#### § 158.232 Calculating the credibility adjustment.

(a) *Formula.* An issuer's credibility adjustment, if any, is the product of the base credibility factor, as determined under [paragraph (b)](/on/2024-09-23/title-45/section-158.232#p-158.232(b)) of this section, multiplied by the deductible factor, as determined under [paragraph (c)](/on/2024-09-23/title-45/section-158.232#p-158.232(c)) of this section.

(b) *Base credibility factor.*

(1) The base credibility factor for fully credible experience or for non-credible experience is zero.

(2) The base credibility factor for partially credible experience is determined based on the number of life-years included in the aggregation, as determined under [§ 158.231 of this subpart](/on/2024-09-23/title-45/part-158/section-158.231), and the factors shown in Table 1. When the number of life-years used to determine credibility exactly matches a life-year category listed in Table 1, the value associated with that number of life-years is the base credibility factor. The base credibility factor for a number of life-years between the values shown in Table 1 is determined by linear interpolation.

Table 1 to [§ 158.232](/on/2024-09-23/title-45/section-158.232): Base Credibility Factors

| Life-years | Base credibility factor |
| --- | --- |
| <1,000 | No Credibility. |
| 1,000 | 8.3%. |
| 2,500 | 5.2%. |
| 5,000 | 3.7%. |
| 10,000 | 2.6%. |
| 25,000 | 1.6%. |
| 50,000 | 1.2%. |
| ≥75,000 | 0.0% (Full Credibility). |

(c) *Deductible factor.*

(1) The deductible factor is based on the average per person deductible of policies whose experience is included in the aggregation, as determined under [§ 158.231 of this subpart](/on/2024-09-23/title-45/part-158/section-158.231). When the weighted average deductible, as determined in accordance with this section, exactly matches a deductible category listed in Table 2, the value associated with that deductible is the deductible factor. The deductible factor for an average weighted deductible between the values shown in Table 2 is determined by linear interpolation.

(i) The per person deductible for a policy that covers a subscriber and the subscriber's dependents shall be the lesser of: the deductible applicable to each of the individual family members; or the overall family deductible for the subscriber and subscriber's family divided by two (regardless of the total number of individuals covered through the subscriber).

(ii) The average deductible for an aggregation is calculated weighted by the life-years of experience for each deductible level of policies included in the aggregation.

(2) An issuer may choose to use a deductible factor of 1.0 in lieu of calculating a deductible factor based on the average of policies included in the aggregation.

Table 2 to [§ 158.232](/on/2024-09-23/title-45/section-158.232): Deductible Factor

| Health plan deductible | Deductible factor |
| --- | --- |
| <$2,500 | 1.000 |
| $2,500 | 1.164 |
| $5,000 | 1.402 |
| ≥$10,000 | 1.736 |

(d) *No credibility adjustment.* Beginning with the 2013 MLR reporting year, the credibility adjustment for an MLR based on partially credible experience is zero if both of the following conditions are met:

(1) Each year in the aggregation included experience of at least 1,000 life-years; and

(2) The issuer's preliminary MLR, as defined under [paragraph (f)](/on/2024-09-23/title-45/section-158.232#p-158.232(f)) of this section, for each year in the aggregation was below the applicable MLR standard, as established under [§§ 158.210](/on/2024-09-23/title-45/section-158.210) and [158.211](/on/2024-09-23/title-45/section-158.211).

(e) *No credibility adjustment.* Beginning with the 2015 MLR reporting year for the student market only, the credibility adjustment for an MLR based on partially credible experience is zero if both of the following conditions are met:

(1) Each year in the aggregation included experience of at least 1,000 life-years; and

(2) The issuer's preliminary MLR, as defined under [paragraph (f)](/on/2024-09-23/title-45/section-158.232#p-158.232(f)) of this section, for each year in the aggregation was below the applicable MLR standard, as established under [§§ 158.210](/on/2024-09-23/title-45/section-158.210) and [158.211](/on/2024-09-23/title-45/section-158.211).

(f) *Preliminary MLR.* Preliminary MLR means the ratio of the numerator, as defined in [§ 158.221(b)](/on/2024-09-23/title-45/section-158.221#p-158.221(b)) and calculated as of March 31st of the year following the year for which the MLR report required in [§ 158.110](/on/2024-09-23/title-45/section-158.110) is being submitted, to the denominator, as defined in [§ 158.221(c)](/on/2024-09-23/title-45/section-158.221#p-158.221(c)), calculated using only a single year of experience, and without applying any credibility adjustment.

[[75 FR 74921](https://www.federalregister.gov/citation/75-FR-74921), Dec. 1, 2010, as amended at [75 FR 82279](https://www.federalregister.gov/citation/75-FR-82279), Dec. 30, 2010; [77 FR 16469](https://www.federalregister.gov/citation/77-FR-16469), Mar. 21, 2012; [77 FR 28790](https://www.federalregister.gov/citation/77-FR-28790), May 16, 2012; [78 FR 15540](https://www.federalregister.gov/citation/78-FR-15540), Mar. 11, 2013; [78 FR 66655](https://www.federalregister.gov/citation/78-FR-66655), Nov. 6, 2013; [81 FR 94183](https://www.federalregister.gov/citation/81-FR-94183), Dec. 22, 2016]