Vol. 77 Friday, 

No. 236 December 7, 2012 

Part II 

Department of Health and Human Services 

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

Patient Protection and Affordable Care Act; HHS Notice of Benefit and 

Payment Parameters for 2014; Proposed Rule 


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73118 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

45 CFR Parts 153, 155, 156, 157 and 

158 

[CMS–9964–P] 

RIN 0938–AR51 

Patient Protection and Affordable Care 

Act; HHS Notice of Benefit and 

Payment Parameters for 2014 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule provides 

further detail and parameters related to: 

the risk adjustment, reinsurance, and 

risk corridors programs; cost-sharing 

reductions; user fees for a Federallyfacilitated Exchange; advance payments 

of the premium tax credit; a Federallyfacilitated Small Business Health 

Option Program; and the medical loss 

ratio program. The cost-sharing 

reductions and advanced payments of 

the premium tax credit, combined with 

new insurance market reforms, will 

significantly increase the number of 

individuals with health insurance 

coverage, particularly in the individual 

market. The premium stabilization 

programs—risk adjustment, reinsurance, 

and risk corridors—will protect against 

adverse selection in the newly enrolled 

population. These programs, in 

combination with the medical loss ratio 

program and market reforms extending 

guaranteed availability (also known as 

guaranteed issue) protections and 

prohibiting the use of factors such as 

health status, medical history, gender, 

and industry of employment to set 

premium rates, will help to ensure that 

every American has access to highquality, affordable health insurance. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on December 31, 2012. 

ADDRESSES: In commenting, please refer 

to file code CMS–9964–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

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

the ‘‘Submit a comment’’ instructions. 

2. By regular mail. You may mail 

written comments to the following 

address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS– 

9964–P, P.O. Box 8016, Baltimore, 

MD 21244–8016. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS– 

9964–P, Mail Stop C4–26–05, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. Alternatively, 

you may deliver (by hand or courier) 

your written comments ONLY to the 

following addresses prior to the close of 

the comment period: 

a. For delivery in Washington, DC— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 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 CMS 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.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244– 

1850. 

If you intend to deliver your 

comments to the Baltimore address, call 

telephone number (410) 786–7195 in 

advance to schedule your arrival with 

one of our staff members. 

Comments erroneously mailed to the 

addresses indicated as appropriate for 

hand or courier delivery may be delayed 

and received after the comment period. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Sharon Arnold at (301) 492–4286, 

Laurie McWright at (301) 492–4311, or 

Jeff Wu at (301) 492–4305 for general 

information. 

Adrianne Glasgow at (410) 786–0686 

for matters related to reinsurance. 

Michael Cohen at (301) 492–4277 for 

matters related to the methodology for 

determining the reinsurance 

contribution rate and payment 

parameters. 

Grace Arnold at (301) 492–4272 for 

matters related to risk adjustment, the 

HHS risk adjustment methodology, or 

the distributed data collection approach 

for the HHS-operated risk adjustment 

and reinsurance programs. 

Adam Shaw at (410) 786–1091 for 

matters related to risk corridors. 

Johanna Lauer at (301) 492–4397 for 

matters related to cost-sharing 

reductions, advance payments of the 

premium tax credits, or user fees. 

Rex Cowdry at (301) 492–4387 for 

matters related to the Small Business 

Health Options Program. 

Carol Jimenez at (301) 492–4457 for 

matters related to the medical loss ratio 

program. 

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:// 

www.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. Executive Summary 

II. Background 

III. Provisions of the Proposed HHS Notice of 

Benefit and Payment Parameters for 2014 

A. Provisions for the State Notice of Benefit 

and Payment Parameters 

B. Provisions and Parameters for the 

Permanent Risk Adjustment Program 

1. Approval of State-Operated Risk 

Adjustment 

2. Risk Adjustment User Fees 

3. Overview of the Risk Adjustment 

Methodology HHS Would Implement 

When Operating Risk Adjustment on 

Behalf of a State 

4. State Alternate Methodology 

5. Risk Adjustment Data Validation 

C. Provisions and Parameters for the 

Transitional Reinsurance Program 

1. State Standards Related to the 

Reinsurance Program 


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2. Contributing Entities and Excluded 

Entities 

3. National Contribution Rate 

4. Calculation and Collection of 

Reinsurance Contributions 

5. Eligibility for Reinsurance Payments 

Under Health Insurance Market Rules 

6. Reinsurance Payment Parameters 

7. Uniform Adjustment to Reinsurance 

Payments 

8. Supplemental State Reinsurance 

Parameters 

9. Allocation and Distribution of 

Reinsurance Contributions 

10. Data Collection Standards for 

Reinsurance Payments 

D. Provisions for the Temporary Risk 

Corridors Program 

1. Definitions 

2. Risk Corridors Establishment and 

Payment Methodology 

3. Risk Corridors Data Requirements 

4. Manner of Risk Corridor Data Collection 

E. Provisions for the Advance Payment of 

the Premium Tax Credit and CostSharing Reduction Programs 

1. Exchange Responsibilities With Respect 

to Advance Payments of the Premium 

Tax Credit and Cost-Sharing Reductions 

2. Exchange Functions: Certification of 

Qualified Health Plans 

3. QHP Minimum Certification Standards 

Relating to Advance Payments of the 

Premium Tax Credit and Cost-Sharing 

Reductions 

4. Health Insurance Issuer Responsibilities 

With Respect to Advance Payments of 

the Premium Tax Credit and CostSharing Reductions 

F. Provisions on User Fees for a FederallyFacilitated Exchange (FFE) 

G. Distributed Data Collection for the HHSOperated Risk Adjustment and 

Reinsurance Programs 

1. Background 

2. Issuer Data Collection and Submission 

Requirements 

3. Risk Adjustment Data Requirements 

4. Reinsurance Data Requirements 

H. Small Business Health Options Program 

I. Medical Loss Ratio Requirements Under 

the Patient Protection and Affordable 

Care Act 

1. Treatment of Premium Stabilization 

Payments, and Timing of Annual MLR 

Reports and Distribution of Rebates 

2. Deduction of Community Benefit 

Expenditures 

3. Summary of Errors in the MLR 

Regulation 

IV. Collection of Information Requirements 

V. Response to Comments 

VI. Regulatory Impact Analysis 

A. Statement of Need 

B. Overall Impact 

C. Impact Estimates of the Payment Notice 

Provisions 

D. Regulatory Flexibility Act 

E. Unfunded Mandates 

F. Federalism 

G. Congressional Review Act Regulations 

Text 

Acronyms 

Affordable Care Act The Affordable Care 

Act of 2010 (which is the collective term 

for the Patient Protection and Affordable 

Care Act (Pub. L. 111–148) and the Health 

Care and Education Reconciliation Act 

(Pub. L. 111–152)) 

APTC Advance payment of the premium 

tax credit 

AV Actuarial Value 

CFR Code of Federal Regulations 

CHIP Children’s Health Insurance Program 

CMS Centers for Medicare & Medicaid 

Services 

EHB Essential Health Benefits 

ERISA Employee Retirement Income 

Security Act 

ESI Employer sponsored insurance 

FFE Federally-facilitated Exchange 

FPL Federal Poverty Level 

GAAP Generally accepted accounting 

principles 

HCC Hierarchical condition category 

HHS United States Department of Health 

and Human Services 

HIPAA Health Insurance Portability and 

Accountability Act of 1996 (Pub. L. 104– 

191) 

IHS Indian Health Service 

IRS Internal Revenue Service 

MLR Medical Loss Ratio 

NAIC National Association of Insurance 

Commissioners 

OMB Office of Management and Budget 

OPM United States Office of Personnel 

Management 

PHS Act Public Health Service Act 

PRA Paperwork Reduction Act of 1985 

QHP Qualified Health Plan 

SHOP Small Business Health Options 

Program 

The Code Internal Revenue Code of 1986 

I. Executive Summary 

A. Purpose 

Beginning in 2014, individuals and 

small businesses will be able to 

purchase private health insurance 

through competitive marketplaces, 

called Affordable Insurance Exchanges, 

or ‘‘Exchanges.’’ Individuals who enroll 

in health plans through Exchanges may 

receive premium tax credits to make 

health insurance more affordable, and 

financial assistance to cover cost sharing 

for health care services. The premium 

tax credits, combined with the new 

insurance reforms, will significantly 

increase the number of individuals with 

health insurance coverage, particularly 

in the individual market. Premium 

stabilization programs—risk adjustment, 

reinsurance, and risk corridors—protect 

against adverse selection in the newly 

enrolled population. These programs, in 

combination with the medical loss ratio 

program and market reforms extending 

guaranteed availability (also known as 

guaranteed issue) protections, 

prohibiting the use of factors such as 

health status, medical history, gender, 

and industry of employment to set 

premium rates, will help to ensure that 

every American has access to highquality, affordable health insurance. 

Premium stabilization programs: The 

Affordable Care Act establishes 

transitional reinsurance and temporary 

risk corridors programs, and a 

permanent risk adjustment program to 

provide payments to health insurance 

issuers that cover higher-risk 

populations and to more evenly spread 

the financial risk borne by issuers. 

The transitional reinsurance program 

and the temporary risk corridors 

program, which begin in 2014, are 

designed to provide issuers with greater 

payment stability as insurance market 

reforms are implemented. The 

reinsurance program will reduce the 

uncertainty of insurance risk in the 

individual market by partially offsetting 

risk of high-cost enrollees. The risk 

corridors program, which is a Federally 

administered program, will protect 

against uncertainty in rates for qualified 

health plans by limiting the extent of 

issuer losses and gains. On an ongoing 

basis, the risk adjustment program is 

intended to provide increased payments 

to health insurance issuers that attract 

higher-risk populations, such as those 

with chronic conditions, and reduce the 

incentives for issuers to avoid higherrisk enrollees. Under this program, 

funds are transferred from issuers with 

lower-risk enrollees to issuers with 

higher-risk enrollees. 

In the Premium Stabilization Rule (77 

FR 17220), we laid out a regulatory 

framework for these three programs. In 

that rule, we stated that the specific 

payment parameters for those programs 

would be published in this proposed 

rule. In this proposed rule, we expand 

upon these standards, and propose 

payment parameters for these programs. 

Advanced payments of the premium 

tax credit and cost-sharing reductions: 

This proposed rule proposes standards 

for advanced payments of the premium 

tax credit and for cost-sharing 

reductions. These programs assist lowand moderate-income Americans in 

affording health insurance on an 

Exchange. Section 1401 of the 

Affordable Care Act amended the 

Internal Revenue Code (26 U.S.C.) to 

add section 36B, allowing an advance, 

refundable premium tax credit to help 

individuals and families afford health 

insurance coverage. Section 36B of the 

Code was subsequently amended by the 

Medicare and Medicaid Extenders Act 

of 2010 (Pub. L. 111–309) (124 Stat. 

3285 (2010)); the Comprehensive 1099 

Taxpayer Protection and Repayment of 

Exchange Subsidy Overpayments Act of 

2011 (Pub. L. 112–9) (125 Stat. 36 

(2011)); and the Department of Defense 

and Full-Year Continuing 

Appropriations Act, 2011 (Pub. L. 112– 

10) (125 Stat. 38 (2011)). The section 


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1Available at: http://cciio.cms.gov/resources/ 

files/Files2/02242012/Av-csr-bulletin.pdf. 

36B credit is designed to make a 

qualified health plan affordable by 

reducing a taxpayer’s out-of-pocket 

premium cost. 

Under section 1411 of the Affordable 

Care Act, an Exchange makes an 

advance determination of tax credit 

eligibility for individuals enrolling in 

coverage through the Exchange and 

seeking financial assistance. Using 

information available at the time of 

enrollment, the Exchange determines: 

(1) whether the individual meets the 

income and other requirements for 

advance payments, and (2) the amount 

of the advance payments. Advance 

payments are made monthly under 

section 1412 of the Affordable Care Act 

to the issuer of the qualified health plan 

(QHP) in which the individual enrolls. 

Section 1402 of the Affordable Care 

Act provides for the reduction of cost 

sharing for certain individuals enrolled 

in QHPs offered through the Exchanges 

and section 1412 of the Affordable Care 

Act provides for the advance payment of 

these reductions to issuers. This 

assistance will help low- and moderateincome qualified individuals and 

families afford the out-of-pocket 

spending associated with health care 

services provided through QHP 

coverage. The law directs issuers to 

reduce cost sharing for essential health 

benefits for individuals with household 

incomes between 100 and 400 percent 

of the Federal Poverty Level (FPL) who 

are enrolled in a silver level QHP 

through an individual market Exchange 

and are eligible for advance payment of 

premium tax credits. The statute also 

directs issuers to eliminate cost sharing 

for Indians (as defined in section 4(d) of 

the Indian Self-Determination and 

Education Assistance Act) with a 

household income at or below 300 

percent of the FPL who are enrolled in 

a QHP of any ‘‘metal’’ level (that is, 

bronze, silver, gold, or platinum) 

through the individual market in the 

Exchange, and prohibits issuers of QHPs 

from requiring cost sharing for Indians, 

regardless of household income, for 

items or services furnished directly by 

the Indian Health Service, an Indian 

Tribe, a Tribal Organization, or an 

Urban Indian Organization, or through 

referral under contracted health 

services. 

HHS published a bulletin 1 outlining 

an intended regulatory approach to 

calculations of actuarial value and 

implementation of cost-sharing 

reductions on February 24, 2012 (the 

‘‘AV/CSR Bulletin’’). Specifically, HHS 

outlined an intended regulatory 

approach for the calculation of AV, de 

minimis variation standards, silver plan 

variations for individuals eligible for 

cost-sharing reductions, and advance 

payments of cost-sharing reductions to 

issuers, among other topics. In the 

Exchange Establishment Rule, we 

established eligibility standards for 

these cost-sharing reductions. In this 

proposed rule, we establish standards 

governing the administration of costsharing reductions and provide specific 

payment parameters for the program. 

Federally-facilitated Exchange user 

fees: Section 1311(d)(5)(A) of the 

Affordable Care Act contemplates an 

Exchange charging assessments or user 

fees to participating issuers to generate 

funding to support its operations. As the 

operator of a Federally-facilitated 

Exchange, HHS has the authority, under 

this section of the statute, to collect and 

spend such user fees. In addition, 31 

U.S.C. 9701 provides for an agency to 

establish a charge for a service provided 

by the agency. Office of Management 

and Budget Circular A–25 Revised 

(‘‘Circular A–25R’’) establishes Federal 

policy regarding user fees and specifies 

that a user charge will be assessed 

against each identifiable recipient for 

special benefits derived from Federal 

activities beyond those received by the 

general public. In this proposed rule, we 

establish a user fee for issuers 

participating in a Federally-facilitated 

Exchange. 

Small Business Health Options 

Program: Section 1311(b)(1)(B) of the 

Affordable Care Act directs each State 

that chooses to operate an Exchange to 

establish a Small Business Health 

Options Program (SHOP) that provides 

health insurance options for small 

businesses. The Exchange Establishment 

Rule sets forth standards for the 

administration of SHOP Exchanges. In 

this proposed rule, we clarify and 

expand upon the standards established 

in that final rule. 

Medical loss ratio program: Public 

Health Service (PHS) Act section 2718 

generally requires health insurance 

issuers to submit an annual MLR report 

to HHS and provide rebates to 

consumers if they do not achieve 

specified MLRs. On December 1, 2010, 

we published an interim final rule, 

entitled ‘‘Health Insurance Issuers 

Implementing Medical Loss Ratio (MLR) 

Requirements under the Patient 

Protection and Affordable Care Act,’’ (75 

FR 74864) that established standards for 

the MLR program. Since then, we have 

made several revisions and technical 

corrections to those rules. We propose 

in this proposed rule to amend the 

regulations to specify how issuers are to 

account for payments or receipts for risk 

adjustment, reinsurance, and risk 

corridors, and to change the timing of 

the annual MLR report and distribution 

of rebates required of issuers to allow 

for accounting of the premium 

stabilization programs. This proposed 

rule also proposes to amend the 

regulations to revise the treatment of 

community benefit expenditures in the 

MLR calculation for issuers exempt 

from Federal income tax. 

B. Summary of the Major Provisions 

This proposed rule fills in the 

framework established by the Premium 

Stabilization Rule by proposing 

provisions and parameters for the three 

premium stabilization programs—the 

permanent risk adjustment program, the 

transitional reinsurance program, and 

the temporary risk corridors program. It 

also proposes key provisions governing 

advance payments of the premium tax 

credit, cost-sharing reductions, and user 

fees for Federally-facilitated Exchanges. 

Finally, it proposes a number of 

amendments relating to the SHOP and 

the medical loss ratio program. 

Risk Adjustment: The goal of the 

Affordable Care Act risk adjustment 

program is to mitigate the impacts of 

possible adverse selection and stabilize 

the premiums in the individual and 

small group markets as and after 

insurance market reforms are 

implemented. In this proposed rule, we 

propose a number of standards and 

parameters for implementing the risk 

adjustment program, including: 

• Provisions governing a State 

operating a risk adjustment program; 

• The risk adjustment methodology 

HHS will use when operating risk 

adjustment on behalf of a State, 

including the risk adjustment model, 

the payments and charges methodology, 

and the data collection approach; and 

• An outline of the data validation 

process we propose to use when 

operating risk adjustment on behalf of a 

State. 

Reinsurance: The Affordable Care Act 

directs that a transitional reinsurance 

program be established in each State to 

help stabilize premiums for coverage in 

the individual market from 2014 

through 2016. In this proposed rule, we 

propose a number of standards and 

parameters for implementing the 

reinsurance program, including: 

• Provisions excluding certain types 

of health coverage from reinsurance 

contributions; 

• The national per capita contribution 

rate to be paid by health insurance 

issuers and self-insured group health 

plans along with the methodology to be 

used for calculating the contributions 


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2Michelle M. Doty et al., Failure to Protect: Why 

the Individual Insurance Market Is Not a Viable 

Option for Most U.S. Families: Findings from the 

Commonwealth Fund Biennial Health Insurance 

Survey, 2007, The Commonwealth Fund, July 2009; 

Sara R. Collins, Invited Testimony: Premium Tax 

Credits Under The Affordable Care Act: How They 

Will Help Millions Of Uninsured And 

Underinsured Americans Gain Affordable, 

Comprehensive Health Insurance, The 

Commonwealth Fund, October 27, 2011. 

3Source: U.S. Census Bureau, Current Population 

Survey, 2012 Annual Social and Economic 

Supplement, Table HI01. Health Insurance 

Coverage Status and Type of Coverage by Selected 

Characteristics: 2011. 

4Source: CMS analysis of June 2012 Medical Loss 

Ratio Annual Reporting data for 2011 MLR 

reporting year, available at http://cciio.cms.gov/ 

resources/data/mlr.html. 

due from a health insurance issuer or 

self-insured group health plan; 

• Provisions establishing eligibility 

for reinsurance payments; 

• The national reinsurance payment 

parameters and the approach we 

propose to use to calculate and 

administer the reinsurance program; 

and 

• The distributed data collection 

approach we propose to use to 

implement the reinsurance program. 

Risk Corridors: The temporary risk 

corridors program permits the Federal 

government and QHPs to share in 

profits or losses resulting from 

inaccurate rate setting from 2014 to 

2016. In this proposed rule, we propose 

to permit a QHP to include profits and 

taxes within its risk corridors 

calculations. We also propose an annual 

schedule for the program and standards 

for data submissions. 

Advance Payments of the Premium 

Tax Credit: Sections 1401 and 1411 of 

the Affordable Care Act provide for 

advance payments of the premium tax 

credit for low- and moderate-income 

enrollees in QHPs on Exchanges. In this 

proposed rule, we propose a number of 

standards governing the administration 

of this program, including: 

• Provisions governing the reduction 

of premiums by the amount of any 

advance payments of the premium tax 

credit; and 

• Provisions governing the allocation 

of premiums to essential health benefits. 

Cost-Sharing Reductions: Sections 

1402 and 1412 of the Affordable Care 

Act provide for reductions in cost 

sharing on essential health benefits for 

low- and moderate-income enrollees in 

qualified silver level health plans in 

individual market Exchanges. It also 

provides for reductions in cost sharing 

for Indians enrolled in QHPs at any 

metal level. In this proposed rule, we 

propose a number of standards 

governing the cost-sharing reduction 

program, including: 

• Provisions governing the design of 

variations of QHPs with cost-sharing 

structures for enrollees of various 

income levels and for Indians; 

• The maximum out-of-pocket limits 

applicable to the various plan 

variations; 

• Provisions governing the 

assignment and reassignment of 

enrollees to plan variations; 

• Provisions governing issuer 

submissions of estimates of cost-sharing 

reductions, which are paid in advance 

to issuers by the Federal government; 

and 

• Provisions governing reconciliation 

of these advance estimates against 

actual cost-sharing reductions provided. 

User Fees: This proposed rule 

proposes a per billable member user fee 

applicable to issuers participating in a 

Federally-facilitated Exchange. This 

proposed rule also outlines HHS’s 

approach to calculating the fee. 

SHOP: Beginning in 2014, SHOP 

Exchanges will allow small employers 

to offer employees a variety of QHPs. In 

this proposed rule, we propose several 

standards and processes for 

implementing SHOP Exchanges, 

including: 

• Standards governing the definitions 

and counting methods used to 

determine whether an employer is a 

small or large employer; 

• A safe harbor method of employer 

contribution in a Federally-facilitated 

SHOP (FF–SHOP); 

• The default minimum participation 

rate; 

• QHP standards linking Exchange 

and FF–SHOP participation and 

ensuring broker commissions in FF– 

SHOP that are the same as those in the 

outside market; and 

• Allowing Exchanges and SHOPs to 

selectively list only brokers registered 

with the Exchange or SHOP (and 

adopting that policy for FFEs and FF– 

SHOPs). 

MLR: The MLR program requires 

issuers to rebate a portion of premiums 

if their MLRs fall short of the applicable 

MLR standard for the reporting year. 

MLR is calculated as a ratio of claims 

plus quality improvement activities to 

premium revenue, with adjustments for 

taxes, regulatory fees, and the premium 

stabilization programs. In this proposed 

rule, we propose a number of standards 

governing the MLR program, including: 

• Provisions accounting for risk 

adjustment, reinsurance, and risk 

corridors in the MLR calculation; 

• A revised timeline for MLR 

reporting and rebates; and 

• Provisions modifying the treatment 

of community benefit expenditures. 

C. Costs and Benefits 

The provisions of this proposed rule, 

combined with other provisions in the 

Affordable Care Act, will improve the 

individual insurance market by making 

insurance more affordable and 

accessible to millions of Americans who 

currently do not have affordable options 

available to them. The shortcomings of 

the individual market today have been 

widely documented.2

These limitations of the individual 

market are made evident by how few 

people actually purchase coverage in 

the individual market. In 2011, 

approximately 48.6 million people were 

uninsured in the United States,3 while 

only around 10.8 million were enrolled 

in the individual market.4 The relatively 

small fraction of the target market that 

actually purchases coverage in the 

individual market in part reflects 

people’s resources, how expensive the 

product is relative to its value, and how 

difficult it is for many people to access 

coverage. 

The provisions of this proposed rule, 

combined with other provisions in the 

Affordable Care Act, will improve the 

functioning of both the individual and 

the small group markets while 

stabilizing premiums. The transitional 

reinsurance program will serve to 

stabilize premiums in the individual 

market. Reinsurance will attenuate 

individual market rate increases that 

might otherwise occur because of the 

immediate enrollment of higher risk 

individuals, potentially including those 

currently in State high-risk pools. In 

2014, it is anticipated that reinsurance 

payments will result in premium 

decreases in the individual market of 

between 10 and 15 percent relative to 

expected premiums without 

reinsurance. 

The risk corridors program will 

protect QHP issuers in the individual 

and small group market against 

inaccurate rate setting and will permit 

issuers to lower rates by not adding a 

risk premium to account for perceived 

uncertainties in the 2014 through 2016 

markets. 

The risk adjustment program protects 

against adverse selection by allowing 

issuers to set premiums according to the 

average actuarial risk in the individual 

and small group market without respect 

to the type of risk selection the issuer 

would otherwise expect to experience 

with a specific product offering in the 

market. This should lower the risk 

premium issuers would otherwise price 

into premiums in the expectation of 

enrolling individuals with unknown 

health status. In addition, it mitigates 

the incentive for health plans to avoid 


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5Brook, Robert H., John E. Ware, William H. 

Rogers, Emmett B. Keeler, Allyson Ross Davies, 

Cathy D. Sherbourne, George A. Goldberg, Kathleen 

N. Lohr, Patricia Camp and Joseph P. Newhouse. 

The Effect of Coinsurance on the Health of Adults: 

Results from the RAND Health Insurance 

Experiment. Santa Monica, CA: RAND Corporation, 

1984. Available at: http://www.rand.org/pubs/ 

reports/R3055. 

6Congressional Budget Office, Letter to 

Honorable Evan Bayh, providing an Analysis of 

Health Insurance Premiums Under the Patient 

Protection and Affordable Care Act, November 30, 

2009; Sara R. Collins, Invited Testimony: Premium 

Tax Credits Under The Affordable Care Act: How 

They Will Help Millions Of Uninsured And 

Underinsured Americans Gain Affordable, 

Comprehensive Health Insurance, The 

Commonwealth Fund, October 27, 2011; Fredric 

Blavin et al., The Coverage and Cost Effects of 

Implementation of the Affordable Care Act in New 

York State, Urban Institute, March 2012. 

7Congressional Budget Office, http:// 

www.cbo.gov/sites/default/files/cbofiles/ 

attachments/03–13-Coverage%20Estimates.pdf 

(Table 3). 

unhealthy members. The risk 

adjustment program also serves to level 

the playing field inside and outside of 

the Exchange, as payments and charges 

are applied to all non-grandfathered 

individual and small group plans. 

Provisions addressing the advance 

payments of the premium tax credit and 

cost-sharing reductions will help 

provide for premium tax credits and the 

reduction or elimination of cost sharing 

for certain individuals enrolled in QHPs 

offered through the Exchanges. This 

assistance will help many low-and 

moderate-income individuals and 

families obtain health insurance. For 

many people, cost sharing is a barrier to 

obtaining needed health care.5 The 

availability of premium tax credits 

through Exchanges starting in 2014 will 

result in lower net premium rates for 

many people currently purchasing 

coverage in the individual market, and 

will encourage younger and healthier 

enrollees to enter the market, improving 

the risk pool and leading to reductions 

in premium rates for current 

policyholders.6

The provisions addressing SHOP 

Exchanges will reduce the burden and 

costs of enrolling employees in small 

group plans, and give small businesses 

many of the cost advantages and choices 

that large businesses already have. 

Additionally, SHOP Exchanges will 

allow for employers to preserve control 

over health plan choices while saving 

employers money by spreading insurers’ 

administrative costs across more 

employers. 

The provisions addressing the MLR 

program will result in a more accurate 

calculation of MLR and rebate amounts, 

since it will reflect issuers’ claimsrelated expenditures, after adjusting for 

the premium stabilization programs. 

We solicit comments on additional 

strategies consistent with the Affordable 

Care Act that HHS or States might 

deploy to help make rates affordable in 

the current market and encourage timely 

enrollment in coverage in 2014. 

Ensuring that premiums are affordable 

is a priority for HHS as well as States, 

consumers, and insurers, so we 

welcome suggestions for the proposed 

rule on ways to achieve this goal while 

implementing these essential consumer 

protections. 

Issuers may incur some one-time 

fixed costs to comply with the 

provisions of the final rule, including 

administrative and hardware costs. 

However, issuer revenues and 

expenditures are also expected to 

increase substantially as a result of the 

expected increase in the number of 

people purchasing individual market 

coverage. That enrollment is projected 

to exceed current enrollment by 50 

percent.7 We are soliciting comments on 

the nature and magnitude of these costs 

and benefits to issuers, and the potential 

effect of the provisions of this rule on 

premium rates and financial 

performance. 

In addition, States may incur 

administrative and operating costs if 

they choose to establish their own 

programs. We are also requesting 

information on such costs. In 

accordance with Executive Orders 

12866 and 13563, we believe that the 

benefits of this regulatory action would 

justify the costs. 

II. Background 

Starting in 2014, individuals and 

small businesses will be able to 

purchase private health insurance 

through State-based competitive 

marketplaces called Affordable 

Insurance Exchanges (Exchanges). The 

Department of Health and Human 

Services (HHS), the Department of 

Labor, and the Department of the 

Treasury are working in close 

coordination to release guidance related 

to Exchanges in several phases. The 

Patient Protection and Affordable Care 

Act (Pub. L. 111–148) was enacted on 

March 23, 2010. The Health Care and 

Education Reconciliation Act (Pub. L. 

111–152) was enacted on March 30, 

2010. We refer to the two statutes 

collectively as the Affordable Care Act 

in this proposed rule. 

A. Premium Stabilization 

A proposed regulation was published 

in the Federal Register on July 15, 2011 

(76 FR 41930) to implement health 

insurance premium stabilization 

policies in the Affordable Care Act. A 

final rule implementing the health 

insurance premium stabilization 

programs (that is, risk adjustment, 

reinsurance, and risk corridors) 

(Premium Stabilization Rule) (77 FR 

17220) was published in the Federal 

Register on March 23, 2012. We 

published a white paper on risk 

adjustment concepts on September 12, 

2011 (Risk Adjustment White Paper). 

We published a bulletin on May 1, 2012, 

outlining our intended approach to 

implementing risk adjustment when we 

are operating risk adjustment on behalf 

of a State (Risk Adjustment Bulletin). 

On May 7–8, 2012, we hosted a public 

meeting in which we discussed that 

approach (Risk Adjustment Spring 

Meeting). 

We published a bulletin on May 31, 

2012, outlining our intended approach 

to making reinsurance payments to 

issuers when we are operating the 

reinsurance program on behalf of a State 

(Reinsurance Bulletin). The Department 

solicited comment on proposed 

operations for both reinsurance and risk 

adjustment when we are operating the 

program on behalf of a State. 

B. Cost-Sharing Reductions 

We published a bulletin outlining an 

intended regulatory approach to 

calculating actuarial value and 

implementing cost-sharing reductions 

on February 24, 2012 (AV/CSR 

Bulletin). In that bulletin, we outlined 

an intended regulatory approach for the 

design of plan variations for individuals 

eligible for cost-sharing reductions, and 

advance payments and reimbursement 

of cost-sharing reductions to issuers, 

among other topics. We reviewed and 

considered comments to the AV/CSR 

Bulletin in developing section III.E. of 

this proposed rule. 

C. Advance Payments of the Premium 

Tax Credit 

A proposed regulation relating to the 

health insurance premium tax credit 

was published by the Department of the 

Treasury in the Federal Register on 

August 17, 2011 (76 FR 50931). A final 

rule relating to the health insurance 

premium tax credit was published by 

the Department of the Treasury in the 

Federal Register on May 23, 2012 (26 

CFR parts 1 and 602). 

D. Exchanges 

A Request for Comment relating to 

Exchanges was published in the Federal 

Register on August 3, 2010 (75 FR 

45584). An Initial Guidance to States on 

Exchanges was issued on November 18, 

2010. A proposed regulation was 

published in the Federal Register on 

July 15, 2011 (76 FR 41866) to 

implement components of the 


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Exchange. A proposed regulation 

regarding Exchange functions in the 

individual market, eligibility 

determinations, and Exchange standards 

for employers was published in the 

Federal Register on August 17, 2011 (76 

FR 51202). A final rule implementing 

components of the Exchanges and 

setting forth standards for eligibility for 

Exchanges (Exchange Establishment 

Rule) was published in the Federal 

Register on March 27, 2012 (77 FR 

18310). 

E. Market Reform Rules 

A notice of proposed rulemaking 

relating to market reforms and effective 

rate review was published in the 

Federal Register on November 26, 2012 

(77 FR 70584) (proposed Market Reform 

Rule). 

F. Essential Health Benefits and 

Actuarial Value 

A notice of proposed rulemaking 

relating to essential health benefits and 

actuarial value was published in the 

Federal Register on November 26, 2012 

(77 FR 70644) (proposed EHB/AV Rule). 

G. Medical Loss Ratio 

HHS published a request for comment 

on PHS Act section 2718 in the Federal 

Register on April 14, 2010 (75 FR 

19297), and published an interim final 

rule with 60 day comment period 

relating to the medical loss ratio (MLR) 

program on December 1, 2010 (75 FR 

74864). A final rule with 30 day 

comment period (MLR Final Rule) was 

published in the Federal Register on 

December 7, 2011 (76 FR 76574). 

H. Tribal Consultations 

This proposed rule may be of interest 

to, and affect, American Indians/Alaska 

Natives. Therefore, we plan to consult 

with Tribes during the comment period 

and prior to publishing a final rule. 

III. Provisions of the Proposed HHS 

Notice of Benefit and Payment 

Parameters for 2014 

A. Provisions for the State Notice of 

Benefit and Payment Parameters 

In § 153.100(c), we established a 

deadline of March 1 of the calendar year 

prior to the applicable benefit year for 

States to publish a State notice of 

benefit and payment parameters if the 

State wishes to modify the parameters 

for the reinsurance program or the risk 

adjustment methodology set forth in the 

applicable HHS notice of benefit and 

payment parameters. We recognize that, 

for this initial benefit year (that is, for 

benefit year 2014), it may be difficult for 

States to publish such a notice by the 

required deadline. We therefore propose 

to modify § 153.100(c) to require that, 

for benefit year 2014 only, a State must 

publish a State notice by March 1, 2013, 

or by the 30th day following publication 

of the final HHS notice of benefit and 

payment parameters, whichever is later. 

If a State that chooses to operate 

reinsurance or risk adjustment does not 

publish the State notice within that 

timeframe, the State would: (1) Adhere 

to the data requirements for health 

insurance issuers to receive reinsurance 

payments that are specified in the 

annual HHS notice of benefit and 

payment parameters for the applicable 

benefit year; (2) forgo the collection of 

additional reinsurance contributions 

under § 153.220(d) and the use of 

additional funds for reinsurance 

payments under § 153.220(d)(3); (3) 

forgo the use of more than one 

applicable reinsurance entity; and (4) 

adhere to the risk adjustment 

methodology and data validation 

standards published in the annual HHS 

notice of benefit and payment 

parameters. 

B. Provisions and Parameters for the 

Permanent Risk Adjustment Program 

The risk adjustment program is a 

permanent program created by the 

Affordable Care Act that transfers funds 

from lower risk, non-grandfathered 

plans to higher risk, non-grandfathered 

plans in the individual and small group 

markets, inside and outside the 

Exchanges. In subparts D and G of the 

Premium Stabilization Rule, we 

established standards for the 

administration of the risk adjustment 

program. A State approved or 

conditionally approved by the Secretary 

to operate an Exchange may establish a 

risk adjustment program, or have HHS 

do so on its behalf. 

In the Premium Stabilization Rule, we 

established that a risk adjustment 

program is operated using a risk 

adjustment methodology. States 

operating their own risk adjustment 

program may use a risk adjustment 

methodology developed by HHS, or may 

elect to submit an alternate 

methodology to HHS for approval. In 

the Premium Stabilization Rule, we also 

laid out standards for States and issuers 

with respect to the collection and 

validation of risk adjustment data. 

In section III.B.1. of this proposed 

rule, we propose standards for HHS 

approval of a State-operated risk 

adjustment program (regardless of 

whether a State elects to use the HHSdeveloped methodology or an alternate, 

Federally certified risk adjustment 

methodology). This approval process 

would be distinct from the approval 

process for State-based Exchanges. In 

section III.B.2. of this proposed rule, we 

propose a fee to support HHS operation 

of the risk adjustment program. This fee 

is a per-capita fee applied to issuers of 

risk adjustment covered plans in States 

where HHS is operating the risk 

adjustment program. 

In section III.B.3. of this proposed 

rule, we describe the methodology that 

HHS would use when operating a risk 

adjustment program on behalf of a State. 

This methodology would be used to 

assign a plan average risk score based 

upon the relative average risk of a plan’s 

enrollees, and to apply a payment 

transfer formula to determine risk 

adjustment payments and charges. We 

also describe the HHS-operated data 

collection approach, and the schedule 

for operating the HHS-operated risk 

adjustment program. States operating a 

risk adjustment program can use this 

methodology, or submit an alternate 

methodology, as described in section 

III.B.4. of this proposed rule. 

Finally, in section III.B.5. of this 

proposed rule, we describe the data 

validation process we propose to use 

when operating a risk adjustment 

program on behalf of a State. We 

propose that issuers contract with 

independent auditors to conduct an 

initial validation audit of risk 

adjustment data, and that we conduct a 

second validation audit of a sample of 

risk adjustment data validated in the 

initial validation audit to verify the 

findings of the initial validation audit. 

We propose that this process be 

implemented over time, such that 

payment adjustments based on data 

validation findings would not be made 

in the initial years. We also describe a 

proposed framework for appeals of data 

validation findings. 

1. Approval of State-Operated Risk 

Adjustment 

a. Risk Adjustment Approval Process 

In the Premium Stabilization Rule, we 

laid out minimum standards for States 

that choose to operate risk adjustment. 

In § 153.310(a), we specified that a State 

that elects to operate an Exchange is 

eligible to establish a risk adjustment 

program. In § 153.310(a)(2) and (a)(3), 

we specified that HHS would carry out 

risk adjustment functions on behalf of 

the State if the State was not eligible to 

operate risk adjustment, or if the State 

deferred operation of risk adjustment to 

HHS. Under our authority in section 

1321(a) of the Affordable Care Act on 

standards for operation of risk 

adjustment programs and section 

1343(b) of the Affordable Care act on 

criteria and methods to be used in 

carrying out risk adjustment activities, 


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we now propose to add § 153.310(a)(4) 

such that, beginning in 2015, HHS 

would carry out the risk adjustment 

functions on behalf of a State if the State 

is not approved by HHS (that is, does 

not meet the standards proposed in 

§ 153.310(c)) to operate a risk 

adjustment program prior to State 

publication of its notice of benefit and 

payment parameters. We believe an 

approval process for State-operated risk 

adjustment programs will promote 

confidence in these programs so that 

they can effectively protect against the 

effects of adverse selection. 

We propose that a new paragraph (c), 

entitled ‘‘State responsibilities for risk 

adjustment,’’ set forth a State’s 

responsibilities with regard to risk 

adjustment program operations. With 

this change, we also propose to 

redesignate paragraphs (c) and (d) to 

paragraphs (e) and (f) of § 153.310. We 

note that the State must ensure that the 

entity it selects to operate risk 

adjustment complies with the standards 

established in § 153.310(b). 

In paragraph § 153.310(c)(1), we 

propose that if a State is operating a risk 

adjustment program for a benefit year, 

the State administer the program 

through an entity that meets certain 

standards. These standards would 

ensure the entity has the capacity to 

operate the risk adjustment program 

throughout the benefit year, and is able 

to administer the risk adjustment 

methodology. We will work with States 

to ensure that entities are ready to 

operate a risk adjustment program by 

the beginning of the applicable benefit 

year. 

As proposed in § 153.310(c)(1)(i), the 

entity must be operationally ready to 

administer the applicable Federally 

certified risk adjustment methodology 

and process the resulting payments and 

charges. We believe that it is important 

for a State to demonstrate that its risk 

adjustment entity has the capacity to 

implement the applicable Federally 

certified risk adjustment methodology 

so that issuers may have confidence in 

the program, and so that the program 

can effectively mitigate the effects of 

potential adverse selection. To meet this 

standard, a State would demonstrate 

that the risk adjustment entity: (1) Has 

systems in place to implement the data 

collection approach, to calculate 

individual risk scores, and calculate 

issuers’ payments and charges in 

accordance with the applicable 

Federally certified risk adjustment 

methodology; and (2) has tested, or has 

plans to test, the functionality of the 

system that would be used for risk 

adjustment operations prior to the start 

of the applicable benefit year. States 

would also demonstrate that the entity 

has legal authority to carry out risk 

adjustment program operations, and has 

the resources to administer the 

applicable risk adjustment methodology 

in its entirety, including the ability to 

make risk adjustment payments and 

collect risk adjustment charges. 

We propose in paragraph 

§ 153.310(c)(1)(ii) that the entity have 

relevant experience to operate a risk 

adjustment program. To meet this 

standard, a State would demonstrate 

that the entity has on staff, or has 

contracted with, individuals or firms 

with experience relevant to the 

implementation of a risk adjustment 

methodology. This standard is intended 

to ensure that the entity has the 

resources and staffing necessary to 

successfully operate the risk adjustment 

program. 

We propose in paragraph 

§ 153.310(c)(2) that a State seeking to 

operate its own risk adjustment program 

ensure that the risk adjustment entity 

complies with all applicable provisions 

of subpart D of 45 CFR part 153 in the 

administration of the applicable 

Federally certified risk adjustment 

methodology. In particular, the State 

would ensure that the entity complies 

with the privacy and security standards 

set forth in § 153.340. 

We propose in § 153.310(c)(3) that the 

State conduct oversight and monitoring 

of risk adjustment activities in order for 

HHS to approve the State’s risk 

adjustment program. Because the 

integrity of the risk adjustment program 

has important implications for issuers 

and enrollees, we propose to consider 

the State’s plan to monitor the conduct 

of the entity. HHS would examine the 

State’s requirements for data integrity 

and the maintenance of records, and the 

State’s standards for issuers’ use of risk 

adjustment payments. We will provide 

more detail about oversight in future 

rulemaking. 

Finally, we propose in § 153.310(d) 

that a State submit to HHS information 

that establishes that it and its risk 

adjustment entity meet the criteria set 

forth in § 153.310(c). Under the 

proposed § 153.310(a)(4), HHS would 

operate risk adjustment in the State, 

under the HHS-developed methodology, 

if the State does not receive approval 

prior to the March deadline for 

publication of the State notice of benefit 

and payment parameters. Thus, if a 

State wishes to operate risk adjustment 

for benefit year 2015, it would have to 

be approved prior to publication of the 

State notice of benefit and payment 

parameters for benefit year 2015 

(publication of which must occur by 

March 1, 2014). We will issue future 

guidance on application dates, 

procedures, and standards. 

We welcome comments on these 

proposed provisions. 

b. Risk Adjustment Approval Process for 

Benefit Year 2014 

For benefit year 2014, we recognize 

there are unique timing issues for 

approving a State-operated risk 

adjustment program. States would not 

know whether they are eligible to 

operate a risk adjustment program until 

they are approved or conditionally 

approved to operate an Exchange for the 

2014 benefit year. In addition, the set of 

Federally certified risk adjustment 

methodologies and the State-operated 

risk adjustment program approval 

process will not be finalized until the 

final Payment Notice is effective. 

Given these timing constraints, we are 

proposing a transitional policy for 

benefit year 2014. We would not require 

that a State-operated risk adjustment 

program receive approval for benefit 

year 2014. Instead, we propose a 

transitional process shortly after the 

provisions of § 153.310(a)(4), (c), and (d) 

become effective. We are requesting that 

States planning to operate risk 

adjustment in benefit year 2014 consult 

with HHS to determine the capacity of 

the State to operate risk adjustment. In 

these consultations, HHS would ask 

States to identify the entity they select 

to operate risk adjustment, and to 

describe its plans for risk adjustment 

operations in the State. This 

consultative process would apply for 

benefit year 2014; however, we intend 

that States obtain formal approval under 

the proposed process for benefit year 

2015 and subsequent years. 

For benefit year 2015 and subsequent 

benefit years, the proposed approval 

process would continue to involve 

ongoing consultations with States and 

their selected risk adjustment entities. 

In the course of these consultations, we 

would provide States and proposed 

entities with our ongoing views on 

whether they are adequately 

demonstrating the capacity of the entity 

to operate all risk adjustment functions. 

If the State does not produce the 

requested evidence or make the 

requested changes in the specified 

timeframe, HHS may determine that the 

relevant criteria were not met, and may 

decline to approve that State’s risk 

adjustment program. We welcome 

comments on this proposal. 

2. Risk Adjustment User Fees 

If a State is not approved to operate 

or chooses to forgo operating its own 

risk adjustment program, HHS would 

operate risk adjustment on the State’s 


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behalf. We intend to collect a user fee 

to support the administration of HHSoperated risk adjustment. This fee 

would apply to issuers of risk 

adjustment covered plans in States in 

which HHS is operating the risk 

adjustment program. 

Circular No. A–25R establishes 

Federal policy regarding user fees, and 

specifies that a user charge will be 

assessed against each identifiable 

recipient for special benefits derived 

from Federal activities beyond those 

received by the general public. The risk 

adjustment program will provide special 

benefits as defined in section 6(a)(1)(b) 

of Circular No. A–25R to an issuer of a 

risk adjustment covered plan because it 

will mitigate the financial instability 

associated with risk selection as other 

market reforms go into effect. The risk 

adjustment program will also contribute 

to consumer confidence in the 

insurance industry by helping to 

stabilize premiums across the 

individual and small group health 

insurance markets. 

We propose to determine HHS’ total 

costs for administering risk adjustment 

programs on behalf of States by 

examining HHS’s contract costs of 

operating the risk adjustment program. 

These contracts cover development of 

the model and methodology, 

collections, payments, account 

management, data collection, program 

integrity and audit functions, 

operational and fraud analytics, 

stakeholder training, and operational 

support. We do not propose to set the 

user fee to cover Federal personnel. 

We would set the user fee rate as a 

national per capita rate, which would 

spread the cost of the program across 

issuers of risk adjustment covered plans 

based on enrollment. We would divide 

HHS’s projected total costs for 

administering the risk adjustment 

programs on behalf of States by the 

expected number of enrollees in risk 

adjustment covered plans in HHSoperated risk adjustment programs. 

An issuer of a risk adjustment covered 

plan in a State where HHS is operating 

risk adjustment would pay a risk 

adjustment user fee equal to the product 

of its annual enrollment in the risk 

adjustment covered plan multiplied by 

the annual per capita risk adjustment 

user fee rate specified in the annual 

notice of benefit and payment 

parameters for the applicable benefit 

year. We would calculate the total user 

fee that would be charged to each issuer 

based on the issuer’s monthly 

enrollment, as provided to HHS using 

the data collection approach for the risk 

adjustment program. This approach 

would ensure that user fees are 

appropriately tied to enrollment and 

spread across issuers. We expect that 

the use of existing data collection and 

submission methods would minimize 

burden on issuers, while promoting 

accuracy. 

We anticipate that the total cost for 

HHS to operate the risk adjustment 

program on behalf of States for 2014 

would be less than $20 million, and that 

the per capita risk adjustment user fee 

would be no more than $1.00 per 

enrollee per year. 

HHS would collect risk adjustment 

user fees from issuers of risk adjustment 

covered plans in June of the year after 

the applicable benefit year to align with 

payments and charges processing, to 

provide issuers the time to fully comply 

with the data collection and submission 

standards, and to permit HHS to 

perform the user fee calculations based 

on actual monthly enrollment counts 

from the benefit year. 

We seek comment on this proposed 

assessment of user fees to support HHSoperated risk adjustment programs. 

3. Overview of the risk adjustment 

methodology HHS would implement 

when operating risk adjustment on 

behalf of a State 

The goal of the risk adjustment 

program is to stabilize the premiums in 

the individual and small group markets 

as and after insurance market reforms 

are implemented. The risk adjustment 

methodology proposed here, which 

HHS would use when operating risk 

adjustment on behalf of a State, is based 

on the premise that premiums should 

reflect the differences in plan benefits 

and plan efficiency, not the health 

status of the enrolled population. 

Under § 153.20, a risk adjustment 

methodology is made up of five 

elements: 

• The risk adjustment model uses an 

individual’s recorded diagnoses, 

demographic characteristics, and other 

variables to determine a risk score, 

which is a relative measure of how 

costly that individual is anticipated to 

be. 

• The calculation of plan average 

actuarial risk and the calculation of 

payments and charges average all 

individual risk scores in a risk 

adjustment covered plan, make certain 

adjustments, and calculate the funds 

transferred between plans. In this 

proposed rule, these two elements of the 

methodology are presented together as 

the payment transfer formula. 

• The data collection approach 

describes HHS’ approach to obtaining 

data, using the distributed model 

described in section III.G. of this 

proposed rule that is required for the 

risk adjustment model and the payment 

transfer formula. 

• The schedule for the risk 

adjustment program describes the 

timeframe for risk adjustment 

operations. 

States approved to operate risk 

adjustment may utilize this risk 

adjustment methodology, or they may 

submit an alternate methodology as 

described in section III.B.4. of this 

proposed rule. 

The risk adjustment methodology 

addresses three considerations: (1) The 

newly insured population; (2) plan 

metal levels and permissible rating 

variation; and (3) the need for inter-plan 

transfers that net to zero. Risk 

adjustment payments or charges would 

be calculated from the payment transfer 

formula described in section III.B.3.c. of 

this proposed rule. The key feature of 

the HHS risk adjustment methodology is 

that the risk score alone does not 

determine whether a plan is assessed 

charges or receives payments. Transfers 

depend not only on a plan’s average risk 

score, but also on its plan-specific cost 

factors relative to the average of these 

factors within a risk pool within a State. 

As discussed in greater detail below, 

the risk adjustment methodology 

developed by HHS: 

• Is developed on commercial claims 

data for a population similar to the 

expected population to be risk adjusted; 

• Uses the hierarchical condition 

categories (‘‘HCC’’) grouping logic used 

in the Medicare population, with HCCs 

refined and selected to reflect the 

expected risk adjustment population; 

• Calculates risk scores with a 

concurrent model (current year 

diagnoses predict current year costs); 

• Establishes 15 risk adjustment 

models, one for each combination of 

metal level (platinum, gold, silver, 

bronze, catastrophic) and age group 

(adults, children, infants); 

• Results in ‘‘balanced’’ payment 

transfers within a risk pool within a 

market within a State; 

• Adjusts payment transfers for plan 

metal level, geographic rating area, 

induced demand, and age rating, so that 

transfers reflect health risk and not 

other cost differences; and 

• Transfers funds between plans 

within a market within a State. 

a. Risk Adjustment Applied to Plans in 

the Individual and Small Group Markets 

Section 1343(c) of the Affordable Care 

Act stipulates that risk adjustment is to 

apply to non-grandfathered health 

insurance coverage offered in the 

individual and small group markets. We 

previously defined a ‘‘risk adjustment 

covered plan’’ in § 153.20 as health 


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insurance coverage offered in the 

individual or small group markets, 

excluding plans offering excepted 

benefits and certain other plans, 

including ‘‘any other plan determined 

not to be a risk adjustment covered plan 

in the annual HHS notice of benefit and 

payment parameters.’’ We propose to 

amend this definition by replacing ‘‘and 

any plan determined not to be a risk 

adjustment covered plan in the annual 

HHS notice of benefit and payment 

parameters’’ with ‘‘and any plan 

determined not to be a risk adjustment 

covered plan in the applicable Federally 

certified risk adjustment methodology.’’ 

We note that, under this revised 

definition, we would describe any plans 

not determined to be risk adjustment 

covered plans under the HHS risk 

adjustment methodology in the annual 

notice of benefit and payment 

parameters, which is subject to notice 

and comment. 

We describe below our proposed 

treatment of certain types of plans 

(specifically, plans not subject to market 

reforms, student health plans, and 

catastrophic plans), and our proposed 

approach to risk pooling for risk 

adjustment purposes when a State 

merges markets for the purposes of the 

single risk pool provision described in 

section 1312(c) of the Affordable Care 

Act. States may propose different 

approaches to these plans and to risk 

pooling in State alternate 

methodologies, subject to the 

requirements established at § 153.330(b) 

in this proposed rule. 

Plans not subject to market reforms: 

Certain types of plans offering nongrandfathered health insurance coverage 

in the individual and small group 

markets would not be subject to the 

insurance market reforms proposed in 

the Market Reform Rule and the EHB/ 

AV proposed rule. In addition, plans 

providing benefits through policies that 

begin in 2013, with renewal dates in 

2014, would not be subject to these 

requirements until renewal in 2014. The 

law specifies that the risk adjustment 

program is to assess charges on nongrandfathered health insurance coverage 

in the individual and small group 

markets with less than average actuarial 

risk and to make payments to nongrandfathered health insurance coverage 

in these markets with higher than 

average actuarial risk. We interpret 

actuarial risk to mean predictable risk 

that the issuer has not been able to 

compensate for through exclusion or 

pricing. In the current market, plans are 

generally not subject to the insurance 

market reforms that begin in 2014 

described at § 147.102 (fair health 

insurance premiums), § 147.104 

(guaranteed availability of coverage, 

subject to the student health insurance 

provisions at § 147.145), § 147.106 

(guaranteed renewability of coverage, 

subject to the student health insurance 

provisions at § 147.145), § 156.80 (single 

risk pool), and Subpart B 156 (essential 

health benefits package), and so are 

generally able to minimize actuarial risk 

by excluding certain conditions (for 

example, maternity coverage for women 

of child-bearing age), denying coverage 

to those with certain high-risk 

conditions, and by pricing individual 

premiums to cover the costs of 

providing coverage to an individual 

with those conditions. 

We propose to use the authority in 

section 1343(b) of the Affordable Care 

Act to ‘‘establish criteria and methods to 

be used in carrying out * * * risk 

adjustment activities’’ to treat plans not 

subject to insurance market reforms at 

§ 147.102 (fair health insurance 

premiums), § 147.104 (guaranteed 

availability of coverage, subject to the 

student health insurance provisions at 

§ 147.145), § 147.106 (guaranteed 

renewability of coverage, subject to the 

student health insurance provisions at 

§ 147.145), § 156.80 (single risk pool), 

and Subpart B 156 (essential health 

benefits package), as follows. Because 

we believe that plans not subject to 

these market reform rules are able to 

effectively minimize actuarial risk, we 

believe these plans would have uniform 

and virtually zero actuarial risk. We 

therefore propose to treat these plans 

separately, such that these plans would 

not be subject to risk adjustment charges 

and would not receive risk adjustment 

payments. Also, these plans would not 

be subject to the issuer requirements 

described in subparts G and H of part 

153. We note that plans issued in 2013 

and subject to these requirements upon 

renewal would become subject to risk 

adjustment upon renewal, and would 

comply with the requirements 

established in subparts G and H of part 

153 at that time. 

Student health plans: Only 

individuals attending a particular 

college or university are eligible to 

enroll in a student health plan (as 

described in § 147.145) offered by that 

college or university. We believe that 

student health plans, because of their 

unique characteristics, will have 

relatively uniform actuarial risk. We 

therefore propose to use the authority in 

section 1343(b) of the Affordable Care 

Act to ‘‘establish criteria and methods to 

be used in carrying out * * * risk 

adjustment activities’’ to treat these 

plans as a separate group that would not 

be subject to risk adjustment charges 

and would not receive risk adjustment 

payments. Therefore, these plans would 

not be subject to the issuer requirements 

described in subparts G and H of part 

153. 

Catastrophic plans: Unlike metal level 

coverage, only individuals age 30 and 

under, or individuals for whom 

insurance is deemed to be unaffordable 

as specified in section 1302(e) of the 

Affordable Care Act, are eligible to 

enroll in catastrophic plans. Because of 

the unique characteristics of this 

population, we propose to use our 

authority to establish ‘‘criteria and 

methods’’ to risk adjust catastrophic 

plans in a separate risk pool from the 

general (metal level) risk pool. 

Catastrophic plans with less than 

average actuarial risk compared with 

other catastrophic plans would be 

assessed charges, while catastrophic 

plans with higher than average actuarial 

risk compared with other catastrophic 

plans would receive payments. The 

specific mechanisms for assessing risk, 

and calculating payments and charges, 

are described below. We are not, 

however, proposing to exempt these 

plans from the requirements in subparts 

G and H of part 153. 

Merger of markets: Section 1312(c) of 

the Affordable Care Act directs issuers 

to use a single risk pool for a market— 

the individual or small group market— 

when developing rates and premiums. 

Section 1312(c)(3) gives States the 

option to merge the individual and 

small group market into a single risk 

pool. To align risk pools for the risk 

adjustment program and rate 

development, we would merge markets 

when operating risk adjustment on 

behalf of a State if the State elects to do 

the same for single risk pool purposes. 

In such a case, rather than transferring 

funds between individual market plans 

only and between small group market 

plans only, we would transfer funds 

between all individual and small group 

market plans, considered as one market. 

When the individual and small group 

markets are merged, the State average 

premium, described in section III.B.3.c. 

below, would be the average premium 

of all applicable individual and small 

group market plans in the applicable 

risk pool, and normalization described 

in section III.B.3.c. below would occur 

across all plans in the applicable risk 

pool in the individual and small group 

market. 

Risk adjustment in State of licensure: 

Risk adjustment is a State-based 

program in which funds are transferred 

within a State within a market, as 

described above. In general, a risk 

adjustment methodology will be linked 

to the rate and benefit requirements 

applicable under State and Federal law 


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8State Jurisdictional and Extraterritorial Issues 

White Paper: States’ Treatment of Regulatory 

Jurisdiction Over Single Employer Group Health 

Insurance (unpublished white paper—available 

from NAIC Research Library or in NAIC 

Proceedings I, 2009) NAIC,3/17/09. 

9http://cciio.cms.gov/resources/files/ 

riskadjustment_whitepaper_web.pdf. 

10American Academy of Actuaries: Risk 

Assessment and Risk Adjustment, Issue Brief. May 

2010. 

11Actuarial Standard of Practice No. 12: Risk 

Classification (for All Practice Areas). Actuarial 

Standards Board, Doc. No. 101. December 2005. 

12We limited the modeling sample to enrollees in 

FFS plans because costs on non-FFS claims may not 

represent the full cost of care associated with a 

disease. 

13 In 2010 the MarketScan database, even FFS 

plan types can have carve-out services paid on a 

capitated basis, which are less reliable for predicted 

expenditure calculations. 

14We used the same projected cost growth as was 

used in the development of the AV calculator. 

in a particular State. Such requirements 

may differ from State to State, and apply 

to policies filed and approved by the 

department of insurance in a State.8

However, a plan licensed in a State (and 

therefore subject to that State’s rate and 

benefit requirements) may enroll 

individuals in multiple States. To help 

ensure that policies in the small group 

market are subject to risk adjustment 

programs linked to the State rate and 

benefit requirements applicable to that 

policy, we propose in § 153.360 that a 

risk adjustment covered plan be subject 

to risk adjustment in the State in which 

the policy is filed and approved. We 

welcome comments on these proposals. 

b. Overview of the HHS Risk 

Adjustment Model 

We developed the HHS risk 

adjustment model in consultation with 

States, providers, issuers, and 

consumers on methodological choices 

by soliciting comment on the choices in 

preamble to the proposed Premium 

Stabilization Rule and in the Risk 

Adjustment White Paper.9 We also 

engaged in discussions with these 

stakeholders at the Risk Adjustment 

Spring Meeting and in user group calls 

with States. 

Each HHS risk adjustment model 

predicts plan liability for an enrollee 

based on that person’s age, sex, and 

diagnoses (risk factors), producing a risk 

score. We propose separate models for 

adults, children, and infants to account 

for cost differences in each of these age 

groups. The adult and child models are 

additive; that is, the relative costs 

assigned to an individual’s age, sex, and 

diagnoses are added together to produce 

a risk score. Infant risk scores are 

determined by inclusion in one of 25 

mutually exclusive groups based on the 

infant’s maturity and the severity of its 

diagnoses. If applicable, the risk score is 

multiplied by a cost-sharing reduction 

adjustment. 

The enrollment-weighted average risk 

score of all enrollees in a particular risk 

adjustment covered plan within a 

geographic rating area are then input 

into the payment transfer formula, as 

described in section III.B.3.c. of this 

proposed rule, to determine an issuer’s 

payment or charge for a particular plan. 

Each HHS risk adjustment model 

predicts individual-level risk scores, but 

is designed to predict average group 

costs to account for risk across plans.10

This method accords with the Actuarial 

Standard Board’s Actuarial Standard of 

Practice for risk classification.11

(1) Data Used To Develop the HHS Risk 

Adjustment Model 

Each HHS risk adjustment model was 

calibrated using de-identified data from 

the Truven Health Analytics 2010 

MarketScan® Commercial Claims and 

Encounters database (MarketScan) for 

individuals living in all States, aged 0– 

64, enrolled in commercial health 

insurance plans. The database contains 

enrollee-specific clinical utilization, 

expenditures, and enrollment across 

inpatient, outpatient, and prescription 

drug services from a selection of large 

employers and health plans. The 

database includes de-identified data 

from approximately 100 payers, and has 

more than 500 million claims from 

insured employees, their spouses, and 

dependents. Active employees, early 

retirees, individuals on COBRA 

continuation coverage, and their 

dependents are included in the 

database. The enrollment data files 

contain information for any person 

enrolled in one of the employer or 

individual health plans at any point 

during a year. Enrollees were classified 

as enrolled in fee-for-service (‘‘FFS’’) 

plans or encounter-type plans, with 

most FFS plans being preferred provider 

organization (‘‘PPO’’) plans, and the 

majority of encounter-type plans being 

health maintenance organization 

(‘‘HMO’’) plans. An individual could 

have been enrolled for as few as one and 

as many as 365 days in a year, and 

could have been enrolled in one or more 

years. In operation, the same rules will 

be applied with respect to enrollment. 

Diagnoses for model calibration were 

extracted from facility and professional 

claims. Facility claims were extracted 

only from bill types that were hospital 

inpatient, hospital outpatient, rural 

health clinic, federally qualified health 

center, or community mental health 

center. For professional and outpatient 

facility claims, diagnoses were generally 

extracted from claims where the 

procedure (CPT code) indicated a faceto-face visit with a qualified clinician. 

Diagnoses from procedures that did not 

meet these criteria (for example, durable 

medical equipment, pathology/ 

laboratory, and diagnostic radiology) 

were not included. The concurrent 

modeling sample (approximately 20 

million individuals) was generated 

using the following criteria: (1) The 

enrollee had to be enrolled in a FFS 

plan; 12 (2) the enrollee must not have 

incurred any claims paid on a capitated 

basis;13 and (3) the enrollee must have 

been enrolled in a plan with drug 

benefits and mental health and 

substance abuse coverage. The final 

database reflects our best approximation 

of the essential health benefits package 

under the Affordable Care Act, which 

also includes prescription drug and 

mental health and substance abuse 

coverage. 

MarketScan expenditure data 

includes gross covered charges, which 

were defined as: 

Gross covered charges = submitted 

charges¥non-covered 

charges¥pricing reductions 

Inpatient, outpatient, and prescription 

drug expenditures for each enrollee 

were calculated by summing gross 

covered charges in, respectively, the 

inpatient, outpatient, and prescription 

drug services files. Total expenditures 

were defined as the sum of inpatient, 

outpatient, and prescription drug 

expenditures. Plan liability 

expenditures for a given plan type 

(platinum, gold, silver, bronze, 

catastrophic) were defined by applying 

the applicable standardized benefit 

design, as discussed in section 

III.B.3.b.10., to total expenditures. To 

more accurately reflect expected 

expenditures for 2014, the 2010 total 

expenditures were increased for 

projected cost growth.14 Average 

monthly expenditures were defined as 

the enrollee’s expenditures for the 

enrollment period divided by the 

number of enrollment months. 

Annualized expenditures (total or plan 

liability) were defined as average 

monthly expenditures multiplied by 12. 

Data for each individual was weighted 

by months of enrollment divided by 12. 

(2) Concurrent Model 

The HHS risk adjustment model is a 

concurrent model. A concurrent model 

takes diagnoses from a given period to 

predict cost in that same period. This is 

in contrast to a prospective model, 

which would use data from a prior 

period to predict costs in a future 

period. We are proposing to use a 


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15Please note that in future years we will update 

the calibration of the HHS risk adjustment model 

to account for the transition from ICD–9–CM codes 

to ICD–10–CM codes. 

concurrent model because 2013 

diagnostic data will not be available for 

use in the model in 2014. In addition, 

we anticipate that enrollees may move 

between plans, or between programs. A 

concurrent model would be better able 

to handle changes in enrollment than a 

prospective model because individuals 

newly enrolling in health plans may not 

have prior data available that can be 

used in risk adjustment. 

(3) Prescription Drugs 

At this time, we have elected not to 

include prescription drug use as a 

predictor in each HHS risk adjustment 

model. While use of particular 

prescription drugs may be useful for 

predicting expenditures, we believe that 

inclusion of prescription drug 

information could create adverse 

incentives to modify discretionary 

prescribing. We seek comments on 

possible approaches for future versions 

of the model to include prescription 

drug information while avoiding 

adverse incentives. 

(4) Principles of Risk Adjustment and 

the Hierarchical Condition Category 

(HCC) Classification System 

A diagnostic classification system 

determines which diagnosis codes 

should be included, how the diagnosis 

codes should be grouped, and how the 

diagnostic groupings should interact for 

risk adjustment purposes. The ten 

principles that were used to develop the 

hierarchical condition category (HCC) 

classification system for the Medicare 

risk adjustment model guided the 

creation of the HHS risk adjustment 

model we propose to use when HHS 

operates risk adjustment on behalf of a 

State. Those principles are: 

Principle 1—Diagnostic categories 

should be clinically meaningful. Each 

diagnostic category is a set of 

International Classification of Diseases, 

Ninth Revision, Clinical Modification 

(‘‘ICD–9–CM’’) codes.15 These codes 

should all relate to a reasonably wellspecified disease or medical condition 

that defines the category. 

Principle 2—Diagnostic categories 

should predict medical (including drug) 

expenditures. Diagnoses in the same 

HCC should be reasonably 

homogeneous with respect to their effect 

on both current (this year’s) costs 

(concurrent risk adjustment) or future 

(next year’s) costs (prospective risk 

adjustment). 

Principle 3—Diagnostic categories 

that will affect payments should have 

adequate sample sizes to permit 

accurate and stable estimates of 

expenditures. Diagnostic categories used 

in establishing payments should have 

adequate sample sizes in available data 

sets. 

Principle 4—In creating an 

individual’s clinical profile, hierarchies 

should be used to characterize the 

person’s illness level within each 

disease process, while the effects of 

unrelated disease processes accumulate. 

Related conditions should be treated 

hierarchically, with more severe 

manifestations of a condition 

dominating (and zeroing out the effect 

of) less serious ones. 

Principle 5—The diagnostic 

classification should encourage specific 

coding. Vague diagnostic codes should 

be grouped with less severe and lowerpaying diagnostic categories to provide 

incentives for more specific diagnostic 

coding. 

Principle 6—The diagnostic 

classification should not reward coding 

proliferation. The classification should 

not measure greater disease burden 

simply because more ICD–9–CM codes 

are present. 

Principle 7—Providers should not be 

penalized for recording additional 

diagnoses (monotonicity). This principle 

has two consequences for modeling: (1) 

no HCC should carry a negative 

payment weight; and (2) a condition 

that is higher-ranked in a disease 

hierarchy (causing lower-rank diagnoses 

to be ignored) should have at least as 

large a payment weight as lower-ranked 

conditions in the same hierarchy. (There 

may be exceptions, as when a coded 

condition represents a radical change of 

treatment of a disease process.) 

Principle 8—The classification system 

should be internally consistent 

(transitive). If diagnostic category A is 

higher-ranked than category B in a 

disease hierarchy, and category B is 

higher-ranked than category C, then 

category A should be higher-ranked 

than category C. Transitivity improves 

the internal consistency of the 

classification system and ensures that 

the assignment of diagnostic categories 

is independent of the order in which 

hierarchical exclusion rules are applied. 

Principle 9—The diagnostic 

classification should assign all ICD–9– 

CM codes (exhaustive classification). 

Because each diagnostic code 

potentially contains relevant clinical 

information, the classification should 

categorize all ICD–9–CM codes. 

Principle 10—Discretionary 

diagnostic categories should be 

excluded from payment models. 

Diagnoses that are particularly subject to 

intentional or unintentional 

discretionary coding variation or 

inappropriate coding by health plans/ 

providers, or that are not clinically or 

empirically credible as cost predictors, 

should not increase cost predictions. 

Excluding these diagnoses reduces the 

sensitivity of the model to coding 

variation, coding proliferation, gaming, 

and upcoding. 

(5) CMS HCC Diagnostic Classification 

System 

The HCCs in the Medicare risk 

adjustment model are referred to as 

CMS HCCs. The HCCs in the HHS risk 

adjustment model are referred to as HHS 

HCCs. The CMS HCC diagnostic 

classification provides the diagnostic 

framework for the classification and 

selection of HCCs for the HHS risk 

adjustment model. The CMS HCC risk 

adjustment model uses patient 

diagnoses and demographic information 

to prospectively predict medical 

spending for beneficiaries in Medicare 

Part C managed care plans. The CMS 

HCC classification system was reviewed 

and adapted to account for the different 

population to create the HHS HCC 

classification. 

The CMS HCC diagnostic 

classification system begins by 

classifying over 14,000 ICD–9–CM 

diagnosis codes into diagnostic groups, 

or DXGs. Each ICD–9–CM code maps to 

exactly one DXG, which represents a 

well-specified medical condition or set 

of conditions. DXGs are further 

aggregated into Condition Categories, or 

CCs. CCs describe a broader set of 

similar diseases. Although they are not 

as homogeneous as DXGs, diseases 

within a CC are related clinically and 

with respect to cost. Hierarchies are 

imposed among related CCs, so that a 

person is coded for only the most severe 

manifestation among related diseases. 

After imposing hierarchies, CCs 

become Hierarchical Condition 

Categories, or HCCs. Although HCCs 

reflect hierarchies among related disease 

categories, for unrelated diseases, HCCs 

accumulate. For example, a female with 

rheumatoid arthritis and breast cancer 

has (at least) two separate HCCs coded, 

and her predicted cost would reflect 

increments for both conditions. The 

model’s structure thus provides, and 

predicts from, a detailed comprehensive 

clinical profile for each individual. 

Three major characteristics of the 

CMS HCC classification system required 

modification for use with the HHS risk 

adjustment model: (1) Population; (2) 

type of spending; and (3) prediction 

year. The CMS HCCs were developed 

using data from the aged and/or 

disabled Medicare population. Although 

every ICD–9–CM diagnosis code is 


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16 In addition, we imposed several additional 

constraints –HCC coefficient values were made 

equal if a lower-ranked HCC in a disease hierarchy 

had a higher coefficient than a higher-ranked HCC; 

the 10 principles of risk adjustment models 

described in section III.B.3.b.4. were generally 

followed. 

mapped and categorized into a 

diagnostic grouping, for some 

conditions (such as pregnancy) the 

sample size in the Medicare population 

is quite low. With larger sample sizes in 

the commercial population, HCCs were 

re-examined for infant, child, and adult 

subpopulations. Additionally, the CMS 

HCCs are configured to predict medical 

spending, while HHS HCCs predict both 

medical and drug spending. Finally, the 

CMS HCC classification is primarily 

designed for use with a prospective risk 

adjustment model, using base year 

diagnoses and demographic information 

to predict the next year’s spending. Each 

HHS risk adjustment model is 

concurrent, using current year diagnoses 

and demographics to predict the current 

year’s spending. Medical conditions 

may predict current year costs that 

differ from future costs; HCC and DXG 

groupings should reflect those 

differences. 

As such, HCCs and DXGs may not be 

the same between the Medicare and 

HHS risk adjustment models. For 

example, the newborn hierarchy was 

reconfigured in the HHS risk adjustment 

model to include new HCCs and DXGs 

to account for major cost differences in 

the youngest premature newborns and 

in neonatal disorders. Adjustments such 

as these resulted in 264 classification 

HCCs in the HHS risk adjustment 

model. 

In designing the diagnostic 

classification for the HHS risk 

adjustment model, principles 7 

(monotonicity), 8 (transitivity), and 9 

(exhaustive classification) were 

prioritized. For example, if the 

expenditure weights for the models did 

not originally satisfy monotonicity, 

constraints were imposed to create 

models that did. However, tradeoffs 

were often required among other 

principles. For example, clinical 

meaningfulness is often best served by 

creating a very large number of detailed 

clinical groupings. However, a large 

number of groupings may not allow for 

adequate sample sizes for each category. 

(6) Principles for HCC Selection 

We selected 127 of the full 

classification of 264 HHS HCCs for 

inclusion in the HHS risk adjustment 

model. In determining which HCCs to 

include in the HHS risk adjustment 

model, HCCs that were more 

appropriate for a concurrent model or 

for the expected risk adjustment 

population (for example, low birth 

weight babies were included in the HHS 

risk adjustment model). We considered 

the basic criteria below to determine 

which HCCs should be included in the 

HHS risk adjustment model: 

• Whether the HCC represents 

clinically significant medical conditions 

with significant costs for the target 

population; 

• Whether there will be a sufficient 

sample size to ensure stable results for 

the HCC; 

• Whether excluding the HCC would 

exclude (or limit the impact of) 

diagnoses particularly subject to 

discretionary coding; 

• Whether the HCC identifies chronic 

or systematic conditions that represent 

insurance risk selection or risk 

segmentation, rather than random acute 

events; 

• Do not represent poor quality of 

care; and 

• Whether the HCC is applicable to 

the model age group. 

Consistent with the risk adjustment 

principles described previously, each 

HHS risk adjustment model excludes 

HHS HCCs containing diagnoses that are 

vague or nonspecific (for example, 

symptoms), discretionary in medical 

treatment or coding (for example, 

osteoarthritis), or not medically 

significant (for example, muscle strain). 

Each HHS risk adjustment model also 

excludes HHS HCCs that do not add to 

costs. 

(7) Grouping of HCCs 

To balance the competing goals of 

improving predictive power and 

limiting coding variability to create a 

relatively simple risk adjustment model, 

a number of HHS HCCs were grouped 

into sets equivalent to a single HCC. 

HHS HCCs were grouped (1) To reduce 

model complexity; (2) to avoid 

including HHS HCCs with small sample 

size; (3) to limit upcoding by severity 

within an HCC hierarchy; and (4) to 

reduce additivity within disease groups 

(but not across disease groups) to 

decrease the sensitivity of the model to 

coding proliferation. After grouping, the 

number of HHS HCCs included in the 

proposed HHS risk adjustment model 

was effectively reduced from 127 to 

100.16

(8) Demographics 

In addition to the HHS HCCs included 

in the HHS risk adjustment model, 

enrollee risk scores are calculated from 

demographic factors. There are 18 age/ 

sex categories for adults, and 8 age/sex 

categories for children. As described 

below, age/sex categories for infants are 

not used. Adults are defined as ages 

21+, children are ages 2–20, and infants 

are ages 0–1. The age categories for 

adult male and female are ages 21–24, 

25–29, 30–34, 35–39, 40–44, 45–49, 50– 

54, 55–59, and 60+. The age categories 

for children male and female are ages 2– 

4, 5–9, 10–14, and 15–20. This is 

consistent with the CMS HCC model, 

which also uses five year increments for 

age groups. In operation, age will be 

defined as age as of the enrollee’s last 

day of enrollment in risk adjustment 

covered plans within an issuer in the 

applicable benefit year. For individuals 

who do not have any of the HHS HCCs 

included in the proposed HHS risk 

adjustment model, predicted 

expenditures are based solely on their 

demographic risk factors. In the 

calibration data set, 19 percent of adults, 

nine percent of children, and 45 percent 

of infants have HCCs included in the 

risk adjustment models. 

(9) Separate Adult, Child and Infant 

Models 

Due to the inherent clinical and cost 

differences in the adult (age 21+), child 

(age 2–20), and infant (age 0–1) 

populations, HHS developed separate 

risk adjustment models for each age 

group. The models for adults and 

children generally have similar 

specifications, including demographic 

age/sex categories and HHS HCCs, but 

differ slightly due to clinical and cost 

differences. However, infants have 

certain costs related to hospitalization at 

birth and can have severe and expensive 

conditions that do not apply to adults or 

children, while having relatively low 

frequencies for most HHS HCCs 

included in the model compared to 

adults and children. Therefore, HHS 

proposes to use a separate infant model. 

The infant model utilizes a mutually 

exclusive groups approach in which 

infants are assigned a maturity category 

(by gestation and birth weight) and a 

severity category. There are 5 maturity 

categories: Extremely Immature; 

Immature; Premature/Multiples; Term; 

and Age 1. For the maturity category, 

age 0 infants would be assigned to one 

of the first four categories and age 1 

infants would be assigned to the Age 1 

category. There are 5 severity categories 

based on the clinical severity and 

associated costs of the non-maturity 

HCCs: Severity Level 1 (Lowest 

Severity) to Severity Level 5 (Highest 

Severity). All infants (age 0 or 1) are 

assigned to a severity category based on 

the highest severity of their nonmaturity HCCs. The 5 maturity 

categories and 5 severity categories 

would be used to create 25 mutuallyexclusive interaction terms to which 


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73130 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

17Mathews, T.J., M.S. & Marian F. MacDormon, 

Ph.D., Division of Vital Statistics. Infant Mortality 

Statistics From the 2007 Period Linked Birth/Infant 

Death Data Set. National Vital Statistic Reports. 

Vol. 59. No. 6. (June 29, 2011). Available at: 

www.cdc.gov/nchs/data/nvsr/nvsr59/ 

nvsr59_06.pdf. 

each infant is assigned. An infant who 

has HCCs in more than one severity 

category would be assigned to the 

highest of those severity categories. An 

infant who has no HCCs or only a 

newborn maturity HCC would be 

assigned to Severity Level 1 (Lowest). 

Finally, evidence suggests that male 

infants have higher costs than female 

infants due to increased morbidity and 

neonatal mortality.17 To account for 

these differences by sex, there are 2 

male-age indicator variables: Age 0 Male 

and Age 1 Male. The male-age variable 

would be added to the interaction term 

to which the infant is assigned. 

We understand that there may be 

cases in which there is no separate 

infant birth claim from which to gather 

diagnoses. For example, at an 

operational level mother and infant 

claims may be bundled such that infant 

diagnoses appear on the mother’s 

record. Where newborn diagnoses 

appear on the mother’s claims, HHS is 

exploring the feasibility of associating 

those codes with the appropriate infant. 

This assumes that the mother and infant 

enrollment records exist and can be 

matched, which may also pose 

operational problems in some cases. 

Alternatively, we are considering 

requiring issuers to provide separate 

mother and infant claims when they 

have received a combined claim. We 

seek comment on the operational 

feasibility of both of these approaches. 

Tables 5 and 6 contain descriptions of 

how the severity and maturity are 

defined. 

(10) Selection of Plan Liability Model 

We propose separate risk adjustment 

models for each metal level because 

plans at different metal levels would 

have different liability for enrollees with 

the same expenditure patterns. 

We considered using a total 

expenditure approach to estimating the 

HHS risk adjustment model. A total 

expenditure risk adjustment model 

would use the demographic age/sex 

categories, HHS HCCs included in the 

model, and any other independent 

variables to predict all of the costs 

associated with an enrollee, whether 

those costs are incurred by the enrollee 

or the issuer. In a total expenditure 

model, two individuals of the same age 

with the same set of HCCs would have 

the same risk score regardless of the 

metal level plan type in which the 

individuals were enrolled. However, we 

do not believe that this approach would 

accurately capture plan liability levels 

due to the non-linear nature of liability 

for plans at different metal levels. In 

particular, deductibles are anticipated to 

be highest in bronze plans and lowest in 

platinum plans. Plan liabilities for plan 

types (platinum, gold, silver, bronze, 

and catastrophic) were defined by 

applying standardized benefit design 

parameters for each given metal level to 

total expenditures. We estimated 

average plan liability for each of the 

plan types, and created an adult, child, 

and infant model for each plan type. 

(11) Disease Interactions 

We propose that the HHS risk 

adjustment models for adults include 

interaction factors. Including 

interactions improves model 

performance for low- and high-cost 

individuals and better reflects plan 

liability across metal levels. 

Disease interactions were created 

using the silver model by first creating 

a single severity illness indicator. We 

elected to use the silver model to create 

interaction terms because we expect 

enrollment to be highest in silver plans 

due to the availability of premium tax 

credits and cost-sharing reductions in 

those plans. The severity illness 

indicator variable was interacted with 

individual HCCs or HCC groups, and the 

predicted costs of the interaction 

variables were then grouped into three 

cost categories: low, medium and high. 

Interaction groups in the medium and 

high cost categories were included in 

the HHS risk adjustment model as 

shown at the bottom of Table 1 below. 

An individual is determined to have the 

severity indicator if they have one or 

more of the HCCs listed in Table 2. 

An individual with at least one of the 

HCCs that comprises the severity illness 

indicator variable and at least one of the 

HCCs interacted with the severity 

illness indicator variable would be 

assigned a single interaction factor. A 

hierarchy is imposed on these 

interaction groups such that an 

individual with a high cost interaction 

is excluded from having a medium cost 

interaction. The high or the medium 

interaction factor would be added to 

demographic and diagnosis factors of 

the individual. 

(12) List of Factors To Be Employed in 

the Model 

The proposed HHS risk adjustment 

models predict annualized plan liability 

expenditures using age and sex 

categories and the HHS HCCs included 

in the HHS risk adjustment model. 

Dollar coefficients were estimated for 

these categories and HCCs using 

weighted least squares regression, where 

the weight was the fraction of the year 

enrolled. 

For each model, the factors were the 

statistical regression dollar values for 

each category or HCC in the model 

divided by a weighted average plan 

liability for the full modeling sample. 

The factors represent the predicted 

relative incremental expenditures for 

each category or HCC. For a given 

enrollee, the sums of the factors for the 

enrollee’s category and HCCs are the 

total relative predicted expenditures for 

that enrollee. Table 1 contains factors 

for each adult model, including the 

interactions. Table 3 contains the factors 

for each child model. Table 5 contains 

the factors for each infant model. 

TABLE 1—ADULT RISK ADJUSTMENT MODEL FACTORS

Factor Platinum Gold Silver Bronze Catastrophic 

Demographic Factors 

Age 21–24, Male ................................................................................. 0.258 0.208 0.141 0.078 0.062 

Age 25–29, Male ................................................................................. 0.278 0.223 0.150 0.081 0.064 

Age 30–34, Male ................................................................................. 0.338 0.274 0.187 0.101 0.079 

Age 35–39, Male ................................................................................. 0.413 0.339 0.240 0.140 0.113 

Age 40–44, Male ................................................................................. 0.487 0.404 0.293 0.176 0.145 

Age 45–49, Male ................................................................................. 0.581 0.487 0.365 0.231 0.195 

Age 50–54, Male ................................................................................. 0.737 0.626 0.484 0.316 0.269 

Age 55–59, Male ................................................................................. 0.863 0.736 0.580 0.393 0.339 

Age 60–64, Male ................................................................................. 1.028 0.880 0.704 0.487 0.424 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73131 

TABLE 1—ADULT RISK ADJUSTMENT MODEL FACTORS—Continued 

Factor Platinum Gold Silver Bronze Catastrophic 

Age 21–24, Female ............................................................................. 0.433 0.350 0.221 0.101 0.072 

Age 25–29, Female ............................................................................. 0.548 0.448 0.301 0.156 0.120 

Age 30–34, Female ............................................................................. 0.656 0.546 0.396 0.243 0.203 

Age 35–39, Female ............................................................................. 0.760 0.641 0.490 0.334 0.293 

Age 40–44, Female ............................................................................. 0.839 0.713 0.554 0.384 0.338 

Age 45–49, Female ............................................................................. 0.878 0.747 0.583 0.402 0.352 

Age 50–54, Female ............................................................................. 1.013 0.869 0.695 0.486 0.427 

Age 55–59, Female ............................................................................. 1.054 0.905 0.726 0.507 0.443 

Age 60–64, Female ............................................................................. 1.156 0.990 0.798 0.559 0.489 

Diagnosis Factors 

HIV/AIDS .............................................................................................. 5.485 4.972 4.740 4.740 4.749 

Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/ 

Shock ................................................................................................ 13.696 13.506 13.429 13.503 13.529 

Central Nervous System Infections, Except Viral Meningitis .............. 7.277 7.140 7.083 7.117 7.129 

Viral or Unspecified Meningitis ............................................................ 4.996 4.730 4.621 4.562 4.550 

Opportunistic Infections ....................................................................... 9.672 9.549 9.501 9.508 9.511 

Metastatic Cancer ................................................................................ 25.175 24.627 24.376 24.491 24.526 

Lung, Brain, and Other Severe Cancers, Including Pediatric Acute 

Lymphoid Leukemia ......................................................................... 11.791 11.377 11.191 11.224 11.235 

Non-Hodgkin‘s Lymphomas and Other Cancers and Tumors ............ 6.432 6.150 6.018 5.983 5.970 

Colorectal, Breast (Age < 50), Kidney, and Other Cancers ................ 5.961 5.679 5.544 5.500 5.483 

Breast (Age 50+) and Prostate Cancer, Benign/Uncertain Brain Tumors, and Other Cancers and Tumors ............................................ 3.509 3.294 3.194 3.141 3.121 

Thyroid Cancer, Melanoma, Neurofibromatosis, and Other Cancers 

and Tumors ...................................................................................... 1.727 1.559 1.466 1.353 1.315 

Pancreas Transplant Status/Complications ......................................... 9.593 9.477 9.411 9.434 9.439 

Diabetes with Acute Complications ..................................................... 1.331 1.199 1.120 1.000 0.957 

Diabetes with Chronic Complications .................................................. 1.331 1.199 1.120 1.000 0.957 

Diabetes without Complication ............................................................ 1.331 1.199 1.120 1.000 0.957 

Protein-Calorie Malnutrition ................................................................. 14.790 14.790 14.786 14.862 14.883

Mucopoly-saccharidosis ....................................................................... 2.335 2.198 2.130 2.071 2.052 

Lipidoses and Glycogenosis ................................................................ 2.335 2.198 2.130 2.071 2.052 

Amyloidosis, Porphyria, and Other Metabolic Disorders ..................... 2.335 2.198 2.130 2.071 2.052 

Adrenal, Pituitary, and Other Significant Endocrine Disorders ........... 2.335 2.198 2.130 2.071 2.052 

Liver Transplant Status/Complications ................................................ 18.445 18.197 18.105 18.165 18.188 

End-Stage Liver Disease ..................................................................... 6.412 6.102 5.974 6.001 6.012 

Cirrhosis of Liver .................................................................................. 2.443 2.255 2.177 2.137 2.125 

Chronic Hepatitis .................................................................................. 1.372 1.228 1.152 1.071 1.046 

Acute Liver Failure/Disease, Including Neonatal Hepatitis ................. 4.824 4.634 4.548 4.547 4.550 

Intestine Transplant Status/Complications .......................................... 77.945 78.110 78.175 78.189 78.195 

Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis ......... 13.144 12.823 12.681 12.743 12.764 

Intestinal Obstruction ........................................................................... 7.257 6.922 6.789 6.842 6.864 

Chronic Pancreatitis ............................................................................. 6.682 6.385 6.269 6.309 6.329 

Acute Pancreatitis/Other Pancreatic Disorders and Intestinal Malabsorption ......................................................................................... 3.614 3.380 3.281 3.245 3.234 

Inflammatory Bowel Disease ............................................................... 2.894 2.640 2.517 2.398 2.355 

Necrotizing Fasciitis ............................................................................. 7.878 7.622 7.508 7.545 7.559

Bone/Joint/Muscle Infections/Necrosis ................................................ 7.878 7.622 7.508 7.545 7.559 

Rheumatoid Arthritis and Specified Autoimmune Disorders ............... 3.414 3.135 3.009 2.987 2.982 

Systemic Lupus Erythematosus and Other Autoimmune Disorders ... 1.263 1.124 1.051 0.954 0.921 

Osteogenesis Imperfecta and Other Osteodystrophies ...................... 3.524 3.300 3.184 3.126 3.107 

Congenital/Developmental Skeletal and Connective Tissue Disorders ............................................................................................... 3.524 3.300 3.184 3.126 3.107 

Cleft Lip/Cleft Palate ............................................................................ 2.168 1.978 1.891 1.815 1.793

Hemophilia ........................................................................................... 49.823 49.496 49.321 49.330 49.329 

Myelodysplastic Syndromes and Myelofibrosis ................................... 15.404 15.253 15.182 15.214 15.224 

Aplastic Anemia ................................................................................... 15.404 15.253 15.182 15.214 15.224 

Acquired Hemolytic Anemia, Including Hemolytic Disease of Newborn .................................................................................................. 7.405 7.198 7.099 7.090 7.089 

Sickle Cell Anemia (Hb-SS) ................................................................. 7.405 7.198 7.099 7.090 7.089 

Thalassemia Major ............................................................................... 7.405 7.198 7.099 7.090 7.089 

Combined and Other Severe Immunodeficiencies .............................. 5.688 5.489 5.402 5.419 5.423 

Disorders of the Immune Mechanism .................................................. 5.688 5.489 5.402 5.419 5.423 

Coagulation Defects and Other Specified Hematological Disorders ... 3.080 2.959 2.899 2.880 2.872 

Drug Psychosis .................................................................................... 3.776 3.517 3.389 3.302 3.274

Drug Dependence ................................................................................ 3.776 3.517 3.389 3.302 3.274 

Schizophrenia ...................................................................................... 3.122 2.854 2.732 2.647 2.624 

Major Depressive and Bipolar Disorders ............................................. 1.870 1.698 1.601 1.476 1.436 

Reactive and Unspecified Psychosis, Delusional Disorders ............... 1.870 1.698 1.601 1.476 1.436 

Personality Disorders ........................................................................... 1.187 1.065 0.974 0.836 0.790 


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73132 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

TABLE 1—ADULT RISK ADJUSTMENT MODEL FACTORS—Continued 

Factor Platinum Gold Silver Bronze Catastrophic 

Anorexia/Bulimia Nervosa .................................................................... 3.010 2.829 2.732 2.657 2.631 

Prader-Willi, Patau, Edwards, and Autosomal Deletion Syndromes ... 5.387 5.219 5.141 5.101 5.091 

Down Syndrome, Fragile X, Other Chromosomal Anomalies, and 

Congenital Malformation Syndromes ............................................... 1.264 1.171 1.099 1.015 0.985 

Autistic Disorder ................................................................................... 1.187 1.065 0.974 0.836 0.790 

Pervasive Developmental Disorders, Except Autistic Disorder ........... 1.187 1.065 0.974 0.836 0.790 

Traumatic Complete Lesion Cervical Spinal Cord .............................. 11.728 11.537 11.444 11.448 11.449 

Quadriplegia ......................................................................................... 11.728 11.537 11.444 11.448 11.449 

Traumatic Complete Lesion Dorsal Spinal Cord ................................. 10.412 10.205 10.108 10.111 10.111 

Paraplegia ............................................................................................ 10.412 10.205 10.108 10.111 10.111 

Spinal Cord Disorders/Injuries ............................................................. 6.213 5.969 5.861 5.843 5.836 

Amyotrophic Lateral Sclerosis and Other Anterior Horn Cell Disease 3.379 3.094 2.967 2.927 2.919 

Quadriplegic Cerebral Palsy ................................................................ 2.057 1.810 1.681 1.610 1.589 

Cerebral Palsy, Except Quadriplegic ................................................... 0.729 0.596 0.521 0.437 0.408 

Spina Bifida and Other Brain/Spinal/Nervous System Congenital 

Anomalies ......................................................................................... 0.727 0.590 0.522 0.467 0.449

Myasthenia Gravis/Myoneural Disorders and Guillain-Barre Syndrome/Inflammatory and Toxic Neuropathy ..................................... 5.174 4.999 4.921 4.900 4.891 

Muscular Dystrophy ............................................................................. 2.118 1.928 1.848 1.771 1.745 

Multiple Sclerosis ................................................................................. 7.441 6.971 6.764 6.830 6.850 

Parkinson‘s, Huntington‘s, and Spinocerebellar Disease, and Other 

Neurodegenerative Disorders .......................................................... 2.118 1.928 1.848 1.771 1.745 

Seizure Disorders and Convulsions .................................................... 1.578 1.411 1.321 1.229 1.199 

Hydrocephalus ..................................................................................... 7.688 7.552 7.486 7.492 7.493

Non-Traumatic Coma, and Brain Compression/Anoxic Damage ........ 9.265 9.102 9.022 9.026 9.025 

Respirator Dependence/Tracheostomy Status .................................... 40.054 40.035 40.022 40.105 40.131 

Respiratory Arrest ................................................................................ 12.913 12.707 12.612 12.699 12.728 

Cardio-Respiratory Failure and Shock, Including Respiratory Distress Syndromes .............................................................................. 12.913 12.707 12.612 12.699 12.728

Heart Assistive Device/Artificial Heart ................................................. 33.372 33.025 32.877 32.978 33.014 

Heart Transplant .................................................................................. 33.372 33.025 32.877 32.978 33.014 

Congestive Heart Failure ..................................................................... 3.790 3.648 3.587 3.591 3.594 

Acute Myocardial Infarction ................................................................. 11.904 11.451 11.258 11.423 11.478 

Unstable Angina and Other Acute Ischemic Heart Disease ............... 6.369 6.001 5.861 5.912 5.935 

Heart Infection/Inflammation, Except Rheumatic ................................ 6.770 6.611 6.537 6.530 6.528 

Specified Heart Arrhythmias ................................................................ 3.363 3.193 3.112 3.063 3.046 

Intracranial Hemorrhage ...................................................................... 10.420 10.062 9.907 9.943 9.959 

Ischemic or Unspecified Stroke ........................................................... 4.548 4.304 4.215 4.242 4.256 

Cerebral Aneurysm and Arteriovenous Malformation ......................... 5.263 5.000 4.890 4.867 4.859 

Hemiplegia/Hemiparesis ...................................................................... 5.979 5.846 5.794 5.858 5.881 

Monoplegia, Other Paralytic Syndromes ............................................. 4.176 4.024 3.959 3.938 3.931 

Atherosclerosis of the Extremities with Ulceration or Gangrene ......... 11.941 11.801 11.745 11.844 11.876 

Vascular Disease with Complications .................................................. 8.228 7.996 7.896 7.922 7.932 

Pulmonary Embolism and Deep Vein Thrombosis .............................. 4.853 4.642 4.549 4.539 4.537 

Lung Transplant Status/Complications ................................................ 31.457 31.161 31.030 31.131 31.161 

Cystic Fibrosis ...................................................................................... 10.510 10.142 9.957 9.960 9.962 

Chronic Obstructive Pulmonary Disease, Including Bronchiectasis .... 1.098 0.978 0.904 0.810 0.780 

Asthma ................................................................................................. 1.098 0.978 0.904 0.810 0.780 

Fibrosis of Lung and Other Lung Disorders ........................................ 2.799 2.657 2.596 2.565 2.556 

Aspiration and Specified Bacterial Pneumonias and Other Severe 

Lung Infections ................................................................................. 9.052 8.934 8.883 8.913 8.924 

Kidney Transplant Status ..................................................................... 10.944 10.576 10.432 10.463 10.482

End Stage Renal Disease ................................................................... 37.714 37.356 37.193 37.352 37.403 

Chronic Kidney Disease, Stage 5 ........................................................ 2.189 2.048 1.995 1.990 1.992 

Chronic Kidney Disease, Severe (Stage 4) ......................................... 2.189 2.048 1.995 1.990 1.992 

Ectopic and Molar Pregnancy, Except with Renal Failure, Shock, or 

Embolism .......................................................................................... 1.377 1.219 1.120 0.912 0.828

Miscarriage with Complications ........................................................... 1.377 1.219 1.120 0.912 0.828 

Miscarriage with No or Minor Complications ....................................... 1.377 1.219 1.120 0.912 0.828 

Completed Pregnancy With Major Complications ............................... 3.778 3.285 3.134 2.931 2.906 

Completed Pregnancy With Complications ......................................... 3.778 3.285 3.134 2.931 2.906 

Completed Pregnancy with No or Minor Complications ...................... 3.778 3.285 3.134 2.931 2.906 

Chronic Ulcer of Skin, Except Pressure .............................................. 2.515 2.371 2.313 2.304 2.304 

Hip Fractures and Pathological Vertebral or Humerus Fractures ....... 9.788 9.570 9.480 9.521 9.536 

Pathological Fractures, Except of Vertebrae, Hip, or Humerus .......... 1.927 1.805 1.735 1.648 1.620 

Stem Cell, Including Bone Marrow, Transplant Status/Complications 30.944 30.908 30.893 30.917 30.928 

Artificial Openings for Feeding or Elimination ..................................... 11.093 10.939 10.872 10.943 10.965 

Amputation Status, Lower Limb/Amputation Complications ................ 7.277 7.087 7.009 7.056 7.073 

Interaction Factors 

Severe illness × Opportunistic Infections ............................................ 12.094 12.327 12.427 12.527 12.555 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73133 

TABLE 1—ADULT RISK ADJUSTMENT MODEL FACTORS—Continued 

Factor Platinum Gold Silver Bronze Catastrophic 

Severe illness × Metastatic Cancer ..................................................... 12.094 12.327 12.427 12.527 12.555 

Severe illness × Lung, Brain, and Other Severe Cancers, Including 

Pediatric Acute Lymphoid Leukemia ................................................ 12.094 12.327 12.427 12.527 12.555 

Severe illness × Non-Hodgkin‘s Lymphomas and Other Cancers and 

Tumors ............................................................................................. 12.094 12.327 12.427 12.527 12.555 

Severe illness × Myasthenia Gravis/Myoneural Disorders and 

Guillain-Barre Syndrome/Inflammatory and Toxic Neuropathy ....... 12.094 12.327 12.427 12.527 12.555 

Severe illness × Heart Infection/Inflammation, Except Rheumatic ..... 12.094 12.327 12.427 12.527 12.555 

Severe illness × Intracranial Hemorrhage ........................................... 12.094 12.327 12.427 12.527 12.555 

Severe illness × HCC group G06 (HCC Group 6 includes 

Myelodysplastic Syndromes and Myelofibrosis, and Aplastic Anemia) .................................................................................................. 12.094 12.327 12.427 12.527 12.555 

Severe illness × HCC group G08 (HCC Group 8 includes Combined 

and Other Severe Immunodeficiencies, and Disorders of the Immune Mechanism) ............................................................................ 12.094 12.327 12.427 12.527 12.555 

Severe illness × End-Stage Liver Disease .......................................... 2.498 2.648 2.714 2.813 2.841 

Severe illness × Acute Liver Failure/Disease, Including Neonatal 

Hepatitis ........................................................................................... 2.498 2.648 2.714 2.813 2.841 

Severe illness × Atherosclerosis of the Extremities with Ulceration or 

Gangrene ......................................................................................... 2.498 2.648 2.714 2.813 2.841 

Severe illness × Vascular Disease with Complications ....................... 2.498 2.648 2.714 2.813 2.841 

Severe illness × Aspiration and Specified Bacterial Pneumonias and 

Other Severe Lung Infections .......................................................... 2.498 2.648 2.714 2.813 2.841 

Severe illness × Artificial Openings for Feeding or Elimination .......... 2.498 2.648 2.714 2.813 2.841 

Severe illness × HCC group G03 (HCC Group 3 includes 

Necrotizing Fasciitis and Bone/Joint/Muscle Infections/Necrosis) ... 2.498 2.648 2.714 2.813 2.841 

TABLE 2—HHS HCCS IN THE SEVERITY ILLNESS INDICATOR VARIABLE

Description 

Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock. 

Peritonitis/Gastrointestinal Perforation/Necrotizing Enter colitis. 

Seizure Disorders and Convulsions. 

Non-Traumatic Coma, Brain Compression/Anoxic Damage. 

Respirator Dependence/Tracheostomy Status. 

Respiratory Arrest. 

Cardio-Respiratory Failure and Shock, Including Respiratory Distress Syndromes. 

Pulmonary Embolism and Deep Vein Thrombosis. 

TABLE 3—CHILD RISK ADJUSTMENT MODEL FACTORS

Factor Platinum Gold Silver Bronze Catastrophic 

Demographic Factors 

Age 2–4, Male ...................................................................................... 0.283 0.209 0.106 0.019 0.000 

Age 5–9, Male ...................................................................................... 0.196 0.140 0.064 0.005 0.000 

Age 10–14, Male ................................................................................. 0.246 0.189 0.110 0.047 0.033 

Age 15–20, Male ................................................................................. 0.336 0.273 0.191 0.114 0.095 

Age 2–4, Female ................................................................................. 0.233 0.165 0.071 0.019 0.000 

Age 5–9, Female ................................................................................. 0.165 0.113 0.048 0.005 0.000 

Age 10–14, Female ............................................................................. 0.223 0.168 0.095 0.042 0.031 

Age 15–20, Female ............................................................................. 0.379 0.304 0.198 0.101 0.077 

Diagnosis Factors 

HIV/AIDS .............................................................................................. 2.956 2.613 2.421 2.228 2.166 

Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/ 

Shock ................................................................................................ 17.309 17.142 17.061 17.081 17.088 

Central Nervous System Infections, Except Viral Meningitis .............. 12.636 12.409 12.296 12.313 12.319 

Viral or Unspecified Meningitis ............................................................ 3.202 3.004 2.896 2.750 2.702 

Opportunistic Infections ....................................................................... 20.358 20.262 20.222 20.201 20.189 

Metastatic Cancer ................................................................................ 34.791 34.477 34.307 34.306 34.300 

Lung, Brain, and Other Severe Cancers, Including Pediatric Acute 

Lymphoid Leukemia ......................................................................... 11.939 11.618 11.436 11.358 11.334 

Non-Hodgkin’s Lymphomas and Other Cancers and Tumors ............ 9.354 9.071 8.908 8.806 8.774 

Colorectal, Breast (Age <50), Kidney, and Other Cancers ................. 3.689 3.480 3.337 3.188 3.143 

Benign/Uncertain Brain Tumors, and Other Cancers and Tumors 18 3.308 3.084 2.954 2.814 2.769 


sroberts on DSK5SPTVN1PROD with 
73134 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

TABLE 3—CHILD RISK ADJUSTMENT MODEL FACTORS—Continued 

Factor Platinum Gold Silver Bronze Catastrophic 

Thyroid Cancer, Melanoma, Neurofibromatosis, and Other Cancers 

and Tumors ...................................................................................... 1.530 1.368 1.254 1.114 1.066 

Pancreas Transplant Status/Complications ......................................... 18.933 18.476 18.264 18.279 18.289 

Diabetes with Acute Complications ..................................................... 2.629 2.354 2.198 1.904 1.799 

Diabetes with Chronic Complications .................................................. 2.629 2.354 2.198 1.904 1.799 

Diabetes without Complication ............................................................ 2.629 2.354 2.198 1.904 1.799 

Protein-Calorie Malnutrition ................................................................. 13.930 13.794 13.726 13.751 13.759

Mucopolysaccharidosis ........................................................................ 6.177 5.867 5.696 5.642 5.625 

Lipidoses and Glycogenosis ................................................................ 6.177 5.867 5.696 5.642 5.625 

Congenital Metabolic Disorders, Not Elsewhere Classified ................ 6.177 5.867 5.696 5.642 5.625 

Amyloidosis, Porphyria, and Other Metabolic Disorders ..................... 6.177 5.867 5.696 5.642 5.625 

Adrenal, Pituitary, and Other Significant Endocrine Disorders ........... 6.177 5.867 5.696 5.642 5.625 

Liver Transplant Status/Complications ................................................ 18.322 18.048 17.922 17.898 17.888 

End-Stage Liver Disease ..................................................................... 12.960 12.754 12.650 12.622 12.614 

Cirrhosis of Liver .................................................................................. 1.177 1.027 0.920 0.871 0.833 

Chronic Hepatitis .................................................................................. 1.177 1.027 0.920 0.807 0.775 

Acute Liver Failure/Disease, Including Neonatal Hepatitis ................. 6.255 6.092 6.003 5.972 5.966 

Intestine Transplant Status/Complications .......................................... 106.169 106.704 106.991 107.180 107.222 

Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis ......... 16.784 16.360 16.156 16.171 16.179 

Intestinal Obstruction ........................................................................... 5.715 5.451 5.307 5.210 5.178 

Chronic Pancreatitis ............................................................................. 16.692 16.315 16.148 16.163 16.166 

Acute Pancreatitis/Other Pancreatic Disorders and Intestinal Malabsorption ......................................................................................... 3.843 3.685 3.584 3.471 3.434 

Inflammatory Bowel Disease ............................................................... 5.049 4.673 4.471 4.320 4.271 

Necrotizing Fasciitis ............................................................................. 5.829 5.551 5.398 5.318 5.292

Bone/Joint/Muscle Infections/Necrosis ................................................ 5.829 5.551 5.398 5.318 5.292 

Rheumatoid Arthritis and Specified Autoimmune Disorders ............... 2.689 2.473 2.327 2.171 2.122 

Systemic Lupus Erythematosus and Other Autoimmune Disorders ... 1.397 1.249 1.139 0.996 0.951 

Osteogenesis Imperfecta and Other Osteodystrophies ...................... 1.536 1.410 1.311 1.211 1.183 

Congenital/Developmental Skeletal and Connective Tissue Disorders ............................................................................................... 1.536 1.410 1.311 1.211 1.183 

Cleft Lip/Cleft Palate ............................................................................ 1.785 1.573 1.441 1.281 1.228

Hemophilia ........................................................................................... 46.388 45.839 45.551 45.541 45.535 

Myelodysplastic Syndromes and Myelofibrosis ................................... 29.387 29.168 29.063 29.075 29.078 

Aplastic Anemia ................................................................................... 29.387 29.168 29.063 29.075 29.078 

Acquired Hemolytic Anemia, Including Hemolytic Disease of Newborn .................................................................................................. 7.791 7.476 7.308 7.229 7.203 

Sickle Cell Anemia (Hb-SS) ................................................................. 7.791 7.476 7.308 7.229 7.203 

Thalassemia Major ............................................................................... 7.791 7.476 7.308 7.229 7.203 

Combined and Other Severe Immunodeficiencies .............................. 5.690 5.455 5.339 5.270 5.247 

Disorders of the Immune Mechanism .................................................. 5.690 5.455 5.339 5.270 5.247 

Coagulation Defects and Other Specified Hematological Disorders ... 4.909 4.754 4.650 4.543 4.511 

Drug Psychosis .................................................................................... 4.067 3.816 3.693 3.596 3.566

Drug Dependence ................................................................................ 4.067 3.816 3.693 3.596 3.566 

Schizophrenia ...................................................................................... 5.536 5.127 4.916 4.775 4.730 

Major Depressive and Bipolar Disorders ............................................. 1.779 1.591 1.453 1.252 1.188 

Reactive and Unspecified Psychosis, Delusional Disorders ............... 1.779 1.591 1.453 1.252 1.188 

Personality Disorders ........................................................................... 0.935 0.832 0.723 0.511 0.441 

Anorexia/Bulimia Nervosa .................................................................... 2.565 2.372 2.252 2.146 2.111 

Prader-Willi, Patau, Edwards, and Autosomal Deletion Syndromes ... 3.606 3.347 3.239 3.201 3.189 

Down Syndrome, Fragile X, Other Chromosomal Anomalies, and 

Congenital Malformation Syndromes ............................................... 2.403 2.203 2.093 1.982 1.943 

Autistic Disorder ................................................................................... 1.673 1.500 1.372 1.177 1.112 

Pervasive Developmental Disorders, Except Autistic Disorder ........... 0.963 0.850 0.723 0.511 0.441 

Traumatic Complete Lesion Cervical Spinal Cord .............................. 18.394 18.224 18.156 18.210 18.228 

Quadriplegia ......................................................................................... 18.394 18.224 18.156 18.210 18.228 

Traumatic Complete Lesion Dorsal Spinal Cord ................................. 18.394 18.224 18.156 18.210 18.228 

Paraplegia ............................................................................................ 18.394 18.224 18.156 18.210 18.228 

Spinal Cord Disorders/Injuries ............................................................. 4.668 4.416 4.287 4.181 4.150 

Amyotrophic Lateral Sclerosis and Other Anterior Horn Cell Disease 14.484 14.155 13.995 13.958 13.954 

Quadriplegic Cerebral Palsy ................................................................ 5.717 5.367 5.223 5.251 5.262 

Cerebral Palsy, Except Quadriplegic ................................................... 1.899 1.672 1.557 1.447 1.412 

Spina Bifida and Other Brain/Spinal/Nervous System Congenital 

Anomalies ......................................................................................... 0.943 0.785 0.686 0.592 0.562

Myasthenia Gravis/Myoneural Disorders and Guillain-Barre Syndrome/Inflammatory and Toxic Neuropathy ..................................... 5.301 5.071 4.950 4.861 4.832 

Muscular Dystrophy ............................................................................. 3.122 2.915 2.800 2.698 2.669 

Multiple Sclerosis ................................................................................. 5.370 4.996 4.806 4.769 4.752 

Parkinson’s, Huntington’s, and Spinocerebellar Disease, and Other 

Neurodegenerative Disorders .......................................................... 3.122 2.915 2.800 2.698 2.669 

Seizure Disorders and Convulsions .................................................... 2.188 2.012 1.882 1.702 1.644 

Hydrocephalus ..................................................................................... 6.791 6.630 6.550 6.521 6.513


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Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73135 

18This HCC also includes Breast (Age 50+) and 

Prostate Cancer. 

TABLE 3—CHILD RISK ADJUSTMENT MODEL FACTORS—Continued 

Factor Platinum Gold Silver Bronze Catastrophic 

Non-Traumatic Coma, and Brain Compression/Anoxic Damage ........ 9.073 8.882 8.788 8.753 8.735 

Respirator Dependence/Tracheostomy Status .................................... 34.717 34.532 34.471 34.623 34.668 

Respiratory Arrest ................................................................................ 14.998 14.772 14.669 14.691 14.696 

Cardio-Respiratory Failure and Shock, Including Respiratory Distress Syndromes .............................................................................. 14.998 14.772 14.669 14.691 14.696

Heart Assistive Device/Artificial Heart ................................................. 25.734 25.262 25.057 25.189 25.225 

Heart Transplant .................................................................................. 25.734 25.262 25.057 25.189 25.225 

Congestive Heart Failure ..................................................................... 6.292 6.159 6.073 6.013 5.992 

Acute Myocardial Infarction ................................................................. 4.568 4.453 4.410 4.433 4.448 

Unstable Angina and Other Acute Ischemic Heart Disease ............... 4.568 4.453 4.410 4.433 4.448 

Heart Infection/Inflammation, Except Rheumatic ................................ 12.842 12.655 12.573 12.590 12.597 

Hypoplastic Left Heart Syndrome and Other Severe Congenital 

Heart Disorders ................................................................................ 7.019 6.823 6.668 6.528 6.480 

Major Congenital Heart/Circulatory Disorders ..................................... 2.257 2.143 2.018 1.870 1.828 

Atrial and Ventricular Septal Defects, Patent Ductus Arteriosus, and 

Other Congenital Heart/Circulatory Disorders ................................. 1.411 1.319 1.206 1.078 1.047 

Specified Heart Arrhythmias ................................................................ 4.483 4.276 4.141 4.052 4.026 

Intracranial Hemorrhage ...................................................................... 21.057 20.757 20.616 20.617 20.618

Ischemic or Unspecified Stroke ........................................................... 8.498 8.373 8.324 8.360 8.363 

Cerebral Aneurysm and Arteriovenous Malformation ......................... 4.704 4.464 4.344 4.280 4.250 

Hemiplegia/Hemiparesis ...................................................................... 5.561 5.404 5.334 5.315 5.310 

Monoplegia, Other Paralytic Syndromes ............................................. 5.561 5.404 5.334 5.315 5.310 

Atherosclerosis of the Extremities with Ulceration or Gangrene ......... 10.174 9.937 9.799 9.688 9.641 

Vascular Disease with Complications .................................................. 11.571 11.355 11.257 11.260 11.272 

Pulmonary Embolism and Deep Vein Thrombosis .............................. 13.894 13.661 13.557 13.591 13.604 

Lung Transplant Status/Complications ................................................ 100.413 100.393 100.412 100.660 100.749 

Cystic Fibrosis ...................................................................................... 13.530 13.006 12.743 12.739 12.742 

Chronic Obstructive Pulmonary Disease, Including Bronchiectasis .... 0.521 0.458 0.354 0.215 0.175 

Asthma ................................................................................................. 0.521 0.458 0.354 0.215 0.175 

Fibrosis of Lung and Other Lung Disorders ........................................ 5.812 5.657 5.555 5.472 5.450 

Aspiration and Specified Bacterial Pneumonias and Other Severe 

Lung Infections ................................................................................. 10.730 10.615 10.549 10.566 10.571 

Kidney Transplant Status ..................................................................... 18.933 18.476 18.264 18.279 18.289

End Stage Renal Disease ................................................................... 43.158 42.816 42.659 42.775 42.808 

Chronic Kidney Disease, Stage 5 ........................................................ 11.754 11.581 11.472 11.374 11.340 

Chronic Kidney Disease, Severe (Stage 4) ......................................... 11.754 11.581 11.472 11.374 11.340 

Ectopic and Molar Pregnancy, Except with Renal Failure, Shock, or 

Embolism .......................................................................................... 1.191 1.042 0.917 0.674 0.590

Miscarriage with Complications ........................................................... 1.191 1.042 0.917 0.674 0.590 

Miscarriage with No or Minor Complications ....................................... 1.191 1.042 0.917 0.674 0.590 

Completed Pregnancy With Major Complications ............................... 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy With Complications ......................................... 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy with No or Minor Complications ...................... 3.419 2.956 2.778 2.498 2.437 

Chronic Ulcer of Skin, Except Pressure .............................................. 1.570 1.479 1.394 1.314 1.289 

Hip Fractures and Pathological Vertebral or Humerus Fractures ....... 7.389 7.174 7.022 6.882 6.842 

Pathological Fractures, Except of Vertebrae, Hip, or Humerus .......... 2.353 2.244 2.128 1.965 1.912 

Stem Cell, Including Bone Marrow, Transplant Status/Complications 30.558 30.485 30.466 30.522 30.538 

Artificial Openings for Feeding or Elimination ..................................... 14.410 14.247 14.197 14.340 14.383 

Amputation Status, Lower Limb/Amputation Complications ................ 10.174 9.937 9.799 9.688 9.641 

TABLE 4—INFANT RISK ADJUSTMENT MODELS FACTORS

Group Platinum Gold Silver Bronze Catastrophic 

Extremely Immature × Severity Level 5 (Highest) ............................... 393.816 392.281 391.387 391.399 391.407 

Extremely Immature × Severity Level 4 .............................................. 225.037 223.380 222.424 222.371 222.365 

Extremely Immature × Severity Level 3 .............................................. 60.363 59.232 58.532 58.247 58.181 

Extremely Immature × Severity Level 2 .............................................. 60.363 59.232 58.532 58.247 58.181 

Extremely Immature × Severity Level 1 (Lowest) ............................... 60.363 59.232 58.532 58.247 58.181 

Immature × Severity Level 5 (Highest) ................................................ 207.274 205.589 204.615 204.629 204.644 

Immature × Severity Level 4 ................................................................ 89.694 88.105 87.188 87.169 87.178 

Immature × Severity Level 3 ................................................................ 45.715 44.305 43.503 43.394 43.379 

Immature × Severity Level 2 ................................................................ 33.585 32.247 31.449 31.221 31.163 

Immature × Severity Level 1 (Lowest) ................................................. 33.585 32.247 31.449 31.221 31.163 

Premature/Multiples × Severity Level 5 (Highest) ............................... 173.696 172.095 171.169 171.111 171.108 


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73136 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

TABLE 4—INFANT RISK ADJUSTMENT MODELS FACTORS—Continued 

Group Platinum Gold Silver Bronze Catastrophic 

Premature/Multiples × Severity Level 4 ............................................... 34.417 32.981 32.155 31.960 31.925 

Premature/Multiples × Severity Level 3 ............................................... 18.502 17.382 16.694 16.311 16.200 

Premature/Multiples × Severity Level 2 ............................................... 9.362 8.533 7.967 7.411 7.241 

Premature/Multiples × Severity Level 1 (Lowest) ................................ 6.763 6.144 5.599 4.961 4.771 

Term × Severity Level 5 (Highest) ....................................................... 132.588 131.294 130.511 130.346 130.292 

Term × Severity Level 4 ...................................................................... 20.283 19.222 18.560 18.082 17.951 

Term × Severity Level 3 ...................................................................... 6.915 6.286 5.765 5.092 4.866 

Term × Severity Level 2 ...................................................................... 3.825 3.393 2.925 2.189 1.951 

Term × Severity Level 1 (Lowest) ....................................................... 1.661 1.449 0.998 0.339 0.188 

Age1 × Severity Level 5 (Highest) ....................................................... 62.385 61.657 61.217 61.130 61.108 

Age1 × Severity Level 4 ...................................................................... 10.855 10.334 9.988 9.747 9.686 

Age1 × Severity Level 3 ...................................................................... 3.633 3.299 3.007 2.692 2.608 

Age1 × Severity Level 2 ...................................................................... 2.177 1.930 1.665 1.320 1.223 

Age1 × Severity Level 1 (Lowest) ....................................................... 0.631 0.531 0.333 0.171 0.137 

Age 0 Male ........................................................................................... 0.629 0.587 0.574 0.533 0.504 

Age 1 Male ........................................................................................... 0.117 0.102 0.094 0.065 0.054 

TABLE 5—HHS HCCS INCLUDED IN INFANT MODEL MATURITY CATEGORIES

Maturity category HCC/Description 

Extremely Immature .................................................................... Extremely Immature Newborns, Birthweight < 500 Grams. 

Extremely Immature .................................................................... Extremely Immature Newborns, Including Birthweight 500–749 Grams. 

Extremely Immature .................................................................... Extremely Immature Newborns, Including Birthweight 750–999 Grams. 

Immature ...................................................................................... Premature Newborns, Including Birthweight 1000–1499 Grams. 

Immature ...................................................................................... Premature Newborns, Including Birthweight 1500–1999 Grams. 

Premature/Multiples ..................................................................... Premature Newborns, Including Birthweight 2000–2499 Grams. 

Premature/Multiples ..................................................................... Other Premature, Low Birthweight, Malnourished, or Multiple Birth Newborns. 

Term ............................................................................................ Term or Post-Term Singleton Newborn, Normal or High Birthweight. 

Age 1 ........................................................................................... All age 1 infants. 

TABLE 6—HHS HCCS INCLUDED IN INFANT MODEL SEVERITY CATEGORIES

Severity category HCC 

Severity Level 5 (Highest) ......................................... Metastatic Cancer. 

Severity Level 5 ......................................................... Pancreas Transplant Status/Complications. 

Severity Level 5 ......................................................... Liver Transplant Status/Complications. 

Severity Level 5 ......................................................... End-Stage Liver Disease. 

Severity Level 5 ......................................................... Intestine Transplant Status/Complications. 

Severity Level 5 ......................................................... Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis. 

Severity Level 5 ......................................................... Respirator Dependence/Tracheostomy Status. 

Severity Level 5 ......................................................... Heart Assistive Device/Artificial Heart. 

Severity Level 5 ......................................................... Heart Transplant. 

Severity Level 5 ......................................................... Congestive Heart Failure. 

Severity Level 5 ......................................................... Hypoplastic Left Heart Syndrome and Other Severe Congenital Heart Disorders. 

Severity Level 5 ......................................................... Lung Transplant Status/Complications. 

Severity Level 5 ......................................................... Kidney Transplant Status. 

Severity Level 5 ......................................................... End Stage Renal Disease. 

Severity Level 5 ......................................................... Stem Cell, Including Bone Marrow, Transplant Status/Complications. 

Severity Level 4 ......................................................... Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock. 

Severity Level 4 ......................................................... Lung, Brain, and Other Severe Cancers, Including Pediatric Acute Lymphoid Leukemia. 

Severity Level 4 ......................................................... Mucopolysaccharidosis. 

Severity Level 4 ......................................................... Major Congenital Anomalies of Diaphragm, Abdominal Wall, and Esophagus, Age < 2. 

Severity Level 4 ......................................................... Myelodysplastic Syndromes and Myelofibrosis. 

Severity Level 4 ......................................................... Aplastic Anemia. 

Severity Level 4 ......................................................... Combined and Other Severe Immunodeficiencies. 

Severity Level 4 ......................................................... Traumatic Complete Lesion Cervical Spinal Cord. 

Severity Level 4 ......................................................... Quadriplegia. 

Severity Level 4 ......................................................... Amyotrophic Lateral Sclerosis and Other Anterior Horn Cell Disease. 

Severity Level 4 ......................................................... Quadriplegic Cerebral Palsy. 

Severity Level 4 ......................................................... Myasthenia Gravis/Myoneural Disorders and Guillain-Barre Syndrome/Inflammatory and 

Toxic Neuropathy. 

Severity Level 4 ......................................................... Non-Traumatic Coma, Brain Compression/Anoxic Damage. 

Severity Level 4 ......................................................... Respiratory Arrest. 

Severity Level 4 ......................................................... Cardio-Respiratory Failure and Shock, Including Respiratory Distress Syndromes. 

Severity Level 4 ......................................................... Acute Myocardial Infarction. 

Severity Level 4 ......................................................... Heart Infection/Inflammation, Except Rheumatic. 

Severity Level 4 ......................................................... Major Congenital Heart/Circulatory Disorders. 

Severity Level 4 ......................................................... Intracranial Hemorrhage. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73137 

TABLE 6—HHS HCCS INCLUDED IN INFANT MODEL SEVERITY CATEGORIES—Continued 

Severity category HCC 

Severity Level 4 ......................................................... Ischemic or Unspecified Stroke. 

Severity Level 4 ......................................................... Vascular Disease with Complications. 

Severity Level 4 ......................................................... Pulmonary Embolism and Deep Vein Thrombosis. 

Severity Level 4 ......................................................... Aspiration and Specified Bacterial Pneumonias and Other Severe Lung Infections. 

Severity Level 4 ......................................................... Chronic Kidney Disease, Stage 5. 

Severity Level 4 ......................................................... Hip Fractures and Pathological Vertebral or Humerus Fractures. 

Severity Level 4 ......................................................... Artificial Openings for Feeding or Elimination. 

Severity Level 3 ......................................................... HIV/AIDS. 

Severity Level 3 ......................................................... Central Nervous System Infections, Except Viral Meningitis. 

Severity Level 3 ......................................................... Opportunistic Infections. 

Severity Level 3 ......................................................... Non-Hodgkin‘s Lymphomas and Other Cancers and Tumors. 

Severity Level 3 ......................................................... Colorectal, Breast (Age < 50), Kidney and Other Cancers. 

Severity Level 3 ......................................................... Benign/Uncertain Brain Tumors, and Other Cancers and Tumors.19

Severity Level 3 ......................................................... Lipidoses and Glycogenosis. 

Severity Level 3 ......................................................... Adrenal, Pituitary, and Other Significant Endocrine Disorders. 

Severity Level 3 ......................................................... Acute Liver Failure/Disease, Including Neonatal Hepatitis. 

Severity Level 3 ......................................................... Intestinal Obstruction. 

Severity Level 3 ......................................................... Necrotizing Fasciitis. 

Severity Level 3 ......................................................... Bone/Joint/Muscle Infections/Necrosis. 

Severity Level 3 ......................................................... Osteogenesis Imperfecta and Other Osteodystrophies. 

Severity Level 3 ......................................................... Cleft Lip/Cleft Palate. 

Severity Level 3 ......................................................... Hemophilia. 

Severity Level 3 ......................................................... Disorders of the Immune Mechanism. 

Severity Level 3 ......................................................... Coagulation Defects and Other Specified Hematological Disorders. 

Severity Level 3 ......................................................... Prader-Willi, Patau, Edwards, and Autosomal Deletion Syndromes. 

Severity Level 3 ......................................................... Traumatic Complete Lesion Dorsal Spinal Cord. 

Severity Level 3 ......................................................... Paraplegia. 

Severity Level 3 ......................................................... Spinal Cord Disorders/Injuries. 

Severity Level 3 ......................................................... Cerebral Palsy, Except Quadriplegic. 

Severity Level 3 ......................................................... Muscular Dystrophy. 

Severity Level 3 ......................................................... Parkinson’s, Huntington’s, and Spinocerebellar Disease, and Other Neurodegenerative 

Disorders. 

Severity Level 3 ......................................................... Hydrocephalus. 

Severity Level 3 ......................................................... Unstable Angina and Other Acute Ischemic Heart Disease. 

Severity Level 3 ......................................................... Atrial and Ventricular Septal Defects, Patent Ductus Arteriosus, and Other Congenital 

Heart/Circulatory Disorders. 

Severity Level 3 ......................................................... Specified Heart Arrhythmias. 

Severity Level 3 ......................................................... Cerebral Aneurysm and Arteriovenous Malformation. 

Severity Level 3 ......................................................... Hemiplegia/Hemiparesis. 

Severity Level 3 ......................................................... Cystic Fibrosis. 

Severity Level 3 ......................................................... Fibrosis of Lung and Other Lung Disorders. 

Severity Level 3 ......................................................... Pathological Fractures, Except of Vertebrae, Hip, or Humerus. 

Severity Level 2 ......................................................... Viral or Unspecified Meningitis. 

Severity Level 2 ......................................................... Thyroid, Melanoma, Neurofibromatosis, and Other Cancers and Tumors. 

Severity Level 2 ......................................................... Diabetes with Acute Complications. 

Severity Level 2 ......................................................... Diabetes with Chronic Complications. 

Severity Level 2 ......................................................... Diabetes without Complication. 

Severity Level 2 ......................................................... Protein-Calorie Malnutrition. 

Severity Level 2 ......................................................... Congenital Metabolic Disorders, Not Elsewhere Classified. 

Severity Level 2 ......................................................... Amyloidosis, Porphyria, and Other Metabolic Disorders.

Severity Level 2 ......................................................... Cirrhosis of Liver. 

Severity Level 2 ......................................................... Chronic Pancreatitis. 

Severity Level 2 ......................................................... Inflammatory Bowel Disease. 

Severity Level 2 ......................................................... Rheumatoid Arthritis and Specified Autoimmune Disorders. 

Severity Level 2 ......................................................... Systemic Lupus Erythematosus and Other Autoimmune Disorders. 

Severity Level 2 ......................................................... Congenital/Developmental Skeletal and Connective Tissue Disorders. 

Severity Level 2 ......................................................... Acquired Hemolytic Anemia, Including Hemolytic Disease of Newborn. 

Severity Level 2 ......................................................... Sickle Cell Anemia (Hb-SS). 

Severity Level 2 ......................................................... Drug Psychosis. 

Severity Level 2 ......................................................... Drug Dependence. 

Severity Level 2 ......................................................... Down Syndrome, Fragile X, Other Chromosomal Anomalies, and Congenital Malformation 

Syndromes. 

Severity Level 2 ......................................................... Spina Bifida and Other Brain/Spinal/Nervous System Congenital Anomalies. 

Severity Level 2 ......................................................... Seizure Disorders and Convulsions. 

Severity Level 2 ......................................................... Monoplegia, Other Paralytic Syndromes. 

Severity Level 2 ......................................................... Atherosclerosis of the Extremities with Ulceration or Gangrene. 

Severity Level 2 ......................................................... Chronic Obstructive Pulmonary Disease, Including Bronchiectasis. 

Severity Level 2 ......................................................... Chronic Ulcer of Skin, Except Pressure. 

Severity Level 1 (Lowest) .......................................... Chronic Hepatitis. 

Severity Level 1 ......................................................... Acute Pancreatitis/Other Pancreatic Disorders and Intestinal Malabsorption. 

Severity Level 1 ......................................................... Thalassemia Major. 

Severity Level 1 ......................................................... Autistic Disorder. 


sroberts on DSK5SPTVN1PROD with 
73138 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

19This HCC also includes Breast (Age 50+) and 

Prostate Cancer. 

TABLE 6—HHS HCCS INCLUDED IN INFANT MODEL SEVERITY CATEGORIES—Continued 

Severity category HCC 

Severity Level 1 ......................................................... Pervasive Developmental Disorders, Except Autistic Disorder. 

Severity Level 1 ......................................................... Multiple Sclerosis. 

Severity Level 1 ......................................................... Asthma. 

Severity Level 1 ......................................................... Chronic Kidney Disease, Severe (Stage 4). 

Severity Level 1 ......................................................... Amputation Status, Lower Limb/Amputation Complications. 

Severity Level 1 ......................................................... No Severity HCCs. 

(13) Adjustments to Model Discussed in 

the Risk Adjustment White Paper 

We discussed the possibility of 

including adjustments to the HHS risk 

adjustment model to account for costsharing reductions and reinsurance 

payments in the Risk Adjustment White 

Paper, and sought comment. We 

propose to include an adjustment for the 

receipt of cost-sharing reductions in the 

model, but not to adjust for receipt of 

reinsurance payments in the model. 

(i) Cost-sharing Reductions Adjustments 

We propose an adjustment to the HHS 

risk adjustment models for individuals 

who receive cost-sharing reductions. 

The Affordable Care Act establishes 

cost-sharing reductions for enrollees in 

individual market plans in Exchanges 

based on their income and/or Indian 

status. Individuals who qualify for costsharing reductions may utilize health 

care services at a higher rate than would 

be the case in the absence of costsharing reductions. This higher 

utilization (to the extent not covered by 

required cost sharing by the enrollees or 

cost-sharing reductions reimbursed by 

the Federal government) would neither 

be paid by cost sharing reductions nor 

built into premiums. This adjustment to 

the HHS risk adjustment models would 

be based on the adjustment for induced 

demand for advanced payment of costsharing reductions described in section 

III.E. of this proposed rule. The 

proposed adjustment factors are set 

forth in Table 7. These adjustments 

would be multiplicative, and applied 

after demographic, diagnosis, and 

interaction factors are summed. 

We plan to evaluate this adjustment 

in the future, once data from the first 

few years of risk adjustment are 

available. We seek comment on this 

approach. 

TABLE 7—COST-SHARING REDUCTION ADJUSTMENT

Household income Plan AV 

Induced 

utilization 

factor 

Non-Indian CSR Recipients 

100–150% of FPL ........................................................................ Plan Variation 94% ..................................................................... 1.12 

150–200% of FPL ........................................................................ Plan Variation 87% ..................................................................... 1.12 

200–250% of FPL ........................................................................ Plan Variation 73% ..................................................................... 1.00 

>250% of FPL .............................................................................. Standard Plan 70% ..................................................................... 1.00 

Indian CSR Recipients 

<300% of FPL .............................................................................. Platinum (90%) ........................................................................... 1.15 

<300% of FPL .............................................................................. Gold (80%) .................................................................................. 1.12 

<300% of FPL .............................................................................. Silver (70%) ................................................................................ 1.07 

<300% of FPL .............................................................................. Bronze (60%) .............................................................................. 1.00 

>300% of FPL .............................................................................. ..................................................................................................... 1.00 

(ii) Reinsurance Adjustments 

Section 1341 of the Affordable Care 

Act establishes a three-year transitional 

reinsurance program in the individual 

market, raising the question of whether 

to account for these reinsurance 

payments when developing the HHS 

risk adjustment models. Some 

reinsurance payments would be made 

for low-risk individuals with 

unexpected high-cost expenditures (for 

example, due to an accident) that may 

not be accounted for in the risk 

adjustment models. However, plans that 

receive risk adjustment payments for 

their higher-than-average risk enrollees 

may also be eligible to receive 

reinsurance payments for the same highrisk enrollees. Adjusting for reinsurance 

payments in the HHS risk adjustment 

model would address the concerns that 

reinsurance and risk adjustment could 

compensate twice for the same high-risk 

individuals. 

Despite this potential, we propose not 

to adjust for reinsurance in the HHS risk 

adjustment model for a number for 

reasons. First, removing reinsurance 

payments from risk adjustment would 

reduce protections for issuers of 

reinsurance-eligible plans that enroll 

high-cost individuals. Second, it would 

be difficult to determine what portion of 

reinsurance payments were made for 

conditions included in each HHS risk 

adjustment model, and the appropriate 

model adjustment for these payments. 

Finally, because the size of the 

reinsurance pool declines over its threeyear duration, the methodology to 

account for reinsurance payments 

would need to be modified each year for 

the HHS risk adjustment model. 

(14) Model Performance Statistics 

To evaluate model performance, we 

examined their R-squared and 

predictive ratios. The R-squared 

statistic, which calculates the 

percentage of individual variation 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73139 

20Winkleman, Ross and Syed Mehmud. ‘‘A 

Comparative Analysis of Claims-Based Tools for 

Health Risk Assessment.’’ Society of Actuaries. 

April 2007. 

explained by a model, measures the 

predictive accuracy of the model 

overall. The predictive ratios measure 

the predictive accuracy of a model for 

different validation groups or 

subpopulations. The predictive ratio for 

each of the HHS risk adjustment models 

is the ratio of the weighted mean 

predicted plan liability for the model 

sample population to the weighted 

mean actual plan liability for the model 

sample population. The predictive ratio 

represents how well the model does on 

average at predicting plan liability for 

that subpopulation. A subpopulation 

that is predicted perfectly would have a 

predictive ratio of 1.0. For each of the 

HHS risk adjustment models, the Rsquared statistic and the predictive ratio 

are in the range of published estimates 

for concurrent risk adjustment 

models.20 The R-squared statistic for 

each model is shown in Table 8. 

We welcome comment on these 

proposed risk adjustment models. 

TABLE 8—R-SQUARED STATISTIC FOR

HHS RISK ADJUSTMENT MODELS

Risk adjustment model R-squared 

statistic 

Platinum Adult .......................... 0.360 

Platinum Child .......................... 0.307 

Platinum Infant .......................... 0.292 

Gold Adult ................................. 0.355 

Gold Child ................................. 0.302 

Gold Infant ................................ 0.289 

Silver Adult ............................... 0.352 

Silver Child ............................... 0.299 

Silver Infant ............................... 0.288 

Bronze Adult ............................. 0.351 

Bronze Child ............................. 0.296 

Bronze Infant ............................ 0.289 

Catastrophic Adult .................... 0.350 

Catastrophic Child .................... 0.295 

Catastrophic Infant ................... 0.289 

c. Overview of the Payment Transfer 

Formula 

Plan average risk scores are calculated 

as the member month-weighted average 

of individual enrollee risk scores, as 

shown in section III.B.3.b. of this 

proposed rule. We defined the 

calculation of plan average actuarial risk 

and the calculation of payments and 

charges in the Premium Stabilization 

Rule. Here, we combine these concepts 

into a risk adjustment payment transfer 

formula. In this section, we refer to 

payments and charges generically as 

transfers. Under § 153.310(e), as 

proposed to renumbered, HHS would 

invoice issuers of risk adjustment 

covered plans for transfers by June 30 of 

the year following the applicable benefit 

year. 

We propose to calculate risk 

adjustment transfers after the close of 

the applicable benefit year, following 

the completion of issuer risk adjustment 

data reporting. As discussed in detail 

below, the payment transfer formula 

includes a set of cost adjustment terms 

that require transfers to be calculated at 

the geographic rating area level for each 

plan (thus, HHS would calculate two 

separate transfer amounts for a plan that 

operates in two rating areas). Payment 

transfer amounts would be aggregated at 

the issuer level (that is, at the level of 

the entity licensed by the State) such 

that each issuer would receive an 

invoice and a report detailing the basis 

for the net payment that would be made 

or the charge that would be owed. The 

invoice would also include plan-level 

risk adjustment information that may be 

used in the issuer’s risk corridors 

calculations. 

The proposed payment transfer 

formula is designed to provide a per 

member per month (PMPM) transfer 

amount. The PMPM transfer amount 

derived from the payment transfer 

formula would be multiplied by each 

plan’s total member months for the 

benefit year to determine the total 

payment due or charge owed by the 

issuer for that plan in a rating area. 

(1) Rationales for a Transfer 

Methodology Based on State Average 

Premiums 

Risk adjustment transfers are intended 

to reduce the impact of risk selection on 

premiums while preserving premium 

differences related to other cost factors, 

such as the actuarial value, local 

patterns of utilization and care delivery, 

local differences in the cost of doing 

business, and, within limits established 

by the Affordable Care Act, the age of 

the enrollee. Risk adjustment payments 

would be fully funded by the charges 

that are collected from plans with lower 

risk enrollees (that is, transfers within a 

State would net to zero). 

In the Risk Adjustment White Paper, 

we presented several approaches for 

calculating risk adjustment transfers 

using the State average premium and 

plans’ own premiums. The approaches 

that used plans’ own premiums resulted 

in unbalanced payment transfers, 

requiring a balancing adjustment to 

yield transfers that net to zero. These 

examples also demonstrated that the 

balancing adjustments could introduce 

differences in premiums across plans 

that were not consistent with features of 

the plan (for example, AV or differences 

in costs and utilization patterns across 

rating areas). A balancing adjustment 

would likely vary from year to year, and 

could add uncertainty to the rate 

development process (that is, plan 

actuaries would need to factor the 

uncertainty of the balancing adjustment 

into their transfer estimates). 

Therefore, we propose a payment 

transfer formula that is based on the 

State average premium for the 

applicable market, as described in 

section III.B.3.a. of this proposed rule. 

The State average premium provides a 

straightforward and predictable 

benchmark for estimating transfers. As 

shown in the examples in the Risk 

Adjustment White Paper, transfers net 

to zero when the State average premium 

is used as the basis for calculating 

transfers. 

Plan premiums differ from the State 

average premium due to a variety of 

factors, such as differences in costsharing structure or regional differences 

in utilization and unit costs. The 

proposed payment transfer formula 

applies a set of cost factor adjustments 

to the State average premium so that it 

will better reflect plan liability. These 

adjustments to the State average 

premium result in transfers that 

compensate plans for liability 

differences associated with risk 

selection, while preserving premium 

differences related to the other cost 

factors described above. 

(2) Conceptual Overview of the Payment 

Transfer Formula 

In this section, we provide a broad 

overview of the payment transfer 

formula that we propose to use when 

operating risk adjustment on behalf of a 

State. We discuss at a conceptual level 

our proposal to use the State average 

premium as the basis of the formula and 

the components of the formula. 

(i) Calculating Transfers Using the State 

Average Premium 

The payment transfer formula 

proposed for 2014 is based on the 

difference between two plan premium 

estimates: (1) A premium based on planspecific risk selection; and (2) a 

premium without risk selection. 

Transfers are intended to bridge the gap 

between these two premium estimates: 


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Conceptually, the goal of payment 

transfers is to provide plans with 

payments to help cover their actual risk 

exposure beyond the premiums the 

plans would charge reflecting allowable 

rating and their applicable cost factors. 

In other words, payments would help 

cover excess actuarial risk due to risk 

selection. 

Both of these premium estimates 

would be based on the State average 

premium. The State average premium is 

the average premium requirement for 

providing insurance to the applicable 

market population. The proposed 

payment transfer formula develops plan 

premium estimates by adjusting the 

State average premium to account for 

plan-specific characteristics such as 

benefit differences. This approach also 

assumes that all plans have premiums 

that can be decomposed into the State 

average premium and a set of 

adjustment factors, and that all plans 

would have the same premium if the 

adjustment factors were held constant 

across plans. Finally, the derivation of 

the payment transfers also assumes that 

plans ‘‘price to cost,’’ that is, that 

competition among plans for enrollees 

drives plans’ premiums to their 

premium requirements. Therefore, we 

may consider ‘‘premiums’’ to be ‘‘costs’’ 

or ‘‘premium requirements.’’ The 

payment transfer formula includes the 

following premium adjustment terms: 

• Plan average risk score: multiplying 

the plan average risk score by the State 

average premium shows how a plan’s 

premium would differ from the State 

average premium based on the risk 

selection experienced by the plan. 

• Actuarial value: a particular plan’s 

premium may differ from the State 

average premium based on the plan’s 

cost sharing structure, or actuarial 

value. An AV adjustment is applied to 

the State average premium to account 

for relative differences between a plan’s 

AV and the market average AV. 

• Permissible rating variation: plan 

rates may differ based on allowable age 

rating factors. The rating adjustment 

accounts for the impact of allowable 

rating factors on the premium that 

would be realized by the plan. 

• Geographic cost differences: 

differences in unit costs and utilization 

may lead to differences in the average 

premium between intra-State rating 

areas, holding other cost factors (for 

example, benefit design) constant. The 

geographic cost adjustment accounts for 

cost differences across rating areas. 

• Induced demand: enrollee spending 

patterns may vary based on the 

generosity of cost-sharing. The induced 

demand adjustment accounts for greater 

utilization of health care services 

induced by lower enrollee cost sharing 

in higher metal level plans. 

The State average premium is 

multiplied by these factors to develop 

the plan premium estimates used in the 

payment transfer formula. The factors 

are relative measures that compare how 

plans differ from the market average 

with respect to the cost factors (that is 

to say, the product of the adjustments is 

normalized to the market average 

product of the cost factors). 

In the absence of these adjustments, 

transfers would reflect liability 

differences attributed to cost factors 

other than risk selection. For example, 

in the absence of the AV adjustment, a 

low AV plan with lower-risk enrollees 

would be overcharged because the State 

average premium would not be scaled 

down to reflect the fact that the plan’s 

AV is lower than the average AV of 

plans operating in the market in the 

State. 

The figure below shows how the State 

average premium, the plan average risk 

score, and other plan-specific cost 

factors are used to develop the two plan 

premium estimates that are used to 

calculate payment transfers: 

(ii) Estimating the Plan Premium With 

Risk Selection 

The first premium term in the 

proposed payment transfer formula, the 

plan premium estimate reflecting risk 

selection, is calculated as the product of 

the State average premium and the 

normalized product of the plan average 

risk score, the plan geographic cost 

factor, and the plan induced demand 

factor. 

The formula below shows how the 

plan premium estimate reflecting risk 

selection would be calculated: 

Where, 

P ̄ s = State average premium, 

PLRSi = plan i’s plan liability risk score, 

IDFi = plan i‘s induced demand factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment; 

and the denominator is summed across all 

plans in the risk pool in the market in the 

State. 

The key factor in the premium 

reflecting risk selection is the plan 

average risk score, which would be 

calculated from the HHS risk 

adjustment models. The plan average 

risk score is a relative measure of plan 

liability based on the health status of a 

plan’s enrollees. The State average 

premium is multiplied by the plan 

average risk score to estimate plan 

liability based on the risk selection 

present in its enrollee population. 

However, because the HHS risk 

adjustment models do not account for 

plan liability differences attributable to 

induced demand or geographic cost 

differences, those cost factors must be 

included in the estimate of the premium 

with risk selection. 

The denominator of the adjustment 

term normalizes the product of the plan 

cost factors to the State average product 

of the cost factors. The normalized 

product of the plan cost factors provides 

an estimate of how a plan’s liability 

differs from the market average due to 

underlying differences in its cost 

factors, including risk selection, 

induced demand and geographic cost 

differences. 


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The premium reflecting risk selection 

does not include an AV adjustment 

because the risk score reflects the plan’s 

AV. Additionally, the premium estimate 

reflecting risk selection does not include 

the allowable rating factor adjustment. 

Thus, the difference between the 

premium estimates (that is, the 

premium with and the premium 

without risk selection) provides an 

estimate of plan liability attributed to 

risk selection that is not compensated 

for through allowable premium rating— 

our measure of actuarial risk. 

(iii) Estimating the Plan Premium 

Without Risk Selection 

The second premium term in the 

proposed payment transfer formula, the 

plan premium estimate not reflecting 

risk selection, would be calculated as 

the product of the State average 

premium and the normalized product of 

the plan AV, plan allowable rating 

factor, the induced demand factor, and 

a geographic cost factor. The formula 

below shows how this term would be 

calculated: 

Where, 

P ̄ s = State average premium, 

AVi = plan i’s metal level AV, 

ARFi = allowable rating factor 

IDFi = plan i’s induced demand factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment; 

and the denominator is summed across all 

plans in the risk pool in the market in the 

State. 

The normalized adjustment terms 

would account for how a plan’s AV, 

allowed rating variation, induced 

demand, and geographic cost factors 

jointly vary from the State average 

product of these terms. The normalized 

product of the adjustment terms would 

be multiplied by the State average 

premium to estimate the extent to which 

the plan’s premium requirement would 

differ from the premium requirement for 

the State average plan due to cost factors 

unrelated to risk selection. 

(iv) Risk Adjustment Payment Transfer 

Formula 

Transfers would be calculated as the 

difference between the plan premium 

estimate reflecting risk selection and the 

plan premium estimate not reflecting 

risk selection—the two premium 

estimates described above. Therefore, 

the proposed 2014 HHS risk adjustment 

payment transfer formula is: 

Where, 

P ̄ s = State average premium, 

PLRSi = plan i’s plan liability risk score, 

AVi = plan i’s metal level AV, 

ARFi = allowable rating factor 

IDFi = plan i’s allowable rating factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment; 

and the denominator is summed across all 

plans in the risk pool in the market in the 

State. 

The difference between the two 

premium estimates in the payment 

transfer formula would determine 

whether a plan would pay a risk transfer 

charge or receive a risk transfer 

payment. Note that the value of the plan 

average risk score by itself does not 

determine whether a plan would be 

assessed a charge or receive a 

payment—even if the risk score is 

greater than 1.0, it is possible that the 

plan would be assessed a charge if the 

premium compensation that the plan 

may receive through its rating practices 

(as measured through the allowable 

rating factor) exceeds the plan’s 

predicted liability associated with risk 

selection. 

Plans with higher AV would, other 

things being equal, also have higher risk 

scores. This is due to the fact that the 

metal level-specific risk adjustment 

models that are used to predict plan 

liability assume different cost sharing 

and levels of plan liability. Thus, the 

risk score for two identical sets of 

enrollees would differ depending on the 

metal level model used. Thus, a bronze 

plan with an average risk score of 1.1 

would likely have more adverse 

selection than a gold plan with an 

average risk score of 1.1 (because the 

bronze plan risk adjustment model 

assumes a lower level of plan liability 

than the gold plan model). 

Risk adjustment transfers are 

calculated at the risk pool level. Each 

State will have a risk pool for all of its 

metal-level plans. Catastrophic plans 

will be treated as a separate risk pool for 

purposes of risk adjustment. Individual 

and small group market plans will 

either be pooled together or treated as 

separate risk pools, as described in 

section III.B.3.a. of this proposed rule. 

(v) Normalization and Budget Neutral 

Transfers 

As discussed above, each of the two 

premium terms in the payment transfer 

formula would be divided by its 

average. This means that each 

‘‘normalized’’ term would average to 

1.0. Thus, the average of the difference 

between these terms would be zero. 

This is the fundamental property of the 

payment transfer formula that ensures 

that transfers across a risk pool would 

net to zero. 

Note that the individual factors in the 

proposed payment transfer formula do 

not need to independently average to 

1.0. For example, the average risk score 

for a State may not equal 1.0 due to the 

underlying differences in the health 

status of the State’s population and the 

national sample used to calibrate the 

model. It is not necessary to separately 

renormalize plan average risk scores to 

the State average risk score because the 

payment transfer formula normalizes 

the product of the risk score, the 

induced demand factor and the 

geographic cost factor. The individual 

scales for PLRS, IDF, GCF, and ARF are 

not specified because the payment 

transfer formula applies to the planspecific value relative to the State 

average. 

(vi) Calculation of Transfer Formula 

Inputs 

In this section, we describe each 

component of the proposed payment 

transfer formula, and explain how it is 

computed and how it affects transfers. 

(A) Plan Average Risk Score 

The plan average risk score represents 

the plan’s overall risk exposure. The 

proposed plan average risk score 

calculation includes an adjustment to 

account for the family rating rules 

proposed in the Market Reform Rule, 

which caps the number of children that 

can count toward the build-up of family 

rates at three. If risk scores were 

calculated as the member monthweighted average of all enrollee risk 

scores, plan average risk scores would 

tend to misrepresent the risk issuers 

take on for family policies that include 

children that do not count toward 

family rates. In general, children tend to 

have lower risk scores than adults, and 

without an adjustment the average risk 

score for family policies including more 

than three children would tend to be 

lower than the average risk score of 


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family policies with three or fewer 

children, despite the fact that family 

policies with more than three children 

face more uncompensated risk. 

The formula below shows the 

proposed plan average risk score 

calculation including the risk of all 

members on the policy, including those 

children not included in the premium. 

Where, 

PLRSi is plan i’s average plan liability risk 

score, the subscript e denotes each 

enrollee within the plan, 

PLRSe is each enrollee’s individual plan 

liability risk score, 

Me is the number of months during the risk 

adjustment period the enrollee e is 

enrolled in the plan, and 

Mb is the number of months during the risk 

adjust period the billable member b is 

enrolled in the plan (billable members 

exclude children who do not count towards 

family rates). 

The proposed payment transfer 

formula uses the plan average risk score 

to calculate transfers. The plan average 

risk scores would be calculated using 

the applicable risk adjustment model 

described in section III.B.3.b. of this 

proposed rule. The plan liability models 

would produce risk scores that reflect 

the health status of the plan’s enrollees 

and the AV of the plan. The AV 

adjustment in the proposed payment 

transfer formula would help ensure that 

transfers do not compensate plans for 

differences in AV (for which the plans 

may charge an appropriate premium). 

(B) Billable Members 

With the exception of the plan 

average risk score calculation discussed 

above, all of the other calculations used 

in the proposed payment transfer 

formula are based on billable members 

(that is, children who do not count 

toward family policy premiums are 

excluded). Member months, the State 

average premium, the allowable rating 

factor, and the geographic cost factor are 

all calculated based on billable 

members. 

(C) State Average Premium 

As noted above, we propose to use the 

State average premium as the basis of 

calculating payment transfers. The 

average premium calculation would be 

based on the total premiums assessed to 

enrollees, including the portion of 

premiums that are attributable to 

administrative costs. The State average 

premium would be calculated as the 

enrollment-weighted mean of all plan 

average premiums of risk adjustment 

covered plans in the applicable risk 

pool in the applicable market in the 

State. The State average premium 

calculation is based on billable member 

months and excludes member months 

for children that do not count toward 

family policy rates. Plan average 

premiums would be calculated from the 

actual premiums charged to their 

enrollees, weighted by the number of 

months enrolled. 

The proposed equations for these 

average premiums are: 

The first equation calculates the State 

average premium P ̄ s as the average of 

individual plan averages, P ̄i weighted by 

each plan’s share of statewide 

enrollment in the risk pool in the 

market, Si

s (based on billable member 

months). The second equation shows 

how the plan averages are calculated. 

This is the weighted mean over all 

subscribers s of subscriber premiums P ̄s, 

with Ms representing the number of 

billable member months of enrollment 

under the policy of each subscriber s. 

(D) Actuarial Value 

The proposed AV adjustment in the 

payment transfer formula would 

account for relative differences in plan 

liability due to differences in actuarial 

value. The AV adjustment helps to 

achieve the goal of compensating plans 

for risk selection while allowing other 

determinants of premiums—including 

the generosity of plan benefits—to be 

reflected in premiums. If the payment 

transfer formula were to ignore actuarial 

value, it would effectively force low-AV 

plans to subsidize high-AV plans. This 

is because the State average premium is 

calculated from all plans at all metal 

levels in the risk pool in the market. As 

a result, in the absence of an actuarial 

value adjustment, a bronze plan with a 

low risk score would see its transfer 

charge increased based on a State 

average premium that includes plans 

with more generous benefits. 

The AV adjustment would be based 

on the metal level actuarial value 

associated with each plan type (for 

example, all bronze health plans would 

be assigned an AV factor of .6 in the 

proposed payment transfer formula). 

Using the metal level actuarial value as 

the basis for this adjustment provides a 

simple and straightforward approach for 

estimating the impact of benefit design 

on plan liability. The standard metal 

level actuarial values approximate plan 

liability for the standard population 

(that is, plan liability in the absence of 

risk selection). Additionally, the 

adjustment should not be based on a 

plan’s actuarial value, including the de 

minimis range as computed by the AV 

calculator. The cost sharing 

assumptions in the HHS risk adjustment 

models correspond to the standard 

metal level actuarial values (for 

example, 0.6 a bronze plan), so the 

actuarial value adjustment in the 

payment transfer formula must also 

correspond to the standard metal level 

actuarial values. 

Table 9 shows the AV adjustment that 

would be used for each category of 

metal level plans. 

TABLE 9—ACTUARIAL VALUE ADJUSTMENT USED FOR EACH METAL LEVEL

IN THE PAYMENT TRANSFER FORMULA

Metal level AV 

adjustment 

Catastrophic .............................. 0.57 

Bronze ...................................... 0.60 

Silver ......................................... 0.70 

Gold .......................................... 0.80 

Platinum .................................... 0.90 

(E) Allowable Rating Variation 

PHS Act section 2701, as added by the 

Affordable Care Act, establishes 

standards for plan premium rating. 

Rates can vary based on three enrollee 

characteristics—age, family size, and 

tobacco use—and geographic area 

within each State. Furthermore, the law 

limits the amount by which premiums 

may vary by age; the most expensive age 

group’s rating cannot be more than three 

times as high as the lowest (for adults 

age 21 or above), and rating based on 

tobacco use cannot exceed a 50 percent 

increment. Plans cannot base premiums 

on enrollee health status. In the 

proposed Market Reform Rule, we have 

issued proposed standards related to the 

rating rules under the Affordable Care 

Act. The proposed payment transfer 

formula discussed above assumes the 

rating standards of the proposed Market 

Reform Rule. The final payment transfer 

formula may require updating in the 

final Payment Notice to reflect any 

changes to the rating standards in the 

final Market Reform Rule. 

The proposed Allowable Rating 

Factor (ARF) adjustment in the payment 

transfer formula would account only for 

age rating. Tobacco use, wellness 

discounts, and family rating 


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requirements would not be included in 

the payment transfer formula for the 

reasons specified below. Geographic 

cost variation is treated as a separate 

adjustment in the payment transfer 

formula. 

Age rating is permitted within limits 

to enable plans to be partially 

compensated for risk based on enrollee 

age. Under the proposed Market Reform 

Rule, each State would have a standard 

age curve that all issuers would be 

required to use. The 3:1 age rating 

restriction applies to the adults aged 21 

and older. Age bands for individuals 

under 21 would not be subject to the 3:1 

restriction, but their corresponding 

rating factors would still be specified in 

the standard age curves. Each plan’s 

allowable rating factor would be 

calculated as the enrollment-weighted 

average of the age factor, based on the 

applicable standard age curve, across all 

of a plan’s enrollees. In operation, for 

the age rating factor included in the 

payment transfer formula, age would be 

calculated as the enrollee’s age at the 

time of enrollment, as outlined in the 

proposed Market Reform Rule. 

Under the proposed Market Reform 

Rule, premiums for families with three 

or fewer children would be calculated 

as the sum of individual rates for each 

individual within the family. These 

individual rates would be based on each 

person’s age, tobacco use, and 

geographic rating area. For families with 

more than three children, the family 

premium would be built up from the 

individual premiums of the parents plus 

the three oldest children. Additional 

children would not be reflected in the 

family premium. The proposed payment 

transfer formula does not include an 

explicit adjustment related to the family 

rating requirements, as rate setting 

would not include a family rating factor. 

Tobacco rating and wellness 

discounts are also not included in the 

proposed allowable rating factor 

adjustment. These rating factors are 

discretionary. HHS proposes not to 

include adjustments for these rating 

factors in the payment transfer formula 

to maintain issuer flexibility with 

respect to tobacco and wellness 

discount rating that is allowed by the 

Affordable Care Act. 

Table 10 shows a simplified example 

of how the ARF values would be 

calculated for three plans. 

TABLE 10—EXAMPLE ALLOWABLE RATING FACTOR CALCULATION

Age band 

State agerating 

curve 

Plan A Plan B Plan C State 

Enrollment percentages (Share of member-months) 

21 ............................................................................................................. 1.000 33.30% 40.00% 10.00% 31.70% 

(Age bands from 22–39 omitted) 

40 ............................................................................................................. 1.278 33.30% 40.00% 20.00% 33.30% 

(Age bands from 41–63 omitted) 

64 and older ............................................................................................. 3.000 33.30% 20.00% 70.00% 35.00% 

Total member-months .............................................................................. .................... 300,000 200,000 100,000 600,000 

ARF .......................................................................................................... .................... 1.758 1.511 2.456 1.793 

In Table 10, three plans constitute the 

entire risk pool in the market in the 

State. In practice, each State age rating 

curve would have 44 adult bands: One 

for each year from 21 to 63, plus a 64- 

and-older band. In this example, we 

simplify by considering only three 

bands: 21, 40, and 64 and older. The 

second column shows the relative 

premiums for each age band; note that 

these values conform to the 3:1 rating 

restriction. 

Three plans are presented in the next 

three columns, followed by statewide 

totals. We assume Plan A’s enrollment 

of 300,000 member-months is equally 

distributed among the three age bands. 

Enrollment in Plan B is weighted 

toward younger ages, while Plan C 

captures a disproportionately older 

population. Statewide, these 

enrollments add up to a 31.7 percent 

share in the age 21 band, 33.3 percent 

in 40 and older age band, and 35.0 

percent in 64 and older age band. 

Plan-specific ARF values are 

calculated similarly. For example, Plan 

C’s ARF is the sum of three products: 

1.000*0.10 + 1.278*0.20 + 3.000*0.70 = 

2.456. This value indicates that within 

the 3:1 rating restriction, Plan C would 

be expected to collect premiums that are 

higher than the State average due to 

Plan C’s enrollments skewing older. 

Plan A’s enrollees are slightly younger 

than the State average, which is also 

reflected in its 1.758 ARF, and Plan B’s 

enrollment is younger than Plan A. 

(F) Induced Demand 

Induced demand reflects differences 

in enrollee spending patterns 

attributable to differences in the 

generosity of plan benefits (as opposed 

to risk selection). Induced demand is a 

function of plan benefit design. We 

believe risk adjustment should not 

compensate a plan for differences in 

plan liability that are not attributed to 

the underlying health and demographic 

characteristics of the plan’s enrollees. In 

the absence of an induced demand 

adjustment, relative differences in 

induced demand may not be reflected in 

a plan’s post-transfer premiums. In 

other words, plans with relatively high 

AV and induced demand could receive 

larger transfers, allowing them to reduce 

the premium impact of induced 

demand. For example, a plan that 

experiences 10 percent higher 

utilization due to induced demand 

would have a post-transfer premium 

that is less than 10 percent above an 

otherwise identical plan without 

induced demand. 

The expenditure data underlying the 

AV calculator includes an induced 

demand factor for each metal level. We 

propose to use the same induced 

demand factors in the payment transfer 

formula, shown in Table 11. 

TABLE 11—INDUCED DEMAND ADJUSTMENT USED FOR EACH METAL LEVEL

IN THE PAYMENT TRANSFER FORMULA

Metal level 

Induced 

demand 

adjustment 

Catastrophic .......................... 1.00 


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TABLE 11—INDUCED DEMAND ADJUSTMENT USED FOR EACH METAL LEVEL

IN THE PAYMENT TRANSFER FORMULA—Continued 

Metal level 

Induced 

demand 

adjustment 

Bronze .................................. 1.00 

Silver ..................................... 1.03 

Gold ...................................... 1.08 

Platinum ................................ 1.15 

(G) Geographic Area Cost Variation 

The proposed geographic cost factor 

(GCF) would be an adjustment in the 

payment transfer formula because there 

are some plan costs—such as input 

prices or utilization rates—that vary 

geographically and are likely to affect 

plan premiums. By including the 

adjustment, these costs would be 

reflected in premiums, rather than being 

offset by transfers. 

Excluding this adjustment would 

cause transfers to subsidize high-risk 

plans in high-cost areas at the expense 

of low-risk plans in low-cost areas. In a 

low-cost area, for example, a plan with 

lower-than-average risk enrollees would 

face a charge scaled to State average 

costs, which would be larger than 

would be appropriate in an area where 

costs are low. At the same time, the 

payment received by higher-thanaverage risk plans would be larger than 

necessary to compensate for the plan’s 

excess risk. This would disadvantage 

low-risk plans relative to high-risk plans 

in the low-cost area. The opposite 

would be true in high-cost areas. 

GCFs would be calculated for each 

rating area. These factors would be 

calculated based on the observed 

average silver plan premiums in a 

geographic area relative to the Statewide 

average silver plan premium. Using only 

silver plans as the basis of the 

adjustment would help control for 

differences in premiums across rating 

areas due to differential enrollment 

patterns in the available plan types. 

Additionally, the silver plan premiums 

used to calculate the adjustment must 

be standardized for age to isolate 

geographic cost differences in 

premiums. 

Calculation of the GCF would involve 

three steps. First, the average premium 

would be computed for each silver plan 

in each rating area (using the same 

formula that is used to compute plan 

premiums in the State average premium 

calculation discussed above). The 

calculation would be: 

The second step would be to generate 

a set of plan average premiums that 

standardizes the premiums for age 

rating. Plan premiums are standardized 

for age by dividing the average plan 

premium by the plan rating factor, the 

enrollment-weighted rating factor 

applied to all billable members 

(discussed above). This formula would 

be: 

The third and final step would 

compute a GCF for each area and assign 

it to all plans in that area. This would 

be accomplished with the following 

calculation: 


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This equation divides the enrollmentweighted average of standardized silverlevel plan premiums in a geographic area by the average of those premiums 

Statewide. The numerator’s summation 

is over all silver-level plans within plan 

i’s geographic area, 

Using these formulas, the enrollmentweighted statewide average of plan GCF 

values would equal 1.0, so deviations 

from 1.0 can be interpreted as the 

percentage by which any geographic 

area’s costs deviate from the State 

average. In other words, a GCF equal to 

1.15 indicates that the plan operates in 

a geographic area where costs are, on 

average, 15 percent higher than the 

Statewide average. 

(H) Calculation of the Plan Transfer 

Payments 

The PMPM transfer payment 

calculated from the proposed payment 

transfer formula would be multiplied by 

the total number of plan member 

months for billable members to 

calculate the total plan level payment. 

As discussed above, transfers would be 

calculated at the plan level within rating 

areas (that is, a plan operating in two 

rating areas would be treated as two 

separate plans for the purposes of 

calculating transfers). 

We welcome comment on this 

proposed payment transfer formula. 

d. Overview of the Data Collection 

Approach 

In § 153.20, we propose a technical 

correction to the definition of risk 

adjustment data collection approach. 

We propose to delete ‘‘and audited’’ so 

that the definition of risk adjustment 

data collection approach means ‘‘the 

specific procedures by which risk 

adjustment data is to be stored, 

collected, accessed, transmitted, 

validated and the applicable 

timeframes, data formats, and privacy 

and security standards.’’ This technical 

correction clarifies that auditing of risk 

adjustment data is not part of the risk 

adjustment data collection approach. 

Risk adjustment data should be audited 

during the data validation process, 

which is not a part of the risk 

adjustment methodology or data 

collection approach. 

We also propose to modify 

§ 153.340(b)(3) by adding the additional 

restriction that ‘‘Use and disclosure of 

personally identifiable information is 

limited to those purposes for which the 

personally identifiable information was 

collected (including for purposes of data 

validation).’’ This addition will further 

ensure the privacy and security of 

potentially sensitive data by limiting the 

use or disclosure of any personally 

identifiable information collected as a 

part of this program. 

The data collection approach HHS 

proposes to use when operating risk 

adjustment on behalf of the State is 

described in the applicable sections of 

section III.G. of this proposed rule and 

in the new proposed § 153.700 through 

§ 153.730. 

We welcome comment on this 

proposed data collection approach. 

e. Schedule for Risk Adjustment 

Under § 153.610(a), issuers of risk 

adjustment covered plans will provide 

HHS with risk adjustment data in the 

form and manner specified by HHS. 

Under the HHS-operated risk 

adjustment program, issuers will not 

send, but must make available to HHS, 

anonymized claims and enrollment 

data, as specified in section III.G. of this 

proposed rule, for benefit year 2014 

beginning January 1, 2014. Enrollee risk 

scores will be calculated based on 

enrollee enrollment periods and claims 

dates of service that occur between 

January 1, 2014 and December 31, 2014. 

Enrollee risk scores for subsequent 

benefit years will be calculated based on 

claims and enrollment periods for that 

same benefit year. 

As set forth in the proposed § 153.730, 

claims to be used in the risk score 

calculation must be made available to 

HHS by April 30 of the year following 

the benefit year. We believe this date 

provides for ample claims runout to 

ensure that diagnoses for the benefit 

year are captured, while providing HHS 

sufficient time to run enrollee risk score, 

plan average risk, and payments and 

charges calculations and meet the June 

30 deadline described at the 

redesignated § 153.310(e). 

We welcome comment on this 

proposed schedule for risk adjustment. 

4. State Alternate Methodology 

a. Technical Correction 

The Premium Stabilization Rule 

established standards for States that 

establish their own risk adjustment 

programs. Under the proposed revision 

to § 153.310, a State may establish a risk 

adjustment program if it elects to 

operate an Exchange and is approved to 

operate risk adjustment in the State. If 

a State does not meet the requirements 

to operate risk adjustment, HHS will 

carry out all functions of risk 

adjustment on behalf of the State. In 

§ 153.320(a), we established that 

Federally certified methodologies must 

be used in the operation of the risk 

adjustment program, and defined the 

process by which a methodology may 

become Federally certified. In this 

proposed rule, we modify 

§ 153.320(a)(1) and (a)(2) to clarify that 

these methodologies must be published 

in ‘‘the applicable annual’’ notice of 

benefit and payment parameters as 

opposed to ‘‘an annual’’ HHS notice of 

benefit and payment parameters. This 

proposed change makes clear that 

methodologies must be certified for use 

each year. 

b. State Alternate Risk Adjustment 

Methodology Evaluation Criteria 

The Premium Stabilization Rule 

specified the information that a State 

will need to provide to support its 

request for HHS to certify an alternate 

risk adjustment methodology. In 

§ 153.330(a), we specified the elements 

required to be included with the request 

to HHS for certification of an alternate 

risk adjustment methodology. Section 

153.330(a)(1)(i) states that a request for 

certification for an alternate 

methodology must include the elements 

specified in § 153.320(b), which 

includes a complete description of: (1) 

The risk adjustment model; (2) the 

calculation of plan average actuarial 

risk; (3) the calculation of payments and 

charges; (4) the risk adjustment data 

collection approach; and (5) the 

schedule for the risk adjustment 

program. Section 153.330(a)(1)(ii) states 

that the alternate methodology request 

must also include the calibration 

methodology and frequency of 

calibration, and § 153.330(a)(1)(iii) 

provides that the request must include 

statistical performance metrics specified 

by HHS. Section 153.330(a)(2) requires 


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that the request also include certain 

descriptive and explanatory information 

relating to the alternate methodology. 

Under our existing regulations, States 

wishing to submit an alternate risk 

adjustment methodology should do so 

by submitting the information described 

in this proposed rule to HHS at 

AlternateRAMethodology@cms.hhs.gov. 

As described in preamble to the 

Premium Stabilization Rule, at the Risk 

Adjustment Spring Meeting, and in 

technical assistance calls with States, 

requests for State alternate 

methodologies will be accepted up to 30 

days after publication of this proposed 

rule. We will review a State’s request for 

certification of its alternate methodology 

only if it has submitted an Exchange 

Blueprint application and has indicated 

on that application its intent to operate 

a risk adjustment program in the State 

(or, in later years, if it is operating or has 

been approved to operate an Exchange). 

We expect to work with States as they 

develop their alternate methodologies. 

We noted in the Premium 

Stabilization Rule that we would 

provide greater detail about the process 

for receiving Federal certification of 

alternate risk adjustment methodologies 

in this proposed rule. We propose the 

following evaluation criteria to certify 

alternate risk adjustment methodologies. 

We propose to redesignate paragraph (b) 

of § 153.330 to paragraph (c), and are 

proposing a new paragraph (b) that sets 

forth the evaluation criteria for alternate 

risk adjustment methodologies. In the 

new § 153.330(b)(1), we propose to 

consider whether the alternate risk 

adjustment methodology meets criteria 

that correspond to the elements of the 

alternate methodology request described 

in paragraph § 153.330(a)(1) and (2). 

Specifically, we will be evaluating the 

extent to which an alternate risk 

adjustment methodology: 

(i) Explains the variation in health 

care costs of a given population; 

(ii) Links risk factors to daily clinical 

practices and is clinically meaningful to 

providers; 

(iii) Encourages favorable behavior 

among providers and health plans and 

discourages unfavorable behavior; 

(iv) Uses data that is complete, high 

in quality, and available in a timely 

fashion; 

(v) Is easy for stakeholders to 

understand and implement; 

(vi) Provides stable risk scores over 

time and across plans; and 

(vii) Minimizes administrative costs. 

For example, to determine the extent 

that an alternate methodology explains 

the variation in health care costs of a 

given populations, we would consider 

whether the risk adjustment model was 

calibrated from data reflecting the 

applicable market benefits, was 

calibrated on a sample that is reasonably 

representative of the anticipated risk 

adjustment population, and was 

calibrated using a sufficient sample to 

ensure stable weights across time and 

plans. In addition, in evaluating this 

criterion, we would consider whether 

the methodology has suitably 

categorized the types of plans subject or 

not subject to risk adjustment, given the 

overall approach taken by the 

methodology and the goal of the 

program to account for plan average 

actuarial risk. States must provide a 

rationale for the methodology’s 

approach to the plans subject to risk 

adjustment. Under this proposed 

criteria, we would also evaluate the 

State’s method for calculating payments 

and charges, as described in section 

III.B.4.c., below. 

We also note that we would consider 

whether the alternate methodology 

discriminates against vulnerable 

populations or creates inappropriate 

incentives. Alternate methodologies 

must not discriminate against 

individuals because of age, disability, or 

expected length of life, and should take 

into account the health care needs of 

diverse segments of the risk adjustment 

population, including women, children, 

persons with disabilities, and other 

vulnerable groups. 

In the proposed § 153.330(b)(2), we 

would consider whether the alternate 

methodology complies with the 

requirements of subpart D, especially 

§ 153.310(e) (as proposed to be 

renumbered) and § 153.340. Section 

153.310(e) requires alternate 

methodologies to have a schedule that 

provides annual notification to issuers 

of risk adjustment covered plans of 

payments and charges by June 30 of the 

year following the benefit year. Section 

153.340(b)(1) sets forth a number of 

minimum requirements for data 

collection under risk adjustment, 

including standards relating to data 

privacy and security. While the Federal 

approach will not directly collect data 

from insurers, but instead will use a 

distributed approach that will not 

include personally identifiable 

information, the Premium Stabilization 

Rule gave States the flexibility to design 

their own data collection approach, 

provided privacy and security standards 

are met. The privacy and security of 

enrollees’ data is of paramount 

importance to HHS, and the data 

collection approach in an alternate 

methodology must protect personally 

identifiable information, if any, that is 

stored, transmitted, or analyzed, to be 

certified. The application for 

certification of the alternate 

methodology should identify which 

data elements contain personally 

identifiable information, and should 

specify how the State would meet these 

data and privacy security requirements. 

In § 153.330(b)(3), we propose to 

consider whether the alternate risk 

adjustment methodology accounts for 

payment transfers across metal levels. 

We believe that sharing risk across 

metal levels is a critical part of a risk 

adjustment methodology as new market 

reforms are implemented because of the 

need to mitigate adverse selection across 

metal levels, as well as within metal 

levels. The proposed HHS risk 

adjustment methodology transfers funds 

between plans across metal levels, and 

under this proposal, State alternate 

methodologies must do so as well. 

For reasons described previously, 

under the proposed HHS risk 

adjustment methodology, we propose to 

apply risk adjustment to catastrophic 

plans in their own risk pool—that is, we 

would transfer funds between 

catastrophic plans, but not between 

catastrophic plans and metal level 

plans. For a number of plans, such as 

student health plans and plans not 

subject to the market reform rules, we 

have proposed not to transfer payments 

under the HHS risk adjustment 

methodology. However, as discussed 

above, we believe that States should 

have the flexibility to submit a 

methodology that transfers funds 

between these types of plans (either in 

their own risk pool or with the other 

metal levels). 

In § 153.330(b)(4), we propose to 

consider whether the elements of the 

alternate methodology align with each 

other. For example, the data collected 

through the data collection approach 

should align with the data required by 

the risk adjustment model to calculate 

individual risk scores. 

Alternate methodologies submitted by 

States that are approved as Federally 

certified risk adjustment methodologies 

for 2014 will be published in the final 

2014 HHS notice of benefit and payment 

parameters. We envision working 

closely with States during the 

development of their alternate 

methodologies to ensure that they meet 

the criteria described above. We expect 

to have a number of meetings with any 

State proposing an alternate 

methodology during the certification 

process. During these meetings, we 

intend to provide input to States on 

whether their proposed alternate 

methodologies meet the given criteria. 

States will then have the opportunity to 

modify their alternate methodologies 

and request further review. We are 


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committed to working with States in a 

collaborative fashion on these matters. 

c. Payment and Charges 

In the preamble to the Premium 

Stabilization Rule, we noted that we 

plan to establish a national method for 

calculation of payments and charges. 

The goal of the proposed payment 

transfer formula is to reduce the impact 

of risk selection on premiums while 

ensuring that payments and charges net 

to zero. A national method for the 

calculation of payments and charges 

would ensure a degree of consistency in 

the risk adjustment program from State 

to State, while allowing States to vary 

other elements of the program. 

However, we recognize that a uniform 

national method could limit States’ 

flexibility in developing their alternate 

risk adjustment methodologies. 

The proposed payment transfer 

formula (regardless of whether for a 

plan liability or total expenditure 

approach, as described in section 

III.B.3.10. utilizes the plan average risk 

score and the State average premium. 

The proposed HHS payment transfer 

formula is based on a plan liability 

model. States can adapt this formula to 

a total expenditure model by replacing 

the plan liability risk score in the 

formula with the total expenditure risk 

score of a plan, and multiplying the 

total expenditure risk score by an 

adjustment for AV. We propose to 

provide States the flexibility to select 

the adjustments used for the calculation 

of payments and charges in their 

alternate methodologies. The proposed 

HHS payment transfer formula will 

make adjustments for AV, age rating 

factor, geographic cost differences, and 

induced demand. States have the option 

of including or excluding any of these 

adjustments. States may also include 

other adjustments in the calculation of 

payments and charges under their 

alternate methodologies. Adjustments 

can be added to or removed from the 

basic payment transfer formula as long 

as these factors are normalized, so that 

transfers net to zero. We will work with 

States on a one-on-one basis in 

developing their payment transfer 

formulae for their alternate 

methodologies. 

States may construct particular 

adjustment factors in different ways. For 

example, HHS would determine an 

adjustment for geographic cost 

differences by comparing the area 

premium to the State average premium. 

A State may elect to develop a different 

factor to adjust for geographic cost 

differences. As described above, we ask 

States to provide the adjustments, the 

associated factors or curves, and the 

rationale for the adjustments they plan 

to use for their alternate methodologies 

as part of their response to the criterion 

proposed in § 153.330(b)(1). We believe 

this approach ensures a degree of 

consistency while allowing States 

flexibility for calculating payments and 

charges. 

5. Risk Adjustment Data Validation 

In § 153.350, we specified standards 

applicable to States, or HHS on behalf 

of States, in validating risk adjustment 

data. Specifically, we required States 

operating risk adjustment programs and 

HHS to establish a process to appeal 

findings from data validation and allow 

the State, or HHS on behalf of the State, 

to adjust risk adjustment payments and 

charges based on data validation 

findings. The credibility of risk 

adjustment data, which results from a 

reliable data validation process, is 

important to establishing issuer 

confidence in the risk adjustment 

program. Moreover, as error rates 

derived from the results of data 

validation may be used to make 

adjustments to the plan average 

actuarial risk calculated for a risk 

adjustment covered plan, the data 

validation process will ensure that such 

transfers accurately reflect each plan’s 

average enrollee risk. In this proposed 

rule, we build upon guidance released 

in the Risk Adjustment Bulletin and in 

discussions held with stakeholders at 

the Risk Adjustment Spring Meeting to 

define data validation standards 

applicable to issuers of risk adjustment 

covered plans when HHS operates risk 

adjustment on behalf of a State. 

We propose that, beginning in 2014, 

HHS conduct a six-stage data validation 

program when operating risk adjustment 

on behalf of a State: (1) Sample 

selection; (2) initial validation audit; (3) 

second validation audit; (4) error 

estimation; (5) appeals; and (6) payment 

adjustments. We discuss these concepts 

in greater detail below. We note States 

are not required to adopt this HHS data 

validation methodology. 

a. Data Validation Standards When HHS 

Operates Risk Adjustment 

We propose to add a new subsection, 

§ 153.630, which sets forth risk 

adjustment data validation standards 

applicable to all issuers of risk 

adjustment covered plans when HHS is 

operating risk adjustment. In 

§ 153.630(a), we propose a general 

standard that issuers of risk adjustment 

covered plans have an initial and 

second validation audit of risk 

adjustment data. These are the second 

and third stages of the six-stage data 

validation program described below. 

b. Data Validation Process When HHS 

Operates Risk Adjustment 

(1) Sample Selection 

Under the Premium Stabilization 

Rule, HHS will validate a statistically 

valid sample from each issuer that 

submits data for risk adjustment every 

year. As described above, sample 

selection is the first stage of HHS’ sixstage risk adjustment data validation 

process. HHS would select the sample 

for each issuer of a risk adjustment 

covered plan in accordance with 

standards discussed in this section. 

HHS would ensure that the data 

validation process reviews an adequate 

sample size of enrollees such that the 

estimated payment errors will be 

statistically sound and so that enrolleelevel risk score distributions reflect 

enrollee characteristics for each issuer. 

The sample would cover applicable 

subpopulations for each issuer. For 

example, enrollees with and without 

risk adjustment diagnoses would be 

included in the sample. In determining 

the appropriate sample size for data 

validation, we recognize the need to 

strike a balance between ensuring 

statistical soundness of the sample and 

minimizing the operational burden on 

issuers, providers, and HHS. 

We expect that each issuer’s initial 

validation audit sample within a State 

will consist of approximately 300 

enrollees, with up to two-thirds of the 

sample consisting of enrollees with 

HCCs. 

Note that any assumptions used by 

HHS that underlie the sample size 

determinations in the initial years of the 

program may be updated as we gain 

experience performing data validation 

for risk adjustment. Additionally, we 

will continue to evaluate population 

distributions to determine the sample 

subpopulations. We seek comment on 

this approach to sample selection, 

particularly on use of existing data 

validation program results that could be 

used to derive comparable estimates 

under this program. 

(2) Initial Validation Audit 

Once the audit samples are selected 

by HHS, issuers would conduct 

independent audits of the risk 

adjustment data for their initial 

validation audit sample enrollees, as set 

forth in § 153.630(b). In § 153.630(b)(1), 

we propose that issuers of risk 

adjustment covered plans engage one or 

more auditors to conduct these 

independent initial validation audits. 

We propose in § 153.630(b)(2) through 

(4) that issuers ensure that initial 

validation auditors are reasonably 

capable of performing the audit, that the 


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21We note that issuers will need to link 

information on the dedicated distributed data 

environments with the information specified this 

proposed rule for data validation purposes. 

audit is completed, that the auditor is 

free from conflicts of interest, and that 

the auditor submits information 

regarding the initial validation audit to 

HHS in the manner and timeframe 

specified by HHS. These proposed 

requirements would ensure that the 

initial validation audit is conducted 

according to minimum audit standards, 

and that issuers or auditors transmit 

necessary information to HHS for use in 

the second validation audit. 

For the enrollees included in the 

HHS-specified audit sample, issuers of 

risk adjustment covered plans would 

provide enrollment and medical record 

documentation to the initial validation 

auditor to validate the demographic and 

health status data of each enrollee, as 

described above.21 We anticipate that 

issuers would have considerable 

autonomy in selecting their initial 

validation auditors. However, initial 

validation auditors must conduct data 

validation audits in accordance with 

audit standards established by HHS. We 

have identified three methods for 

establishing these standards: 

• HHS or an HHS-designated entity 

could prospectively certify auditors for 

these audits; 

• HHS could develop standards that 

issuers and initial validation auditors 

would follow, without any requirement 

of prior HHS certification or approval of 

auditors; or 

• HHS could issue non-binding, ‘‘best 

practice’’ guidelines for issuers and 

auditors. 

We request comment on these 

approaches and on any standards or best 

practices that should be applicable. 

Upon conclusion of the initial 

validation audit process, issuers of risk 

adjustment covered plans would be 

required to submit audit findings to 

HHS in accordance with the standards 

established by HHS. 

(3) Second Validation Audit 

We propose to retain an independent 

second validation auditor to verify the 

accuracy of the findings of the initial 

validation audit. We would select a subsample of initial validation audit sample 

enrollees for review by the second 

validation auditor. We would provide 

additional information pertaining to its 

approach for selecting the second 

validation audit sub-sample in future 

guidance. The second validation auditor 

would only review enrollee information 

that was or was to be originally 

presented during the initial validation 

audit. 

In § 153.630(c), we establish standards 

for issuers of risk adjustment covered 

plans related to HHS’ second validation 

audit of risk adjustment data. These 

requirements establish minimum 

standards for issuer compliance with 

the second validation audit. We propose 

that an issuer of a risk adjustment 

covered plan comply with, and ensure 

the initial validation auditor complies 

with, HHS and the second validation 

auditor in connection with the second 

validation audit. Specifically, issuers 

would submit (or ensure their initial 

validation auditor submits) data 

validation information, as specified by 

HHS, from their initial validation audit 

for each enrollee included in the second 

validation audit sub-sample. Issuers 

would also transmit all information to 

HHS or its second validation auditor in 

an electronic format to be determined by 

HHS. The second validation auditor 

would inform the issuers of error 

findings based on their review of 

enrollees in the second validation audit 

subsample. 

(4) Error Estimation 

We would estimate risk score error 

rates based on the findings from the data 

validation process. Risk adjustment 

errors may include any findings that 

result in a change to the demographic or 

health status components of an 

enrollee’s risk score. This may include 

errors due to incorrect diagnosis coding, 

invalid documentation, missing or 

insufficient medical record 

documentation, or incorrect 

determination of enrollee demographic 

information. We are considering 

estimating changes in plan average 

actuarial risk for the issuer error rates 

calculated from data validation 

activities, with a suitable confidence 

interval. We plan to conduct analyses to 

determine the most effective 

methodology for adjusting plan risk 

scores for calculating risk adjustment 

payment transfers. 

Upon completion of the second 

validation audit and error estimation 

stages of HHS’s data validation process, 

we would provide each issuer with 

enrollee-level audit results and error 

estimates at the issuer level, based on 

the methodology described above. 

We are requesting comments on the 

described error estimation concepts. 

c. Appeals 

In accordance with § 153.350(d), we 

provide an administrative process to 

appeal findings with respect to data 

validation. We propose in § 153.630(d) 

that issuers may appeal the findings of 

a second validation audit or the 

application of a risk score error rate to 

its risk adjustment payments and 

charge. We anticipate that appeals 

would be limited to instances in which 

the audit was not conducted in 

accordance with second validation audit 

standards established by HHS. We will 

provide further detail on this process in 

future guidance or regulation, as 

appropriate. 

d. Payment Adjustments 

In accordance with 153.350(b), HHS 

may adjust charges and payments to a 

risk adjustment covered plan based on 

the recalculation of plan average 

actuarial risk following the data 

validation process. We anticipate that 

HHS would use a prospective approach 

when making such payment 

adjustments. We believe a prospective 

approach is appropriate because we 

anticipate issuers’ error estimates to be 

relatively stable from year to year. 

Further, we believe it is necessary to use 

a prospective approach to allow issuers 

and HHS sufficient time to complete the 

validation and appeals processes. 

Transfers for a given benefit year would 

likely be invoiced before the data 

validation process for that benefit year 

is completed. The prospective approach 

would ensure that issuers would not be 

subject to a second transfer for the 

benefit year. We would use an issuer’s 

data validation error estimates from the 

prior year to adjust the issuer’s average 

risk score in the current year for 

transfers. We request comments on this 

approach. 

As described previously, because the 

risk adjustment program transfers funds 

between issuers in a zero sum manner, 

trust in the system is important for the 

success of the program. We have 

proposed the data validation process 

described here to ensure that issuers 

comply with risk adjustment standards 

and to promote confidence in the risk 

adjustment program. As such, we 

propose in paragraph § 153.630(e) that 

HHS may adjust payments and charges 

for issuers that do not comply with the 

initial or second validation audit 

standards set forth in § 153.630(b) and 

(c). We seek comment on the types of 

adjustments that may be assessed on 

issuers that do not comply with 

parameters set forth in this proposed 

rule. 

e. Proposed HHS-Operated Data 

Validation Process for Benefit Years 

2014 and 2015 

We propose that issuers of risk 

adjustment covered plans adhere to the 

data validation process outlined above 

beginning with data for the 2014 benefit 

year. However, we recognize the 

complexity of the risk adjustment 


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22As discussed in more detail below, Section 

1341 of the Affordable Care Act provides that health 

insurance issuers and ‘‘third party administrators 

on behalf of group health plans’’ must make 

contributions to an applicable reinsurance entity. 

Although self-insured group health plans are 

ultimately liable for reinsurance contributions, a 

third-party administrator or administrative-servicesonly contractor may be utilized for transfer of the 

reinsurance contributions. For consistency, 

throughout this proposed rule, we will refer to these 

contributing entities as self-insured group health 

plans. 

23See our discussion of this distributed approach 

in section III.G. of this proposed rule. 

program and the data validation 

process, and the uncertainty in the 

market that will exist in 2014. In 

particular, we are concerned that 

adjusting payments and charges without 

first gathering information on the 

prevalence of error could lead to a 

costly and potentially ineffective audit 

program. Therefore, we are proposing 

that issuers conduct an initial validation 

audit and that we conduct a second 

validation audit for benefit year 2014 

and 2015, but that we would not adjust 

payments and charges based on 

validation findings during these first 

two years of the program (that is, we 

would not adjust payments and charges 

based on validation results on data from 

the 2014 and 2015 benefit years). 

However, we would conduct all aspects 

of the data validation program other 

than adjusting payments and charges 

(though we would make adjustments 

under the proposed § 153.630(e)) during 

the first two years of the program, 

including requiring the initial validation 

and second validation audits, and 

calculating error rates for each issuer. 

We believe that the data validation 

conducted during the first two years of 

the program will serve an important 

educational purpose for issuers and 

providers. Although we are proposing 

not to adjust payments and charges as 

a correction based on error estimates 

discovered, we note that other remedies, 

such as prosecution under the False 

Claims Act, may be applicable to issuers 

not in compliance with the risk 

adjustment program requirements. We 

have tried to balance the need to 

provide assurance to issuers that all risk 

adjustment data is adequate and that 

calculations are appropriate with the 

desire to limit burden and uncertainty 

in the initial years of program operation. 

This approach was taken with the 

Medicare Part C risk adjustment 

program—the data validation audit 

process was observed for several years 

before payment adjustments were made. 

We plan to work with issuers during the 

first two years of the data validation 

program, and will seek additional input 

on how to improve the process. We are 

requesting comments on this approach, 

particularly with respect to 

improvements to the data validation 

process generally, whether there are 

alternatives to forgoing changes to 

payments and charges that we should 

adopt, and what methods we should 

adopt to ensure data integrity in the first 

two years of the program. 

As part of our effort to refine the data 

validation program during the first two 

years, we are considering publishing a 

report on the error rates discovered 

during these first two years, and 

propose to use these results to inform 

our audit program. For this report, we 

may conduct special studies of the 

second validation audits aimed at 

comparing the error rate results of the 

initial validation auditors and second 

validation audits. For example, the 

second validation audits may be used to 

assess the extent to which auditor error 

contributed to the initial validation 

audit risk score error rate findings, and 

to determine whether discrepancies 

between the results of the two audits 

may result in adjustments to the 

estimated error rates calculated for the 

initial validation audit process. 

The second validation audits could 

also be used to assess the accuracy of 

the initial audit error rates at either the 

auditor or issuer level. Conducting the 

second validation audits at the auditor 

level in future years would allow us to 

examine the accuracy of the initial 

validation audit without having to draw 

large initial validation audit record 

samples from each issuer that 

participates in risk adjustment. We 

anticipate that a small number of audit 

firms will perform the majority of initial 

audits. We seek comment on the 

approaches outlined here, as well as 

additional approaches to data validation 

for risk adjustment. 

f. Data Security and Transmission 

In § 153.630(f), we establish data 

security and transmission requirements 

for issuers related to the HHS data 

validation process. These requirements 

establish the manner in which issuers 

and auditors must transmit audit 

information, and ensure that any 

enrollee information that is transmitted 

is protected. In § 153.630(f)(1), we 

propose that issuers submit any risk 

adjustment data and source 

documentation specified by HHS for the 

initial and second validation audits to 

HHS in the manner and timeframe 

established by HHS. We propose in 

§ 153.630(f)(2) that, in connection with 

the initial validation audit, the second 

validation audit, and any appeals, an 

issuer must ensure that it and its initial 

validation auditor complies with the 

security standards described at 

§ 164.308, § 164.310, and § 164.312. 

C. Provisions and Parameters for the 

Transitional Reinsurance Program 

The Affordable Care Act directs that 

a transitional reinsurance program be 

established in each State to help 

stabilize premiums for coverage in the 

individual market from 2014 through 

2016. The reinsurance program is 

designed to alleviate the need to build 

into premiums the risk of enrolling 

individuals with significant unmet 

medical needs. By stabilizing premiums 

in the individual market equitably 

throughout the United States, the 

reinsurance program is intended to help 

millions of Americans purchase 

affordable health insurance, reduce 

unreimbursed usage of hospital and 

other medical facilities by the 

uninsured, and thereby lower medical 

expenses and premiums for all people 

with private health insurance. 

We aim to administer the reinsurance 

program to provide reinsurance 

payments in an efficient, fair, and 

accurate manner, where they are needed 

most, to effectively stabilize premiums 

nationally. In addition, we intend to 

implement the reinsurance program in a 

manner that minimizes the 

administrative burden of collecting 

contributions and making reinsurance 

payments. For example, HHS intends to 

collect contributions from health 

insurance issuers and self-insured group 

health plans 22 in all States, including 

States that elect to operate their 

reinsurance programs. This would allow 

for a centralized and streamlined 

process for the collection of 

contributions, and would avoid 

inefficiencies related to using different 

processes in different States. This would 

also eliminate the need for States to 

send to HHS the contributions collected 

for the U.S. Treasury. Federal 

collections will also leverage economies 

of scale, reducing the overall 

administrative costs of the reinsurance 

program. 

We also intend to simplify collections 

by using a national per capita uniform 

contribution rate. Collection based on a 

per capita rate is simpler and easier to 

implement than other methods. In 

addition, in the HHS-operated 

reinsurance program, we propose to 

calculate reinsurance payments using 

the same distributed approach for data 

collection that we propose for operating 

risk adjustment on behalf of States.23

This will permit issuers to receive 

reinsurance payments using the same 

systems established for the risk 

adjustment program, resulting in less 

administrative burden and lower costs, 


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while maintaining the security of 

identifiable health information. 

In this proposed rule, we propose 

modifications and refinements to the 

reinsurance program standards for 

States and issuers. These modifications 

further reduce the administrative 

burden of collecting contributions and 

making reinsurance payments, and will 

more effectively stabilize premiums in 

the individual markets in all States 

across the country. In particular, we 

propose uniform reinsurance payment 

parameters to be used across all States. 

These payment parameters would be 

used to calculate reinsurance payments 

in all States, regardless of whether the 

State or HHS on behalf of the State 

operates the reinsurance program. We 

also propose that HHS will collect 

contributions from health insurance 

issuers and self-insured group health 

plans in all States, including States that 

elect to operate their own reinsurance 

programs. In addition, we propose a 

national, uniform calendar under which 

reinsurance contributions will be 

collected from all contributing entities, 

and reinsurance payments will be 

disbursed to issuers of nongrandfathered individual market plans. 

Furthermore, we propose to distribute 

reinsurance payments based on the need 

for reinsurance payments in each State. 

Because reinsurance contributions and 

reinsurance needs will vary 

significantly between States, we believe 

a policy of disbursing reinsurance 

payments solely in a State in which the 

contributions are collected would not 

meet the States’ individual reinsurance 

needs, would not fulfill HHS’s 

obligation to provide equitable 

allocation of these funds under section 

1341(b)(2)(B) of the Affordable Care Act 

as well as would disbursing reinsurance 

payments in the manner proposed in 

this proposed rule. 

We note that these proposals reflect 

changes from policies set forth in the 

Premium Stabilization Rule. The 

principal proposed changes from the 

policies in the Premium Stabilization 

Rule include: 

• Uniform reinsurance payment 

parameters to be used by all States; 

• A uniform reinsurance contribution 

collection and payment calendar; 

• A one-time annual reinsurance 

contribution collection, instead of 

quarterly collections in a benefit year; 

• Collection of reinsurance 

contributions by HHS under the 

national contribution rate from both 

health insurance issuers and selfinsured group health plans; 

• A limitation on States’ ability to 

change reinsurance payment parameters 

from those that HHS establishes in the 

annual HHS notice of benefit and 

payment parameters—a State may only 

propose supplemental reinsurance 

payment parameters if the State elects to 

collect additional funds for reinsurance 

payments or use additional State funds 

for reinsurance payments; and 

• A limitation on States that seek 

additional reinsurance funds for 

administrative expenses, such that the 

State must have its applicable 

reinsurance entity collect those 

additional funds. 

These modifications are proposed in 

addition to other regulatory changes 

outlined below to ensure effective 

administration of the transitional 

reinsurance program. 

1. State Standards Related to the 

Reinsurance Program 

a. State Notice of Benefit and Payment 

Parameters 

HHS intends to establish a 

reinsurance contribution and payment 

process and reinsurance payment 

parameters that will be applicable in all 

States, and proposes to amend the 

requirements set forth in the Premium 

Stabilization Rule accordingly. First, 

instead of allowing a State establishing 

its own reinsurance program to modify, 

via a State notice of benefit and 

payment parameters, the data collection 

frequency for issuers to receive 

reinsurance payments from those 

specified in this proposed rule, we 

propose that all States be required to use 

the annual payment schedule set forth 

in this proposed rule. As such, we 

propose to amend § 153.100(a)(1) to 

remove the reference to State 

modification of data collection 

frequency. Under this proposal, the 

frequency with which data must be 

submitted for reinsurance payments 

would follow a national schedule. 

Under § 153.100(a)(1), HHS would 

continue to allow a State establishing a 

reinsurance program to modify the data 

requirements for health insurance 

issuers to receive reinsurance payments, 

provided that the State publishes a State 

notice of benefit and payment 

parameters and specifies these 

modifications in that notice. 

We propose to also amend § 153.100 

by deleting subparagraph (a)(5), and to 

add § 153.232 to direct a State that 

elects to collect additional reinsurance 

contributions for purposes of making 

additional reinsurance payments or to 

use additional funds for reinsurance 

payments under § 153.220(d) to publish 

supplemental State reinsurance 

payment parameters in its State notice 

of benefit and payment parameters 

under proposed § 153.100(a)(2). 

The Premium Stabilization Rule 

stated that a State establishing a 

reinsurance program may either directly 

collect additional reinsurance 

contributions for administrative 

expenses and reinsurance payments 

when a State elects to collect from 

health insurance issuers, or may elect to 

have HHS collect contributions from 

health insurance issuers for 

administrative expenses. However, we 

now propose to change this policy such 

that a State operating its own 

reinsurance program will no longer be 

permitted to have HHS collect 

additional funds for administrative 

expenses. To create the most effective 

reinsurance program, we are proposing 

to collect reinsurance contributions on 

behalf of all States from both health 

insurance issuers and self-insured group 

health plans in the aggregate, and we 

propose to disburse reinsurance 

payments based on a State’s need for 

reinsurance payments, not based on 

where the contributions were collected. 

As a result, HHS will no longer be able 

to attribute additional funds for 

administrative expenses back to a State. 

We propose to amend § 153.100(a)(3) to 

clarify that these additional 

contributions may only be collected by 

a State operating its own reinsurance 

program in that State. 

We also propose to delete 

§ 153.110(d)(5) and § 153.210(a)(2)(iii), 

because we propose to disburse 

reinsurance contributions in proportion 

to the need for reinsurance payments. 

Thus, a State’s allocation of reinsurance 

contributions among applicable 

reinsurance entities is no longer 

necessary. Accordingly, we also propose 

to delete § 153.110(d)(2), which requires 

that a State notice include an estimate 

of the number of enrollees in fully 

insured plans with the boundaries of 

each reinsurance entity. 

We further propose that HHS collect 

all contributions under a national 

contribution rate from all health 

insurance issuers in all States. We 

therefore propose to delete all 

requirements regarding the State 

collection of reinsurance contributions 

from health insurance issuers under the 

national contribution rate, including 

§ 153.100(a)(2) and § 153.110(b), 

removing the requirement that a State 

publish a State notice of benefit and 

payment parameters to announce its 

intention to collect reinsurance 

contributions from health insurance 

issuers. We also propose to delete 

§ 153.110(d)(4) which requires States to 

publish in their State notices an 

estimate of the reinsurance 

contributions that will be collected by 

each applicable reinsurance entity. 


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b. Reporting to HHS 

We propose to amend § 153.210 by 

adding paragraph (e), which directs a 

State that establishes a reinsurance 

program to provide information 

regarding all requests for reinsurance 

payments received from all reinsuranceeligible plans for each quarter during 

the benefit year. We propose to use this 

information to monitor requests for 

reinsurance payments and reinsurance 

contribution amounts throughout the 

benefit year, to ensure equitable 

reinsurance payments in all States. 

To provide issuers in the individual 

market with information to assist in 

developing rates in subsequent benefit 

years, we propose in § 153.240(b)(2) that 

a State, or HHS on behalf of the State, 

provide issuers of reinsurance-eligible 

plans with quarterly estimates of the 

expected requests for reinsurance 

payments for the reinsurance-eligible 

plan under both the national payment 

parameters and any State supplemental 

payments parameters set forth under 

§ 153.232, as determined by HHS or the 

State’s reinsurance entity, as applicable. 

These quarterly estimates would 

provide issuers with the timely 

information that is needed to support 

the calculation of expected claims 

assumptions that are key to rate 

development and ultimately, premium 

stabilization. We expect that an issuer of 

a reinsurance-eligible plan will use this 

information to estimate total 

reinsurance payments to be received for 

future benefit years, and will use its best 

estimates of future payments to reduce 

premiums. It is our expectation that 

reinsurance payments will be used in 

the rate setting process to reduce 

premiums, fulfilling the goals of the 

reinsurance program. 

The national reinsurance payment 

parameters are calculated to expend all 

reinsurance contributions collected 

under the national contribution rate. 

Similarly, the additional funds collected 

by the State for reinsurance payments or 

additional State funds are to be 

reasonably calculated, under proposed 

§ 153.232(a)(2), to cover all additional 

reinsurance payments projected to be 

made under the State supplemental 

payment parameters. Because the 

national payment parameters and State 

supplemental payment parameters 

apply to two separate funds, we believe 

that it is important for a State to 

distinguish between reinsurance 

payments made under the two different 

sets of parameters so that reinsuranceeligible plans can understand how each 

reinsurance program will likely affect 

claims costs. HHS intends to collaborate 

with issuers and States to develop these 

early notifications. We therefore 

propose in § 153.240(b) that each State, 

or HHS on behalf of the State, ensure 

that each applicable reinsurance entity 

provides to issuers the expected 

requests for reinsurance payments made 

under § 153.410 and § 152.232 for all 

reinsurance-eligible plans in the State 

within 60 days of the end of each 

quarter, with a final report for a benefit 

year sent to issuers no later than June 30 

of the year following the applicable 

benefit year. 

For efficient administration of the 

reinsurance program, HHS must ensure 

that reinsurance contributions are 

appropriately spent on reinsurance 

payments. To this end, we intend to 

obtain reports regarding reinsurance 

payments and administrative expenses 

from States that establish a reinsurance 

program. We intend to provide details of 

these reports in future regulation and 

guidance, along with similar standards 

for Exchanges, the risk adjustment 

program, and other Affordable Care Act 

programs. 

c. Additional State Collections 

Under the current § 153.220(g) of the 

Premium Stabilization Rule (which we 

now propose to redesignate as 

paragraph (d)), a State operating its own 

reinsurance program may elect to collect 

more than the amounts based on the 

national contribution rate set forth in 

the annual HHS notice of benefit and 

payment parameters for administrative 

expenses of the applicable reinsurance 

entity or additional reinsurance 

payments. Under § 153.220(h)(1) of the 

Premium Stabilization Rule (now 

proposed to be designated as 

§ 153.220(d)(2)), a State must notify 

HHS within 30 days after publication of 

the draft annual HHS notice of benefit 

and payment parameters for the 

applicable benefit year of the additional 

contribution rate that it elects to collect. 

We note that although the proposed 

§ 153.220(d) specifies that a State may 

elect to collect additional reinsurance 

contributions for administrative 

expenses or reinsurance payments, 

nothing in section 1341 of the 

Affordable Care Act or this proposed 

rule gives a State the authority to collect 

from self-insured group health plans 

covered by ERISA, and that Federal law 

generally preempts State law that relates 

to an ERISA-covered plan. 

d. State Collections 

We propose that HHS collect 

reinsurance contributions from all 

contributing entities regardless of 

whether a State elects to operate the 

reinsurance program or have HHS 

operate the reinsurance program on its 

behalf. As reinsurance payments will be 

calculated based on aggregate 

contributions collected and total 

requests for reinsurance payments 

nationally, we believe that a centralized 

collection process for all contributing 

entities will facilitate the allocation and 

disbursement of funds. This will also 

streamline the contribution submissions 

process for health insurance issuers who 

operate in multiple States. 

We propose to amend § 153.220(a) to 

set forth that if a State establishes a 

reinsurance program, HHS will collect 

all reinsurance contributions from all 

contributing entities for that State under 

the national contribution rate. We, 

therefore, propose to delete 

§ 153.220(a)(2), as we are no longer 

requiring a State to ensure that the 

applicable reinsurance entity accepts 

contributions for reinsurance 

contribution enrollees who reside in 

that State with respect to health 

insurance issuers from HHS. In 

accordance with the proposed change 

regarding State collections, we also 

propose to delete § 153.220(b) of the 

Premium Stabilization Rule, which 

directs a State operating its own 

reinsurance program to notify HHS of its 

intention to collect from its health 

insurance issuers for the 2014 benefit 

year by December 1, 2012. If finalized as 

proposed, we would consider any 

notification a State made to HHS 

pursuant to § 153.220(b) of the Premium 

Stabilization Rule prior to the 

finalization of this proposed rule to be 

withdrawn. We propose to delete 

§ 153.220(f) of the Premium 

Stabilization Rule which includes 

requirements on the State collection of 

reinsurance contributions from health 

insurance issuers. 

Section 153.220(e) of the Premium 

Stabilization Rule requires that 

reinsurance contributions are allocated 

as required in the annual HHS notice of 

benefit and payment parameters for the 

applicable benefit year such that 

contributions allocated for reinsurance 

payments within the State are only used 

for reinsurance payments, and 

contributions allocated for payments to 

the U.S. Treasury are paid in the 

timeframe and manner established by 

HHS. We also propose that any 

additional contributions collected under 

§ 153.220(d)(1)(ii) and allocated for 

reinsurance payments under the State 

supplemental reinsurance payment 

parameters must be used to make 

reinsurance payments. We also propose 

under § 153.220(d)(3) that States may 

use additional funds, which were not 

collected as additional reinsurance 

contributions, to make reinsurance 

payments under the State supplemental 


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24See section 1341(d) of the Affordable Care Act. 

25 In the Certain Preventive Services under the 

Affordable Care Act Advanced Notice of Proposed 

Rulemaking (77 FR 16501) published March 21, 

2012, potential changes to the reinsurance 

contributions were contemplated with regard to a 

potential religious accommodation for 

contraception coverage for certain self-funded 

plans. If the rules regarding the religious 

accommodation include changes to the reinsurance 

contribution, this policy may be changed 

accordingly. 

26We note that under the definition of 

reinsurance-eligible plan in § 153.20, if a plan is 

excluded from making reinsurance contributions, 

the plan is excluded from the reinsurance program 

altogether, (that is, a plan excluded from making 

reinsurance contributions cannot receive 

reinsurance payments). 

27See Section 7F of the National Association of 

Insurance Commissioners (NAIC) Model Regulation 

to Implement the Accident and Sickness Insurance 

Minimum Standards Model Act, (MDL–171) for a 

definition of major medical expense coverage. 

Available at: http://naic.org/committees_index

_model_description_a_c.htm#accident_health. 

reinsurance payment parameters. This 

would allow States to use other revenue 

sources, including funds collected for 

State high-risk pools as discussed 

below, for supplemental reinsurance 

payments, as determined by a State. 

This proposal ensures that additional 

State collections for reinsurance 

payments and other State funds, as 

applicable, may be used to reduce 

premiums. 

e. High-Risk Pools 

We are not proposing further 

requirements for State high-risk pools 

beyond those currently provided at 

§ 153.250. As stated in that section, a 

State must eliminate or modify its highrisk pool to the extent necessary to carry 

out the transitional reinsurance 

program. However, any changes made to 

a State high-risk pool must comply with 

the terms and conditions of Grants to 

States for Operation of Qualified HighRisk Pools (CFDA 93.780), as applicable. 

Under § 153.400(a)(2)(iii), State highrisk pools are excluded from making 

reinsurance contributions and cannot 

receive reinsurance payments. Because 

State high-risk pools and the 

transitional reinsurance program both 

target high-cost enrollees, high-risk 

pools can operate in parallel with the 

reinsurance program, serving a distinct 

subset of the target population. States 

have the flexibility to decide whether to 

maintain, phase out, or eliminate their 

high-risk pools. 

The Affordable Care Act permits a 

State to coordinate its high-risk pool 

with the reinsurance program ‘‘to the 

extent not inconsistent’’ 24 with the 

statute. Thus, a State may coordinate the 

entry of the State’s high-risk pool 

enrollees into the Exchange. HHS is 

examining ways in which a State could 

continue its program to complement 

Exchange coverage. We clarify that 

nothing in the Premium Stabilization 

Rule prevents a State that establishes its 

own reinsurance program from using 

State money designated for its own 

high-risk pool towards the reinsurance 

program. However, a State may not use 

funds collected for the reinsurance 

program for its high-risk pool. As 

indicated in the Premium Stabilization 

Rule, funds collected for the transitional 

reinsurance program can only be used 

for the purpose of making payments 

under the reinsurance program or for 

administering that program. Finally, a 

State could designate its high-risk pool 

as its applicable reinsurance entity, 

provided that the high-risk pool meets 

all applicable criteria for being an 

applicable reinsurance entity. 

2. Contributing Entities and Excluded 

Entities 

Section 1341 of the Affordable Care 

Act provides that health insurance 

issuers and third party administrators 

on behalf of group health plans must 

make payments to an applicable 

reinsurance entity. Thus, with respect to 

insured coverage, issuers are liable for 

making reinsurance contributions. With 

respect to self-insured group health 

plans, the plan is liable, although a 

third-party administrator or 

administrative-services-only contractor 

may be utilized to transfer reinsurance 

contributions on behalf of a self-insured 

group health plan, at that plan’s 

discretion. A self-insured, selfadministered group health plan without 

a third-party administrator or 

administrative-services-only contractor 

would make its reinsurance 

contributions directly.25

Under section 1341(b)(3)(B)(i) of the 

Affordable Care Act, contribution 

amounts for reinsurance are to reflect, in 

part, an issuer’s ‘‘fully insured 

commercial book of business for all 

major medical products.’’ We interpret 

this statutory language to mean that an 

issuer will not be required to make 

reinsurance contributions for coverage 

that is non-commercial, or that is not 

‘‘major medical coverage.’’ 26 We believe 

it is implicit in the statute that 

contributions are not required for health 

insurance coverage that is not regulated 

by a State department of insurance and 

written on a policy form filed with and 

approved by a State department of 

insurance (but contributions are 

generally required for self-insured plans 

even though they are not regulated by a 

State department of insurance). We 

discuss below our intent to exclude 

certain types of plans. 

Major medical coverage: Section 

1341(b)(3)(B)(i) of the Affordable Care 

Act refers to ‘‘major medical products,’’ 

but does not define the term. For the 

purpose of the reinsurance program, our 

view is that coverage provided under a 

major medical product (which we refer 

to in Part 153 as ‘‘major medical 

coverage’’) is health coverage, which 

may be subject to reasonable enrollee 

cost sharing, for a broad range of 

services and treatments including 

diagnostic and preventive services, as 

well as medical and surgical conditions 

provided in various settings, including 

inpatient, outpatient, and emergency 

room settings.27 Thus, for purposes of 

the reinsurance program, we believe 

that coverage that is limited in scope 

(for example, dread disease coverage, 

hospital indemnity coverage, standalone vision coverage, or stand-alone 

dental coverage) or extent (for example, 

coverage that is not subject to the Public 

Health Service Act section 2711 and its 

implementing regulations) would not be 

major medical coverage. 

In this proposed rule, we also propose 

to clarify that when an individual has 

both Medicare coverage and employerprovided group health coverage, 

Medicare Secondary Payer (MSP) rules 

under section 1862(b) of the Social 

Security Act would be applicable, and 

the group health coverage would be 

considered major medical coverage only 

if the group health coverage is the 

primary payer of medical expenses (and 

Medicare is the individual’s secondary 

payer) under the MSP rules. For 

example, a working 68-year-old 

employee enrolled in a group health 

plan who, under the MSP rules, is a 

beneficiary for whom Medicare is the 

secondary payer would be counted for 

purposes of reinsurance contributions. 

However, a 68-year-old retiree enrolled 

in a group health plan who, under the 

MSP rules, is a beneficiary for whom 

Medicare is the primary payer would 

not be counted for purposes of 

reinsurance contributions. Similarly, an 

individual covered under a group health 

plan with only Medicare Part A 

(hospitalization) benefits (where 

Medicare is the primary payer), would 

not be counted for purposes of 

reinsurance contributions because the 

group health coverage would not be 

considered major medical coverage. We 

also intend that individuals entitled to 

Medicare because of disability or endstage renal disease that have other 

primary coverage under the MSP rules 

be treated consistently with the working 


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28We note that contributions are generally 

required for self-insured plans even if not regulated 

by a State department of insurance because selfinsured plans are not typically regulated by these 

entities. 

29The preamble to interim final regulations under 

section 2711 of the PHS Act provides that an HRA 

satisfies the prohibition on annual and lifetime 

limits in section 2711 when it is integrated as part 

of a group health plan with other coverage that 

satisfies section 2711. See 75 FR 37190–37191. 

aged, as outlined above. We seek 

comment on this proposal. 

Commercial book of business: Section 

1341(b)(3)(B)(i) of the Affordable Care 

Act refers to a ‘‘commercial book of 

business,’’ which we interpret to refer to 

large and small employer group policies 

and individual market policies. For 

example, products offered by an issuer 

under Medicare Part C or D would be 

part of a ‘‘governmental’’ book of 

business, not a commercial book of 

business. Similarly, a plan or coverage 

offered by a Tribe to Tribal members 

and their spouses and dependents, and 

other persons of Indian descent closely 

affiliated with the Tribe in the capacity 

of the Tribal members as Tribal 

members (and not in their capacity as 

current or former employees of the Tribe 

or their dependents) would not be part 

of a commercial book of business, but a 

plan or coverage offered by the Federal 

government, a State government or a 

Tribe to employees (or retirees or 

dependents) because of a current or 

former employment relationship would 

be part of a commercial book of 

business. We seek comment on this 

interpretation. 

Policy filed and approved in a State. 

We propose that a group or individual 

policy for health insurance coverage not 

filed and approved in a State be 

excluded from reinsurance 

contributions. To illustrate, if group 

coverage for employees substantially all 

of whom work outside the United 

States—‘‘expatriate coverage’’—is not 

written on a form filed with and 

approved by a State department of 

insurance, we propose to exclude it 

from reinsurance contributions because 

that coverage is not within the 

jurisdiction of a State department of 

insurance and the Affordable Care Act 

generally does not apply. On the other 

hand, insured group ‘‘expatriate’’ 

coverage written on a form filed with 

and approved by a State department of 

insurance would be subject to the 

Affordable Care Act and required to 

make reinsurance contributions. 

Individual coverage for overseas travel 

would be similarly treated. 

Therefore, we propose to amend 

§ 153.400(a)(1) to state that a 

contributing entity must make 

reinsurance contributions on behalf of 

its self-insured group health plans and 

health insurance coverage except to the 

extent that: 

(1) The plan or coverage is not major 

medical coverage; 

(2) In the case of health insurance 

coverage, the coverage is not considered 

to be part of an issuer’s commercial 

book of business; or 

(3) In the case of health insurance 

coverage, the coverage is not issued on 

a form filed and approved by a State 

insurance department.28 We seek 

comment on this proposal. 

Under the requirements proposed in 

§ 153.400(a)(1), and for clarity, we 

propose in § 153.400(a)(2) to explicitly 

exclude the following types of plans and 

coverage from reinsurance 

contributions. 

(a) Excepted benefits: We are not 

proposing a change in policy with 

respect to plans or health insurance 

coverage that consist solely of excepted 

benefits as defined by section 2791(c) of 

the PHS Act, as currently described in 

§ 153.400(a)(2) of the Premium 

Stabilization Rule. 

(b) Private Medicare, Medicaid, CHIP, 

State high-risk pools, and basic health 

plans: Both Medicare and Medicaid 

have fee-for-service or traditional 

components, as well as managed care 

components, in which private health 

insurance issuers, under contract with 

HHS, deliver the requisite benefits. As 

discussed in the preamble to the 

Premium Stabilization Rule, these 

private Medicare or Medicaid plans are 

excluded from reinsurance 

contributions because they are not part 

of a commercial book of business. We 

also clarify that for purposes of 

reinsurance contributions, programs 

under the CHIP, Federal and State highrisk pools (including the Pre-Existing 

Condition Insurance Plan Program 

under section 1101 of the Affordable 

Care Act), and basic health plans 

described in section 1331 of the 

Affordable Care Act are similarly 

excluded from reinsurance 

contributions because they are not part 

of a commercial book of business. 

(c) Health Reimbursement 

Arrangements (HRAs) integrated with a 

group health plan: HRAs are group 

health plans that are governed by IRS 

Notice 2002–45 (2002–2 CB 93) and 

subsequent guidance. An employer 

credits an amount to each eligible 

employee’s HRA which the employees 

may use for allowable medical 

expenses. An HRA that is integrated 

with a group health plan is excluded 

from reinsurance contributions because 

it is integrated with major medical 

coverage.29 We note that reinsurance 

contributions generally would be 

required for that group health plan. 

(d) Health saving accounts (HSAs): 

Eligible individuals covered by a high 

deductible health plan may have the 

option of contributing to an HSA. An 

HSA is an individual arrangement 

governed by section 223(d) of the Code 

and subsequent guidance that consists 

of a tax-favored account held in trust to 

accumulate funds that can be used to 

pay qualified medical expenses of the 

beneficiary. An HSA is offered along 

with a high deductible health plan. For 

purposes of reinsurance contributions, 

we believe that an HSA is not major 

medical coverage because it consists of 

a fixed amount of funds that are 

available for both medical and nonmedical purposes, and would be 

excluded from reinsurance 

contributions. We note that reinsurance 

contributions generally would be 

required for the high deductible health 

plan because we believe that it would 

constitute major medical coverage. 

(e) Health flexible spending 

arrangements (FSAs): Health FSAs are 

usually funded by an employee’s 

voluntary salary reduction contributions 

under section 125 of the Code. Because 

section 9005 of the Affordable Care Act 

limits the annual amount that may be 

contributed by an employee to a health 

FSA to $2,500, we believe that a health 

FSA is not major medical coverage 

under this rule, and therefore would be 

excluded from reinsurance 

contributions. 

(f) Employee assistance plans, disease 

management programs, and wellness 

programs: Employee assistance plans, 

disease management programs, and 

wellness programs typically provide 

ancillary benefits to employees that in 

many cases do not constitute major 

medical coverage. Employers, plan 

sponsors, and health insurance issuers 

have flexibility in designing these 

programs to provide services to provide 

additional benefits to employees, 

participants, and beneficiaries. If the 

program (whether self-insured or 

insured) does not provide major medical 

coverage, we propose to exclude it from 

reinsurance contributions. We also note 

that employers that provide one or more 

of these ancillary benefits often sponsor 

major medical plans, which will be 

subject to reinsurance contributions, 

absent other excluding circumstances. 

(g) Stop-loss and indemnity 

reinsurance policies: For the purpose of 

reinsurance, we propose to exclude 

stop-loss insurance and indemnity 

reinsurance because they do not 

constitute major medical coverage for 

the applicable covered lives. Generally, 

a stop-loss policy is an insurance policy 


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that protects against health insurance 

claims that are catastrophic or 

unpredictable in nature and provides 

coverage to self-insured group health 

plans once a certain level of risk has 

been absorbed by the plan. Stop-loss 

insurance allows an employer to selfinsure for a set amount of claims costs, 

with the stop-loss insurance covering 

most or all of the remainder of the 

claims costs that exceed the set amount. 

An indemnity reinsurance policy is an 

agreement between two or more 

insurance companies under which the 

reinsuring company agrees to accept 

and to indemnify the issuing company 

for all or part of the risk of loss under 

policies specified in the agreement and 

the issuing company retains its liability 

to, and its contractual relationship with, 

the applicable lives covered. We believe 

these types of policies were not 

intended to be subject to the reinsurance 

program. No inference is intended as to 

whether stop-loss or reinsurance 

policies constitute health insurance 

policies for purposes other than 

reinsurance contributions. 

(h) Military Health Benefits: TRICARE 

is the component of the Military Health 

System that furnishes health care 

insurance to active duty and retired 

personnel of the uniformed services 

(and covered dependents) through 

private issuers under contract. Although 

TRICARE coverage is provided by 

private issuers, it is not part of a 

commercial book of business because 

the relationship between the uniformed 

services and service members differs 

from the traditional employer-employee 

relationship in certain important 

respects. For example, service members 

may not resign from duty during a 

period of obligated service, may not 

form unions, and may be subject to 

discipline for unexcused absences from 

duty. Consequently, our view is that 

such military health insurance is 

excluded from reinsurance 

contributions. 

In addition to TRICARE, the Military 

Health System also includes health care 

services that doctors, dentists, and 

nurses provide to uniformed services 

members on military bases and ships. 

The Veterans Health Administration 

within the U.S. Department of Veterans 

Affairs provides health care to 

qualifying veterans of the uniformed 

services at its outpatient clinics, 

hospitals, medical centers, and nursing 

homes. Similarly, because we do not 

consider these programs to be part of a 

commercial book of business, our view 

is that such military health programs are 

excluded from reinsurance 

contributions. 

(i) Tribal coverage: As discussed 

above, we propose to exclude plans or 

coverage (whether fully insured or selfinsured) offered by a Tribe to Tribal 

members and their spouses and 

dependents (and other persons of Indian 

descent closely affiliated with the Tribe) 

in the capacity of the Tribal members as 

Tribal members (and not in their 

capacity as current or former employees 

of the Tribe or their dependents) as this 

would not be part of a commercial book 

of business. However, a plan or coverage 

offered by the Federal government, a 

State government or a Tribe to 

employees (or retirees or dependents) 

because of a current or former 

employment relationship would be part 

of a commercial book of business. 

Similarly, coverage provided to Indians 

through programs operated under the 

authority of the Indian Health Service 

(IHS), Tribes or Tribal organizations, or 

Urban Indian organizations, as defined 

in section 4 of the Indian Health Care 

Improvement Act would be excluded 

from reinsurance contributions because 

it is not part of a commercial book of 

business. We note, however, that a plan 

or coverage offered by a Tribe to its 

employees (or retirees or dependents) 

on account of a current or former 

employment relationship would not be 

excluded. 

3. National Contribution Rate 

a. 2014 Rate 

As described in § 153.220(c) 

(previously designated as § 153.220(e)), 

we intend to publish in the annual HHS 

notice of benefit and payment 

parameters the national per capita 

reinsurance contribution rate for the 

upcoming benefit year. We read section 

1341 of the Affordable Care Act to 

specify the total contribution amounts 

to be collected from contributing 

entities (reinsurance pool) as $10 billion 

in 2014, $6 billion in 2015, and $4 

billion in 2016. Additionally, we read 

sections 1341(b)(3)(B)(iv) and 1341(b)(4) 

of the Affordable Care Act to direct the 

collection of funds for contribution to 

the U.S. Treasury each year as $2 billion 

in 2014, $2 billion in 2015, and $1 

billion in 2016. These amounts, payable 

to the U.S. Treasury, total $5 billion, 

which we note is the same amount as 

that appropriated for the Early Retiree 

Reinsurance Program under section 

1102 of the Affordable Care Act. It has 

been suggested that the collection of the 

$2 billion in funds payable to the U.S. 

Treasury for 2014 should be deferred 

until 2016, thereby lowering the 

contribution rate in 2014, while 

ensuring that the total amount specified 

by law is returned to the U.S. Treasury 

by the end of this temporary program. 

We seek comment on whether such a 

delayed collection would be consistent 

with the statutory requirements 

described above and whether there are 

other steps that could be taken to reduce 

the burden of these collections on 

contributing entities. Finally, section 

1341(b)(3)(B)(ii) of the Affordable Care 

Act allows for the collection of 

additional amounts for administrative 

expenses. Taken together, these three 

components make up the total dollar 

amount to be collected from 

contributing entities for each of the 

three years of the reinsurance program 

under the national per capita 

contribution rate. 

Each year, the national per capita 

contribution rate will be calculated by 

dividing the sum of the three amounts 

(the national reinsurance pool, the U.S. 

Treasury contribution, and 

administrative costs) by the estimated 

number of enrollees in plans that must 

make reinsurance contributions: 

As an illustration, under the 

Affordable Care Act, the 2014 national 

reinsurance pool is $10 billion, and the 

contribution to the U.S. Treasury is $2 

billion. The amount to be collected for 

administrative expenses for benefit year 

2014 would be $20.3 million (or 0.2 

percent of the $10 billion dispersed), 

discussed in greater detail below. The 

HHS estimate of the number of enrollees 

in plans that must make reinsurance 

contributions that total the $12.02 

billion described above yields a per 

capita contribution rate of $5.25 per 


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month in benefit year 2014. We seek 

comment on this calculation. 

Section 153.220(c) (previously 

designated as § 153.220(e)) provides that 

HHS will set in the annual HHS notice 

of benefit and payment parameters for 

the applicable benefit year the national 

contribution rate and the proportion of 

contributions collected under the 

national contribution rate to be 

allocated to reinsurance payments, 

payments to the U.S. Treasury, and 

administrative expenses. In Table 12 

below, we specify these proportions (or 

amounts, as applicable): 

TABLE 12—PROPORTION OF CONTRIBUTIONS COLLECTED UNDER THE NATIONAL CONTRIBUTION RATE FOR REINSURANCE

PAYMENTS, PAYMENTS TO U.S. TREASURY AND ADMINISTRATIVE EXPENSES

Proportion or amount for: 

If total contribution collections 

under the national 

contribution rate are less 

than or equal to $12.02 

billion 

If total contribution collections under the national contribution rate are more 

than $12.02 billion 

Reinsurance payments ............ 83.2 percent ($10 billion/ 

$12.02 billion).

The difference between total national collections and those contributions allocated to the U.S. Treasury and administrative expenses. 

Payments to the U.S. Treasury 16.6 percent ($2 billion/ 

$12.02 billion).

$2 billion. 

Administrative expenses .......... 0.2 percent ($20.3 million/ 

$12.02 billion).

$20.3 million. 

As shown in Table 12, if the total 

amount of contributions collected is less 

than equal to $12.02 billion, we propose 

to allocate approximately 83.2 percent 

of the reinsurance contributions 

collected to reinsurance payments, 16.6 

percent of the reinsurance contributions 

collected to the U.S. Treasury and 0.2 

percent of the reinsurance contributions 

collected to administrative expenses. 

Section III.C.6. of this proposed rule 

provides details on the methodology we 

used to develop enrollment estimates 

for the national per capita contribution 

rate. 

b. Federal Administrative Fees 

As described in the Premium 

Stabilization Rule, HHS would collect 

reinsurance contributions from selfinsured group health plans, even if a 

State is operating its own reinsurance 

program. As noted above, we propose 

that HHS also collect reinsurance 

contributions from health insurance 

issuers, even if a State is operating its 

own reinsurance program. In this 

proposed rule, we estimate the Federal 

administrative expenses of operating the 

reinsurance program in 2014 to be 

approximately $20.3 million, or 

approximately 0.2 percent of the $10 

billion in reinsurance funds to be 

distributed in 2014. We believe this 

figure reflects the Federal government’s 

significant economies of scale in 

operating the program, and estimate a 

national per capita contribution rate of 

$0.11 annually for HHS administrative 

expenses. 

As shown in Table 13, we expect to 

apportion the annual per capita amount 

of $0.11 of administrative expenses as 

follows: $0.055 of the total amount 

collected per capita for administrative 

fees for the collection of contributions 

from health insurance issuers and selfinsured group health plans; and $0.055 

of the total amount collected per capita 

for administrative fees for reinsurance 

payment activities, supporting the 

administration of payments to issuers of 

reinsurance-eligible plans. 

TABLE 13—BREAKDOWN OF ADMINISTRATIVE EXPENSES

[Annual, per capita] 

Item Estimated cost 

Collecting contributions from health insurance issuers and self-insured group health plans ..................................................... $0.055 

Payment activities ........................................................................................................................................................................ 0.055 

Total annual per capita fee for HHS to perform all reinsurance functions ................................................................................. 0.11 

If HHS operates the reinsurance 

program on behalf of a State, HHS 

would retain the annual per capita fee 

for HHS to perform all reinsurance 

functions, which would be $0.11. If a 

State operates its own reinsurance 

program, HHS would transfer $0.055 of 

the per capita administrative fee to the 

State for purposes of administrative 

expenses incurred in making 

reinsurance payments, and retain the 

remaining $0.055 to offset the costs of 

contribution collection. We note that the 

administrative expenses for reinsurance 

payments will be distributed in 

proportion to the State-by-State total 

requests for reinsurance payments made 

under the national payment parameters. 

We seek comment on this approach, and 

other reasonable, administratively 

simple approaches that may be used to 

calculate administrative costs. 

4. Calculation and Collection of 

Reinsurance Contributions 

a. Calculation of Reinsurance 

Contribution Amount and Timeframe 

for Collections 

We intend to administer the 

reinsurance program in a manner that 

minimizes the administrative burden on 

health insurance issuers and selfinsured group health plans, while 

ensuring that contributions are 

calculated accurately. Thus, we propose 

in § 153.400(a) and § 153.240(b)(1), 

respectively, to collect and pay out 

reinsurance funds annually to minimize 

the costs of administering the program 

and the burden on contributing entities. 

If we were to collect and make 

reinsurance payments throughout the 

benefit year, we would likely be 

required to hold the disbursement of a 

large portion of the reinsurance 

payments until the end of the benefit 

year to ensure an equitable allocation of 

payments. This would deprive 

contributing entities of the use of those 

funds during the benefit year, and we 

believe that the proposed § 153.400(a) 


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30See the proposed rule published on April 17, 

2012 (77 FR 22691). Once the PCORTF Rule is 

finalized, we may modify the methods of reporting 

contained in this rulemaking. 

and § 153.240(b)(1) would address this 

issue. However, we note that this 

approach would delay the receipt of 

some reinsurance payments for 

individual market issuers, and solicit 

comment on the benefits and burdens 

for issuers, States, and other 

stakeholders of a more frequent 

collections and payment cycle. 

Under the Premium Stabilization 

Rule, HHS would collect reinsurance 

contributions through a per capita 

assessment on contributing entities. To 

clarify how this assessment is made, we 

propose to add § 153.405, which 

provides that the reinsurance 

contribution of a contributing entity be 

calculated by multiplying the average 

number of covered lives of reinsurance 

contribution enrollees during the benefit 

year for all of the contributing entity’s 

plans and coverage that must pay 

reinsurance contributions, by the 

national contribution rate for the 

applicable benefit year. 

We also propose to amend 

§ 153.405(b) to require that, no later 

than November 15 of benefit year 2014, 

2015, and 2016, as applicable, a 

contributing entity must submit to HHS 

an annual enrollment count of the 

average number of covered lives of 

reinsurance contribution enrollees for 

each benefit year. The count must be 

determined as specified in proposed 

§ 153.405(d), (e), (f), or (g) as applicable. 

We propose to amend § 153.400(a) so 

that each contributing entity makes 

reinsurance contributions at the 

national contribution rate annually and 

in a manner specified by HHS. We also 

propose to amend § 153.400(a) so that 

each contributing entity makes 

reinsurance contributions under any 

additional applicable State 

supplemental contribution rate, if a 

State elects to collect additional 

contributions for administrative 

expenses or reinsurance payments 

under § 153.220(d), annually and in a 

manner specified by the State. We 

believe this annual collection schedule 

will ensure a more accurate count of a 

contributing entity’s average covered 

lives, and would avoid the need for any 

initial estimates and subsequent 

reconciliation to account for 

fluctuations in enrollment during the 

course of the benefit year. 

Under § 153.405(c)(1), within 15 days 

of submission of the annual enrollment 

count or by December 15, whichever is 

later, HHS will notify each contributing 

entity of the reinsurance contribution 

amounts to be paid based on that annual 

enrollment count. We specify in 

§ 153.405(c)(2) that a contributing entity 

remit contributions to HHS within 30 

days after the date of the notification of 

contributions due for the applicable 

benefit year. The amount to be paid by 

the contributing entity must be based 

upon the notification received under 

§ 153.405(c)(1). 

Counting Methods for Health 

Insurance Issuers: In § 153.405(d), we 

propose a number of methods that a 

health insurance issuer may use to 

determine the average number of 

covered lives of reinsurance 

contribution enrollees under a health 

insurance plan for a benefit year for 

purposes of the annual enrollment 

count. These methods promote 

administrative efficiencies by building 

on the methods permitted for purposes 

of the fee to fund the Patient-Centered 

Outcomes Research Trust Fund (the 

PCORTF Rule), modified so that a 

health insurance issuer may determine 

an annual enrollment count during the 

fourth quarter of the benefit year.30

Thus, under each of these methods, the 

number of covered lives will be 

determined based on the first nine 

months of the benefit year. 

(1) Actual Count Method: Under the 

PCORTF Rule, an issuer may use the 

‘‘actual count method’’ to determine the 

number of lives covered under the plan 

for the plan year by calculating the sum 

of the lives covered for each day of the 

plan year and dividing that sum by the 

number of days in the plan year. We 

propose that, for reinsurance 

contributions purposes, a health 

insurance issuer would add the total 

number of lives covered for each day of 

the first nine months of the benefit year 

and divide that total by the number of 

days in those nine months. 

(2) Snapshot Count Method: Under 

the PCORTF Rule, a health insurance 

issuer may use the ‘‘snapshot count 

method’’ generally by adding the total 

number of lives covered on a certain 

date during the same corresponding 

month in each quarter, or an equal 

number of dates for each quarter, and 

dividing the total by the number of 

dates on which a count was made. For 

reinsurance contributions purposes, an 

issuer would add the totals of lives 

covered on a date (or more dates if an 

equal number of dates are used for each 

quarter) during the same corresponding 

month in each of the first three quarters 

of the benefit year, (provided that the 

dates used for the second and third 

quarters must be within the same week 

of the quarter as the date used for the 

first quarter), and divide that total by 

the number of dates on which a count 

was made. For this purpose, the same 

months must be used for each quarter 

(for example, January, April and July). 

(3) Member Months Method or State 

Form Method: Under the PCORTF Rule, 

a health insurance issuer may use the 

‘‘Member Months Method’’ or ‘‘State 

Form Method’’ by using data from the 

NAIC Supplemental Health Exhibit or 

similar data from other State forms. 

However, data from these forms may be 

out of date at the time of the annual 

enrollment count submission, and we 

believe that it is important that health 

insurance issuers achieve an accurate 

count of covered lives, particularly for 

individual market plans. We expect that 

the individual market would be subject 

to large increases in enrollment between 

2014 and 2016. Therefore, we propose a 

modified counting method based upon 

the ratio of covered lives per policy in 

the NAIC or State form. Specifically, we 

propose that health insurance issuers 

using this method multiply the average 

number of policies for the first nine 

months of the applicable benefit year by 

the ratio of covered lives per policy 

calculated from the NAIC Supplemental 

Health Care Exhibit (or from a form filed 

with the issuer’s State of domicile for 

the most recent time period). Issuers 

would count the number of policies in 

the first nine months of the applicable 

benefit year by adding the total number 

of policies on one date in each quarter, 

or an equal number of dates for each 


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31The preamble to the proposed PCORTF Rule 

explains that ‘‘the 2.35 dependency factor reflects 

that all participants with coverage other than selfonly have coverage for themselves and some 

number of dependents. The Treasury Department 

and the IRS developed the factor, and other similar 

factors used in the regulations, in consultation with 

Treasury Department economists and in 

consultation with plan sponsors regarding the 

procedures they currently use for estimating the 

number of covered individuals.’’ 

32 If the definition of ‘‘plan sponsor’’ is revised in 

the final PCORTF Rule, we intend to revise the 

definition proposed herein to maintain consistency. 

quarter (or all dates for each quarter), 

and dividing the total by the number of 

dates on which a count was made. 

For example, if a health insurance 

issuer indicated on the NAIC form for 

the most recent time period that it had 

2,000 policies covering 4,500 covered 

lives, it would apply the ratio of 4,500 

divided by 2,000, equaling 2.25 to the 

number of policies it had over the first 

three quarters of the applicable benefit 

year. If the issuer had an average of 

2,300 policies in the three quarters of 

the applicable benefit year, it would 

report 2.25 multiplied by 2,300 as the 

number of covered lives for the 

purposes of reinsurance contributions. 

Counting Methods for Self-Insured 

Group Health Plans: In § 153.405(e), we 

propose a number of methods that a 

self-insured group health plan may use 

to determine the average number of 

covered lives for purposes of the annual 

enrollment count. These methods mirror 

the methods permitted to sponsors of 

self-insured group health plans under 

the PCORTF Rule, modified slightly for 

timing, so that enrollment counts may 

be obtained on a more current basis. 

(1) Actual Count Method or Snapshot 

Count Method: We propose that selfinsured plans, like health insurance 

issuers, may use the actual count 

method or snapshot count method as 

described above. 

(2) Snapshot Factor Method: Under 

the PCORTF Rule, a plan sponsor 

generally may use the ‘‘snapshot factor 

method’’ by adding the totals of lives 

covered on any date (or more dates if an 

equal number of dates are used for each 

quarter) during the same corresponding 

month in each quarter, and dividing that 

total by the number of dates on which 

a count was made, except that the 

number of lives covered on a date is 

calculated by adding the number of 

participants with self-only coverage on 

the date to the product of the number of 

participants with coverage other than 

self-only coverage on the date and a 

factor of 2.35.31 For this purpose, the 

same months must be used for each 

quarter (for example, January, April, 

July, and October). For reinsurance 

contributions purposes, a self-insured 

group health plan would use this 

PCORTF counting method over the first 

three quarters of the benefit year, 

provided that for this purpose, the 

corresponding dates for the second and 

third quarters of the benefits year must 

be within the same week of the quarter 

as the date selected for the first quarter. 

(3) Form 5500 Method: Under the 

PCORTF Rule, a plan sponsor may use 

the ‘‘Annual Return/Report of Employee 

Benefit Plan’’ filed with the Department 

of Labor (Form 5500) by using data from 

the Form 5500 for the last applicable 

plan year. We propose that, for purposes 

of reinsurance contributions, a selfinsured group health plan may also rely 

upon such data, even though the data 

may reflect enrollment in a previous 

benefit year. Our modeling of the 2014 

health insurance marketplace, discussed 

in section III.C.6. of this proposed rule, 

suggests that enrollment in self-insured 

group health plans is less likely to 

fluctuate than enrollment in the 

individual market. Thus, we propose 

that a self-insured group plan may 

calculate the number of lives covered 

for a plan that offers only self-only 

coverage by adding the total participants 

covered at the beginning and end of the 

benefit year, as reported on the Form 

5500, and dividing by two. 

Additionally, a self-insured group plan 

that offers self-only coverage and 

coverage other than self-only coverage 

may calculate the number of lives 

covered by adding the total participants 

covered at the beginning and the end of 

the benefit year, as reported on the Form 

5500. 

Counting Methods for Plans With Selfinsured and Insured Options: An 

employer may sponsor a group health 

plan that offers one or more coverage 

options that are self-insured and one or 

more other coverage options that are 

insured. In § 153.405(f), we propose that 

to determine the number of covered 

lives of reinsurance contribution 

enrollees under a group health plan 

with both self-insured and insured 

options for a benefit year must use one 

of the methods specified in either 

§ 153.405(d)(1) or § 153.405(d)(2)—the 

‘‘actual count’’ method or ‘‘snapshot 

count’’ for health insurance issuers. 

Aggregation of self-insured group 

health plans and health insurance 

plans: We propose in § 153.405(g)(1) 

that if a plan sponsor maintains two or 

more group health plans or health 

insurance plans (or a group health plan 

with both insured and self-insured 

components) that collectively provide 

major medical coverage for the same 

covered lives, which we refer to as 

‘‘multiple plans’’ for the purpose of the 

reinsurance program, then these 

multiple plans must be treated as a 

single self-insured group health plan for 

purposes of calculating any reinsurance 

contribution amount due under 

paragraph (c) of this section. This 

approach would prevent the double 

counting of a covered life for major 

medical coverage offered across 

multiple plans, and prohibit plan 

sponsors that provide such major 

medical coverage from splitting the 

coverage into separate arrangements to 

avoid reinsurance contributions on the 

grounds that it does not offer major 

medical coverage. 

For purposes of § 153.405(g)(1), the 

plan sponsor is responsible for paying 

the applicable fee. We propose to define 

‘‘plan sponsor’’ in proposed 

§ 153.405(g)(2) based on the definition 

of the term in the PCORTF Rule.32 We 

propose to define ‘‘plan sponsor’’ as: 

(A) The employer, in the case of a 

plan established or maintained by a 

single employer; 

(B) The employee organization, in the 

case of a plan established or maintained 

by an employee organization; 

(C) The joint board of trustees, in the 

case of a multi-employer plan (as 

defined in section 414(f) of the Code); 

(D) The committee, in the case of a 

multiple employer welfare arrangement; 

(E) The cooperative or association that 

establishes or maintains a plan 

established or maintained by a rural 

electric cooperative or rural cooperative 

association (as such terms are defined in 

section 3(40)(B) of ERISA); 

(F) The trustee, in the case of a plan 

established or maintained by a 

voluntary employees’ beneficiary 

association (meaning that the 

association is not merely serving as a 

funding vehicle for a plan that is 

established or maintained by an 

employer or other person); 

(G) In the case of a plan, the plan 

sponsor of which is not described in (A) 

through (F) above, the person identified 

or designated by the terms of the 

document under which the plan is 

operated as the plan sponsor, provided 

that designation is made and consented 

to, by no later than the date by which 

the count of covered lives for that 

benefit year is required to be provided. 

After that date, the designation for that 

benefit year may not be changed or 

revoked, and a person may be 

designated as the plan sponsor only if 

the person is one of the persons 

maintaining the plan (for example, one 

of the employers that is maintaining the 

plan with one or more other employers); 

or 

(H) In the case of a plan the sponsor 

of which is not described in (A) through 


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(F) above, and for which no 

identification or designation of a plan 

sponsor has been made pursuant (G), 

each employer or employee organization 

that maintains the plan (with respect to 

employees of that employer or employee 

organization), and each board of 

trustees, cooperative or association that 

maintains the plan. 

Exceptions: We propose two 

exceptions to this aggregation rule, in 

§ 153.405(g)(3). First, if the benefits 

provided by any health insurance or 

self-insured group health plans are 

limited to excepted benefits within the 

meaning of section 2791(c) of the PHS 

Act (such as stand-alone dental or 

vision benefits), the excepted benefits 

coverage need not be aggregated with 

other plans for purposes of this section. 

Second, if benefits provided by any 

health insurance or self-insured group 

health plan are limited to prescription 

drug coverage, that prescription drug 

coverage need not be aggregated so as to 

reduce the burden on sponsors who 

have chosen to structure their coverage 

in that manner. As discussed in section 

III.C.2. of this proposed rule, coverage 

that consists solely of prescription drug 

or excepted benefits is not major 

medical coverage. If enrollees have 

major medical coverage and separate 

coverage consisting of prescription drug 

or excepted benefits, reinsurance 

contributions only would be required 

with respect to the major medical 

coverage. Reinsurance contributions 

would not be required with respect to 

the same enrollees’ prescription drug or 

excepted benefits coverage, and 

consequently, double counting of 

covered lives will not occur. 

Multiple Plans: In § 153.405(g)(4), we 

propose counting requirements for 

multiple plans in which at least one of 

the plans is an insured plan (covered in 

§ 153.405(g)(4)(i)), and multiple selfinsured group health plans not 

including an insured plan (covered in 

§ 153.405(g)(4)(ii)). First, we anticipate 

that a plan sponsor will generate or 

obtain a list of the participants in each 

plan and then analyze the lists to 

identify those participants that have 

major medical coverage across all the 

plans collectively. To calculate the 

average number of covered lives of 

reinsurance contribution enrollees 

across multiple plans, we propose that 

a plan sponsor must use one of the 

methods applicable to health insurance 

plans or self-insured group health plans 

under § 153.405(d) and § 153.405(e), 

respectively, applied across the multiple 

plans as a whole. We also propose to 

require reporting to HHS or the 

applicable reinsurance entity 

concerning multiple plans, as discussed 

in § 153.405(g)(4). Additionally, it is 

important to note that the reinsurance 

program operates on a benefit year basis 

as discussed in section III.C.5. of this 

proposed rule, which is defined at 

§ 153.20 of this part (by reference to 

§ 155.20) as the calendar year, and the 

applicable counting methods all apply 

on that basis, no matter the plan year 

applicable to particular plans. 

Multiple Group Health Plans 

Including an Insured Plan: When one or 

more of the multiple group health plans 

is an insured plan, we propose that the 

actual count method for health 

insurance issuers in § 153.405(d)(1) or 

the snapshot count method for health 

insurance issuers in § 153.405(d)(2) 

must be used. We propose to prohibit 

the use of the ‘‘Member Months 

Method’’ or ‘‘State Form Method’’ to 

count covered lives across multiple 

insured plans because those methods 

would not easily permit aggregate 

counting, since the identities of the 

covered lives are not available on the 

applicable forms. We propose that the 

plan sponsor must determine and 

report, in a timeframe and manner 

established by HHS, to HHS (or, the 

applicable reinsurance entity if the 

multiple plans all consist solely of 

health insurance plans and the 

applicable reinsurance entity of a State 

is collecting contributions from health 

insurance issuers in such State): (1) The 

average number of covered lives 

calculated; (2) the counting method 

used; and (3) the names of the multiple 

plans being treated as a single group 

health plan as determined by the plan 

sponsor and reported to HHS. 

Multiple Self-Insured Group Health 

Plans Not Including an Insured Plan: 

We describe the counting provisions 

applicable to multiple self-insured 

group health plans (that is, when none 

of the plans is an insured plan) in 

proposed paragraph (g)(4)(ii) of this 

section. There are four counting 

methods available for self-insured plans 

which are set forth in proposed 

§ 153.405(e)(1) through § 153.405(e)(4) 

of this section. Proposed § 153.405(e)(1) 

permits a plan sponsor to use the actual 

count method under § 153.405(d)(1) or 

the snapshot count method under 

§ 153.405(d)(2) that are also available for 

insured plans. Proposed paragraph (e)(2) 

permits an additional method (the 

snapshot factor method) for self-insured 

plans. We propose not to permit a plan 

sponsor to use the fourth method, the 

‘‘Form 5500 Method’’ as described in 

proposed § 153.405(e)(3) to count 

covered lives across multiple selfinsured plans because that method 

would not easily permit aggregate 

counting, since the identities of the 

covered lives are not available on that 

form. Thus, we propose three possible 

methods for multiple self-insured plans 

under paragraph (g)(4)(ii). We further 

propose that the plan sponsor must 

report, in a timeframe and manner 

established by HHS, to HHS: (1) The 

average number of covered lives 

calculated; (2) the counting method 

used; and (3) the names of the multiple 

plans being treated as a single group 

health plan as determined by the plan 

sponsor. 

Consistency with PCORTF Rule Not 

Required: We intend to allow a 

contributing entity to use a different 

counting method for the annual 

enrollment count of covered lives for 

purposes of reinsurance contributions 

from that used for purposes of the return 

required in connection with the 

PCORTF Rule. Because time periods 

and counting methods may differ, we 

would not require that a contributing 

entity submit consistent estimates of its 

covered lives in the return required in 

connection with the PCORTF Rule and 

the annual enrollment count required 

for reinsurance contributions (although 

these counts should be performed in 

accordance with the rules of the 

counting method chosen). However, 

when calculating the average number of 

covered lives across two or more plans 

under proposed paragraph (g), the same 

counting method must be used across 

all of the multiple plans, because they 

would be treated as a single plan for 

counting purposes. 

We welcome comments on this 

approach to counting covered lives for 

reinsurance contributions. 

b. State Use of Contributions Attributed 

to Administrative Expenses 

To achieve the purposes of the 

reinsurance program, reinsurance 

contributions collected must be 

appropriately spent on reinsurance 

payments, payments to the U.S. 

Treasury, and on reasonable expenses to 

administer the reinsurance program. 

Therefore, we provide guidance on three 

restrictions that we intend to propose on 

the use of reinsurance contributions for 

administrative expenses, to permit 

States that participate in the reinsurance 

program to accurately estimate the cost 

of administrative expenses. While we 

will provide details of those standards 

in future regulation and guidance, along 

with similar standards for Exchanges, 

the risk adjustment program, and other 

Affordable Care Act programs, we 

provide below an overview of our 

intentions. 

First, we intend to apply the 

prohibition described in section 

1311(d)(5)(B) of the Affordable Care Act 


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33As defined at 45 CFR 144.103, ‘‘policy year 

means in the individual health insurance market 

the 12-month period that is designated as the policy 

year in the policy documents of the individual 

health insurance coverage. If there is no designation 

of a policy year in the policy document (or no such 

policy document is available), then the policy year 

is the deductible or limit year used under the 

coverage. If deductibles or other limits are not 

imposed on a yearly basis, the policy year is the 

calendar year.’’ 

to the reinsurance program so that 

reinsurance funds intended for 

administrative expenses cannot be used 

for staff retreats, promotional giveaways, 

excessive executive compensation, or 

promotion of Federal or State legislative 

or regulatory modifications. Second, we 

intend to propose that reinsurance 

funds intended for administrative 

expenses may not be used for any 

expense not necessary to the operation 

and administration of the reinsurance 

program. Third, we intend to propose 

that an applicable reinsurance entity 

must allocate any shared, indirect, or 

overhead costs between reinsurancerelated and other State expenses based 

on generally accepted accounting 

principles, consistently applied. An 

applicable reinsurance entity would be 

required to provide HHS, in a timeframe 

and manner specified by HHS, a report 

setting forth and justifying its allocation 

of administrative costs. We welcome 

comments on these intended proposals. 

5. Eligibility for Reinsurance Payments 

Under Health Insurance Market Rules 

We are proposing to add § 153.234 to 

clarify that, under either the reinsurance 

national payment parameters or the 

State supplemental reinsurance 

payment parameters, if applicable, a 

reinsurance-eligible plan’s covered 

claims costs for an enrollee incurred 

prior to the application of 2014 market 

reform rules—§ 147.102 (fair health 

insurance premiums), § 147.104 

(guaranteed availability of coverage, 

subject to the student health insurance 

provisions at § 147.145), § 147.106 

(guaranteed renewability of coverage, 

subject to the student health insurance 

provisions at § 147.145), § 156.80 (single 

risk pool), and Subpart B 156 (essential 

health benefits package)—do not count 

toward either the national or State 

supplemental attachment points, 

reinsurance caps, or coinsurance rates. 

Unlike plans subject to the market 

reform rules under the Affordable Care 

Act, plans not subject to these 2014 

market reforms rules may use several 

mechanisms to avoid claims costs for 

newly insured, high-cost individuals by 

excluding certain conditions (for 

example, maternity coverage for women 

of child-bearing age), by denying 

coverage to those with certain high-risk 

conditions, and by pricing individual 

premiums to cover the costs of 

providing coverage to such individuals. 

(We note that student health plan 

eligibility would be subject to the 

modified guaranteed availability and 

guaranteed issue requirements only, to 

the extent that they apply, as set forth 

in § 147.145, and we would require that 

the student health plans only meet those 

modified requirements to be eligible for 

reinsurance payments.) The market 

reform rules will be effective for the 

individual market for policy years 33

beginning on or after January 1, 2014, 

and as a result, policies that are issued 

in 2013 will be subject to these rules at 

the time of renewal in 2014, and 

therefore, become eligible for 

reinsurance payments at the time of 

renewal in 2014. 

We believe that providing reinsurance 

payments only to those reinsuranceeligible plans that are subject to the 

2014 market reform rules better reflects 

the reinsurance program’s purpose of 

mitigating premium adjustments to 

account for risk from newly insured, 

high-cost individuals. We also propose 

that State-operated reinsurance 

programs similarly limit eligibility for 

reinsurance payments. We recognize 

that this policy contrasts with the 

approach proposed for State-operated 

risk adjustment programs, under which 

HHS is proposing to permit States to 

choose to risk adjust plans not subject 

to the 2014 market reform rules. 

Because some States may have enacted 

State-specific rating and market reforms 

that they believe would justify the 

inclusion of these plans in risk 

adjustment before these plans’ renewal 

dates, permitting State flexibility on the 

applicability of risk adjustment to plans 

not subject to the 2014 market reform 

rules furthers the goals of the risk 

adjustment program. However, we 

believe that State flexibility for 

eligibility for reinsurance payments 

does not further the goal of the 

reinsurance program. 

Also, we intend to operate the 

reinsurance program on a calendar year 

basis, which we believe makes the most 

sense from policy and administrative 

perspectives. First, we believe that there 

is ambiguity in section 1341 of the 

Affordable Care Act as to whether the 

reinsurance program is to be 

administered on a plan year or calendar 

year basis. Some provisions of section 

1341 concerning contributions from and 

payments to issuers use the term ‘‘plan 

year.’’ However, other provisions of 

section 1341—notably sections 

1341(b)(4), 1341(b)(3)(B)(iv) and 

1341(c)(1)(A)—contemplate that the 

transitional reinsurance program would 

run with the calendar year. Second, a 

calendar year based program would 

ensure adequate collections in the early 

part of the program and to preserve 

fairness in making reinsurance 

payments. Third, implementing the 

reinsurance program on a calendar year 

basis permits the reinsurance program 

schedule to coincide with the MLR and 

the temporary risk corridors program 

schedules, both of which operate on a 

calendar year basis. Finally, we believe 

that the purpose of the reinsurance 

program is to stabilize premiums 

beginning in 2014, when the Exchanges 

begin to operate. We believe that the 

statute reflects this intent in section 

1341(c)(1)(A) of the Affordable Care Act, 

which states that the purpose of an 

applicable reinsurance entity is ‘‘to help 

stabilize premiums for coverage in the 

individual market in a State during the 

first three years of operation of an 

Exchange for such markets within the 

State when the risk of adverse selection 

related to new rating rules and market 

changes is greatest.’’ 

We welcome comments on this 

proposal. 

6. Reinsurance Payment Parameters 

As described in the Premium 

Stabilization Rule, reinsurance 

payments to eligible issuers will be 

made for a portion of an enrollee’s 

claims costs paid by the issuer that 

exceeds an attachment point, subject to 

a reinsurance cap. The coinsurance rate, 

attachment point, and reinsurance cap 

are the reinsurance ‘‘payment 

parameters.’’ Section 1341(b)(2)(B) of 

the Affordable Care Act directs the 

Secretary, in establishing standards for 

the transitional reinsurance program to 

include a formula for determining the 

amount of reinsurance payments to be 

made to issuers for high-risk individuals 

that provides for the equitable allocation 

funds. Using the Secretary’s authority 

under this provision, we propose to 

amend the policy described in the 

Premium Stabilization Rule by 

establishing uniform, ‘‘national’’ 

reinsurance payment parameters that 

will be applicable to the reinsurance 

program for each State, whether or not 

operated by a State. We believe that 

using uniform, national payment 

parameters would result in equitable 

access to the reinsurance funds across 

States, while furthering the goal of 

premium stabilization across all States 

by disbursing reinsurance contributions 

where they are most needed. 

The primary purpose of the 

transitional reinsurance program is to 

stabilize premiums by setting the 

reinsurance payment parameters to 

achieve the greatest impact on rate 


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setting, and therefore, premiums, 

through reductions in plan risk, while 

complementing the current commercial 

reinsurance market. In contrast to 

commercial reinsurance, which is used 

to protect against risk, the primary 

purpose of the reinsurance program is to 

stabilize premiums in the individual 

market from 2014 through 2016. The 

reinsurance program is designed to 

protect against issuers’ potential 

perceived need to raise premiums due 

to the implementation of the 2014 

market reform rules, specifically 

guaranteed availability. Even though 

HHS expects that any potential new 

high-cost claims from newly insured 

individuals would be balanced out by 

low-cost claims from many newly 

insured individuals who enter the 

individual market as a result of the 

availability of premium tax credits, 

more affordable coverage, the minimum 

coverage provision, and greater 

transparency and competition in the 

market, the reinsurance program is 

designed to alleviate the concern of new 

high-cost claims from newly insured 

individuals. 

Therefore, we propose that the 2014 

national payment parameters be 

established at an attachment point of 

$60,000, when reinsurance payments 

would begin, a national reinsurance cap 

of $250,000, when the reinsurance 

program stops paying claims for a highcost individual, and a uniform 

coinsurance rate of 80 percent, meant to 

reimburse a proportion of claims 

between the attachment point and 

reinsurance cap while giving issuers an 

incentive to contain costs. These three 

proposed payment parameters would 

help offset high-cost enrollees, without 

interfering with traditional commercial 

reinsurance, which typically has 

attachment points in the $250,000 

range. We estimate that these national 

payment parameters will result in total 

requests for reinsurance payments of 

approximately $10 billion. With the 

coinsurance rate, reinsurance cap, and 

attachment point fixed uniformly across 

all States, we believe that the 

reinsurance program would have the 

greatest equitable impact on premiums 

across all States. We believe that these 

proposed national payment parameters 

best address the reinsurance program’s 

goals to promote national premium 

stabilization and market stability while 

providing plans incentives to continue 

effective management of enrollee costs. 

We intend to continue to monitor 

individual market enrollment and 

claims patterns to appropriately 

disburse reinsurance payments 

throughout each of the benefit years. 

To assist with the development of the 

payment parameters, HHS developed a 

model that estimates market enrollment 

incorporating the effects of State and 

Federal policy choices and accounting 

for the behavior of individuals and 

employers, the Affordable Care Act 

Health Insurance Model (ACAHIM). The 

outputs of the ACAHIM, especially the 

estimated enrollment and expenditure 

distributions, were used to analyze a 

number of policy choices relating to 

benefit and payment parameters, 

including the national reinsurance 

contribution rate and national 

reinsurance payment parameters. 

The ACAHIM generates a range of 

national and State-level outputs for 

2014, including the level and 

composition of enrollment across 

markets given the eligible population in 

a State. The ACAHIM is described 

below in two sections: (1) The approach 

for estimating 2014 enrollment and (2) 

the approach for estimating 2014 

expenditures. Because enrollment 

projections are key to estimating the 

reinsurance payment parameters for the 

reinsurance program, HHS paid much 

attention to the underlying data sources 

and assumptions for the ACAHIM. The 

ACAHIM uses recent Current 

Population Survey (CPS) data adjusted 

for small populations at the State level, 

exclusion of undocumented immigrants, 

and population growth to 2014, to 

assign individuals to the various 

coverage markets. 

More specifically, the ACAHIM 

assigns each individual to a single 

health insurance market as their 

baseline (pre-Affordable Care Act) 

insurance status. In addition to 

assuming that individuals currently in 

Medicare, TRICARE, or Medicaid will 

remain in such coverage, the ACAHIM 

takes into account the probability that a 

firm will offer employment-based 

coverage based on the CPS distribution 

of coverage offers for firms of a similar 

size and industry. Generally, to 

determine the predicted insurance 

enrollment status for an individual or 

family (the ‘‘health insurance unit’’ or 

‘‘HIU’’) in 2014, the ACAHIM calculates 

the probability that the firm will offer 

insurance, then models Medicaid 

eligibility, and finally models eligibility 

for advance payments of the premium 

tax credit and cost-sharing reductions 

under the Exchange. Whenever a 

transition to another coverage market is 

possible, the ACAHIM takes into 

account the costs and benefits of the 

decision for the HIU and assigns a 

higher probability of transition to those 

with the greatest benefit. The ACAHIM 

also assumes that uninsured individuals 

will take up individual market coverage 

as informed by current take-up rates of 

insurance across States, varying by 

demographics and incomes and 

adjusting for post Affordable Care Act 

provisions, such as advance payments 

of the premium tax credit and costsharing reductions. 

Estimated expenditure distributions 

from the ACAHIM are used to set the 

uniform, national reinsurance payment 

parameters so that estimated 

contributions align with estimated 

payments for eligible enrollees. The 

ACAHIM uses the Health Intelligence 

Company, LLC (HIC) database from 

calendar year 2010, with the claims data 

trended to 2014 to estimate total 

medical expenditures per enrollee by 

age, gender, and area of residence. The 

expenditure distributions are further 

adjusted to take into account plan 

benefit design, or, ‘‘metal’’ level (that is, 

‘‘level of coverage,’’ as defined in 

156.20) of individual insurance 

coverage in an Exchange. To describe a 

State’s coverage market, the ACAHIM 

computes the pattern of enrollment 

using the model’s predicted number and 

composition of participants in a 

coverage market. These estimated 

expenditure distributions were the basis 

for the national reinsurance payment 

parameters. 

7. Uniform Adjustment to Reinsurance 

Payments 

We propose to amend § 153.230 by 

specifying in subparagraph (d) that HHS 

will adjust reinsurance payments by a 

uniform, pro rata adjustment rate in the 

event that HHS determines that the 

amount of total requests for reinsurance 

payments under the national 

reinsurance payment parameters will 

exceed the amount of reinsurance 

contributions collected under the 

national contribution rate during a given 

benefit year. The total amount of 

contributions considered for this 

purpose would include any 

contributions collected but unused 

under the national contribution rate 

during any previous benefit year. 

For example, in 2014, if total requests 

for reinsurance payments under the 

national reinsurance payment 

parameters are $10.1 billion and only 

$10 billion is collected for reinsurance 

payments under the national 

contribution rate, then all requests for 

reinsurance payments would be reduced 

by approximately 1 percent. However, if 

HHS determines that the total 

reinsurance contributions collected 

under the national contribution rate for 

the applicable benefit year are equal to 

or more than the total requests for 

reinsurance payments calculated using 

the national reinsurance payment 


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parameters, then no such adjustment 

will be applied, and all requests for 

reinsurance payments will be paid in 

full under the national payment 

parameters. Any unused reinsurance 

funds would be used for the next benefit 

year’s reinsurance payments. This 

uniform pro rata adjustment would 

ensure that claims are paid at the same 

rate out of the national reinsurance 

fund, and promote equitable access to 

the national reinsurance fund across all 

States while furthering the goal of 

premium stabilization under the 

Affordable Care Act. We invite comment 

on this policy. 

8. Supplemental State Reinsurance 

Parameters 

While we propose uniform, national 

payment parameters applicable to all 

States as discussed above, we are also 

proposing to add § 153.232(a), which 

specifies the manner in which States 

may modify the national reinsurance 

payment parameters established in the 

HHS notice of benefit and payment 

parameters. Specifically, we propose 

that a State that establishes its own 

reinsurance program may only modify 

the national reinsurance payment 

parameters by establishing State 

supplemental payment parameters that 

cover an issuer’s claims costs beyond 

the national reinsurance payments 

parameters. Furthermore, reinsurance 

payments under these State 

supplemental payments parameters may 

only be made with additional funds the 

State collects for reinsurance payments 

under § 153.220(d)(1)(ii) or State funds 

applied to the reinsurance program 

under § 153.220(d)(3). We believe that 

this approach would not prohibit States 

from collecting additional amounts for 

reinsurance payments, as provided for 

under section 1341(b)(3)(B) of the 

Affordable Care Act, while allowing 

nationwide access to the reinsurance 

payments from the contributions 

collected under the national reinsurance 

contribution rate. 

We propose in § 153.232(a) that a 

State may set State supplemental 

reinsurance payments parameters by 

adjusting the national reinsurance 

payment parameters in one or more of 

the following ways: (1) Decreasing the 

national attachment point; (2) increasing 

the national reinsurance cap; or (3) 

increasing the national coinsurance rate. 

In other words, a State may not alter the 

national reinsurance payment 

parameters in a manner that could result 

in reduced reinsurance payments. We 

seek comment on this approach, 

including whether there should be any 

limitations as to how a State may 

supplement the national reinsurance 

payment parameters. 

To provide issuers with greater 

certainty for premium rate setting 

purposes, we propose that a State 

ensure that any additional funds for 

reinsurance payments it collects under 

§ 153.220(d)(1)(ii) or State funds under 

§ 153.220(d)(3) as applicable are 

reasonably calculated to cover 

additional reinsurance payments that 

are projected to be made under the 

State’s supplemental reinsurance 

payment parameters for a given benefit 

year. We believe that the State must also 

ensure that such parameters are applied 

to all reinsurance-eligible plans in that 

State in the same manner. We further 

propose in § 153.232(b) that 

contributions collected under 

§ 153.220(d)(1)(ii) or additional funds 

collected under § 153.220(d)(3), as 

applicable, must be applied toward 

requests for reinsurance payments made 

under the State supplemental 

reinsurance payments parameters for 

each benefit year commencing in 2014 

and ending in 2016. 

We also propose in § 153.232(c) that, 

as applicable, a health insurance issuer 

of a non-grandfathered individual 

market plan becomes eligible for 

reinsurance payments under a State’s 

supplemental reinsurance parameters, if 

its incurred claims costs for an 

individual enrollee’s covered benefits 

during a benefit year: (1) Exceed the 

supplemental State attachment point; 

(2) exceed the national reinsurance cap; 

or (3) exceed the national attachment 

point, if the State has established a State 

supplemental coinsurance rate. This 

would allow reinsurance payments 

made under the State supplemental 

payment parameters to ‘‘wrap around’’ 

the national reinsurance payment 

parameters so that the State could apply 

any additional contributions it collects 

under proposed § 153.220(d) towards 

reinsurance payments beyond the 

national reinsurance payment 

parameters. In this way, HHS can 

distribute funds under the national 

payments formula to where they are 

needed most, while allowing States that 

elect to run their own program the 

flexibility to supplement nationally 

calculated reinsurance payments. As 

mentioned previously, States would be 

required to separate in its reporting to 

issuers the reinsurance payments paid 

under the national reinsurance payment 

parameters and State supplemental 

reinsurance payment parameters. 

To ensure that reinsurance payments 

under State supplemental payment 

parameters do not overlap with the 

national reinsurance payment 

parameters, we propose the method for 

calculating State supplemental 

reinsurance payments. Specifically, we 

propose in § 153.232(d) that 

supplemental reinsurance payments 

with respect to a health insurance 

issuer’s claims costs for an individual 

enrollee’s covered benefits must be 

calculated by taking the sum of: (1) The 

product of such claims costs between 

the supplemental State attachment point 

and the national attachment point 

multiplied by the national coinsurance 

rate (or applicable State supplemental 

coinsurance rate); (2) the product of 

such claims costs between the national 

reinsurance cap and the supplemental 

State reinsurance cap multiplied by the 

national coinsurance rate (or applicable 

State supplemental coinsurance rate); 

and (3) the product of such claims costs 

between the national attachment point 

and the national reinsurance cap 

multiplied by the difference between 

the State supplemental coinsurance rate 

and the national coinsurance rate. 

For example, in 2014 a State may 

elect to establish supplemental State 

reinsurance payment parameters that 

modify all three national reinsurance 

payment parameters, by establishing a 

State supplemental attachment point of 

$50,000, a State supplemental 

coinsurance rate of 100 percent, and a 

State supplemental reinsurance cap of 

$300,000. Under these supplemental 

State reinsurance payment parameters, 

the State must use its additional 

contributions to pay up to $98,000 of 

the issuer costs under $300,000 or the 

sum of: $10,000 (100 percent of an 

issuer’s costs between the State’s 2014 

supplemental attachment point of 

$50,000 and the 2014 national 

attachment point $60,000); and $50,000 

(100 percent of an issuer’s costs between 

the 2014 national reinsurance cap of 

$250,000 and the 2014 State 

supplemental reinsurance cap 

$300,000); and $38,000 (the product of 

an issuer’s costs between $60,000 and 

$250,000 multiplied by the difference 

between the State’s supplemental 

coinsurance rate (100 percent) and the 

national coinsurance rate (80 percent). 

Contributions collected under the 

national contribution rate would be 

applied to an issuer’s claims costs above 

the 2014 national attachment point, 

subject to the national coinsurance rate 

and national reinsurance cap. 

Alternatively, a second State may 

elect to establish a State supplemental 

attachment point of $40,000 in 2014, but 

elect not to establish a supplemental 

State coinsurance rate or reinsurance 

cap. That State would then use any 

additional contributions it collects to 

cover up to $16,000 or 80 percent (the 

2014 national coinsurance rate) of an 


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issuer’s claims costs between $40,000 

(the 2014 supplemental State 

attachment point) and $60,000 (the 2014 

national attachment point). As in the 

first example, contributions collected 

under the national contribution rate 

would be applied to an issuer’s claims 

costs above the 2014 national 

attachment point, subject to the national 

coinsurance rate and national 

reinsurance cap. 

Similar to payment calculations under 

the national reinsurance payments 

parameters, we propose in § 153.232(e) 

that if all requested reinsurance 

payments under the State supplemental 

reinsurance parameters calculated in a 

State for a benefit year will exceed all 

the additional funds a State collects for 

reinsurance payments under 

§ 153.220(d)(1)(ii) or State funds under 

§ 153.220(d)(3) as applicable, the State 

must determine a uniform pro rata 

adjustment to be applied to all such 

requests for reinsurance payments in the 

State. Each applicable reinsurance 

entity in the State must reduce all such 

requests for reinsurance payments 

under the State supplemental 

reinsurance payment parameters for the 

applicable benefit year by that 

adjustment. 

Finally, in § 153.232(f), we propose 

that a State must ensure that 

reinsurance payments made to issuers 

under the State supplemental 

reinsurance payment parameters do not 

exceed the issuer’s total paid amount for 

the reinsurance-eligible claim(s) and 

any remaining additional funds 

collected under § 153.220(d)(1)(ii) must 

be used for reinsurance payments under 

the State supplemental parameters in 

subsequent benefit years. We seek 

comment on this proposal, including 

other areas of flexibility that could be 

provided to State-operated reinsurance 

programs. 

9. Allocation and Distribution of 

Reinsurance Contributions 

Section 153.220(d) of the Premium 

Stabilization Rule currently provides 

that HHS would distribute reinsurance 

contributions collected for reinsurance 

payments from a State to the applicable 

reinsurance entity for that State. We 

propose to replace this section with 

proposed § 153.235(a), which provides 

that HHS will allocate and distribute the 

reinsurance contributions collected 

under the national contribution rate 

based on the need for reinsurance 

payments, regardless of where the 

contribution was collected. As 

previously stated in this proposed rule, 

HHS will disburse all contributions 

collected under the national 

contribution rate from all States for the 

applicable benefit year, based on all 

available contributions and the 

aggregate requests for reinsurance 

payments, net of the pro rata 

adjustment, if any. We believe that this 

method of disbursing reinsurance 

contributions will allow the transitional 

reinsurance program to equitably 

stabilize premiums across the nation, 

and permit HHS to direct reinsurance 

funds based on the need for reinsurance 

payments. Consistent with this 

proposal, we propose to amend 

§ 153.220(a) to clarify that even if a State 

establishes a reinsurance program, HHS 

would directly collect from health 

insurance issuers, as well as self-insured 

group health plans, the reinsurance 

contributions for enrollees who reside 

in that State. 

10. Reinsurance Data Collection 

Standards 

a. Data Collection Standards for 

Reinsurance Payments 

Section 153.240(a) directs a State’s 

applicable reinsurance entity to collect 

data needed to determine reinsurance 

payments as described in § 153.230. We 

propose to amend § 153.240(a) by 

adding subparagraph (1) to direct a State 

to ensure that its applicable reinsurance 

entity either collect or be provided 

access to the data necessary to 

determine reinsurance payments from 

an issuer of a reinsurance-eligible plan. 

We note that this data would include 

data related to cost-sharing reductions 

because reinsurance payments are not 

based on a plan’s paid claims amounts 

that are reimbursed by cost-sharing 

reduction amounts. The applicable 

reinsurance entity, therefore, must 

reduce a plan’s paid claims amount 

considered for reinsurance payments 

attributable to cost-sharing reductions. 

When HHS operates a reinsurance 

program on behalf of a State, HHS 

would utilize the same distributed data 

collection approach that we propose to 

use for risk adjustment, as described in 

section III.G. of this proposed rule. This 

proposed amendment would clarify that 

an applicable reinsurance entity may 

either use a distributed data collection 

approach for its reinsurance program or 

directly collect privacy-protected data 

from issuers to determine an issuer’s 

reinsurance payments. The distributed 

data collection approach would not 

involve the direct collection of data; 

instead, HHS or the State would access 

data on plans’ secure servers. 

We also propose to amend 

§ 153.240(a) by adding subparagraph (3), 

directing States to provide a process 

through which an issuer of a 

reinsurance-eligible plan that does not 

generate individual enrollee claims in 

the normal course of business (such as 

a capitated plan) may request 

reinsurance payments (or submit data to 

be considered for reinsurance payments) 

based on estimated costs of encounters 

for the plan in accordance with the 

requirements of § 153.410. We propose 

to direct States to ensure that such 

requests (or a subset of such requests) 

are subject to (to the extent required by 

the State) a data validation program. A 

State would have the flexibility to 

design a data validation program that 

meets its adopted methodology and 

State-specific circumstances. This 

proposed amendment would enable 

certain reinsurance-eligible plans, such 

as staff-model health maintenance 

organizations, that do not generate 

claims with associated costs in the 

normal course of business to provide 

data to request and receive reinsurance 

payments. 

When HHS operates a reinsurance 

program on behalf of a State, issuers of 

capitated plans would generate claims 

for encounters, and derive costs for 

those claims when submitting requests 

for reinsurance payments (or submitting 

data to be considered for reinsurance 

payments). It is our understanding that 

many capitated plans currently use 

some form of encounter data pricing 

methodology to derive claims, often by 

imputing an amount based upon the 

Medicare fee-for-service equivalent 

price or the usual, customary, and 

reasonable equivalent that would have 

been paid for the service in the 

applicable market. A capitated plan 

should use its principal internal 

methodology for pricing encounters, 

such as the methodology in use for other 

State or Federal programs (for example, 

a methodology used for the Medicare 

Advantage market). If a plan has no 

such methodology, or has an incomplete 

methodology, it would be permitted to 

implement a methodology or 

supplement the methodology in a 

manner that yields derived claims that 

are reasonable in light of the specific 

market that the plan is serving. 

Capitated plans, like all plans that 

submit reinsurance payment requests 

(or data to be considered for reinsurance 

payments) in the HHS-operated 

program, will be subject to validation 

and audit. Because capitated plans 

already use pricing methodologies, we 

believe this proposed policy would 

permit capitated plans to participate in 

the reinsurance program with a minimal 

increase in administrative burden. We 

welcome comments on this approach. 


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34Available at: http://www.whitehouse.gov/sites/ 

default/files/omb/memoranda/fy2007/m07-16.pdf. 

35Borsch, Matthew, CFA, and Wass, Sam, Equity 

Research Report, Americas: Managed Care, Decline 

in Blue Cross Margins Shows the Industry-Wide 

Downturn, Goldman Sachs Group, Inc. (August 28, 

2012). 

b. Notification of Reinsurance Payments 

We propose to add § 153.240(b)(1) 

which directs a State, or HHS on behalf 

of the State, to notify issuers of the total 

amount of reinsurance payments that 

will be made no later than June 30 of the 

year following the benefit year. This 

corresponds with the date on which a 

State or HHS must notify issuers of risk 

adjustment payments and charges. As 

such, by June 30 of the year following 

the applicable benefit year, issuers will 

be notified of reinsurance payments and 

risk adjustment payments and charges, 

allowing issuers to account for their 

total reinsurance payments and risk 

adjustment payments and charges when 

submitting data for the risk corridors 

and MLR programs. To provide issuers 

in the individual market with 

information to assist in development of 

premiums and rates in subsequent 

benefit years, we also propose in new 

§ 153.240(b)(2) that a State provide 

quarterly notifications of estimates to 

each reinsurance-eligible plan of the 

expected requests for reinsurance 

payments for each quarter. HHS intends 

to collaborate with issuers and States to 

develop these early notifications. We 

welcome comments on this proposal. 

c. Privacy and Security Standards 

We propose to amend § 153.240 by 

adding paragraph (d)(1), to require a 

State operating its own reinsurance 

program to ensure that the applicable 

reinsurance entity’s collection of 

personally identifiable information is 

limited to information reasonably 

necessary for use in the calculation of 

reinsurance payments and that use and 

disclosure of personally identifiable 

information is limited to those purposes 

for which the personally identifiable 

information was collected (including for 

purposes of data validation). This 

proposal aligns with corresponding 

language for the risk adjustment 

program. The term ‘‘personally 

identifiable information’’ is a broadly 

used term across Federal agencies, and 

has been defined in the Office of 

Management and Budget Memorandum 

M–07–16 (May 22, 2007).34 To reduce 

duplicative guidance or potentially 

conflicting regulatory language, we are 

not defining personally identifiable 

information in this proposed rule, and 

incorporate the aforementioned 

definition in to this proposed rule. 

We also propose to amend § 153.240 

by adding paragraph (d)(2) to require 

that an applicable reinsurance entity 

implement specific privacy and security 

standards to ensure enrollee privacy, 

and to protect sensitive information. 

Specifically, this provision would 

require an applicable reinsurance entity 

to provide administrative, physical, and 

technical safeguards for personally 

identifiable information that may be 

used to request reinsurance payments. 

This provision is meant to ensure that 

an applicable reinsurance entity 

complies with the same privacy and 

security standards that apply to issuers 

and providers, specifically the security 

standards described at § 164.308, 

§ 164.310, and § 164.312. 

d. Data Collection 

We propose to add new § 153.420(a) 

to address data collection issues, 

including the distributed data collection 

approach that HHS intends to use when 

operating the reinsurance program on 

behalf of a State. We propose that 

issuers of plans eligible for and seeking 

reinsurance payments submit or make 

accessible data (including data on costsharing reductions to permit the 

calculation of enrollees’ claims costs 

incurred by the issuer), in accordance 

with the reinsurance data collection 

approach established by the State, or 

HHS on behalf of the State. 

In § 153.420(b), we propose that an 

issuer of a reinsurance-eligible plan 

submit data to be considered for 

reinsurance payments for the applicable 

benefit year by April 30 of the year 

following the end of the applicable 

benefit year. The April 30 deadline 

would apply to all issuers of 

reinsurance-eligible plans, regardless of 

whether HHS or the State is operating 

reinsurance. We welcome comments on 

this proposal. 

D. Provisions for the Temporary Risk 

Corridors Program 

1. Definitions 

In the Premium Stabilization Rule, we 

stated in response to comments that we 

intended to propose that taxes and 

profits be accounted for in the risk 

corridors calculation, in a manner 

consistent with the MLR program. We, 

therefore, propose the following 

amendments and additions to the 

definitions in this section. 

We propose to amend § 153.500 by 

defining ‘‘taxes’’ with respect to a QHP 

as Federal and State licensing and 

regulatory fees paid with respect to the 

QHP as described in § 158.161(a), and 

Federal and State taxes and assessments 

paid for the QHP as described in 

§ 158.162(a)(1) and § 158.162(b)(1). This 

definition aligns with the fees and taxes 

deductible from premiums in the MLR 

calculation. We use this definition to 

define ‘‘after tax premiums earned’’ 

which we propose to mean, with respect 

to a QHP, premiums earned minus 

taxes. 

We propose to revise the definition of 

‘‘administrative costs’’ in § 153.500 to 

mean, with respect to a QHP, the total 

non-claims costs incurred by the QHP 

issuer for the QHP, including taxes. We 

note that under this broader definition, 

administrative costs may also include 

fees and assessments other than ‘‘taxes,’’ 

as defined above. 

Using the definitions above, we 

propose to amend § 153.500 by defining 

‘‘profits’’ with respect to a QHP to mean 

the greater of: (1) 3 percent of after-tax 

premiums earned; and (2) premiums 

earned by the QHP minus the sum of 

allowable costs and administrative costs 

of the QHP. Thus, we propose to define 

profits for a QHP through the use of the 

risk corridors equation; however, we 

provide for a minimum 3 percent profit 

margin so that the risk corridors 

program will protect a reasonable profit 

margin (subject to the 20 percent cap on 

allowable administrative costs as 

described below). We believe that 

permitting issuers of QHPs to retain a 

reasonable profit margin will afford 

them greater assurance of achieving 

reasonable financial results given the 

expected changes in the market in 2014 

through 2016, and will encourage the 

issuers to reduce the risk premium built 

into their rates. Long-term industry 

trends suggest an average industry 

underwriting margin of approximately 2 

percent.35 However, our understanding 

is that the 2 percent margin includes 

many plans with significant, 

unexpected underwriting losses, and 

includes lines of business that typically 

have lower underwriting margins than 

those customarily earned in the 

individual and small group markets. 

MLR data from 2011 on 30 large issuers 

suggest an average underwriting margin 

of approximately 3 percent, once 

individual issuer negative results are 

removed. We believe that a calculation 

with significant negative margins 

removed better reflects reasonable issuer 

projections of underwriting profit. We 

welcome comments on the estimates, 

data sources, and appropriate profit 

margin to use in the risk corridor 

calculation. 

Finally, using the definition of profits 

discussed above, we propose to revise 

the definition of ‘‘allowable 

administrative costs’’ in § 153.500 so 

that it means, with respect to a QHP, the 

sum of administrative costs, other than 


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taxes, and profits earned, which sum is 

limited to 20 percent of after-tax 

premiums earned (including any 

premium tax credit under any 

governmental program), plus taxes. This 

definition reflects the inclusion of 

profits and taxes discussed above, and 

clarifies that the 20 percent cap on 

allowable administrative costs applies 

to taxes, other than taxes deductible 

from premium revenue under the MLR 

rules, a result that is consistent with the 

way these taxes are accounted for by the 

MLR rules. 

The following example illustrates the 

operation of the risk corridors 

calculation as proposed in this proposed 

rule: 

• Premiums earned: Assume a QHP 

with premiums earned of $200. 

• Allowable costs: Assume allowable 

costs of $140, including expenses for 

health care quality and health 

information technology, and other 

applicable adjustments. Risk adjustment 

and reinsurance payments are after-thefact adjustments to allowable costs for 

purposes of determining risk corridors 

amounts, and allowable costs must be 

reduced by the amount of any costsharing reductions received from HHS. 

• Non-Claims Costs: Assume that the 

QHP has non-claims costs of $50, of 

which $15 are properly allocable to 

licensing and regulatory fees and taxes 

and assessments described in 

§ 158.161(a), § 158.162(a)(1), and 

§ 158.162(b)(1) (that is, ‘‘taxes’’). 

The following calculations result: 

• Taxes: Under the proposed 

definition of taxes, the QHP’s taxes will 

be $15. 

• Administrative costs are proposed 

to be defined as non-claims costs. In this 

case, those costs would be $50. 

Administrative costs other than taxes 

would be $35. 

• After-tax premiums earned are 

proposed to be defined as premiums 

earned minus taxes, or in this case $200 

¥ $15 = $185. 

• Profits are proposed to be defined 

as the greater of: 3 percent of premiums 

earned, or 3 percent * $200 = $6; and 

premiums earned by the QHP minus the 

sum of allowable costs and 

administrative costs, or $200—($140 + 

$50) = $200 ¥ $190 = $10. Therefore, 

profits for the QHP would be $10, which 

is greater than $6. 

• Allowable administrative costs are 

proposed to be defined as the sum of 

administrative costs, other than taxes, 

plus profits earned by the QHP, which 

sum is limited to 20 percent of after-tax 

premiums earned by the QHP (including 

any premium tax credit under any 

governmental program), plus taxes. 

= ($35 + $10), limited to 20 percent 

of $185, plus $15 

= $45, limited to $37, plus $15 

= $37, plus $15 

= $52. 

• The target amount is defined as 

premiums earned reduced by allowable 

administrative costs, or $200 ¥ $52 = 

$148. 

• The risk corridors ratio is the ratio 

of allowable costs to target amount, or 

the ratio of $140 to $148, or 

approximately 94.6 percent (rounded to 

the nearest one-tenth of one percent), 

meaning that the QHP issuer would be 

required to remit to HHS 50 percent of 

approximately (97 percent ¥ 94.6 

percent) = 50 percent of 2.4 percent, or 

approximately 1.2 percent of the target 

amount, or approximately 0.012 * $148, 

or approximately $1.78. 

We propose these amendments to 

account for taxes and profits in a 

manner broadly consistent with the 

MLR calculation. As described in the 

Premium Stabilization Rule, we seek 

alignment between the MLR and risk 

corridors program when practicable so 

that similar concepts in the two 

programs are handled in a similar 

manner, and similar policy goals are 

reflected. Otherwise, there would be the 

potential for the Federal government to 

subsidize MLR rebate payments, or for 

an issuer to make risk corridors 

payments even though no MLR rebates 

would have been required. 

We welcome comments on these 

proposals. 

2. Risk Corridors Establishment and 

Payment Methodology 

We propose to add paragraph (d) to 

§ 153.510, which would specify the due 

date for QHP issuers to remit risk 

corridors charges to HHS. Under this 

provision, an issuer would be required 

to remit charges within 30 days after 

notification of the charges. 

We propose a schedule for the risk 

corridors program, as follows. By June 

30 of the year following an applicable 

benefit year, under the redesignated 

§ 153.310(e), issuers of QHPs will have 

been notified of risk adjustment 

payments and charges for the applicable 

benefit year. By that same date, under 

proposed § 153.240(b)(1), QHP issuers 

also would have been notified of all 

reinsurance payments to be made for the 

applicable benefit year. As such, we 

propose in § 153.530(d) that the due 

date for QHP issuers to submit all 

information required under § 153.530 of 

the Premium Stabilization Rule is July 

31 of the year following the applicable 

benefit year. We note that in section 

III.I. of this proposed rule, we are 

proposing that the MLR reporting 

deadline be revised to align with this 

schedule. 

We welcome comments on these 

proposals. 

3. Risk Corridors Data Requirements 

In § 153.530 of the Premium 

Stabilization Rule, we stated that to 

support the risk corridors program 

calculations, a QHP must submit data 

related to actual premium amounts 

collected, including premium amounts 

paid by parties other than the enrollee 

in a QHP, specifically advance premium 

tax credits. We further specified that 

risk adjustment and reinsurance 

payments be regarded as after-the-fact 

adjustments to allowable costs for 

purposes of determining risk corridors 

amounts, and allowable costs be 

reduced by the amount of any costsharing reductions received from HHS. 

For example, if a QHP incurred $200 in 

allowable costs for a benefit year, but 

received a risk adjustment payment of 

$25, made reinsurance contributions of 

$10, received reinsurance payments of 

$35, and received cost-sharing reduction 

payments of $15, its allowable costs 

would be $135 ($200 allowable costs ¥ 

$25 risk adjustment payments received 

+ $10 reinsurance contributions made 

¥ $35 reinsurance payments received 

¥ $15 cost-sharing reduction 

payments). 

As noted in section III.E. of this 

proposed rule, we are proposing an 

approach to reimbursement of costsharing reductions that would add an 

additional reimbursement requirement 

for cost-sharing reductions by providers 

with whom the issuer has a fee-forservice compensation arrangement. As 

described in section III.E., we propose 

that issuers be reimbursed for, in the 

case of a benefit for which the issuer 

compensates the provider in whole or in 

part on a fee-for-service basis, the actual 

amount of cost-sharing reductions 

provided to the enrollee for the benefit 

and reimbursed to the provider by the 

issuer. However, cost-sharing reductions 

on benefits rendered by providers for 

which the issuer provides compensation 

other than on a fee-for-service 

arrangement (such as a capitated 

system) would not be held to this 

standard. 

It is our understanding that, in most 

fee-for-service arrangements, costsharing reductions will be passed 

through to the fee-for-service provider, 

and as such a QHP’s allowable costs 

should not include either enrollee cost 

sharing or cost-sharing reductions 

reimbursed by HHS. However, in 

contrast in capitated arrangements, costsharing reduction payments should be 

accounted for as a deduction from 


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allowable costs because we assume in a 

competitive market that capitation 

payments (which are reflected directly 

in an issuer’s allowable costs) will be 

raised to account for the reductions in 

providers’ cost-sharing income, and that 

the issuer will retain the cost-sharing 

reduction payments. 

Therefore, we are proposing to amend 

§ 153.530(b)(2)(iii) so that allowable 

costs are reduced by any cost-sharing 

reduction payments received by the 

issuer for the QHP to the extent not 

reimbursed to the provider furnishing 

the item or service. 

4. Manner of Risk Corridor Data 

Collection 

We also propose to amend 

§ 153.530(a), (b), and (c) to specify that 

we will address the manner of 

submitting required risk corridors data 

in future guidance rather than in this 

HHS notice of benefit and payment 

parameters. 

E. Provisions for the Advance Payments 

of the Premium Tax Credit and CostSharing Reduction Programs 

1. Exchange Responsibilities With 

Respect to Advance Payments of the 

Premium Tax Credit and Cost-Sharing 

Reductions 

a. Special Rule for Family Policies 

We propose to amend § 155.305(g)(3), 

currently entitled ‘‘special rule for 

multiple tax households.’’ Currently, 

this provision sets forth a rule for 

determining the cost-sharing reductions 

applicable to individuals who are, or 

who are expected to be, in different tax 

households but who enroll in the same 

QHP policy. This provision includes a 

hierarchy of cost-sharing eligibility 

categories. Our proposed amendment 

would rename this paragraph ‘‘special 

rule for family policies,’’ add a category 

for qualified individuals who are not 

eligible for any cost-sharing reductions, 

and add text to explicitly address 

situations in which Indians (as defined 

in § 155.300(a)) and non-Indians enroll 

in a family policy. The proposed 

amendment would extend the current 

policy with respect to tax households 

such that individuals on a family policy 

would be eligible to be assigned to the 

most generous plan variation for which 

all members of the family are eligible. 

We note that nothing in this provision 

precludes qualified individuals with 

different levels of eligibility for costsharing reductions from purchasing 

separate policies to secure the highest 

cost-sharing reductions for which they 

are respectively eligible. We expect that 

Exchanges will assist consumers in 

understanding the relative costs and 

benefits of enrolling in a family policy 

versus several individual policies. 

The following example demonstrates 

the applicability of this provision: 

• Example: A and B are parent and 

child who live together, but are each in 

separate tax households. A and B 

purchase a silver level QHP family 

policy in the individual market on an 

Exchange. A has a household income of 

245 percent of the FPL, while B has a 

household income of 180 percent of the 

FPL. Individually, A would be eligible 

for enrollment in the 73 percent AV 

silver plan variation (that is, with higher 

cost-sharing requirements), and B in the 

87 percent AV silver plan variation (that 

is, with lower cost-sharing 

requirements). Under the proposed 

provision, A and B would collectively 

qualify for the 73 percent AV silver plan 

variation, but not the 87 percent AV 

silver plan variation. 

HHS recognizes that this policy may 

limit the cost-sharing reductions that 

members of a family could receive if the 

family chooses to enroll in a family 

policy; however, section 1402 of the 

Affordable Care Act does not permit an 

individual to receive benefits under the 

Federal cost-sharing reductions program 

for which the individual is ineligible. In 

addition, because deductibles and outof-pocket limits are calculated at the 

policy level, as opposed to the 

individual level, it would be 

operationally difficult to establish 

separate cost-sharing requirements for 

different enrollees within the same 

policy. We discuss this policy further 

with regard to Indians in section 

III.E.4.i. of this proposed rule. We 

welcome comments on this proposal 

and its effect on families. 

b. Recalculation of Advance Payments 

of the Premium Tax Credit and CostSharing Reductions 

We propose to add paragraph (g) to 

§ 155.330, related to eligibility 

redeterminations during a benefit year, 

to clarify how changes during a benefit 

year in a tax filer’s situation that are 

reported or identified in accordance 

with § 155.330 affect eligibility for 

advance payments of the premium tax 

credit and cost-sharing reductions. As 

discussed in the Exchange 

Establishment Rule, an Exchange must 

redetermine a tax filer’s eligibility for 

advance payments of the premium tax 

credit and cost-sharing reductions either 

as a result of a self-reported change by 

an individual under § 155.330(b) or as a 

result of periodic data matching as 

described in § 155.330(d). 

As described in 26 CFR 1.36B–4(a)(1), 

a tax filer whose premium tax credit for 

the taxable year exceeds the tax filer’s 

advance payments may receive the 

excess as an income tax refund, and a 

tax filer whose advance payments for 

the taxable year exceed the tax filer’s 

premium tax credit would owe the 

excess as additional income tax liability, 

subject to the limits specified in 26 CFR 

1.36B–4(a)(3). Consequently, it is 

important when calculating advance 

payments that the Exchange act to 

minimize any projected discrepancies 

between the advance payments and the 

final premium tax credit amount, which 

would be determined by the IRS after 

the close of the tax year. Thus, we 

propose in § 155.330(g)(1)(i) that when 

an Exchange is recalculating the 

amounts of advance payments of the 

premium tax credit available due to an 

eligibility redetermination made during 

the benefit year, an Exchange must 

account for any advance payments 

already made on behalf of the tax filer 

in the benefit year for which 

information is available to the 

Exchange, such that the recalculated 

advance payment amount is projected to 

result in total advance payments for the 

benefit year that correspond to the tax 

filer’s projected premium tax credit for 

the benefit year, calculated in 

accordance with 26 CFR 1.36B–3. We 

propose in § 155.330(g)(1)(ii) to specify 

that the advance payment provided on 

the tax filer’s behalf must be greater 

than or equal to zero, and must comply 

with 26 CFR 1.36B–3(d), which limits 

advance payments to the total premiums 

for the QHPs (and stand-alone dental 

plans, if applicable) selected. 

The following example demonstrates 

the applicability of this provision: 

• Tax filer A is determined eligible 

for enrollment in a QHP through the 

Exchange and for advance payments of 

the premium tax credit during open 

enrollment prior to 2014 based on an 

expected household income for the year 

2014 of $33,510 (300 percent of the 

FPL). Tax filer A seeks to purchase 

coverage in a rating area where the 

premium for the second lowest cost 

silver plan is $300 per month. As such, 

the maximum amount of advance 

payments of the premium tax credit per 

month would be calculated as follows: 

300 ¥ ((1/12)*(9.5%*33,510)) = $35. 

During the month of June, the tax filer 

reports an expected decrease in annual 

household income such that tax filer A’s 

projected household income for the year 

2014 will now be $27,925 (250 percent 

of the FPL). Thus, the maximum amount 

of advance payments of the premium 

tax credit per month would be 

calculated as follows: 300 ¥ ((1/ 

12)*(8.05%*27,925)) = $113. However, 

the Exchange’s recalculation of advance 

payments of the premium tax credit 


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must take into account the advance 

payments already made on behalf of tax 

filer A. The Exchange must first 

multiply $113 by 12 months to calculate 

the expected tax credit for the entire 

year ($1,356), subtract the amount 

already paid for the first six months 

($210), and then divide the difference 

by the number of months remaining in 

the year (six), which results in a 

recalculated maximum advance 

payment for the remaining months of 

$191. In this example, we assume that 

the taxpayer has elected to have the 

maximum advance payment for which 

he or she is eligible to be paid to his or 

her selected QHP issuer. 

If a tax filer is determined eligible for 

advance payments of the premium tax 

credit during the benefit year but did 

not previously receive advance 

payments of the premium tax credit, the 

Exchange would calculate the advance 

payments in accordance with the 

process described above, without 

subtracting any previous payments. We 

reiterate that the provision of all 

advance payments of the premium tax 

credit must be consistent with section 

36B of the Code and its implementing 

regulations, including the requirement 

that premium tax credits (and advance 

payments) are available only for 

‘‘coverage months’’ during which the 

individual is eligible and enrolled in a 

QHP through the Exchange. We also 

considered taking a different approach if 

an eligibility redetermination during the 

benefit year results in an increase in 

advance payments of the premium tax 

credit—we considered proposing that in 

such a situation, HHS would make 

retroactive payments to the QHP issuer 

for all prior months of the benefit year 

to reflect the increased advance 

payment amount, not to exceed the total 

premium for each month. This approach 

would permit us to pay out more of the 

full premium tax credit amount prior to 

the close of the tax year. Without 

retroactive payments, in the case of a 

redetermination late in the year, we 

would have a limited ability to pay out 

an increase because of the limitation 

that the premium tax credit—and thus 

the advance payments of the premium 

tax credit not exceed the total premium 

for the month. Following this alternative 

approach in the case of increases in 

advance payments of the premium tax 

credit during the benefit year could also 

help address any outstanding premium 

amounts owed by an enrollee to a QHP 

issuer. We solicit comments regarding 

whether we should adopt this approach, 

and how QHP issuers should be 

required to provide the retroactive 

payments to enrollees. 

In § 155.330(g)(2), we propose that, 

when redetermining eligibility for costsharing reductions during the benefit 

year, an Exchange must determine an 

individual to be eligible for the category 

of cost-sharing reductions that 

corresponds to the individual’s 

expected annual household income for 

the benefit year, as determined at 

redetermination. Section 1402(f)(3) of 

the Affordable Care Act provides that 

eligibility determinations for costsharing reductions are made on the 

basis of the expected annual household 

income for the same taxable year for 

which the advance payment 

determination is made under section 

1412(b) of the Affordable Care Act. 

Therefore, if a mid-year change in 

income triggers use of a new annual 

household income figure for purposes of 

determining eligibility for advance 

payments of the premium tax credit, 

eligibility for cost-sharing reductions 

must also be redetermined using the 

new figure. However, unlike the 

premium tax credit, cost-sharing 

reductions are not reconciled at the end 

of the year by tax filers. As such, 

redeterminations of eligibility for costsharing reductions should not take into 

account the amount of cost-sharing 

reductions already provided on an 

individual’s behalf. 

The following example demonstrates 

the applicability of this provision: 

• Tax filer B is determined eligible for 

enrollment in a QHP through the 

Exchange and for cost-sharing 

reductions during open enrollment prior 

to 2014 and enrolls in a silver plan 

QHP. Tax filer B is assigned to a plan 

variation in January 2014 based on an 

expected annual household income of 

150 percent of the FPL. During the 

month of June, the tax filer self-reports 

an increase in expected household 

income such that tax filer B’s expected 

annual household income will now be 

at 200 percent of the FPL. The Exchange 

must redetermine the tax filer’s 

eligibility for cost-sharing reductions for 

the remainder of the benefit year 

following the effective date of 

redetermination at 200 percent of the 

FPL, which is the tax filer’s expected 

annual household income, and the tax 

filer should then be assigned to the plan 

variation designed to provide costsharing reductions for individuals with 

that expected annual household income. 

c. Administration of Advance Payments 

of the Premium Tax Credit and CostSharing Reductions 

We propose to add two paragraphs to 

§ 155.340. First, we propose to add 

paragraph (e) to § 155.340, which would 

provide that if one or more individuals 

in a tax household who are eligible for 

advance payments of the premium tax 

credit(s) collectively enroll in more than 

one policy through the Exchange 

(whether by enrolling in more than one 

policy under a QHP, enrolling in more 

than one QHP, or enrolling in one or 

more QHPs and one or more stand-alone 

dental plans) for any month in a benefit 

year, the Exchange must allocate the 

advance payment of the premium tax 

credit(s) in accordance with the 

methodology proposed in 

§ 155.340(e)(1) and (2). We note that an 

Exchange, under § 155.340(a), must 

submit to HHS the dollar amount of the 

advance payment that will be made to 

each QHP on behalf of the enrollee. 

We propose the following allocation 

methodology: as described in 

§ 155.340(e)(1), the Exchange must first 

allocate the portion of the advance 

payment of the premium tax credit(s) 

that is less than or equal to the aggregate 

adjusted monthly premiums for the 

QHP policies, as defined under 26 CFR 

1.36B–3(e), properly allocated to EHB, 

among the QHP policies in proportion 

to the respective portions of the 

premiums for the policies properly 

allocated to EHB. As described in 

proposed § 155.340(e)(2), any remaining 

advance payment of the premium tax 

credit(s) must be allocated among the 

stand-alone dental policies in 

proportion to the respective portions of 

the adjusted monthly premiums for the 

stand-alone dental policies properly 

allocated to the pediatric dental EHB. 

The portion of the adjusted monthly 

premium for a QHP policy or a standalone dental policy that is allocated to 

EHB would be determined based on the 

information that the QHP issuer 

submits, under the proposed § 156.470, 

and described in section III.E.2. of this 

proposed rule. For example, if a family 

collectively eligible for advance 

payments of the premium tax credit 

purchases two QHPs and a stand-alone 

dental plan, with a $500 adjusted 

monthly premium allocated to EHB, a 

$400 adjusted monthly premium 

allocated to EHB, and a $100 adjusted 

monthly premium allocated to the 

pediatric dental essential health benefit, 

respectively, the Exchange must allocate 

five-ninths of the advance payment of 

the premium tax credit (up to $500) to 

the first QHP, and four-ninths (up to 

$400) to the second QHP. If there is any 

remaining advance payment of the 

premium tax credit, this will be 

allocated to the stand-alone dental plan. 

This rule ensures a pro rata allocation 

(by premium) of the advance payment of 

the premium tax credit to the QHPs, 

while ensuring that the advance 


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36 45 CFR 156.280(e)(1)(i) provides that if a QHP 

provides coverage of services described in 

paragraph (d)(1) of that section, the QHP issuer 

must not use Federal funds, including advance 

payments of the premium tax credit or cost-sharing 

reductions, to pay for the services. 

payment of premium tax credits are 

only for (and based on) the portion of 

premiums for EHB. We welcome 

comments on this proposal. 

Second, we propose to add paragraph 

(f) to § 155.340, which sets forth 

standards for an Exchange when it is 

facilitating the collection and payment 

of premiums to QHP issuers and standalone dental plans on behalf of 

enrollees, as permitted under 

§ 155.240(c). Consistent with our 

proposed provision in § 156.460(a), 

§ 155.340(f)(1) would direct the 

Exchange to reduce the portion of the 

premium for the policy collected from 

the enrollee by the amount of the 

advance payment of the premium tax 

credit for the applicable month(s) when 

the Exchange elects to collect premiums 

on behalf of QHPs. Because the 

Exchange is responsible for premium 

collections in these circumstances, the 

Exchange must also take responsibility 

for lowering the premium costs charged 

to enrollees by the amount of the credit. 

Proposed § 155.340(f)(2) would direct 

Exchanges to display the amount of the 

advance payment of the premium tax 

credit for the applicable month(s) on an 

enrollee’s billing statement. This is the 

Exchange equivalent of the requirement 

for QHP issuers proposed in 

§ 156.460(b). Both rules are drafted for 

the same purpose: To ensure that an 

enrollee is aware of the total cost of the 

premium so that he or she may verify 

that the correct advance payment of the 

premium tax credit has been applied. 

We welcome comments on this 

proposal. 

2. Exchange Functions: Certification of 

Qualified Health Plans 

We propose to add § 155.1030. This 

section would set forth standards for 

Exchanges to ensure that QHPs in the 

individual market on the Exchange meet 

the requirements related to advance 

payments of the premium tax credit and 

cost-sharing reductions, as proposed in 

§ 156.215 and described below. We 

propose these standards under section 

1311(c) of the Affordable Care Act, 

which provides for the Secretary to 

establish criteria for the certification of 

health plans as QHPs, as well as section 

1321(a)(1), which provides general 

rulemaking authority for title I of the 

Affordable Care, including the 

establishment of programs for the 

provision of advance payments of the 

premium tax credit and cost-sharing 

reductions. We believe that it is 

appropriate to incorporate these 

standards into the QHP certification 

criteria because Exchanges are the 

primary entities that interact with and 

oversee QHPs. 

In § 155.1030(a)(1), we propose that 

the Exchange ensure that each issuer 

that offers or seeks to offer a QHP in the 

individual market on the Exchange 

submit the required plan variations, as 

proposed in § 156.420, for each of its 

health plans proposed to be offered in 

the individual market on the Exchange. 

Further we propose that the Exchange 

must certify that the plan variations 

meet the requirements detailed in 

§ 156.420. We expect that an Exchange 

would collect prior to each benefit year 

the information necessary to validate 

that the issuer meets the requirements 

for silver plan variations, as detailed in 

§ 156.420(a), and collect for certification 

the information necessary to validate 

that the issuer meets the requirements 

for zero and limited cost sharing plan 

variations, as detailed in § 156.420(b) . 

We expect that this data collection 

would include the cost-sharing 

requirements for the plan variations, 

such as the annual limitation on cost 

sharing, and any reductions in 

deductibles, copayments or 

coinsurance. In addition, the Exchange 

would collect or calculate the actuarial 

values of each QHP and silver plan 

variation, calculated under § 156.135 of 

the proposed EHB/AV Rule. We propose 

in § 155.1030(a)(2) that the Exchange 

provide the actuarial values of the QHPs 

and silver plan variations to HHS. As 

described in § 156.430, HHS would use 

this information to determine the 

payments to QHP issuers for the value 

of the cost-sharing reductions. 

In § 155.1030(b)(1), we propose to 

require the Exchange to collect certain 

information that an issuer must submit 

under § 156.470 that would allow for 

the calculation of the advance payments 

of cost-sharing reductions and the 

premium tax credit. Specifically, in 

§ 156.470(a), we propose that an issuer 

provide to the Exchange annually for 

approval, for each metal level health 

plan (that is, a health plan at any of the 

four levels of coverage, as defined in 

§ 156.20) offered, or proposed to be 

offered, in the individual market on the 

Exchange, an allocation of the rate and 

the expected allowed claims costs for 

the plan, in each case, to: (1) EHB, other 

than services described in 

§ 156.280(d)(1),36 and (2) any other 

services or benefits offered by the health 

plan not described in clause (1). We 

propose this annual submission of the 

rate allocation information, under 

section 36B(b)(3)(D) of the Code, as 

added by section 1401 of the Affordable 

Care Act, to allow for the removal of the 

cost of ‘‘additional benefits’’ from the 

advance payments of the premium tax 

credit. The rate allocation information 

would allow the Exchange to calculate 

the percentage of the rate attributable to 

EHB; this percentage could then be 

multiplied by the adjusted monthly 

premium, as defined by 26 CFR 1.36B– 

3(e), and the monthly premium of the 

QHP in which the taxpayer enrolls, to 

calculate the premium assistance 

amount. The allocation of the expected 

allowed claims costs would be used to 

validate the rate allocation, and to 

calculate the advance payments for costsharing reductions as described in 

proposed § 156.430 of this proposed 

rule. 

In § 156.470(e), we further propose 

that an issuer of a metal level health 

plan offered, or proposed to be offered, 

in the individual market on the 

Exchange also submit to the Exchange 

annually for approval, an actuarial 

memorandum with a detailed 

description of the methods and specific 

bases used to perform the allocations. 

The Exchange and HHS would use this 

memorandum to verify that the 

allocations meet the standard, proposed 

in § 156.470(c). First, the issuer must 

ensure that the allocation is performed 

by a member of the American Academy 

of Actuaries in accordance with 

generally accepted actuarial principles 

and methodologies. Second, the rate 

allocation should reasonably reflect the 

allocation of the expected allowed 

claims costs attributable to EHB 

(excluding those services described in 

§ 156.280(d)(1)). Third, the allocation 

should be consistent with the allocation 

of State-required benefits to be 

submitted by the issuer as proposed in 

§ 155.170(c) of the proposed EHB/AV 

Rule, and the allocation requirements 

described in § 156.280(e)(4) for certain 

services. Fourth, the issuer should 

calculate the allocation as if it was a 

premium under the fair health 

insurance premium standards described 

at § 147.102, the single risk pool 

standards described at § 156.80, and the 

same premium rate standards described 

at § 156.255. We propose this 

requirement because we believe the 

allocation of rates should be performed 

consistent with the standards applicable 

to the setting of rates. Thus, for 

example, an issuer should calculate the 

allocation of premiums using costs for 

essential health benefits across all 

enrollees in all plans in the relevant risk 

pool, under § 156.80, and not across a 

standardized population or a planspecific population. Although the last 


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approach might yield a more accurate 

allocation, it would increase the 

analytical burden on issuers, and it 

would not align with other reporting 

requirements, such as for the Effective 

Rate Review program (established under 

section 2794 of the PHS Act), which 

requires projections based on the single 

risk pool standards. We welcome 

comment on this proposed standard and 

alternative approaches. 

In § 156.470(b), we propose somewhat 

similar standards for the allocation of 

premiums for stand-alone dental plans. 

Specifically, we propose that an issuer 

provide to the Exchange annually for 

approval, for each stand-alone dental 

plan offered, or proposed to be offered, 

in the individual market on the 

Exchange, a dollar allocation of the 

expected premium for the plan, to: (1) 

the pediatric dental essential health 

benefit, and (2) any benefits offered by 

the stand-alone dental plan that are not 

the pediatric essential health benefit. As 

described in 26 CFR 1.36B–3(k), this 

allocation will be used to determine 

premium tax credit, and thus the 

advance payment of the premium tax 

credit, available if an individual enrolls 

in both a QHP and a stand-alone dental 

plan. We note that unlike issuers of 

metal level health plans offered or 

proposed to be offered as QHPs, issuers 

of stand-alone dental plans would be 

required to submit a dollar allocation of 

the expected premium for the plan 

(rather than a percentage of the rate, 

which would be multiplied by the 

premium to determine the allocation of 

the premium). 

We propose this approach because 

issuers of stand-alone dental plans are 

exempt from certain standards in the 

proposed Market Reform Rule, 

including § 147.102 and 156.80 (related 

to fair health insurance premiums and 

the single risk pool), and as a result, are 

not required to develop rates under the 

same limitations that apply to issuers of 

QHPs in the individual and small group 

markets. Implicit in the allocation 

methodology required for issuers of 

QHPs proposed in § 156.470(a) is a 

requirement that the premium rating 

methodology be set prior to the 

allocation. We anticipate that issuers of 

stand-alone dental plans may take into 

account additional rating factors, up to 

and including medical underwriting, 

which would make the completion and 

submission of final premium rating 

methodologies to the Exchange 

problematic. Our proposal at 

§ 156.470(b) does not require issuers of 

stand-alone dental plans to finalize the 

total premium prior to the benefit year, 

but does require issuers to finalize the 

dollar amount of the premium allocable 

to the pediatric dental essential health 

benefit to allow for the calculation of 

advance payments of the premium tax 

credit. This approach will ensure that 

Exchanges have sufficient information 

to calculate advance payments of the 

premium tax credit at the time an 

applicant selects coverage. 

In proposed § 156.470(e), we also 

propose that issuers of stand-alone 

dental plans submit to the Exchange 

annually for approval an actuarial 

memorandum with a detailed 

description of the methods and specific 

bases used to perform the allocations, 

demonstrating that the allocations meet 

the standards proposed in § 156.470(d). 

These standards are similar to those 

proposed for issuers of metal level 

health plans offered or proposed to be 

offered as QHPs, with some adaptations 

specific to stand-alone dental plans. In 

§ 156.470(d)(1) and (2) we propose that 

the allocation be performed by a 

member of the American Academy of 

Actuaries in accordance with generally 

accepted actuarial principles and 

methodologies, and be consistent with 

the allocation applicable to Staterequired benefits to be submitted by the 

issuer under § 155.170(c). In addition, in 

§ 156.470(d)(3), we propose that the 

allocation be calculated under the fair 

health insurance premium standards 

described at 45 CFR 147.102, except for 

the provision related to age set forth at 

§ 147.102(a)(1)(ii); the single risk pool 

standards described at 45 CFR 156.80; 

and the same premium rate standards 

described at 45 CFR 156.255 (in each 

case subject to the standard proposed in 

subparagraph (4) described below). We 

propose these standards because we 

believe that Congress intended that 

premium tax credits be available based 

on the market reforms embodied in the 

Affordable Care Act. However, in the 

place of the fair health insurance 

premium standards related to age, we 

propose in subparagraph (4) that the 

allocation be calculated so that the 

amount of the premium allocated to the 

pediatric dental essential health benefit 

for an individual under the age of 19 

years does not vary, and the amount of 

the premium allocated to the pediatric 

dental essential health benefit for an 

individual aged 19 years or more is 

equal to zero. Thus, for example, an 

issuer of a stand-alone dental plan 

should calculate the dollar allocation for 

individuals under 19 years of age across 

all such enrollees in all plans in the 

relevant risk pool, under § 156.80. This 

will ensure that advance payments of 

the premium tax credit are applied to 

policies that include individuals who 

may benefit from the pediatric dental 

essential health benefit as interpreted in 

the proposed EHB/AV Rule. We seek 

comment on this approach and the 

proposed allocation standards. We also 

note that issuers of stand-alone dental 

plans are not required to submit an 

allocation of their expected allowed 

claims costs because these plans are not 

eligible for cost-sharing reductions, as 

described in § 156.440(b). 

In § 155.1030(b)(1), we propose that 

the Exchange collect and review 

annually the rate or premium allocation, 

the expected allowed claims cost 

allocation, and the actuarial 

memorandum that an issuer submits; 

and ensure that such allocations meet 

the standards set forth in § 156.470(c). 

To ensure that the allocations are 

completed appropriately, we expect that 

the Exchange will review the allocation 

information in conjunction with the rate 

and benefit information that the issuer 

submits under § 156.210. To facilitate 

this review, we proposed revisions to 

the reporting requirements for the 

Effective Rate Review program in the 

proposed Market Reform rule to include 

the rate allocation and expected allowed 

claims cost allocation information that 

issuers of metal level health plans 

would submit. Therefore, an Exchange 

that coordinates its review of QHP rates 

and benefits with the State’s Effective 

Rate Review program would be able to 

also coordinate the allocation review, 

avoiding duplication. This approach 

should streamline the submission 

process for issuers. We note, however, 

that it is ultimately the responsibility of 

the Exchange to ensure that the issuer 

performs the allocations appropriately 

for each health plan or stand-alone 

dental plan that the issuer offers, or 

seeks to offer, on the individual market 

in the Exchange, including those that 

are not reported as part of the Effective 

Rate Review program. Therefore, we 

expect that Exchanges will collect the 

allocation information through the 

Effective Rate Review program or the 

QHP certification and annual 

submission process, as appropriate. 

As discussed above, the rate and 

premium allocation information would 

then be used by the Exchange to 

calculate the dollar amounts of the 

advance payments of the premium tax 

credit, and the expected allowed claims 

cost allocation would be used by HHS 

to calculate the advance payments of the 

cost-sharing reductions, as described in 

§ 156.430. To allow for these 

calculations, and to ensure that Federal 

funds are spent appropriately, we 

propose under § 155.1030(b)(2) that the 

Exchange be required to submit to HHS 

the approved allocation(s) and actuarial 

memorandum for each QHP and standVerDate Mar<15>2010 18:09 Dec 06, 2012 Jkt 229001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 E:\FR\FM\07DEP2.SGM 07DEP2

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alone dental plan. We propose to 

provide further detail on the manner 

and timeframe of this submission to 

HHS in the future; however, we expect 

that the Exchange would be required to 

submit the information prior to the start 

of the benefit year. In paragraph (b)(4), 

we propose authority for the use of this 

data by HHS for the approval of the 

estimates that issuers submit for 

advance payments of cost-sharing 

reductions described in § 156.430, and 

for the oversight of the advance 

payments of cost-sharing reductions and 

premium tax credits programs. 

In § 155.1030(b)(3), we propose that 

the Exchange collect annually any 

estimates and supporting 

documentation that a QHP issuer 

submits to receive advance payments for 

the value of the cost-sharing reductions 

under § 156.430(a). The Exchange must 

then submit the estimates and 

supporting documentation to HHS for 

review and approval. This collection 

from issuers should occur as part of the 

initial QHP certification process and 

any annual submission process. We 

propose to provide further detail on the 

manner and timeframe of the 

submission to HHS in the future; 

however, we expect that the Exchange 

would be required to submit the 

information prior to the start of the 

benefit year. 

3. QHP Minimum Certification 

Standards Relating to Advance 

Payments of the Premium Tax Credit 

and Cost-Sharing Reductions 

Under HHS rulemaking authority 

under sections 1311(c)(1), 1321(a)(1), 

1402 and 1412 of the Affordable Care 

Act, we propose to add § 156.215. This 

section would amend the QHP 

minimum certification standards and 

specify that an issuer seeking to offer a 

health plan on the individual market in 

the Exchange meet the requirements 

described in subpart E of part 156 

related to the administration of advance 

payments of the premium tax credit and 

cost-sharing reductions. We propose to 

add this section to clarify that 

compliance with part 156 subpart E, 

including the standards and submission 

requirements proposed at § 156.420 and 

§ 156.470, is a requirement of QHP 

certification, and therefore, is included 

in the standard described at 

§ 155.1000(b), under which an Exchange 

must offer only health plans that meet 

the minimum certification 

requirements. Under our proposal, 

continuing compliance with subpart E 

requirements by QHPs and QHP issuers 

is a condition of certification; failure to 

comply with the requirements could 

result in decertification of the QHP as 

well as other enforcement actions. This 

corresponds to the proposed addition of 

§ 155.1030, which sets forth the 

Exchange responsibilities on 

certification with respect to advance 

payments of the premium tax credit and 

cost-sharing reductions (described 

previously). 

4. Health Insurance Issuer 

Responsibilities With Respect to 

Advance Payments of the Premium Tax 

Credit and Cost-Sharing Reductions 

a. Definitions 

Under § 156.400, we propose 

definitions for terms that are used 

throughout subpart E of part 156. These 

terms apply only to subpart E. Some of 

these definitions cross-reference 

definitions elsewhere in parts 155 or 

156, including definitions proposed in 

the proposed EHB/AV Rule: the terms 

‘‘advance payments of the premium tax 

credit’’ and ‘‘Affordable Care Act’’ are 

defined by reference to § 155.20, and the 

term ‘‘maximum annual limitation on 

cost sharing’’ is defined as the highest 

annual dollar amount that health plans 

(other than QHPs with cost-sharing 

reductions) may require in cost sharing 

for a particular year, as established for 

that year under § 156.130 of the 

proposed EHB/AV Rule. The terms 

‘‘Federal poverty level or FPL’’ and 

‘‘Indian’’ are defined by reference to 

§ 155.300(a). The term ‘‘de minimis 

variation’’ is defined as the allowable 

variation in the AV of a health plan that 

does not result in a material difference 

in the true dollar value of the health 

plan as established in § 156.140(c)(1) of 

the proposed EHB/AV Rule. We also 

propose to define ‘‘stand-alone dental 

plan’’ as a plan offered through an 

Exchange under § 155.1065. We seek 

comment on these definitions. 

We propose to rely on the definitions 

of ‘‘cost sharing’’ and ‘‘cost-sharing 

reductions’’ from § 156.20. We note that 

the definitions of cost sharing and costsharing reductions apply only with 

respect to EHB, though without regard 

to whether the EHB is provided inside 

or outside of a QHP’s network. We 

propose to define ‘‘annual limitation on 

cost sharing’’ to mean the annual dollar 

limitation on cost sharing required to be 

paid by an enrollee that is established 

by a particular health plan. However, as 

proposed in § 156.130(c) of the 

proposed EHB/AV Rule, we note again 

that the annual limitation on cost 

sharing would not include cost sharing 

for benefits provided outside of a QHP’s 

network. If a State requires a QHP to 

cover benefits in addition to EHB, the 

provisions of this subpart E (except for 

§ 156.420(c) and (d)) relating to costsharing reductions do not apply to those 

additional State-required benefits. For 

clarity, we note these provisions apply 

to State-required benefits included in 

EHB under § 156.110(f) of the proposed 

EHB/AV Rule. Finally, we note that 

cost-sharing reductions are subject to 

§ 156.280(e)(1)(ii). 

Other definitions are proposed here to 

effectuate the regulations proposed in 

subpart E. This Payment Notice 

includes five related definitions: 

standard plan, silver plan variation, zero 

cost sharing plan variation, limited cost 

sharing plan variation, and plan 

variation, as follows: 

• We propose to define ‘‘standard 

plan’’ as a QHP offered at one of the four 

levels of coverage, defined at § 156.140, 

with an annual limitation on cost 

sharing that conforms to the 

requirements of § 156.130(a). A standard 

plan at the bronze, silver, gold, or 

platinum level of coverage is referred to 

as a standard bronze plan, a standard 

silver plan, a standard gold plan, and a 

standard platinum plan, respectively. 

• We propose to define ‘‘silver plan 

variation’’ as, with respect to a standard 

silver plan, any of the variations of that 

standard silver plan described in 

§ 156.420(a). 

• We propose to define ‘‘zero cost 

sharing variation’’ as, with respect to a 

QHP at any level of coverage, the 

variation of such QHP described in 

§ 156.420(b)(1), which provides for the 

elimination of cost sharing for Indians 

based on household income level. 

• We propose to define ‘‘limited cost 

sharing variation’’ as, with respect to a 

QHP at any level of coverage, the 

variation of such QHP described in 

§ 156.420(b)(2), which provides for the 

prohibition on cost sharing applicable to 

the receipt of benefits from IHS or 

certain other providers, irrespective of 

income level. 

• We propose to define ‘‘plan 

variation’’ as a zero cost sharing plan 

variation, limited cost sharing plan 

variation, or silver plan variation. We 

emphasize that the plan variations of a 

QHP are not separate plans, but 

variations in how the cost sharing 

required under the QHP is to be shared 

between the enrollee(s) and the Federal 

government. 

We propose these definitions to 

administer and implement the costsharing reductions established under 

section 1402 of the Affordable Care Act. 

As described in more detail below, 

although there will only be one actual 

QHP (for example, a standard silver 

plan) with one standard cost-sharing 

structure, we use the concept of plan 

variations to describe how certain 

eligible individuals will pay only a 


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portion of the total cost sharing required 

under that QHP, with the Federal 

government bearing the remaining costsharing obligations under section 1402 

of the Affordable Care Act. 

To reflect how the Affordable Care 

Act creates different eligibility 

categories with different associated costsharing reductions, we propose that 

each plan variation will reflect the 

enrollee’s portion of the cost sharing 

requirements for the QHP. We refer to 

‘‘assigning’’ enrollees to the applicable 

plan variation to describe how the 

enrollee will receive the benefits 

described in section 1402 of the 

Affordable Care Act. We reiterate that 

these variations are not different QHPs 

and that a change in eligibility for costsharing reductions simply changes the 

enrollee’s responsibility for part of the 

total cost sharing under the same QHP. 

We seek comment on these definitions. 

We propose to define ‘‘de minimis 

variation for a silver plan variation’’ as 

a single percentage point. That is, we 

propose that 1 percentage point 

variation in the AV of a silver plan 

variation would not result in a material 

difference in the true dollar value of the 

silver plan variation. We note that this 

proposal differs from the 2 percentage 

point de minimis variation standard for 

health plans, proposed in 

§ 156.140(c)(1) of the proposed EHB/AV 

Rule. We believe that because costsharing reductions are reimbursed by 

the Federal government, the degree of 

flexibility afforded to issuers of silver 

plan variations in the cost-sharing 

design should be somewhat less. With 

this standard we seek to balance the 

need to ensure that individuals receive 

the full value of the cost-sharing 

reductions for which they are eligible, 

and issuers’ ability to set reasonable 

cost-sharing requirements. 

We propose to define ‘‘most 

generous’’ or ‘‘more generous’’ as, 

between a QHP (including a standard 

silver plan) or plan variation and one or 

more other plan variations of the same 

QHP, the QHP or plan variation 

designed for the category of individuals 

last listed in § 155.305(g)(3). That list, as 

proposed to be amended under this rule, 

first lists the QHP with no cost-sharing 

reductions, followed by the limited cost 

sharing plan variation, the 73 percent, 

87 percent, and 94 percent silver plans, 

and finally, the zero cost sharing plan 

variation. We seek comment on this 

definition. 

We propose to define the ‘‘annual 

limitation on cost sharing’’ as the 

annual dollar limit on cost sharing 

required to be paid by an enrollee that 

is established by a particular QHP. We 

note that this definition refers to the 

plan-specific cost-sharing parameter, 

while the defined term ‘‘maximum 

annual limitation on cost sharing’’ refers 

to the uniform maximum that would 

apply to all QHPs (other than QHPs 

with cost-sharing reductions) for a 

particular year. 

Finally, we propose to define the 

‘‘reduced maximum annual limitation 

on cost sharing’’ as the dollar value of 

the maximum annual limitation on cost 

sharing for a silver plan variation that 

remains after applying the reduction in 

the maximum annual limitation on cost 

sharing required by section 1402 of the 

Affordable Care Act, as announced in 

the annual HHS notice of benefit and 

payment parameters. The reduced 

maximum annual limitation on cost 

sharing for each silver plan variation for 

2014 is proposed in the preamble for 

§ 156.420 of this Payment Notice. The 

reduced maximum annual limitation 

applies, as does the maximum annual 

limitation, only with respect to cost 

sharing on EHB, and does not apply to 

cost sharing on services provided by 

out-of-network providers. 

b. Cost-Sharing Reductions for Enrollees 

In § 156.410(a), we propose that a 

QHP issuer must ensure that an 

individual eligible for cost-sharing 

reductions, as demonstrated by 

assignment to a particular plan 

variation, pay only the cost sharing 

required of an eligible individual for the 

applicable covered service under a plan 

variation. For example, if an individual 

is assigned to an 87 percent AV silver 

plan variation, and the copayment for a 

hospital emergency room visit is 

reduced from $100 to $50 under that 

silver plan variation, the individual 

must be charged only the reduced 

copayment of $50. We also specify in 

this paragraph that the enrollee receive 

this reduction in cost sharing when the 

cost sharing is collected, which in this 

instance might occur when the enrollee 

visits the emergency room for care. This 

means that a QHP issuer may not create 

a system in which an eligible enrollee 

is required to pay the full cost sharing 

requirement and apply for a 

reimbursement or refund. This proposal 

applies to all forms of cost sharing, 

including copayments, coinsurance, and 

deductibles. Similarly, the QHP issuer 

must ensure that the enrollee is not 

charged any type of cost sharing after 

the applicable annual limitation on cost 

sharing has been met. We note, 

however, that an individual eligible for 

cost-sharing reductions would not be 

eligible for a reduced copayment or 

coinsurance rate until any applicable 

(potentially reduced) deductible has 

been paid. For example, assume that a 

QHP issuer requires a $750 deductible 

for individuals eligible for a 73 percent 

AV silver plan variation, with reduced 

cost sharing occurring after the 

deductible is met. Further assume that 

an individual eligible for cost-sharing 

reductions has not previously incurred 

cost sharing during the benefit year 

under the QHP and has a two day 

hospital stay that costs $500 per day. 

Under this plan variation, the 

individual must pay $500 for the first 

day and $250 for the second day to meet 

the plan’s deductible requirements 

before receiving the reduced 

coinsurance or copayment under the 73 

percent AV plan variation. We seek 

comment on these provisions. 

In § 156.410(b), we propose that after 

a qualified individual makes a plan 

selection, a QHP issuer would assign the 

individual to the applicable plan 

variation under the eligibility 

determination sent to the QHP issuer by 

the Exchange. For example, an 

individual determined by the Exchange 

to be eligible for a 94 percent AV silver 

plan variation would be provided the 

option to enroll in any silver health plan 

with the appropriate cost-sharing 

reductions applied (the statute specifies 

that cost-sharing reductions are 

available to non-Indians only in silver 

health plans). We note that the QHP 

issuer is entitled to rely upon the 

eligibility determination sent to the 

QHP issuer by the Exchange. 

In § 156.410(b)(1), we propose that a 

QHP issuer assign a qualified individual 

who chooses to enroll in a silver plan 

in the individual market in the 

Exchange to the silver plan variation for 

which the qualified individual is 

eligible. This proposal is consistent with 

section 1312(a)(1) of the Affordable Care 

Act, which permits the individual to 

enroll in the silver health plan. 

However, section 1312(a)(1) does not 

address whether the individual could 

opt out of the most generous silver plan 

variation (that is, to refuse the most 

generous cost-sharing reductions for 

which the individual is eligible). We 

believe that allowing opting out of the 

most generous silver plan variation 

could cause significant consumer 

confusion, with no attendant policy 

benefit. Furthermore, we note that if a 

qualified individual does not want to 

take advantage of the cost-sharing 

reductions for which he or she is 

eligible, the individual may elect to 

decline to apply for cost-sharing 

reductions when seeking enrollment 

through the Exchange. In addition, we 

note that section 1402(a) states the 

requirement on QHP issuers to provide 

cost-sharing reductions to eligible 

individuals once the QHP issuer has 


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been notified of the individual’s 

eligibility. We invite comment on this 

approach. 

Section § 156.410(b)(2) and (3) are 

discussed below in the section of this 

proposed rule related to special costsharing reduction rules for Indians. 

In § 156.410(b)(4), we propose that a 

QHP issuer must assign an individual 

determined ineligible by the Exchange 

for cost-sharing reductions to the 

selected QHP with no cost-sharing 

reductions. 

c. Plan Variations 

In § 156.420, we propose that issuers 

submit to the Exchange for certification 

and approval the variations of the health 

plans that they seek to offer, or continue 

to offer, in the individual market on the 

Exchange as QHPs that include required 

levels of cost-sharing reductions. We 

further clarify that under our proposal, 

multi-State plans, as defined in 

§ 155.1000(a), and CO–OP QHPs, as 

defined in § 156.505, would be subject 

to the provisions of this subpart. OPM 

will certify the plan variations of the 

multi-State plans and determine the 

time and manner for submission. 

Sections 1402(a) through (c) of the 

Affordable Care Act direct issuers to 

reduce cost sharing for EHB for eligible 

insured enrolled in a silver health plan 

with household incomes between 100 

and 400 percent of the FPL, such that 

the plan’s share (before any 

reimbursement from HHS for costsharing reductions) of the total allowed 

costs of the benefits are a certain 

percentage (that is, the health plan 

meets a certain AV level). To achieve 

these AV levels, the law directs issuers 

to first reduce the maximum annual 

limitation on cost sharing. The amount 

of the reduction in the maximum annual 

limitation on cost sharing is specified in 

the statute; however, under section 

1402(c)(1)(B)(ii) of the Affordable Care 

Act, the Secretary may adjust the 

reduction to ensure that the resulting 

limits do not cause the AVs of the 

health plans to exceed the specified 

levels. After the issuer reduces the 

annual limitation on cost sharing to 

comply with the applicable reduced 

maximum annual limitation, section 

1402(c)(2) of the Affordable Care Act 

directs the Secretary to establish 

procedures under which an issuer is to 

further reduce cost sharing if necessary 

to achieve the specified AV levels. 

Table 14 sets forth the reductions in 

the maximum annual limitation on cost 

sharing (subject to revision by the 

Secretary) and AV levels applicable to 

silver plans for these individuals, under 

section 1402(c) of the Affordable Care 

Act: 

TABLE 14—STATUTORY REDUCTIONS IN MAXIMUM ANNUAL LIMITATION ON COST SHARING

Household 

income 

Reduction in maximum 

annual 

limitation on cost sharing 

(subject to revision by 

the Secretary) 

AV level 

(calculated before any 

reimbursement from 

HHS) 

(percent) 

100–150% of FPL .................................................................................................................... 2⁄3 94 

150–200% of FPL .................................................................................................................... 2⁄3 87 

200–250% of FPL .................................................................................................................... 1⁄2 73 

250–300% of FPL .................................................................................................................... 1⁄2 70 

300–400% of FPL .................................................................................................................... 1⁄3 70 

For individuals with household 

incomes of 250 to 400 percent of the 

FPL, we note that without any change 

in other forms of cost sharing, any 

reduction in the maximum annual 

limitation on cost sharing will cause an 

increase in AV. Therefore, a reduction 

in the maximum annual limitation on 

cost sharing for the standard silver plan 

could require corresponding increases 

in other forms of cost sharing to 

maintain the required 70 percent AV. 

For example, if a plan were directed to 

lower its annual limitation on cost 

sharing for individuals with household 

income between 250 and 400 percent of 

the FPL from $6,000 to $5,000, the 

issuer might be required to significantly 

increase plan deductibles, coinsurance, 

and co-payments to maintain the 

required 70 percent AV. We anticipate 

that most individuals would not expect 

to reach the annual limitation on cost 

sharing, and therefore, would be 

required to pay more in up-front costs 

under such a cost-sharing structure. 

Given the effect of the reductions in the 

maximum annual limitation on cost 

sharing outlined above and the 

additional administrative burden 

required in designing and operating 

additional silver plan variations, we 

propose not to reduce the maximum 

annual limitation on cost sharing for 

individuals with household incomes 

between 250 and 400 percent of the 

FPL. We believe that this approach is 

within the Secretary’s authority under 

section 1402(c)(1)(B)(ii) of the 

Affordable Care Act, and would benefit 

those individuals who do not expect to 

reach the annual limitation on cost 

sharing, who are likely to represent the 

majority of eligible individuals. The 

majority of those who commented on 

this approach in response to the AV/ 

CSR Bulletin were supportive of this 

proposed implementation of section 

1402(c)(1) of the Affordable Care Act. 

For individuals with a household 

income of 100 to 250 percent of the FPL, 

we propose, as outlined in the AV/CSR 

Bulletin, an annual three-step process 

for the design of cost-sharing structures 

in the silver plan variations, as follows: 

Step 1. In the first step, we would 

identify in the annual HHS notice of 

benefit and payment parameters the 

maximum annual limitation on cost 

sharing applicable to all plans that will 

offer the EHB package. This limit would 

be used to set the reduced maximum 

annual limitation on cost sharing 

applicable to silver plan variations. 

Section 156.130(a) of the proposed 

EHB/AV Rule relates to the maximum 

annual limitation on cost sharing for 

EHB packages. For benefit year 2014, 

cost sharing (except for cost sharing on 

services provided by out-of-network 

providers) under self-only coverage and 

non-self-only coverage may not exceed 

the annual dollar limit on cost sharing 

for high deductible health plans as 

described in sections 223(c)(2)(A)(ii)(I) 

and 223(c)(2)(A)(ii)(II) of the Code, 

respectively. For a benefit year 

beginning after 2014, the maximum 

annual limitation on cost sharing will 

equal the dollar limit for 2014 benefit 

year adjusted by a premium adjustment 

percentage determined by HHS, under 

section 1302(c)(4) of the Affordable Care 

Act. We plan to propose the premium 

adjustment percentage applicable to the 

2015 benefit year in the next HHS notice 

of benefit and payment parameters. 

Maximum Annual Limitation on Cost 

Sharing for Benefit Year 2014: As 

discussed above, the maximum annual 

limitation on cost sharing for 2014 will 

be the dollar limit on cost sharing for 


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37We note that these plan structures are broadly 

consistent with structures suggested by research 

from ‘‘Small Group Health Insurance in 2010: A 

Comprehensive Survey of Premiums, Product 

Choices, and Benefits.’’ America’s Health Insurance 

Plans Center for Policy and Research. July 2011; 

‘‘Employer Health Benefits: 2011 Summary of 

Findings.’’ The Kaiser Family Foundation and 

Health Research & Educational Trust. Accessed on 

June 7, 2012 from http://ehbs.kff.org/pdf/8226.pdf; 

and ‘‘What the Actuarial Values in the Affordable 

Care Act Mean.’’ The Kaiser Family Foundation: 

Focus on Health Reform. April 2011. Accessed on 

June 7, 2012 from http://www.kff.org/healthreform/ 

upload/8177.pdf. 

high deductible health plans set by the 

IRS for 2014. The IRS will publish this 

dollar limit in the spring of 2013. 

However, to allow time for HHS to 

analyze the impact of the reductions in 

the maximum annual limitation on cost 

sharing on health plan AV levels, and to 

allow issuers adequate time to develop 

the cost-sharing structures of their silver 

plan variations for submission during 

the QHP certification process, we 

propose to estimate the dollar limit for 

2014, using the methodology detailed in 

sections 223(c)(2)(A)(ii) and 223(g) of 

the Code. This methodology calls for a 

base dollar limit to be updated annually 

by a cost-of-living adjustment, which for 

2014 is based on the average Consumer 

Price Index for all urban consumers, 

published by the Department of Labor, 

for a 12-month period ending March 31, 

2013. Because that the Consumer Price 

Index for March 2013 is not yet 

available, we propose to use a projection 

of this number developed by the Office 

of Management Budget for the 

President’s Budget for Fiscal Year 2013. 

Using this projection, and the 

methodology described in the Code, we 

estimate that the maximum annual 

limitation on cost sharing for self-only 

coverage for 2014 will be approximately 

$6,400 (the maximum annual limitation 

on cost sharing for other than self-only 

coverage for 2014 would be twice that 

amount, or $12,800). This is slightly 

more than a 2 percent increase from the 

limit set by IRS for 2013 ($6,250). We 

emphasize that this estimate was 

developed only for purposes of setting 

the reduced maximum annual limitation 

on cost sharing for silver plan 

variations. Under section 1302(c)(1)(A) 

of the Affordable Care Act, cost sharing 

incurred under plans offering EHB 

packages in 2014 cannot exceed the 

limit set by IRS under section 

223(c)(2)(A)(ii)(I) and (II) of the Code for 

2014 plan years. We welcome comment 

on this approach. 

Step 2. In the second step under our 

proposal, we would analyze the effect 

on AV of the reductions in the 

maximum annual limitation on cost 

sharing described in section 

1402(c)(1)(A) of the Affordable Care Act. 

Under section 1402(c)(1)(B)(ii), we 

would adjust the reduction in the 

maximum annual limitation on cost 

sharing, if necessary, to ensure that the 

actuarial value of the applicable silver 

plan variations would not exceed the 

actuarial value specified in section 

1402(c)(1)(B)(i). A description of our 

analyses and the reduced annual 

limitations on cost sharing for the three 

income categories will be published in 

this annual HHS notice of benefit and 

payment parameters. 

Reduced Maximum Annual 

Limitation on Cost Sharing for Benefit 

Year 2014. For the 2014 benefit year, we 

analyzed the impact on actuarial value 

of the reductions described in the 

Affordable Care Act to the estimated 

maximum annual limitation on cost 

sharing for self-only coverage for 2014 

($6,400). We began by developing three 

model silver level QHPs. These model 

plans were meant to represent the broad 

sets of plan designs that we expect 

issuers to offer at the silver level of 

coverage through an Exchange. To that 

end, the model plans include a PPO 

plan with a typical cost-sharing 

structure ($1,675 deductible and 20 

percent in-network coinsurance rate), a 

PPO plan with a lower deductible and 

above-average coinsurance ($575 

deductible and 40 percent in-network 

coinsurance rate), and an HMO-like 

plan ($2,100 deductible, 20 percent 

coinsurance rate, and the following 

services with copays that are not subject 

to the deductible or coinsurance: $500 

inpatient stay, $350 emergency 

department visit, $25 primary care 

office visit, and $50 specialist office 

visit).37 All three model plans meet the 

actuarial value requirements for silver 

health plans, and start with an annual 

limitation on cost sharing equal to the 

estimated maximum annual limitation 

on cost sharing ($6,400). The plan 

design features of the model QHPs were 

entered into the AV calculator 

developed by HHS and proposed at 

§ 156.135(a) in the proposed EHB/AV 

Rule, implementing section 1302(d) of 

the Affordable Care Act. We then 

observed how the reduction in the 

maximum annual limitation on cost 

sharing specified in the Affordable Care 

Act (that is, 2⁄3 or 1⁄2 of the annual 

limitation on cost sharing, as applicable) 

affected the AV of the plans. 

We found that the reduction in the 

maximum annual limitation on cost 

sharing specified in the Affordable Care 

Act for enrollees with a household 

income level between 100 and 150 

percent of the FPL (2⁄3 reduction), and 

150 and 200 percent of the FPL (2⁄3

reduction), did not cause the AV of any 

of the model QHPs to exceed the 

statutorily specified AV level (94 and 

87, respectively). This suggests that it is 

unnecessary to adjust the reduction 

under section 1402(c)(1)(B)(ii) of the 

Affordable Care Act for benefit year 

2014. In contrast, the reduction in the 

maximum annual limitation on cost 

sharing specified in the Affordable Care 

Act for enrollees with a household 

income level between 200 and 250 

percent of FPL (1⁄2 reduction), did cause 

the AVs of the model QHPs to exceed 

the specified AV level of 73 percent. As 

a result, we propose that QHP issuers 

only be required to reduce their annual 

limitation on cost sharing for enrollees 

in the 2014 benefit year with a 

household income between 200 and 250 

percent of FPL by approximately 1⁄5, 

rather than 1⁄2. We further propose to 

moderate the reductions in the 

maximum annual limitation on cost 

sharing for all three income categories, 

as shown in Table 15, to account for any 

potential inaccuracies in our estimate of 

the maximum annual limitation on cost 

sharing for 2014, and unique plan 

designs that may not be captured by our 

three model QHPs. We note that 

selecting a lesser reduction for the 

maximum annual limitation on cost 

sharing will not reduce the benefit 

afforded to enrollees in aggregate as 

QHP issuers are required to further 

reduce their limit on cost sharing, or 

reduce other types of cost sharing, if the 

required reduction does not cause the 

actuarial value of the QHP to meet the 

specified level, as detailed in step 3 of 

this proposal. Based on this analysis, in 

Table 15, we propose the following 

reduced maximum annual limitations 

on cost sharing for benefit year 2014: 


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TABLE 15—REDUCTIONS IN MAXIMUM ANNUAL LIMITATION ON COST SHARING FOR 2014 

Eligibility category 

Reduced maximum annual 

limitation on cost sharing 

for self-only coverage for 2014 

Reduced maximum annual 

limitation on cost sharing 

for other than self-only 

coverage for 2014 

Individuals eligible for cost-sharing reductions under § 155.305(g)(2)(i) (that 

is, 100–150% of FPL) .................................................................................. $2,250 $4,500 

Individuals eligible for cost-sharing reductions under § 155.305(g)(2)(ii) (that 

is, 150–200% of FPL) .................................................................................. $2,250 $4,500 

Individuals eligible for cost-sharing reductions under § 155.305(g)(2)(iii) (that 

is, 200–250% of FPL) .................................................................................. $5,200 $10,400 

We do not believe there will be a need 

to revise our analyses once the IRS 

dollar limit for 2014 is published, and 

propose that QHP issuers may rely on 

the reduced maximum annual 

limitations on cost sharing published in 

the final HHS notice of benefit and 

payment parameters to develop their 

silver plan variations for the 2014 

benefit year. We welcome comment on 

this approach. 

Step 3. In the third step under our 

proposal, a QHP issuer offering coverage 

in the individual market on the 

Exchange would develop three 

variations of its standard silver plan— 

one each for individuals with household 

incomes between 100 and 150 percent 

of the FPL, 150 and 200 percent of the 

FPL, and 200 and 250 percent of the 

FPL—with each variation having an 

annual limitation on cost sharing that 

does not exceed the applicable reduced 

maximum annual limitation on cost 

sharing published in the annual HHS 

notice of benefit and payment 

parameters. If the application of the 

reduced annual limitation on cost 

sharing results in an AV for a particular 

silver plan variation that differs from 

the required 73, 87, or 94 percent AV 

level by more than the permitted 

amount (that is, the 1 percent de 

minimis amount for silver plan 

variations, subject to proposed 

§ 156.420(f), as described below), the 

QHP issuer would adjust the costsharing structure in that silver plan 

variation to achieve the applicable AV 

level. 

For example, we propose to set the 

reduced maximum annual limitation on 

cost sharing for self-only coverage for 

2014 at $2,250 for individuals with 

household incomes between 150 and 

200 percent of the FPL. However, an 

issuer might find that even when the 

limitation on cost sharing for the 

proposed plan is reduced to $2,250, the 

actuarial value of the plan may only 

increase to 82 percent. The issuer would 

then amend its cost-sharing structure by 

decreasing copayments, deductibles or 

coinsurance (or further reducing the 

annual limitation on cost sharing) so 

that the silver plan variation achieves 

the required AV of 87 percent (plus or 

minus the de minimis variation for 

silver plan variations). The AV of the 

silver plan variation would be 

calculated using the AV calculator or 

other permitted methods, as described 

in § 156.135 of the proposed EHB/AV 

Rule. 

We set forth in § 156.420(a)(1) through 

(3) proposed specifications for the three 

silver plan variations, and propose that 

they may deviate from the required AV 

levels by the de minimis variation for 

silver plan variations, established as 1 

percentage point. We further propose 

that issuers submit these silver plan 

variations annually to the Exchange for 

certification, prior to the benefit year. 

Silver plan variations must be approved 

annually even if the standard silver plan 

does not change, since the reduced 

maximum annual limitation on cost 

sharing may change annually due to the 

premium adjustment percentage. We 

welcome comment on this proposed 

provision. 

Sections 156.420(b) and (d) are 

discussed below in the section related to 

special cost-sharing reduction rules for 

Indians. 

In § 156.420(c), we propose that silver 

plan variations cover the same benefits 

and include the same providers as the 

standard silver plan. We further propose 

that silver plan variations must require 

the same out-of-pocket spending for 

benefits other than EHB. Lastly, we 

propose that silver plan variations be 

subject to all requirements applicable to 

the standard silver plan (except for the 

requirement that the plan have an AV as 

set forth in § 156.140(b)(2) of the 

proposed EHB/AV Rule). This means, 

for example, that silver plan variations 

must meet standards relating to 

marketing and benefit design of QHPs, 

network adequacy standards, and 

essential community providers. 

Although these requirements are 

implicit because a plan variation is not 

a separate plan, we seek to make these 

requirements explicit to ensure that 

QHP issuers develop appropriate plan 

variations. 

In § 156.420(e), we propose a standard 

to govern the design of cost sharing 

structures for silver plan variations. 

Under this approach, the cost sharing 

for enrollees under any silver plan 

variation for an EHB from a provider 

may not exceed the corresponding cost 

sharing in the standard silver plan or 

any other silver plan variation of the 

standard silver plan with a lower AV. 

For example, if the co-payment on an 

emergency room visit at a particular 

university hospital is $30 in the silver 

plan variation with a 73 percent AV, the 

co-payment in the silver plan variation 

with an 87 percent AV for that issuer 

would be $30 or less. This proposed 

standard would apply to all types of 

cost-sharing reductions, including 

reductions to deductibles, coinsurance, 

and co-payments. An issuer would have 

the flexibility to vary cost sharing on 

particular benefits or providers so long 

as that cost sharing did not increase for 

a particular benefit or provider for 

higher AV silver plan variations. This 

standard, along with the proposed 

requirements in § 156.420(c), would 

help ensure that silver plan variations 

with higher AVs would always provide 

the most cost savings to enrollees while 

providing the same benefits and 

provider network. Furthermore, 

consumers would be best served by 

enrolling in the highest AV variation of 

the standard silver plan selected for 

which they are eligible. We also believe 

that this proposed standard is 

appropriate as the plan variations are 

meant to be the same as the QHP, except 

as to the payer of the cost sharing and 

the reduction in out-of-pocket costs 

charged to the eligible individual. 

We provided an overview of this 

proposed approach in the AV/CSR 

Bulletin. One commenter expressed 

concern about the differential effect of 

deductibles on low-income populations, 

and suggested that we also set limits on 

deductibles in silver plan variations. A 

number of other commenters also urged 

HHS to adopt more restrictive 


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38We note that these payments (both advance and 

reconciled), and the estimated or actual cost-sharing 

reductions underlying them, are subject to 45 CFR 

156.280(e)(1)(ii). 

requirements on issuers’ designs of costsharing structures in silver plan 

variations. One commenter urged HHS 

to systematically monitor a number of 

aspects of how QHP issuers implement 

cost-sharing reductions. 

We believe that, at this point, this 

proposal strikes the appropriate balance 

between protecting consumers and 

preserving QHP issuer flexibility. The 

standard in § 156.420(e) that cost 

sharing for a silver plan variation not 

exceed the corresponding cost sharing 

for a standard silver plan or silver plan 

variation with a lower AV, along with 

non-discrimination standards described 

in § 156.130(g) of the proposed EHB/AV 

Rule, protects low-income populations 

who are assigned to these QHP plan 

variations through the Exchange. We 

seek comment on this approach. 

In § 156.420(f), we propose that, 

notwithstanding the permitted de 

minimis variation in AV for a health 

plan or the permitted de minimis 

variation for a silver plan variation, the 

AV of the standard silver plan (which 

must be 70 percent plus or minus 2 

percentage points) and the AV of the 

silver plan variation applicable to 

individuals with household incomes 

between 200 and 250 percent of the FPL 

(which must be 73 percent plus or 

minus 1 percentage point) must differ 

by at least 2 percentage points. For 

example, under the de minimis standard 

proposed in § 156.140(c)(1) of the 

proposed EHB/AV rule, an issuer would 

be permitted to offer a standard silver 

plan with an AV of 72 percent. Under 

the proposed rule in § 156.420(f), that 

issuer would be permitted to offer a 

silver plan variation with an AV of 74 

percent to individuals with household 

incomes between 200 and 250 percent 

of the FPL, but not a silver plan 

variation with an AV of 73 percent. This 

proposal helps ensure that eligible 

enrollees with household incomes 

between 200 and 250 percent of the FPL 

can purchase a plan with a cost-sharing 

structure that is more generous than that 

associated with the standard silver plan, 

consistent with Congressional intent for 

cost-sharing reductions under section 

1402(c). We chose to propose a 2 

percentage point differential to ensure 

that a difference in cost-sharing 

reductions provided to each income 

category is maintained, while still 

allowing issuers the flexibility to set the 

AV within the de minimis variation 

standards and to develop plan designs 

with easy-to-understand cost sharing 

arrangements. We welcome comments 

on this approach. 

d. Changes in Eligibility for CostSharing Reductions 

In § 156.425(a), we propose that if the 

Exchange notifies a QHP issuer of a 

change in an enrollee’s eligibility for 

cost-sharing reductions (including a 

change following which the enrollee 

will not be eligible for cost-sharing 

reductions), then the QHP issuer must 

change the individual’s assignment so 

that the individual is assigned to the 

applicable standard plan or plan 

variation. We also propose that the QHP 

issuer effectuate the change in eligibility 

in accordance with the effective date of 

eligibility provided by the Exchange, as 

described in § 155.330(f). We clarify that 

if an enrollee changes QHPs after the 

effective date of the eligibility change as 

the result of a special enrollment period, 

once the Exchange notifies the issuer of 

the new QHP of the enrollment, that 

QHP issuer must assign the enrollee to 

the applicable standard plan or plan 

variation of the QHP selected by the 

enrollee, consistent with the proposed 

§ 156.410(b). 

In paragraph (b) of § 156.425, we 

propose that in the case of a change in 

assignment to a different plan variation 

(or standard plan without cost-sharing 

reductions) of the same QHP in the 

course of a benefit year (including in the 

case of a re-enrollment into the QHP 

following enrollment in a different 

plan), the QHP issuer must ensure that 

any cost sharing paid by the applicable 

individuals under the previous plan 

variations (or standard plan without 

cost-sharing reductions) is accounted for 

in the calculation of deductibles and 

annual limitations on cost sharing in the 

individual’s new plan variation for the 

remainder of the benefit year. We note 

that a change from or to an individual 

or family policy of a QHP due to the 

addition or removal of family members 

does not constitute a change in plan for 

the family members who remain on the 

individual or family policy. Individuals 

would therefore not be penalized by 

changes in eligibility for cost-sharing 

reductions during the benefit year or the 

addition or removal of family members, 

although they would be ineligible for 

any refund on cost sharing to the extent 

the newly applicable deductible or 

annual limitation on cost sharing is 

exceeded by prior cost sharing. The 

QHP issuer would not be prohibited 

from or required to extend this policy to 

situations in which the individual 

changes QHPs, including by enrolling in 

a QHP at a different metal level, but 

would be permitted to so extend this 

policy, provided that this extension of 

the policy is applied across all enrollees 

in a uniform manner. We seek comment 

on this provision. 

e. Payment for Cost-Sharing Reductions 

Section 1402(c)(3) of the Affordable 

Care Act directs a QHP issuer to notify 

the Secretary of HHS of cost-sharing 

reductions made under the statute for 

individuals with household incomes 

under 400 percent of the FPL, and 

directs the Secretary to make periodic 

and timely payments to the QHP issuer 

equal to the value of those reductions. 

Section 1402(c)(3)(B) also permits the 

Secretary to establish a capitated 

payment system to carry out these 

payments. Further, section 1412(c)(3) of 

the Affordable Care Act permits advance 

payments of cost-sharing reduction 

amounts to QHP issuers based upon 

amounts specified by the Secretary. 

Under these authorities, we propose to 

implement a payment approach under 

which we would make monthly advance 

payments to issuers to cover projected 

cost-sharing reduction amounts, and 

then reconcile those advance payments 

at the end of the benefit year to the 

actual cost-sharing reduction 

amounts.38 This approach fulfills the 

Secretary’s obligation to make ‘‘periodic 

and timely payments equal to the value 

of the reductions’’ under section 

1402(c)(3) of the Affordable Care Act. 

This proposal would not require issuers 

to fund the value of any cost-sharing 

reductions prior to reimbursement (to 

the extent the issuers provide the 

required actuarial information), and 

ensures that payments are made only for 

actual cost-sharing reduction amounts 

realized by Exchange enrollees. This 

approach is similar to the one employed 

for the low-income subsidy under 

Medicare Part D. We welcome 

comments on this and alternative 

approaches, and whether this approach 

should change over time. 

To implement our proposed payment 

approach, in § 156.430(a)(1)(i) through 

(iv), we propose that for each health 

plan that an issuer offers, or intends to 

offer, in the individual market on the 

Exchange as a QHP, the issuer must 

provide to the Exchange annually prior 

to the benefit year, for approval by HHS, 

an estimate of the dollar value of the 

cost-sharing reductions to be provided 

over the benefit year. If the QHP is a 

silver health plan, the submission must 

identify separately the per member per 

month dollar value of the cost-sharing 

reductions to be provided under each 

silver plan variation identified in 


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39Under § 156.20, cost-sharing reductions are 

only provided on EHB. In addition, 

§ 156.280(e)(1)(i) states that if a QHP provides 

coverage of services described in paragraph (d)(1) 

of that section, the QHP issuer must not use federal 

funds, including cost-sharing reductions, to pay for 

the service. 

40We note that these induced utilization factors 

appear to be broadly consistent with results from 

the RAND Health Insurance Experiment, described 

in Robert H. Brook, John E. Ware, William H. 

Rogers, Emmett B. Keeler, Allyson Ross Davies, 

Cathy Donald Sherbourne, George A. Goldberg, 

Kathleen N. Lohr, Patti Camp, and Joseph P. 

Newhouse. The Effect of Coinsurance on the Health 

of Adults: Results from the RAND Health Insurance 

Experiment. Santa Monica, Calif.: RAND 

Corporation, R–3055–HHS, December 1984. 

§ 156.420(a)(1), (2), and (3). And for 

each QHP, regardless of metal level, the 

submission must identify the per 

member per month dollar value of the 

cost-sharing reductions to be provided 

under the zero cost sharing plan 

variation. In addition, the estimate 

should be accompanied by supporting 

documentation validating the estimate. 

We expect that Exchanges will collect 

this information from issuers through 

the QHP certification process or an 

annual submission process, and then 

send the information to HHS for review 

and approval. Sections 156.430(a)(1)(ii) 

and 156.430(a)(2) are further described 

in section III.E.4.i. of this proposed rule. 

We further propose that issuers 

develop the estimates using the 

methodology specified by HHS in the 

applicable annual HHS notice of benefit 

and payment parameters. In 

§ 156.430(a)(3), we propose that HHS 

will approve estimates that follow this 

methodology. For the 2014 benefit year, 

we propose that issuers use a 

methodology that utilizes the data that 

issuers submit under § 156.420 and 

§ 156.470. As a result, issuers would not 

be required to submit any additional 

data or supporting documentation to 

receive advance payments in benefit 

year 2014 for the value of the costsharing reductions that would be 

provided under silver plan variations. 

Below, we describe in detail how the 

data that issuers will submit under 

§ 156.420 and § 156.470 will be used to 

develop the estimate of the value of the 

cost-sharing reductions for the 2014 

benefit year. 

Methodology for Developing Estimate 

of Value of Cost-Sharing Reductions for 

Silver Plan Variations for 2014 Benefit 

Year. We propose that for the 2014 

benefit year, issuers use a simplified 

methodology for estimating the value of 

the cost-sharing reductions under silver 

plan variations and calculating the 

advance payments. We believe that the 

lack of data regarding the costs that will 

be associated with the QHPs and their 

plan variations will make it difficult to 

accurately predict the value of the costsharing reductions, even if a complex 

methodology is used. We intend to 

review the methodology for estimating 

the advance payments in future years, 

once more data is available. We also 

note that the payment reconciliation 

process described § 156.430(c) through 

paragraph (e) would ensure that the 

QHP issuer is made whole for the value 

of any cost-sharing reductions provided 

during the year, which may not be equal 

to the value of the advance payments. 

For the 2014 benefit year, we propose 

that advance payments be estimated on 

a per enrollee per month basis using the 

following formula: 

In this formula, the monthly expected 

allowed claims cost for a silver plan 

variation would equal one-twelfth of the 

expected allowed claims costs allocated 

to EHB, other than services described in 

§ 156.280(d)(1),39 for the standard silver 

plan, multiplied by a factor to account 

for the increased utilization that may 

occur under the specific plan variation 

due to the reduced cost-sharing 

requirements. As described in § 156.470, 

the QHP issuer will submit the expected 

allowed claims cost information to the 

Exchange annually. The Exchange will 

then review this estimate, and submit 

the approved information to HHS, as 

described in proposed § 155.1030(b)(2) 

above, for use in the advance payment 

calculation. HHS will then multiply the 

monthly expected allowed claims cost 

by one of the following induced 

utilization factors, to arrive at the 

monthly expected allowed claims cost 

for the particular plan variation. We 

propose the following induced 

utilization factors based on our analysis 

of the expected difference in 

expenditures for enrollees in QHPs of 

different actuarial values. For this 

analysis, we used the Actuarial Value 

Calculator, developed by HHS using the 

Health Intelligence Company, LLC (HIC) 

database from calendar year 2010. This 

database includes detailed enrollment 

and claims information for individuals 

who are members of regional insurers 

and covers over 54 million individuals. 

The database includes current members 

of small group health plans, and a 

population relatively similar to the 

population of enrollees likely to 

participate in the health exchanges.40

TABLE 16—INDUCED UTILIZATION FACTORS FOR PURPOSES OF COSTSHARING REDUCTION ADVANCE PAYMENTS

Household 

income 

Silver plan 

AV 

Induced utilization factor 

100–150% of 

FPL.

Plan Variation 

94%.

1.12 

150–200% of 

FPL.

Plan Variation 

87%.

1.12 

TABLE 16—INDUCED UTILIZATION FACTORS FOR PURPOSES OF COSTSHARING REDUCTION ADVANCE PAYMENTS—Continued 

Household 

income 

Silver plan 

AV 

Induced utilization factor 

200–250% of 

FPL.

Plan Variation 

73%.

1.00 

In the second half of the formula, we 

propose the multiplication of the 

monthly expected allowed claims cost 

for the particular plan variation by the 

difference in AV between the standard 

silver plan and the plan variation. This 

will allow us to estimate the difference 

in cost sharing between the standard 

plan and the plan variation. We propose 

to use the actuarial values of the QHPs 

and silver plan variations that the 

Exchange will submit to HHS under 

§ 155.1030(a)(2). 

This methodology should limit the 

burden of estimating cost-sharing 

reduction amounts on QHP issuers, and 

provide a standardized per enrollee per 

month estimate of the value of costsharing reductions. This estimate can 

then be multiplied by the number of 

enrollees assigned to a particular plan 

variation in a given month to arrive at 

the total advance payment that will be 

provided to the issuer for each plan 

variation of each QHP, for a given 


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month. We welcome comment on this 

methodology and the proposed induced 

utilization factors, as well as the value 

of increasing the complexity of the 

methodology versus the value of 

operational efficiency. 

In § 156.430(b), we propose making 

periodic advance payments to issuers 

based on the approved advance 

estimates provided under § 156.430(a) 

and the confirmed enrollment 

information. We propose to use the 

methodology described above to 

determine the amount of these advance 

payments. 

In § 156.430(c), we propose that a 

QHP issuer report to HHS the actual 

amount of cost-sharing reductions 

provided. In general, for a particular 

benefit provided by the QHP, this 

amount would equal the difference 

between the cost sharing required of an 

enrollee in the corresponding standard 

silver plan with no cost-sharing 

reductions and the cost sharing that was 

actually required of the enrollee under 

the plan variation at the point where the 

service was provided. For example, if an 

individual enrolled in a silver plan 

variation receives a benefit that would 

be subject to a $20 copayment under the 

standard silver plan but is subject to 

only a $5 copayment under the silver 

plan variation in which the individual 

is enrolled, the cost-sharing reduction 

amount would be $15. Additional 

specifications regarding submission of 

actual cost-sharing reduction amounts 

will be provided in future guidance; 

however, we expect that QHP issuers 

will submit the actual amount of costsharing reductions provided after the 

close of the benefit year. 

In § 156.430(c)(1) and (c)(2), we 

propose specific standards for the 

reporting of cost-sharing reduction 

amounts. In § 156.430(c)(1), we propose 

that in the case of a benefit for which 

the QHP issuer compensates the 

applicable provider in whole or in part 

on a fee-for-service basis, the QHP 

issuer submit the total allowed costs for 

essential health benefits charged for an 

enrollees’ policy for the benefit year, 

broken down by what the issuer paid, 

what the enrollee paid, and the amount 

reimbursed to the provider for the 

amount that the enrollee would have 

paid under the standard QHP without 

cost-sharing reductions. In 

§ 156.430(c)(2), we propose that in the 

case of a benefit for which the QHP 

issuer compensates the applicable 

provider in any other manner (such as 

on a capitated basis), the QHP issuer 

submit the total allowed costs for 

essential health benefits charged for an 

enrollees’ policy for the benefit year, 

broken down by what the issuer paid, 

what the enrollee paid, and the amount 

that the enrollee would have paid under 

the standard QHP without cost-sharing 

reductions. When we refer to 

compensation made on a capitated basis 

in this context, we mean a 

compensation model under which 

issuers make payments to providers 

based on a contracted rate for each 

enrollee, commonly referred to as a 

‘‘per-member-per-month’’ rate, 

regardless of the number or type of 

services provided. We note that a nonfee-for-service provider is not required 

to be reimbursed by the issuer. 

However, we expect that issuers and 

providers in non-fee-for-service 

arrangements will make available to 

providers compensation for cost-sharing 

reductions through their negotiated 

capitation payments. We seek comments 

on this assumption and other payment 

approaches for QHPs that use a 

capitated system to pay providers. 

In § 156.430(d), we propose to 

periodically reconcile advance 

payments to issuers against the actual 

cost-sharing reduction amounts reported 

under § 156.430(c). Thus, where a QHP 

issuer compensates a provider in whole 

or in part on a fee-for-service basis, we 

would reconcile the advance payments 

provided to the issuer against the actual 

amount of cost-sharing reductions 

reimbursed to providers and provided to 

enrollees. Where the QHP issuer 

compensates a provider under another 

arrangement, such as a capitated 

arrangement, we would reconcile the 

advance payments made to issuers 

against the actual cost-sharing reduction 

amounts provided to enrollees. We 

propose this differentiated 

reimbursement approach because if 

issuers are paying providers on a basis 

other than a fee-for-service basis, the 

parties may not be exchanging data or 

making payments on a per-service basis. 

We do not wish to interfere with 

contractual payment arrangements 

between issuers and providers by 

imposing per-service accounting or 

payment streams if an issuer and 

provider have elected not to structure 

their relationship in that manner. 

However, in all cases we would 

condition reimbursement upon 

provision to the enrollee at the point-ofservice of the cost-sharing reduction 

under the applicable plan variation. We 

welcome comment on this proposal. 

We propose in § 156.430(e) that if the 

actual amounts of cost-sharing 

reductions exceed the advance payment 

amounts provided to the issuer 

(including if the QHP issuer elected not 

to submit an advance estimate of the 

cost-sharing reduction amounts 

provided under the limited cost sharing 

plan variation, and therefore received 

no advance payments), HHS would 

reimburse the issuer for the shortfall, 

assuming that the issuer has submitted 

its actual cost-sharing reduction amount 

report to HHS in a timely fashion. If the 

actual amounts of cost-sharing 

reductions are less than the advance 

payment amounts provided to the 

issuer, we propose that the QHP issuer 

must repay the difference to HHS. 

Detailed procedural requirements and 

interpretive guidance on cost-sharing 

reduction reconciliation will be 

provided in the future. 

In § 156.430(f), we propose rules on 

advance payment and reimbursement of 

cost-sharing reductions during special 

transitional periods of coverage where 

eligibility and enrollment are uncertain, 

including requirements relating to costsharing reductions provided during 

grace periods following non-payment of 

premium. Under § 156.270, a QHP 

issuer must establish a standard policy 

for termination of coverage for nonpayment of premiums by enrollees. 

Under that policy, a three-month grace 

period applies if an enrollee receiving 

advance payments of the premium tax 

credit has previously paid at least one 

full month’s premium during the benefit 

year. In the first month of the grace 

period, the QHP issuer must pay all 

appropriate claims for services rendered 

and HHS would reimburse the QHP 

issuer for cost-sharing reductions for 

such claims (and the QHP issuer may 

retain any advance payments of costsharing reductions), but the issuer may 

pend claims for services rendered to the 

enrollee in the second and third months 

of the grace period. If an enrollee 

exhausts the grace period without 

making full payment of the premiums 

owed, the QHP issuer may terminate 

coverage and deny payment for the 

pending claims. 

In § 156.430(f)(1), we propose 

standards related to the non-payment of 

premiums and exhausted grace periods. 

We propose that a QHP issuer will be 

eligible for reimbursement of costsharing reductions provided prior to a 

termination of coverage effective date. 

Furthermore, any advance payments of 

cost-sharing reductions would be paid 

to a QHP issuer for coverage prior to a 

determination of termination, including 

during any grace period as described in 

§ 155.430(b)(2)(ii)(A) and (B). The 

determination of termination occurs on 

the date that the Exchange sends 

termination information to the QHP 

issuer and HHS under § 155.430(c)(2). 

The QHP issuer would be required to 

repay any advance payments of costsharing reductions made with respect to 

any month after any termination of 


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coverage effective date during a grace 

period. A QHP issuer generally would 

not be eligible for reimbursement of 

cost-sharing reductions provided after 

the termination of coverage effective 

date with respect to a grace period. For 

example, if an individual receiving 

advance payments of the premium tax 

credit is eligible for cost-sharing 

reductions, and stops paying his or her 

premium, HHS would continue to 

provide advance payments of the costsharing reductions during the grace 

period. HHS would reimburse the QHP 

issuer for any reduction in cost sharing 

provided during the first month of the 

three-month grace period, but not after 

the termination of coverage effective 

date (that is, there will be no 

reimbursement for cost-sharing 

reductions provided during the second 

and third month of the grace period if 

retroactive termination occurs). The 

issuer may pend claims and payments 

for cost-sharing reductions for services 

rendered to the individual in the second 

and third month of the grace period, as 

described in § 156.270(d). The QHP 

issuer must return to HHS any advance 

payments of the cost-sharing reduction 

applicable to the second and third 

months. This proposed policy aligns 

with the approach for advance 

payments of the premium tax credit 

described in § 156.270(e). 

We propose in § 156.430(f)(2) and (3) 

that in the case of any other retroactive 

termination, if the termination (or late 

determination thereof) is the fault of the 

QHP issuer, as reasonably determined 

by the Exchange, the QHP issuer would 

not be eligible for advance payments 

and reimbursement for cost-sharing 

reductions provided during the period 

following the termination of coverage 

effective date and prior to the 

determination of the termination; and if 

the termination (or the late 

determination thereof) is not the fault of 

the QHP issuer, as reasonably 

determined by the Exchange, the QHP 

issuer would be eligible for advance 

payments and reimbursement for costsharing reductions provided during 

such period. For example, if a QHP 

issuer fails to timely notify the 

Exchange that an enrollee requested a 

termination of coverage, the Exchange 

could reasonably determine that the 

QHP issuer is at fault and would not be 

eligible for advance payments and 

reimbursement for cost-sharing 

reductions provided during the period 

following the termination of coverage 

effective date and prior to the 

determination of the termination. 

Alternatively, if an individual was 

incorrectly enrolled in a QHP due to an 

error by the Exchange, the QHP issuer 

would not be at fault and would be 

eligible for advance payments and 

reimbursement for cost-sharing 

reductions provided during the period 

following the termination of coverage 

effective date and prior to the 

determination of the termination. We 

welcome comment on this proposal and 

other approaches, and seek comment on 

the relative equities of, incentives 

created by, and consequences of this 

proposal and other approaches, 

including the potential costs to HHS. 

In § 156.430(f)(4), we propose that a 

QHP issuer would be eligible for 

advance payments and reimbursement 

of cost-sharing reductions provided 

during any period for resolution of 

inconsistencies in information required 

to determine eligibility for enrollment 

under § 155.315(f). Under § 155.315(f), if 

an Exchange cannot verify eligibility 

information for an individual, it must 

provide the individual at least 90 days 

to present satisfactory evidence of 

eligibility to resolve the inconsistency. 

In the interim, the Exchange must make 

an eligibility determination based upon 

the individual’s attestation and other 

verified information in the application, 

including with respect to the costsharing reductions for which the 

individual is eligible. At the end of the 

inconsistency period, if the Exchange 

cannot confirm the attestation, the 

Exchange must make the eligibility 

determination based upon the data 

available, subject to certain exceptions. 

In the event the Exchange cannot 

confirm the attestation and determines 

the individual to be ineligible for costsharing reductions provided during the 

inconsistency period, we propose to 

reimburse those cost-sharing reductions 

because there is no clear mechanism 

under the Affordable Care Act for 

seeking reimbursement of those 

amounts from the individual. We 

welcome comment on this proposal and 

other approaches, and seek comment on 

the relative equities of, incentives 

created by, and consequences of this 

proposal and other approaches, 

including the potential costs to HHS. 

f. Plans Eligible for Advance Payments 

of the Premium Tax Credit and CostSharing Reductions 

In § 156.440, we clarify the 

applicability of advance payments of the 

premium tax credit and cost-sharing 

reductions to certain QHPs. We propose 

that the provisions of part 156 subpart 

E generally apply to qualified health 

plans offered in the individual market 

on the Exchange. 

However, we propose in § 156.440(a) 

that the provisions not apply to 

catastrophic plans as described in 

§ 156.155 of the proposed Market 

Reform Rule to be consistent with 26 

CFR 1.36B–1(c). Section 36B(c)(3)(A) of 

the Code defines a QHP to exclude 

catastrophic plans—a definition that 

also applies to section 1402 of the 

Affordable Care Act, by means of 

section 1402(f)(1) of the Affordable Care 

Act. Further, eligibility for cost-sharing 

reductions is tied to a ‘‘coverage month 

with respect to which a premium tax 

credit is paid,’’ which would exclude 

months during which the individual is 

enrolled in a catastrophic health plan. 

Therefore, we propose that enrollment 

in a catastrophic plan precludes 

eligibility for cost-sharing reductions. 

Effectively, this proposal restricts the 

provision of cost-sharing reductions 

with respect to Indians only, because 

non-Indians can only receive costsharing reductions when enrolled in a 

silver plan variation. 

We propose in § 156.440(b) that the 

provisions of this subpart E, including 

§ 156.410, § 156.420, § 156.425, 

§ 156.430, and § 156.470, to the extent 

each relate to cost-sharing reductions, 

not apply to stand-alone dental plans. 

Section 1311(d)(2)(B)(ii) of the 

Affordable Care Act provides that an 

Exchange must allow a stand-alone 

dental plan that provides pediatric 

dental benefits that are EHB to be 

offered separately from or in 

conjunction with a QHP. However, 

section 1402(c)(5) of the Affordable Care 

Act states if an individual enrolls in 

both a QHP and a stand-alone dental 

plan, the provisions on cost-sharing 

reductions under sections 1402(a) and 

(c) of the Affordable Care Act do not 

apply to that portion of the cost-sharing 

reductions properly allocable to 

pediatric dental EHB, meaning that if an 

individual enrolls in both a QHP and a 

stand-alone dental plan offered on an 

Exchange, cost-sharing reductions are 

not payable with respect to pediatric 

dental benefits offered by the standalone dental plan. However, costsharing reductions would be payable 

with respect to pediatric dental benefits 

provided by a QHP. Requiring payment 

of cost-sharing reductions on pediatric 

dental benefits within a stand-alone 

dental plan offered on an Exchange 

would create significant operational 

complexities. For example, stand-alone 

dental plans would be required to 

submit plan variations, and since the 

calculation of AV for stand-alone dental 

plans will not be standardized, the 

review and approval of the plan 

variations and advance estimates would 

be difficult to oversee. 

We propose to clarify in § 156.440(c) 

that the provisions of this subpart E 


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apply to child-only plans. Section 

1302(f) of the Affordable Care Act and 

§ 156.200(c)(2) of this subchapter 

provides that an issuer that offers a QHP 

at any level of coverage in an Exchange 

also must offer the plan at the same 

level of coverage in the Exchange only 

to individuals that have not attained age 

21. Under section 1302(f) of the 

Affordable Care Act, the child-only plan 

is to be treated as a QHP, and is 

therefore subject to the provisions of 

this subpart E. 

g. Reduction of Enrollee’s Share of 

Premium To Account for Advance 

Payments of the Premium Tax Credit 

In § 156.460(a), we propose to codify 

QHP issuer requirements set forth in 

section 1412(c)(2)(B) of the Affordable 

Care Act. The law authorizes the 

payment of advance tax credits to QHP 

issuers on behalf of certain qualified 

enrollees. The advance payment must 

be used to reduce the portion of the 

premium charged to enrollees. In 

§ 156.460(a)(1), we propose to codify 

clause (i) of that subparagraph, which 

requires that a QHP issuer reduce the 

portion of the premium charged to the 

enrollee by the amount of the advance 

payment of the premium tax credit for 

the applicable month(s). 

In § 156.460(a)(2), we propose to 

codify section 1412(c)(2)(B)(ii) of the 

statute, which requires that the QHP 

issuer notify the Exchange of any 

reduction in the portion of the premium 

charged to the individual. This 

notification will be sent to the Exchange 

through the standard enrollment 

acknowledgment in accordance with 

§ 156.265(g). That information will then 

be submitted to the Secretary via 

enrollment information sent from the 

Exchange to HHS under § 155.340(a)(1). 

In § 156.460(a)(3), we propose to 

codify section 1412(c)(2)(B)(iii), which 

requires that a QHP issuer display the 

amount of the advance payment of the 

premium tax credit for the applicable 

month(s) on an enrollee’s billing 

statement. This requirement would 

ensure that the enrollee is aware of the 

total cost of the premium and would 

allow the enrollee to verify that the 

correct amount for the advance payment 

of the premium tax credit has been 

applied to his or her account. 

In § 156.460(b), we propose that a 

QHP issuer may not refuse to commence 

coverage under a policy or terminate a 

policy on account of any delay in 

payment from the Federal government 

of an advance payment of the premium 

tax credit on behalf of an enrollee if the 

QHP issuer has been notified by the 

Exchange that it would receive an 

advance payment. We expect that 

monthly advance payments of the 

premium tax credit would be paid in the 

middle of the month, and propose to 

require that issuers not decline to cover 

individuals nor terminate policies for 

which the enrollee’s payments have 

been timely made on account of the 

timing of the advance payments of the 

premium tax credit. 

We welcome comment on these 

proposals. 

h. Allocation of Rates and Claims Costs 

for Advance Payments of Cost-Sharing 

Reductions and the Premium Tax Credit 

As described in section III.E.2. of this 

proposed rule, we propose in § 156.470 

to direct issuers to allocate the rate or 

expected premium for each metal level 

health plan and stand-alone dental plan 

offered, or proposed to be offered, in the 

individual market on the Exchange, and 

the expected allowed claims costs for 

the metal level health plans, among EHB 

and additional benefits. Issuers must 

submit these allocations annually to the 

Exchange, along with an actuarial 

memorandum with a detailed 

description of the methods and specific 

bases used to perform the allocations. 

The Exchange and HHS will use this 

memorandum to verify that these 

allocations meet the standards set forth 

in paragraphs (c) and (d) of § 156.470. 

We propose that issuers submit the 

allocation information to the Exchange 

as part of the QHP certification process 

and an annual submission process for 

QHPs that are already certified, though 

an Exchange may specify alternative 

submission channels. For example, for 

issuers interested in participating in a 

Federally-facilitated Exchange, we 

propose to collect the metal level health 

plan allocation information through the 

Effective Rate Review program. We 

proposed revisions to the rate review 

reporting requirements in the proposed 

Market Reform Rule to include the 

allocation submission. This approach 

should streamline the submission 

process for issuers. We note that multiState plans, as defined in § 155.1000(a), 

are subject to these provisions. OPM 

would determine the time and manner 

for multi-State plans to submit the 

allocation information. We welcome 

comment on this proposal. 

i. Special Cost-Sharing Reduction Rules 

for Indians 

We discuss in greater detail below a 

number of provisions throughout this 

proposed subpart E implementing 

section 1402(d) of the Affordable Care 

Act, which governs cost-sharing 

reductions for Indians. 

Interpretation of section 1402(d)(2) of 

the Affordable Care Act: Section 

1402(d)(1) of the Affordable Care Act 

directs a QHP issuer to treat an Indian 

with household income not more than 

300 percent of the FPL as an ‘‘eligible 

insured’’—a defined term in the statute 

triggering cost-sharing reductions for 

non-Indians—and to eliminate all cost 

sharing for those Indians. Conversely, 

section 1402(d)(2) of the Affordable Care 

Act, which prohibits cost sharing under 

a plan for items or services to an Indian 

enrolled in a QHP provided directly by 

the Indian Health Service, an Indian 

Tribe, Tribal Organization, or Urban 

Indian Organization, or through referral 

under contract health services, does not 

direct the issuer to treat the Indian as an 

‘‘eligible insured.’’ Section 1402(f)(2) of 

the Affordable Care Act permits costsharing reductions only for months in 

which the ‘‘insured’’—which we 

interpret to be synonymous with the 

term ‘‘eligible insured’’—is allowed a 

premium tax credit. The implications of 

this interpretation are that cost-sharing 

reductions under sections 1402(a) and 

1402(d)(1) of the Affordable Care Act are 

only available to individuals eligible for 

premium tax credits. However, costsharing reductions under section 

1402(d)(2) of the Affordable Care Act 

would be available to Indians regardless 

of their eligibility for premium tax 

credits. This approach aligns with the 

typical practice today, under which cost 

sharing is not required with respect to 

services provided to an Indian by the 

IHS, an Indian Tribe, Tribal 

Organization, or Urban Indian 

Organization. Furthermore, as described 

in § 155.350(b), an Exchange may 

determine an Indian eligible for costsharing reductions under section 

1402(d)(2) of the Affordable Care Act 

without requiring the applicant to 

request an eligibility determination for 

insurance affordability programs. We 

welcome comment on our interpretation 

of sections 1402(d)(2) and 1402(f)(2) of 

the Affordable Care Act. 

We note also that section 1402(d) of 

the Affordable Care Act specifies that 

reductions in cost sharing must be 

provided to Indians who purchase 

coverage on the Exchange. Although 

section 1402(d)(1) of the Affordable Care 

Act applies only to the individual 

market, section 1402(d)(2) of the 

Affordable Care Act does not contain 

this explicit restriction. We propose to 

interpret section 1402(d)(2) of the 

Affordable Care Act to apply only to the 

individual market because we believe 

section 1402(d)(2) flows from and builds 

upon the identification of ‘‘any qualified 

health plans’’ made in section 

1402(d)(1). Further, we believe that 

Congress did not intend for reductions 


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in cost sharing to be available outside 

the individual market Exchanges. We 

welcome comment on this 

interpretation and any other 

interpretation of this language. 

Finally, we note that section 

1402(d)(2)(B) of the Affordable Care Act 

states that QHP issuers are not to reduce 

payments to the relevant facility or 

provider for an item or service by the 

amount of any cost sharing that would 

be due from an Indian but for the 

prohibition on cost sharing set forth in 

section 1402(d)(2) of the Affordable Care 

Act. We propose not to codify this 

provision in regulation because we 

believe it is clear and self-enforcing, and 

because we believe that it would also be 

impermissible for an issuer to reduce 

payments to a provider for any costsharing reductions required under 

sections 1402(a) or 1402(d)(1) of the 

Affordable Care Act—particularly 

because these cost-sharing reductions 

are to be reimbursed by HHS. We also 

note that nothing in this section 

exempts an issuer from section 206 of 

the Indian Health Care Improvement 

Act, which provides that the United 

States, an Indian Tribe, Tribal 

organization, or urban Indian 

organization has the right to recover 

from third party payers, including 

QHPs, up to the reasonable charges 

billed for providing health services, or, 

if higher, the highest amount an insurer 

would pay to other providers. 

Proposed provisions of part 156 

relating to Indians: Similar to costsharing reductions for non-Indians, we 

propose to use the concept of plan 

variations to describe how Indians 

would pay only a portion, or as 

appropriate, none of the total cost 

sharing required under that plan, with 

the Federal government bearing the 

remaining cost-sharing obligation. In 

§ 156.410(b)(2), we propose that a QHP 

issuer assign an Indian determined by 

the Exchange to have an expected 

household income that does not exceed 

300 percent of the FPL to a zero cost 

sharing plan variation of the selected 

QHP (no matter the level of coverage) 

with no cost sharing, based on the 

enrollment and eligibility information 

submitted to the QHP issuer by the 

Exchange. In § 156.410(b)(3), we 

propose that a QHP issuer assign an 

Indian determined eligible by the 

Exchange for cost-sharing reductions 

under section 1402(d)(2) of the 

Affordable Care Act to a limited cost 

sharing plan variation of the selected 

QHP (no matter the level of coverage) 

with no cost sharing required on 

benefits received from the IHS and 

certain other providers. The 

assignments to the plan variations 

would be subject to § 155.305(g)(3), 

which governs plan variation placement 

decisions when a single policy covers 

two or more individuals who are 

eligible for different levels of costsharing reductions. We also considered 

an alternative approach to the provision 

of cost-sharing reductions for Indians. 

Rather than requiring QHP issuers to 

assign Indians to zero and limited cost 

sharing plan variations, QHP issuers 

would simply assign Indians to the 

standard plan (or as appropriate, silver 

plan variation), and would waive the 

cost-sharing requirements, as 

appropriate. We note that this latter 

approach would permit an Indian and 

non-Indian to enroll in the same plan, 

and for each to receive the cost-sharing 

reductions to which they would be 

individually entitled. We are proposing 

the approach described above in part 

because we believe that the use of plan 

variations will permit issuers to 

efficiently and effectively provide to all 

enrollees eligible for cost-sharing 

reductions, especially Indians, their 

appropriate level of cost-sharing 

reductions. Because of technical 

constraints, we understand that 

complying with the alternative 

approach would be nearly impossible 

for many issuers for the 2014 benefit 

year. Due to these considerations, 

adopting the alternative approach could 

lead many issuers to implement costsharing waivers manually, which could 

lead to fewer cost-sharing reductions 

being available to Indians. In addition, 

we note that under the proposed Market 

Reform Rule at § 147.102(c)(1), the total 

premium for family coverage in a State 

that has not adopted community rating 

principles is to be determined by 

summing the premiums for each 

individual family member (but that 

premiums for no more than the three 

oldest family members who are under 

age 21 must be taken into account). 

Thus, in many instances, a family made 

up of Indians and non-Indians would 

lose no premium savings from enrolling 

in different policies to obtain the 

maximum cost-sharing reductions for 

which each family member is eligible. 

However, we seek comment on which 

approach HHS should adopt beginning 

January 1, 2016. We propose the 

approach first described above pending 

the adoption of any change in approach. 

We also seek comment on the burdens 

that may be imposed on individuals, 

providers and insurers under the 

proposed and alternative approaches. 

Finally, we will monitor whether 

providers are receiving less payment for 

Indians who choose to enroll in a family 

policy without the benefit of costsharing. 

In § 156.420(b), we propose that QHP 

issuers submit to the Exchange the zero 

cost sharing plan variation and limited 

cost sharing plan variations for each of 

the QHPs (at any level of coverage) that 

it intends to offer on the Exchange. The 

zero cost sharing plan variation— 

addressing cost-sharing reductions 

under section 1402(d)(1) of the 

Affordable Care Act and available to 

Indians with expected household 

incomes that do not exceed 300 percent 

of the FPL, as determined under 

§ 155.350(a)—must have all cost sharing 

eliminated. The limited cost sharing 

plan variation—addressing cost-sharing 

reductions under section 1402(d)(2) of 

the Affordable Care Act and available to 

all Indians as determined in 

§ 155.350(b)—must have no cost sharing 

on any item or service furnished 

directly by the IHS, an Indian Tribe, 

Tribal Organization, Urban Indian 

Organization, or through referral under 

contract health services, as defined in 

25 U.S.C. 1603. We note that unlike 

silver plan variations, zero cost sharing 

plan variation and limited cost sharing 

plan variations must only be submitted 

for certification when the standard plan 

is submitted for QHP certification. We 

welcome comment on this proposal. 

In § 156.420(d), we propose language 

similar to that proposed in § 156.420(c) 

for silver plan variations—that the zero 

cost sharing plan variation and limited 

cost sharing plan variations cover the 

same benefits and include the same 

providers as the standard QHP, and 

require the same out-of-pocket spending 

for benefits other than EHB. We also 

propose that a limited cost sharing plan 

variation, which would have no cost 

sharing on any item or service furnished 

directly by the IHS, Indian Tribe, Tribal 

Organization, or Urban Indian 

Organization, or through referral under 

contract health services, must have the 

same cost sharing on items or services 

not described in § 156.420(b)(2) as the 

QHP with no cost-sharing reductions. 

Lastly, we propose that zero cost sharing 

plan variation and limited cost sharing 

plan variations be subject to all 

standards applicable to the standard 

QHP (except for the requirement that 

the plan have an AV as set forth in 

156.140(b)). We believe that these 

standards are appropriate, as a plan 

variation and a standard plan are meant 

to be the same QHP, except for the 

reductions in cost sharing. We welcome 

comment on this proposal. 

Section 1402(d)(3) of the Affordable 

Care Act directs the Secretary to pay a 

QHP issuer the amount necessary to 

reflect the increase in AV of a QHP 


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73180 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

required by reason of the changes in 

cost sharing for Indians under section 

1402(d) of the Affordable Care Act. We 

propose to use the same payment 

approach to reimburse cost-sharing 

reductions for Indians under sections 

1402(d) as we propose to use for costsharing reductions provided to eligible 

individuals with household incomes 

between 100 and 250 percent of the FPL 

under section 1402(a) of the Affordable 

Care Act. That is, we propose that QHP 

issuers submit estimates for the dollar 

value of the cost-sharing reductions to 

be provided under the zero cost sharing 

plan variation and limited cost sharing 

plan variations, to receive advance 

payments, and then reconcile the 

advance payments to the actual costsharing reduction amounts. This unified 

approach satisfies both the requirement 

for ‘‘periodic and timely payments equal 

to the value of the reductions’’ under 

section 1402(c)(3) of the Affordable Care 

Act, and payment of ‘‘the amount 

necessary to reflect the increase in AV 

of the plan’’ under section 1402(d)(3) of 

the Affordable Care Act. Because AV is 

a mechanism for identifying how much 

the plan pays for benefits compared to 

the costs paid by an enrollee, we believe 

reimbursement of the dollar value of the 

reductions satisfies the requirement to 

pay QHP issuers an amount necessary to 

reflect the increase in actuarial value of 

the qualified health plan as a result of 

the reductions. Furthermore, at this 

time, it would be difficult for issuers 

and HHS to accurately estimate the 

‘‘increase in AV of the plan’’ resulting 

from the cost-sharing reduction rules for 

Indians. Relevant data on Indian 

populations’ cost sharing is not easily 

available, and issuers would not be able 

to use the AV calculator to estimate 

Indian-only cost-sharing features of a 

plan because the calculator is based on 

a standard population. Our proposed 

combined approach to reimbursing both 

cost-sharing reductions for eligible 

individuals with household incomes 

between 100 and 250 percent of the FPL 

and cost-sharing reductions for Indians 

should reduce the operational and 

financial burden on issuers and HHS, 

who would otherwise be required to 

operate under and implement two 

separate reimbursement programs. 

In § 156.430(a)(1)(ii) we propose that 

for each metal level QHP that an issuer 

offers or intends to offer in the 

individual market on the Exchange, the 

issuer must provide to the Exchange 

annually prior to the benefit year, for 

approval by HHS, estimates, and 

supporting documentation validating 

the estimates, of the per member per 

month dollar value of cost-sharing 

reductions to be provided under the 

zero cost sharing plan variation. These 

estimates must be developed using the 

methodology specified by HHS in the 

applicable annual HHS notice of benefit 

and payment parameters. We propose 

that issuers use the same methodology 

described above for estimating advance 

payments for the cost-sharing 

reductions provided under silver plan 

variations for estimating advance 

payments for the cost-sharing 

reductions provided under the zero cost 

sharing plan variation. This 

methodology would utilize data that 

QHP issuers submit for other 

requirements, such as § 156.420 and 

§ 156.470. As a result, QHP issuers 

would not be required to submit 

separate estimates or supporting 

documentation to receive advance 

payments in benefit year 2014 for the 

value of the cost-sharing reductions that 

would be provided under the zero cost 

sharing plan variation. 

As in the case of silver plan 

variations, the following formula would 

be used: 

In this formula, the monthly expected 

allowed claims cost for the zero cost 

sharing plan variation would equal onetwelfth of the expected allowed claims 

costs allocated to EHB, other than 

services described in § 156.280(d)(1), for 

the standard plan, multiplied by a factor 

to account for the increased utilization 

that may occur under the zero cost 

sharing plan variation due to the 

elimination of the cost-sharing 

requirements. As described in § 156.470, 

the QHP issuer should submit the 

expected allowed claims cost 

information to the Exchange annually. 

The Exchange would then review this 

allocation, and submit the approved 

allocation to HHS, as described in 

§ 155.1030(b)(2), for use in the advance 

payment calculation. HHS would then 

multiply the monthly expected allowed 

claims cost by the induced utilization 

factor, to arrive at the monthly expected 

allowed claims cost for the zero cost 

sharing plan variation. We propose the 

following induced utilization factors for 

the zero cost sharing plan variation, 

based on our analysis of the HIC 

database from calendar year 2010. 

TABLE 17—INDUCED UTILIZATION FACTORS FOR ADVANCE PAYMENTS FOR

COST-SHARING REDUCTIONS FOR INDIANS

Zero cost sharing plan 

variation 

Induced 

utilization 

factor 

Zero Cost Sharing Plan Variation of Bronze QHP ........... 1.15 

Zero Cost Sharing Plan Variation of Silver QHP ............. 1.12 

Zero Cost Sharing Plan Variation of Gold QHP .............. 1.07 

Zero Cost Sharing Plan Variation of Platinum QHP ........ 1.00 

In the second half of the formula, we 

propose to multiply the monthly 

expected allowed claims cost for the 

zero cost sharing plan variation by the 

difference in AV between the standard 

plan and the plan variation. The AV of 

the zero cost sharing plan variation 

would be 100, because all cost sharing 

is eliminated for this plan variation. 

Lastly, the per enrollee per month 

estimate will be multiplied by the 

number of individuals assigned to the 

zero cost sharing plan variation (based 

on the most recent confirmed 

enrollment data) in a given month to 

arrive at the total advance payment that 

will be provided to the issuer for each 

QHP. We welcome comment on this 

methodology and the proposed induced 

utilization factor, as well as the value of 

increasing the complexity of the 

methodology versus the value of 

operational efficiency. 

In § 156.430(a)(2), we discuss the 

process for estimating the value of costsharing reductions to be provided under 

the limited cost sharing plan variation 

open to Indians regardless of household 

income. We propose that QHP issuers 

have the option to forgo submitting an 

estimate of the value of these costsharing reductions if they believe the 

operational cost of developing the 

estimate is not worth the value of the 


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advance payment. If a QHP issuer 

chooses to not submit an estimate, the 

issuer would provide the cost-sharing 

reductions as required, and would be 

reimbursed by HHS after the close of the 

benefit year, as proposed in 

§ 156.430(c). If a QHP issuer does seek 

advance payments for the these costsharing reductions, the issuer must 

provide to the Exchange annually prior 

to the benefit year, for approval by HHS, 

an estimate, and supporting 

documentation validating the estimate, 

of the per member per month dollar 

value of the cost-sharing reductions to 

be provided under the limited cost 

sharing plan variation of the QHP. The 

estimate must be developed using the 

methodology specified by HHS in the 

applicable annual HHS notice of benefit 

and payment parameters. For the 2014 

benefit year, we simply propose that 

issuers submit a reasonable estimate of 

the value of the reductions, developed 

by a member of the American Academy 

of Actuaries in accordance with 

generally accepted actuarial principles 

and methodologies, and that the 

estimate should be no higher than the 

corresponding estimate for the zero cost 

sharing plan variation. We do not 

propose a standardized methodology 

because, unlike other plan variations, 

these cost-sharing reductions are to be 

provided for only a specific subset of 

providers, and the Affordable Care Act 

does not prescribe an AV for these 

reductions. As noted above, because the 

actuarial value calculator is based on a 

standard population, it will not have the 

functionality to generate an accurate AV 

for these plan variations. However, as in 

the case of the other plan variations, we 

plan to review the methodology for 

calculating the advance payments once 

more data is available. We also note that 

the payment reconciliation process 

described in § 156.430(c) through (e) 

would ensure that the QHP issuer is 

made whole for the value of any costsharing reductions provided during the 

benefit year that may not be adequately 

covered by the advance payments. 

The Exchange will collect the 

estimate and supporting documentation, 

as described in § 155.1030(b)(3), and 

submit the estimate and supporting 

documentation to HHS for review. 

Assuming the estimate is reasonable, 

HHS would make advance payments to 

the QHP issuer following the same 

procedure as for the other plan 

variations, and as discussed in 

§ 156.430(b). 

We welcome comment on this 

approach. 

F. Provisions on User Fees for a 

Federally-Facilitated Exchange (FFE) 

Section 1311(d)(5)(A) of the 

Affordable Care Act contemplates an 

Exchange charging assessments or user 

fees to participating health insurance 

issuers to generate funding to support 

its operations. If a State is not an 

electing State or does not have an 

approved Exchange, section 1321(c)(1) 

directs HHS to operate an Exchange 

within the State. In addition, 31 U.S.C. 

9701 permits an agency to establish a 

charge for a service provided by the 

agency. Circular No. A–25R establishes 

Federal policy regarding user fees, and 

specifies that a user charge will be 

assessed against each identifiable 

recipient for special benefits derived 

from Federal activities beyond those 

received by the general public. Based on 

section 1311(d)(5)(A) of the Affordable 

Care Act and Circular No. A–25, we are 

proposing that HHS collect a user fee 

from participating issuers (as defined in 

§ 156.50(a)) to support the operation of 

Federally-facilitated Exchanges. 

Participating issuers will receive two 

special benefits not available to the 

general public when they offer plans 

through a Federally-facilitated 

Exchange: (1) The certification of their 

plans as QHPs, and (2) the ability to sell 

health insurance coverage through a 

Federally-facilitated Exchange to 

individuals determined eligible for 

enrollment in a QHP. These special 

benefits are provided to participating 

issuers based on the following Federal 

operations in connection with the 

operation of Federally-facilitated 

Exchanges: 

• Provision of consumer assistance 

tools; 

• Consumer outreach and education; 

• Management of a Navigator 

program; 

• Regulation of agents and brokers; 

• Eligibility determinations; 

• Administration of advance 

payments of the premium tax credit and 

cost-sharing reductions; 

• Enrollment processes; 

• Certification processes for QHPs 

(including ongoing compliance 

verification, recertification and 

decertification); and 

• Administration of a SHOP 

Exchange. 

Activities performed by the Federal 

government that do not provide issuers 

participating in a Federally-facilitated 

Exchange with a special benefit will not 

be covered by this user fee. 

Circular No. A–25R states that user 

charges should generally be set at a level 

so that they are sufficient to recover the 

full cost to the Federal government of 

providing the service when the 

government is acting in its capacity as 

sovereign (as is the case when HHS 

operates a Federally-facilitated 

Exchange). However, Circular No. A– 

25R also allows for exceptions to this 

policy, if approved by OMB. To 

maintain a competitive balance between 

plans inside and outside the Exchanges, 

to align with the administrative cost 

structure of State-based Exchanges, and 

because we believe that growing 

enrollment is likely to increase user fee 

receipts in future years, we have 

requested an exception to the policy for 

2014. As a result, in § 156.50(c), we 

propose that a participating issuer 

offering a plan through a Federallyfacilitated Exchange remit a user fee to 

HHS each month, in the time and 

manner established by HHS, equal to 

the product of the billable members 

enrolled through the Exchange in the 

plan offered by the issuer, and the 

monthly user fee rate specified in the 

annual HHS notice of benefit and 

payment parameters for the applicable 

benefit year. For purposes of this 

paragraph, billable members are defined 

under the proposed § 147.102(c)(1) as 

the number of members on a policy, 

with a limitation of three family 

members under age 21. This approach 

will ensure that the user fee generally 

aligns with the number of enrollees for 

each issuer. 

For the 2014 benefit year, we propose 

a monthly user fee rate equal to 3.5 

percent of the monthly premium 

charged by the issuer for a particular 

policy under the plan. We seek to align 

this rate with rates charged by Statebased Exchanges, and may adjust this 

rate to take into account comparable 

State-based Exchange rates in the final 

Payment Notice. We note that this 

policy does not affect the ability of a 

State to use grants described in section 

1311 of the Affordable Care Act to 

develop functions that a State elects to 

operate under a Partnership Exchange, 

and to support State activities to build 

interfaces with a Federally-facilitated 

Exchange, as described in the ‘‘State 

Exchange Implementation Questions 

and Answers,’’ published November 29, 

2011. 

Circular No. A–25R provides for a 

user fee to be collected simultaneously 

with the rendering of services, and thus 

we further propose to assess user fees 

throughout the benefit year in which 

coverage is offered. Additional guidance 

on user fee collection processes will be 

provided in the future; however, we 

anticipate that user fees will be 

calculated based on the number of 

billable members enrolled in a plan 

each month. We anticipate collecting 


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41We issued a proposed regulation on risk 

pooling at § 156.80 of the proposed Market Reform 

Rule. 

user fees by deducting the user fee from 

Exchange-related program payments. If 

an issuer does not receive any 

Exchange-related program payments, 

the issuer would be invoiced for the 

user fee on a monthly basis. We 

welcome comment on these proposals 

and the operational processes related to 

user fee assessment and collections. 

In addition, we welcome comments 

on a policy that we are considering that 

would provide for the pooling of 

Exchange user fees or all administrative 

costs across a particular market 

(however, the user fee would be 

collected only from issuers participating 

in the Federally-facilitated Exchange). 

The Market Reform proposed rule 

proposes an implementation of section 

1312(c) of the Affordable Care Act under 

which the claims experience of all 

enrollees in health plans offered by an 

issuer in a State in the individual, small 

group, or combined market, as 

applicable, are to be pooled. We are 

considering further developing this 

policy, which we would codify in 

regulation at § 156.80,41 by requiring 

that Exchange user fees also be subject 

to risk pooling. Specifically, we are 

considering proposing that issuers be 

allowed an adjustment to the index rate 

for the pooled, expected Exchange user 

fees for the set of health plans offered 

in a particular market. We are 

considering this additional specification 

to provide further protection against 

adverse selection for QHP coverage, and 

to ensure that the costs of Exchange user 

fees are spread evenly across the market. 

We seek comment on this policy, 

including whether it should apply to a 

broader set of administrative costs. For 

example, under this alternative, it could 

apply to both Exchange user fees and 

distribution costs, or all administrative 

costs. In addition, we seek comment on 

an alternative approach, under which 

the proposed risk pooling would apply 

across all health plans within a product 

(defined as a specific set of benefits), 

rather than across a market. 

G. Distributed Data Collection for the 

HHS-Operated Risk Adjustment and 

Reinsurance Programs 

1. Background 

The Premium Stabilization Rule 

specifies at § 153.20 that a risk 

adjustment methodology must include a 

risk adjustment data collection 

approach. Therefore, the Federally 

certified risk adjustment methodology 

described in this proposed rule must 

include such a data collection approach. 

As already discussed, we propose to add 

new § 153.420(a) to establish that an 

issuer of a reinsurance-eligible plan 

must submit or make accessible all 

required reinsurance data in accordance 

with the reinsurance data collection 

approach established by the State, or by 

HHS on behalf of the State. In addition, 

we propose to amend Part 153 by 

adding Subpart H, entitled ‘‘Distributed 

Data Collection for HHS-Operated 

Programs.’’ We intend to clarify in 

Subpart H the data collection process 

that HHS would use when operating a 

risk adjustment or reinsurance program 

on behalf of a State. 

In the preamble to the proposed 

Premium Stabilization Rule, we 

described a distributed approach as one 

in which each issuer formats its own 

data in a manner consistent with the 

risk assessment database, and then 

passes risk scores to the entity 

responsible for assessing risk 

adjustment charges and payments. In 

the preamble to the Premium 

Stabilization Rule, we indicated that we 

intend to use a distributed approach to 

collect data for the HHS-operated risk 

adjustment program. In the Reinsurance 

Bulletin, we stated that we will also use 

such an approach when we operate the 

reinsurance program. We believe that 

this approach minimizes issuer burden 

while protecting enrollees’ privacy. 

2. Issuer Data Collection and 

Submission Requirements 

Under the HHS-operated risk 

adjustment and reinsurance programs, 

HHS will use a distributed data 

collection approach to run software on 

enrollee-level and claims-level data that 

reside on an issuer’s dedicated data 

environment. This approach will 

require close technological coordination 

between issuers and HHS. 

Distributed data environment: In 

§ 153.700(a), we propose that an issuer 

of a risk adjustment covered plan or a 

reinsurance-eligible plan in a State 

where HHS is operating the risk 

adjustment or reinsurance program on 

behalf of the State, must establish a 

dedicated data environment and 

provide data access to HHS, in a manner 

and timeframe specified by HHS, for 

risk adjustment and reinsurance 

operations. To accomplish the 

distributed data collection approach for 

both the reinsurance and risk 

adjustment programs, issuers would be 

required to establish secure, dedicated, 

electronic server environments to house 

medical and pharmacy claims, 

encounter data, and enrollment 

information. Issuers would be directed 

to make this data accessible to HHS in 

HHS-specified electronic formats, and to 

provide HHS with access to the data 

environment to install, update, and 

operate common software and specific 

reference tables for the purpose of 

executing risk adjustment and 

reinsurance program operations. Issuers 

would also be directed to correct 

submitted files to resolve problems 

detected by HHS during file processing. 

We will provide further technical 

details on these standards in the future. 

We note that HHS will store, in a 

private and secure HHS computing 

environment, aggregate plan summary 

data and reports based on activities 

performed on each issuer’s dedicated 

server environment. Except for purposes 

of data validation and audit, HHS will 

not store any personally identifiable 

enrollee information or individual 

claim-level information. 

We propose in § 153.700(b) that 

issuers must establish the dedicated 

data environment (and confirm proper 

establishment through successfully 

testing the environment to conform with 

HHS standards for such testing) three 

months prior to the first date of full 

operation. For example, for benefit year 

2014, implementation, including 

testing, will begin in March 2013, and 

continue through October 2013, in 

preparation for the commencement of 

risk adjustment and reinsurance 

program operations on January 1, 2014. 

HHS also plans to schedule technical 

assistance trainings for issuers in 2013. 

Data Requirements: In § 153.710(a), 

we propose that an issuer of a risk 

adjustment covered plan or reinsuranceeligible plan in a State in which HHS is 

operating the risk adjustment or 

reinsurance program, as applicable, 

must provide to HHS, through the 

dedicated data environment, access to 

the enrollee-level plan enrollment data, 

enrollee claims data, and enrollee 

encounter data specified by HHS. 

We propose in § 153.710(b) that all 

claims data submitted by an issuer of a 

risk adjustment covered plan or 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, must have resulted in 

payment by the issuer. The enrolleelevel data must include information 

from claims and encounter data 

(including data related to cost-sharing 

reductions, to permit HHS to calculate 

enrollee paid claims net of cost-sharing 

reductions) as sourced from all medical 

and pharmacy providers, suppliers, 

physicians, or other practitioners who 

furnished items or services to the 

issuer’s health plan members for all 

permitted paid medical and pharmacy 

services during the benefit period. All 


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42Examples of such plans include staff-model 

health maintenance organizations and plans that 

pay providers on a capitated basis. 

43Available at: http://www.whitehouse.gov/sites/ 

default/files/omb/memoranda/fy2007/m07-16.pdf. 

data must be provided at the level of 

aggregation specified by HHS. 

A listing of required data, proposed 

data formats, and data definitions for 

the HHS-operated distributed data 

approaches for the risk adjustment and 

reinsurance programs will be provided 

in the PRA approved under OMB 

Control Number (OCN) 0938–1155 with 

an October 31, 2015 expiration date. 

In § 153.710(c), we propose that an 

issuer that does not generate claims in 

the normal course of business 42 must 

derive costs on all applicable provider 

encounters using their principal internal 

methodology for pricing those 

encounters (for example, a pricing 

methodology used for the Medicare 

Advantage encounter data collection). If 

a plan has no such methodology, or has 

an incomplete methodology, it would be 

permitted to implement a methodology 

or supplement the methodology in a 

manner that yields derived claims that 

are reasonable in light of the specific 

market that the plan is serving. 

Establishment and usage of masked 

enrollee identification numbers: We 

propose in § 153.720(a) that an issuer of 

a risk adjustment covered plan or 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, must establish an unique 

masked enrollee identification number 

for each enrollee, in accordance with 

HHS-defined requirements as described 

in this section, and maintain the same 

masked enrollee identification number 

for an enrollee across enrollments or 

plans within the issuer, within the 

State, during a benefit year. In 

§ 153.720(b), we propose that an issuer 

of a risk adjustment covered plan or 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, may not include an 

enrollee’s personally identifiable 

information in the masked enrollee 

identification number or use the same 

masked enrollee identification number 

for different enrollees enrolled with the 

issuer. The requirements here align the 

specific requirements for data collection 

with the requirements in § 153.340(b) of 

the Premium Stabilization Rule and the 

proposed § 153.240(d). As discussed 

above, the term ‘‘personally identifiable 

information’’ is a broadly used term 

across Federal agencies, and has been 

defined in the Office of Management 

and Budget Memorandum M–07–16 

(May 22, 2007).43 To reduce duplicative 

guidance or potentially conflicting 

regulatory language, we are not defining 

personally identifiable information in 

this proposed rule, and incorporate the 

aforementioned definition in to this 

proposed rule. 

Deadline for submission of data: We 

propose in § 153.730 that an issuer of a 

risk adjustment covered plan or 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, submit data to be considered 

for risk adjustment payments and 

charges and reinsurance payments for 

the applicable benefit year by April 30 

of the year following the end of the 

applicable benefit year. This timeline 

will permit sufficient time for HHS to 

calculate and notify issuers of those 

payments and charges in time to meet 

the June 30 deadline set forth in 

§ 153.310(e), as proposed to be 

renumbered, and proposed in 

§ 153.240(b)(1). 

Proposed § 153.240(b)(2) provides that 

States administering their own 

reinsurance program must notify issuers 

of reinsurance-eligible plans of their 

expected requests for reinsurance 

payments on a quarterly basis. We 

believe that these interim reports will 

provide issuers in the individual market 

with information to assist in the 

development of premiums and rates in 

subsequent benefit years. Acceptable 

enrollment and claims/encounter data 

not submitted in a timely manner will 

be considered in the next quarter or 

during the annual processing period. 

The annual reinsurance payments will 

not be determined until after April 30 of 

the year following the applicable benefit 

year, once all requests for reinsurance 

payments have been submitted, and any 

adjustments have been made under 

proposed § 153.230(d). Therefore, for 

claims to be eligible for reinsurance 

payments, acceptable enrollment and 

paid claims or encounter data must be 

available on the issuer’s environment 

prior to the April 30 deadline, as 

specified in future guidance. 

3. Risk Adjustment Data Requirements 

HHS’s data collection approach is 

aligned with the HHS risk adjustment 

model and its calculation of payments 

and charges. This section describes the 

types of data that will be acceptable for 

risk adjustment. 

a. Data collection period: The data 

collection period will encompass 

enrollment and services for the 

applicable benefit year. 

(1) Claim-level service dates. 

Institutional and medical claims and 

encounter data where the discharge date 

or through date of service occurs in the 

applicable benefit year will be allowed 

for risk adjustment, provided that all 

other criteria defined under this section 

are met. 

(2) Enrollment periods. Issuers must 

provide data for all individuals enrolled 

in risk adjustment covered plans in the 

applicable benefit year with enrollment 

effective dates beginning on or after 

January 1 of that benefit year. 

b. Acceptable Risk Adjustment Data. 

Acceptable risk adjustment data for 

enrollee risk score calculation will be 

determined using the criteria listed 

below. 

(1) Acceptable claim types. Data to 

calculate enrollee risk scores will 

include diagnoses reported on 

institutional and medical claims that 

result in final payment action or 

encounters that result in final accepted 

status. The specific criteria for capturing 

a complete inpatient stay (across 

multiple bills) for single hospital 

admission will be provided in future 

guidance. 

(2) Acceptable provider types. 

Diagnoses reported on certain hospital 

inpatient facility, hospital outpatient 

and physician provider claims will be 

acceptable for risk adjustment. The risk 

adjustment model discussion provides 

HHS’ description for identifying and 

excluding claims from providers based 

on these criteria. 

(3) Acceptable diagnoses. Diagnoses 

will be acceptable for enrollee risk score 

calculation if they are present on 

medical claims and encounters that 

meet criteria that are acceptable for 

HHS-operated risk adjustment data 

collection. 

c. Risk Adjustment Processing and 

Reporting. Issuers are responsible for 

correcting errors and problems 

identified by HHS in the distributed 

data environment. 

4. Reinsurance Data Requirements 

This section describes the types of 

data that would be necessary for the 

evaluation of claims eligible for 

reinsurance payments to reinsuranceeligible plans as defined under § 153.20. 

HHS would use the same distributed 

data collection approach used for risk 

adjustment; however, only data 

elements necessary for reinsurance 

claim selection will be considered for 

the purpose of determining a 

reinsurance payment. Data considered 

acceptable for reinsurance payment 

calculations are described below. 

a. Data collection period. Medical and 

pharmacy claims, where a claim was 


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44 § 155.705(b)(2). 45 § 155.705(b)(3). 46Patient Protection and Affordable Care Act; 

Establishment of Exchanges and Qualified Health 

Plans; Exchange Standards for Employers (CMS– 

9989), 77 FR 18310 (Mar. 27, 2012). 

incurred in the benefit year beginning 

on or after January 1 of the applicable 

benefit year and paid before the 

applicable data submission deadline 

(provided all other criteria are met) 

would be accepted for consideration. 

b. Acceptable Reinsurance Data. 

Acceptable reinsurance data leading to 

eligible claim selection for the 

reinsurance program will be determined 

using the criteria listed below. 

(1) Claim types. Data to identify 

eligible reinsurance paid claims would 

include medical and pharmacy claims. 

Claims that resulted in payment by the 

issuer as the final action and encounters 

priced in accordance with issuer pricing 

methodologies would be considered for 

payment. Replacement claims for the 

purposes of adjusting data elements 

submitted on prior claim submissions, 

including, but not limited to changes in 

payment amounts, services rendered, 

diagnosis, would be accepted, but 

interim bills and late charges would not 

be accepted. The specific criteria for 

submitting complete data for inpatient 

stays will be provided in future 

guidance. 

(2) Capitated plans: Encounter data 

submitted by issuers that do not 

generate claims in the normal course of 

business would be accepted for 

consideration when services were 

performed in the benefit year beginning 

on or after January 1, 2014 and 

submitted prior to the applicable datasubmission deadline. Specific 

information related to the assessment 

and application of encounter claims for 

reinsurance calculations will be 

provided in future guidance. 

c. Reinsurance Processing and 

Reporting. HHS plans to provide each 

issuer with a periodic report on data 

functions performed in each issuer’s 

distributed data environment, including 

the identification of reinsurance eligible 

claims by State. The reports would 

indicate whether HHS accepted or 

rejected submitted files and data, and 

errors detected by HHS. Issuers would 

need to provide corrected files and data 

to address errors identified in HHSprovided reports for those files and data 

to be eligible for identification during 

reinsurance processing. Timeframes for 

the processing and reporting of these 

reports, including receipt of corrected 

files or discrepancy resolution, will be 

provided in future guidance. 

H. Small Business Health Options 

Program 

1. Employee Choice in the FederallyFacilitated SHOP (FF–SHOP) 

Employee choice is a central SHOP 

concept, and facilitating employee 

choice at a single level of coverage 

selected by the employer—bronze, 

silver, gold, or platinum—is a required 

SHOP function.44 In addition, the SHOP 

may also allow a qualified employer to 

make QHPs available to employees by 

other methods.45 For the FF–SHOP, we 

continue to consider whether to allow a 

qualified employer to offer its 

employees only a single QHP. We note 

that, once an employer has selected a 

single QHP and decided on a 

contribution toward that QHP, the 

employer can then offer employees a 

choice of all the other plans at the same 

metal level at no additional cost to the 

employer. Since adding employee 

choice would have no adverse financial 

impact on the employer, we propose 

that Federally-facilitated SHOPs will 

not offer a single QHP option to 

employers but will focus instead on the 

innovative features of a SHOP: A 

simpler employer experience and 

enhanced employee choice. In FF– 

SHOPs, we propose that employers will 

choose a level of coverage (bronze, 

silver, gold, or platinum) and a 

contribution, and employees can then 

choose any QHP at that level. 

In addition to this choice within 

single level of coverage, many 

employers expressed support for 

employer and employee choice across 

metal levels both in comments to the 

Exchange Establishment NPRM and in 

stakeholder discussions. Issuers, 

however, have expressed concern about 

the potential risk segmentation that may 

result. In comments submitted to HHS 

in connection with the Exchange Final 

Rule,46 issuers urged that employee 

choice be limited to a single level of 

coverage selected by the employer based 

on the potential for risk segmentation 

with a greater degree of employee 

choice. There was general agreement 

among these commenters that the degree 

of risk segmentation is small if 

employee choice is limited to a single 

metal level of coverage, particularly 

given the presence of risk adjustment, 

and increases as employee choice is 

extended across metal levels of 

coverage. Many commenters suggested 

that the risk segmentation associated 

with broad choice across all metal levels 

may adversely affect premiums. 

Some issuers expressed openness to 

allowing the employee to ‘‘buy up’’ to 

certain plans at the next higher level of 

coverage, thereby offering employees a 

broader range of health plans. Therefore, 

we seek comment on adding an 

additional employer option in the FF– 

SHOP that would allow a qualified 

employer to make available to 

employees all QHPs at the level of 

coverage selected by the employer plus 

any QHPs at the next higher level of 

coverage that a QHP issuer agrees to 

make available under this option. QHP 

issuers could decide whether or not to 

make available QHPs at the next higher 

level of coverage above the level of 

coverage selected by the employer. 

We note that concerns about risk 

selection will be mitigated both by the 

risk adjustment program which 

addresses risk selection directly and by 

consumer tools showing expected ‘‘total 

costs’’ of coverage (premium, 

deductibles, copayments and 

coinsurance) that help consumers 

compare the cost of a high premium/low 

cost sharing plan with a low premium/ 

high cost sharing plan. Nonetheless, 

particularly in the early years of 

implementation, the FF–SHOP in each 

State will need to balance the 

fundamental goal of enhancing 

employer and employee choice against 

concerns about potential risk selection 

to achieve the broadest issuer 

participation, the best range of plan 

design choices, and the most effective 

competition in the small group market. 

Therefore, we seek comment on a 

transitional policy in which a Federallyfacilitated SHOP would allow or direct 

employers to choose a single QHP from 

those offered through the SHOP. 

2. Methods for Employer Contributions 

in the FF–SHOP 

Employers may elect a variety of ways 

to contribute toward health coverage 

that are consistent with Federal law. 

Because employees in the FF–SHOP 

will be choosing their own coverage and 

will need to know the net cost to them 

after the employer’s contribution, the 

employer will need to choose a 

contribution method before employees 

select their qualified health plans. To 

facilitate this, each SHOP would offer 

‘‘safe harbor’’ methods of contributing 

toward the employee coverage— 

methods that reflect a meaningful 

employer choice and that conform to 

existing Federal law. The safe harbor 

methods described below are not the 

only allowable methods of contribution, 

but are those that will be available 

initially to qualified employers 

participating in FF–SHOPs. 

Under this proposed rule at 

§ 155.705(b)(11), FF–SHOPs would base 

the employer contribution methods on 

the cost of a reference plan chosen by 

the qualified employer. This reference 

plan approach is one of the methods 


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47 IRS Notice 2010–82, section III.G. describes 

employer contribution methods using a reference 

plan with a variety of different rating methods: Per 

member rating (referred to in the Notice as ‘‘list 

billing’’), composite rating (referred to as 

‘‘composite billing’’), and the hybrid method 

(referred to as an ‘‘employer-computed composite 

rate’’). Although prepared as guidance regarding 

employer contributions eligible for the small 

business premium tax credit and applicable only 

through 2013, it provides a clear description of 

‘‘safe harbor’’ methods that will be used in the FF– 

SHOP. 

48Thus, the ratio of the employee contribution 

made by the oldest adult and the youngest adult 

toward the reference plan cannot exceed 3:1 before 

any tobacco use factor is applied. 

49Because tobacco use information from 

employees will not be available when estimating 

total premiums for the group and average premiums 

per employee, tobacco use will always be a 

surcharge applied to an employee’s or dependent’s 

premium. See the proposed Health Insurance 

Market Rules (77 FR at 70595–70597) and the 

Incentives for Nondiscriminatory Wellness 

Programs in Group Health Plans Proposed Rule (77 

FR 70620) for further discussion of the tobacco use 

surcharge and wellness programs. 

50See 29 CFR 1625.10 for a description of the 

ways in which employee contributions toward 

premiums may vary according to employee age 

without constituting impermissible age 

discrimination. 

described in section III.G. of IRS Notice 

2010–82 regarding allowable ways an 

employer may contribute to the 

employees’ premiums and qualify for 

the small business premium tax credit 

prior to 2014.47 We note that the IRS 

plans to issue additional guidance 

applicable to plan years beginning after 

2013. 

The IRS Notice describes two types of 

reference plan premiums—one in which 

the premium for the reference plan is a 

composite premium that is the same for 

each member and a second in which the 

premium for the reference plan varies 

with the age of the covered individual 

(or other permissible rating factor). In 

both cases, the small business can 

define its contribution toward a 

member’s coverage as a percentage of 

the premium for the reference plan. 

Except in States that prohibit 

employee contributions that vary by age 

or require issuers to quote only 

composite premiums, the qualified 

employer would be asked the following 

question: ‘‘Do you want each employee 

to contribute the same amount toward 

the reference plan premium, or do you 

want the employee’s contribution to 

vary with age within the allowed 

limits?’’ 48 49 This option to charge 

younger employees lower premiums for 

a given coverage may help attract 

younger individuals into the risk pool 

and may help employer groups meet 

any minimum participation rates. On 

the other hand, this option also results 

in higher premium contributions by 

older employees who are also more 

likely to incur higher out-of-pocket 

costs.50

If the qualified employer decides that 

the employee’s contribution should vary 

by age, then the employer contribution 

would be based on the reference plan, 

and the remaining employee 

contribution for the employee’s plan 

would not be affected by other 

employees’ decisions about 

participation. Once the employees have 

chosen their plans, the qualified 

employer would approve the final 

application and the FF–SHOP would 

enroll the employees in their chosen 

health plans. 

If the qualified employer decides that 

each employee pays the same amount 

for the reference plan coverage, 

regardless of age, the composite 

premium for the reference plan, and the 

employer contribution based on that 

plan, may change based on which 

employees choose to participate, just as 

composite premiums may need to be requoted by the issuer today. 

Operationally, once the employee 

choices have been made, the composite 

premium for the reference plan would 

be recalculated, and the employer and 

employees notified of any changes. 

We welcome comments on this 

approach. 

3. Linking Issuer Participation in an FFE 

to Participation in an FF–SHOP 

Consistent with the goal of ensuring 

choice of affordable insurance plans, in 

this proposed rule, we propose 

standards that we believe will help 

ensure that qualified employers and 

qualified employees enrolling through a 

FF–SHOP are offered a robust set of 

QHP choices in a competitive small 

group marketplace. We believe that a 

competitive marketplace offering 

qualified individuals, qualified 

employers, and qualified employees a 

choice of issuers and QHPs is a central 

goal of the Affordable Care Act, and that 

the SHOP can provide an effective way 

for small employers to offer their 

employees a choice of issuers and 

QHPs. We propose in § 156.200(g) to 

leverage issuers’ participation in an FFE 

to ensure participation in the FF–SHOP, 

provided that no issuer would be 

required to begin offering small group 

market products as a result of this 

provision. 

While a State-operated SHOP has a 

variety of options available to ensure a 

robust choice of QHPs and issuers, an 

FFE is limited to the QHP certification 

process. We propose in § 156.200(g) that 

an FFE may certify a QHP in the 

individual market of an FFE only if the 

QHP issuer meets one of the following 

conditions: (1) The issuer offers through 

the FF–SHOP serving that State at least 

one small group market QHP at the 

silver level of coverage and one at the 

gold level of coverage; (2) the QHP 

issuer does not offer small group market 

plans in that State, but another issuer in 

the same issuer group (as defined 

below) offers through the FF–SHOP 

serving that State at least one small 

group market QHP at the silver level of 

coverage and one at the gold level of 

coverage; or (3) neither the issuer nor 

any issuer in the same issuer group 

offers a small group market product in 

the State. Thus, no issuer would be 

required to begin offering small group 

market plans to meet this requirement. 

We note that § 156.515(c)(2) has 

already implemented similar provisions 

for the Consumer Operated and 

Oriented Plans (CO–OPs). A CO–OP is 

not required to offer plans in the small 

group market, but if the CO–OP does 

offer a small group market plan, it must 

offer a silver and a gold QHP in each 

SHOP that serves the geographic regions 

in which the CO–OP offers coverage in 

the small group market. 

We propose to add to § 156.20 a 

definition of ‘‘issuer group’’ that will be 

specific to this section of the 

regulations. The proposed definition 

includes both issuers affiliated by 

common ownership and control and 

issuers affiliated by the common use of 

a nationally licensed service mark. We 

believe that either of these elements— 

common control or common use of a 

licensed mark—would appropriately 

identify an issuer group. We define 

‘‘issuer group’’ to help assure that the 

certification standard linking Exchange 

participation with SHOP participation 

has similar effects on small issuers and 

large issuer groups. We seek comment 

on this issue and whether or not the 

policy meets its three intended goals: 

Enhancing employer and employee 

choice, assuring similar effects on single 

issuers and issuer groups, and not 

requiring any issuer not already offering 

coverage, to begin offering coverage in 

the small group market. 

4. Broker Compensation for Coverage 

Sold Through an FFE or FF–SHOP 

While a State also has a variety of 

policies it might adopt with regard to 

broker compensation that would help 

create a level playing field for 

enrollment inside and outside the SHOP 

due to the State’s broad authority to 

regulate insurance markets, FFE and 

FF–SHOP options for creating a level 

playing field are again limited to QHP 

certification standards. In a new 

paragraph § 156.200(f), we propose that 

QHP certification by an FFE and an FF– 


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SHOP be conditioned on the QHP issuer 

paying similar broker compensation for 

QHPs offered through a FFE or FF– 

SHOP that it would pay for similar 

health plans offered outside an FFE and 

an FF–SHOP. We request comment on 

whether ‘‘similar health plans’’ is a 

sufficient standard and if not, which 

factors should be considered in 

identifying ‘‘similar health plans.’’ We 

also request comment on how this 

standard might apply when small group 

market product commissions are 

calculated on a basis other than an 

amount per employee or covered life or 

a percentage of premium. 

5. Minimum Participation Rate in the 

FF–SHOP 

Section 155.705(b)(10) specifies that a 

SHOP may establish a uniform 

minimum participation rate for its 

QHPs. Further rulemaking is needed to 

establish a minimum participation rate 

in the FF–SHOP. We recognized in the 

proposed Exchange Establishment Rule, 

76 FR at 41886, that minimum 

participation rates calculated at the 

level of the issuer are currently in wide 

use by issuers as one method to reduce 

the potential for adverse selection. We 

note here that the ability of a SHOP, 

including an FF–SHOP, to adopt a 

minimum participation rate as an 

exception to the guaranteed issue 

requirements of the Affordable Care Act 

is dependent on the final adoption of 

§ 147.104(b)(1) of the proposed Health 

Insurance Market Rule, (77 FR 70612), 

which conditions employer eligibility 

for the year-around open enrollment 

period in the SHOP (or FF–SHOP) on 

meeting any minimum participation rate 

that the SHOP (or FF–SHOP) might 

establish. 

Because we believe risk selection 

based on employee decisions to 

participate is likely without a minimum 

participation rate, we propose a 

minimum participation rate for the FF– 

SHOP of 70 percent, calculated at the 

level of the FF–SHOP. This rate is based 

on consultations with issuer 

organizations and regulators about 

customary minimum participation rates 

and would apply to all qualified 

employers in the FF–SHOP serving a 

given State. Because State law, 

regulation, and market practices vary 

from State to State, we also propose an 

option for the FF–SHOP to adopt a 

different uniform minimum 

participation rate in a State with a FF– 

SHOP if there is evidence that: 

(1) A State law sets the rate; or 

(2) A higher or lower rate is 

customarily used by the majority of 

QHP issuers in that State for products in 

the State’s small group market outside 

the SHOP. 

In addition, in accordance with State 

laws, we propose that certain types of 

alternative coverage will exclude an 

employee entirely from the calculation 

of the minimum participation rate: 

(1) A group health plan offered by 

another employer; or 

(2) A governmental program such as 

Medicare, Medicaid, or TRICARE. 

We seek comment on the default 

minimum participation rate and the 

exceptions that will help ensure 

alignment with current State practice 

and standards inside and outside the 

SHOP. 

6. Determining Employer Size for 

Purposes of SHOP Participation 

While the Exchange Establishment 

Rule did not finalize a method for 

determining employer size, we note that 

part-time employees must be taken into 

account in some reasonable way to be 

consistent with the Affordable Care Act 

standards for determining employer 

size. We propose to amend the 

definitions of ‘‘small employer’’ and 

‘‘large employer’’ in § 155.20 to specify 

the method for determining employer 

size and to add the definition of large 

employer to § 157.20. In determining 

whether an employer is a small 

employer for purposes related to the 

SHOP, we propose that the full-time 

equivalent method used in section 

4980H(c)(2)(e) of the Code, as added by 

section 1513 of the Affordable Care Act, 

be used. We seek comment on the 

proposed definition. We believe that 

having a single method will provide 

greater clarity and simplicity both for 

employers and for States seeking to 

reconcile State methods of determining 

group size with Federal methods in the 

operation of Exchanges and for 

determining employer eligibility to 

participate in the SHOP. We discuss the 

timing of this action in the ‘‘Transitional 

Policies’’ section below. 

7. Definition of a Full-Time Employee 

for Purposes of Exchanges and SHOPs 

Section 1312(f)(2)(A) of the Affordable 

Care Act defines a qualified employer as 

one ‘‘that elects to make all full-time 

employees of such employer eligible for 

one or more qualified health plans 

offered in the small group market 

through an Exchange that offers 

qualified health plans.’’ The Affordable 

Care Act does not define a full-time 

employee for purposes of this provision. 

We propose to add to § 155.20 a 

definition of full-time employee that 

cross-references section 4980H(c)(4) of 

the Code, which provides that a fulltime employee with respect to any 

month is generally an employee who is 

employed an average at least 30 hours 

of service per week, subject to the 

transitional policies discussed in the 

next paragraph. Under our proposal, 

this definition would control for 

purposes of the section 1312(f)(2)(A) 

requirement that qualified employers 

offer coverage to all full-time 

employees. 

8. Transitional Policies 

Most States currently use definitions 

of a full-time employee and methods of 

counting employees to determine 

employer size that differ from Federal 

definitions and methods. We believe 

that certain provisions of the Affordable 

Care Act that distinguish between the 

small group market and large group 

market and between large employers 

and small employers require that a 

Federal definition be used. We also note 

that section 1304(b)(3) of the Affordable 

Care Act provides States with some 

discretion in how they define their 

small group market in 2014 and 2015. 

Because States will generally take 

legislative action before January 1, 2016, 

to redefine the upper limit of the small 

group market as 100 employees, we 

believe that States can also act at that 

time to adopt a counting method that is 

consistent with Federal law. 

Therefore, we propose that the 

definitions of small employer and fulltime employee proposed above be 

effective January 1, 2016, for purposes 

of Exchange and SHOP administration. 

With respect to State-operated SHOPs 

for 2014 and 2015 only, HHS will not 

take any enforcement actions against a 

State-operated SHOP for including a 

group in the small group market based 

on a State definition that does not 

include part-time employees when the 

group should have been classified as 

part of the large group market based on 

the Federal definition. Similarly, during 

2014 and 2015, an employer and a Stateoperated SHOP may adopt a reasonable 

basis for their determination of whether 

they have met the SHOP requirement to 

offer coverage to all full-time 

employees, such as the definition of 

full-time employee from the State’s 

small group market definition or the 

Federal definition from section 4980H 

of Chapter 43 of the Code. 

The FF–SHOP, however, must use a 

counting method that takes part-time 

employees into account. We propose 

that these definitions will be effective 

October 1, 2013 for the FF–SHOP. To 

make an employer eligibility 

determination, the FF–SHOP will ask 

employers about the number of 

employees based on the full-time 

equivalent method used in section 


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4980H of Chapter 43 of the Code, as 

added by section 1513 of the Affordable 

Care Act. Thus, in FF–SHOP States, 

there may be a few employers who can 

purchase a small group market plan 

outside of the FF–SHOP (because they 

have fewer than 50 full time employees) 

but will not be eligible to purchase 

through the FF–SHOP (because they 

have more than 50 full time equivalent 

employees). 

We request comment on the proposed 

definitions and on the proposed 

transition policies. 

9. Web Site Disclosures Relating to 

Agents and Brokers 

We propose modifications to the Web 

site disclosure standards relating to 

brokers in § 155.220(b). Specifically, we 

propose a new paragraph (b)(1) that 

would allow an Exchange or SHOP to 

limit the display of agent and broker 

information to include only those 

licensed agents and brokers who are 

registered with the Exchange or SHOP 

and a new paragraph (b)(2) that would 

specifically adopt this provision for an 

FFE and an FF–SHOP. We believe that 

listing only brokers who have registered 

with the Exchange is in the best interest 

of the consumer, both because the 

registration and training helps assure 

that the agent or broker is familiar with 

the Exchange policies and application 

process and because the proposed 

listing will not contain large numbers of 

licensed brokers who are not active in 

the market. We welcome comments on 

these proposals. 

10. QHP Issuer Standards Specific to 

Shop 

We propose modifications to the QHP 

issuer standards specific to SHOP for 

enrollment in § 156.285. Specifically, 

we propose a technical correction in 

paragraph (c)(7) such QHP issuers 

participating in the SHOP must enroll 

qualified employees if they are eligible 

for coverage. This correction aligns 

SHOP enrollment standards to Exchange 

enrollment standards. 

I. Medical Loss Ratio Requirements 

Under the Patient Protection and 

Affordable Care Act 

1. Treatment of Premium Stabilization 

Payments, and Timing of Annual MLR 

Reports and Distribution of Rebates 

Our previous rulemakings concerning 

PHS Act section 2718 did not address 

how issuers are to account for the 

premium stabilization programs in their 

MLR reports and in calculating their 

MLR and any rebates owing, given that 

the premium stabilization programs are 

effective beginning in 2014. This 

proposed rule would modify the 

definition of premium revenue in 

§ 158.130, the formula in § 158.221(c) 

for calculating an issuer’s MLR, and the 

formula in § 158.240(c) for calculating 

an issuer’s rebate if the MLR standard is 

not met, in the current MLR regulation 

to account for payments and receipts 

related to the premium stabilization 

programs. When the MLR annual 

reporting form is updated for the 

reporting year 2014 and later, premium 

stabilization amounts would be 

considered a part of total premium 

revenue reported to the Secretary, 

similar to other elements involved in 

the derivation of earned premium. The 

MLR annual reporting form would then 

account for premium stabilization 

amounts by removing them from 

adjusted earned premium, so that these 

amounts do not have a net impact on 

the adjusted earned premium used in 

calculating the MLR denominator and 

rebates. Additionally, this proposed rule 

would amend § 158.140(b) to include 

premium stabilization amounts as an 

adjustment to incurred claims in 

calculating the MLR numerator as 

provided in § 158.221. This approach 

would address stakeholder concerns 

that netting premium stabilization 

amounts directly against adjusted 

earned premium in MLR and rebate 

calculations would result in an issuer 

paying either a higher total amount or 

a lower total amount for rebates and the 

premium stabilization programs 

combined, depending on whether the 

issuer’s net premium stabilization 

obligations resulted in payment or 

receipt of funds by the issuer. The 

approach in this proposed rule would 

also preserve consistency between the 

MLR and risk corridors programs by 

treating premium stabilization amounts 

in MLR and rebate calculations the same 

way section 1342(c) of the Affordable 

Care Act treats reinsurance and risk 

adjustment amounts in risk corridors 

calculations, by applying them as 

adjustments to cost, not revenue. 

Although PHS Act section 2718 

provides that premium revenue should 

‘‘account for’’ collections or receipts for 

the premium stabilization programs, we 

believe the statutory language provides 

flexibility as to whether to account for 

the effects of such collections or receipts 

in determining revenue (the 

denominator) or costs (the numerator) of 

the MLR formula. We considered 

netting premium stabilization payments 

or receipts against revenue, but for the 

reasons discussed above, have not 

proposed that approach. We invite 

comment on this decision. 

In sum, the formula for calculating the 

MLR would be amended as follows to 

take into account payments for and 

receipts related to the premium 

stabilization programs: 

Adjusted MLR = [(i + q + n ¥ r)/{(p + 

n ¥ r) ¥ t ¥ f ¥ n + r}] + c 

Where, 

i = incurred claims 

q = expenditures on quality improving 

activities 

p = earned premiums 

t = Federal and State taxes 

f = licensing and regulatory fees 

n = reinsurance, risk corridors, and risk 

adjustment payments made by issuer 

r = issuer’s reinsurance, risk corridors, and 

risk adjustment related receipts 

c = credibility adjustment, if any. 

Issuers must provide rebates to 

enrollees if their MLRs fall short of the 

applicable MLR standard for the 

reporting year. Rebates for a company 

whose adjusted MLR value in a State 

falls below the minimum MLR standard 

in a given market would be calculated 

using the following amended formula: 

Rebates = (m ¥ a) * [(p + n ¥ r) ¥ t 

¥ f ¥ n + r] 

Where, 

m = the applicable minimum MLR standard 

for a particular State and market 

a = issuer’s adjusted MLR for a particular 

State and market. 

The amendments made by this 

proposed rule would be effective for 

MLR reporting years beginning in 2014. 

In addition, this proposed rule would 

change the MLR reporting and rebate 

deadlines, beginning with the 2014 MLR 

reporting year, to coordinate them with 

the reporting cycles of the premium 

stabilization programs. Currently, an 

issuer must file its annual MLR report 

by June 1 and pay any rebates it owes 

to consumers by August 1 of the year 

that follows the MLR reporting year. 

However, looking ahead, the amounts 

associated with the premium 

stabilization programs that issuers must 

take into account in their MLR 

calculations will not be known until 

after June 1 each year. For example, a 

state, or HHS on behalf of a state, has 

until June 30 of the year following a 

benefit year to notify issuers of the risk 

adjustment and reinsurance payments 

due or charges owed for that benefit 

year (§ 153.310(e); § 153.240(b)(1) as 

proposed in this proposed rule). As 

further specified above in section III.C. 

of this proposed rule issuers must 

submit risk corridors data and 

calculations by July 31 of the year 

following a benefit year (§ 153.530(d) as 

proposed in this proposed rule). 

Accordingly, we propose to amend 

§ 158.110(b) to change the date of MLR 


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51Regulation for Uniform Definitions and 

Standardized Methodologies for Calculation of the 

Medical Loss Ratio for Plan Years 2011, 2012 and 

2013 per Section 2718(b) of the Public Health 

Service Act, available at http://www.naic.org/ 

documents/committees_ex_mlr_reg_asadopted.pdf. 

reporting to the Secretary from June 1 to 

July 31 beginning with the 2014 MLR 

reporting year, and we propose to 

amend § 158.240(d) to change the rebate 

due date from August 1 to September 30 

to accommodate the schedule for the 

premium stabilization programs 

beginning with the 2014 MLR reporting 

year. Similarly, we propose to amend 

§ 158.241(a)(2) to change the due date 

for rebates provided by premium credit 

from August 1 to September 30, to apply 

to the first month’s premium that is due 

on or after September 30 following the 

MLR reporting year, beginning with the 

2014 MLR reporting year. In choosing 

these dates, we tried to balance 

consumers’ and policyholders’ interests 

in maintaining the dates for MLR 

reporting and rebates as close to the 

June 1 and August 1 dates as possible 

with issuers’ interests in having the 

necessary data to submit their annual 

MLR report and sufficient time to 

disburse any rebates. Although we must 

provide issuers any reconciliation of 

their risk corridors calculations by 

August 31, as described above in 

Section C of this proposed rule, we 

believe that there will be few changes to 

the risk corridors calculations submitted 

by issuers to the Secretary by July 31. 

This would give issuers one additional 

month from any reconciliation to 

disburse any rebates owed, which we 

believe is sufficient time. Comments on 

the proposed timeline are welcome. 

2. Deduction of Community Benefit 

Expenditures 

While we did not specifically solicit 

comments on the deduction from 

premium for community benefit 

expenditures in the MLR December 7, 

2011 final rule with comment period, 

we received a few comments that 

recommend that a tax exempt not-forprofit issuer should be able to deduct 

both community benefit expenditures 

and State premium tax. These 

commenters suggest that prior to 

publication of the final rule, the MLR 

interim final rule published on 

December 1, 2010 gave a tax exempt 

not-for-profit issuer this flexibility. Two 

commenters assert that a Federal 

income tax exempt issuer is required to 

make community benefit expenditures 

to maintain its Federal income tax 

exempt status, and that allowing a 

deduction for community benefit 

expenditures takes the place of a 

Federal income tax deduction in the 

MLR calculation. Commenters have 

made clear that deducting both State 

premium taxes and community benefit 

expenditures would help level the 

playing field because it would allow a 

Federal income tax exempt issuer to 

deduct its community benefit 

expenditures in the same manner that a 

for-profit issuer is allowed to deduct its 

Federal income taxes. We agree, and 

this proposed rule would amend 

§ 158.162(b)(1)(vii) to allow a Federal 

income tax exempt issuer to deduct both 

State premium taxes and community 

benefit expenditures from earned 

premium in the MLR calculation. This 

proposed rule would not change the 

treatment of State premium taxes and 

community benefit expenditures for 

those issuers that are not exempt from 

paying Federal income tax. Comments 

are welcome on the merits of allowing 

a tax exempt issuer to deduct both State 

premium taxes and community benefit 

expenditures from earned premium. 

In its model MLR recommendation,51

the NAIC determined that the deduction 

from premium for community benefit 

expenditures should be limited to a 

reasonable amount to discourage fraud 

and abuse and that this limit should be 

the State premium tax rate. We applied 

this principle in allowing issuers 

exempt from State premium tax to 

deduct community benefit expenditure, 

up to the State premium tax rate, in 

their MLR calculation. However, the 

MLR final rule published on December 

7, 2011 allowed issuers exempt from 

Federal income tax to deduct 

community benefit expenditures in lieu 

of State premium taxes, not Federal 

income taxes. 

Commenters have suggested that a 3 

percent limit on the deduction from 

premium for community benefit 

expenditures would be sufficient to 

allow a tax exempt issuer to maintain its 

current community benefit expenditure. 

The 2011 MLR data indicate that, of the 

not-for-profit issuers that reported nonzero community benefit expenditures, 

the average spent on community benefit 

expenditures (deductible and nondeductible) was about 1.6 percent of 

premium. This suggests that a 3 percent 

community benefit expenditure 

deduction limit would not discourage a 

tax exempt issuer from making 

community benefit expenditures. In 

light of the NAIC model rule and the 

comments received, we propose to limit 

the deduction from premium for 

community benefit expenditures for 

issuers that are exempt from Federal 

income tax to the higher of either 3 

percent of premium or the highest 

premium tax rate charged in a State. 

Comments are solicited on the proposed 

community benefit expenditures 

deduction limit. 

3. Summary of Errors in the MLR 

Regulation 

a. Errors in the December 1, 2010 

Interim Final Rule 

We are making two changes to the 

December 1, 2010 interim final rule (75 

FR 74864) to make the language of the 

rule consistent with the NAIC’s 

recommendations, which in the 

preamble we stated that we were 

adopting. 

On page 74924, in § 158.140 (b)(5)(i), 

we mistakenly specified the date by 

which issuers must define the formula 

they use for the blended rate adjustment 

as ‘‘January 1, 2011’’ instead of ‘‘January 

1 of the MLR reporting year.’’ We are 

updating this date to ensure that all 

issuers are able to choose to make the 

blended rate adjustment going forward. 

We mistakenly omitted the words ‘‘by 

the issuer’’ following the words ‘‘will be 

defined’’ and mistakenly used the word 

‘‘will’’ instead of ‘‘must’’ in describing 

the objective formula to be used in 

reporting group coverage at a blended 

rate. 

On page 74928, in § 158.232(d), we 

inadvertently used the word ‘‘For’’ 

instead of ‘‘Beginning with’’ when 

describing the date after which 

partially-credible issuers that 

consistently fail to meet the MLR 

standard will not be allowed to use a 

credibility adjustment. 

b. Error in the May 16, 2012 Correcting 

Amendment 

Section 158.232(c)(1)(i) of the MLR 

regulation was amended by the May 16, 

2012 correcting amendment (77 FR 

28788), which currently reads: ‘‘[t]he 

per person deductible for a policy that 

covers a subscriber and the subscriber’s 

dependents shall be the lesser of: The 

sum 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).’’ In this correcting 

amendment, we further amend 

§ 158.232(c)(1)(i) by deleting the words 

‘‘The sum of’’ after the words ‘‘the lesser 

of:’’ and the comma after the words 

‘‘subscriber’s family,’’ which we 

inadvertently did not delete in the May 

16, 2012 correcting amendment. 

IV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 


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collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. To fairly evaluate whether an 

information collection should be 

approved by OMB, section 3506(c)(2)(A) 

of the Paperwork Reduction Act of 1995 

requires that we solicit comment on the 

following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

The following sections of this 

document contain paperwork burden 

but not all of them are subject to the 

information collection requirements 

(ICRs) under the PRA for reasons noted. 

A. Collections Related to State 

Operation of Reinsurance & Risk 

Adjustment Programs (§ 153.210 

Through § 153.240, § 153.310) 

Although the number of States that 

will elect to operate their own 

reinsurance or risk adjustment programs 

is unknown, we anticipate that fewer 

than nine States will choose to do so. 

Collections from fewer than 10 persons 

are exempt from the PRA under 44 

U.S.C. 3502(3)(A)(i). Therefore, we do 

not plan to seek OMB approval for the 

following collections. However, in the 

event that, by the time of the final 

Payment Notice, we believe that the 

number of States will be greater than 9, 

we will seek PRA approval based on the 

burden estimates outlined below. 

1. Reporting to HHS (§ 153.210) 

We are proposing under § 153.210(e) 

that a State operating its own 

reinsurance program must ensure that 

its applicable reinsurance entity provide 

information regarding the requests for 

reinsurance payments under the 

national contribution rate made under 

§ 153.410 of this part for all reinsuranceeligible plans for each quarter during 

the applicable benefit year. We estimate 

that it will take an operations analyst 2 

hours (at $55 an hour) to gather 

information from applicable reinsurance 

entities and to submit this information 

to HHS, for a total burden of $110 per 

State selecting to run reinsurance. 

2. Collection of Reinsurance 

Contribution Funds (§ 153.220) 

Under proposed § 153.220(d), a State 

that operates its own reinsurance 

program and elects to collect additional 

reinsurance contributions for additional 

administrative expenses or 

supplemental reinsurance payments or 

use additional State funds for 

supplemental reinsurance payments 

must notify HHS of its intent to do so 

within 30 days after publication of the 

draft annual HHS notice of benefit and 

payment parameters for the applicable 

benefit year. We believe that the burden 

associated with this requirement is the 

time and effort necessary for the State to 

provide this notification, and estimate it 

will take each State approximately 1 

hour by an operations analyst (at $55 an 

hour) to submit this notification 

requirement. Consequently, we estimate 

a total burden of $55 for each State as 

a result of this requirement. 

3. Collections Related to Reinsurance 

Payments Made Under a State 

Additional Contribution Rate 

(§ 153.232) 

Under § 153.232(a), we propose to 

require a State running its own 

reinsurance program that chooses to 

collect additional contributions under 

§ 153.220(d) to set supplemental State 

reinsurance payment parameters and to 

ensure that reinsurance contributions 

collected and funds used are reasonably 

calculated to cover additional 

reinsurance payments that are projected 

to be made only under the supplemental 

reinsurance payment parameters. We 

estimate that it will take an operations 

analyst 8 hours (at $55 an hour) and a 

senior manager 2 hours (at $77 an hour) 

to determine appropriate supplemental 

payment parameters. Therefore, we 

estimate that it will cost each State 

choosing to collect additional 

contributions approximately $594 to 

comply with this requirement. 

Under § 153.232(d), we propose that 

States that run their own reinsurance 

program and that choose to collect 

additional contributions under 

§ 153.220(d) calculate the supplemental 

reinsurance payments from their 

additional funds collected under the 

State additional contribution rate using 

supplemental payment parameters in 

conjunction with the national payment 

parameters to reimburse a particular 

portion of claims. Additionally, under 

§ 153.232(e), we propose that, if all 

requested reinsurance payments under 

the State supplemental reinsurance 

parameters calculated will exceed all 

reinsurance contributions collected 

under the additional State contribution 

rate for the benefit year, the State must 

determine a uniform pro rata adjustment 

to be applied to all requests for 

reinsurance payments. The State or the 

applicable reinsurance entity must 

reduce all such requests for reinsurance 

payments for the applicable benefit year 

by that adjustment. We estimate it will 

take an operations analyst 40 hours (at 

$55 an hour) and a senior manager 12 

hours (at $77 an hour) to determine 

appropriate payment calculations and, if 

necessary, a pro rata adjustment. 

Therefore, we estimate that it will cost 

each State choosing to collect additional 

contributions approximately $3,124 to 

comply with this requirement. 

4. Collections Related to Disbursement 

of Reinsurance Payments (§ 153.240) 

We propose to amend § 153.240(a) to 

direct a State operating its own 

reinsurance program to ensure that the 

applicable reinsurance entity either 

collects data or is provided access to the 

data required to determine reinsurance 

payments as described in §§ 153.230 

and 153.232. In § 153.240(b) we propose 

that a State or HHS on behalf of the 

State notify issuers of the total amount 

of reinsurance payments that will be 

made no later than June 30 of the year 

following the benefit year, as well as an 

estimate to each reinsurance-eligible 

plan of expected requests for 

reinsurance payments from the plan on 

a quarterly basis during the applicable 

benefit year. We estimate it will take an 

operations analyst 40 hours (at $55 an 

hour), 10 hours per quarter, and a senior 

manager 12 hours (at $77 an hour), 3 

hours per quarter, to determine 

appropriate quarterly estimates of 

expected reinsurance payments and to 

notify plans. Additionally, we expect it 

will take an operations analyst 40 hours 

(at $55 an hour) and a senior manager 

12 hours (at $77 an hour) to determine 

the total amount of reinsurance 

payments for each reinsurance-eligible 

plan. Therefore, we estimate that it will 

cost each State choosing to run 

reinsurance approximately $6,248 to 

comply with this requirement. We will 

also revise the supporting statement of 

0938–1155 to reflect the additional 

burden for States choosing to run 

reinsurance of providing quarterly 

estimates of expected reinsurance 

payments and notice of total 

reinsurance payments to reinsuranceeligible plans. At the final Payment 

Notice stage, we will revise the 

supporting statement of 0938–1155 to 

clarify that a State has the option to 

ensure that the applicable reinsurance 

entity provides access to data required 

to determine reinsurance payments, and 

that the State is not required to verify 

that the reinsurance entity is collecting 

this data directly. 

In § 153.240(a)(3), we propose that a 

State must provide a process through 

which an issuer of a reinsurance-eligible 

plan that does not generate individual 


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enrollee claims in the normal course of 

business, such as a capitated plan, may 

use estimated claims costs to make a 

request for payment (or to submit data 

to be considered for reinsurance 

payments) for such plan in accordance 

with the requirements of § 153.410. In 

addition, the State must ensure that 

such requests for reinsurance payment 

are subject to validation. We estimate 

that our proposal will result in a small 

administrative cost to States associated 

with determining a format for 

submission of reinsurance payment data 

and notifying capitated plans of the 

acceptable method and format of data 

collection. We anticipate that a State 

will only need to establish this process 

once. On average, we estimate that it 

will take each State approximately 50 

hours to comply with this requirement. 

We estimate it will take an operations 

analyst 40 hours (at $55 an hour) and a 

senior manager 10 hours (at $77 an 

hour) to determine an appropriate 

format for submission of reinsurance 

payment data for capitated plans and to 

notify plans of the acceptable method 

and format for data collection. 

Therefore, we estimate that it will cost 

each State choosing to run reinsurance 

approximately $2,970 to comply with 

this proposal. 

In § 153.240(d)(1), we propose that, if 

a State establishes a reinsurance 

program, the State must ensure that the 

applicable reinsurance entity’s 

collection of personally identifiable 

information is limited to information 

reasonably necessary for use in the 

calculation of reinsurance contributions 

or payments. Furthermore, in 

§ 153.240(d)(2), we propose that, if a 

State establishes a reinsurance program, 

it must ensure that the applicable 

reinsurance entity implements security 

standards that provide administrative, 

physical, and technical safeguards for 

the individually identifiable 

information consistent with the security 

standards. To comply with this 

requirement, we believe that most States 

will require the applicable reinsurance 

entity to comply with privacy and 

security standards that are similar to the 

Federal standards already established 

under the HIPAA and The Health 

Information Technology for Economic 

and Clinical Health Act (HITECH) (Pub. 

L. 104–191, 110 Stat. 1936, enacted 

August 21, 1996) or with privacy and 

security standards that are already 

established under State law, rather than 

developing entirely new standards to 

apply to reinsurance entities. We further 

anticipate that most States will 

incorporate this requirement into their 

contracting process with reinsurance 

entities. We estimate it will take a 

contract administrator 2 hours (at $40 

an hour) and a lawyer 2 hours (at $77 

an hour) to establish privacy and 

security standards for reinsurance 

entities and to notify reinsurance 

entities of these standards. Therefore, 

we estimate a total burden of 4 hours 

and $234 for each State choosing to 

operate reinsurance to comply with this 

proposal. 

5. HHS Approval of Risk Adjustment 

States (§ 153.310) 

Under § 153.310(a)(4), we are 

proposing that a State that operates risk 

adjustment must be approved by HHS to 

do so. The burden associated with this 

process is the time and effort required 

by a State to submit evidence that it 

meets the approval standards set forth 

in § 153.310(c). Note that these 

processes will start in benefit year 

2015—prior to that, HHS will engage in 

informal consultations with States. In 

any given benefit year after 2015, 

different States may apply for approval. 

We estimate it will take each State 

approximately 180 hours to complete 

the initial risk adjustment entity 

approval process. We estimate it will 

take an operations analyst 72 hours (at 

$55 an hour), a contract administrator 

72 hours (at $40 per hour), a senior 

manager 24 hours (at $77 an hour), and 

an attorney 12 hours (at $77 an hour) to 

meet the initial approval requirements. 

Therefore, we estimate a total burden of 

$9,612 for each entity, as a result of 

these approval requirements. 

B. ICRs Regarding Calculation of 

Reinsurance Contributions (§ 153.405) 

In § 153.405, we propose an annual 

enrollment count of covered lives by 

contributing entities using counting 

methods derived from the PCORTF 

Rule. We propose requiring contributing 

entities to provide annual counts of 

their enrollment and reinsurance 

contributions to HHS based on their last 

reported PCORTF number as modified 

for reinsurance purposes. The burden 

associated with this requirement is the 

time and effort required by an issuer to 

derive an annual, enrollment count. 

Because issuers will already be under an 

obligation to determine a count of 

covered lives using a PCORTF method, 

the burden associated with this 

requirement is the additional burden of 

conducting these counts using the 

slightly modified counting methods 

specified in this proposed rule. On 

average, we estimate it will take each 

issuer 1 hour to reconcile and submit 

final enrollment counts to HHS. 

Assuming an hourly wage rate of $55 for 

an operations analyst, we estimate an 

aggregate burden of $110,000 for 2,000 

reinsurance contributing entities subject 

to this requirement. We are revising 

supporting statement of OMB Control 

Number 0938–1155 to include the 

required data elements that issuers will 

need to submit their enrollment counts 

and to specify that issuers must follow 

the methodology when they derive 

enrollee counts for reinsurance 

contributions. 

C. Requests for Reinsurance Payment 

(§ 153.410) 

As described in § 153.410, we propose 

that issuers of reinsurance-eligible plans 

seeking reinsurance payment must 

request payment in accordance with the 

requirements of this proposed rule or 

the State notice of benefit and payment 

parameters, as applicable. To be eligible 

for reinsurance payments, issuers of 

reinsurance-eligible plans must submit 

or make accessible all necessary data to 

be considered for reinsurance payments 

for the applicable benefit year. 

Issuers operating reinsurance-eligible 

plans in the individual market that are 

subject to the reinsurance data 

collection requirements are eligible to 

make reinsurance payment requests. To 

minimize burden on issuers, HHS 

intends to collect data in an identical 

manner for the HHS-operated 

reinsurance program and HHS-operated 

risk adjustment programs. In addition, 

when HHS operates reinsurance on 

behalf of a State, the maximum out-ofpocket differential between a costsharing reduction plan variation and the 

national maximum out-of-pocket limit 

established by the Federal government 

would be factored into an issuer’s 

reinsurance payment. Although we are 

clarifying the data elements issuers 

would be required to submit as part of 

the reinsurance payment request 

process, the burden associated with this 

requirement is already accounted for 

under OMB Control Number 0938–1155 

with an October 31, 2015 expiration 

date. We are updating the supporting 

statement approved under 0938–1155 

with an October 31, 2015 expiration 

date to reflect these clarified data 

elements. 

D. Upload of Risk Adjustment and 

Reinsurance Data (§ 153.420) 

Under the HHS-operated risk 

adjustment and reinsurance programs, 

HHS proposes to use a distributed data 

collection approach to run software on 

enrollee-level plan enrollment, claims 

and encounter data that reside on an 

issuer’s dedicated data environment. We 

propose in § 153.700(a) to require that 

an issuer of a risk adjustment covered 

plan or a reinsurance-eligible plan in a 


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State where HHS is operating the risk 

adjustment or reinsurance program on 

behalf of the State, as applicable, must 

provide HHS, through the dedicated 

data environment, access to enrolleelevel plan enrollment data, enrollee 

claims data, and enrollee encounter data 

as specified by HHS. Under 

§ 153.710(b), all claims data submitted 

by an issuer of a risk adjustment 

covered plan or a reinsurance-eligible 

plan in a State in which HHS is 

operating risk adjustment or 

reinsurance, as applicable, must have 

resulted in payment by the issuer. 

Under § 153.710(c), an issuer of a risk 

adjustment covered plan or a 

reinsurance-eligible plan in a State in 

which HHS is operating risk adjustment 

or reinsurance, as applicable, that does 

not generate individual enrollee claims 

in the normal course of business must 

derive costs on all applicable provider 

encounters using its principal internal 

methodology for pricing those 

encounters. Issuers will be directed to 

make risk adjustment and reinsurance 

data accessible to HHS in a way that 

conforms to HHS-established guidelines 

and applicable standards for electronic 

data collection and submission, storage, 

privacy and security, and processing. In 

addition, in § 153.720(a), we propose 

requiring these issuers to establish a 

unique masked enrollee identification 

number for each enrollee, in accordance 

with HHS-defined requirements and 

maintain the same masked enrollee 

identification number for enrollees that 

enroll in different plans within the 

issuer, within the State, during a benefit 

year. Issuers must provide all data to 

HHS in the specified formats, and must 

correct submitted files to resolve 

problems detected by HHS during file 

processing. The burden associated with 

this requirement is the time and effort 

to ensure that information in the 

dedicated data environment complies 

with HHS requirements. 

We estimate that this data submission 

requirement will affect 1,800 issuers, 

and will cost each issuer approximately 

$327,600 in total labor and capital costs 

(including the average cost of $15,000 

for a data processing server) during the 

start-up year. This cost will be lower in 

future years when fixed costs decrease. 

This cost reflects an estimate of 3 fulltime equivalent employees (5,460 hours 

per year) at an average hourly rate of 

$59.39 per hour. We anticipate that 

approximately 400 data processing 

servers will be established across the 

market in 2014, and these servers will 

process approximately 9 billion claims 

and enrollment files. Therefore, we 

estimate an aggregate burden, including 

labor and capital costs, of $589,680,000 

for all issuers as a result of these 

requirements. We are revising the 

supporting statements associated with 

the submission of risk adjustment data 

and reinsurance enrollment data 

approved under OMB Control Number 

0938–1155 with an October 31, 2015 

expiration date to account for this 

burden. 

E. ICRs Regarding Data Validation 

Requirements When HHS Operates Risk 

Adjustment (§ 153.630) 

Under § 153.630, an issuer that offers 

at least one risk adjustment covered 

plan in a State where HHS is operating 

risk adjustment on behalf of the State for 

the applicable benefit year must have an 

initial validation audit performed on its 

risk adjustment data. The burden 

associated with this requirement is the 

issuer’s time and effort to provide HHS 

with source claims, records, and 

enrollment information to validate 

enrollee demographic information for 

initial and second validation audits, and 

the issuer’s cost to employ an 

independent auditor to perform the 

initial validation audit on a statistically 

valid sample of enrollees. 

The statistically valid sample of 

enrollees provided to each issuer will 

consist of enrollees both with and 

without HCCs. We estimate that each 

issuer sample will consist of 

approximately 300 enrollees, with a 

disproportionate share of approximately 

two-thirds of the sample consisting of 

enrollees with HCCs. We also anticipate 

that this audit burden will affect about 

1,800 issuers. 

Based on Truven Health Analytics 

2010 MarketScan® data, we have 

determined that for enrollees with 

HCCs, the average number of HCCs to be 

reviewed by an auditor per enrollee is 

approximately two. Additionally, based 

on HHS audit experience, we estimate 

that it may cost approximately $180 

($90 per hour for 2 hours) for an auditor 

to review the medical record 

documentation for one enrollee with 

roughly two HCCs. We expect that it 

may cost approximately $30 per 

enrollee ($90 per hour for 20 minutes) 

to validate demographic information for 

all enrollees in the audit sample, 

totaling approximately $210 per 

enrollee with HCCs and $30 per enrollee 

with no HCCs. We assume that an initial 

validation audit will be performed on 

180,000 enrollees without HCCs, and 

360,000 enrollees with HCCs. We have 

developed this estimate assuming that 

medical records will not be reviewed for 

enrollees without HCCs, and that 

validation for these enrollees will be 

conducted using demographic data 

only. Based on the information above, 

we estimate that the total burden per 

issuer to retain initial validation 

auditors to perform the initial validation 

would cost approximately $45,000. 

Therefore, for 1,800 issuers, we 

anticipate that the total burden of 

conducting initial validation audits will 

be $81 million. We are revising the PRA 

currently approved OMB Control 

Number 0938–1155 with an October 31, 

2015 expiration date to account for this 

additional burden. 

Under § 153.630(d), issuers will have 

the opportunity to appeal errors 

identified through the second validation 

audit process. Because we intend to 

provide further detail on this process in 

later guidance and rulemaking, we 

currently cannot estimate the number of 

issuers that will appeal HCC findings, or 

the cost per issuer for doing so. 

Therefore, we will seek OMB approval 

and solicit public comment on the 

appeal information collection 

requirements established under 

§ 153.630(d) at a future date. 

F. ICRs Regarding QHP Certification 

Standards Related to Advance 

Payments of the Premium Tax Credit 

and Cost-Sharing Reductions 

(§ 155.1030) 

In § 155.1030(a)(1), we propose that 

the Exchange ensure that each issuer 

that offers or seeks to offer a QHP in the 

individual market on the Exchange 

submit the required plan variations, as 

proposed in § 156.420, for each of its 

health plans proposed to be offered as 

a QHP in the individual market on the 

Exchange. Further we propose that the 

Exchange must certify that the plan 

variations meet the requirements 

detailed in § 156.420. We expect that an 

Exchange would collect prior to each 

benefit year the information necessary 

to validate that the issuer meets the 

requirements for silver plan variations, 

as detailed in § 156.420(a), and collect 

for certification the information 

necessary to validate that the issuer 

meets the requirements for zero and 

limited cost sharing plan variations, as 

detailed in § 156.420(b). We expect that 

this data collection would include the 

cost-sharing requirements for the plan 

variations, such as the annual limitation 

on cost sharing, and any reductions in 

deductibles, copayments or 

coinsurance. In addition, the Exchange 

would collect or calculate the actuarial 

values of each QHP and silver plan 

variation, calculated under § 156.135 of 

the proposed EHB/AV Rule. We propose 

in § 155.1030(a)(2) that the Exchange 

provide the actuarial values of the QHPs 

and silver plan variations to HHS. As 

proposed in § 155.1030(b)(4), HHS may 


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use this information in connection with 

approving estimates for advance 

payment of cost-sharing reductions 

submitted by issuers under proposed 

§ 156.430. Because HHS will already 

have this information for Federallyfacilitated Exchanges, the burden 

associated with this requirement is the 

time and effort for each Partnership or 

State-based Exchange to submit this 

information. We estimate that it will 

take each Partnership or State-based 

Exchange approximately 3.5 hours to 

collect, validate, and submit the data to 

HHS (3 hours by a database 

administrator at $47.70 per hour, and 

0.5 hours by a manager at $75.15 per 

hour). We estimate that this will cost 

each Exchange approximately $181 per 

year. We plan to revise the supporting 

statement published under CMS form 

number 10433, which is pending OMB 

approval, to account for this additional 

burden. 

In paragraph (b)(1) and (2), we 

propose that the Exchange collect, 

review, and submit the rate or expected 

premium allocation, the expected 

allowed claims cost allocation, and the 

actuarial memorandum that a metal 

level health plan or stand-alone dental 

plan issuer submits under § 156.470. 

This collection will allow for the 

calculation of the advance payments of 

cost-sharing reductions and the 

premium tax credit. The Exchange must 

ensure that such allocations meet the 

standards set forth in § 156.470(c) and 

(d). This allocation information must be 

collected and approved before a health 

plan or stand-alone dental plan can be 

certified for participation in the 

Exchange. We expect that the Exchange 

will collect the allocation information in 

conjunction with the rate and benefit 

information that the issuer submits 

under § 156.210 and/or the rate 

information that the QHP issuers 

submits through the Effective Rate 

Review program. Therefore, we believe 

that the burden for Partnership 

Exchanges or State-based Exchanges to 

submit to HHS this information 

collected from QHPs is generally part of 

the burden that is accounted for in the 

PRA approved under OMB Control 

Number 0938–1141. We estimate that 

Partnership and State-based Exchanges 

will incur additional burden to submit 

allocation information to HHS for standalone dental plans. We estimate that it 

will take each Exchange 30 minutes to 

submit this information for each standalone dental plan, and assume that this 

submission will be performed at the 

hourly wage rate of $38.49 for an 

insurance analyst. Assuming 20 standalone dental plans across the market, we 

estimate an aggregate burden of 

approximately $385 for all Partnership 

or State-based Exchanges to submit this 

information to HHS. We plan to revise 

the supporting statement published 

under CMS form number 10433, which 

is pending OMB approval, to account 

for this additional burden. 

In subparagraph (b)(3), we propose 

that the Exchange must collect any 

estimates and supporting 

documentation that a QHP issuer 

submits to receive advance payments of 

certain cost-sharing reductions, as 

described in § 156.430(a), and submit, in 

the manner and timeframe established 

by HHS, the estimates and supporting 

documentation to HHS for review. 

Because HHS will already have this 

information for Federally-facilitated 

Exchanges, the burden associated with 

this requirement is the time and effort 

for each Partnership or State-based 

Exchange to submit this information. 

We believe that this requirement will 

impose minimal burden, and that it will 

take an insurance analyst 5 minutes (at 

an hourly wage rate of $38.49), to collect 

and submit this information to HHS for 

each Partnership or State-based 

Exchange. Therefore, we estimate a 

burden of $3.08 for each Partnership or 

State-based Exchange as a result of this 

requirement. 

G. ICRs Regarding QHP Participation 

Standards in SHOP (§ 156.200) 

In § 156.200(g)(1), we propose that if 

the issuer of a QHP in an FFE also 

participates in the State’s small group 

market, the QHP certification standard 

would be met if the issuer offers at least 

one small group market QHP at the 

silver level of coverage and one QHP at 

the gold level of coverage in an FF– 

SHOP serving that State. We also 

propose that, if neither the issuer nor 

any issuer in the same issuer group 

participates in the small group market of 

the State, the standard would be met. 

Therefore, no issuer would be required 

to begin offering small group market 

plans to meet this requirement. The 

burden associated with this requirement 

is the time and effort for an issuer to 

prepare a QHP certification application 

for a SHOP for at least one silver level 

and one gold level plan design. This 

burden would be incurred by issuers 

who, absent this requirement, would 

otherwise not have participated in a 

SHOP. We describe the burden 

associated with this requirement in the 

30-day Federal Register Notice for the 

Initial Plan Data Collection published 

on November 21, 2012 (77 FR 69846). 

H. ICRs Regarding Plan Variations 

(§ 156.420) 

In § 156.420, we propose that issuers 

submit to the Exchange for certification 

the variations of the health plans that 

they offer or propose to offer in the 

individual market on the Exchange that 

include required levels of cost-sharing 

reductions. We provide an overview of 

the submission process associated with 

this requirement in this proposed rule. 

In paragraph (a), we propose that, for 

each silver health plan that an issuer 

offers or proposes to offer in the 

individual market on the Exchange, the 

QHP issuer must submit to the 

Exchange for certification the standard 

silver plan and three variations of the 

standard silver plan. In paragraph (b), 

we further propose that a QHP issuer 

must, for each of its health plans at any 

metal level of coverage, submit a zero 

cost sharing plan variation and a limited 

cost sharing plan variation of each 

health plan offered or proposed to be 

offered in the individual market on the 

Exchange. 

We estimate that 1,200 issuers will 

participate in an Exchange nationally, 

and that each issuer will offer one QHP 

per metal level with four zero cost 

sharing plan variations and four limited 

cost sharing plan variations (one per 

metal level QHP) and three plan 

variations for low-income populations, 

for a total of four standard plans and 

eleven plan variations. Our burden 

estimate assumes that each issuer will 

submit these plan variations as part of 

their electronic QHP application, which 

is described in further detail in the 

‘‘Supporting Statement for Initial Plan 

Data Collection to Support QHP 

Certification and other Financial 

Management and Exchange 

Operations,’’ which was provided for 

public comment on November 21, 2012 

(77 FR 69846). We estimate that it will 

take approximately 1.5 hours to submit 

the requisite information for a plan 

variation (0.75 hours by an actuary at a 

wage rate of $56.89, 0.5 hours by an 

insurance analyst at a wage rate of 

$38.49, and 0.25 hours by an insurance 

manager at a wage rate of $67.44). We 

estimate that each submission for a plan 

variation will cost an issuer $78.77, for 

a total estimated annual cost of $866.47 

per issuer for the 11 plan variations. We 

estimate an aggregate burden of 

$1,039,764 for all issuers participating 

in the Exchange. We plan to revise the 

supporting statement published under 

CMS form number 10433, which is 

pending final OMB approval, to account 

for this additional burden. 


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Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73193 

I. ICRs Regarding Payment of CostSharing Reductions (§ 156.430) 

In § 156.430(a)(1), we propose that for 

each silver plan variation and zero cost 

sharing plan variation that an issuer 

offers or proposes to offer in the 

individual market on the Exchange, the 

QHP issuer must provide to the 

Exchange, for approval by HHS, 

estimates, and supporting 

documentation validating the estimates, 

of the dollar value of cost-sharing 

reductions to be provided. However, we 

propose a simplified methodology for 

calculating the advance payments for 

the initial years of the cost-sharing 

reduction program. This methodology 

will utilize data that QHP issuers submit 

for other requirements, such as 

§ 156.420 and § 156.470. As a result, 

there will be no additional burden 

associated with this requirement. 

In § 156.430(a)(2), we discuss the 

process for estimating the value of costsharing reductions to be provided under 

the plan variation open to Indians with 

a household income above 300 percent 

of the FPL, described in § 156.420(b)(2). 

If a QHP issuer seeks advance payments 

for the these cost-sharing reductions, the 

issuer must provide to the Exchange, for 

approval by HHS, an estimate, and 

supporting documentation validating 

the estimate, of the dollar value of the 

cost-sharing reductions to be provided 

under the limited cost sharing plan 

variation of the QHP. We estimate that 

1,200 issuers will participate in 

Exchanges nationally, and that each 

issuer will offer one QHP per metal 

level, with one limited cost sharing plan 

variation for each metal level. For each 

plan variation, the issuer may submit an 

estimate and supporting documentation 

of the dollar value of the cost-sharing 

reductions. We expect estimates and 

supporting documentation will be 

submitted as part of the electronic QHP 

application, which is described in 

further detail in the ‘‘Supporting 

Statement for Initial Plan Data 

Collection to Support QHP Certification 

and other Financial Management and 

Exchange Operations,’’ which was 

provided for public comment on 

November 21, 2012 (77 FR 69846). We 

estimate that it will take approximately 

1.0 hours to submit each response for a 

plan variation (0.5 hours by an actuary 

at a wage rate of $56.89 and 0.5 hours 

by an insurance analyst at a wage rate 

of $38.49. We estimate that each 

response for a plan variation will cost 

an issuer $47.69, for an estimated total 

issuer burden to submit responses for 4 

plan variations of $228,912 for the year. 

We plan to revise the supporting 

statement published under CMS form 

number 10433, which is pending final 

OMB approval, to account for this 

additional burden. 

In § 156.430(c), we propose that a 

QHP issuer submit to HHS, in the 

manner and timeframes established by 

HHS the actual amount of cost-sharing 

reductions provided to each enrollee. 

This information is necessary so that 

HHS can reconcile advance payments 

made throughout the year to actual costsharing amounts. While these 

information collection requirements are 

subject to the Paperwork Reduction Act, 

the information collection process and 

instruments associated with this 

requirement are currently under 

development. We will seek OMB 

approval and solicit public comments 

upon their completion. 

J. ICRs Regarding Reduction of an 

Enrollee’s Share of Premium to Account 

for Advance Payment of the Premium 

Tax Credit (§ 156.460) 

In § 156.460(a)(2), we propose that if 

a QHP issuer receives an advance 

payment of the premium tax credit on 

behalf of an individual, the QHP issuer 

must notify the Exchange of any 

reduction in premium through the 

standard enrollment acknowledgment in 

accordance with § 156.265(g). Because 

this notification will occur through the 

enrollment acknowledgement process 

that already exists under the final 

Exchange Establishment rule (77 FR 

18310), we believe that this requirement 

will impose minimal burden on QHP 

issuers, and that it will take an 

insurance analyst 5 minutes (at an 

hourly wage of $38.49), to collect and 

submit this information to each 

Exchange Therefore, we estimate a 

burden of $3.20 for each QHP issuer, 

and an aggregate burden of $3,849 for all 

1,200 QHP issuers, as a result of this 

requirement. 

K. ICRs Regarding Allocation of Rates 

and Claims Costs for Advance Payments 

of the Premium Tax Credit and CostSharing Reductions (§ 156.470) 

In § 156.470(a), we propose that an 

issuer provide to the Exchange annually 

for approval, for each metal level health 

plan offered or proposed to be offered in 

the individual market on the Exchange, 

an allocation of the rate and the 

expected allowed claims costs for the 

plan, for EHB, other than services 

described in § 156.280(d)(1), and any 

other services or benefits offered by a 

health plan that do not meet the 

definition of EHB. In § 156.470(b) we 

propose that an issuer of a stand-alone 

dental plan provide to the Exchange for 

approval a dollar allocation of the 

expected premium for the plan to the 

pediatric dental essential health benefit. 

In § 156.470(c) and (d), we propose that 

issuers ensure that the allocation 

described in paragraphs (a) and (b), 

respectively, are calculated following 

specific standards. Lastly, in 

§ 156.470(e), we propose that an issuer 

of a metal level health plan or standalone dental plan offered, or proposed 

to be offered, in the individual market 

on the Exchange, submit an actuarial 

memorandum with a detailed 

description of the methods and specific 

bases used to perform the allocations 

that would be required under 

paragraphs (a) and (b) of that section, 

demonstrating that the allocations meet 

the standards set forth in paragraphs (c) 

and (d). 

QHP issuers will submit these 

allocations and justifications through 

the Effective Rate Review program (Rate 

Increase Disclosure and Review Rule, 76 

FR 29964). The Rate Increase Disclosure 

and Review Rule develops a process to 

ensure the public disclosure of all 

information and justifications relating to 

unreasonable rate increases. To that 

end, the regulation establishes various 

reporting requirements for health 

insurance issuers, including a 

Preliminary Justification for a proposed 

rate increase, a Final Justification for 

any rate increase determined by a State 

or HHS to be unreasonable, and a 

notification requirement for 

unreasonable rate increases that will not 

be implemented. The Preliminary 

Justification includes data supporting 

the potential rate increase as well as a 

written explanation of the rate increase. 

For those rates HHS will be reviewing, 

issuers’ submissions also will include 

data and information that HHS will 

need to make a valid actuarial 

determination regarding whether a rate 

increase is unreasonable. Therefore, 

there will be no additional burden on 

QHP issuers that submit their rates 

through the Effective Rate Review 

program. The burden for the Effective 

Rate Review submission is already 

accounted for in OMB Control Number 

0938–1141. We are additionally revising 

the supporting statement of the PRA 

approved under OMB Control Number 

0938–1141 to clarify that we will be 

collecting this allocation information 

from metal plans to be offered on an 

Exchange, whether they are new or 

existing. 

This requirement will result in 

additional burden for stand-alone dental 

plans. We estimate that it will take each 

stand-alone dental plan 5 hours to 

prepare and submit this information to 

the Exchange. We assume that this 

requirement will require 3 hours of 

labor by an insurance analyst (at an 


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52Bureau of Labor Statistics, U.S. Department of 

Labor, National Compensation Survey: 

Occupational Earnings in the United States, 2011. 

United States Government Printing Office. May 

2011. Retrieved from http://www.bls.gov/ncs/ 

ncswage2010.htm. 

hourly wage rate of $38.49) and 2 hours 

of labor by an actuary (at an hourly 

wage rate of $56.89). Assuming 20 

stand-alone dental plans across the 

market, we estimate an aggregate burden 

of approximately $4,585 for all standalone dental plans to submit these 

allocations and justifications to the 

Exchange. We plan to revise the 

supporting statement published under 

HHS form number 10433, which is 

pending final OMB approval, to account 

for this additional burden. 

L. ICRs Regarding Medical Loss Ratio 

Reporting (§ 158.130, § 158.140, 

§ 158.162, § 158.221, § 158.240) 

This proposed rule would direct 

issuers to include all payments and 

receipt amounts related to the 

reinsurance, risk corridors and risk 

adjustment programs in the annual MLR 

report. 

The existing information collection 

requirement is approved under OMB 

Control Number 0938–1164. This 

includes the annual reporting form that 

is currently used by issuers to submit 

MLR information to HHS. Prior to the 

deadline for the submission of the 

annual MLR report for the 2014 MLR 

reporting year, and in accordance with 

the PRA, HHS plans to solicit public 

comment and seek OMB approval for an 

updated annual form that will include 

reporting of the premium stabilization 

payments and will reflect the changes in 

deduction for community benefit 

expenditures for federal income tax 

exempt not-for-profit issuers. 

TABLE 18—ESTIMATED FISCAL YEAR REPORTING RECORDKEEPING AND COST BURDENS

Regulation 

sections 

OMB Control 

No./CMS 

Form No. 

Respondents Responses 

Burden per 

response 

(hours) 

Total annual 

burden 

(hours) 

Hourly 

labor 

cost of 

reporting 52

($) 

Total labor 

cost 

($) 

Total 

capital/ 

maintenance costs 

($) 

Total cost 

($) 

§ 153.405 .............. 0938–NEW ............... 2,000 2,000 1.00 2,000 55.00 110,000 0 110,000 

§ 153.420 .............. 0938–1155 ............... 1,800 9,000,000,000 0.001 9,828,000 59.39 583,680,000 6,000,000 589,680,000 

§ 153.630(b) .......... 0938–1155 ............... 1,800 540,000 1.67 900,000 90.00 81,000,000 0 81,000,000 

§ 155.1030(a) ........ 0938–NEW/CMS– 

10433.

51 51 3.50 179 51.62 9,240 0 9,240 

§ 155.1030(b)(2) ... 0938–NEW/CMS– 

10433.

20 20 0.50 10 38.49 385 0 385 

§ 155.1030(b)(3) ... 0938–NEW/CMS– 

10433.

51 51 0.08 4.1 38.49 158 0 158 

§ 156.420 .............. 0938–NEW/CMS– 

10433.

1,200 13,200 1.50 19,800 52.51 1,039,698 0 1,039,698 

§ 156.430(a)(2) ..... 0938–NEW/CMS– 

10433.

1,200 4,800 1.00 4,800 47.69 228,912 0 228,912 

§ 156.460(a)(2) ..... 0938–NEW ............... 1,200 1,200 0.08 96 38.49 3,695 0 3,695 

§ 156.470 .............. 0938–NEW/CMS– 

10433.

20 20 5 100 45.85 4,585 0 4,585 

Total .............. .................................. 3,271 .......................... .................... .................... .................... 666,076,673 6,000,000 672,076,673 

V. 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. 

VI. Regulatory Impact Analysis 

A. Statement of Need 

This proposed rule implements 

standards related to premium 

stabilization programs (reinsurance, risk 

adjustment, and risk corridors), 

consistent with the Affordable Care Act. 

The purpose of these three programs is 

to protect issuers from the negative 

effects of adverse selection and to 

protect consumers from increases in 

premiums due to issuer uncertainty. 

The Premium Stabilization Rule 

provided that further details on the 

implementation of these programs, 

including the specific parameters 

applicable to these programs, would be 

forthcoming in this proposed rule. This 

proposed rule also includes provisions 

governing the cost-sharing reductions 

program, the advance payment of the 

premium tax credit program, the 

medical loss ratio program, the SHOP 

Exchange, and user fees for Federallyfacilitated Exchanges. 

B. Overall Impact 

We have examined the impacts of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation 

and Regulatory Review (January 18, 

2011), the Regulatory Flexibility Act 

(RFA) (September 19, 1980, Pub. L. 96– 

354), section 202 of the Unfunded 

Mandates Reform Act of 1995 (March 

22, 1995, Pub. L. 104–4), Executive 

Order 13132 on Federalism (August 4, 

1999), and the Congressional Review 

Act (5 U.S.C. 804(2)). 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. A 

regulatory impact analysis (RIA) must 

be prepared for rules with economically 

significant effects ($100 million or more 

in any 1 year). 

OMB has determined that this 

Payment Notice is ‘‘economically 

significant’’ within the meaning of 

section 3(f)(1) of Executive Order 12866, 

because it is likely to have an annual 

effect of $100 million in any one year. 

Accordingly, we have prepared an RIA 

that presents the costs and benefits of 

this proposed rule. 

It is difficult to discuss the wideranging effects of these provisions in 

isolation, though the overarching goal of 

the premium stabilization and 

Exchange-related provisions and 

policies in the Affordable Care Act is to 


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53Sommers, Ben et al. ‘‘Mortality and Access to 

Care among Adults after State Medicaid 

Expansions’’ New England Journal of Medicine. No: 

367 20121025–1034. 

54Finkelstein, A. et al. ‘‘The Oregon Health 

Insurance Experiment: Evidence from the First 

Year.’’ NBER Working Paper No. 17190, July 2011. 

make affordable health insurance 

available to individuals who do not 

have access to affordable employersponsored coverage. The provisions 

within this proposed rule are integral to 

the goal of expanding coverage. For 

example, the premium stabilization 

programs (risk adjustment, reinsurance, 

and risk corridors) decrease the risk of 

financial loss that health insurance 

issuers might otherwise expect in 2014 

and the cost-sharing reductions program 

and advanced payments of the premium 

tax credit assist low- and moderateincome consumers in purchasing health 

insurance. The combined impacts of 

these provisions affect the private 

sector, issuers, and customers, through 

increased access to health care services 

including preventive services, decreased 

uncompensated care, lower premiums, 

and increased plan (and thereby cost) 

transparency. Through the reduction of 

financial uncertainty for issuers and 

increased affordability for consumers, 

the provisions are expected to increase 

access to health coverage. 

Recent research 53 analyzed the effects 

of increased insurance coverage. The 

analysis studied the health effects of 

expanded Medicaid eligibility in three 

States (New York, Maine, and Arizona) 

with comparable States that did not 

expand Medicaid over a multiyear time 

period. The study found that increased 

coverage resulted in: 

• Significant reduction in mortality 

(19.6 deaths per 100,000); 

• Increased rate of self-reported 

health status (by three percent); and 

• Reduction in cost-related delays in 

care (by 21 percent). 

While these results may not be 

entirely generalizable given the 

population and coverage type, they do 

replicate other research findings 54 of 

the importance of health coverage in 

improving health and reducing 

mortality. 

There are administrative costs to 

States to set up and administer these 

programs. For issuers not receiving 

payments, any contribution is an 

additional cost, which an issuer could 

pass on to beneficiaries through 

premium increases. There are also 

reporting costs for issuers to submit data 

and financial information. This RIA 

discusses in detail the benefits and costs 

of the provisions in this proposed rule. 

In this RIA, we discuss programs and 

requirements newly implemented by the 

proposed rule, such as certain 

provisions related to the cost-sharing 

reductions program, the advance 

payment of the premium tax credit 

program, the medical loss ratio program, 

the SHOP Exchange, and user fees for a 

Federally-facilitated Exchange, as well 

as new regulatory provisions for the 

three premium stabilization programs 

(reinsurance, risk adjustment, and risk 

corridors) which had been introduced as 

part of the Premium Stabilization Rule 

(77 FR 17220). In addition to building 

on the RIA for that earlier rule, we are 

able, for the analysis of much of the 

proposed rule, to use the Congressional 

Budget Office’s estimates of the 

Affordable Care Act’s impact on federal 

spending, revenue collection, and 

insurance enrollment. 

C. Impact Estimates of the Payment 

Notice Provisions and Accounting Table 

In accordance with OMB Circular A– 

4, Table 19 below depicts an accounting 

statement summarizing HHS’ 

assessment of the benefits, costs, and 

transfers associated with this regulatory 

action. 

This proposed rule implements 

standards for programs that will have 

numerous effects, including providing 

consumers with affordable health 

insurance coverage, reducing the impact 

of adverse selection, and stabilizing 

premiums in the individual and small 

group health insurance markets and in 

an Exchange. We are unable to quantify 

benefits of the proposed rule—such as 

improved health and longevity due to 

increased insurance enrollment—and 

some costs—such as the cost to society 

of providing additional medical services 

to newly-enrolled individuals. Direct 

costs in the table below reflect 

administrative costs to States, health 

insurance issuers, and Exchanges. The 

effects in Table 19 reflect estimated 

cost-sharing reduction payments, which 

are transfers from the General Fund of 

the U.S. Treasury to consumers who 

qualify for cost-sharing reductions. 

These transfer estimates are based on 

the Congressional Budget Office’s March 

2012 baseline estimates, and have been 

annualized over the 5 year period from 

FYs 2013–2017. Estimated transfers do 

not yet reflect any user fees paid by 

insurance issuers for the Federallyfacilitated Exchange because we cannot 

estimate those fee totals until the 

number of States operating an Exchange 

is determined. 

TABLE 19—ACCOUNTING TABLE

Category Estimates 

Units 

Year dollar 

Discount 

rate 

(%) 

Period 

covered 

Benefits 

Annualized Monetized ($millions/year) ..................................................................... Not Estimated 

Not Estimated 

Costs 

Annualized Monetized ($millions/year) ..................................................................... $518.85 2013 7 2013–2017 

$529.56 2013 3 2013–2017 

Transfers 

Federal Annualized Monetized ($millions/year) ....................................................... $6,513.85 2013 7 2013–2017 

$6,787.26 2013 3 2013–2017 


sroberts on DSK5SPTVN1PROD with 
73196 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

This impact analysis for the premium 

stabilization programs references 

estimates from CBO and CMS. CBO’s 

estimates remain the most 

comprehensive accounting of all the 

interacting provisions pertaining to the 

Affordable Care Act, and contain 

Federal budget impact estimates of some 

provisions that have not been 

independently estimated by CMS. Based 

on our review, we expect that the 

provisions of this proposed rule will not 

significantly alter CBO’s estimates of the 

budget impact of the reinsurance, risk 

corridors, and risk adjustment programs. 

The requirements of these programs are 

well within the parameters used in the 

modeling of the Affordable Care Act. 

Our review and analysis of the 

requirements indicate that the impacts 

are likely within the model’s margin of 

error. 

For this RIA, we are updating the 

estimates for the reinsurance and risk 

adjustment programs to reflect the fiveyear period from fiscal years (FYs) 2013 

through 2017. Table 20 includes the 

CBO estimates for outlays and receipts 

for the reinsurance and risk adjustment 

programs from FYs 2013 through 2017. 

These estimates for reinsurance and risk 

adjustment reflect CBO’s scoring of 

these provisions. Unlike the current 

policy, CBO assumed risk adjustment 

payments and charges would begin to be 

made in 2014, when in fact these 

payments and charges will begin in 

2015 as discussed above. Additionally, 

the CBO estimates do not reflect the $5 

billion in reinsurance contributions that 

are submitted to the U.S. Treasury. 

There are no outlays and receipts for 

reinsurance and risk adjustment in 2013 

because the provisions do not take effect 

until 2014. 

CBO did not separately estimate the 

program costs of risk corridors, but 

assumed aggregate collections from 

some issuers would offset payments 

made to other issuers. Table 20 

summarizes the effects of the risk 

adjustment and reinsurance programs 

on the Federal budget, with the 

additional, societal effects of this 

proposed rule discussed in this 

Regulatory Impact Analysis. 

TABLE 20—ESTIMATED FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS FOR THE REINSURANCE AND RISK ADJUSTMENT

PROGRAMS FROM FYS 2013–2017, IN BILLIONS OF DOLLARS

Year 2013 2014 2015 2016 2017 2013–2017 

Reinsurance and Risk Adjustment Program Payments * .................... 11 18 18 18 65 

Reinsurance and Risk Adjustment Program Receipts * .. .................... 12 16 18 18 64 

* Risk adjustment program payments and receipts lag by one quarter. Receipt will fully offset payments over time. 

Source: Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010. 

Risk Adjustment 

Risk adjustment is a permanent 

program administrable by States that 

operate an HHS-approved Exchange, 

with risk adjustment criteria and 

methods established by HHS, with 

States having the option of proposing 

alternative methodologies. Risk 

adjustment is generally applied to nongrandfathered health plans offered in 

the individual and small group markets, 

both inside and outside of the Exchange. 

A State that does not operate an 

Exchange cannot operate risk 

adjustment, although a State operating 

an Exchange can elect not to run risk 

adjustment. For States that do not 

operate an Exchange, do not elect to 

operate risk adjustment, or do not obtain 

HHS approval to operate risk 

adjustment, HHS will administer the 

risk adjustment functions on the State’s 

behalf. 

The Exchange may operate risk 

adjustment, although a State may also 

elect to have an entity other than the 

Exchange perform the risk adjustment 

functions, provided that the State is 

approved by HHS to operate risk 

adjustment. Similar to the approach for 

reinsurance, multiple States may 

contract with a single entity to 

administer risk adjustment, provided 

that risk is pooled at the State level and 

that each State is approved to operate 

their risk adjustment program. Having a 

single entity administer risk adjustment 

in multiple States may provide 

administrative efficiencies. In this 

proposed rule, we propose to establish 

a risk adjustment State approval 

process. We describe these 

administrative costs in the Collection of 

Information Requirements section of 

this proposed rule. 

The details of the HHS-developed risk 

adjustment methodology are specified 

in this proposed rule. The HHSdeveloped risk adjustment methodology 

is based on a model that is concurrent 

and uses demographic and diagnosis 

information in a benefit year to predict 

total plan liability in the benefit year. 

The national payment transfer 

methodology is based on the State 

average premium to ensure that 

payments and charges net to zero. 

States may use this methodology or 

develop and propose alternate risk 

adjustment methodologies that meet 

Federal standards. Once HHS approves 

an alternate risk adjustment 

methodology, it will be considered a 

Federally certified risk adjustment 

methodology that any State may elect to 

use. In this proposed rule, we lay out 

the criteria that HHS will use to 

evaluate alternate risk adjustment 

methodologies. Approved Federally 

certified risk adjustment methodologies 

will be published in the final HHS 

notice of benefit and payment 

parameters. 

States that elect to develop their own 

risk adjustment methodologies are likely 

to have increased administrative costs. 

Developing a risk adjustment 

methodology requires complex data 

analysis, including population 

simulation, predictive modeling, and 

model calibration. States that elect to 

use the HHS developed methodology 

would likely reduce administrative 

costs. We describe these administrative 

costs in the Collection of Information 

Requirements section of this proposed 

rule. 

In the Premium Stabilization Rule, we 

defined a risk adjustment covered plan 

as any health insurance coverage offered 

in the individual or small group market 

with the exception of grandfathered 

health plans, group health insurance 

coverage described in § 146.145(c) of 

this subchapter, individual health 

insurance coverage described in 

§ 148.220 of this subchapter, and any 

other plan determined not to be a risk 

adjustment covered plan in the annual 

HHS notice of benefit and payment 

parameters. In this proposed rule, we 

clarify that plans not subject to certain 

market reforms and student health plans 

will not be subject to the issuer 

requirements in subparts G and H of 45 

CFR part 153. 

States have the flexibility to merge the 

individual and small group markets into 

one risk pool, or keep them separate for 

the purposes of risk adjustment. Risk 

adjustment must be conducted 

separately in unmerged markets. 

Developing the technology 

infrastructure required for data 


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Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73197 

55Congressional Budget Office. 2011. Letter to 

Hon. Nancy Pelosi. March 20, 2010. 

submission will likely require an 

administrative investment. The risk 

adjustment process will require 

significant amounts of demographic and 

diagnostic data to run through a risk 

assessment model to determine 

individual risk scores that form the 

basis for plan and State averages. The 

Premium Stabilization Rule requires 

States to collect or calculate individual 

risk scores at a minimum. States may 

vary the amount and type of data 

collected, provided that States meet 

specified data collection standards. 

Administrative costs will vary across 

States and health insurance issuers 

depending on the type of data collection 

approach used in the State. In States 

opting to operate risk adjustment using 

a distributed model of data collection, 

the costs associated with mapping and 

storing the required data and, in some 

cases, the costs associated with running 

the risk adjustment software will likely 

be borne by the issuer. 

States and issuers that already have 

systems in place for data collection and 

reporting will have reduced 

administrative costs. For example, 

issuers that already report data for 

Medicare Advantage (MA) or Medicaid 

Managed Care may see minimal 

additional administrative burden for 

risk adjustment. Additionally, some 

States risk-adjust their Medicaid 

Managed Care programs. States with allpayer or multi-payer claims databases 

may need to modify their systems to 

meet the requirements of risk 

adjustment. However, these costs of 

modification will be less than the costs 

of establishing these systems. States and 

issuers that do not have existing 

technical capabilities will have larger 

administrative costs related to 

developing necessary infrastructure. 

Issuer characteristics, such as size and 

payment methodology, will also affect 

administrative costs. In general, national 

issuers will likely be better prepared for 

the requirements of risk adjustment than 

small issuers. Additionally, 

administrative costs may be greater for 

issuers whose providers are paid by 

capitation and who do not receive 

claims or encounter data, as they will 

have to modify their systems to account 

for the information required for risk 

adjustment methodology. 

In this proposed rule, we provide 

more details on the data collection 

approach when we operate risk 

adjustment on behalf of a State. The 

Premium Stabilization Rule established 

that when HHS operates risk adjustment 

on behalf of a State, it will use a 

distributed approach. We believe that 

this approach minimizes issuer burden 

while protecting enrollee privacy. 

Under a distributed approach, issuers 

will need to format risk adjustment data, 

and maintain that data in compliance 

with HHS-established guidelines and 

applicable standards. We describe these 

administrative costs in the Collection of 

Information Requirements section of 

this proposed rule. 

The Premium Stabilization Rule 

directs States to audit a sample of data 

from each issuer and to ensure proper 

implementation of risk adjustment 

software by all issuers that participate in 

risk adjustment. States may extrapolate 

results from the sample to adjust the 

average actuarial risk for the plan. This 

approach is consistent with the 

approach now used in Medicare 

Advantage, where audit sample error 

rates will be extrapolated to contractlevel payments to recoup overpayment 

amounts. 

In this proposed rule, we propose data 

validation standards for when HHS 

operates risk adjustment on behalf of a 

State. We are proposing that HHS 

conduct a data validation program 

consisting of six stages: (1) Sample 

selection; (2) initial validation audit; (3) 

second validation audit; (4) error 

estimation; (5) appeals; and (6) payment 

adjustments. Issuers would engage 

independent initial auditors to conduct 

an initial audit of an HHS-selected 

sample of risk adjustment data. HHS 

would retain a second validation 

auditor to verify the findings of the 

initial validation audit and provide 

error estimates. However, in this 

proposed rule we propose that there be 

no adjustments to payments and charges 

based on the error estimates for benefit 

years 2014 and 2015. We describe these 

administrative costs in the Collection of 

Information Requirements section of 

this proposed rule. We are also 

proposing a process to appeal data 

validation findings. Issuers will have an 

opportunity to appeal findings from 

both the initial validation audit and 

second validation audit. 

Risk adjustment transfers dollars from 

health plans with lower-risk enrollees to 

health plans with higher-risk enrollees. 

From 2014 through 2016, it is estimated 

that $27 billion will be transferred 

between issuers. We are updating the 

cost estimates for this RIA to include 

2017, using CBO estimates.55 From 2014 

through 2017, we estimate that there 

will be $45 billion transferred between 

issuers. 

Risk adjustment protects against 

adverse selection by allowing insurers 

to set premiums according to the 

average actuarial risk in the individual 

and small group market without respect 

to the type of risk selection the insurer 

would otherwise expect to experience 

with a specific product offering in the 

market. This should lower the risk 

premium and allow issuers to price 

their products closer to the average 

actuarial risk in the market. In addition, 

it mitigates the incentive for health 

plans to avoid unhealthy members. 

The risk adjustment program also 

serves to level the playing field inside 

and outside of the Exchange, as 

payments and charges are applied to all 

non-grandfathered individual and small 

group plans. This mitigates the potential 

for excessive premium growth within 

the Exchange due to anticipated adverse 

selection. 

Reinsurance 

The Affordable Care Act creates a 

transitional reinsurance program for the 

years 2014, 2015, and 2016. Each State 

is eligible to establish a reinsurance 

program. If a State establishes a 

reinsurance program, the State must 

enter into a contract with an applicable 

reinsurance entity to carry out the 

program. If a State does not elect to 

establish its own reinsurance program, 

HHS will carry out the reinsurance 

program for that State. 

The Affordable Care Act requires a 

reinsurance pool of $10 billion in 2014, 

$6 billion in 2015, and $4 billion in 

2016. It also requires annual 

contributions to the U.S. Treasury of $2 

billion, $2 billion, and $1 billion for 

those years, respectively. These 

contributions are funded by health 

insurance issuers and third party 

administrators on behalf of self-insured 

group health plans. Section 1341(b)(3) 

of the Affordable Care Act directs the 

Secretary of HHS to establish the 

method for determining contribution 

levels for the program. HHS proposes to 

establish a national per capita 

contribution rate designed to collect the 

$12.02 billion in 2014 to cover the 

required $10 billion in reinsurance 

payments, the $2 billion contribution to 

the U.S. Treasury, and the additional 

$20.3 million to cover the Federal 

administrative expenses of operating the 

reinsurance program in 2014. We 

continue to estimate that we will collect 

these amounts authorized from 2014 

through 2016 for the reinsurance pool, 

including the annual contributions to 

the U.S. Treasury. 

HHS proposes to collect the required 

contributions under the national 

contribution rate from health insurance 

issuers and self-insured group health 


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73198 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

56The Department of Labor has reviewed this 

proposed rule and advised that paying required 

reinsurance contributions would constitute a 

permissible expense of the plan for purposes of 

Title I of the Employee Retirement Income Security 

Act (ERISA) because the payment is required by the 

plan under the Affordable Care Act as interpreted 

in this proposed rule. (See generally, Advisory 

Opinion 2001–01A to Mr. Carl Stoney, Jr., available 

at www.dol.gov/ebsa discussing settlor versus plan 

expenses.) 

plans.56 States establishing their own 

reinsurance program may collect 

additional contributions for 

administrative costs and/or reinsurance 

payments. Section 1341(a)(3)(B) of the 

Affordable Care Act requires that the 

reinsurance contribution amount for 

each issuer reflect each issuers’ fully 

insured commercial book of business for 

all major medical products. In this 

proposed rule, we clarify which types of 

health insurance coverage and selfinsured group health plans are to make 

reinsurance contributions, and which 

are not. This clarification does not affect 

the amounts authorized to be collected 

for reinsurance. 

A State that establishes a reinsurance 

program may elect to collect additional 

contributions to provide funding for 

administrative expenses or 

supplemental reinsurance payments. 

Additional contributions for 

administrative expenses may be 

collected by the State’s applicable 

reinsurance entity, at the State’s 

election. Any additional contributions 

for reinsurance payments must be 

collected by the State’s applicable 

reinsurance entity. In this proposed 

rule, we propose to collect 

administrative expenses for HHSoperated reinsurance programs. A State 

that operates the reinsurance program 

bears the administrative costs of the 

applicable reinsurance entity, and must 

ensure that the reinsurance entity 

complies with program requirements. 

HHS will share some of its collections 

for administrative costs with States that 

run the program. If a State operates its 

own reinsurance program, HHS would 

transfer $0.055 of the per capita 

administrative fee to the State for 

purposes of administrative expenses 

incurred in making reinsurance 

payments, and retain the remaining 

$0.055 to offset the costs of contribution 

collection. A State may have more than 

one reinsurance entity, and two or more 

States may jointly enter into an 

agreement with the same applicable 

reinsurance entity to carry out 

reinsurance in their State. 

Administrative costs will likely increase 

if multiple reinsurance entities are 

established within a State, whereas 

administrative efficiencies may be 

found if multiple States contract with 

one applicable reinsurance entity. 

We propose in this proposed rule an 

annual collections and payment cycle. 

We also considered a quarterly 

collections and payment cycle, as 

envisioned by the Premium 

Stabilization Rule. However, a quarterly 

cycle would impose significant costs on 

contributing entities. Because HHS and 

States operating reinsurance would 

likely need to hold back a significant 

portion of reinsurance funds until the 

end of the year to ensure equitable 

payment of requests for reinsurance 

payments. We believe that issuers 

would receive only limited benefits 

from a quarterly payment cycle. 

In § 153.100(a), a State is required to 

issue an annual notice of benefit and 

payment parameters specific to that 

State if it elects to: (i) Modify the data 

requirements from the HHS-operated 

reinsurance program; (ii) collect 

additional reinsurance contributions, 

under § 153.220(d); or (iii) use more 

than one applicable reinsurance entity. 

States that establish a reinsurance 

program will also maintain any records 

associated with the reinsurance 

program, as set forth in § 153.240(c). In 

addition, a State will notify HHS if it 

intends to collect additional 

administrative expenses and provide 

justification for the additional 

collection. The Premium Stabilization 

Rule established that reinsurance 

contributions will be based on a per 

capita amount. The per capita approach 

would be less complex to administer in 

comparison to the percent of premium 

approach that HHS considered but 

ultimately decided not to pursue. 

Further, the per capita approach will 

better enable HHS to maintain the goals 

of the reinsurance program by providing 

issuers with a more straightforward 

approach to reinsurance contributions. 

States would be permitted to collect 

additional contributions towards 

supplemental reinsurance payments. 

We describe the administrative costs in 

the Collection of Information 

Requirements section of this proposed 

rule. 

In this proposed rule, we establish the 

methodology to be used for counting 

covered lives for purposes of calculating 

reinsurance contributions. This 

methodology is based upon counting 

methods permitted under the PCORTF 

Rule. We believe that relying on a 

previously established process set forth 

in the PCORTF Rule for counting 

enrollees will minimize issuer burden 

for conducting these counts. In the 

Collection of Information Requirements 

section of this proposed rule, we 

describe the administrative costs for 

issuers associated with the data 

requirements in § 153.400(b) for all 

contributing entities both inside and 

outside the Exchange. The contributing 

entities would be required to provide 

enrollment data to HHS to substantiate 

contribution amounts. 

Reinsurance payments will be made 

to issuers of individual insurance 

coverage for high claims costs for 

enrollees. In this proposed rule, we 

propose a national attachment point, 

national reinsurance cap, and national 

coinsurance rate. In the Premium 

Stabilization Rule, we established that 

payments will be made on a portion of 

claims costs for enrollees in reinsurance 

eligible plans incurred above an 

attachment point, subject to a 

reinsurance cap. 

Use of a reinsurance cap, as well as 

the requirement for health insurance 

issuer costsharing above the attachment 

point and below the cap, may 

incentivize health insurance issuers to 

control costs. This approach based on 

claims costs is simpler to implement 

and more familiar to health insurance 

issuers, and therefore will likely result 

in savings in administrative costs as 

compared to a condition-based 

reinsurance approach. The program 

costs of reinsurance are expected to be 

reflected in changes to health insurance 

premiums. 

A State operating its own reinsurance 

program may opt to supplement the 

reinsurance parameters proposed by 

HHS only if the State elects to collect 

additional contributions for 

supplemental reinsurance payments or 

use additional State funds for 

supplemental reinsurance payments, 

and must specify these supplemental 

payment parameters in its State notice 

of benefit and payment parameters. 

In this proposed rule, we propose that 

States provide a process through which 

a reinsurance-eligible plan that does not 

generate individual enrollee claims may 

derive costs to request reinsurance 

payments. In addition, we clarify that 

when HHS operates a reinsurance 

program on behalf of a State that these 

plans may price encounters in 

accordance with its existing principal, 

internal encounter pricing methodology. 

Additionally, we propose in 

§ 153.240(b) of this proposed rule that 

States operating their own reinsurance 

program must notify issuers of 

reinsurance payments to be made, as 

well as provide reinsurance-eligible 

plans an estimate of expected requests 

for reinsurance payments. Moreover, we 

propose for both State- and HHSoperated reinsurance programs, that 

only plans subject to the 2014 market 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73199 

57Swartz, K. ‘‘Health New York: Making 

Insurance More Affordable for Low-Income 

Workers.’’ The Commonwealth Fund. November 

2001. 

58 Issuers represent companies (for example, 

NAIC company code). These estimates do not 

include issuers of plans with total annual limits of 

$250,000 or less (sometimes referred to as ‘‘minimed’’ plans) or expatriate plans. 

reform rules would be eligible for 

reinsurance payment. 

In this proposed rule, we also provide 

more details on the data collection 

approach for HHS-operated reinsurance 

programs. HHS plans to use the same 

distributed data collection approach 

used for risk adjustment; however, only 

data elements necessary for reinsurance 

claim selection will be considered for 

the purpose of determining reinsurance 

payments. In the Collection of 

Information Requirements section, we 

describe the administrative costs 

required in § 153.410 for issuers of 

reinsurance-eligible plans in States 

where HHS is operating reinsurance to 

receive reinsurance payments. We 

believe details on the reinsurance data 

collection approach proposed in the 

HHS notice of benefit and payment 

parameters are reflected in these cost 

estimates. 

All health insurance issuers 

contribute to the reinsurance pool, 

because successful implementation of 

the range of reforms in 2014 benefit all 

of their enrollees (for example, those 

reforms should lead to fewer 

unreimbursed health costs, lowering the 

costs for all issuers and group health 

plans) while only health insurance 

issuers with plans in the individual 

market are eligible to receive payments. 

This serves to stabilize premiums in the 

individual market while having a 

minimal impact on large group issuers 

and plans. Reinsurance will attenuate 

individual market rate increases that 

might otherwise occur because of the 

immediate enrollment of higher risk 

individuals, potentially including those 

currently in State high-risk pools. It will 

also help prevent insurers from building 

in risk premiums to their rates given the 

unknown health of their new enrollees. 

It is expected that the cost of 

reinsurance contributions will be 

roughly equal to one percent of 

premiums in the total market in 2014, 

less in 2015 and 2016, and will end in 

2017. In contrast, it is anticipated that 

reinsurance payments will result in 

premium decreases in the individual 

market of between 10 and 15 percent. 

Evidence from the Healthy New York 

(Healthy NY) program 57 supports the 

magnitude of these estimates. In 2001, 

the State of New York began operating 

Healthy NY and required all HMOs in 

the State to offer policies for which 

small businesses and low-income 

individuals would be eligible. The 

program contained a ‘‘stop-loss’’ 

reinsurance provision designed to lower 

premiums for enrollees. Under the 

program, if any enrollee incurred 

$30,000 in annual claims, his or her 

insurer was reimbursed for 90 percent of 

the next $70,000 in claims. Premiums 

for Healthy NY policies were about 15 

percent to 30 percent less than those for 

comparable HMO policies in the small 

group market. 

Medical Loss Ratio 

This proposed rule proposes to amend 

the MLR and rebate calculation 

methodologies to include payments and 

receipts related to the premium 

stabilization programs. The definition of 

premium revenue would be modified to 

account for these payments and 

receipts. When the MLR annual 

reporting form is updated for the 

reporting year 2014 and later, premium 

stabilization payment and receipt 

amounts would be considered a part of 

gross earned premium reported to the 

Secretary, similar to other elements 

involved in the derivation of earned 

premium. The MLR annual reporting 

form would then account for premium 

stabilization payment and receipt 

amounts by removing them from 

adjusted earned premium, so that these 

amounts do not have a net impact on 

the adjusted earned premium used in 

calculating the MLR denominator and 

rebates. Additionally, this proposed rule 

proposes to amend the MLR calculation 

methodology to add or subtract 

premium stabilization payment(s) and 

receipt amounts in the MLR numerator, 

consistent with the way the statute 

prescribes the calculation methodology 

for risk corridors. These adjustments 

will reduce or increase issuers’ MLRs, 

and may increase or reduce issuers’ 

rebates, respectively. The amended 

methodology will result in a more 

accurate calculation of MLR and rebate 

amounts, since it will reflect issuers’ 

actual claims-related expenditures. This 

approach will also support the 

effectiveness of both the MLR and the 

premium stabilization programs by 

correctly offsetting the premium 

stabilization payment and receipt 

amounts against rebates, consistently 

with the risk corridors calculation 

methodology adopted in § 153.530. 

Based on HHS’s experience with the 

2011 MLR reporting year, there are 466 

health insurance issuers 58 offering 

coverage in the individual and group 

markets to almost 80 million enrollees 

that will be affected by the proposed 

amendment to account for premium 

stabilization payments in MLR and 

rebate calculations. In 2012, an 

estimated 54 issuers paid $396 million 

in rebates for the 2011 MLR reporting 

year to approximately 4 million 

enrollees in the individual markets, 

while 59 issuers in the small group 

market provided approximately $289 

million in rebates to policyholders and 

subscribers on behalf of over 3 million 

enrollees, and 47 issuers in the large 

group market provided approximately 

$403 million in rebates to policyholders 

and subscribers on behalf of almost 6 

million enrollees. Lack of data makes it 

difficult to predict how high-risk 

enrollees will be distributed among 

issuers and, therefore, how MLRs and 

total rebates would be affected. Issuers 

with relatively low-risk enrollees are 

likely to have positive net premium 

stabilization payments (that is, 

payments would be greater than 

receipts) and, if so, their MLRs will 

increase as a result of the amended MLR 

calculation methodology. If any of these 

issuers fail to meet the MLR standard, 

taking the premium stabilization 

payments and receipts into account in 

the MLR calculations will result in 

lower rebate payments. Issuers with 

relatively high-risk enrollees are likely 

to have positive net receipts (that is, 

receipts would be greater than 

payments) and, if so, their MLRs would 

decrease as a result. If any such issuer 

fails to meet the MLR standard, its 

rebate amount will increase. Since such 

issuers are likely to have high claims 

expenditures and therefore, high MLRs, 

they would be less likely to owe rebates. 

So we do not anticipate that rebates will 

go up for such issuers. 

The Payment Notice proposes to also 

change the deadlines for MLR report 

submission and rebate payments so that 

the deadlines occur after all the 

premium stabilization payment and 

receipt amounts are determined. The 

change in the deadlines will allow 

issuers to calculate the MLR and rebate 

amounts based on actual calculated 

payments and receipts rather than 

estimated amounts and will improve the 

accuracy of the rebate payments and 

reports. This will also reinforce the 

effectiveness of the premium 

stabilization programs, since issuers are 

less likely to pay higher or lower rebates 

based on inaccurate payment and 

receipt estimations. Accordingly, we 

propose to change the date of MLR 

reporting to the Secretary from June 1 to 

July 31, and the rebate due date from 

August 1 to September 30. 

Issuers will also have to report their 

payments and receipts related to the 

premium stabilization programs in the 


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73200 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

59Brook, et al., at footnote 5 above. 

annual MLR report beginning in the 

2014 MLR reporting year. Once issuers 

calculate these amounts, which they 

will be required to do regardless of the 

MLR reporting requirements, the 

administrative cost of including these 

amounts in the report will be minimal. 

The current MLR calculation 

methodology allows an issuer to deduct 

from premiums in the calculation of an 

issuer’s MLR and rebates either the 

amount it paid in State premium taxes, 

or the amount of its community benefit 

expenditures up to a maximum of the 

highest premium tax rate in the State, 

whichever is greater, as provided in the 

final rule with comment period (76 FR 

76574) published on December 7, 2011. 

This proposed rule proposes to amend 

the MLR methodology and allow a 

federal income tax exempt not-for-profit 

issuer to deduct from premium both 

community benefit expenditures and 

State premium taxes, limited to the 

higher of the State’s highest premium 

tax rate or 3 percent of premium. Other 

issuers would continue to use the 

current methodology. This would create 

a level playing field for Federal income 

tax exempt not-for-profit issuers, who 

are required to make community benefit 

expenditures to maintain their federal 

income tax exempt status and would not 

discourage community benefit 

expenditures. This is likely to increase 

the MLRs for tax exempt not-for-profit 

issuers. If any of these issuers fail to 

meet the MLR standard, then this will 

result in lower rebate payments. 

Based on MLR annual reports 

submitted by issuers for the 2011 MLR 

reporting year, we estimate that there 

are 132 not-for-profit issuers that will be 

affected by this proposed amendment. 

In the absence of data on tax exempt 

not-for-profit issuers, we use the 

estimates for not-for-profit issuers in our 

analysis. Therefore, the actual impact is 

likely to be lower. For the 20 not-forprofit issuers that submitted data on 

community benefit expenditures, such 

expenditures as a percentage of earned 

premiums ranged from 0.04 percent to 

4.11 percent with an average of 1.57 

percent, which is likely to be less than 

the current limit for most of the issuers 

and is less than the proposed limit as 

well. We assume that issuers will 

maintain the level of community benefit 

expenditures as reported in their MLR 

annual reports for the 2011 MLR 

reporting year. We estimate that under 

the current policy, in the 2012 MLR 

reporting year, 17 not-for-profit issuers 

will owe approximately $182 million in 

rebates to approximately 1.5 million 

enrollees. The proposed change in 

treatment of community benefit 

expenditures for such issuers will have 

minimal effect on their MLRs and 

rebates under this assumption, since 

their current expenditures are below the 

current deduction limits. 

Issuers with lower rebate payments as 

a result of these adjustments would 

need to send fewer rebate notices, and 

therefore, would have lower 

administrative costs related to rebates 

and rebate notices. 

Risk Corridors 

The Affordable Care Act creates a 

temporary risk corridors program for the 

years 2014, 2015, and 2016 that applies 

to QHPs. The risk corridors program 

creates a mechanism for sharing risk for 

allowable costs between the Federal 

government and QHP issuers. The 

Affordable Care Act establishes the risk 

corridors program as a Federal program; 

consequently, HHS will operate the risk 

corridors program under Federal rules 

with no State variation. The risk 

corridors program will help protect 

against inaccurate rate setting in the 

early years of the Exchanges by limiting 

the extent of issuer losses and gains. 

QHP issuers must submit to HHS data 

on premiums earned, allowable claims 

and quality costs, and allowable 

administrative costs, reflecting data 

categories required under the Medical 

Loss Ratio Interim Final Rule (75 FR 

74918). In designing the program, HHS 

has sought to leverage existing data 

reporting for Medical Loss Ratio 

purposes as much as possible. 

As noted above, the risk corridors 

program is intended to protect QHP 

issuers in the individual and small 

group market against inaccurate rate 

setting. Due to uncertainty about the 

population during the first years of 

Exchange operation, issuers may not be 

able to predict their risk accurately, and 

their premiums may reflect costs that 

are ultimately lower or higher than 

predicted. To determine whether an 

issuer pays into, or receives payments 

from, the risk corridors program, HHS 

will compare allowable costs 

(essentially, claims costs) and the target 

amount—the difference between a 

plan’s earned premiums and allowable 

administrative costs. In this proposed 

rule, we have provided for adjustments 

to the risk corridors calculation to 

account for taxes and profits within its 

allowable administrative costs. The 

threshold for risk corridor payments and 

charges is reached when a QHP issuer’s 

allowable costs exceed, or fall short of, 

the target amount by at least three 

percent. A QHP with allowable costs 

that are at least three percent less than 

its target amount will pay into the risk 

corridors program. Conversely, HHS 

will pay a QHP with allowable costs 

that exceed its target amount by at least 

3 percent. Risk corridor payments and 

charges are a percentage of the 

difference between allowable costs and 

target amount and therefore are not on 

a ‘‘first dollar’’ basis. 

In this proposed rule, HHS also 

specified the annual schedule for the 

risk corridors program, including dates 

for claims run-out, data submission, and 

notification of risk corridors payments 

and charges. 

We believe the proposals on the risk 

corridors program in this proposed rule 

have a negligible effect on the impact of 

the program established by and 

described in the Premium Stabilization 

Rule. 

Advance Payments of the Premium Tax 

Credit and Cost-Sharing Reductions 

The impact analysis for Payment 

Notice provisions relating to advance 

payments of the premium tax credit and 

cost-sharing reductions references 

estimates from the CBO’s March 2012 

baseline projections. Based on our 

review, we expect that those proposed 

provisions will not alter CBO’s March 

2012 baseline estimates of the budget 

impact of those two programs. The 

requirements are well within the 

parameters used in the modeling of the 

Affordable Care Act. Our review and 

analysis of the requirements indicate 

that the impacts are likely within the 

model’s margin of error. The Affordable 

Care Act provides for premium tax 

credits and the reduction or elimination 

of cost sharing for certain individuals 

enrolled in QHPs offered through the 

Exchanges. This assistance will help 

many low- and moderate-income 

individuals and families obtain health 

insurance—for many people, cost 

sharing is a barrier to obtaining needed 

health care.59

Section 1402(a)–(c) of the Affordable 

Care Act directs issuers to reduce cost 

sharing for essential health benefits for 

individuals with household incomes 

between 100 and 400 percent of the FPL 

who are enrolled in a QHP offered at the 

silver level of coverage in the individual 

market on the Exchange and are eligible 

for a premium tax credit or advance 

payment of premium tax credits. The 

Affordable Care Act, at section 1402(d), 

also directs issuers to eliminate cost 

sharing for Indians (as defined in 

§ 155.300) with a household income at 

or below 300 percent of the FPL who are 

enrolled in a QHP of any metal level in 

the individual market on the Exchange, 

and prohibits issuers from requiring cost 

sharing for Indians, regardless of 

household income, for items or services 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 73201 

60 ‘‘Updated Estimates for the Insurance Coverage 

Provisions of the Affordable Care Act,’’ 

Congressional Budget Office, March 2012. 

3Congressional Budget Office, ‘‘Letter to the 

Honorable Evan Bayh: An Analysis of Health 

Insurance Premiums under the Patient Protection 

and Affordable Care Act,’’ Washington, DC, 2009. 

61Available at: http://cciio.cms.gov/resources/ 

files/Files2/03162012/hie3r-ria-032012.pdf. 

furnished directly by the IHS, an Indian 

Tribe, a Tribal Organization, or an 

Urban Indian Organization or through 

referral under contracted health 

services. Finally, the Affordable Care 

Act, at section 1412, provides for the 

advance payments of the premium tax 

credit and cost-sharing reductions. 

A subset of the persons who enroll in 

QHPs in the individual market through 

the Exchanges beginning in 2014 will be 

affected by the provisions relating to 

advance payments of premium tax 

credit and cost-sharing reductions 

(those with household incomes below 

400 percent of the FPL and Indians 

enrolled in QHPs). In March 2012, CBO 

estimated that there will be 

approximately 20 million enrollees in 

Exchange coverage by 2016, including 

approximately 16 million Exchange 

enrollees who will be receiving 

subsidies.60 Participation rates among 

potential enrollees are expected to be 

lower in the first few years of Exchange 

availability as employers and 

individuals adjust to the features of the 

Exchanges.3

In this proposed rule, we provide 

additional details for Exchanges and 

issuers on the administration of advance 

payments of premium tax credit and 

cost-sharing reductions for individuals 

and families. We clarify the approach to 

providing for cost-sharing reductions to 

individuals who purchase a family 

policy. We also propose standards 

applicable to Exchanges when setting 

effective dates for changes in eligibility, 

collecting premiums from enrollees, and 

administering advance payments of 

cost-sharing reductions and the 

premium tax credit. We describe these 

administrative costs in the Collection of 

Information Requirements section of 

this proposed rule. 

Finally, we direct QHP issuers to 

enroll individuals in the plan variation 

with the correct cost-sharing structure, 

and to provide those individuals with 

the cost-sharing reductions for which 

they are eligible. QHP issuers are 

responsible for submitting plan 

variations containing the cost-sharing 

structures proposed by HHS as required 

by the Affordable Care Act. We also 

clarify which plans are eligible for costsharing reductions, and we propose 

standards relating to advance payments 

of cost-sharing reductions and 

reconciliation of those advance 

payments against actual cost-sharing 

reduction provided. In addition, we 

propose that QHP issuers reduce an 

enrollee’s share of premium to account 

for advance payments of the premium 

tax credit, and submit allocations of 

rates and claims costs to allow for the 

calculation of advance payments of costsharing reductions and the premium tax 

credit. We describe these administrative 

costs in the Collection of Information 

Requirements section of this proposed 

rule. 

The cost-sharing reduction and 

advance payment of the premium tax 

credit policies will apply to all issuers 

that choose to seek certification to offer 

QHPs through the Exchanges for the 

individual market. QHP issuers will 

experience costs related to preparing 

and submitting to HHS data to support 

the administration of cost-sharing 

reductions. We anticipate that the 

provisions for advance payments of the 

premium tax credit and cost-sharing 

reductions will result in transfers from 

the General Fund of the Treasury to 

people receiving cost-sharing reductions 

and advance payments of the premium 

tax credit. 

User Fees 

To support certain Federal operations 

of Federally-facilitated Exchanges, we 

propose in this proposed rule, under 

section 1311(d)(5)(A) of the Affordable 

Care and 31 U.S.C. 9701, that a 

participating issuer offering a plan 

through a Federally-facilitated Exchange 

remit a user fee to HHS each month 

equal to the product of the billable 

members (that is, members that count 

towards the premium) enrolled in the 

QHP offered by the issuer in the 

Exchange, and the monthly user fee rate 

specified in the annual HHS notice of 

benefit and payment parameters for the 

applicable benefit year. In this proposed 

rule we set forth our intention to have 

the Federally-facilitated Exchange user 

fee generally reflect the user fee in place 

by State-based Exchanges in 2014. For 

the 2014 benefit year, we propose a 

monthly user fee rate equal to 3.5 

percent of the monthly premium 

charged by the issuer for a particular 

policy under the QHP. Because we seek 

to align this rate with rates charged by 

State-based Exchanges, we may adjust 

this rate to conform with State-based 

Exchange rates in the final Payment 

Notice. We do not have an aggregate 

estimate of the collections from the user 

fee at this time because we do not yet 

have a count of the number of States in 

which HHS will run a Federallyfacilitated Exchange. We anticipate that 

this user fee collection will be sufficient 

to cover the majority of costs related to 

the operation of Federally-facilitated 

Exchanges and maintain balance within 

the market. 

SHOP 

The Small Business Health Options 

Program (SHOP) facilitates the 

enrollment of small businesses into 

small group health insurance plans. A 

qualitative analysis of the costs and 

benefits of establishing a SHOP was 

included in the RIA published in 

conjunction with the Exchange 

Establishment Rule.61 This Impact 

Analysis addresses the additional costs 

and benefits of the proposed 

modifications in this proposed rule to 

the SHOP sections of the Exchange 

Final Rule. 

In this proposed rule, we propose to 

implement policies for FF–SHOPs 

designed to prevent significant adverse 

selection while promoting robust plan 

choice for employees. These policies 

include methods a qualified employer 

may use to make QHPs available to its 

employees, rules to ensure parity with 

a market’s group participation 

requirements, rules to permit the 

display of agent and broker information 

on FF–SHOP Web sites, alignment of 

market definitions with other applicable 

rules, and incentives for issuers to 

participate in FF–SHOPs. Many of these 

proposed policies are expected to create 

no significant new costs. 

The Affordable Care Act permits a 

qualified employer participating in a 

SHOP to select a metal level of coverage 

and make all plans in that level of 

coverage available to its employees. 

This represents an increase in plan 

choice over what many employees of 

small employers have today. Limiting 

this choice to a single level of coverage 

reduces potential adverse selection 

within the group and therefore any 

additional cost due to expanded choice. 

In the Exchange Establishment Rule, we 

did not quantify either the small risk 

premium or the modest additional 

consumer benefit resulting from 

employee choice at a single level of 

coverage. We seek comment on both 

limiting employee choice to prevent 

adverse selection and allowing for 

choice across two rather than one metal 

level. 

The Exchange Final Rule permits a 

SHOP to set a minimum participation 

rate; such authority is limited to the 

extent the minimum participation rate is 

permissible under the PHS Act and 

applicable State law. Minimum 

participation rates require participation 

in the health plan by a substantial 

portion of the employer’s group, thereby 


sroberts on DSK5SPTVN1PROD with 
73202 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

62 Dafny, L., Ho, K., & Varela, M. (2010). Let them 

have choice: Gains from shifting away from 

employer-sponsored health insurance and toward 

an individual exchange (No. w15687). National 

Bureau of Economic Research. 

assuring a more representative risk pool 

and reducing adverse selection. Setting 

a minimum participation rate that is too 

low would make it ineffective, while 

setting it too high would reduce the 

number of employers offering coverage. 

This proposed rule proposes, subject to 

permissibility under the PHS Act, that 

FF–SHOPs use a default participation 

rate of 70 percent that may be modified 

if there is evidence that a higher or 

lower rate is either customary in the 

State or required by State statute. 

Because this policy results in no change 

in market dynamics, it places no 

additional costs on employers or 

issuers. 

This proposed rule proposes new 

incentives for some health insurance 

issuers to participate in the FF–SHOP. 

Health insurance issuers that offer 

coverage in both the individual and 

small group markets and wish to sell 

QHPs in an FFE must also offer QHPs 

in an FF–SHOP. This policy promotes 

robust issuer participation in the FF– 

SHOP which will help small employers 

offer their employees a broad choice of 

health plan. 

The benefits of broad plan choice are 

quite significant. One study suggests 

expanding plan choice while holding 

premiums constant for employees 

results in a median increase in 

consumer surplus by 20 percent of the 

premium cost of coverage.62 Some of 

this benefit is due to expanded choice 

in plan type and health insurance 

issuer. There are two costs associated 

with this policy. The first is the cost for 

the QHP issuer of submitting plans for 

certification in the FF–SHOP, which is 

described in the 30-day Federal Register 

Notice for the Initial Plan Data 

Collection published on November 21, 

2012 (77 FR 69846). The second is the 

cost of additional user fees QHP issuers 

must pay for participating in the FF– 

SHOP. 

D. Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) requires 

agencies to prepare an initial regulatory 

flexibility analysis to describe the 

impact of the final rule on small 

entities, unless the head of the agency 

can certify that the rule will not have a 

significant economic impact on a 

substantial number of small entities. 

The RFA generally defines a ‘‘small 

entity’’ as (1) A proprietary firm meeting 

the size standards of the Small Business 

Administration (SBA), (2) a not-forprofit organization that is not dominant 

in its field, or (3) a small government 

jurisdiction with a population of less 

than 50,000. States and individuals are 

not included in the definition of ‘‘small 

entity.’’ HHS uses a change in revenues 

of more than three to five percent as its 

measure of significant economic impact 

on a substantial number of small 

entities. 

This proposed rule contains proposed 

rules for premium stabilization 

programs required of health plan issuers 

including the risk adjustment program 

as well as the transitional reinsurance 

program and temporary risk corridors 

programs. Because we believe that few 

insurance firms offering comprehensive 

health insurance policies fall below the 

size thresholds for ‘‘small entities’’ 

established by the SBA, we do not 

believe that an initial regulatory 

flexibility analysis is required with 

respect to such firms. 

For purposes of the RFA, we expect 

the following types of entities to be 

affected by this proposed rule: (1) 

Health insurance issuers; (2) health 

insurance plan sponsors; (3) reinsurance 

entities; (4) risk adjustment entities; and 

(5) third-party administrators. We 

believe that health insurance issuers 

and plan sponsors would be classified 

under the North American Industry 

Classification System (NAICS) code 

524114 (Direct Health and Medical 

Insurance Carriers); reinsurance entities, 

risk adjustment entities and third party 

administrators would be classified 

under NAICS codes 524130 

(Reinsurance Carriers), 524298 

(Actuarial Services) and 524292 (Third 

Party Administration of Insurance). 

According to SBA size standards, 

entities with average annual receipts of 

$7 million or less would be considered 

small entities for these NAICS codes. 

Issuers could possibly be classified in 

621491 (HMO Medical Centers) and, if 

this is the case, the SBA size standard 

would be $10 million or less. 

Based on data from Medical Loss 

Ratio annual report submissions for the 

2011 MLR reporting year, there are 22 

small entities (companies), each with 

less than $7 million in earned 

premiums, that offer individual or group 

health insurance coverage and would 

therefore be subject to the provisions 

related to MLR. These small entities 

account for less than 5 percent of the 

estimated 466 issuers that would be 

affected by the provisions of this rule. 

Thirty six percent of these small issuers 

belong to holding groups, and many if 

not all of these small issuers are likely 

to have other lines of business that 

would result in their revenues 

exceeding $7 million. 

In this proposed rule, we propose 

requirements on employers that choose 

to participate in a SHOP Exchange. As 

discussed above, the SHOP is limited by 

statute to employers with at least one 

but not more than 100 employees. For 

this reason, we expect that many 

employers would meet the SBA 

standard for small entities. We do not 

believe that the regulation imposes 

requirements on employers offering 

health insurance through SHOP that are 

more restrictive than the current 

requirements on small employers 

offering ESI. For example, we propose to 

generally match existing minimum 

participation rates in the outside 

market. Additionally, as discussed in 

the Regulatory Impact Analysis, we 

believe the proposed policy will provide 

greater choice for the employee among 

plans and issuers, benefitting both 

employer and employee and simplify 

the process for the employer of 

administering multiple health benefit 

plans. We believe the processes that we 

have established constitute the 

minimum amount of requirements 

necessary to implement statutory 

mandates and accomplish our policy 

goals, and that no appropriate regulatory 

alternatives could be developed to 

further lessen the compliance burden. 

We believe that a substantial number 

of sponsors of self-insured group health 

plans could qualify as ‘‘small entities.’’ 

This proposed rule specifies the 

reinsurance contributions that would be 

required from third-party administrators 

on behalf of such entities. However, we 

do not believe that these contributions 

are likely to result in a change in 

revenues of more than 3 to 5 percent. 

We request comment on whether the 

small entities affected by this proposed 

rule have been fully identified. We also 

request comment and information on 

potential costs for these entities and on 

any alternatives that we should 

consider. 

E. Unfunded Mandates 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal governments, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. In 2012, that 

threshold is approximately $139 

million. Since the impact on State, 

local, or Tribal governments and the 

private sector is below the threshold, no 

analysis under UMRA is required. 


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F. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a final 

rule that imposes substantial direct 

costs on State and local governments, 

pre-empts State law, or otherwise has 

Federalism implications. Because States 

have flexibility in designing their 

Exchange and Exchange-related 

programs, State decisions will 

ultimately influence both administrative 

expenses and overall premiums. States 

are not required to establish an 

Exchange. For States electing to operate 

an Exchange, risk adjustment and 

reinsurance, much of the initial cost of 

creating Exchanges and Exchangerelated programs will be funded by 

Exchange Planning and Establishment 

Grants. After establishment, Exchanges 

will be financially self-sustaining, with 

revenue sources at the discretion of the 

State. Current State Exchanges charge 

user fees to issuers. 

In HHS’s view, while this proposed 

rule does not impose substantial direct 

requirement costs on State and local 

governments, this regulation has 

Federalism implications due to direct 

effects on the distribution of power and 

responsibilities among the State and 

Federal governments relating to 

determining standards relating to health 

insurance that is offered in the 

individual and small group markets. 

Each State electing to establish an 

Exchange must adopt the Federal 

standards contained in the Affordable 

Care Act and in this Payment Notice, or 

have in effect a State law or regulation 

that implements these Federal 

standards. However, HHS anticipates 

that the Federalism implications (if any) 

are substantially mitigated because 

under the statute, States have choices 

regarding the structure and governance 

of their Exchanges. Additionally, the 

Affordable Care Act does not require 

States to establish an Exchange; if a 

State elects not to establish an Exchange 

or the State’s Exchange is not approved, 

HHS, either directly, or through 

agreement with a non-profit entity, must 

establish and operate an Exchange in 

that State. 

In compliance with the requirement 

of Executive Order 13132 that agencies 

examine closely any policies that may 

have Federalism implications or limit 

the policy making discretion of the 

States, HHS has engaged in efforts to 

consult with and work cooperatively 

with affected States, including 

participating in conference calls with 

and attending conferences of the 

National Association of Insurance 

Commissioners, and consulting with 

State insurance officials on an 

individual basis. 

Throughout the process of developing 

this proposed rule, HHS has attempted 

to balance the States’ interests in 

regulating health insurance issuers, and 

Congress’ intent to provide access to 

Affordable Insurance Exchanges for 

consumers in every State. By doing so, 

it is HHS’s view that we have complied 

with the requirements of Executive 

Order 13132. 

G. Congressional Review Act 

This proposed rule is subject to the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.), which specifies that 

before a rule can take effect, the Federal 

agency promulgating the rule shall 

submit to each House of the Congress 

and to the Comptroller General a report 

containing a copy of the rule along with 

other specified information, and has 

been transmitted to Congress and the 

Comptroller General for review. 

List of Subjects 

45 CFR Part 153 

Administrative practice and 

procedure, Adverse selection, Health 

care, Health insurance, Health records, 

Organization and functions 

(Government agencies), Premium 

stabilization, Reporting and 

recordkeeping requirements, 

Reinsurance, Risk adjustment, Risk 

corridors, Risk mitigation, State and 

local governments. 

45 CFR Part 155 

Administrative practice and 

procedure, Health care access, Health 

insurance, Reporting and recordkeeping 

requirements, State and local 

governments, Cost-sharing reductions, 

Advance payments of premium tax 

credit, Administration and calculation 

of advance payments of the premium 

tax credit, Plan variations, Actuarial 

value. 

45 CFR Part 156 

Administrative practice and 

procedure, Advertising, Advisory 

committees, Brokers, Conflict of 

interest, Consumer protection, Grant 

programs—health, Grants 

administration, Health care, Health 

insurance, Health maintenance 

organization (HMO), Health records, 

Hospitals, American Indian/Alaska 

Natives, Individuals with disabilities, 

Loan programs—health, Organization 

and functions (Government agencies), 

Medicaid, Public assistance programs, 

Reporting and recordkeeping 

requirements, State and local 

governments, Sunshine Act, Technical 

assistance, Women, and Youth. 

45 CFR Part 157 

Employee benefit plans, Health 

insurance, Health maintenance 

organization (HMO), Health records, 

Hospitals, Indians, Individuals with 

disabilities, Organization and functions 

(Government agencies), Medicaid, 

Public assistance programs, Reporting 

and recordkeeping requirements, Safety, 

State and local governments, Sunshine 

Act, Technical Assistance, Women, and 

Youth. 

45 CFR Part 158 

Administrative practice and 

procedure, Claims, Health care, Health 

insurance, Health plans, penalties, 

Reporting and recordkeeping 

requirements, Premium revenues, 

Medical loss ratio, Rebating. 

For the reasons set forth in the 

preamble, the Department of Health and 

Human Services proposes to amend 45 

CFR parts 153, 155, 156, 157, and 158 

as set forth below: 

PART 153—STANDARDS RELATED TO 

REINSURANCE, RISK CORRIDORS, 

AND RISK ADJUSTMENT UNDER THE 

AFFORDABLE CARE ACT 

1. The authority citation for part 153 

continues to read as follows: 

Authority: Secs. 1321, 1341–1343, Pub. L. 

111–148, 24 Stat. 119. 

2. Section 153.20 is amended by 

revising the definitions of ‘‘Risk 

adjustment covered plan’’ and ‘‘Risk 

adjustment data collection approach’’ as 

follows: 

§ 153.20 Definitions. 

* * * * * 

Risk adjustment covered plan means, 

for the purpose of the risk adjustment 

program, any health insurance coverage 

offered in the individual or small group 

market with the exception of 

grandfathered health plans, group 

health insurance coverage described in 

§ 146.145(c) of this subchapter, 

individual health insurance coverage 

described in § 148.220 of this 

subchapter, and any plan determined 

not to be a risk adjustment covered plan 

in the applicable Federally certified risk 

adjustment methodology. 

* * * * * 

Risk adjustment data collection 

approach means the specific procedures 

by which risk adjustment data is to be 

stored, collected, accessed, transmitted, 

and validated and the applicable 

timeframes, data formats, and privacy 

and security standards. 

* * * * * 


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73204 Federal Register / Vol. 77, No. 236 / Friday, December 7, 2012 / Proposed Rules 

3. Section 153.100 is amended by— 

A. Revising paragraph (a)(1). 

B. Removing paragraph (a)(2). 

C. Redesignating paragraphs (a)(3) and 

(4) as paragraphs (a)(2) and (3). 

D. Revising newly designated 

paragraph (a)(2). 

E. Removing paragraph (a)(5). 

F. Revising paragraph (c). 

G. Revising paragraph (d)(1). 

H. Removing paragraph (d)(2). 

I. Redesignating paragraphs (d)(3) and 

(4) as paragraphs (d)(2) and (3). 

J. Revising newly designated 

paragraph (d)(2). 

K. Removing paragraph (d)(5). 

L. Redesignating paragraph (d)(6) as 

paragraph (d)(4). 

The revisions read as follows: 

§ 153.100 State notice of benefit and 

payment parameters. 

(a) * * * 

(1) Modify the data requirements for 

health insurance issuers to receive 

reinsurance payments from those 

specified in the annual HHS notice of 

benefit and payment parameters for the 

applicable benefit year; 

(2) Collect additional reinsurance 

contributions under § 153.220(d) or use 

additional funds for reinsurance 

payments under § 153.220(d)(3); or 

* * * * * 

(c) State notice deadlines. If a State is 

required to publish an annual State 

notice of benefit and payment 

parameters for a particular benefit year, 

then with respect to benefit year 2014, 

it must do so by March 1, 2013, or by 

the 30th day following the publication 

of the final HHS notice of benefit and 

payment parameters, whichever is later. 

With respect to subsequent benefit 

years, a State must do so by March 1 of 

the calendar year prior to the benefit 

year for which the notice applies. 

(d) * * * 

(1) Adhere to the data requirements 

for health insurance issuers to receive 

reinsurance payments that are specified 

in the annual HHS notice of benefit and 

payment parameters for the applicable 

benefit year; 

(2) Forgo the collection of additional 

reinsurance contributions under 

§ 153.220(d) and the use of additional 

funds for reinsurance payments under 

§ 153.220(d)(3); 

* * * * * 

4. Section 153.110 is amended by: 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as 

paragraph (b) and revising newly 

designated paragraph (b). 

D. Redesignating paragraph (d) as 

paragraph (c). 

E. Removing newly designated 

paragraph (c)(2). 

F. Removing newly designated 

paragraph (c)(4). 

G. Removing newly designated 

paragraph (c)(5). 

H. Redesignating paragraph (c)(6) as 

paragraph (c)(3). 

I. Removing paragraph (e). 

J. Redesignating paragraph (f) as 

paragraph (d). 

The revisions read as follows: 

§ 153.110 Standards for the State notice of 

benefit and payment parameters. 

(a) Data requirements. If a State that 

establishes a reinsurance program elects 

to modify the data requirements for 

health insurance issuers to receive 

reinsurance payments from those 

specified in the annual HHS notice of 

benefit and payment parameters for the 

applicable benefit year, the State notice 

of benefit and payment parameters must 

specify those modifications. 

(b) Additional collections. If a State 

that establishes a reinsurance program 

elects to collect additional funds under 

§ 153.220(d) or use additional funds for 

reinsurance payments under 

§ 153.220(d)(3), the State must publish 

in the State notice of benefit and 

payment parameters the following: 

(1) A description of the purpose of the 

additional collection, including whether 

it will be used to cover reinsurance 

payments made under § 153.232, 

administrative costs, or both; 

(2) The additional contribution rate at 

which the funds will be collected; and 

(3) If the purpose of the additional 

collection includes reinsurance 

payments (or if the State is using 

additional funds for reinsurance 

payments under § 153.220(d)(3)), the 

State supplemental reinsurance 

payment parameters required under 

§ 153.232. 

* * * * * 

5. Section 153.210 is amended by 

revising paragraph (a)(2) and adding 

paragraph (e) to read as follows: 

§ 153.210 State establishment of a 

reinsurance program. 

(a) * * * 

(2) If a State contracts with more than 

one applicable reinsurance entity, the 

State must ensure that each applicable 

reinsurance entity operates in a distinct 

geographic area with no overlap of 

jurisdiction with any other applicable 

reinsurance entity. 

* * * * * 

(e) Reporting to HHS. Each State that 

establishes a reinsurance program must 

ensure that each applicable reinsurance 

entity provides information regarding 

requests for reinsurance payments 

under the national contribution rate 

made under § 153.410 for all 

reinsurance-eligible plans for each 

quarter during the applicable benefit 

year in a manner and timeframe 

established by HHS. 

6. Section 153.220 is amended by— 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as 

paragraph (b). 

D. Removing paragraph (d). 

E. Redesignating paragraph (e) as 

paragraph (c). 

F. Revising newly designated 

paragraph (c)(2). 

G. Removing paragraph (f). 

H. Redesignating paragraph (g) as 

paragraph (d). 

I. Revising newly designated 

paragraph (d). 

J. Removing paragraph (h). 

The revisions read as follows: 

§ 153.220 Collection of reinsurance 

contribution funds. 

(a) Collections. If a State establishes a 

reinsurance program, HHS will collect 

all reinsurance contributions from all 

contributing entities for that State under 

the national contribution rate. 

* * * * * 

(c) * * * 

(2) Payments to the U.S. Treasury as 

described in paragraph (b)(2) of this 

section; and 

* * * * * 

(d) Additional State collections. If a 

State establishes a reinsurance program: 

(1) The State may elect to collect more 

than the amounts that would be 

collected based on the national 

contribution rate set forth in the annual 

HHS notice of benefit and payment 

parameters for the applicable benefit 

year to provide: 

(i) Funding for administrative 

expenses of the applicable reinsurance 

entity; or 

(ii) Additional funds for reinsurance 

payments. 

(2) The State must notify HHS within 

30 days after publication of the draft 

annual HHS notice of benefit and 

payment parameters for the applicable 

benefit year of the additional 

contribution rate that it elects to collect 

for any additional contributions under 

paragraph (d)(1) of this section. 

(3) A State may use additional funds 

which were not collected as additional 

reinsurance contributions under this 

part for reinsurance payments under the 

State supplemental payment parameters 

under § 153.232. 

* * * * * 

7. Section 153.230 is revised to read 

as follows: 


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§ 153.230 Calculation of reinsurance 

payments made under the national 

contribution rate. 

(a) Eligibility for reinsurance 

payments under the national 

reinsurance parameters. A health 

insurance issuer of a non-grandfathered 

individual market plan becomes eligible 

for reinsurance payments from 

contributions under the national 

contribution rate when its claims costs 

for an individual enrollee’s covered 

benefits in a benefit year exceed the 

national attachment point. 

(b) National reinsurance payment 

parameters. The national reinsurance 

payment parameters for each year 

commencing in 2014 and ending in 

2016 set forth in the annual HHS notice 

of benefit and payment parameters for 

an applicable benefit year will apply 

with respect to reinsurance payments 

made from contributions received under 

the national contribution rate. 

(c) National reinsurance payments. 

Each reinsurance payment made from 

contributions received under the 

national contribution rate will be 

calculated as the product of the national 

coinsurance rate multiplied by the 

health insurance issuer’s claims costs 

for an individual enrollee’s covered 

benefits that the health insurance issuer 

incurs between the national attachment 

point and the national reinsurance cap. 

(d) Uniform adjustment to national 

reinsurance payments. If HHS 

determines that all reinsurance 

payments requested under the national 

payment parameters from all 

reinsurance-eligible plans in all States 

for a benefit year will exceed all 

reinsurance contributions collected 

under the national contribution rate in 

all States for an applicable benefit year, 

HHS will determine a uniform pro rata 

adjustment to be applied to all such 

requests for reinsurance payments for 

all States. Each applicable reinsurance 

entity, or HHS on behalf of a State, must 

reduce all requests for reinsurance 

payments for the applicable benefit year 

by any adjustment required under this 

paragraph (d). 

8. Section 153.232 is added to read as 

follows: 

§ 153.232 Calculation of reinsurance 

payments made under a State additional 

contribution rate. 

(a) State supplemental reinsurance 

payment parameters. (1) If a State 

establishes a reinsurance program and 

elects to collect additional contributions 

under § 153.220(d)(1)(ii) or use 

additional funds for reinsurance 

payments under § 153.220(d)(3), the 

State must set supplemental reinsurance 

payment parameters using one or more 

of the following methods: 

(i) Decreasing the national attachment 

point; 

(ii) Increasing the national 

reinsurance cap; or 

(iii) Increasing the national 

coinsurance rate. 

(2) The State must ensure that 

additional reinsurance contributions 

and funds projected to be received 

under § 153.220(d)(1)(ii) and 

§ 153.220(d)(3), as applicable, for any 

applicable benefit year are reasonably 

calculated to cover additional 

reinsurance payments that are projected 

to be made only under the supplemental 

reinsurance payment parameters (that 

will not be paid under the national 

payment parameters) for the given 

benefit year. 

(3) All applicable reinsurance entities 

in a State collecting additional 

reinsurance contributions must apply 

the State supplemental reinsurance 

payment parameters established under 

paragraph (a)(1) of this section when 

calculating reinsurance payments. 

(b) General requirement for payments 

under State supplemental reinsurance 

parameters. Contributions collected 

under § 153.220(d)(1)(ii) or funds under 

§ 153.220(d)(3), as applicable, must be 

applied towards requests for 

reinsurance payments made under the 

State supplemental reinsurance 

payments parameters for each benefit 

year commencing in 2014 and ending in 

2016. 

(c) Eligibility for reinsurance 

payments under State supplemental 

reinsurance parameters. If a State 

establishes supplemental State 

reinsurance payment parameters under 

§ 153.232(a)(1), a health insurance 

issuer of a non-grandfathered individual 

market plan becomes eligible for 

reinsurance payments from 

contributions under § 153.220(d)(1)(ii) 

or funds under § 153.220(d)(3), as 

applicable, if its incurred claims costs 

for an individual enrollee’s covered 

benefits in a benefit year: 

(1) Exceed the supplemental State 

attachment point set forth in the State 

notice of benefit and payment 

parameters for the applicable benefit 

year if a State has established such a 

supplemental attachment point under 

§ 153.232(a)(1)(i); 

(2) Exceed the national reinsurance 

cap set forth in the annual HHS notice 

of benefit and payment parameters for 

the applicable benefit year if a State has 

established a supplemental State 

reinsurance cap under 

§ 153.232(a)(1)(ii); or 

(3) Exceed the national attachment 

point set forth in the annual HHS notice 

of benefit and payment parameters for 

the applicable benefit year if a State has 

established a supplemental coinsurance 

rate under § 153.232(a)(1)(iii). 

(d) Payments under State 

supplemental reinsurance parameters. 

Each reinsurance payment made from 

contributions received under 

§ 153.220(d)(1)(ii) or funds under 

§ 153.220(d)(3), as applicable, will be 

calculated with respect to a health 

insurance issuer’s claims costs for an 

individual enrollee’s covered benefits as 

the sum of the following: 

(1) If the State has established a 

supplemental State attachment point, to 

the extent the issuer’s incurred claims 

costs for such benefits exceed the 

supplemental State attachment point 

but do not exceed the national 

attachment point, the product of such 

claims costs between the supplemental 

State attachment point and the national 

attachment point multiplied by the 

national coinsurance rate (or, if the State 

has established a supplemental State 

coinsurance rate, the supplemental State 

coinsurance rate); 

(2) If the State has established a 

supplemental State reinsurance cap, to 

the extent the issuer’s incurred claims 

costs for such benefits exceed the 

national reinsurance cap but do not 

exceed the supplemental State 

reinsurance cap, the product of such 

claims costs between the national 

reinsurance cap and the supplemental 

State reinsurance cap multiplied by the 

national coinsurance rate (or, if the State 

has established a supplemental State 

coinsurance rate, the supplemental State 

coinsurance rate); and 

(3) If the State has established a 

supplemental coinsurance rate, the 

product of the issuer’s incurred claims 

costs for such benefits between the 

national attachment point and the 

national reinsurance cap multiplied by 

the difference between the 

supplemental coinsurance rate and the 

national coinsurance rate. 

(e) Uniform adjustment to payments 

under State supplemental reinsurance 

payment parameters. If all requested 

reinsurance payments under the State 

supplemental reinsurance parameters 

calculated in accordance with paragraph 

(a)(1) of this section from all 

reinsurance-eligible plans in a State for 

a benefit year will exceed all 

reinsurance contributions collected 

under § 153.220(d)(1)(ii) or funds under 

§ 153.220(d)(3) for the applicable benefit 

year, the State must determine a 

uniform pro rata adjustment to be 

applied to all such requests for 

reinsurance payments. Each applicable 

reinsurance entity in the State must 

reduce all such requests for reinsurance 


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payments for the applicable benefit year 

by that adjustment. 

(f) Limitations on payments under 

State supplemental reinsurance 

parameters. A State must ensure that: 

(1) The payments made to issuers 

must not exceed the issuer’s total paid 

amount for the reinsurance-eligible 

claim(s); and 

(2) Any remaining additional funds 

for reinsurance payments collected 

under § 153.220(d)(1)(ii) must be used 

for reinsurance payments under the 

State supplemental reinsurance 

payment parameters in subsequent 

benefit years. 

9. Section 153.234 is added to read as 

follows: 

§ 153.234 Eligibility under health 

insurance market rules. 

A reinsurance-eligible plan’s covered 

claims costs for an enrollee incurred 

prior to the application of the following 

provisions do not count towards either 

the national reinsurance parameters or 

the State supplemental reinsurance 

parameters: 45 CFR 147.102, 147.104 

(subject to 147.145), 147.106 (subject to 

147.145), 156.80, and subpart B of part 

156. 

10. Section 153.235 is added to read 

as follows: 

§ 153.235 Allocation and distribution of 

reinsurance contributions. 

(a) Allocation of reinsurance 

contributions. HHS will allocate and 

distribute reinsurance contributions 

collected from contributing entities 

under the national contribution rate for 

reinsurance payments to each State 

based on total requests for reinsurance 

payments made under the national 

reinsurance payment parameters in all 

States and submitted under § 153.410, 

net of any adjustment under 

§ 153.230(d). 

(b) Excess reinsurance contributions. 

Any reinsurance contributions collected 

from contributing entities under the 

national contribution rate for 

reinsurance payments for any benefit 

year but unused for the applicable 

benefit year will be used for reinsurance 

payments under the national 

reinsurance payment parameters for 

subsequent benefit years. 

11. Section 153.240 is amended by 

revising paragraphs (a) and (b) and by 

adding a new paragraph (d) to read as 

follows: 

§ 153.240 Disbursement of reinsurance 

payments. 

(a) Data collection. If a State 

establishes a reinsurance program, the 

State must ensure that the applicable 

reinsurance entity: 

(1) Collects data required to determine 

reinsurance payments as described in 

§ 153.230 and § 153.232, as applicable, 

from an issuer of reinsurance-eligible 

plans or is provided access to such data, 

according to the data requirements 

specified by the State in the State notice 

of benefit and payment parameters 

described in subpart B of this part. 

(2) Makes reinsurance payments to 

the issuer of a reinsurance-eligible plan 

after receiving a valid claim for payment 

from that health insurance issuer in 

accordance with the requirements of 

§ 153.410. 

(3) Provides a process through which 

an issuer of a reinsurance-eligible plan 

that does not generate individual 

enrollee claims in the normal course of 

business may use estimated claims costs 

to make a request for payment (or to 

submit data to be considered for 

reinsurance payments) in accordance 

with the requirements of § 153.410. The 

State must ensure that such requests for 

reinsurance payment (or a subset of 

such requests) are subject to validation. 

(b) Notification of reinsurance 

payments. For each applicable benefit 

year, 

(1) A State, or HHS on behalf of the 

State, must notify issuers annually of: 

(i) Reinsurance payments under the 

national payment parameters, and 

(ii) Reinsurance payments under the 

State supplemental payment parameters 

if applicable, to be made for the 

applicable benefit year no later than 

June 30 of the year following the 

applicable benefit year. 

(2) A State must provide to each 

reinsurance-eligible plan the expected 

requests for reinsurance payments made 

under: 

(i) The national payment parameters, 

and 

(ii) State supplemental payments 

parameters if applicable, from such plan 

on a quarterly basis during the 

applicable benefit year in a timeframe 

and manner determined by HHS. 

* * * * * 

(d) Privacy and security. (1) If a State 

establishes a reinsurance program, the 

State must ensure that the applicable 

reinsurance entity’s collection of 

personally identifiable information is 

limited to information reasonably 

necessary for use in the calculation of 

reinsurance payments, and that use and 

disclosure of personally identifiable 

information is limited to those purposes 

for which the personally identifiable 

information was collected (including for 

purposes of data validation). 

(2) If a State establishes a reinsurance 

program, the State must ensure that the 

applicable reinsurance entity 

implements security standards that 

provide administrative, physical, and 

technical safeguards for the personally 

identifiable information consistent with 

the security standards described at 45 

CFR 164.308, 164.310, and 164.312. 

12. Section 153.310 is amended by: 

A. Redesignating paragraphs (c) and 

(d) as paragraphs (e) and (f), 

respectively. 

B. Adding new paragraphs (a)(4), (c) 

and (d). 

The additions read as follows: 

§ 153.310 Risk adjustment administration. 

(a) * * * 

(4) Beginning in 2015, any State that 

is approved to operate an Exchange and 

elects to operate risk adjustment but has 

not been approved by HHS to operate 

risk adjustment prior to publication of 

its State notice of benefit and payment 

parameters for the applicable benefit 

year, will forgo implementation of all 

State functions in this subpart, and HHS 

will carry out all of the provisions of 

this subpart on behalf of the State. 

* * * * * 

(c) State responsibility for risk 

adjustment. (1) A State operating a risk 

adjustment program for a benefit year 

must administer the applicable 

Federally certified risk adjustment 

methodology through an entity that— 

(i) Is operationally ready to 

implement the applicable Federally 

certified risk adjustment methodology 

and process the resulting payments and 

charges; and 

(ii) Has experience relevant to 

operating the risk adjustment program. 

(2) The State must ensure that the risk 

adjustment entity complies with all 

applicable provisions of subpart D of 

this part in the administration of the 

applicable Federally certified risk 

adjustment methodology. 

(3) The State must conduct oversight 

and monitoring of its risk adjustment 

program. 

(d) Certification for a State to operate 

risk adjustment. (1) To be approved by 

HHS to operate risk adjustment under a 

particular Federally certified risk 

adjustment methodology for a benefit 

year, a State must establish that it and 

its risk adjustment entity meet the 

standards set forth in paragraph (c) of 

this section. 

(2) To obtain such approval, the State 

must submit to HHS, in a form and 

manner specified by HHS, evidence that 

its risk adjustment entity meets these 

standards. 

13. Section 153.320 is amended by 

revising paragraphs (a)(1) and (a)(2) to 

read as follows: 


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§ 153.320 Federally certified risk 

adjustment methodology. 

* * * * * 

(a) * * * 

(1) The risk adjustment methodology 

is developed by HHS and published in 

the applicable annual HHS notice of 

benefit and payment parameters; or 

(2) An alternate risk adjustment 

methodology is submitted by a State in 

accordance with § 153.330, reviewed 

and certified by HHS, and published in 

the applicable annual HHS notice of 

benefit and payment parameters. 

* * * * * 

14. Section 153.330 is amended by— 

A. Redesignating paragraph (b) as 

paragraph (c). 

B. Adding new paragraph (b). 

The additions read as follows: 

§ 153.330 State alternate risk adjustment 

methodology. 

* * * * * 

(b) Evaluation criteria for alternate 

risk adjustment methodology. An 

alternate risk adjustment methodology 

will be certified by HHS as a Federally 

certified risk adjustment methodology 

based on the following criteria: 

(1) The criteria listed in paragraph 

(a)(2) of this section; 

(2) Whether the methodology 

complies with the requirements of this 

subpart D; 

(3) Whether the methodology 

accounts for risk selection across metal 

levels; and 

(4) Whether each of the elements of 

the methodology are aligned. 

* * * * * 

15. Section 153.340 is amended by 

revising paragraph (b)(3) to read as 

follows: 

§ 153.340 Data collection under risk 

adjustment. 

* * * * * 

(b) * * * 

(3) If a State is operating a risk 

adjustment program, the State must 

ensure that any collection of personally 

identifiable information is limited to 

information reasonably necessary for 

use in the applicable risk adjustment 

model, calculation of plan average 

actuarial risk, or calculation of 

payments and charges. Except for 

purposes of data validation, the State 

may not collect or store any personally 

identifiable information for use as a 

unique identifier for an enrollee’s data, 

unless such information is masked or 

encrypted by the issuer, with the key to 

that masking or encryption withheld 

from the State. Use and disclosure of 

personally identifiable information is 

limited to those purposes for which the 

personally identifiable information was 

collected (including for purposes of data 

validation). 

* * * * * 

16. Section 153.360 is added to 

subpart D to read as follows: 

§ 153.360 Application of risk adjustment to 

the small group market. 

Enrollees in a risk adjustment covered 

plan must be assigned to the applicable 

risk pool in the State in which the 

enrollee’s policy was filed and 

approved. 

17. Section 153.400 is revised to read 

as follows: 

§ 153.400 Reinsurance contribution funds. 

(a) General requirement. Each 

contributing entity must make 

reinsurance contributions annually: at 

the national contribution for all 

reinsurance contribution enrollees, in a 

manner specified by HHS; and at the 

additional State supplemental 

contribution rate if the State has elected 

to collect additional contributions under 

§ 153.220(d), in a manner specified by 

the State. 

(1) A contributing entity must make 

reinsurance contributions for its selfinsured group health plans and health 

insurance coverage except to the extent 

that: 

(i) Such plan or coverage is not major 

medical coverage; 

(ii) In the case of health insurance 

coverage, such coverage is not 

considered to be part of an issuer’s 

commercial book of business; 

(iii) In the case of health insurance 

coverage, such coverage is not issued on 

a form filed and approved by a State. 

(2) Accordingly, as specified in 

paragraph (a)(1) of this section, a 

contributing entity is not required to 

make contributions on behalf of the 

following: 

(i) A self-insured group health plan or 

health insurance coverage that consists 

solely of excepted benefits as defined by 

section 2791(c) of the PHS Act; 

(ii) Coverage offered by an issuer 

under contract to provide benefits under 

any of the following titles of the Social 

Security Act: 

(A) Title XVIII (Medicare); 

(B) Title XIX (Medicaid); or 

(C)Title XXI (Children’s Health 

insurance Program); 

(iii) A Federal or State high-risk pool, 

including the Pre-Existing Condition 

Insurance Plan Program; 

(iv) Basic health plan coverage offered 

by issuers under contract with a State as 

described in section 1331 of the 

Affordable Care Act; 

(v) A health reimbursement 

arrangement within the meaning of IRS 

Notice 2002–45 (2002–2 CB 93) or any 

subsequent applicable guidance, that is 

integrated with a self-insured group 

health plan or health insurance 

coverage; 

(vi) A health savings account within 

the meaning of section 223(d) of the 

Code; 

(vii) A health flexible spending 

arrangement within the meaning of 

section 125 of the Code; 

(viii) An employee assistance plan, 

disease management program, or 

wellness program that does not provide 

major medical coverage; 

(ix) A stop-loss policy or an 

indemnity reinsurance policy; 

(x) TRICARE and other military health 

benefits for active and retired uniformed 

services personnel and their 

dependents; 

(xi) A plan or coverage provided by an 

Indian Tribe to Tribal members and 

their spouses and dependents (and other 

persons of Indian descent closely 

affiliated with the Tribe), in the capacity 

of the Tribal members as Tribal 

members (and not in their capacity as 

current or former employees of the Tribe 

or their dependents); or 

(xii) Health programs operated under 

the authority of the Indian Health 

Service. 

(b) Data requirements. Each 

contributing entity must submit to HHS 

data required to substantiate the 

contribution amounts for the 

contributing entity, in the manner and 

timeframe specified by HHS. 

18. Section 153.405 is added to read 

as follows: 

§ 153.405 Calculation of reinsurance 

contributions. 

(a) In general. The reinsurance 

contribution required from a 

contributing entity for its reinsurance 

contribution enrollees during a benefit 

year is calculated by multiplying: 

(1) The average number of covered 

lives of reinsurance contribution 

enrollees during the applicable benefit 

year for all plans and coverage 

described in § 153.400(a)(1) of the 

contributing entity; by 

(2) The contribution rate for the 

applicable benefit year. 

(b) Annual enrollment count. No later 

than November 15 of benefit year 2014, 

2015, or 2016, as applicable, a 

contributing entity must submit an 

annual enrollment count of the average 

number of covered lives of reinsurance 

contribution enrollees for the applicable 

benefit year to HHS. The count must be 

determined as specified in paragraphs 

(d) or (e) of this section, as applicable. 

(c) Notification and payment. (1) 

Within 15 days of the submission of the 

annual enrollment count described in 


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paragraph (b) of this section or by 

December 15 of the applicable benefit 

year, whichever is later HHS will notify 

the contributing entity of the 

reinsurance contribution amount to be 

paid for the applicable benefit year. 

(2) A contributing entity must remit 

reinsurance contributions to HHS 

within 30 days after the date of the 

notification. 

(d) Procedures for counting covered 

lives for health insurance issuers. To 

determine the average number of 

covered lives of reinsurance 

contribution enrollees under a health 

insurance plan for a benefit year, a 

health insurance issuer must use one of 

the following methods: 

(1) Adding the total number of lives 

covered for each day of the first nine 

months of the benefit year and dividing 

that total by the number of days in the 

first nine months; 

(2) Adding the total number of lives 

covered on any date (or more dates, if 

an equal number of dates are used for 

each quarter) during the same 

corresponding month in each of the first 

three quarters of the benefit year, and 

dividing that total by the number of 

dates on which a count was made. For 

this purpose, the same months must be 

used for each quarter (for example 

January, April and July) and the date 

used for the second and third quarter 

must fall within the same week of the 

quarter as the corresponding date used 

for the first quarter; or 

(3) Multiplying the average number of 

policies in effect for the first nine 

months of the benefit year by the ratio 

of covered lives per policy in effect, 

calculated using the prior National 

Association of Insurance Commissioners 

(NAIC) Supplemental Health Care 

Exhibit (or a form filed with the issuer’s 

State of domicile for the most recent 

time period). 

(e) Procedures for counting covered 

lives for self-insured group health plans. 

To determine the number of covered 

lives of reinsurance contribution 

enrollees under a self-insured group 

health plan for a benefit year, a plan 

must use one of the following methods: 

(1) One of the methods specified in 

either paragraph (d)(1) or paragraph 

(d)(2) of this section; 

(2) Adding the total number of lives 

covered on any date (or more dates, if 

an equal number of dates are used for 

each quarter) during the same 

corresponding month in each of the first 

three quarters of the benefit year 

(provided that the date used for the 

second and third quarters must fall 

within the same week of the quarter as 

the corresponding date used for the first 

quarter), and dividing that total by the 

number of dates on which a count was 

made, except that the number of lives 

covered on a date is calculated by 

adding the number of participants with 

self-only coverage on the date to the 

product of the number of participants 

with coverage other than self-only 

coverage on the date and a factor of 

2.35. For this purpose, the same months 

must be used for each quarter (for 

example, January, April, and July); 

(3) Using the number of lives covered 

for the benefit year calculated based 

upon the ‘‘Annual Return/Report of 

Employee Benefit Plan’’ filed with the 

Department of Labor (Form 5500) for the 

last applicable time period. For 

purposes of this paragraph (e)(3), the 

number of lives covered for the benefit 

year for a plan offering only self-only 

coverage equals the sum of the total 

participants covered at the beginning 

and end of the benefit year, as reported 

on the Form 5500, divided by 2, and the 

number of lives covered for the benefit 

year for a plan offering self-only 

coverage and coverage other than selfonly coverage equals the sum of the 

total participants covered at the 

beginning and the end of the benefit 

year, as reported on the Form 5500; and 

(f) Procedures for counting covered 

lives for group health plans with a selfinsured coverage option and an insured 

coverage option. To determine the 

number of covered lives of reinsurance 

contribution enrollees under a group 

health plan with a self-insured coverage 

option and an insured coverage option 

for a benefit year, a plan must use one 

of the methods specified in either 

paragraph (d)(1) or paragraph (d)(2) of 

this section. 

(g) Multiple group health plans 

maintained by the same plan sponsor— 

(1) General rule. If a plan sponsor 

maintains two or more self-insured 

group health plans (including one or 

more group health plans that provide 

health insurance coverage) that 

collectively provide major medical 

coverage for the same covered lives, 

then those multiple plans shall be 

treated as a single self-insured group 

health plan for purposes of calculating 

any reinsurance contribution amount 

due under paragraph (d) of this section. 

(2) Plan Sponsor. For purposes of this 

paragraph (g), the term ‘‘plan sponsor’’ 

means: 

(i) The employer, in the case of a plan 

established or maintained by a single 

employer; 

(ii) The employee organization, in the 

case of a plan established or maintained 

by an employee organization; 

(iii) The joint board of trustees, in the 

case of a multiemployer plan (as defined 

in section 414(f) of the Code); 

(iv) The committee, in the case of a 

multiple employer welfare arrangement; 

(v) The cooperative or association that 

establishes or maintains a plan 

established or maintained by a rural 

electric cooperative or rural cooperative 

association (as such terms are defined in 

section 3(40)(B) of ERISA); 

(vi) The trustee, in the case of a plan 

established or maintained by a 

voluntary employees’ beneficiary 

association (meaning that the 

association is not merely serving as a 

funding vehicle for a plan that is 

established or maintained by an 

employer or other person); 

(vii) In the case of a plan, the sponsor 

of which is not described in paragraph 

(g)(2)(i) through (g)(2)(vi) of this section, 

the person identified by the terms of the 

document under which the plan is 

operated as the plan sponsor, or the 

person designated by the terms of the 

document under which the plan is 

operated as the plan sponsor, provided 

that designation is made, and that 

person has consented to the designation, 

by no later than the date by which the 

count of covered lives for that benefit 

year is required to be provided, after 

which date that designation for that 

benefit year may not be changed or 

revoked, and provided further that a 

person may be designated as the plan 

sponsor only if the person is one of the 

persons maintaining the plan (for 

example, one of the employers that is 

maintaining the plan with one or more 

other employers or employee 

organizations); or 

(viii) In the case of a plan, the sponsor 

of which is not described in paragraph 

(g)(2)(i) through (g)(2)(vi) of this section, 

and for which no identification or 

designation of a plan sponsor has been 

made under paragraph (g)(2)(i)(vii) of 

this section, each employer that 

maintains the plan (with respect to 

employees of that employer), each 

employee organization that maintains 

the plan (with respect to members of 

that employee organization), and each 

board of trustees, cooperative or 

association that maintains the plan. 

(3) Exception. A plan sponsor is not 

required to include as part of a single 

self-insured group health plan as 

determined under paragraph (g)(1) of 

this section any self-insured group 

health plan (including a group health 

plan that provides health insurance 

coverage) that consists solely of 

excepted benefits as defined by section 

2791(c) of the PHS Act, or that only 

provides benefits related to prescription 

drugs. 

(4) Procedures for counting covered 

lives for multiple group health plans 

treated as a single group health plan. 


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The rules in this paragraph (g)(4) govern 

the determination of the average number 

of covered lives in a benefit year for any 

set of multiple self-insured group health 

plans or health insurance plans (or a 

combination of one or more self-insured 

group health plans and one or more 

health insurance plans) that are treated 

as a single group health plan under 

paragraph (g)(1) of this section. 

(i) Multiple group health plans 

including an insured plan. If at least one 

of the multiple plans is an insured plan, 

the average number of covered lives of 

reinsurance contribution enrollees must 

be calculated using one of the methods 

specified in either paragraph (d)(1) or 

paragraph (d)(2) of this section, applied 

across the multiple plans as a whole. 

The following information must be 

determined by the plan sponsor and 

reported to HHS, in a manner and 

timeframe specified by HHS: 

(A) The average number of covered 

lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans 

being treated as a single group health 

plan as determined by the plan sponsor 

and reported to HHS. 

(ii) Multiple group health plans not 

including an insured plan. If each of the 

multiple plans is a self-insured group 

health plan, the average number of 

covered lives of reinsurance 

contribution enrollees must be 

calculated using one of the methods 

specified either in paragraph (e)(1) or 

paragraph (e)(2) of this section, applied 

across the multiple plans as a whole. 

The following information must be 

determined by the plan sponsor and 

reported to HHS, in a manner and 

timeframe specified by HHS: 

(A) The average number of covered 

lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans 

being treated as a single group health 

plan as determined by the plan sponsor. 

19. Section 153.410 is amended by 

revising paragraph (a) as follows: 

§ 153.410 Requests for reinsurance 

payments. 

(a) General requirement. An issuer of 

a reinsurance-eligible plan may make a 

request for payment when an enrollee of 

that reinsurance-eligible plan has met 

the criteria for reinsurance payment set 

forth in subpart B of this part and the 

HHS notice of benefit and payment 

parameters and State notice of benefit 

and payment parameters for the 

applicable benefit year, if applicable. 

* * * * * 

20. Section 153.420 is added to 

subpart E to read as follows: 

§ 153.420 Data collection. 

(a) Data requirement. To be eligible 

for reinsurance payments, an issuer of a 

reinsurance-eligible plan must submit or 

make accessible all required reinsurance 

data in accordance with the reinsurance 

data collection approach established by 

the State, or by HHS on behalf of the 

State. 

(b) Deadline for submission of data. 

An issuer of a reinsurance-eligible plan 

must submit or make accessible data to 

be considered for reinsurance payments 

for the applicable benefit year by April 

30 of the year following the end of the 

applicable benefit year. 

21. Section 153.500 is amended by— 

A. Revising the definitions of 

‘‘Administrative costs’’ and ‘‘Allowable 

administrative costs.’’ 

B. Adding the definitions of ‘‘Aftertax premiums earned,’’ ‘‘Profits,’’ and 

‘‘Taxes’’ in alphabetical order. 

The revisions and additions read as 

follows: 

§ 153.500 Definitions. 

* * * * * 

Administrative costs mean, with 

respect to a QHP, total non-claims costs 

incurred by the QHP issuer for the QHP, 

including taxes. 

After-tax premiums earned mean, 

with respect to a QHP, premiums earned 

with respect to the QHP minus taxes. 

Allowable administrative costs mean, 

with respect to a QHP, the sum of 

administrative costs of the QHP, other 

than taxes plus profits earned by the 

QHP, which sum is limited to 20 

percent of after-tax premiums earned 

with respect to the QHP (including any 

premium tax credit under any 

governmental program), plus taxes. 

* * * * * 

Profits mean, with respect to a QHP, 

the greater of: 

(1) Three percent of after tax 

premiums earned, and 

(2) Premiums earned of the QHP 

minus the sum of allowable costs and 

administrative costs of the QHP. 

* * * * * 

Taxes mean, with respect to a QHP, 

Federal and State licensing and 

regulatory fees paid with respect to the 

QHP as described in § 158.161(a) of this 

subchapter, and Federal and State taxes 

and assessments paid with respect to 

the QHP as described in § 158.162(a)(1) 

and (b)(1) of this subchapter. 

* * * * * 

22. Section 153.510 is amended by 

adding new paragraph (d) to read as 

follows:. 

§ 153.510 Risk corridors establishment 

and payment methodology. 

* * * * * 

(d) Charge submission deadline. A 

QHP issuer must remit charges to HHS 

within 30 days after notification of such 

charges. 

23. Section 153.530 is amended by— 

A. Revising paragraphs (a), (b) 

introductory text, (b)(2)(iii), and (c). 

B. Adding new paragraph (d). 

The revisions and additions read as 

follows: 

§ 153.530 Risk corridors data 

requirements. 

(a) Premium data. A QHP issuer must 

submit to HHS data on the premiums 

earned with respect to each QHP that 

the issuer offers in a manner specified 

by HHS. 

(b) Allowable costs. A QHP issuer 

must submit to HHS data on the 

allowable costs incurred with respect to 

each QHP that the QHP issuer offers in 

a manner specified by HHS. For 

purposes of this subpart, allowable costs 

must be— 

* * * * * 

(2) * * * 

(iii) Any cost-sharing reduction 

payments received by the issuer for the 

QHP to the extent not reimbursed to the 

provider furnishing the item or service. 

(c) Allowable administrative costs. A 

QHP issuer must submit to HHS data on 

the allowable administrative costs 

incurred with respect to each QHP that 

the QHP issuer offers in a manner 

specified by HHS. 

(d) Timeframes. For each benefit year, 

a QHP issuer must submit all 

information required under this section 

by July 31 of the year following the 

benefit year. 

24. Section 153.630 is added to 

subpart G to read as follows: 

§ 153.630 Data validation requirements 

when HHS operates risk adjustment. 

(a) General requirement. An issuer of 

a risk adjustment covered plan in a State 

where HHS is operating risk adjustment 

on behalf of the State for the applicable 

benefit year must have an initial and 

second validation audit performed on 

its risk adjustment data as described in 

this section. 

(b) Initial validation audit. 

(1) An issuer of a risk adjustment 

covered plan must engage one or more 

independent auditors to perform an 

initial validation audit of a sample of its 

risk adjustment data selected by HHS. 

(2) The issuer must ensure that the 

initial validation auditors are reasonably 

capable of performing an initial data 

validation audit according to the 

standards established by HHS for such 

audit, and must ensure that the audit is 

so performed. 

(3) The issuer must ensure that each 

initial validation auditor is reasonably 


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free of conflicts of interest, such that it 

is able to conduct the initial validation 

audit in an impartial manner and its 

impartiality is not reasonably open to 

question. 

(4) The issuer must ensure validation 

of the accuracy of risk adjustment data 

for a sample of enrollees selected by 

HHS. The issuer must ensure that the 

initial validation audit findings are 

submitted to HHS in a manner and 

timeframe specified by HHS. 

(c) Second validation audit. HHS will 

select a subsample of the risk 

adjustment data validated by the initial 

validation audit for a second validation 

audit. The issuer must comply with, and 

must ensure the initial validation 

auditor complies with, standards for 

such audit established by HHS, and 

must cooperate with, and must ensure 

that the initial validation auditor 

cooperates with, HHS and the second 

validation auditor in connection with 

such audit. 

(d) Data validation appeals. An issuer 

may appeal the findings of a second 

validation audit or the application of a 

risk score error rate to its risk 

adjustment payments and charges. 

(e) Adjustment of payments and 

charges. HHS may adjust payments and 

charges for issuers that do not comply 

with audit requirements and standards, 

as specified in part (b) and (c) of this 

section. 

(f) Data security and transmission. 

(1) An issuer must submit the risk 

adjustment data and source 

documentation for the initial and 

second validation audits specified by 

HHS to HHS or its designee in the 

manner and timeframe specified by 

HHS. 

(2) An issuer must ensure that it and 

its initial validation auditor comply 

with the security standards described at 

45 CFR 164.308, 164.310, and 164.312 

in connection with the initial validation 

audit, the second validation audit, and 

any appeal. 

25. Subpart H is added to read as 

follows: 

Subpart H—Distributed Data Collection for 

HHS-Operated Programs 

Sec. 

153.700 Distributed data environment. 

153.710 Data requirements. 

153.720 Establishment and usage of masked 

enrollee identification numbers. 

153.730 Deadline for submission of data. 

Subpart H—Distributed Data Collection 

for HHS-Operated Programs 

§ 153.700 Distributed data environment. 

(a) Dedicated distributed data 

environments. For each benefit year in 

which HHS operates the risk adjustment 

or reinsurance program on behalf of a 

State, an issuer of a risk adjustment 

covered plan or a reinsurance-eligible 

plan in the State, as applicable, must 

establish a dedicated data environment 

and provide data access to HHS, in a 

manner and timeframe specified by 

HHS, for any HHS-operated risk 

adjustment and reinsurance program. 

(b) Timeline. An issuer must establish 

the dedicated data environment (and 

confirm proper establishment through 

successfully testing the environment to 

conform with applicable HHS standards 

for such testing) three months prior to 

the first date of full operation. 

§ 153.710 Data requirements. 

(a) Enrollment, claims, and encounter 

data. An issuer of a risk adjustment 

covered plan or a reinsurance-eligible 

plan in a State in which HHS is 

operating the risk adjustment or 

reinsurance program, as applicable, 

must provide to HHS, through the 

dedicated data environment, access to 

enrollee-level plan enrollment data, 

enrollee claims data, and enrollee 

encounter data as specified by HHS. 

(b) Claims data. All claims data 

submitted by an issuer of a risk 

adjustment covered plan or a 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, must have resulted in 

payment by the issuer. 

(c) Claims data from capitated plans. 

An issuer of a risk adjustment covered 

plan or a reinsurance-eligible plan in a 

State in which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, that does not generate 

individual enrollee claims in the normal 

course of business must derive the costs 

of all applicable provider encounters 

using its principal internal methodology 

for pricing those encounters. If the 

issuer does not have such a 

methodology, or has an incomplete 

methodology, it must supplement the 

methodology in a manner that yields 

derived claims that are reasonable in 

light of the specific service and 

insurance market that the plan is 

serving. 

§ 153.720 Establishment and usage of 

masked enrollee identification numbers. 

(a) Enrollee identification numbers. 

An issuer of a risk adjustment covered 

plan or a reinsurance-eligible plan in a 

State in which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, must— 

(1) Establish a unique masked 

enrollee identification number for each 

enrollee; and 

(2) Maintain the same masked 

enrollee identification number for an 

enrollee across enrollments or plans 

within the issuer, within the State, 

during a benefit year. 

(b) Prohibition on personally 

identifiable information. An issuer of a 

risk adjustment covered plan or a 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program on 

behalf of the State, as applicable, may 

not— 

(1) Include enrollee’s personally 

identifiable information in the masked 

enrollee identification number; or 

(2) Use the same masked enrollee 

identification number for different 

enrollees enrolled with the issuer. 

§ 153.730 Deadline for submission of data. 

A risk adjustment covered plan or a 

reinsurance-eligible plan in a State in 

which HHS is operating the risk 

adjustment or reinsurance program, as 

applicable, must submit data to be 

considered for risk adjustment 

payments and charges and reinsurance 

payments for the applicable benefit year 

by April 30 of the year following the 

applicable benefit year. 

PART 155—EXCHANGE 

ESTABLISHMENT STANDARDS AND 

OTHER RELATED STANDARDS 

UNDER THE AFFORDABLE CARE ACT 

26. The authority citation for part 155 

continues to read as follows: 

Authority: Secs. 1301, 1302, 1303, 1304, 

1311, 1312, 1313, 1321, 1322, 1331, 1334, 

1401, 1402, 1411, 1412, 1413. 

27. Section 155.20 is amended by— 

A. Revising the definitions of ‘‘Large 

employer’’ and ‘‘Small employer’’. 

B. Adding definitions of ‘‘Federallyfacilitated Exchange,’’ ‘‘Federallyfacilitated SHOP,’’ and ‘‘Full-time 

employee’’ in alphabetical order. 

The revisions and additions read as 

follows: 

§ 155.20 Definitions. 

* * * * * 

Federally-facilitated Exchange means 

an Exchange established and operated 

within a State by the Secretary under 

section 1321(c)(1) of the Affordable Care 

Act. 

Federally-facilitated SHOP means a 

Small Business Health Options Program 

established and operated within a State 

by the Secretary under section 

1321(c)(1) of the Affordable Care Act. 

Full-time employee has the meaning 

given in section 4980H (c)(4) of the 

Code effective for plan years beginning 

on or after January 1, 2016, except for 

operations of a Federally-facilitated 


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SHOP for which it is effective for plan 

years beginning on or after October 1, 

2013. 

* * * * * 

Large employer means, in connection 

with a group health plan with respect to 

a calendar year and a plan year, an 

employer who employed an average of 

at least 101 employees on business days 

during the preceding calendar year and 

who employs at least 1 employee on the 

first day of the plan year. In the case of 

plan years beginning before January 1, 

2016, a State may elect to define larger 

employer by substituting ‘‘51 

employees’’ for ‘‘101 employees.’’ The 

number of employees shall be 

determined using the method set forth 

in section 4980H (c)(2)(E) of the Code, 

effective for plan years beginning on or 

after January 1, 2016, except for 

operations of a Federally-facilitated 

SHOP for which the method shall be 

used for plan years beginning on or after 

October 1, 2013. 

* * * * * 

Small employer means, in connection 

with a group health plan with respect to 

a calendar year and a plan year, an 

employer who employed an average of 

at least 1 but not more than 100 

employees on business days during the 

preceding calendar year and who 

employs at least 1 employee on the first 

day of the plan year. In the case of plan 

years beginning before January 1, 2016, 

a State may elect to define small 

employer by substituting ‘‘50 

employees’’ for ‘‘100 employees.’’ The 

number of employees shall be 

determined using the method set forth 

in section 4980H (c)(2)(E) of the Code, 

effective for plan years beginning on or 

after January 1, 2016, except for 

operations of a Federally-facilitated 

SHOP for which the method shall be 

used for plan years beginning on or after 

October 1, 2013. 

* * * * * 

28. Section 155.220 is amended by 

revising paragraph (b) to read as 

follows— 

§ 155.220 Ability to States to permit agents 

and brokers to assist qualified individuals, 

qualified employers, or qualified employees 

enrolling in QHPs. 

* * * * * 

(b)(1) Web site disclosure. The 

Exchange or SHOP may elect to provide 

information regarding licensed agents 

and brokers on its Web site for the 

convenience of consumers seeking 

insurance through that Exchange and 

may elect to limit the information to 

information regarding licensed agents 

and brokers who have completed any 

required Exchange or SHOP registration 

and training process. 

(2) A Federally-facilitated Exchange 

or SHOP will limit the information 

provided on its Web site regarding 

licensed agents and brokers to 

information regarding licensed agents 

and brokers who have completed 

registration and training. 

* * * * * 

29. Section 155.305 is amended by 

revising paragraph (g)(3) to read as 

follows: 

§ 155.305 Eligibility standards. 

* * * * * 

(g) * * * 

(3) Special rule for family policies. To 

the extent that an enrollment in a QHP 

in the individual market offered through 

an Exchange under a single policy 

covers two or more individuals who, if 

they were to enroll in separate 

individual policies would be eligible for 

different cost sharing, the Exchange 

must deem the individuals under such 

policy to be collectively eligible only for 

the category of eligibility last listed 

below for which all the individuals 

covered by the policy would be eligible: 

(i) Individuals not eligible for changes 

to cost sharing; 

(ii) Individuals described in 

§ 155.350(b) (the special cost-sharing 

rule for Indians regardless of income); 

(iii) Individuals described in 

paragraph (g)(2)(iii) of this section; 

(iv) Individuals described in 

paragraph (g)(2)(ii) of this section; 

(v) Individuals described in paragraph 

(g)(2)(i) of this section; and 

(vi) Individuals described in 

§ 155.350(a) (the cost-sharing rule for 

Indians with household incomes under 

300 percent of the FPL). 

* * * * * 

30. Section 155.330 is amended by 

adding paragraph (g) to read as follows: 

§ 155.330 Eligibility redetermination during 

a benefit year. 

* * * * * 

(g) Recalculation of advance 

payments of the premium tax credit and 

cost-sharing reductions. (1) When 

recalculating the amount of advance 

payments of the premium tax credit for 

which a tax filer is determined eligible 

as a result of an eligibility 

redetermination in accordance with this 

section, the Exchange must — 

(i) Account for any advance payments 

already made on behalf of the tax filer 

for the benefit year for which 

information is available to the 

Exchange, such that the recalculated 

advance payment amount is projected to 

result in total advance payments for the 

benefit year that correspond to the tax 

filer’s total projected premium tax credit 

for the benefit year, calculated in 

accordance with 26 CFR 1.36B–3; and 

(ii) Ensure that that the advance 

payment provided on the tax filer’s 

behalf is greater than or equal to zero 

and is calculated in accordance with 26 

CFR 1.36B–3(d)(1). 

(2) When redetermining eligibility for 

cost-sharing reductions in accordance 

with this section, the Exchange must 

determine an individual eligible for the 

category of cost-sharing reductions that 

corresponds to his or her expected 

annual household income for the benefit 

year (subject to the special rule for 

family policies set forth in 

§ 155.305(g)(3). 

31. Section 155.340 is amended by 

adding paragraphs (e) and (f) to read as 

follows: 

§ 155.340 Administration of advance 

payments of the premium tax credit and 

cost-sharing reductions. 

* * * * * 

(e) Allocation of advance payments of 

the premium tax credit between 

policies. If advance payments of the 

premium tax credit are to be made on 

behalf of a tax filer (or two tax filers 

who are a married couple), and 

individuals in the tax filer’s tax 

household are enrolled in more than 

one QHP or stand-alone dental plan, 

then the advance payments must be 

allocated as follows: 

(1) That portion of the advance 

payment of the premium tax credit that 

is less than or equal to the aggregate 

adjusted monthly premiums, as defined 

in 26 CFR § 1.36B–3(e), for the QHP 

policies properly allocated to EHB must 

be allocated among the QHP policies in 

proportion to the respective portions of 

the premiums for the policies properly 

allocated to EHB; and 

(2) Any remaining advance payment 

of the premium tax credit must be 

allocated among the stand-alone dental 

policies (if any) in proportion to the 

respective portions of the adjusted 

monthly premiums for the stand-alone 

dental policies properly allocated to the 

pediatric dental essential health benefit. 

(f) Reduction of enrollee’s portion of 

premium to account for advance 

payments of the premium tax credit. If 

an Exchange is facilitating the collection 

and payment of premiums to QHP 

issuers and stand-alone dental plans on 

behalf of enrollees under § 155.240, and 

if a QHP issuer or stand-alone dental 

plan has been notified that it will 

receive an advance payment of the 

premium tax credit on behalf of an 

enrollee for whom the Exchange is 

facilitating such functions, the Exchange 

must— 


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(1) Reduce the portion of the premium 

for the policy collected from the 

individual for the applicable month(s) 

by the amount of the advance payment 

of the premium tax credit; and 

(2) Include with each billing 

statement, as applicable, to or for the 

individual the amount of the advance 

payment of the premium tax credit for 

the applicable month(s) and the 

remaining premium owed for the policy. 

32. Section 155.705 is amended by 

revising paragraph (b)(3) and by adding 

new paragraphs (b)(10)(i), (b)(10)(ii), 

(b)(11)(i) and (b)(11)(ii) to read as 

follows: 

§ 155.705 Functions of a SHOP. 

* * * * * 

(b) * * * 

(3) (i) SHOP options with respect to 

employer choice requirements. With 

regard to QHPs offered through the 

SHOP, the SHOP may allow a qualified 

employer to make one or more QHPs 

available to qualified employees by a 

method other than the method 

described in paragraph (b)(2) of this 

section. 

(ii) A Federally-facilitated SHOP will 

only permit a qualified employer to 

make available to qualified employees 

all QHPs at the level of coverage 

selected by the employer as described in 

paragraph (b)(2) of this section. 

* * * * * 

(10) * * * 

(i) Subject to sections 2702 and 2703 

of the Public Health Service Act, a 

Federally-facilitated SHOP must use a 

minimum participation rate of 70 

percent, calculated as the number of 

qualified employees accepting coverage 

under the employer’s group health plan, 

divided by the number of qualified 

employees offered coverage, excluding 

from the calculation any employee who, 

at the time the employer submits the 

SHOP application, is enrolled in 

coverage through another employer’s 

group health plan or through a 

governmental plan such as Medicare, 

Medicaid, or TRICARE. 

(ii) Notwithstanding paragraph 

(b)(10)(i) of this section, a Federallyfacilitated SHOP may utilize a different 

minimum participation rate in a State if 

there is evidence that a State law sets a 

minimum participation rate or that a 

higher or lower minimum participation 

rate is customarily used by the majority 

of QHP issuers in that State for products 

in the State’s small group market 

outside the SHOP. 

(11) * * * 

(i) To determine the employer and 

employee contributions, a SHOP may 

establish one or more standard methods 

that employers may use to define their 

contributions toward employee and 

dependent coverage. 

(ii) A Federally-facilitated SHOP must 

use the following method for employer 

contributions: 

(A) The employer will select a level 

of coverage as described in paragraph 

(b)(2) and (b)(3) of this section. 

(B) The employer will select a QHP 

within that level of coverage to serves as 

a reference plan on which contributions 

will be based. 

(C) The employer will define a 

percentage contribution toward 

premiums for employee-only coverage 

under the reference plan and, if 

dependent coverage is offered, a 

percentage contribution toward 

premiums for dependent coverage under 

the reference plan. 

(D) An employer may establish, to the 

extent allowed by Federal and State law, 

different percentages for different 

employee categories. 

(E) Either State law or the employer 

may require that a Federally-facilitated 

SHOP base contributions on a 

calculated composite premium for the 

reference plan for employees, for adult 

dependents, and for dependents below 

age 21. 

(F) The resulting contribution 

amounts for each employee’s coverage 

may then be applied toward the QHP 

selected by the employee. 

33. Section 155.1030 is added to read 

as follows: 

§ 155.1030 QHP certification standards 

related to advance payments of the 

premium tax credit and cost-sharing 

reductions. 

(a) Review of plan variations for costsharing reductions. (1) The Exchange 

must ensure that each issuer that offers 

or seeks to offer a health plan at any 

level of coverage in the individual 

market on the Exchange submits the 

required plan variations for the health 

plan as described in § 156.420 of this 

subchapter. The Exchange must certify 

that the plan variations meet the 

requirements of § 156.420. 

(2) The Exchange must provide to 

HHS the actuarial values of each QHP 

and silver plan variation, calculated 

under § 156.135 of this subchapter, in 

the manner and timeframe established 

by HHS. 

(b) Information for administering 

advance payments of the premium tax 

credit and advance payments of costsharing reductions. (1) The Exchange 

must collect and review annually the 

rate allocation, the expected allowed 

claims cost allocation, and the actuarial 

memorandum that an issuer submits to 

the Exchange under § 156.470 of this 

subchapter, to ensure that such 

allocations meet the standards set forth 

in § 156.470(c) and (d). 

(2) The Exchange must submit, in the 

manner and timeframe established by 

HHS, to HHS the approved allocations 

and actuarial memorandum underlying 

the approved allocations for each health 

plan at any level of coverage or standalone dental plan offered, or proposed 

to be offered in the individual market on 

the Exchange. 

(3) The Exchange must collect 

annually any estimates and supporting 

documentation that a QHP issuer 

submits to receive advance payments of 

certain cost-sharing reductions, under 

§ 156.430(a) of this subchapter, and 

submit, in the manner and timeframe 

established by HHS, the estimates and 

supporting documentation to HHS for 

review. 

(4) HHS may use the information 

provided to HHS by the Exchange under 

this section for the approval of the 

estimates that an issuer submits for 

advance payments of cost-sharing 

reductions, as described in § 156.430 of 

this subchapter, and the oversight of the 

advance payments of cost-sharing 

reductions and premium tax credits 

programs. 

PART 156—HEALTH INSURANCE 

ISSUER STANDARDS UNDER THE 

AFFORDABLE CARE ACT, INCLUDING 

STANDARDS RELATED TO 

EXCHANGES 

34. The authority citation for part 156 

is revised to read as follows: 

Authority: Title I of the Affordable Care 

Act, sections 1301–1304, 1311–1312, 1321– 

1322, 1324, 1334, 1342–1343, 1401–1402, 

and 1412, Pub. L. 111–148, 124 Stat. 119 (42 

U.S.C. 18021–18024, 18031–18032, 18041– 

18042, 18044, 18054, 18061, 18063, 18071, 

18082, 26 U.S.C. 36B, and 31 U.S.C. 9701). 

35. Section 156.20 is amended by 

adding definitions for ‘‘Federallyfacilitated SHOP’’ and ‘‘Issuer group’’ in 

alphabetical order to read as follows: 

§ 156.20 Definitions. 

* * * * * 

Federally-facilitated SHOP has the 

meaning given to the term in § 155.20 of 

this subchapter. 

* * * * * 

Issuer group means all entities treated 

under subsection (a) or (b) of section 52 

of the Internal Revenue Code of 1986 as 

a member of the same controlled group 

of corporations as (or under common 

control with) a health insurance issuer, 

or issuers affiliated by the common use 

of a nationally licensed service mark. 

* * * * * 


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36. Section 156.50 is amended by 

revising paragraph (b) and by adding 

paragraph (c) to read as follows: 

§ 156.50 Financial support. 

* * * * * 

(b) Requirement for State-based 

Exchange user fees. A participating 

issuer must remit user fee payments, or 

any other payments, charges, or fees, if 

assessed by a State-based Exchange 

under § 155.160 of this subchapter. 

(c) Requirement for Federallyfacilitated Exchange user fee. To 

support the functions of Federallyfacilitated Exchanges, a participating 

issuer offering a plan through a 

Federally-facilitated Exchange must 

remit a user fee to HHS each month, in 

the timeframe and manner established 

by HHS, equal to the product of the 

billable members enrolled through the 

Exchange in the plan offered by the 

issuer, and the monthly user fee rate 

specified in the annual HHS notice of 

benefit and payment parameters for the 

applicable benefit year. For purposes of 

this paragraph, billable members are 

defined under 45 CFR 147.102(c)(1) as 

each family member in a policy, with a 

limitation of three family members 

under age 21. 

37. Section 156.200 is amended by 

adding paragraphs (f) and (g) to read as 

follows: 

§ 156.200 QHP issuer participation 

standards. 

* * * * * 

(f) Broker compensation in a 

Federally-facilitated Exchange. A QHP 

issuer must pay the same broker 

compensation for QHPs offered through 

a Federally-facilitated Exchange that the 

QHP issuer pays for similar health plans 

offered in the State outside a Federallyfacilitated Exchange. 

(g) Certification standard specific to a 

Federally-facilitated Exchange. A 

Federally-facilitated Exchange may 

certify a QHP in the individual market 

of a Federally-facilitated Exchange only 

if the QHP issuer meets one of the 

conditions below: 

(1) The QHP issuer also offers through 

a Federally-facilitated SHOP serving 

that State at least one small group 

market QHP at the silver level of 

coverage and one at the gold level of 

coverage as described in section 1302(d) 

of the Affordable Care Act; 

(2) The QHP issuer does not offer 

small group market products in that 

State, but another issuer in the same 

issuer group offers through a Federallyfacilitated SHOP serving that State at 

least one small group market QHP at the 

silver level of coverage and one at the 

gold level of coverage; or 

(3) Neither the issuer nor any other 

issuer in the same issuer group offers a 

small group market product in that 

State. 

38. Section 156.215 is added to read 

as follows: 

§ 156.215 Advance payments of the 

premium tax credit and cost-sharing 

reduction standards. 

(a) Standards relative to advance 

payments of the premium tax credit and 

cost-sharing reductions. In order for a 

health plan to be certified as a QHP 

initially and to maintain certification to 

be offered in the individual market on 

the Exchange, the issuer must meet the 

requirements related to the 

administration of cost-sharing 

reductions and advance payments of the 

premium tax credit set forth in subpart 

E of this part. 

(b) [Reserved] 

39. Section 156.285 is amended by 

adding paragraph (c)(7) to read as 

follows: 

§ 156.285 Additional standards specific to 

SHOP. 

* * * * * 

(c) * * * 

(7) A QHP issuer must enroll a 

qualified employee only if the 

Exchange— 

(i) Notifies the QHP issuer that the 

employee is a qualified employee; and 

(ii) Transmits information to the QHP 

issuer as provided in § 155.400(a) of this 

subchapter. 

* * * * * 

40. Subpart E is added to read as 

follows: 

Subpart E—Health Insurance Issuer 

Responsibilities With Respect to Advance 

Payments of the Premium Tax Credit and 

Cost-Sharing Reductions 

Sec. 

156.400 Definitions. 

156.410 Cost-sharing reductions for 

enrollees. 

156.420 Plan variations. 

156.425 Changes in eligibility for costsharing reductions. 

156.430 Payment for cost-sharing 

reductions. 

156.440 Plans eligible for advance 

payments of the premium tax credit and 

cost-sharing reductions. 

156.460 Reduction of enrollee’s share of 

premium to account for advance 

payments of the premium tax credit. 

156.470 Allocation of rates and claims 

costs for advance payments of costsharing reductions and the premium tax 

credit. 

Subpart E—Health Insurance Issuer 

Responsibilities With Respect to 

Advance Payments of the Premium 

Tax Credit and Cost-Sharing 

Reductions 

§ 156.400 Definitions. 

The following definitions apply to 

this subpart: 

Advance payments of the premium 

tax credit has the meaning given to the 

term in § 155.20 of this subchapter. 

Affordable Care Act has the meaning 

given to the term in § 155.20 of this 

subchapter. 

Annual limitation on cost sharing 

means the annual dollar limit on cost 

sharing required to be paid by an 

enrollee that is established by a 

particular qualified health plan. 

De minimis variation means the 

allowable variation in the AV of a health 

plan that does not result in a material 

difference in the true dollar value of the 

health plan as established in 

§ 156.140(c)(1). 

De minimis variation for a silver plan 

variation means a single percentage 

point. 

Federal poverty level or FPL has the 

meaning given to the term in 

§ 155.300(a) of this subchapter. 

Indian has the meaning given to the 

term in § 155.300(a) of this subchapter. 

Limited cost sharing plan variation 

means, with respect to a QHP at any 

level of coverage, the variation of such 

QHP described in § 156.420(b)(2). 

Maximum annual limitation on cost 

sharing means the highest annual dollar 

amount that qualified health plans 

(other than QHPs with cost-sharing 

reductions) may require in cost sharing 

for a particular year, as established for 

that year under § 156.130. 

Most generous or more generous 

means, between a QHP (including a 

standard silver plan) or plan variation, 

and one or more other plan variations of 

the same QHP, the QHP or plan 

variation designed for the category of 

individuals last listed in § 155.305(g)(3) 

of this subchapter. 

Plan variation means a zero cost 

sharing plan variation, a limited cost 

sharing plan variation, or a silver plan 

variation. 

Reduced maximum annual limitation 

on cost sharing means the dollar value 

of the maximum annual limitation on 

cost sharing for a silver plan variation 

that remains after applying the 

reduction, if any, in the maximum 

annual limitation on cost sharing 

required by section 1402 of the 

Affordable Care Act as announced in the 

annual HHS notice of benefit and 

payment parameters. 


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Silver plan variation means, with 

respect to a standard silver plan, any of 

the variations of that standard silver 

plan described in § 156.420(a). 

Stand-alone dental plan means a plan 

offered through an Exchange under 

§ 155.1065 of this subchapter. 

Standard plan means a QHP offered 

at one of the four levels of coverage, 

defined at § 156.140, with an annual 

limitation on cost sharing that conforms 

to the requirements of § 156.130(a). A 

standard plan at the bronze, silver, gold, 

or platinum level of coverage is referred 

to as a standard bronze plan, a standard 

silver plan, a standard gold plan, and a 

standard platinum plan, respectively. 

Zero cost sharing plan variation 

means, with respect to a QHP at any 

level of coverage, the variation of such 

QHP described in § 156.420(b)(1). 

§ 156.410 Cost-sharing reductions for 

enrollees. 

(a) General requirement. A QHP issuer 

must ensure that an individual eligible 

for cost-sharing reductions, as 

demonstrated by assignment to a 

particular plan variation, pay only the 

cost sharing required of an eligible 

individual for the applicable covered 

service under the plan variation. The 

cost-sharing reduction for which an 

individual is eligible must be applied 

when the cost sharing is collected. 

(b) Assignment to applicable plan 

variation. If an individual is determined 

to be eligible to enroll in a QHP in the 

individual market offered through an 

Exchange and elects to do so, the QHP 

issuer must assign the individual under 

enrollment and eligibility information 

submitted by the Exchange as follows— 

(1) If the individual is determined 

eligible by the Exchange for cost-sharing 

reductions under § 155.305(g)(2)(i), (ii), 

or (iii) of this subchapter (subject to the 

special rule for family policies set forth 

in § 155.305(g)(3) of this subchapter) 

and chooses to enroll in a silver health 

plan, the QHP issuer must assign the 

individual to the silver plan variation of 

the selected silver health plan described 

in § 156.420(a)(1), (2), or (3), 

respectively. 

(2) If the individual is determined 

eligible by the Exchange for cost-sharing 

reductions for Indians with lower 

household income under § 155.350(a) of 

this subchapter (subject to the special 

rule for family policies set forth in 

§ 155.305(g)(3) of this subchapter), and 

chooses to enroll in a QHP, the QHP 

issuer must assign the individual to the 

zero cost sharing plan variation of the 

selected QHP with all cost sharing 

eliminated described in § 156.420(b)(1). 

(3) If the individual is determined by 

the Exchange to be eligible for costsharing reductions for Indians 

regardless of household income under 

§ 155.350(b) of this subchapter (subject 

to the special rule for family policies set 

forth in § 155.305(g)(3) of this 

subchapter), and chooses to enroll in a 

QHP, the QHP issuer must assign the 

individual to the limited cost sharing 

plan variation of the selected QHP with 

the prohibition on cost sharing for 

benefits received from the Indian Health 

Service and certain other providers 

described in § 156.420(b)(2). 

(4) If the individual is determined by 

the Exchange not to be eligible for costsharing reductions (including eligibility 

under the special rule for family 

policies set forth in § 155.305(g)(3) of 

this subchapter), and chooses to enroll 

in a QHP, the QHP issuer must assign 

the individual to the selected QHP with 

no cost-sharing reductions. 

§ 156.420 Plan variations. 

(a) Submission of silver plan 

variations. For each of its silver health 

plans that an issuer seeks to offer or to 

continue to offer in the individual 

market on an Exchange, the issuer must 

submit annually to the Exchange for 

certification prior to each benefit year 

the standard silver plan and three 

variations of the standard silver plan, as 

follows— 

(1) For individuals eligible for costsharing reductions under 

§ 155.305(g)(2)(i) of this subchapter, a 

variation of the standard silver plan 

with: 

(i) An annual limitation on cost 

sharing no greater than the reduced 

maximum annual limitation on cost 

sharing specified in the annual HHS 

notice of benefit and payment 

parameters for such individuals, and 

(ii) Other cost-sharing reductions such 

that the AV of the silver plan variation 

is 94 percent plus or minus the de 

minimis variation for a silver plan 

variation; 

(2) For individuals eligible for costsharing reductions under 

§ 155.305(g)(2)(ii) of this subchapter, a 

variation of the standard silver plan 

with: 

(i) An annual limitation on cost 

sharing no greater than the reduced 

maximum annual limitation on cost 

sharing specified in the annual HHS 

notice of benefit and payment 

parameters for such individuals, and 

(ii) Other cost-sharing reductions such 

that the AV of the silver plan variation 

is 87 percent plus or minus the de 

minimis variation for a silver plan 

variation; and 

(3) For individuals eligible for costsharing reductions under 

§ 155.305(g)(2)(iii) of this subchapter, a 

variation of the standard silver plan 

with: 

(i) An annual limitation on cost 

sharing no greater than the reduced 

maximum annual limitation on cost 

sharing specified in the annual HHS 

notice of benefit and payment 

parameters for such individuals, and 

(ii) Other cost-sharing reductions such 

that the AV of the silver plan variation 

is 73 percent plus or minus the de 

minimis variation for a silver plan 

variation (subject to § 156.420(h)). 

(b) Submission of zero and limited 

cost sharing plan variations. For each of 

its health plans at any level of coverage 

that an issuer seeks QHP certification 

for the individual market on an 

Exchange, the issuer must submit to the 

Exchange for certification the health 

plan and two variations of the health 

plan, as follows— 

(1) For individuals eligible for costsharing reductions under § 155.350(a) of 

this subchapter, a variation of the health 

plan with all cost sharing eliminated; 

and 

(2) For individuals eligible for costsharing reductions under § 155.350(b) of 

this subchapter, a variation of the health 

plan with no cost sharing on any item 

or service that is an EHB furnished 

directly by the Indian Health Service, an 

Indian Tribe, Tribal Organization, or 

Urban Indian Organization (each as 

defined in 25 U.S.C. 1603), or through 

referral under contract health services. 

(c) Benefit and network equivalence in 

silver plan variations. A standard silver 

plan and each silver plan variation 

thereof must cover the same benefits 

and providers, and require the same outof-pocket spending for benefits other 

than essential health benefits. Each 

silver plan variation is subject to all 

requirements applicable to the standard 

silver plan (except for the requirement 

that the plan have an AV as set forth in 

§ 156.140(b)(2)). 

(d) Benefit and network equivalence 

in zero and limited cost sharing plan 

variations. A QHP and each zero cost 

sharing plan variation or limited cost 

sharing plan variation thereof must 

cover the same benefits and providers, 

and require the same out-of-pocket 

spending for benefits other than 

essential health benefits. A limited cost 

sharing plan variation must have the 

same cost sharing on items or services 

not described in paragraph (b)(2) of this 

section as the QHP with no cost-sharing 

reductions. Each zero cost sharing plan 

variation or limited cost sharing plan 

variation is subject to all requirements 

applicable to the QHP (except for the 

requirement that the plan have an AV as 

set forth in § 156.140(b)). 


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(e) Decreasing cost sharing in higher 

AV silver plan variations. The cost 

sharing required of enrollees under any 

silver plan variation of a standard silver 

plan for an essential health benefit from 

a provider (including a provider outside 

the plan’s network) may not exceed the 

corresponding cost sharing required in 

the standard silver plan or any other 

silver plan variation thereof with a 

lower AV. 

(f) Minimum AV differential between 

70 percent and 73 percent silver plan 

variations. Notwithstanding any 

permitted de minimis variation in AV 

for a health plan or permitted de 

minimis variation for a silver plan 

variation, the AVs of a standard silver 

plan and the silver plan variation 

thereof described in paragraph (a)(3) of 

this section must differ by at least 2 

percentage points. 

§ 156.425 Changes in eligibility for costsharing reductions. 

(a) Effective date of change in 

assignment. If the Exchange notifies a 

QHP issuer of a change in an enrollee’s 

eligibility for cost-sharing reductions 

(including a change in the individual’s 

eligibility under the special rule for 

family policies set forth in 

§ 155.305(g)(3) of this subchapter due to 

a change in eligibility of another 

individual on the same policy), then the 

QHP issuer must change the 

individual’s assignment such that the 

individual is assigned to the applicable 

standard plan or plan variation of the 

QHP as required under § 156.410(b) as 

of the effective date of eligibility 

required by the Exchange. 

(b) Continuity of deductible and outof-pocket amounts. In the case of a 

change in assignment to a different plan 

variation (or standard plan without costsharing reductions) of the same QHP in 

the course of a benefit year under this 

section, the QHP issuer must ensure that 

any cost sharing paid by the applicable 

individual under previous plan 

variations (or standard plan without 

cost-sharing reductions) for that benefit 

year is taken into account in the new 

plan variation (or standard plan without 

cost-sharing reductions) for purposes of 

calculating cost sharing based on 

aggregate spending by the individual, 

such as for deductibles or for the annual 

limitations on cost sharing. 

§ 156.430 Payment for cost-sharing 

reductions. 

(a) Estimates of value of cost-sharing 

reductions for purposes of advance 

payments. (1) For each health plan that 

an issuer offers, or intends to offer, in 

the individual market on an Exchange 

as a QHP, the issuer must provide to the 

Exchange annually prior to the benefit 

year, for approval by HHS, an estimate 

of the dollar value of the cost-sharing 

reductions to be provided over the 

benefit year. The estimate must: 

(i) If the QHP is a silver health plan, 

identify separately the per member per 

month dollar value of the cost-sharing 

reductions to be provided under each 

silver plan variation identified in 

§ 156.420(a)(1), (2), and (3); 

(ii) Regardless of the level of coverage 

of the QHP, identify the per member per 

month dollar value of the cost-sharing 

reductions to be provided under the 

zero cost sharing plan variation; 

(iii) Be accompanied by supporting 

documentation validating the estimate; 

and 

(iv) Be developed using the 

methodology specified by HHS in the 

applicable annual HHS notice of benefit 

and payment parameters. 

(2) If an issuer seeks advance 

payments for the cost-sharing 

reductions to be provided under the 

limited cost sharing plan variation of a 

health plan it offers, or seeks to offer, in 

the individual market on the Exchange 

as a QHP at any level of coverage, the 

issuer must provide to the Exchange 

annually prior to the benefit year, for 

approval by HHS, an estimate of the per 

member per month dollar value of the 

cost-sharing reductions to be provided 

over the benefit year under such limited 

cost sharing plan variation. The estimate 

must: 

(i) Be accompanied by supporting 

documentation validating the estimate; 

and 

(ii) Be developed using the 

methodology specified by HHS in the 

annual HHS notice of benefit and 

payment parameters. 

(3) HHS’s approval of the estimate 

will be based on whether the estimate 

is made consistent with the 

methodology specified by HHS in the 

annual HHS notice of benefit and 

payment parameters. 

(b) Advance payments. A QHP issuer 

will receive periodic advance payments 

based on the approved advance 

estimates provided under paragraph (a) 

of this section and the actual enrollment 

in the applicable plan variation. 

(c) Submission of actual amounts. A 

QHP issuer must submit to HHS, in the 

manner and timeframe established by 

HHS, the following— 

(1) In the case of a benefit for which 

the QHP issuer compensates the 

applicable provider in whole or in part 

on a fee-for-service basis, the total 

allowed costs for essential health 

benefits charged for an enrollees’ policy 

for the benefit year, broken down by 

what the issuer paid, what the enrollee 

paid, and the amount reimbursed to the 

provider by the QHP issuer for the 

amount that the enrollee would have 

paid under the standard QHP without 

cost-sharing reductions; and 

(2) In the case of a benefit for which 

the QHP issuer compensates the 

applicable provider in any other 

manner, the total allowed costs for 

essential health benefits charged for an 

enrollees’ policy for the benefit year, 

broken down by what the issuer paid, 

what the enrollee paid, and what the 

enrollee would have paid under the 

standard QHP without cost-sharing 

reductions. 

(d) Reconciliation of amounts. HHS 

will perform periodic reconciliations of 

any advance payments of cost-sharing 

reductions provided to a QHP issuer 

under paragraph (b) of this section 

against— 

(1) The actual amount of cost-sharing 

reductions provided to enrollees and 

reimbursed to providers by the QHP 

issuer for benefits for which the QHP 

issuer compensates the applicable 

providers in whole or in part on a feefor-service basis; and 

(2) The actual amount of cost-sharing 

reductions provided to enrollees for 

benefits for which the QHP issuer 

compensates the applicable providers in 

any other manner. 

(e) Payment of discrepancies. If the 

actual amounts of cost-sharing 

reductions described in paragraphs 

(d)(1) and (2) of this section are— 

(1) More than the amount of advance 

payments provided and the QHP issuer 

has timely provided the actual amounts 

of cost-sharing reductions as required 

under paragraph (c) of this section, HHS 

will reimburse the QHP issuer for the 

difference; and 

(2) Less than the amount of advance 

payments provided, the QHP issuer 

must repay the difference to HHS in the 

manner and timeframe specified by 

HHS. 

(f) Cost-sharing reductions during 

special periods. (1) Notwithstanding the 

reconciliation process described in 

paragraphs (c) through (e) of this 

section, a QHP issuer will not be eligible 

for reimbursement of any cost-sharing 

reductions provided following a 

termination of coverage effective date 

with respect to a grace period as 

described in § 155.430(b)(2)(ii)(A) or (B) 

of this subchapter. However, the QHP 

issuer will be eligible for reimbursement 

of cost-sharing reductions provided 

prior to the termination of coverage 

effective date. Advance payments of 

cost-sharing reductions will be paid to 

a QHP issuer prior to a determination of 

termination (including during any grace 

period, but the QHP issuer will be 


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required to repay any advance payments 

made with respect to any month after 

any termination of coverage effective 

date during a grace period). 

(2) Notwithstanding the reconciliation 

process described in paragraphs (c) 

through (e) of this section, if the 

termination of coverage effective date is 

prior to the determination of 

termination other than in the 

circumstances described in paragraph 

(f)(1) of this section, and if the 

termination (or the late determination 

thereof) is the fault of the QHP issuer, 

as reasonably determined by the 

Exchange, the QHP issuer will not be 

eligible for advance payments and 

reimbursement for cost-sharing 

reductions provided during the period 

following the termination of coverage 

effective date and prior to the 

determination of the termination. 

(3) Subject to the requirements of the 

reconciliation process described in 

paragraphs (c) through (e) of this 

section, if the termination of coverage 

effective date is prior to the 

determination of termination other than 

in the circumstances described in 

paragraph (f)(1) of this section, and if 

the reason for the termination (or late 

determination thereof) is not the fault of 

the QHP issuer, as reasonably 

determined by the Exchange, the QHP 

issuer will be eligible for advance 

payments and reimbursement for costsharing reductions provided during 

such period. 

(4) Subject to the requirements of the 

reconciliation process described in 

paragraphs (c) through (e) of this 

section, a QHP issuer will be eligible for 

advance payments and reimbursement 

for cost-sharing reductions provided 

during any period of coverage pending 

resolution of inconsistencies in 

information required to determine 

eligibility for enrollment under 

§ 155.315(f) of this subchapter. 

§ 156.440 Plans eligible for advance 

payments of the premium tax credit and 

cost-sharing reductions. 

Except as noted in paragraph (a) 

through (c) of this section, the 

provisions of this subpart apply to 

qualified health plans offered in the 

individual market on the Exchange. 

(a) Catastrophic plans. The provisions 

of this subpart do not apply to 

catastrophic plans as described in 

§ 156.155. 

(b) Stand-alone dental plans. The 

provisions of this subpart, to the extent 

relating to cost-sharing reductions, do 

not apply to stand-alone dental plans. 

The provisions of this subpart, to the 

extent relating to advance payments of 

the premium tax credit, apply to standalone dental plans. 

(c) Child-only plans. The provisions 

of this subpart apply to child-only 

QHPs, as described in § 156.200(c)(2). 

§ 156.460 Reduction of enrollee’s share of 

premium to account for advance payments 

of the premium tax credit. 

(a) Reduction of enrollee’s share of 

premium to account for advance 

payments of the premium tax credit. A 

QHP issuer that receives notice from the 

Exchange that an individual enrolled in 

the issuer’s QHP is eligible for an 

advance payment of the premium tax 

credit must— 

(1) Reduce the portion of the premium 

charged to or for the individual for the 

applicable month(s) by the amount of 

the advance payment of the premium 

tax credit; 

(2) Notify the Exchange of the 

reduction in the portion of the premium 

charged to the individual in accordance 

with § 156.265(g); and 

(3) Include with each billing 

statement, as applicable, to or for the 

individual the amount of the advance 

payment of the premium tax credit for 

the applicable month(s), and the 

remaining premium owed. 

(b) Delays in payment. A QHP issuer 

may not refuse to commence coverage 

under a policy or terminate coverage on 

account of any delay in payment of an 

advance payment of the premium tax 

credit on behalf of an enrollee if the 

QHP issuer has been notified by the 

Exchange under § 155.340(a) of this 

subchapter that the QHP issuer will 

receive such advance payment. 

§ 156.470 Allocation of rates and claims 

costs for advance payments of cost-sharing 

reductions and the premium tax credit. 

(a) Allocation to additional health 

benefits for QHPs. An issuer must 

provide to the Exchange annually for 

approval, in the manner and timeframe 

established by HHS, for each health 

plan at any level of coverage offered, or 

proposed to be offered in the individual 

market on an Exchange, an allocation of 

the rate and the expected allowed 

claims costs for the plan, in each case, 

to: 

(1) EHB, other than services described 

in § 156.280(d)(1), and 

(2) Any other services or benefits 

offered by the health plan not described 

paragraph (a)(1) of this section. 

(b) Allocation to additional health 

benefits for stand-alone dental plans. 

An issuer must provide to the Exchange 

annually for approval, in the manner 

and timeframe established by HHS, for 

each stand-alone dental plan offered, or 

proposed to be offered, in the individual 

market on the Exchange, a dollar 

allocation of the expected premium for 

the plan, to: 

(1) The pediatric dental essential 

health benefit, and 

(2) Any benefits offered by the standalone dental plan that are not the 

pediatric dental essential health benefit. 

(c) Allocation standards for QHPs. 

The issuer must ensure that the 

allocation described in paragraph (a) of 

this section— 

(1) Is performed by a member of the 

American Academy of Actuaries in 

accordance with generally accepted 

actuarial principles and methodologies; 

(2) Reasonably reflects the allocation 

of the expected allowed claims costs 

attributable to EHB (excluding those 

services described in § 156.280(d)(1)); 

(3) Is consistent with the allocation 

applicable to State-required benefits to 

be submitted by the issuer under 

§ 155.170(c) of this subchapter, and the 

allocation requirements described in 

§ 156.280(e)(4) for certain services; and 

(4) Is calculated under the fair health 

insurance premium standards described 

at 45 CFR 147.102, the single risk pool 

standards described at 45 CFR 156.80, 

and the same premium rate standards 

described at 45 CFR 156.255. 

(d) Allocation standards for standalone dental plans. The issuer must 

ensure that the dollar allocation 

described in paragraph (b) of this 

section— 

(1) Is performed by a member of the 

American Academy of Actuaries in 

accordance with generally accepted 

actuarial principles and methodologies; 

(2) Is consistent with the allocation 

applicable to State-required benefits to 

be submitted by the issuer under 

§ 155.170(c) of this subchapter; 

(3) Is calculated under the fair health 

insurance premium standards described 

at 45 CFR 147.102, except for the 

provision related to age set forth at 

§ 147.102(a)(1)(ii); the single risk pool 

standards described at 45 CFR 156.80; 

and the same premium rate standards 

described at 45 CFR 156.255 (in each 

case subject to paragraph (d)(4) of this 

section); and 

(4) Is calculated so that the dollar 

amount of the premium allocable to the 

pediatric dental essential health benefit 

for an individual under the age of 19 

years does not vary, and the dollar 

amount of the premium allocable to the 

pediatric dental essential health benefit 

for an individual aged 19 years or more 

is equal to zero. 

(e) Disclosure of attribution and 

allocation methods. An issuer of a 

health plan at any level of coverage or 

a stand-alone dental plan offered, or 

proposed to be offered in the individual 


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market on the Exchange must submit to 

the Exchange annually for approval, an 

actuarial memorandum, in the manner 

and timeframe specified by HHS, with 

a detailed description of the methods 

and specific bases used to perform the 

allocations set forth in paragraphs (a) 

and (b), and demonstrating that the 

allocations meet the standards set forth 

in paragraphs (c) and (d) of this section, 

respectively. 

PART 157—EMPLOYER 

INTERACTIONS WITH EXCHANGES 

AND SHOP PARTICIPATION 

41. The authority citation for part 157 

continues to read as follows: 

Authority: Title I of the Affordable Care 

Act, sections 1311, 1312, 1321, 1411, 1412, 

Pub. L. 111–148, 124 Stat. 199. 

42. Section 157.20 is amended by 

adding the definitions for ‘‘Federallyfacilitated SHOP,’’ ‘‘Full-time 

employee,’’ and ‘‘Large employer’’ in 

alphabetical order to read as follows: 

§ 157.20 Definitions. 

* * * * * 

Federally-facilitated SHOP has the 

meaning given to the term in § 155.20 of 

this subchapter. 

Full-time employee has the meaning 

given to the term in § 155.20 of this 

subchapter. 

Large employer has the meaning given 

to the term in § 155.20 of this 

subchapter. 

* * * * * 

PART 158—ISSUER USE OF PREMIUM 

REVENUE: REPORTING AND REBATE 

REQUIREMENTS 

43. The authority citation for part 158 

continues to read as follows: 

Authority: Section 2718 of the Public 

Health Service Act (42 U.S.C. 300gg–18), as 

amended. 

44. Section 158.110 is amended by 

revising paragraph (b) to read as follows: 

§ 158.110 Reporting requirements related 

to premiums and expenditures. 

* * * * * 

(b) Timing and form of report. The 

report for each of the 2011, 2012, and 

2013 MLR reporting years must be 

submitted to the Secretary by June 1 of 

the year following the end of an MLR 

reporting year, on a form and in the 

manner prescribed by the Secretary. 

Beginning with the 2014 MLR reporting 

year, the report for each MLR reporting 

year must be submitted to the Secretary 

by July 31 of the year following the end 

of an MLR reporting year, on a form and 

in the manner prescribed by the 

Secretary. 

* * * * * 

45. Section 158.130 is amended by 

adding paragraph (b)(5) to read as 

follows: 

§ 158.130 Premium revenue. 

* * * * * 

(b) * * * 

(5) Account for the net payments or 

receipts related to risk adjustment, risk 

corridors, and reinsurance programs 

under sections 1341, 1342, and 1343 of 

the Patient Protection and Affordable 

Care Act, 42 U.S.C. 18061, 18062, 

18063. 

46. Section 158.140 is amended by 

adding paragraph (b)(4)(ii) and revising 

paragraph (b)(5)(i) to read as follows: 

§ 158.140 Requirements for clinical 

services provided to enrollees. 

* * * * * 

(b) * * * 

(4) * * * 

(ii) Net payments or receipts related to 

risk adjustment, risk corridors, and 

reinsurance programs under sections 

1341, 1342, and 1343 of the Patient 

Protection and Affordable Care Act, 42 

U.S.C. 18061, 18062, 18063. 

(5) * * * 

(i) Affiliated issuers that offer group 

coverage at a blended rate may choose 

whether to make an adjustment to each 

affiliate’s incurred claims and activities 

to improve health care quality, to reflect 

the experience of the issuer with respect 

to the employer as a whole, according 

to an objective formula that must be 

defined by the issuer prior to January 1 

of the MLR reporting year, so as to result 

in each affiliate having the same ratio of 

incurred claims to earned premium for 

that employer group for the MLR 

reporting year as the ratio of incurred 

claims to earned premium calculated for 

the employer group in the aggregate. 

* * * * * 

47. Section 158.162 is amended by 

revising paragraph (b)(1)(vii) and adding 

paragraph (b)(1)(viii) to read as follows: 

§ 158.162 Reporting of Federal and State 

taxes. 

* * * * * 

(b) * * * 

(1) * * * 

(vii) Payments made by a Federal 

income tax exempt issuer for 

community benefit expenditures as 

defined in paragraph (c) of this section, 

limited to the highest of either: 

(A) Three percent of earned premium; 

or 

(B) The highest premium tax rate in 

the State for which the report is being 

submitted, multiplied by the issuer’s 

earned premium in the applicable State 

market. 

(viii) In lieu of reporting amounts 

described in paragraph (b)(1)(vi) of this 

section, an issuer that is not exempt 

from Federal income tax may choose to 

report payment for community benefit 

expenditures as described in paragraph 

(c) of this section, limited to the highest 

premium tax rate in the State for which 

the report is being submitted multiplied 

by the issuer’s earned premium in the 

applicable State market. 

* * * * * 

48. Section 158.221 is amended by 

revising paragraph (c) to read as follows: 

§ 158.221 Formula for calculating an 

issuer’s medical loss ratio. 

* * * * * 

(c) Denominator. The denominator of 

an issuer’s MLR must equal the issuer’s 

premium revenue, as defined in 

§ 158.130, excluding the issuer’s Federal 

and State taxes and licensing and 

regulatory fees, described in 

§§ 158.161(a) and 158.162(a)(1) and 

(b)(1), and after accounting for payments 

or receipts for risk adjustment, risk 

corridors, and reinsurance, described in 

§ 158.130(b)(5). 

49. Section 158.232 is amended by 

revising paragraph (c)(1)(i) and 

paragraph (d) introductory text to read 

as follows: 

§ 158.232 Calculating the credibility 

adjustment. 

* * * * * 

(c) * * * 

(1) * * * 

(i) The per person deductible for a 

policy that covers a subscriber and the 

subscriber’s dependents shall be the 

lesser of: the deductible applicable to 

each of the individual family members; 

or the overall family deductible for the 

subscriber and subscriber’s family 

divided by two (regardless of the total 

number of individuals covered through 

the subscriber). 

* * * * * 

(d) No credibility adjustment. 

Beginning with the 2013 MLR reporting 

year, the credibility adjustment for and 

MLR based on partially credible 

experience is zero if both of the 

following conditions are met: 

* * * * * 

50. Section 158.240 is amended by 

revising paragraphs (c) and (d) to read 

as follows: 

§ 158.240 Rebating premium if the 

applicable medical loss ratio standard is 

not met. 

* * * * * 

(c) Amount of rebate to each enrollee. 

(1) For each MLR reporting year, an 


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issuer must rebate to the enrollee the 

total amount of premium revenue, as 

defined in § 158.130 of this part, 

received by the issuer from the enrollee, 

after subtracting Federal and State taxes 

and licensing and regulatory fees as 

provided in §§ 158.161(a) and 

158.162(a)(1) and (b)(1), and after 

accounting for payments or receipts for 

risk adjustment, risk corridors, and 

reinsurance as provided in 

§ 158.130(b)(5), multiplied by the 

difference between the MLR required by 

§ 158.210 or § 158.211, and the issuer’s 

MLR as calculated under § 158.221. 

(2) For example, an issuer must rebate 

a pro rata portion of premium revenue 

if it does not meet an 80 percent MLR 

for the individual market in a State that 

has not set a higher MLR. If an issuer 

has a 75 percent MLR for the coverage 

it offers in the individual market in a 

State that has not set a higher MLR, the 

issuer must rebate 5 percent of the 

premium paid by or on behalf of the 

enrollee for the MLR reporting year after 

subtracting taxes and fees and 

accounting for payments or receipts 

related to reinsurance, risk adjustment 

and risk corridors. In this example, an 

enrollee may have paid $2,000 in 

premiums for the MLR reporting year. If 

the issuer received net payments related 

to reinsurance, risk adjustment and risk 

corridors of $200, the gross earned 

premium would be $2,200. If the 

Federal and State taxes and licensing 

and regulatory fees that may be 

excluded from premium revenue as 

described in §§ 158.161(a), 

158.161(a)(1), and 158.162(b)(1) are 

$150 and the net payments related to 

reinsurance, risk adjustment and risk 

corridors that must be accounted for in 

premium revenue as described in 

§§ 158.130(b)(5), 158.221 and 158.240 

are $200, then the issuer would subtract 

$150 and $200 from gross premium 

revenue of $2,200, for a base of $1,850 

in premium. The enrollee would be 

entitled to a rebate of 5 percent of 

$1,850, or $92.50. 

(d) Timing of rebate. For each of the 

2011, 2012, and 2013 MLR reporting 

years, an issuer must provide any rebate 

owing to an enrollee no later than 

August 1 following the end of the MLR 

reporting year. Beginning with the 2014 

MLR reporting year, an issuer must 

provide any rebate owing to an enrollee 

no later than September 30 following 

the end of the MLR reporting year. 

* * * * * 

51. Section 158.241 is amended by 

revising paragraph (a)(2) to read as 

follows: 

§ 158.241 Form of rebate. 

(a) * * * 

(2) For each of the 2011, 2012, and 

2013 MLR reporting years, any rebate 

provided in the form of a premium 

credit must be provided by applying the 

full amount due to the first month’s 

premium that is due on or after August 

1 following the MLR reporting year. If 

the amount of the rebate exceeds the 

premium due for August, then any 

overage shall be applied to succeeding 

premium payments until the full 

amount of the rebate has been credited. 

Beginning with the 2014 MLR reporting 

year, any rebate provided in the form of 

a premium credit must be provided by 

applying the full amount due to the first 

month’s premium that is due on or after 

September 30 following the MLR 

reporting year. If the amount of the 

rebate exceeds the premium due for 

October, then any overage shall be 

applied to succeeding premium 

payments until the full amount of the 

rebate has been credited. 

* * * * * 

Dated: November 28, 2012. 

Marilyn Tavenner, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: November 28, 2012. 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2012–29184 Filed 11–30–12; 11:15 am] 

BILLING CODE 4120–01–P 


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