASSUMPTIONS: 

One-Time Costs ............................................ 417 371 52,125 $200 $10,425,000 $25,000 $28,100 

Ongoing Costs .............................................. 417 371 2,226 200 445200 1,068 1,200 

Total Year One Costs ................................... 417 371 54,351 200 10,870,200 26,068 29,300 

MID RANGE ASSUMPTIONS: 

One-Time Costs ............................................ 417 773 62,550 200 12,510,000 30,000 16,184 

Ongoing Costs .............................................. 417 773 8,503 200 1,700,600 4,078 2,200 

Total Year One Costs ................................... 417 773 71,053 200 14,210,600 34,078 18,384 

HIGH RANGE ASSUMPTIONS: 

One-Time Costs ............................................ 417 1,396 72,975 200 14,595,000 35,000 10,455 

Ongoing Costs .............................................. 417 1,396 22,336 200 4,467,200 10,713 3,200 

Total Year One Costs ................................... 417 1,396 95,311 200 19,062,200 45.713 13,655 

Notes: Estimated costs are stated in 2010 dollars. 

(1) Estimated number of one-time start up hours and annual ongoing hours. 

(2) Actuary salary/fee. 

3. Estimated Costs to the States and 

Federal Government Related To Rate 

Review Provisions 

Section 2794 directs the Secretary to, 

in conjunction with the States establish 

a process for the annual review of 

unreasonable increases in premiums for 

health insurance coverage. In doing so, 

both the Federal Government and States 

will incur certain administrative costs. 

However, HHS estimates that the 

additional costs to the States will be 

negligible given that the majority 

already conduct some level of rate 

review, and the costs to the Federal 

Government and States will be 

extremely small. 

4. Estimated Costs to the Federal 

Government 

States currently have primary 

responsibility for the review of rate 

increases and will continue to under 

this proposed regulation. If a State does 

not have an effective rate review 

program in place for all or some markets 

within the State, HHS would review rate 

increases that meet or exceed the 10 

percent threshold and make its own 

determinations of whether the rate 

increases were excessive, unjustified, or 

unfairly discriminatory, or otherwise 

unreasonable, within those markets. 

This activity could be conducted with 

in-house resources and/or with the use 

of contracted services. Given the fact 

that, as noted above, some States do not 

have review authority in either the 

small group or individual markets, and 

assuming filings are evenly distributed 

across markets, HHS estimates a range 

between 28 percent and 36 percent of 

the rate filings requiring review in 2011 

would fall under HHS’s review 

responsibility. Based on these filing 

estimates and the necessary actuarial 

expertise, this rate review process 

would range in cost from $0.6 million 

to $4.8 million. 

Table 5 describes the assumptions 

used in the estimates for the 

administrative costs to the Federal 

Government associated with its rate 

review activities. 

TABLE 5—ESTIMATED ACTUARIAL RATES

Estimated actuarial rates Low Mid High 

Principal Actuaries ....................................................................................................................... $340.00 $350.00 $360.00 

Support Actuaries ........................................................................................................................ 200.00 234.00 275.00 

Actuarial Analyst .......................................................................................................................... 120.00 150.00 180.00 

Administrative Support ................................................................................................................. 80.00 100.00 120.00 

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9 Data provided by States on recent rate review 

actions from informal discussions between HHS 

and State Department of Insurance actuaries 

TABLE 5—ESTIMATED ACTUARIAL RATES—Continued 

Estimated actuarial rates Low Mid High 

Estimated Time to Complete Average Review Average Time Required 

Principal Actuaries ....................................................................................................................... 4.25 5.50 6.75 

Support Actuaries ........................................................................................................................ 8.50 9.50 11.00 

Actuarial Analyst .......................................................................................................................... 12.00 14.00 15.00 

Administrative Support ................................................................................................................. 9.00 9.50 12.00 

Actuarial Staff Hours .................................................................................................................... 24.75 29.00 32.75 

Total Staff Hours .................................................................................................................. 33.75 38.5 44.75 

Low Mid High 

Estimated Cost per Review ......................................................................................................... $5,305 $7,198 $9,595 

Number of Rate Reviews ............................................................................................................ 104 255 503 

Total Expected Contracting Cost ......................................................................................... 551,720 1,835,490 4,826,285 

In addition to the costs to the Federal 

government of conducting rate reviews 

in States that do not conduct effective 

reviews, there will be a small, largely 

one-time cost to the Federal government 

to determine whether States are 

conducting effective reviews. 

5. Estimated Costs to States 

HHS recognizes that States have 

significant experience reviewing rate 

increases. As discussed earlier in this 

preamble, most States have existing 

effective rate review programs that 

would meet the requirements of this 

regulation in substituting for HHS’ 

review of rate filings that meet or exceed 

the threshold. Rate review grants 

provided by HHS are expected to 

increase the effectiveness of State rate 

review processes, but are not a direct 

measure of the cost of this regulation. 

HHS estimates that the cost burden on 

States would be small because most 

States currently conduct rate review. 

For these States the incremental costs 

and requirements of this regulation 

would be minimal. Some States do not 

already have a rate review process or 

have a process that applies to only a 

portion of the individual and small 

group markets that this regulation 

addresses. In these States, the 

implementation costs to develop 

effective rate review processes at the 

State level will be offset by the rate 

review grants provided by HHS. 

However, from a Federal budget 

perspective, these Federal costs from 

grants will be largely balanced by a 

decrease in the Federal cost of 

performing reviews directly. For States 

not currently conducting effective rate 

review, there are likely a variety of 

factors affecting the decision to institute 

an effective rate review process, 

including the need for resources, as well 

as potential legislative hurdles. The rate 

review grants are expected to help 

States overcome some of these hurdles. 

States with effective rate review 

programs would be required to report on 

their rate review activities to the 

Secretary. HHS believes that this 

reporting requirement will involve 

minimal cost. HHS estimates that 

reporting information from the State to 

Department will require approximately 

20 minutes per filing. Based on resource 

use from the NAIC’s 2009 Resource 

Report which shows the average 

Department of Insurance actuary earns 

approximately $45 an hour, HHS 

estimates an average cost per filing of 

$15. The estimated cost of reporting the 

two-thirds of filings meeting or 

exceeding the 10 percent threshold, 

which are reviewed by States, ranges 

from $4,011 to $13,404. 

G. Transfers 

The proposed rule will likely result in 

lower premiums, although the 

magnitude of this effect is difficult to 

predict. To the extent that premiums are 

lower as a result of the proposed rule, 

this represents a transfer from insurers/ 

shareholders to consumers. The 

experience of States that engage in rate 

review, summarized in Table 6, suggests 

that the review process may result in 

premium increases that are lower than 

they would otherwise be.9

TABLE 6—STATE RATE REVIEW ACTIONS

[State filings from 2005 to 2010] 

State Market Number of filings 

Range of rate 

requests 

Range of actual 

increases 

Number of 

rate reductions 

A ............. Individual ................................................................................ 96 7%–40% ........... 0%–21% ........... 15 

Small Group ........................................................................... 21 14%–26% ......... 9%–22% ........... 5 

B ............. Individual ................................................................................ 31 4%–30% ........... 1%–25% ........... 14 

Small Group ........................................................................... 37 1%–17% ........... 1%–17% ........... 5 

C ............ Combined .............................................................................. 34 1%–32% ........... 1%–32% ........... 8 

It is difficult, however, to draw strong 

conclusions from this information about 

the effects of additional rate review on 

rates because we are uncertain about 

insurers’ behavioral response. Further, a 

substantial number of States currently 

operate effective rate review processes, 

and it is likely that any potential effect 

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in these States will be less than in States 

currently without strong rate review. 

Although HHS did not estimate the 

impact of this proposed regulation on 

the reduction in premium rate increases, 

HHS estimates that comprehensive 

major medical premiums are $28 billion 

in the individual market and $95 billion 

in the small group market, for a total of 

$123 billion in 2011 (Medical Loss Ratio 

Regulation Technical Appendix, 

December 1, 2010 and National Health 

Expenditure projection factors). The 

percentage of individuals covered under 

policies that will lose grandfathered 

status in the individual market is 

estimated to be 40 to 67 percent 

(Grandfathered Health Plan Regulation, 

June 17, 2010). The percentage of small 

group plans relinquishing their 

grandfathered status in the small group 

market is estimated to be 20 to 42 

percent in 2011 (Grandfathered Health 

Plan Regulation, June 17, 2010). Thus, 

HHS estimates that approximately $30 

to $59 billion of premiums will be 

written by issuers in the individual and 

small group markets to nongrandfathered subscribers. Given the 

magnitude of the premiums that may be 

affected, HHS invites comments on how 

to calculate premium savings so as to 

determine whether the $100 million 

threshold is met. 

H. Regulatory Alternatives 

Under the Executive Order, HHS is 

required to consider alternatives to 

issuing regulations and alternative 

regulatory approaches. HHS considers a 

variety of regulatory alternatives below. 

1. Establish a Lower or Higher 

Threshold for Rate Increase Review 

Section 2794(a) requires the Secretary, 

in conjunction with the States to 

conduct an annual review of 

unreasonable increases in premiums. In 

establishing a threshold for rate 

increases that would be subject to 

review, HHS (1) examined national 

trends in rate increases and health care 

costs; and (2) weighed the 

administrative burden on issuers and 

States against the level of protection for 

consumers. 

If HHS established a threshold lower 

than 10 percent, this would impose a 

larger burden on issuers, States, and 

HHS, and HHS judged that it would not 

yield a substantial benefit for 

consumers. However, as discussed 

earlier in the preamble, HHS proposes 

an approach that balances the regulatory 

burdens on both the agency and the 

industry where every rate increase, no 

matter how small, is reviewed for 

unreasonableness against the potential 

harm to consumers should a small but 

unreasonable increase be implemented. 

In addition, HHS has also taken into 

consideration the fact that many States, 

as discussed below, conduct a rate 

review process for all rate increases 

without regard to the magnitude of the 

increase, and we expect the number of 

States conducting such reviews to 

increase. Therefore, as a practical 

matter, in a growing number of States, 

the prospect that an unreasonable 

increase that is also below the 10 

percent threshold would be 

implemented without review is 

mitigated by the State review processes. 

HHS recognizes that there may be rate 

increases that fall below the 10 percent 

threshold that are unjustified. However, 

given the practice of many States to 

review all increases, HHS considered 

the cost benefit of the additional Federal 

resources to potentially catch 

unjustified/unreasonable rates vs. 

fairness to consumers and the additional 

administrative burden for insurers. HHS 

could spend additional resources and 

potentially catch only a small number of 

unreasonable rates below the threshold. 

HHS also examined establishing a 

threshold higher than 10 percent for rate 

increases that would be subject to 

review. However, in attempting to strike 

the balance discussed above, HHS 

decided on the 10 percentage point 

threshold. Specifically, with a threshold 

higher than 10 percent, consumers 

would face greater exposure to rate 

increases that were either unjustified or 

excessive with no assurance that those 

rates were given a careful review. 

2. Establish a State-Specific Threshold 

HHS recognizes that underlying costs 

and health care trends vary from State 

to State. Many factors influence the 

magnitude and frequency of increases in 

the States, and a single, national filing 

threshold does not reflect all of the local 

variations. Therefore, in this proposed 

rule, HHS proposes to use a Statespecific threshold as determined by the 

Secretary for future calendar years. 

HHS did not immediately adopt the 

State-specific threshold for rate 

increases in calendar year 2011 because 

of the lack of State-specific data. For 

future calendar years, the Secretary 

would consider the State-specific data 

submitted for each rate increase subject 

to review, and also the State-specific 

rate trend data and information received 

by the Secretary from those States that 

have received ‘‘premium review grants’’ 

under section 2794(c) of the PHS Act. 

Using these data, the Secretary may set 

a State-specific threshold. In the event 

the Secretary does not have sufficient 

data to calculate a State-specific 

threshold, the threshold will remain at 

10 percent. 

3. Establish a Threshold Based on the 

Market Share of the Insurer 

An alternative approach would have 

established a lower threshold for 

insurers with larger market share, with 

the justification that such insurers were 

more likely to be able to exert market 

power. However, analysis of data from 

a limited number of States suggested 

showed no evidence that larger insurers 

received higher rates of increase. 

Further, to the extent that market power 

exists in the individual market because 

subscribers with health problems are 

unable to switch to a competing insurer, 

this power exists equally for small 

companies as for large ones. As a result, 

HHS decided to propose a uniform 

threshold for all insurers, regardless of 

their size. 

4. Apply Rate Review Standards to the 

Large Group Market 

As discussed in the preamble, HHS 

discussed applying this proposed rule to 

the large group market as well as the 

individual and small group markets. 

However, because of the current ratesetting practices of the large group 

market and States’ limited authority 

over this segment of the market, HHS 

concluded that this regulation should 

only apply to the individual and small 

group markets. 

We welcome comments on the likely 

costs and benefits of this proposed rule 

as presented, on alternatives that would 

improve consumer benefits and 

minimize industry burden, and on our 

quantitative estimates of burden. 

I. 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 proposed 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 RFA requires agencies to analyze 

options for regulatory relief of small 

businesses, if a proposed rule has a 

significant impact on a substantial 

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number of small entities. For purposes 

of the RFA, small entities include small 

businesses, nonprofit organizations, and 

small government jurisdictions. Small 

businesses are those with sizes below 

thresholds established by the Small 

Business Administration (SBA). We 

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 we 

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. 

Further, the one-time costs of this 

proposed rule are approximately $25 

thousand per covered entity (regardless 

of size or non-profit status) and 

approximately $4 thousand annually in 

ongoing costs. Numbers of this 

magnitude do not remotely approach 

the amounts necessary to be considered 

a ‘‘significant economic impact’’ on 

firms with revenues of tens of millions 

of dollars (usually hundreds of millions 

or billions of dollars annually). 

Accordingly, we have determined, and 

certify, that this proposed rule will not 

have a significant economic impact on 

a substantial number of small entities 

and that a regulatory flexibility analysis 

is not required. 

In addition, section 1102(b) of the 

Social Security Act requires us to 

prepare a regulatory impact analysis if 

a proposed 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 notice of proposed 

rulemaking would not affect small rural 

hospitals. Therefore, the Secretary has 

determined that this proposed rule 

would not have a significant impact on 

the operations of a substantial number 

of small rural hospitals. 

J. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits before issuing any 

proposed 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 proposed rule. Rather, it focuses on 

certain categories of cost, mainly those 

‘‘Federal mandate’’ costs resulting from: 

(1) Imposing enforceable duties on 

State, local, or tribal governments, or on 

the private sector; or (2) increasing the 

stringency of conditions in, or 

decreasing the funding of, State, local, 

or tribal governments under entitlement 

programs. 

This proposed rule includes no 

mandates on State, local, or tribal 

governments. Under the proposed rule, 

issuers would be required to submit rate 

justification reports for rate increases of 

10 percent or greater directly to HHS. A 

State may voluntarily choose to use its 

existing rate review process, if deemed 

an ‘‘effective rate review program,’’ to 

make a determination as to whether a 

rate increase is unreasonable. If a State 

chooses to review the rate increase, the 

State would be required to submit to 

HHS the final determination and an 

explanation of its analysis. However, if 

a State chooses not to do so, HHS would 

review a rate increase subject to review 

to determine whether it is unreasonable. 

Thus, the law and this regulation do not 

impose an unfunded mandate on States. 

However, consistent with policy 

embodied in UMRA, this notice for 

proposed rulemaking 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. 

K. 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 HHS’ view, while the requirements 

proposed in this notice for proposed 

rulemaking would not impose 

substantial direct costs on State and 

local governments, this notice for 

proposed rulemaking has federalism 

implications due to direct effects on the 

distribution of power and 

responsibilities among the State and 

Federal governments relating to 

determining the reasonableness of rate 

increases for coverage that Statelicensed health insurance issuers offer 

in the individual and small group 

markets. 

HHS recognizes that there are 

federalism implications with regard to 

HHS’ evaluation of effective rate review 

programs and its subsequent review of 

rate increases. Under Subpart C of this 

proposed rule, HHS outlines those 

criteria that States would have to meet 

in order to be deemed to have an 

effective rate review program. If HHS 

determines that a State does not meet 

those criteria, then HHS would review 

a rate increase subject to review to 

determine whether it is unreasonable. If 

a State does meet the criteria, then HHS 

would adopt that State’s determination 

of whether a rate increase is 

unreasonable. 

States would continue to apply State 

law requirements regarding rate and 

policy filings. State rate review 

processes that are more stringent than 

the Federal requirements would likely 

be deemed effective and satisfy the 

requirements under this proposed rule. 

Accordingly, States have significant 

latitude to impose requirements with 

respect to health 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, HHS has engaged in efforts to 

consult with and work cooperatively 

with affected States, including 

participating in conference calls with 

and attending conferences of the 

National Association of Insurance 

Commissioners, and consulting with 

State insurance officials on an 

individual basis. 

Throughout the process of developing 

this notice of proposed rulemaking, 

HHS has attempted to balance the 

States’ interests in regulating health 

insurance issuers, and Congress’ intent 

to provide uniform protections to 

consumers in every State. By doing so, 

it is HHS’ view that it has complied 

with the requirements of Executive 

Order 13132. Under the requirements 

set forth in section 8(a) of Executive 

Order 13132, and by the signatures 

affixed to this regulation, HHS certifies 

that the Office of Consumer Information 

and Insurance Oversight has complied 

with the requirements of Executive 

Order 13132 for the attached notice for 

proposed rulemaking in a meaningful 

and timely manner. 

List of Subjects in 45 CFR Part 154 

Administrative practice and 

procedure, Claims, Health care, Health 

insurance, Health plans, Penalties, 

Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, the Department of Health and 

Human Services proposes to amend 45 

CFR subtitle A, subchapter B, by adding 

a new part 154 to read as follows: 

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81026 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

PART 154—HEALTH INSURANCE 

ISSUER RATE INCREASES: 

DISCLOSURE AND REVIEW 

REQUIREMENTS 

Subpart A—General Provisions 

Sec. 

154.101 Basis and scope. 

154.102 Definitions. 

154.103 Applicability. 

Subpart B—Disclosure and Review 

Provisions 

154.200 Rate increases subject to review. 

154.205 Unreasonable rate increases. 

154.210 Review of rate increases subject to 

review by HHS or by a State. 

154.215 Submission of disclosure to HHS 

for rate increases subject to review. 

154.220 Timing of preliminary justification. 

154.225 Determination by HHS or a State of 

an unreasonable rate increase. 

154.230 Submission and posting of final 

justifications for unreasonable rate 

increases. 

Subpart C—Effective Rate Review 

Programs 

154.301 HHS’s determinations of effective 

rate review programs. 

Authority: Section 2794 of the Public 

Health Service Act (42 U.S.C. 300gg–94). 

Subpart A—General Provisions 

§ 154.101 Basis and scope. 

(a) Basis. This part implements 

section 2794 of the Public Health 

Service (PHS) Act. 

(b) Scope. This part establishes the 

requirements for health insurance 

issuers offering small group or 

individual health insurance coverage to 

report information concerning 

unreasonable rate increases to the 

Department of Health and Human 

Services (HHS). This part further 

establishes the process by which it will 

be determined whether the rate 

increases are unreasonable rate 

increases as defined in this part. 

§ 154.102 Definitions. 

As used in this part: 

Effective rate review program means a 

State program that HHS has determined 

meets the requirements set forth in 

§ 154.301(a) for the relevant market 

segment in the State. 

Federal medical loss ratio standard 

means the applicable medical loss ratio 

standard for the State and market 

segment involved, determined under 

subpart B of 45 CFR part 158. 

Health insurance coverage has the 

meaning given the term in section 

2791(b)(1) of the PHS Act. 

Health insurance issuer has the 

meaning given the term in section 

2791(b)(2) of the PHS Act. 

HHS means the Department of Health 

and Human Services. 

Individual market has the meaning 

given the term under the applicable 

State’s rate filing laws, except that 

where State law does not define the 

term, it has the meaning given in section 

2791(e)(1)(A) of the PHS Act. 

Product means a package of health 

insurance coverage benefits with a 

discrete set of rating and pricing 

methodologies that a health insurance 

issuer offers in a State. 

Rate increase means an increase of the 

rates for a specific product offered in the 

individual or small group market. 

Rate increase subject to review means 

a rate increase that meets the criteria set 

forth in § 154.200. 

Secretary means the Secretary of the 

Department of Health and Human 

Services. 

Small group market has the meaning 

given under the applicable State’s rate 

filing laws, except that where State law 

does not define the term, it has the 

meaning given in section 2791(e)(5) of 

the PHS Act; provided, however, that 

for the purpose of this definition, ‘‘50’’ 

employees is substituted for ‘‘100’’ 

employees in the definition of ‘‘small 

employer’’ under section 2791(e)(4). 

State has the meaning given the term 

in section 2791(d)(14) of the PHS Act. 

Unreasonable rate increase means: 

(1) When HHS is conducting the 

review required by this part, a rate 

increase that HHS determines is: 

(i) An excessive rate increase; 

(ii) An unjustified rate increase; or 

(iii) An unfairly discriminatory rate 

increase; as described in § 154.205. 

(2) When HHS adopts the 

determination of a State that has an 

effective rate review program, a rate 

increase that the State determines is 

excessive, unjustified, unfairly 

discriminatory, or otherwise 

unreasonable as provided under 

applicable State law. 

§ 154.103 Applicability. 

(a) In general. The requirements of 

this part apply to health insurance 

issuers offering health insurance 

coverage in the individual market and 

small group market. 

(b) Exceptions. The requirements of 

this part do not apply to grandfathered 

health plan coverage as defined in 45 

CFR § 147.140, or to excepted benefits 

as described in paragraph (1) of 

subsection (c) of section 2791 of the 

Public Health Service Act, or as 

described in paragraph (2), (3) or (4) of 

such subsection if the benefits are 

provided under a separate policy, 

certificate or contract of insurance. 

Subpart B—Disclosure and Review 

Provisions 

§ 154.200 Rate increases subject to 

review. 

(a) Rate increases that meet or exceed 

the following threshold are subject to 

review to determine whether they are 

unreasonable rate increases: 

(1) For rate increases filed in a State 

on or after July 1, 2011, or effective on 

or after July 1, 2011 in a State that does 

not require rate increases to be filed, a 

rate increase that is 10 percent or more, 

as calculated under paragraph (b) of this 

section. 

(2) For rate increases filed in a State 

during calendar year 2012 and 

thereafter, or effective during calendar 

year 2012 and thereafter in a State that 

does not require rate increases to be 

filed, any rate increase, as calculated 

under paragraph (b) of this section that 

meets or exceeds: 

(i) State-specific thresholds as 

determined by the Secretary for the 

applicable calendar year based on the 

cost of health care and health insurance 

coverage in a State; or 

(ii) 10 percent if an applicable Statespecific threshold is not established by 

the Secretary under paragraph (a)(2)(i) 

of this section. The thresholds set forth 

in paragraph (a)(2)(i) will be published 

in the Federal Register no later than 

September 15th of the year preceding 

the calendar year in which the threshold 

applies, beginning in 2012. 

(b) A rate increase meets or exceeds 

the applicable threshold set forth in 

paragraph (a) of this section if the 

weighted average increase for all 

enrollees subject to the rate increase 

meets or exceeds the applicable 

threshold. 

(c) If a rate increase that does not 

otherwise meet or exceed the threshold 

under paragraph (b) of this section 

meets or exceeds the threshold if 

combined with a previous increase or 

increases during the 12 month period 

preceding the date on which the rate 

increase would become effective, then 

the rate increase must be considered to 

meet or exceed the threshold and is 

subject to review under § 154.210, and 

such review shall include a review of 

the aggregate rate increases during the 

applicable 12 month period. 

§ 154.205 Unreasonable rate increases. 

(a) When HHS reviews a rate increase 

subject to review under § 154.210(a), 

HHS will determine that the rate 

increase is an unreasonable rate increase 

if the increase is an excessive rate 

increase, an unjustified rate increase, or 

an unfairly discriminatory rate increase. 

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(b) The rate increase is an excessive 

rate increase if the increase causes the 

premium charged for the health 

insurance coverage to be unreasonably 

high in relation to the benefits provided 

under the coverage. In determining 

whether the rate increase causes the 

premium charged to be unreasonably 

high in relationship to the benefits 

provided, HHS will consider: 

(1) Whether the rate increase results 

in a projected medical loss ratio below 

the Federal medical loss ratio standard 

in the applicable market to which the 

rate increase applies, after accounting 

for any adjustments allowable under 

Federal law; 

(2) Whether one or more of the 

assumptions on which the rate increase 

is based is not supported by substantial 

evidence; and 

(3) Whether the choice of assumptions 

or combination of assumptions on 

which the rate increase is based is 

unreasonable. 

(c) The rate increase is an unjustified 

rate increase if the health insurance 

issuer provides data or documentation 

to HHS in connection with the increase 

that is incomplete, inadequate or 

otherwise does not provide a basis upon 

which the reasonableness of an increase 

may be determined. 

(d) The rate increase is an unfairly 

discriminatory rate increase if the 

increase results in premium differences 

between insureds within similar risk 

categories that: 

(1) Are not permissible under 

applicable State law; or 

(2) In the absence of an applicable 

State law, do not reasonably correspond 

to differences in expected costs. 

§ 154.210 Review of rate increases subject 

to review by HHS or by a State. 

(a) Except as provided in paragraph 

(b) of this section, HHS will review a 

rate increase subject to review to 

determine whether it is unreasonable, as 

required by this part. 

(b) HHS will adopt a State’s 

determination of whether a rate increase 

is an unreasonable rate increase, if the 

State: 

(1) Has an effective rate review 

program as described in § 154.301; and 

(2) The State provides to HHS, on a 

form and in a manner prescribed by the 

Secretary, its final determination of 

whether a rate increase is unreasonable, 

which must include an explanation of 

how its analysis of the relevant factors 

set forth in § 154.301(a)(3) caused it to 

arrive at that determination, within five 

business days following the State’s final 

determination. 

(c) HHS will post and maintain on its 

Web site a list of the States that meet the 

requirements of paragraph (b) of this 

section. 

§ 154.215 Submission of disclosure to 

HHS for rate increases subject to review. 

(a) For each rate increase subject to 

review, a health insurance issuer must 

submit a preliminary justification for 

each product affected by the increase on 

a form and in the manner prescribed by 

the Secretary. 

(b) The preliminary justification must 

consist of the following parts: 

(1) Rate increase summary; 

(2) Written description justifying the 

rate increase; and 

(3) When HHS is reviewing the rate 

increase under § 154.210(a), rate filing 

documentation. 

(c) A health insurance issuer must 

complete and submit parts one and two 

of the preliminary justification 

described in paragraph (b)(1) and (2) of 

this section to HHS and, as long as the 

applicable State accepts such 

submissions, to the applicable State, for 

any rate increase subject to review. If a 

rate increase subject to review is for a 

product offered in the individual market 

or small group market and HHS is 

reviewing the rate increase under 

§ 154.210(a), then the health insurance 

issuer must also complete and submit 

part three of the preliminary 

justification described in paragraph 

(b)(3) of this section to HHS only. 

(d) The health insurance issuer may 

submit a single, combined preliminary 

justification for rate increases subject to 

review affecting multiple products, if 

the claims experience of all products 

has been aggregated to calculate the rate 

increases and the rate increases are the 

same across all products. 

(e) Content of rate increase summary. 

The rate increase summary must 

include the following: 

(1) Historical and projected claims 

experience; 

(2) Trend projections related to 

utilization, and service or unit cost; 

(3) Any claims assumptions related to 

benefit changes; 

(4) Allocation of the overall rate 

increase to claims and non-claims costs; 

(5) Per enrollee per month allocation 

of current and projected premium; 

(6) Current loss ratio and projected 

loss ratio; 

(7) Three year history of rate increases 

for the product associated with the rate 

increase; and 

(8) Employee and executive 

compensation data from the health 

insurance issuer’s annual financial 

statements. 

(f) Content of written description 

justifying the rate increase. The written 

description of the rate increase must 

include a simple and brief narrative 

describing the data and assumptions 

that were used to develop the rate 

increase and include the following: 

(1) Explanation of the rating 

methodology; 

(2) Explanation of the most significant 

factors causing the rate increase, 

including a brief description of the 

relevant claims and non-claims expense 

increases reported in the rate increase 

summary; and 

(3) Brief description of the overall 

experience of the policy, including 

historical and projected expenses, and 

loss ratios. 

(g) Content of rate filing 

documentation. (1) The rate filing 

documentation supports the information 

required under paragraphs (d) and (e) of 

this section. This documentation must 

be sufficient to permit HHS to conduct 

a review to determine whether the rate 

increase is an unreasonable rate increase 

and must include the following: 

(i) Description of the type of policy, 

benefits, renewability, general 

marketing method and issue age limits; 

(ii) Scope and reason for the rate 

increase; 

(iii) Average annual premium per 

policy, before and after the rate increase; 

(iv) Past experience, and any other 

alternative or additional data used; 

(v) A description of how the rate 

increase was determined, including the 

general description and source of each 

assumption used; 

(vi) The cumulative loss ratio and a 

description of how it was calculated; 

(vii) The projected future loss ratio 

and a description of how it was 

calculated; 

(viii) The projected lifetime loss ratio 

that combines cumulative and future 

experience, and a description of how it 

was calculated; 

(ix) Federal medical loss ratio 

standard in the applicable market to 

which the rate increase applies, 

accounting for any adjustments 

allowable under Federal law; and 

(x) If the result under paragraph 

(g)(1)(vii) of this section is less than the 

standard under paragraph (g)(1)(ix) of 

this section, a justification for this 

outcome. 

(2) If the health insurance issuer is 

also required to submit a rate filing to 

a State in connection with the rate 

increase under State law, HHS will 

accept a copy of the filing provided that 

the filing includes all of the information 

described in paragraph (g)(1)(i) through 

paragraph (g)(1)(x) of this section. 

(h) In the event the level of detail 

provided by the issuer for the 

information under paragraph (g) of this 

section does not provide sufficient basis 

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81028 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

for HHS to determine whether the rate 

increase is an unreasonable rate 

increase, HHS will request the 

additional information necessary to 

make its determination. The health 

insurance issuer must provide the 

requested information to HHS within 

five business days following its receipt 

of the request. 

(i) Posting of the disclosure on the 

HHS Web site. 

(1) HHS will promptly make available 

to the public on its Web site the 

information contained in parts one and 

two of each preliminary justification. 

(2) HHS will make available to the 

public on its Web site the information 

contained in part three of each 

preliminary justification after its receipt 

thereof. 

(i) HHS will post any information 

contained in part three of the 

preliminary justification that is not 

designated as ‘‘confidential’’ as defined 

in HHS’s Freedom of Information Act 

regulations, 45 CFR 5.65. 

(ii) HHS will make a determination as 

to whether to post information 

designated as ‘‘confidential’’ under the 

standards and procedure set forth in 45 

CFR 5.65, and will post that information 

only after making a determination that 

it is subject to disclosure as provided by 

45 CFR 5.65. 

(3) HHS will include the following 

disclaimer on its Web site with 

information made available to the 

public under this paragraph (i): 

‘‘The preliminary justification is the initial 

summary information regarding the rate 

increase subject to review and does not 

represent a determination that the rate 

increase subject to review is an unreasonable 

rate increase.’’ 

§ 154.220 Timing of preliminary 

justification. 

A health insurance issuer must 

submit a preliminary justification for all 

rate increases subject to review that are 

filed in a State on or after July 1, 2011, 

or effective on or after July 1, 2011 in 

a State that does not require the rate 

increase subject to review to be filed, as 

follows: 

(a) If a State requires that a proposed 

rate increase be filed with the State 

prior to the implementation of the rate, 

the health insurance issuer must submit 

to HHS and the applicable State the 

preliminary justification on the date on 

which the health insurance issuer 

submits the proposed rate increase to 

the State. 

(b) For all other States, the health 

insurance issuer must submit to HHS 

and the State the preliminary 

justification prior to the implementation 

of the rate increase. 

§ 154.225 Determination by HHS or a State 

of an unreasonable rate increase. 

(a) When HHS receives a preliminary 

justification for a rate increase subject to 

review and HHS reviews the rate 

increase under § 154.210(a), HHS will 

determine whether the rate increase is 

an unreasonable rate increase. 

(1) HHS will post on its Web site its 

final determination and a brief 

explanation of its analysis within five 

business days following its final 

determination. 

(2) If HHS determines that the rate 

increase is an unreasonable rate 

increase, HHS will also provide its final 

determination and brief explanation to 

the health insurance issuer within five 

business days following its final 

determination. 

(b) If a State conducts a review under 

§ 154.210(b), HHS will adopt the State’s 

determination of whether a rate increase 

is unreasonable and post on the HHS 

Web site the State’s final determination 

described in § 154.210(b)(2). 

(c) If a State determines that the rate 

increase is an unreasonable rate increase 

and the health insurance issuer is 

legally permitted to implement the 

unreasonable rate increase under 

applicable State law, HHS will provide 

the State’s final determination and brief 

explanation to the health insurance 

issuer within five business days 

following HHS’s receipt thereof. 

§ 154.230 Submission and posting of final 

justifications for unreasonable rate 

increases. 

(a) If a health insurance issuer 

receives from HHS a final determination 

by HHS or a State that a rate increase 

is an unreasonable rate increase, and the 

health insurance issuer declines to 

implement the rate increase or chooses 

to implement a lower increase, the 

health insurance issuer must submit to 

HHS timely notice that it will not 

implement the rate increase or that it 

will implement a lower increase on a 

form and in the manner prescribed by 

the Secretary. 

(b) If a health insurance issuer 

implements a lower increase as 

described in paragraph (a) of this 

section and the lower increase does not 

meet or exceed the applicable threshold 

under § 154.200, such lower increase is 

not subject to this part. If the lower 

increase meets or exceeds the applicable 

threshold, the health insurance issuer 

must submit a new preliminary 

justification under this part. 

(c) If a health insurance issuer 

implements a rate increase determined 

by HHS or a State to be unreasonable, 

the health insurance issuer must, within 

the later of 10 days after the 

implementation of such increase or the 

health insurance issuer’s receipt of 

HHS’s final determination that a rate 

increase is an unreasonable rate 

increase: 

(1) Submit to HHS a final justification 

in response to HHS’s or the State’s final 

determination, as applicable. The 

information in the final justification 

must be consistent with the information 

submitted in the preliminary 

justification supporting the rate 

increase; and 

(2) Prominently post on its Web site 

the following information on a form and 

in the manner prescribed by the 

Secretary: 

(i) The information made available to 

the public by HHS and described in 

§ 154.215(i); 

(ii) HHS’s or the State’s final 

determination and brief explanation 

described in § 154.225(a) and 

§ 154.210(b)(2), as applicable; and 

(iii) The health insurance issuer’s 

final justification for implementing an 

increase that has been determined to be 

unreasonable by HHS or the State, as 

applicable. 

(3) The health insurance issuer must 

continue to make this information 

available to the public on its Web site 

for at least three years. 

(d) HHS will post all final 

justifications on the HHS Web site. This 

information will remain available to the 

public on the HHS Web site for three 

years. 

Subpart C–Effective Rate Review 

Programs 

§ 154.301 HHS’s determinations of 

effective rate review programs. 

(a) Effective rate review program. The 

purpose of an effective rate review 

program as set forth in this section is to 

determine whether a rate increase is an 

unreasonable rate increase. In 

evaluating whether a State has an 

effective rate review program, HHS will 

apply the following criteria for the 

review of rates for the small group 

market and the individual market, and 

also, as applicable depending on State 

law, the review of rates for different 

types of products within those markets: 

(1) The State receives from issuers 

data and documentation in connection 

with rate increases that are sufficient to 

conduct the examination described in 

paragraph (a)(3) of this section. 

(2) The State conducts an effective 

and timely review of the data and 

documentation submitted by a health 

insurance issuer in support of a 

proposed rate increase. 

(3) The State’s rate review process 

includes an examination of: 

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(i) The reasonableness of the 

assumptions used by the health 

insurance issuer to develop the 

proposed rate increase and the validity 

of the historical data underlying the 

assumptions; and 

(ii) The health insurance issuer’s data 

related to past projections and actual 

experience. 

(4) The examination must include an 

analysis of: 

(i) The impact of medical trend 

changes by major service categories; 

(ii) The impact of utilization changes 

by major service categories; 

(iii) The impact of cost-sharing 

changes by major service categories; 

(iv) The impact of benefit changes; 

(v) The impact of changes in enrollee 

risk profile; 

(vi) The impact of any overestimate or 

underestimate of medical trend for prior 

year periods related to the rate increase; 

(vii) The impact of changes in reserve 

needs; 

(viii) The impact of changes in 

administrative costs related to programs 

that improve health care quality; 

(ix) The impact of changes in other 

administrative costs; 

(x) The impact of changes in 

applicable taxes, licensing or regulatory 

fees; 

(xi) Medical loss ratio; and 

(xii) The health insurance issuer’s 

risk-based capital status relative to 

national standards. 

(5) The State’s determination of 

whether a rate increase is unreasonable 

is made under a standard that is set 

forth in State statute or regulation. 

(b) HHS will determine whether a 

State has an effective rate review 

program for each market based on 

documentation and information 

received from the State or any other 

information otherwise available to HHS 

that its rate review program meets the 

criteria described in paragraph (a) of 

this section. 

(c) HHS reserves the right to 

determine that a State no longer has an 

effective rate review program if HHS 

determines that the State no longer 

satisfies the criteria set forth in 

paragraph (a) of this section. 

Dated: December 16, 2010. 

Jay Angoff, 

Director, Office of Consumer Information and 

Insurance Oversight. 

Approved: December 16, 2010. 

Kathleen Sebelius, 

Secretary. 

[FR Doc. 2010–32143 Filed 12–21–10; 8:45 am] 

BILLING CODE 4150–03–P 

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