Vol. 77 Monday, 

No. 227 November 26, 2012 

Part III 

Department of Health and Human Services 

45 CFR Parts 144, 147, 150, et al. 

Patient Protection and Affordable Care Act; Health Insurance Market Rules; 

Rate Review; Proposed Rule 

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1Ctr. on Health Ins. Reforms, Georgetown Univ. 

Health Policy Inst., Individual Market Guaranteed 

Issue, Individual Health Insurance Market Rate 

Restrictions, and Small Group Health Insurance 

Market Rate Restrictions, available at http:// 

statehealthfacts.org; Nat’l Women’s Law Center, 

Turning to Fairness: Insurance Discrimination 

Against Women Today and the Affordable Care Act 

(2012). 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

45 CFR Parts 144, 147, 150, 154 and 

156 

[CMS–9972–P] 

RIN 0938–AR40 

Patient Protection and Affordable Care 

Act; Health Insurance Market Rules; 

Rate Review 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement the Affordable Care Act’s 

policies related to fair health insurance 

premiums, guaranteed availability, 

guaranteed renewability, risk pools, and 

catastrophic plans. The proposed rule 

would clarify the approach used to 

enforce the applicable requirements of 

the Affordable Care Act with respect to 

health insurance issuers and group 

health plans that are non-federal 

governmental plans. This proposed rule 

would also amend the standards for 

health insurance issuers and states 

regarding reporting, utilization, and 

collection of data under section 2794 of 

the Public Health Service Act (PHS Act). 

It also revises the timeline for states to 

propose state-specific thresholds for 

review and approval by CMS. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on December 26, 2012. 

ADDRESSES: In commenting, please refer 

to file code CMS–9972–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–9972–P, P.O. Box 8012, Baltimore, 

MD 21244–1850. 

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–9972–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) 786–9994 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: 

Jacob Ackerman, (410) 786–1565, 

concerning the health insurance market 

rules; Douglas Pennington, (410) 786– 

1553 (or by email: ratereview@hhs.gov), 

concerning rate review. 

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 (800) 743–3951. 

I. Executive Summary 

A. Purpose of the Proposed Regulatory 

Action 

1. Need for the Proposed Regulatory 

Action 

Today, consumers with current or 

past medical problems can be denied 

health insurance coverage in the vast 

majority of individual (nongroup) 

markets (45 states). Similarly, 

individuals and small employers often 

find that they have few protections in 

terms of the premiums that issuers can 

charge them. For example, in the 

individual market, 43 states allow 

health status rating and 48 states allow 

age rating (often unlimited). While 37 

states explicitly allow gender rating, 

three states that prohibit gender rating 

do not require maternity coverage in all 

individual market policies, meaning 

that, since maternity coverage requires 

additional premium in those states, a 

total of 40 states allow some form of 

gender rating in practice. In the small 

group market, 38 states allow health 

status rating, 48 states allow age rating 

(often unlimited), 35 states allow gender 

rating, and 37 states allow industry 

rating.1

Sections 2701, 2702, and 2703 of the 

Public Health Service Act (PHS Act), as 

added and amended by the Patient 

Protection and Affordable Care Act 

(Affordable Care Act), and section 

1312(c) of the Affordable Care Act 

address these problems by extending 

guaranteed availability (also known as 

guaranteed issue) protections so that 

individuals and employers will be able 

to obtain coverage when it currently can 

be denied, by continuing current 

guaranteed renewability protections, by 

prohibiting the use of factors such as 

health status, medical history, gender, 

and industry of employment to set 

premium rates, by limiting age rating, 

and by prohibiting issuers from dividing 

up their insurance pools. These reforms 

are effective for plan years (group 

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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. 

market) and policy years (individual 

market) starting on or after January 1, 

2014. 

The implementation of these 

proposed rules will ensure that every 

American, for the first time, will have 

access to affordable health insurance 

coverage notwithstanding any health 

problems they may have. In addition, 

also for the first time throughout the 

nation, health insurance issuers will be 

prevented from charging individuals 

and small employers higher premiums 

due to enrollees’ health status or gender. 

CMS is issuing these proposed 

regulations to provide the necessary 

guidance to implement these important 

consumer protections included in 

sections 2701, 2702, and 2703 of the 

PHS Act and section 1312(c) of the 

Affordable Care Act. 

In addition, PHS Act section 2723 

provides CMS with enforcement 

authority with respect to health 

insurance issuers (in certain instances) 

and group health plans that are nonfederal governmental plans in 

connection with the various health 

insurance and group health plan 

standards added by the Affordable Care 

Act. The proposed rules would make 

non-substantive changes that clarify the 

processes that CMS currently uses to 

enforce such standards. These technical 

changes seek to eliminate confusion 

among states, issuers, non-federal 

governmental group health plans, 

consumers, and others concerning 

CMS’s enforcement processes. 

The proposed rule would also include 

proposed policy for enrollment in 

catastrophic plans that are available for 

young adults and people who would 

otherwise find health insurance 

unaffordable. 

The proposed rule would also revise 

the timing of the submission of requests 

for state-specific thresholds and the 

effective dates of such thresholds; 

require that health insurance issuers 

submit data on proposed rate increases 

in a form and manner to be determined 

by CMS, and amend the requirements 

for a state to have an Effective Rate 

Review Program. We are proposing 

these changes to align with the timing 

of rate submissions of qualified health 

plans (QHPs), as defined under section 

1301 of the Affordable Care Act, in the 

Exchanges, and to adjust rate review to 

meet its additional purpose of helping 

to promote fair market competition 

beginning in 2014. The law requires 

that, beginning in 2014, the Secretary of 

the Department of Health and Human 

Services (the Secretary), in conjunction 

with states, monitor premium increases 

of health insurance coverage offered 

through an Exchange and outside of an 

Exchange. The Secretary will monitor 

these increases to identify patterns that 

could signal market disruption and 

assist in oversight of the new marketwide rating reforms created by the 

Affordable Care Act, which are effective 

on January 1, 2014. 

2. Legal Authority 

The substantive authority for these 

proposed rules is generally sections 

2701, 2702, 2703, 2723 and 2794 of the 

PHS Act and sections 1302(e), 1312(c), 

and 1560(c) of the Affordable Care Act. 

PHS Act section 2792 authorizes us to 

promulgate regulations that are 

necessary or appropriate to carry out 

sections 2701, 2702, 2703, 2723, and 

2794. Section 1321(a) of the Affordable 

Care Act authorizes rulemaking with 

respect to sections 1302(e), 1312(c), and 

1560(c). 

B. Summary of the Major Provisions of 

This Proposed Regulatory Action 

Proposed 45 CFR 147.102 would 

require issuers offering nongrandfathered health insurance coverage 

in the individual and small group 

markets starting in 2014, and the large 

group market if such coverage is 

available through an Affordable 

Insurance Exchange (Exchange) starting 

in 2017, to limit any variation in 

premiums with respect to a particular 

plan or coverage to age and tobacco use 

within limits, family size, and 

geography. 

Proposed § 147.104 would require 

issuers offering non-grandfathered 

health insurance coverage to accept 

every individual or employer who 

applies for coverage in the individual or 

group market, as applicable, subject to 

certain exceptions (for example, limits 

on network capacity). 

Proposed § 147.106 would require 

issuers to renew all coverage in the 

individual and group markets, subject to 

certain exceptions (for example, nonpayment of premiums or fraud). 

The proposed revisions in 45 CFR 

part 154 would make three changes to 

the existing rate review program. 

Proposed revisions in § 154.200 would 

require states seeking state-specific 

thresholds to submit proposals for such 

thresholds by August 1 of each year and 

require CMS to review the proposals by 

September 1 of each year. If approved, 

a state-specific threshold would be 

effective January 1 of the following year. 

Proposed revisions in § 154.215 and 

§ 154.220 would require health 

insurance issuers to submit, in a 

standardized format to be specified by 

the Secretary, data relating to proposed 

rate increases that are filed in a state on 

or after April 1, 2013, or effective on or 

after January 1, 2014 in a state that does 

not require the rate increases to be filed. 

Proposed revisions in § 154.301 would 

add criteria and factors for a state to 

have an Effective Rate Review Program, 

including that the state receives from all 

issuers proposing rate increases data 

and documentation about the rate 

increases in the standardized form 

specified by the Secretary; reviews the 

information for proposed rate increases 

greater than or equal to the review 

threshold; and makes information 

publicly available through its Web site. 

Proposed § 156.80 generally would 

require health insurance issuers to treat 

all of their non-grandfathered business 

in the individual market and small 

group market, respectively, as a single 

risk pool. A state would have the 

authority to choose to direct issuers to 

merge their non-grandfathered 

individual and small group pools into a 

combined pool. 

Proposed § 156.155 generally would 

codify section 1302(e) of the Affordable 

Care Act regarding catastrophic plans. 

The proposed revisions in 45 CFR 

part 150 would clarify that CMS uses 

the same enforcement processes with 

respect to the requirements of 45 CFR 

part 147, which implements provisions 

added by the Affordable Care Act, as it 

does with respect to the requirements of 

45 CFR parts 146 and 148, which predate the Affordable Care Act. Additional 

revisions would conform certain 

sections in 45 CFR part 144 to the 

clarification concerning the scope of 45 

CFR part 150. 

C. Costs and Benefits 

The provisions of this proposed rule, 

combined with other provisions in the 

Affordable Care Act, will improve the 

individual health insurance market by 

making insurance 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 Between 50 and 

129 million Americans, if they tried to 

purchase coverage in the individual 

market, would be denied coverage 

entirely or would have their premiums 

‘‘rated up,’’ and would likely have 

coverage for certain medical conditions 

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3ASPE, At Risk: Preexisting Conditions Could 

Affect 1 in 2 Americans: 129 Million People Could 

Be Denied Affordable Coverage Without Health 

Reform, November 2011. 

4Source: 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. 

5Source: 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. 

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). 

excluded.3 In addition, people 

previously enrolled in individual 

insurance with high health risks or costs 

are often further blocked from access to 

the market as they are put into ‘‘closed 

blocks’’ of business that are not open to 

new enrollees, and subject to large 

premium increases each year. Relatively 

healthy subscribers can switch into 

lower-priced, open blocks of coverage, 

while those who are sick only have the 

choice of paying the large premium 

increases or dropping coverage 

altogether. 

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,4 while 

only around 10.8 million were enrolled 

in the individual market.5 The relatively 

small fraction of the target market that 

actually purchases coverage in the 

individual market in part reflects how 

expensive the product is relative to its 

value, people’s resources, 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. The provision 

for guaranteed availability will ensure 

that individuals with health problems 

who were previously unable to obtain 

coverage in the individual market will 

have access to coverage. The provision 

requiring that age, tobacco use, family 

size, and geography are the only 

permissible rating factors, within limits, 

will ensure that people with greater 

than average health needs are not priced 

out of the market. The provision 

requiring a single risk pool in each 

market will ensure that rate increases 

for healthy and less healthy people will 

be equal over time. Elimination of rating 

based on gender will mean lower 

premium rates for women, and the 3:1 

limit on the rates charged to older 

subscribers will result in lower 

premium rates for older subscribers 

without shifting significant risk to 

younger subscribers as would happen 

under pure community rating. While 

eliminating gender rating and the 

limitations on age ratios could affect 

premium rates for some in some 

markets, this will be largely mitigated 

for most people by the availability of 

premium tax credits, by increased 

efficiencies and greater competition in 

the individual market, by measures such 

as the transitional reinsurance program 

and temporary risk corridors program to 

stabilize premiums, and by expected 

improvements in the overall health 

status of the risk pool. The availability 

of premium tax credits through 

Exchanges starting in 2014 will result in 

lower net premium rates for most 

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 Additionally, young 

adults and people for whom coverage 

would otherwise be unaffordable will 

have access to a catastrophic plan that 

will have a lower premium, protect 

against high out-of-pocket costs, and 

cover recommended preventive services 

without cost sharing. Similarly, the 

minimum coverage provision will lead 

to expansion in the number of 

purchasers and improvements in the 

health of the risk pool. Further, 

premium rates are expected to decline 

as a result of the administrative 

efficiencies from eliminating 

underwriting, and, more importantly, 

due to the effects of greater competition 

in the individual market created by 

Exchanges. Lower premium rates are 

expected to lead to further increases in 

purchase, and a further improvement in 

the risk pool. 

We solicit comments on additional 

strategies consistent with the Affordable 

Care Act that CMS or states might 

deploy to avoid or minimize disruption 

of rates in the current market and 

encourage timely enrollment in 

coverage in 2014. For example, these 

strategies could include instituting the 

same enrollment periods inside and 

outside of Exchanges (as proposed in 

this rule) or a phase-in or transition 

period for certain policies. Additionally, 

we are examining ways in which states 

could continue their high risk pools 

beyond 2014 as a means of easing the 

transition. Ensuring premiums are 

affordable is a priority for the 

Administration as well as states, 

consumers, and insurers, so we 

welcome suggestions for the final rule 

on ways to achieve this goal while 

implementing these essential consumer 

protections. 

Issuers may incur some one-time 

fixed costs in order to comply with the 

provisions of the final rule, including 

administrative and marketing costs. 

Administrative costs are, however, 

expected to decrease as a result of the 

elimination of medical underwriting to 

determine premium amounts. 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, which is projected to 

exceed 50 percent of current 

enrollment.7 We are soliciting 

information 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 costs if 

they choose to establish their own, new 

geographic rating areas and age rating 

curves. We are also requesting 

information on such costs. 

The proposed amendments to the rate 

review program would help issuers to 

avoid significant duplication of effort 

for filings subject to review by using the 

same standardized template for both 

non-QHPs and QHPs. Additionally, the 

collection of rate information below the 

rate review threshold and use of a 

standardized data template would 

provide the Department of Health and 

Human Services (HHS) and state 

departments of insurance with the 

ability to conduct the review and 

approval of products sold inside and 

outside an Exchange and ensure market 

stability. Health insurance issuers 

would incur administrative costs to 

prepare and submit the data. 

In accordance with Executive Orders 

12866 and 13563, we believe that the 

benefits of this regulatory action would 

justify the costs. 

II. Background 

The Patient Protection and Affordable 

Care Act, Public Law 111–148, was 

enacted on March 23, 2010. The Health 

Care and Education Reconciliation Act, 

Public Law 111–152, was enacted on 

March 30, 2010. These laws are 

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8Schoen, C., et al., State Trends in Premiums and 

Deductibles, 2003–2010: The Need for Action to 

Address Rising Costs, Realizing Health Reform’s 

Potential, p. 5 (Nov. 2011). 

9Claxton,G., et al., Health Benefits in 2010: 

Premiums Rise Modestly, Workers Pay More Toward 

Coverage, Health Affairs, 29, no.10 (2010):1942– 

1950. 

10Himmelstein, D., et al., Medical Bankruptcy in 

the United States, 2007: Results of a National 

Study, The American Journal of Medicine, Vol. 122, 

No. 8, 741–746. 

11Pollitz, K., How Accessible is Individual Health 

Insurance for Consumers in Less-Than-Perfect 

Health (2001). 

12Collins, S., et al., Gaps in Health Insurance: 

Why So Many Americans Experience Breaks in 

Coverage and How the Affordable Care Act Will 

Help (April 2011). 

13 Doty, M., et al., When Unemployed Means 

Uninsured: The Toll of Job Loss on Health 

Coverage, and How the Affordable Care Act Will 

Help, Realizing Health Reform’s Potential, p. 3 

(Aug. 2011). 

14COBRA continuation coverage permits some 

employees and their dependents, in some 

circumstances, to remain temporarily covered 

under an employer’s group health plan after 

coverage would otherwise end. But because a 

former employee must usually pay the entire 

premium amount (including both the amount paid 

as an active employee and the amount previously 

contributed by the employer), plus a 2-percent 

administrative fee, COBRA coverage may be 

unaffordable for many people. 

15Ctr. on Health Ins. Reforms, Georgetown Univ. 

Health Policy Inst., Small Group Health Insurance 

Market Guaranteed Issue and Individual Market 

Guarantee Issue, available at http:// 

statehealthfacts.org. 

16Ctr. on Health Ins. Reforms, Georgetown Univ. 

Health Policy Inst., Small Group Health Insurance 

Market Guaranteed Issue and Individual Market 

Guarantee Issue, available at http:// 

statehealthfacts.org. 

17Ctr. on Health Ins. Reforms, Georgetown Univ. 

Health Policy Inst., HIPAA Rules, available at 

http://statehealthfacts.org. 

18Pollitz, K., et al., Early Experience with the 

‘‘New Federalism’’ in Health Insurance Regulation, 

Health Affairs, 19, no.4 (2000):7–22. 

19Fuchs, B., Expanding the Individual Health 

Insurance Market: Lessons from the State Reforms 

of the 1990s (2004) at p. 7. 

collectively referred to as the Affordable 

Care Act. 

A. Legislative Overview Prior to the 

Affordable Care Act 

The current individual and small 

group health insurance markets 

generally are viewed as dysfunctional, 

placing consumers at a disadvantage 

due to the high cost of health insurance 

coverage, resulting from factors such as 

lack of competition, adverse selection, 

and limited transparency. In the past ten 

years, average total premiums for group 

and individual health insurance 

coverage have increased substantially.8

Similarly, the share of premium paid by 

employees in the group market has 

increased, as well as the amounts that 

employees pay in out-of-pocket costs.9

In 2007, 62 percent of personal 

bankruptcies were attributable to 

medical expenses. Many of these 

individuals and families either had 

health insurance that did not provide 

adequate coverage for their medical 

expenses or lost medical coverage due 

to illness.10

In addition to affordability concerns, 

many people have difficulty finding and 

enrolling in coverage options. If 

employer-based coverage is not 

available, a person may find that 

affordable individual market coverage is 

not available due to medical 

underwriting. Research has shown that 

individuals could be denied coverage 

based even on common medical 

conditions such as asthma, depression, 

hypertension, and knee injuries.11 Even 

if a person is accepted for coverage in 

the individual market, that coverage 

may be conditioned on paying higher 

premiums, preexisting condition 

exclusion waiting periods, and even 

permanent exclusions of coverage for 

certain medical conditions. One study 

found that 38 percent of persons seeking 

individual market coverage reported it 

very difficult or impossible to find the 

coverage they needed.12 Uninsured 

individuals are more likely to report not 

having routine medical check-ups, not 

receiving recommended medical 

treatments, and not refilling 

prescriptions.13

Among other policies, the Affordable 

Care Act expands affordable coverage to 

uninsured Americans through the 

private health insurance market. When 

fully implemented, its reforms will 

make health insurance coverage more 

affordable and accessible for individuals 

and families, many of whom could not 

previously get or afford coverage. The 

insurance market reforms will help 

ensure that no individual or small 

employer is denied insurance coverage, 

and that, once issued, coverage cannot 

be non-renewed due to health factors. 

Premiums charged by health insurance 

issuers may only vary by certain factors. 

Further, each issuer will have a single 

risk pool for its business in the 

individual market and a single risk pool 

for its business in the small group 

market (unless a state decides to merge 

the markets). This risk pool provision 

will spread risk more evenly among 

consumers, which will help keep 

premiums more affordable. 

Prior to the Affordable Care Act, title 

XXVII of the PHS Act included certain 

insurance market protections for 

individuals and employers that were 

added by the Health Insurance 

Portability and Accountability Act of 

1996 (HIPAA). HIPAA provided 

guaranteed renewability of coverage to 

individuals and employers, broad 

guaranteed availability rights to small 

employers, and narrower guaranteed 

availability rights in the individual 

market for certain individuals leaving 

group coverage. In practice, relatively 

few individuals exercise their HIPAA 

rights to individual market guaranteed 

availability due to the high costs of such 

coverage in many states and the 

requirement that they first exhaust any 

available continuation coverage, such as 

COBRA, which is often unaffordable.14

HIPAA did not include any protections 

to ensure that all persons could obtain 

affordable coverage in the individual 

market. Thus, most individuals could be 

medically underwritten and denied 

coverage by issuers in the vast majority 

of states. HIPAA also did not include 

any limits on premium variation or 

requirements regarding risk pooling that 

would have made health insurance 

coverage more affordable for individuals 

and small employers. HIPAA included 

enforcement provisions allowing CMS 

to enforce these and other requirements 

of title XXVII of the PHS Act with 

respect to health insurance issuers (in 

some instances) and group health plans 

that are non-federal governmental plans. 

Both before and after HIPAA, a 

number of states enacted limited, 

incremental reforms to improve access 

and increase affordability in their 

individual and group insurance 

markets. HIPAA explicitly recognized 

the role of the states as the primary 

insurance regulators where their 

standards were at least as protective as 

HIPAA. Although the level of activity 

varies by state, most states have adopted 

guaranteed availability and renewability 

reforms consistent with HIPAA, and 

several states have adopted rating 

standards. For example, one recent 

survey of state insurance market rules 

found that all states require guaranteed 

availability in the small employer 

market.15 The same survey found that 

41 states had implemented ‘‘alternative 

mechanisms’’ for guaranteed availability 

for HIPAA-eligible individuals, while 

the remaining states used the federal 

fallback mechanism.16 However, only 

five states (Maine, Massachusetts, New 

Jersey, New York, and Vermont) went 

beyond HIPAA to require that all issuers 

accept all applicants in the individual 

market, with limited exceptions.17 With 

respect to guaranteed renewability, one 

survey reported that 48 states require it 

in the small group market 18 and another 

survey reported that all 50 states require 

it in the individual market.19 While 

HIPAA did not include any provisions 

addressing rating or pooling, 47 states 

have one or more requirements in the 

small group market and 18 states have 

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20Ctr. on Health Ins. Reforms, Georgetown Univ. 

Health Policy Inst., Small Group Health Insurance 

Market Rate Restrictions and Individual Market 

Rate Restrictions, available at http:// 

statehealthfacts.org. 

21Source: U.S. Census Bureau, Current 

Population Survey, 2012 Annual Social and 

Economic Supplement, Table HI06. Health 

Insurance Coverage Status by State for All People: 

2011. 

22The Affordable Care Act also added section 

715(a)(1) to the Employee Retirement Income 

Security Act (ERISA) and section 9815(a)(1) to the 

Internal Revenue Code (the Code) to incorporate the 

provisions of part A of title XXVII of the PHS Act 

into ERISA and the Code, and to make them 

applicable to group health plans other than nonfederal governmental group health plans. The 

market requirements discussed in this proposed 

rule apply to health insurance issuers offering 

health insurance coverage. 

23Under the HIPAA enforcement structure, the 

states (or, if they lack authority or fail to 

substantially enforce, CMS) take enforcement 

actions against health insurance issuers that fail to 

comply with the requirements of PHS Act sections 

2701–2703. See Code § 4980D(d); ERISA § 502(b)(3); 

PHS Act § 2723. 

24The applicable definitions for individual 

market, small group market, and large group market 

are found in PHS Act section 2791(e) and section 

1304(a) of the Affordable Care Act. 

25 ‘‘Plan year’’ and ‘‘policy year,’’ for purposes of 

these proposed rules, are defined at 45 CFR 

144.103. These terms are defined differently than 

‘‘plan year’’ and ‘‘benefit year’’ as used in 

connection with QHPs (45 CFR 155.20). 

26 In addition, although not the subject of this 

proposed rule, section 1252 of the Affordable Care 

Act generally provides that any standard or 

requirement adopted by a state pursuant to title I 

of the Affordable Care Act (or an amendment made 

by title I) shall be applied uniformly to all health 

plans in each insurance market to which the 

standard and requirements apply. Sections 1302(e) 

and 1312(c) of the Affordable Care Act and the 

amendments to PHS Act sections 2701, 2702, and 

2703 are all found in title I of the Affordable Care 

Act. 

27 In addition, through regulation, section 2794 

does not apply to health insurance issuers offering 

health insurance coverage in the large group 

market. 

one or more requirements in the 

individual market.20

Despite the advances in some states, 

only five states (Maine, Massachusetts, 

New Jersey, New York, and Vermont) 

have adopted a comprehensive set of 

guaranteed availability and community 

rating reforms in both their individual 

and small group markets that meet or 

exceed those in the Affordable Care Act. 

Only Massachusetts, which enacted a 

landmark health reform law in 2006 that 

coupled insurance market reforms with 

an insurance exchange, premium 

subsidies, and a minimum coverage 

provision, has succeeded in covering 

nearly all residents of the state. In 2011, 

only 3.4 percent of Massachusetts 

residents were uninsured, compared to 

15.7 percent nationally.21 In contrast, 

individuals with medical conditions in 

the 45 states without guaranteed 

availability and rating reforms often find 

themselves with few—or even no— 

coverage options at affordable prices. 

B. Overview of the Changes in the 

Affordable Care Act 

Subtitles A and C of title I of the 

Affordable Care Act reorganized, 

amended, and added provisions to part 

A of title XXVII of the PHS Act relating 

to health insurance issuers in the group 

and individual markets and group 

health plans that are non-federal 

governmental plans.22 As relevant here, 

these provisions include PHS Act 

sections 2701 (fair health insurance 

premiums), 2702 (guaranteed 

availability of coverage), and 2703 

(guaranteed renewability of coverage), 

which apply to health insurance 

coverage offered by health insurance 

issuers.23 These provisions will 

establish a federal floor that ensures all 

individuals and employers have certain 

basic protections with respect to the 

availability of the health insurance 

coverage in all states. 

Section 2701 regarding fair premiums 

applies to the individual and small 

group markets generally, and to the 

large group market if a state permits 

large employers to purchase coverage 

through an Exchange.24 Pursuant to 

section 1312(f)(2)(B) of the Affordable 

Care Act, a state may permit large 

employers to purchase through an 

Exchange starting in 2017. Sections 

2702 and 2703 apply to the individual 

and group (small and large) markets. 

These provisions apply to health 

insurance coverage in the respective 

markets regardless of whether such 

coverage is a QHP offered on Exchanges. 

Section 1255 of the Affordable Care Act 

provides that PHS Act sections 2701, 

2702, and 2703 are effective for plan 

years (in the individual market, policy 

years) beginning on or after January 1, 

2014.25 Section 1251(a)(2) of the 

Affordable Care Act specifies that 

grandfathered health insurance coverage 

is not subject to sections 2701, 2702, 

and 2703 of the PHS Act. In addition, 

the Affordable Care Act amended the 

HIPAA enforcement provision that 

previously was applicable to group 

health insurance coverage and nonfederal governmental group health plans 

by expanding its scope to include 

individual health insurance coverage 

and by renumbering the provision as 

PHS Act section 2723. 

The preemption provisions of PHS 

Act section 2724(a)(1) apply so that the 

requirements of the Affordable Care Act 

are not to be ‘‘construed to supersede 

any provision of state law which 

establishes, implements, or continues in 

effect any standard or requirement 

solely relating to health insurance 

issuers in connection with individual or 

group health insurance coverage except 

to the extent that such standard or 

requirement prevents the application of 

a requirement’’ of the Affordable Care 

Act. Section 1321(d) of the Affordable 

Care Act applies the same preemption 

principle to requirements of title I of the 

Affordable Care Act. As mentioned, 

state laws that impose stricter 

requirements on health insurance 

issuers than those imposed by the 

Affordable Care Act will not be 

superseded by the Affordable Care 

Act.26

Section 1312(c) of the Affordable Care 

Act creates a single risk pool standard, 

applicable to both QHPs and non-QHPs, 

in the individual and small group 

markets; in addition, states may choose 

to have a merged individual and small 

group market pool. Although the 

Affordable Care Act does not provide an 

explicit effective date for section 

1312(c), we interpret it to be effective 

for plan years (in the individual market, 

policy years) beginning on or after 

January 1, 2014, given its dependence 

on and interaction with the new market 

reforms, as well as its explicit reference 

to the establishment of the Exchanges in 

2014. Section 1312(c) does not apply to 

grandfathered health plans. 

Lastly, section 1302 of the Affordable 

Care Act specifies levels of cost-sharing 

protections that health plans will offer, 

including in subsection (e) a 

catastrophic plan for young adults and 

people who cannot otherwise afford 

health insurance. 

C. Rate Increase Disclosure and Review 

Section 1003 of the Affordable Care 

Act adds a new section 2794 of the PHS 

Act, which directs the Secretary, in 

conjunction with the states, to establish 

a process for the annual review of 

‘‘unreasonable increases in premiums 

for health insurance coverage.’’ The 

statute provides that health insurance 

issuers must submit to the Secretary and 

the applicable state justifications for 

unreasonable premium increases prior 

to the implementation of the increases. 

Section 2794 also specifies that 

beginning with plan years beginning in 

2014, the Secretary, in conjunction with 

the states, shall monitor premium 

increases of health insurance coverage 

offered through an Exchange and 

outside of an Exchange. Section 2794 of 

the PHS Act does not apply to 

grandfathered health insurance 

coverage, nor does it apply to selffunded plans.27

On May 23, 2011, CMS published a 

final rule with comment period (76 FR 

29964), to implement the annual review 

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28Consistent with our later discussion of the 

single risk pool provision, all non-grandfathered 

health insurance coverage offered through 

associations and multiple employer welfare 

arrangements (MEWAs) is subject to the modified 

community rating rules applicable to the 

appropriate market, as defined by PHS Act section 

2791(e)(1), (3), and (5) (definitions of individual 

market, large group market, and small group 

market, respectively). 

29The age, tobacco use, and geographic factors are 

multiplicative. For example, the maximum 

variation for both age (for adults) and tobacco use 

is 4.5:1 (3 times 1.5:1), putting aside the issue of 

wellness discounts, which are discussed later in 

this preamble. The family rate calculation could be 

additive or multiplicative, depending on whether a 

per-member or family tier rating methodology is 

used, as explained later in this preamble. 

30 In addition, health insurance issuers currently 

are prohibited from requiring any individual to pay 

a premium greater than that for another similarly 

situated individual enrolled in group health 

insurance coverage on the basis of a health factor. 

Further, issuers currently are prohibited from 

charging persons enrolled in group or individual 

health insurance coverage higher premiums due to 

genetic information. PHS Act sections 2702, as in 

effect when the Affordable Care Act was enacted 

(group market), and 2753 (individual market). In 

addition to these requirements, starting in policy 

years beginning on or after January 1, 2014, issuers 

will be prohibited from requiring any individual 

enrolled in non-grandfathered individual market 

coverage to pay a premium greater than that for 

another similarly situated individual on the basis of 

a health factor. PHS Act section 2705. 

31By law, issuers must transition all nongrandfathered small group and individual market 

coverage issued prior to January 1, 2014, to these 

adjusted community rating rules in the first plan 

year (small group market) or the first policy year 

(individual market) beginning on or after January 1, 

2014, even if the issuers previously used other 

rating rules for products in these markets. 

32These requirements apply to health insurance 

coverage and therefore are not applicable to selfinsured plans. 

of unreasonable increases in premiums 

for health insurance coverage called for 

by section 2794. Among other things, 

CMS established a process by which all 

proposed rate increases above a defined 

threshold in the individual and small 

group markets would be reviewed by a 

state or by CMS to determine whether 

or not the rate increases are 

unreasonable. These rates would be 

reviewed by the state in states with 

Effective Rate Review Programs and by 

CMS in states without Effective Rate 

Review Programs. For 2011, the review 

threshold was a rate increase of 10 

percent or more. CMS also established 

a process for a state to set a statespecific threshold for future calendar 

years. 

We are proposing revisions to the rate 

review program that would standardize 

and streamline data submission, fulfill 

the new requirement beginning in 2014 

that the Secretary monitor premium 

increases of health insurance coverage 

offered through an Exchange and 

outside of an Exchange, and establish 

new standards that incorporate the 

effect of the market reform provisions 

that take effect in 2014. 

III. Provisions of the Proposed 

Regulations 

Collectively, the proposed regulations 

regarding modified community rating, 

guaranteed availability, guaranteed 

renewability, and risk pooling create the 

foundation for a competitive and 

accessible health insurance market 

starting in 2014. The Affordable Care 

Act allows individuals and employers to 

obtain and renew health insurance 

coverage without regard to enrollees’ 

health status. Health insurance 

premiums will no longer be based on 

enrollees’ pre-existing conditions or 

gender, and health insurance issuers no 

longer will be able to divide up their 

risk pools (also known as blocks of 

business) in order to discriminate 

against less healthy individuals. These 

proposed rules would clarify health 

insurance issuers’ obligations under 

these reforms. 

These proposed rules regarding 

insurance market reforms are 

inextricably linked to several other 

reforms in the Affordable Care Act that 

function to expand access to and 

affordability of coverage. For example, 

subtitle D of title I of the Affordable 

Care Act authorizes the establishment of 

Exchanges where individuals and small 

employers can enroll in QHPs and 

creates certain premium stabilization 

programs for the reformed marketplace. 

Further, Code section 36B provides for 

premium tax credits for eligible 

individuals who enroll in QHPs through 

Exchanges. Similarly, Code section 45R 

provides for small business tax credits 

for eligible employers who enroll in 

health insurance coverage through the 

Small Business Health Options Program 

(SHOP). Although these other reforms 

are not the subjects of this proposed 

rule, they do influence the options 

available for implementing this 

proposed rule. 

As noted, the proposed rule would 

make technical changes to clarify the 

processes that CMS uses to enforce 

Affordable Care Act reforms with 

respect to issuers and non-federal 

governmental group health plans. The 

proposed rule also would codify the 

policies related to catastrophic plans. 

A. Fair Health Insurance Premiums 

(Proposed § 147.102) 

PHS Act section 2701 provides that 

health insurance issuers may vary 

premium rates for health insurance 

coverage in the individual and small 

group markets 28 based on a limited set 

of specified factors. The factors are, with 

respect to a particular plan or coverage: 

(1) Whether the plan or coverage applies 

to an individual or family; (2) rating 

area; (3) age, limited to a variation of 3:1 

for adults; and (4) tobacco use, limited 

to a variation of 1.5:1.29 All other rating 

factors are prohibited. Thus, PHS Act 

section 2701 effectively prohibits 

several factors currently in use today, 

such as health status, claims experience, 

gender, industry, occupation, and 

duration of coverage, among others. 

Other factors that might be considered 

for rating purposes, such as eligibility 

for tax credits, prior source of coverage, 

and credit worthiness, also are 

prohibited. The practice of ‘‘reunderwriting’’ also is prohibited. Reunderwriting refers to issuers increasing 

premiums at renewal for existing 

customers because they incurred claims 

or experienced worsening health during 

a policy year.30

For purposes of family coverage, any 

premium variation for age and tobacco 

use must be applied to the portion of 

premium attributable to each family 

member. PHS Act section 2701(a)(2)(A) 

specifies that states can establish one or 

more rating areas. PHS Act section 

2702(a)(2)(B) provides that CMS may 

establish rating areas if a state does not 

establish them. CMS, in consultation 

with the NAIC, will define permissible 

age bands. All non-grandfathered health 

insurance coverage in the individual 

and small group markets is subject to 

the requirements in this section.31 In 

addition, health insurance coverage in 

the large group market is subject to 

these requirements, inside and outside 

an Exchange, if a state permits such 

coverage to be offered through an 

Exchange starting in 2017.32 As 

discussed earlier, we welcome 

comments on whether and how this 

proposed rule could be modified to 

simultaneously secure the protections 

required by law and keep premiums 

affordable for individuals and small 

employers purchasing nongrandfathered health insurance coverage 

in these markets. 

1. State and Issuer Flexibility Related to 

Rating Methodologies 

While PHS Act section 2701 limits 

how issuers may vary premiums, the 

statute does not specify detailed rating 

methodologies. By rating methodology, 

we refer to the array of choices made in 

setting prices—for example, the age 

curves an issuer would use to distribute 

rates within the 3:1 limit on adult rates 

as enrollees grow older. The rating 

methodology also could include the 

method for computing rates in the small 

group market and the methods for 

computing family premiums. In current 

practice, most aspects of rating 

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33For additional background, see CCIIO, Risk 

Adjustment Implementation Issues (2011), pp. 17– 

23, available at: http://cciio.cms.gov/resources/

files/riskadjustment_whitepaper_web.pdf. 

34The HIPAA non-discrimination provisions 

currently prohibit individual employees enrolled in 

a group health plan from being required to pay 

higher premiums or make higher contributions 

based on their health status (26 CFR 54.9802–1; 29 

CFR 2590.702; 45 CFR 146.121). 

35Employer/employee contribution levels are 

subject to other laws. PHS Act section 2705(b) 

prohibits group health plans from discriminating 

based on health status against similarly situated 

individuals in terms of contribution amounts. This 

nondiscrimination requirement generally was 

carried over to the Affordable Care Act from 

methodology are left to the discretion of 

health insurance issuers, subject to 

oversight by the states. As discussed 

later, greater standardization in rating 

methodologies starting in 2014 is 

advantageous for a number of reasons, 

including consumer protection, 

improved transparency, improved 

competition, and administrative 

simplification. We discuss various types 

of choices in rating methodology in 

more detail in the succeeding sections 

of this preamble, and welcome comment 

on them. 

This proposed rule implements our 

authority under PHS Act section 2701 

and would apply to all nongrandfathered health insurance coverage 

in the individual and small group 

markets starting in 2014. This rule 

proposes to standardize rating 

methodologies, particularly with respect 

to age rating and certain aspects of 

family rating, for health insurance 

coverage in the individual and small 

group markets when the market reforms 

go into effect in 2014. This proposed 

rule allows flexibility for states and 

issuers in rating methodology when it 

comes to certain aspects of family, 

tobacco, age, geography, and small 

group rating. 

More standardization with respect to 

rating methodologies is advantageous in 

many respects. First, the risk adjustment 

methodology under section 1343 of the 

Affordable Care Act will need to 

accommodate permissible rating factors 

under PHS Act section 2701.33 A 

standardized rating methodology for all 

plans within a state would enhance the 

transparency, predictability, and 

accuracy of risk adjustment because the 

risk adjustment methodology would 

account for rating as it is applied by 

issuers. For example, without a 

specified age curve, the risk adjustment 

methodology would have to rely upon 

an estimate of a state-level average age 

curve. This estimate, when applied to 

specific issuers, could lead to a loss of 

accuracy in the calculation of a plan’s 

average actuarial risk to the extent the 

issuer’s rating curve varies from the 

estimated average curve. To the extent 

there is decreased accuracy in the risk 

adjustment methodology as a result of 

such an approximation, its goals of 

promoting competition based on service 

and effective care, rather than risk 

selection, may be undermined and 

consumers and issuers would be 

negatively affected. 

Furthermore, some core functions of 

the Exchange, such as calculating rates 

for QHPs and determining the 

benchmark plan for purposes of the 

premium tax credit under Code section 

36B, would be simplified if issuers used 

the same age curves, age bands, and 

family rating methods. The second 

lowest cost silver plan is the benchmark 

plan that will be used to determine the 

maximum amount an applicant can 

receive for premium tax credits. If 

issuers choose their own age curves, age 

bands, and family rating methods, the 

definition of the second lowest cost 

silver plan would likely vary by 

applicant. In contrast, standardizing 

rating methodologies will result in all 

applicants having the same plan from 

the same issuer as the second lowest 

cost silver plan, regardless of the 

applicant’s age and family composition, 

in a given rating area. This will improve 

price transparency for consumers by 

facilitating their ability to identify the 

second lowest cost silver plan. Lastly, 

allowing differences in rating 

methodologies between issuers in the 

same market in a state could provide an 

avenue for adverse selection. 

The following sections discuss the 

proposed rating methodology. We 

welcome comments on the areas where 

and the extent to which state and issuer 

flexibility in rating methodologies 

versus a more standardized approach is 

desirable. 

2. Small Group Market Rating 

Two rating methods are used 

currently in the marketplace to generate 

small group market rates. The first 

method, known as composite rating, 

uses the rating characteristics of an 

entire small group, such as the average 

employee health risk,34 average 

employee age, geography, group size, 

and industrial code, to determine an 

average per-employee rate (along with 

corresponding average family tier rates) 

for the small group. We understand that 

a few states require this approach. In 

states without such requirements, 

issuers generally use this approach for 

groups with, for example, more than ten 

employees. In contrast, under the 

second method, the issuer calculates a 

separate rate for each employee’s 

coverage based on the allowable rating 

factors for that employee and then sums 

each individual rate to determine the 

total group premium. This approach is 

often used for very small groups (for 

example, those with ten or fewer 

employees). 

Given that PHS Act section 2701 does 

not distinguish between individual and 

small group market rating, we propose 

that issuers would calculate rates for 

employee and dependent coverage in 

the small group market on a per-member 

basis, in the same manner that they 

would calculate rates for persons in the 

individual market, as discussed below, 

and then calculate the group premium 

by totaling the premiums attributable to 

each covered individual. Per-member 

rating is required by PHS Act section 

2701(a)(4), which specifies that the age 

and tobacco use factors be apportioned 

to each family member. However, as 

discussed below, this proposed rule 

does not preclude the possibility that 

employees and their dependents would 

be charged amounts based on their 

group’s average, rather than amounts 

based on their own specific factors, 

notwithstanding that issuers must base 

the total premium for a group on its 

actual current enrollment. We propose 

that states which anticipate requiring 

premiums to be based on average 

enrollee amounts submit information to 

CMS not later than 30 days after the 

publication of the final rule to support 

the accuracy of the risk adjustment 

methodology. 

In the group context, the allowable 

rating factors, including tobacco use, 

would be appropriately associated with 

specific employees and dependents. 

Additionally, with per-member rating, 

premium changes for new hires and 

departures during the year would be 

priced more accurately, an issue of 

particular importance in smaller groups. 

And in the SHOP, when employees are 

offered choices among plans and 

issuers, the additional cost or savings 

resulting from an employee’s plan 

choice would also be priced more 

accurately, ensuring that each issuer 

receives appropriate premiums for the 

individuals choosing its health plans. 

The use of per-member rating would 

give employers flexibility to choose how 

to allocate their contributions to 

employees’ coverage. PHS Act section 

2701 governs the basis upon which an 

issuer may permissibly charge different 

groups or individuals different rates for 

the same insurance product, but it does 

not specify how an employer will 

allocate the premium contributions 

among employees.35 Although many 

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HIPAA. The relevant HIPAA authorities currently 

in effect for group health plans and group health 

insurance coverage are Code section 9802, ERISA 

section 702, and PHS Act section 2702 (prior to 

being renumbered and amended by the Affordable 

Care Act), as well as 26 CFR 54.9802–1, 29 CFR 

2590.702, and 45 CFR 146.121. Guidance 

concerning employer/employee contributions has 

been provided by the Equal Employment 

Opportunity Commission in connection with the 

age discrimination requirements (29 CFR 

1625.10(d)(4)(ii)). 

36Under this approach, the issuer would charge 

the same per-member premium for all family 

members of the same age and tobacco use status. 

The issuer could not charge different rates for 

family members of the same age and tobacco use 

status based on their status, for example, as the 

policyholder, spouse, or dependent. 

variations may be consistent with 

applicable state and federal law, we 

anticipate that there are two primary 

ways employee contributions may be 

determined. 

An employer may choose to set the 

employee contribution as a percentage 

of the underlying cost of the employee’s 

coverage. Under this option, older 

employees and smokers would make 

higher contributions toward coverage, 

reflecting their higher risk and 

permissible rate variation based on age 

and tobacco use. Younger employees 

would make lower contributions, which 

may improve the perceived value of 

insurance for these employees and 

increase take-up rates, making it easier 

for the employer to meet any minimum 

participation rate requirement that may 

apply. 

Alternatively, after the issuer 

develops rates using the per-member 

methodology, an employer may elect to 

generate a composite rate in which each 

employee’s contribution for a given 

family composition is the same, as most 

employers offering coverage do today, 

by adding the per-member rates and 

dividing the total by the number of 

employees to arrive at the group’s 

average rate and determine employer 

and employee contributions based on 

that composite rate. This flexibility for 

small employers would take into 

account that many employers, states, 

and issuers are already accustomed to 

composite rating, it is relatively simple, 

and this method may be beneficial to 

older employees. However, this 

composite method may differ from how 

composite rates often are developed 

today. This decision will be up to 

employers. 

We seek comment on the alignment of 

the method for calculating each 

employee’s rate in the small group 

market with that used to calculate an 

individual’s rate in the individual 

market. In particular, we seek comment 

on the implications of this approach for 

employers and employees, whether it is 

more compatible with employee choice 

in the SHOP, and whether it leads to 

more accurate pricing of employee 

choices. 

3. Family Rating 

PHS Act section 2701(a)(1)(A)(i) 

provides that issuers may vary rates 

based on whether a plan covers an 

individual or a family. PHS Act section 

2701(a)(4) provides that, with respect to 

family coverage, the rating variation 

permitted for age and tobacco use must 

be applied based on the portion of the 

premium attributable to each family 

member covered under a plan. 

The rule proposes that issuers add up 

the rate of each family member to arrive 

at a family premium.36 However, we 

propose that the rates of no more than 

the three oldest family members who 

are under age 21 would be taken into 

account in computing the family 

premium. This policy is intended to 

mitigate the premium disruption for 

larger families accustomed to family tier 

structures, which typically cap the 

number of children taken into 

consideration in setting premiums. We 

propose a cut-off age of 21 for this cap 

so that it is consistent with the cut-off 

age used in the proposed rule on age 

rating, as well as the requirement that 

child-only policies be available to those 

under age 21. We do not propose a 

similar cap on the number of family 

members age 21 and older whose permember rates would be added into the 

family premium. 

Consistent with PHS Act section 

2701(a)(4), the proposed per-member 

approach to family rating ensures that 

any variation in premium by age or 

tobacco use is applied to the appropriate 

family member. Per-member rating also 

simplifies the administration of risk 

adjustment because the risk associated 

with each family member would be 

easily identified. We solicit comments 

on the use of the per-member build-up 

methodology for individual and small 

group market coverage. In addition, we 

request comments on the appropriate 

cap, if any, on the number of child and 

adult family members whose premiums 

should be taken into account in 

determining the family premium and 

the appropriate cut-off age for a perchild cap (for example, whether this 

should be aligned with the extension of 

dependent coverage to age 26 instead). 

Currently, some issuers apply 

specified family tier or family 

composition multipliers to a base 

premium to arrive at a family rate. Other 

issuers may determine a family 

premium rate based upon the 

policyholder or oldest adult’s age. These 

current practices are impermissible 

under PHS Act section 2701(a)(4) to the 

extent that the multipliers or the base 

premium vary based on age or tobacco 

use, since some family members would 

be rated using factors that do not apply 

to them individually. However, this 

conflict does not exist in a state that 

does not permit variation based on age 

or tobacco use. 

Accordingly, the proposed rule would 

permit a state to require issuers to use 

a standard family tier methodology 

(with corresponding multipliers) if the 

state requires pure community rating, 

without any adjustments for age or 

tobacco use. The multipliers for the tiers 

would need to be actuarially justified to 

ensure that health insurance issuers 

could not charge excessively high 

premiums to individuals or families that 

would render meaningless their 

guaranteed availability rights under PHS 

Act section 2702. PHS Act section 2701 

does not require that issuers use a twotier structure (that is, individual and 

family). For example, a state would be 

able to specify a four-tier structure (that 

is, individual; individual and spouse; 

individual and child/children; and all 

other families). If a state anticipates 

adopting such a policy in the event this 

proposed approach is finalized, we 

propose such states submit relevant 

information on their proposed family 

tiers to CMS no later than 30 days after 

the publication of the final rule to 

support the accuracy of the risk 

adjustment methodology. 

We propose that if a state has pure 

community rating in place, but does not 

adopt a uniform family tier 

methodology (with corresponding 

multipliers), the per-member rating 

methodology would apply as the 

default. In a state that does not require 

community rating, an issuer that 

voluntarily uses pure community rating 

would need to use per-member rating, 

given the absence of a uniform family 

tier methodology in that state. We solicit 

comment on whether, instead of 

permitting flexibility in the final rule, 

states with pure community rating 

should also use the per-member 

approach that would be used in states 

that allow age and tobacco use 

adjustments. 

4. Persons Included Under Family 

Coverage 

Currently, issuers have considerable 

flexibility in determining how to set 

rates for family policies and in defining 

which family members may be on the 

same policy, subject to federal and state 

laws requiring coverage of certain 

individuals (for example, dependent 

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37NAIC, Guidance Manual in the Evaluation of 

Rating Manuals and Filings Concerning Small 

Employer and Individual Health Insurance (2003), 

p. 33. 

children under age 26 pursuant to PHS 

Act section 2714, if a plan or issuer 

otherwise offers dependent child 

coverage). Our research indicates that 

covered family members typically 

include the employee or individual 

market policyholder; a spouse or 

partner, as defined by state law; 

biological children; adopted children; 

and children placed for adoption. 

Sometimes other classes of people are 

covered, such as stepchildren, 

grandchildren, other children related by 

blood, foster children, and children 

under guardianship. 

We request comments on whether the 

final rule should specify the minimum 

categories of family members that health 

insurance issuers must include in 

setting rates for family policies, or 

whether we should defer to the states 

and health insurance issuers to make 

this determination. We also request 

comments on the types of individuals 

who typically are included under family 

coverage currently, including types of 

covered individuals who would not 

meet the classification of tax 

dependents. We note that any family 

member not covered under a family 

policy would be eligible for an 

individual policy pursuant to 

guaranteed availability of coverage 

under PHS Act section 2702. 

5. Rating for Geography 

PHS Act section 2701(a)(1)(A)(ii) 

provides that rates may vary by rating 

areas. PHS Act section 2701(a)(2) 

provides that a state must establish one 

or more rating areas within that state. 

CMS is charged with reviewing the 

adequacy of the rating areas established 

by a state. If the state’s rating areas are 

inadequate (for example, they do not 

cover a sufficient number of 

individuals) or a state does not act, CMS 

may establish such rating areas. 

Although section 2701 does not specify 

the maximum variation for a rating area 

factor, in contrast to its specifying the 

maximum age factor (3:1 for adults) and 

the maximum tobacco factor (1.5:1), a 

rating area factor should be actuarially 

justified to ensure that issuers do not 

charge excessively high premiums that 

would render meaningless the 

guaranteed availability rights of 

individuals and employers under PHS 

Act section 2702. 

Currently, in most states, issuers have 

considerable flexibility in establishing 

their rating areas. The rule proposes that 

a state could establish no more than 

seven rating areas within the state along 

geographic divisions, generally 

consistent with the maximum number 

in states today. The proposed rule 

makes no distinction between health 

insurance coverage offered inside or 

outside an Exchange, so these rating 

areas would apply equally to all nongrandfathered coverage in the 

individual or small group market. 

The choice of a maximum of seven 

areas in the proposed rule is based on 

the higher-end of the number of rating 

areas that states currently have 

established in the individual and small 

group markets (for example, 

Massachusetts, New Jersey, and 

Oregon). We believe that setting an 

upper limit on the number of rating 

areas provides states with the flexibility 

needed to designate rating areas that are 

adequately sized and accommodate 

local market conditions, while avoiding 

an excessive number of rating areas that 

would be confusing to consumers and 

not reflect significant market 

differences. We solicit comments on the 

maximum number of rating areas that 

may be established within a state and 

the potential standards for determining 

an appropriate maximum number. 

Taking into account the spectrum of 

current rating rules regarding geography 

and the need for state flexibility to 

account for local market conditions, the 

proposed rule includes three standards 

for the geographic divisions based on 

standards that we understand states and 

issuers currently use for rating areas. A 

state could select one of the approved 

standards that we would presume 

‘‘adequate’’ or submit its own standard, 

which would be subject to approval. 

These are: (1) One rating area for the 

entire state; (2) rating areas based on 

counties or three-digit zip codes (that is, 

areas in which all zip codes share the 

same first three digits); or (3) rating 

areas based on metropolitan statistical 

areas (MSAs) and non-MSAs. The 

proposed rule would not require that all 

the sections of a rating area be 

geographically adjacent. For example, a 

state could create a rating area 

comprised of all non-MSA portions of a 

state that have similar health care costs. 

Under the first standard, there would 

be one rating area for the entire state. 

While this approach would make it 

easier to establish and monitor rating 

areas, it may be most practical in states 

where there is not significant variation 

in health care costs among the different 

regions of the state. 

Under the second standard, the rating 

areas would be based on counties or 

three-digit zip codes. A state using this 

method would be expected to use either 

counties or three-digit zip codes, but not 

both. In the United States, there are 

3,068 counties, varying greatly in size 

and population. There are 

approximately 455 three-digit zip codes 

in the United States. Three-digit zip 

codes generally cover larger areas than 

a county. Current NAIC rating guidance 

notes that many small group plans 

currently use rating areas based on 

three-digit zip codes or counties.37

Under the third standard, rating areas 

could be based on the state’s MSAs and 

non-MSAs. MSAs encompass at least 

one urban core with a population of at 

least 50,000 people, plus adjacent 

territory that has a high degree of social 

and economic integration with the core. 

MSAs are always established along 

county boundaries, but may include 

counties from more than one state. The 

367 MSAs in the United States include 

approximately one-third of the counties 

and 83 percent of the population of the 

United States. MSAs could provide a 

convenient and established method of 

grouping counties into larger areas. 

Further, current NAIC rating guidance 

suggests that MSAs be considered as 

one possible standard for rating areas. 

For MSAs that cross state boundaries, 

we propose that these should be divided 

between the respective states if the MSA 

option is adopted. States with counties 

not encompassed by an MSA could 

create one or more non-MSA rating 

areas for those counties. For states with 

more than seven MSAs and non-MSA 

areas, we propose that these states 

combine some of the areas into no more 

than seven rating areas based on a 

reasonable methodology, such as cost 

similarity. 

We request comments regarding the 

use of these proposed standards for 

rating areas, as well as comments 

regarding other options for standards for 

geographic divisions and other relevant 

factors that could be used for 

developing rating areas. We request 

comments from states that already have 

standard rating areas regarding what 

changes, if any, would be necessary to 

meet one or more of the proposed 

standards and the proposed limit of 

having no more than seven rating areas. 

We also request comments on whether 

the final rule should establish minimum 

geographic size and minimum 

population requirements for rating areas 

and whether state rating areas currently 

in existence should be deemed in 

compliance with this provision. 

To the extent a state establishes rating 

areas using the proposed standards, that 

is one rating area for the entire state, or 

no more than seven rating areas if 

counties, three-digit zip codes, or 

MSAs/non-MSAs are used, we propose 

that the state’s rating areas would be 

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presumed adequate. We propose that 

CMS would take a more active role in 

assessing the adequacy of the state’s 

rating areas when a state designates 

rating areas based on geographic 

divisions other than those identified in 

the proposed rule. 

In the event that a state does not 

establish rating areas consistent with the 

proposed standards, the one-area-perstate standard would apply, unless we 

applied one of the other standards to 

designate rating areas in a particular 

state. In that case, we likely would be 

inclined to use the MSA/non-MSA 

standard. To the extent that we establish 

a state’s rating areas, we would work 

with the state, local issuers, and others 

to determine how best to establish rating 

areas responsive to local market 

conditions. 

We recognize that states and issuers 

need lead time to update pricing models 

and make related system changes to 

accommodate potentially new rating 

areas in 2014. To support the accuracy 

of the risk adjustment methodology, we 

propose that states needing such lead 

time submit relevant information on 

their rating areas to CMS within 30 days 

after the publication of the final rule. 

Lastly, we recognize that states may 

wish to establish or modify their rating 

areas after 2014. For example, states 

might wish to modify rating areas in 

light of local utilization and cost 

patterns, issuer service areas, or changes 

in MSA designations. We request 

comments on appropriate schedules and 

procedural considerations related to 

rating area designations for plan years 

after 2014. 

6. Rating for Age 

PHS Act section 2701(a)(1)(A)(iii) 

provides that the premium rate charged 

by an issuer for non-grandfathered 

health insurance coverage in the 

individual or small group market may 

vary by age, but may not vary by more 

than 3:1 for adults. The statute does not 

specify a premium rating limitation for 

children, but it provides that the 3:1 

adult ratio must be ‘‘consistent with 

section 2707(c)’’ of the PHS Act. Section 

2707(c), in turn, requires that child-only 

plans be made available to individuals 

under age 21. 

We believe the statutory language 

supports an interpretation that the 3:1 

age rating limitation was intended to 

apply only to adults age 21 and older. 

Further, we believe that PHS Act section 

2702 supports a requirement that issuers 

set actuarially justifiable child rates 

using a standard population, to prevent 

the charging of unjustified premiums 

that would, in effect, prevent 

individuals under age 21 from 

exercising their guaranteed availability 

rights. Accordingly, we propose to allow 

rates to vary within a ratio of 3:1 for 

adults (defined for purposes of this 

requirement as individuals age 21 and 

older), and that rates must be actuarially 

justified based on a standard population 

for individuals under age 21, consistent 

with the proposed uniform age curve 

discussed later in this section. We 

request comment on this approach. 

We propose that enrollees’ age factors 

and bands should be determined based 

on an enrollee’s age at policy issuance 

and renewal, so that age rating factors 

are applied on a consistent basis by all 

issuers and that consumers (including 

those purchasing policies covering 

multiple family members) do not 

receive multiple premium increases 

each year. This is the same 

measurement point as the first day of a 

plan or policy year, which is the age 

determination point for catastrophic 

plans. We request comments on whether 

other measurement points (for example, 

birthdays) might be more appropriate. 

PHS Act section 2701(a)(3) directs 

CMS, in consultation with the NAIC, to 

define ‘‘permissible age bands’’ for 

purposes of age rating. Age bands are 

simply ranges of sequential ages. In the 

context of health insurance, they are 

often used to segregate where the slope 

of premium rate variation by age 

changes, the most common being that 

the slope is zero within the band (that 

is, does not change), and non-zero from 

one band to the next band in the 

sequence (for example, persons aged 30 

to 34 pay the same premium, but lower 

than those age 35 to 39, who pay the 

same premium to each other, and 

similarly for age 40 to 44, etc.). 

In accordance with section 2701(a)(3), 

we consulted with the NAIC, through its 

Health Care Reform Actuarial (B) 

Working Group, concerning the 

permissible age bands to be defined by 

CMS. The NAIC Working Group did not 

make specific recommendations, but 

provided valuable feedback regarding 

state regulation of age bands, issuer 

practices, and important policy 

considerations related to possible age 

band standards. Although state 

standards vary, and issuers that set their 

own age bands do so using a variety of 

different methods, our discussions with 

the industry indicate that bands smaller 

than five years are common in the 

individual market. Taking into 

consideration the feedback we received 

from NAIC, we propose the following 

standard age bands for use in all states 

and markets subject to the rating rules 

of PHS Act section 2701: 

• Children: A single age band 

covering children 0 to 20 years of age, 

where all premium rates are the same. 

• Adults: One-year age bands starting 

at age 21 and ending at age 63. 

• Older adults: A single age band 

covering individuals 64 years of age and 

older, where all premium rates are the 

same. 

We propose these age bands for a 

number of reasons. First, with respect to 

children, we are proposing a single age 

band for child ages 0–20 to reflect the 

generally small differences in costs 

between children of various ages (other 

than newborns and very young 

children). We believe that a single age 

band for children will simplify and 

make risk adjustment methodologies 

more efficient, and allow consumers to 

more easily compare and predict costs 

as children age, particularly if the 

consumer has children that are several 

years apart in age. We solicit comments 

on whether multiple age bands or a 

single age band for children are 

appropriate. 

Second, with respect to adults ages 21 

to 63, we propose one-year age bands so 

that consumers would experience 

steady, relatively small premium 

increases each year due to age. If 

broader age bands are adopted (for 

example, five-year bands), consumers 

would experience larger premium 

increases when they reach the end of 

one age band and move into the next. 

Although five-year bands are currently 

common in the small group market, we 

are also proposing to apply the same 

age-band structure to the small group 

market to align with our proposal that 

the per-member rating buildup 

approach be used in both the individual 

and the small group markets. We 

request comment on this approach. 

Finally, we propose a single age band 

for adults age 64 and older largely to 

facilitate compliance with the Medicare 

Secondary Payer requirements when 

per-member rating is used for older 

individuals in the small group market. 

Medicare Secondary Payer requirements 

generally prohibit an employer with 20 

or more employees from charging 

Medicare-eligible employees a premium 

that is higher than the premium charged 

to non-Medicare-eligible employees 

(section 1862(b)(1)(A) of the Social 

Security Act, 42 U.S.C. 1395y(b)(1)(A); 

42 CFR 411.102(b), 411.108(a)(6)). 

Consequently, we believe that the 

highest age band used to generate 

individually rated premiums must begin 

before age 65, when individuals 

generally are not eligible for Medicare 

based on age. We believe this proposed 

age band is reasonable because 

individuals age 64 and older represent 

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38We have developed our proposed age curve 

based on our assumptions of the distribution of 

claims costs by age in the post-2103 market. 

Although it is difficult to exactly predict the 

composition of the post-2013 market and the actual 

claims costs that will be incurred, we developed 

our proposed age curve using assumptions that are 

consistent with those utilized for the risk 

adjustment program, as described in our Premium 

Stabilization Rule (77 FR 17220). 

39We measured the value of plan coverage by 

approximating plan actuarial value (AV) on the 

same scale that we use to separate plans into four 

metal tiers. For the purposes of our analysis, we 

designated plans with AVs of 0.55–0.75 as ‘‘low 

value’’ plan designs, 0.75–0.85 as ‘‘medium value’’ 

plan designs, and 0.85–0.95 for ‘‘high value’’ plan 

designs. 40Reporting of base premium rates for the 

individual market to HealthCare.gov does not take 

into account any additional premium due to health 

status, which is commonly added in the individual 

market. These rates, therefore, are not necessarily 

the actual premiums paid by the 60,000 enrollees 

in those plans. 41For the purposes of this analysis, we analyzed 

two separate employer databases with data from a 

combination of large and small employers. One 

database consisted of 303,000 individuals with 12 

continuous months of coverage (to account for 

seasonal variation in claims costs) that were 

employed at firms with 50–250 employees. The 

second database of large employer coverages 

(including self-insured employers) was composed 

of 33 million individuals with 12 months of 

continuous coverage. 

42For younger ages near age 21 and older ages 

closer to 64, the change of premium rates from one 

age to the next higher age would be lower than the 

change in expected claims costs for those ages. 

only a small proportion of enrollees in 

the individual and small group markets, 

and are likely to have similar claims 

costs despite their age differences. We 

seek comment on this approach. 

This proposed rule would direct 

health insurance issuers within a market 

in a state to use a uniform age rating 

curve. An age curve is a specified 

distribution of relative rates across all 

age bands. Reflecting statutory 

requirements, our proposed age curve 

anchors the premium amount to age 21, 

and is expressed as a ratio, for all ages 

between ages 0 and 64, inclusive. We 

believe that using uniform age bands 

and rating curves will simplify 

identification of the second lowest cost 

silver plan used to determine premium 

tax credits, and will provide an 

incentive for issuers to compete to offer 

plans that provide the best value across 

the entire age curve. Doing so will also 

promote the accuracy of the risk 

adjustment program established under 

section 1343 of the Affordable Care Act, 

which is essential to ensuring market 

stability in the reformed marketplace, 

and reduce the potential for adverse 

selection.38 A standardized rating 

methodology for all plans within a state 

would also enhance the transparency, 

predictability, and accuracy of the risk 

adjustment program because the risk 

adjustment methodology could account 

for age rating as it is applied by issuers. 

We are proposing to apply the same 

default age rating curve to both the 

individual and small group markets. 

Our proposed uniform age curve 

assumes that issuers will vary premiums 

to the greatest extent permissible within 

the 3:1 age rating constraint for adults 

(or narrower ratios as provided under 

state law). We have constructed our 

proposed age curve based on gross 

premium amounts, which includes 

administrative, overhead, and marketing 

costs in addition to the amount 

attributable to enrollee claims costs, 

without accounting for any tax credits 

that may offset a consumer’s premium 

costs. Because our analysis of premiums 

found evidence that issuers do not vary 

their age curves across much of the 21– 

64 age band in significant amounts 

across geography or product types, we 

do not believe that applying a uniform 

rating curve to individual and small 

group markets would disadvantage 

issuers according to the geographic 

region they are licensed in, or the value 

of the coverage that the product/plan 

type offers.39

Our review of base premium rates for 

60,000 covered lives (based on data 

reported on HealthCare.gov by a sample 

of regional issuers operating in different 

regions of the country) has shown that 

base premium rates vary according to 

age at a mostly consistent rate, and are 

largely unaffected by product type/plan 

design or geographic region.40

Furthermore, an examination of the 

large group insurance market 

demonstrates clear evidence that issuers 

generally utilize an underlying cost 

curve that varies by age in a manner that 

is independent of the value of the plan 

coverage.41 The analysis of the large 

group market is particularly relevant as 

a predictor of post-2014 individual and 

small group market rating practices 

because the large group market is 

characterized by coverage for most 

essential benefits, has guaranteed 

availability of coverage, and does not 

use person-specific underwriting; these 

types of rates will likely be more 

characteristic of those of the reformed 

2014 individual and small group 

market. Consequently, we do not believe 

that issuers need the flexibility to vary 

age curves across product/plan designs 

or geographic regions after taking into 

account the requirement for a 3:1 rating 

restriction, or that applying a uniform 

age curve to issuers in the individual 

and small group markets will lead to 

any significant disturbance in issuer 

pricing practices across different 

geographic regions or plan designs. 

Therefore, we are proposing that CMS’s 

uniform age curve would apply by 

default in a state, unless a state adopted 

a different uniform age curve. We 

request comment on the application of 

a single, default age curve to the 

individual and small group market 

based on the above assumptions and the 

methodology for doing so. 

We propose that we would fit our 

uniform age curve to the 3:1 adult age 

rating limit by ‘‘flattening’’ the ends of 

the age curve derived from expected 

claim cost patterns in a manner that 

accommodates the 3:1 premium ratio 

limit for the highest and the lowest 

adult ages. Under this approach, when 

other factors (for example, mix of 

gender, tobacco use, geographic region, 

and plan type) are held constant among 

ages, the rate of premium change from 

one age to the next will closely mirror 

the rate of expected claims costs, except 

for those ages closest to age 21 and age 

64.42 As compared to an approach that 

would proportionally compress the 

curve (that is, the relationship between 

premiums by age) for all ages, this 

proposed approach would ensure that 

the fewest number of individuals (or 

employees, in the small group market) 

would be affected by the 3:1 premium 

ratio constraint, thereby mitigating 

premium disruption for the largest 

number of consumers, and reducing the 

need for significant risk adjustment 

across age bands. We propose that we 

would revise our default curve 

periodically to reflect our most current 

knowledge of the individual and small 

group market (for example, enrollment, 

population distribution, and cost 

patterns) following implementation of 

2014 reforms. We request comment on 

our proposed approach for fitting the 

proposed adult age curve to the 

statutorily specified 3:1 premium ratio. 

With respect to the age curve for 

children’s ages, we have constructed a 

proposed default curve using a single 

age band for ages 0–20, using the same 

data sources that we used to derive our 

proposed adult age curve, as described 

above. The value of our proposed 

default age curve for ages 0–20 was 

supported by the actual experience for 

those ages. The shift from the child age 

curve at age 20 to the adult age curve 

at age 21 could result in a premium 

differential for these ages that is not 

reflected in issuers’ current rating 

practices. However, given the low 

premiums for individuals in these age 

groups, as well as the relative premium 

stability from age 21 through early 30s 

under the standardized age curve, we do 

not anticipate that this differential 

would result in a significant financial 

burden on consumers. While we do not 

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43 In addition, section 1334(c)(5) of the Affordable 

Care Act, pertaining to multi-state plans, indicates 

that states may require ‘‘more protective’’ age rating 

requirements that are lower than 3:1 in their 

individual and small group markets. 

44The interaction of PHS Act section 2701 with 

the wellness program rules under PHS Act section 

2705(j) is discussed later in this section. 

45Although not the subject of this NPRM, we note 

that the tobacco use rating factor is not taken into 

account in determining the amount of the premium 

tax credit under Code section 36(b)(3)(C). 

believe that this discontinuity 

undermines the accuracy of the 

methodology we used to develop our 

proposed child and adult age curves, we 

request comment on potential 

implications that the transition from the 

proposed child curve to the proposed 

adult curve may have for issuers and 

consumers. We also seek comment on 

the proposed rating curve, including 

whether it is generally consistent with 

current insurer rating practices and 

minimally disruptive to the current 

market within the confines of the rating 

restrictions and reforms under the 

Affordable Care Act. 

CMS PROPOSED STANDARD AGE CURVE

Age Premium ratio Age Premium ratio Age Premium ratio 

0–20 0.635 35 1.222 50 1.786 

21 1.000 36 1.230 51 1.865 

22 1.000 37 1.238 52 1.952 

23 1.000 38 1.246 53 2.040 

24 1.000 39 1.262 54 2.135 

25 1.004 40 1.278 55 2.230 

26 1.024 41 1.302 56 2.333 

27 1.048 42 1.325 57 2.437 

28 1.087 43 1.357 58 2.548 

29 1.119 44 1.397 59 2.603 

30 1.135 45 1.444 60 2.714 

31 1.159 46 1.500 61 2.810 

32 1.183 47 1.563 62 2.873 

33 1.198 48 1.635 63 2.952 

34 1.214 49 1.706 64 and Older 3.000 

Although we are proposing a uniform 

age rating curve for the reasons 

described above, our proposed approach 

would maintain flexibility for states and 

issuers regarding certain aspects of age 

rating. In most states, premium rates for 

health insurance coverage are permitted 

to vary by age to the extent that issuers 

can actuarially justify such rates; this 

practice could continue within the 

boundaries of the proposed policy. A 

state law that prescribed a narrower 

ratio for adults (for example, 2:1) or 

prohibited different adult rates 

altogether would not be preempted 

under PHS Act section 2724(a)(1) since 

such state law would not ‘‘prevent the 

application’’ of section 2701.43 To 

support the accuracy of the risk 

adjustment methodology, we propose 

that states using narrower ratios submit 

relevant information on their ratios to 

CMS no later than 30 days after the 

publication of the final rule. We also 

seek input on the consequences of these 

choices in terms of the likely percentage 

premium increases that consumers will 

face when aging from one age band to 

another, the impact on the 

administration and accuracy of risk 

adjustment, the administration of 

premium tax credits, and consumer 

convenience. We propose that states 

would have the option to designate a 

uniform age curve other than the CMS 

age curve. If a state anticipates using its 

own age curve, we propose the state 

submit relevant information on its 

proposed curve to CMS no later than 30 

days after the publication of the final 

rule to support the accuracy of the risk 

adjustment methodology. 

7. Rating for Tobacco Use 

PHS Act section 2701(a)(1)(A)(iv) 

provides that health insurance issuers in 

the individual and small group markets 

cannot vary rates based on tobacco use 

by more than 1.5:1.44 As mentioned, 

PHS Act section 2701(a)(4) provides that 

the rating variation for tobacco use 

applies based on the portion of 

premium that is attributable to each 

family member covered under the plan. 

A state law that prescribes a narrower 

ratio (for example, 1.25:1) or prohibits 

varying rates for tobacco use altogether 

would not be preempted since such 

state law would not impose a standard 

or requirement that conflicts, or makes 

it impossible to comply, with 

permissible rating practices under 

federal law, and thus would not prevent 

the application of PHS Act section 

2701.45 If a state anticipates adopting 

narrower ratios for tobacco use, we 

propose that the state submit relevant 

information on their ratios to CMS no 

later than 30 days after the publication 

of the final rule. 

Currently, many states allow health 

insurance issuers in the individual and 

small group markets to vary premiums 

based on tobacco use. In addition, many 

states limit the amount by which 

premiums can vary due to tobacco use 

by allowing use of that factor only 

within their overall health status limits. 

For example, the NAIC’s Small 

Employer Health Insurance Availability 

Model Act (1993 Version) does not 

specifically identify tobacco use as a 

permissible rating factor, but allows its 

use within the overall 1.67:1 ratio for 

the health status of the employees or 

dependents of the small employer. 

There is not a clear and consistent 

definition of tobacco use among the 

states for rating purposes. Numerous 

states such as Louisiana, Maine, 

Massachusetts, Minnesota, and New 

Mexico allow tobacco use to be 

considered as a rating factor in both the 

individual and small group markets. 

While these states provide a definition 

of what constitutes a tobacco product, 

they do not specifically define ‘‘tobacco 

use.’’ 

We understand that issuers typically 

rely on self-reported data, such as 

information from applications and 

health risk assessments, to determine 

tobacco usage. Since applications and 

health risk assessments vary from issuer 

to issuer, there is wide variation in how 

issuers define tobacco use. 

One possible approach for purposes of 

implementing this provision upon 

which we invite comment would be to 

include one or more questions on 

tobacco use in the single streamlined 

application under § 155.405, or in 

connection with other enrollmentrelated processes for an Exchange. We 

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46See 26 CFR 54.9802–1; 29 CFR 2590.702; 45 

CFR 146.121. Prior to the issuance of the final 2006 

regulations, the Departments published interim 

final regulations with request for comment 

implementing the HIPAA nondiscrimination 

provisions on April 8, 1997 at 62 FR 16894, 

followed by proposed regulations regarding 

wellness programs on January 8, 2001 at 66 FR 

1421. 

47The 2006 regulations also required that a 

wellness program be reasonably designed to 

promote health or prevent disease; give eligible 

individuals an opportunity to qualify for the reward 

at least once per year; make the reward available to 

all similarly situated individuals (and offer a 

reasonable alternative standard to any individual 

for whom it is unreasonably difficult due to a 

medical condition to satisfy the otherwise 

applicable standard during that period (or for whom 

it is medically inadvisable to attempt to satisfy the 

otherwise applicable standard)), and, in all plan 

materials describing the terms of the program, 

disclose the availability of a reasonable alternative 

standard. 

48While this new 30 percent limit is set forth in 

PHS Act section 2705(j), because the existing 20 

percent limits were established by regulation, in the 

case of grandfathered health plans governed by the 

old version of section 2702, the 20 percent limit is 

proposed to be increased by the Departments in 

proposed regulations published contemporaneously 

with the publication of this proposed rule. 

49The wellness program NPRM proposes that the 

additional increase in the size of the reward for 

wellness programs designed to prevent tobacco use 

would not be limited to the small group market, to 

provide consistency across markets and to provide 

large group, self-insured, and grandfathered 

employment-based plans the same additional 

flexibility to promote tobacco-free workforces as 

small, insured, non-grandfathered health plans. 

specifically invite comment on the 

possible use of the single streamlined 

application to collect information 

concerning tobacco use in connection 

with a premium surcharge, as well as 

alternative options for identifying 

tobacco use, as well as how the 

information should be collected with 

respect to health insurance coverage 

offered outside an Exchange. 

The proposed rule does not prohibit 

issuers from varying the tobacco use 

factor used for a particular age band, as 

long as any variation is not greater than 

1.5:1, the maximum variation for 

tobacco use under PHS Act section 

2701(a)(1)(A)(iv), and is consistent with 

other applicable law, including the 

HIPAA nondiscrimination provisions. 

In other words, an issuer could use a 

lower tobacco use factor for a younger 

individual (for example, 1.3:1) 

compared to an older individual (for 

example, 1.4:1), as long as the factor 

does not exceed 1.5:1 for any age group. 

In contrast to the age rating factor, 

where we are proposing that issuers 

utilize a standard age curve, we are 

proposing that states or issuers have the 

flexibility to determine the appropriate 

tobacco rating factor within a range of 

1:1 to 1:1.5, consistent with the wellness 

requirements discussed below. We seek 

comments on this approach. 

We also considered how the 

requirements under PHS Act section 

2701(a)(1)(A)(iv) would interact with 

rewards for tobacco cessation offered as 

part of employer wellness programs. 

Tobacco cessation programs are a 

common aspect of employers’ wellness 

programs. Prior to the enactment of the 

Affordable Care Act, the Departments of 

HHS, Labor, and the Treasury (jointly, 

the Departments) published final rules 

regarding the nondiscrimination and 

wellness program provisions under 

HIPAA (71 FR 75014, Dec. 13, 2006, 

referred to as the 2006 regulations).46

The HIPAA wellness requirements 

implemented in these 2006 regulations 

were set forth in section 2702 of the 

PHS Act (with parallel provisions 

contained in ERISA section 702 and 

Code section 9802). While PHS Act 

section 2702 did not specifically impose 

any limit on rewards that could be 

offered under wellness programs, the 

2006 regulations provided that plans 

and issuers could offer a reward that 

does not exceed 20 percent of the total 

cost of coverage in a health-contingent 

wellness program, provided specified 

consumer-protection conditions were 

met.47

The Affordable Care Act added a new 

PHS Act section 2705(j), effective for 

plan years beginning on or after January 

1, 2014. Section 2705(j) largely reflects 

the wellness provisions from the 2006 

regulations, with a few clarifications 

and modifications. Under PHS Act 

section 2705(j), plans and issuers 

generally can offer a reward of up to 30 

percent of the cost of coverage48 for 

participation in a wellness program that 

is based on an individual satisfying a 

standard that is related to a health 

status-related factor (‘‘health factor’’), 

subject to certain conditions. PHS Act 

section 2705(j) also authorizes the 

Departments to increase the maximum 

reward to as much as 50 percent of the 

total cost of coverage if they determine 

such an increase to be appropriate. 

Contemporaneously with the 

publication of this proposed rule, the 

Departments are publishing a notice of 

proposed rulemaking (NPRM) under 

section 2705(j), which proposes to 

increase the maximum reward under a 

wellness program in group health 

coverage from 20 percent to 30 percent 

of the cost of coverage. The rule further 

proposes an increase of an additional 20 

percentage points (to 50 percent) to the 

extent that the additional percentage is 

in connection with a program designed 

to prevent or reduce tobacco use. 

We propose in this rule that the 

definition of ‘‘tobacco use’’ for purposes 

of section 2701 be consistent with the 

approach taken with respect to healthcontingent programs designed to 

prevent or reduce tobacco use under 

section 2705(j). That is, by proposing to 

raise the maximum permissible reward 

for participating in a tobacco cessation 

program in the wellness rule, we are 

proposing that a health insurance issuer 

in the small group market would be 

required to offer a tobacco user the 

opportunity to avoid paying the full 

amount of the tobacco use surcharge 

permitted under PHS Act section 2701 

if he or she participates in a wellness 

program meeting the standards of PHS 

Act section 2705(j) and its 

implementing regulations.49

There are several positive aspects to 

implementing PHS Act sections 2701 

and 2705(j) in a coordinated manner 

with respect to tobacco use in the small 

group market. Rather than have the 

tobacco use surcharge under PHS Act 

section 2701 be strictly a negative 

financial incentive, this approach would 

encourage tobacco users to pursue 

tobacco cessation remedies offered 

under their employers’ wellness 

programs, enhancing their long-term 

health and potentially reducing health 

care costs. It also would alleviate 

underreporting for tobacco use since 

tobacco users who disclose their tobacco 

use would not automatically have to pay 

the premium surcharge, but could 

instead participate in the employer’s 

cessation program. Finally, group health 

plans and health insurance issuers with 

wellness programs may find it 

administratively more efficient to 

implement the two provisions 

concurrently given that employers are 

familiar with the requirements of 

wellness programs associated with 

increased premiums related to a health 

factor. We welcome comments on this 

proposal and other ideas for 

coordinating the implementation of the 

tobacco surcharge under PHS Act 

section 2701 and the wellness 

provisions under PHS Act section 

2705(j). 

We also invite comment on possible 

definitions of ‘‘tobacco use’’ that could 

be applied for purposes of sections 2701 

and 2705(j). One possible definition 

would rely on self-reporting as to 

whether the individual would be 

considered a tobacco user. Another 

possibility may be what some issuers 

use today: a defined amount of tobacco 

use within a specified look-back period. 

A third possibility may be to define 

‘‘tobacco use’’ as regular, and not 

infrequent or sporadic, tobacco use 

(perhaps including some standard of 

frequency). Another option would 

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50Other federal laws may restrict the health 

insurance coverage products available to certain 

individuals. For example, individuals must meet 

certain requirements related to residency, 

citizenship/immigration status, and nonincarceration in order to buy QHPs through an 

Exchange (45 CFR 155.305(a)). 

51For employees, COBRA events include a loss of 

coverage due to voluntary or involuntary 

termination of employment for reasons other than 

gross misconduct and reduction in the number of 

hours of employment. For spouses of covered 

employees, these events include a loss of coverage 

Continued 

define a tobacco user as one who uses 

tobacco with sufficient frequency so as 

to be addicted to nicotine. Regardless of 

how tobacco use is defined, we are 

proposing that the definition of 

‘‘tobacco use’’ for purposes of section 

2701 be consistent with the approach 

taken with respect to health-contingent 

wellness programs designed to prevent 

or reduce tobacco use under section 

2705(j). 

PHS Act section 2705(b) also 

prohibits issuers from charging 

enrollees in the individual market 

higher premiums based on health 

factors. However, PHS Act section 

2705(j) does not apply to the individual 

health insurance market. To the extent 

there is any conflict between PHS Act 

sections 2701 and 2705 as applied to the 

individual market, we think the more 

specific language of PHS Act section 

2701 allowing tobacco use surcharges 

prevails over the more general language 

of PHS Act section 2705 prohibiting 

premium differences based on health 

factors. In other words, issuers could 

implement the tobacco use surcharge in 

the individual market without having to 

offer wellness programs. However, we 

solicit comments on whether and how, 

consistent with PHS Act sections 2701 

and 2705, the tobacco surcharge in the 

individual market could be combined 

with the same type of incentive to 

promote tobacco cessation that is 

available in the group market. 

B. Guaranteed Availability of Coverage 

(Proposed § 147.104) 

PHS Act section 2702 provides that 

health insurance issuers that offer 

health insurance coverage in the 

individual or group market in a state 

must accept every individual and 

employer in the state that applies for 

coverage, subject to certain exceptions. 

These exceptions allow issuers to limit 

enrollment: (1) To certain open and 

special enrollment periods; (2) to an 

employer’s eligible individuals who 

live, work, or reside in the service area 

of a network plan; and (3) in certain 

situations involving network capacity 

and financial capacity. 

PHS Act section 2702 generally is 

based on the HIPAA provision for 

guaranteed availability in the small 

group market. Compared to HIPAA, 

however, the Affordable Care Act: (1) 

Expands guaranteed availability beyond 

the small group market to include the 

individual and large group markets as 

well; (2) requires the establishment of 

open enrollment periods; (3) establishes 

new special enrollment periods in 

addition to those in HIPAA; and (4) 

eliminates the guaranteed availability 

exception for coverage offered only to 

bona fide association members in the 

small group market. Accordingly, this 

proposed rule generally is based on the 

HIPAA rule for guaranteed availability 

in the small group market (§ 146.150). In 

addition, the proposed rule would add 

a new marketing standard pursuant to 

PHS Act section 2702 that is identical 

to that applicable to QHPs established 

under 45 CFR 156.225. 

The proposed rule would direct that 

issuers offer coverage to and accept any 

individual or employer in the state that 

applies for such coverage—regardless of 

health status, risk, or medical claims 

and costs—with limited exceptions.50

Issuers would be required to offer all 

products that are approved for sale in 

the applicable market. We believe that 

the protections of the Affordable Care 

Act apply to all non-grandfathered 

health insurance coverage in an 

applicable state market. Accordingly, 

beginning in 2014, even nongrandfathered ‘‘closed blocks’’ of 

business would be available to new 

enrollees, subject to the limited 

exceptions discussed below. We 

welcome comments on this proposal. 

We propose that issuers offering 

health insurance coverage in the group 

market would maintain a year-round 

open enrollment period for employers to 

purchase such coverage, while issuers 

offering coverage in the individual 

market would offer plans during open 

enrollment periods (including the initial 

open enrollment period) consistent with 

those required by Exchanges for 

individual market QHPs. The effective 

dates of such coverage would align with 

the Exchange standards for the 

appropriate market (if any, in the case 

of the large group market). These 

standards are intended to minimize 

adverse selection by setting consistent 

open enrollment periods for the 

insurance marketplace, regardless of 

whether individuals or employers 

choose to purchase outside or through 

an Exchange. We solicit comments on 

whether this proposal sufficiently 

addresses the open enrollment needs of 

individual market customers whose 

coverage renews on dates other than 

January 1 and whether aligning open 

enrollment periods with policy years 

(based on a calendar year) in the 

individual market is more desirable. 

Given that employer groups generally 

pose less of an adverse selection risk 

than individuals and issuers currently 

are willing to offer them coverage at any 

point in the year, we believe that a yearround enrollment period for large and 

small employers will not be 

burdensome on issuers nor change the 

status quo in most states. 

Prior to the Affordable Care Act, the 

HIPAA provision for guaranteed 

availability in the small group market 

had allowed issuers to establish 

employer contribution rules and group 

participation rules that small employers 

must meet in order to qualify for 

guaranteed availability, as allowed 

under applicable state law. PHS Act 

section 2702 does not include the 

contribution and participation 

exception to guaranteed availability; 

however, PHS Act section 2703 does 

include such an exception for 

guaranteed renewability. We are 

concerned that failing to provide a small 

employer contribution and participation 

exception to guaranteed availability by 

regulation would trigger adverse 

selection against the small group 

market, given its year-round open 

enrollment period, vis-a`-vis the 

individual market, which has a timelimited open enrollment period. In other 

words, some individuals could use the 

open-ended enrollment period for small 

employers to buy insurance only as 

medical needs arise, thereby creating 

instability in the small group market 

and increasing premiums for other small 

employers. Thus, the proposed rule 

would allow issuers to condition yearround open enrollment in the small 

group market on a small employer being 

able to satisfy the same contribution and 

participation requirements at issuance 

that the issuer is permitted to consider 

at renewal, either as allowed by state 

law or, in the case of a QHP offered in 

the SHOP, as permitted by § 156.285(c). 

Establishing this requirement by rule 

effectively would preserve the status 

quo under HIPAA. If the final rule 

includes this requirement, we would 

also adopt corresponding changes in 

§ 155.725, which establishes the 

enrollment periods in the SHOP. 

The proposed rule sets forth that 

issuers make available special 

enrollment periods in both the 

individual and group markets for 

individuals and plan participants and 

beneficiaries in connection with the 

events that would trigger eligibility for 

COBRA coverage under ERISA section 

603.51 This set of special enrollment 

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due to reasons that would make the employee 

eligible for COBRA, the employee’s becoming 

entitled to Medicare, divorce or legal separation of 

the covered employee, and death of the covered 

employee. For children of covered employees, these 

events include a loss of coverage due to reasons that 

would make the employee eligible for COBRA, the 

employee’s becoming entitled to Medicare, divorce 

or legal separation of the covered employee, death 

of the covered employee, and loss of dependent 

child status under plan rules. 

52The special enrollment framework originally 

created under HIPAA for special enrollment due to 

loss of eligibility for other coverage and dependent 

special enrollment is 30 days. The Children’s 

Health Insurance Program (CHIP) Reauthorization 

Act of 2009 also added special enrollment rights to 

ERISA, the PHS Act, and the Code that allow 

employees to enroll in a group health plan or group 

health insurance coverage upon termination of 

Medicaid or CHIP coverage or eligibility for a 

premium assistance program under Medicaid or 

CHIP. Under these circumstances, an employee 

must request special enrollment within 60 days. 

53See 26 CFR 54.9801–6, 29 CFR 2590.701–6, and 

45 CFR 146.117 (HIPAA); and 45 CFR 155.420 

(Exchange). 

54Available at: http://cciio.cms.gov/resources/

files/Files2/10112011/hipaa_98_01_508.pdf.pdf. 

55CMS, ‘‘State Exchange Implementation 

Questions and Answers. Available at: http://cciio.

cms.gov/resources/files/Files2/11282011/exchange_

q_and_a.pdf.pdf. 

56Section 4 of the NAIC Model Act prohibits ‘‘an 

advertisement, announcement or statement 

containing any assertion, representation or 

statement with respect to the business of insurance 

or with respect to any insurer in the conduct of its 

insurance business, which is untrue, deceptive or 

misleading.’’ Section 5 of the NAIC Model 

Regulation provides that the format and content of 

advertisements of accident and sickness insurance 

must ‘‘be sufficiently complete and clear to avoid 

events is in addition to the special 

enrollment events provided under PHS 

Act section 2704(f) for loss of eligibility 

for other coverage or dependent special 

enrollment (that is, the special 

enrollment rights originally created 

under HIPAA for group health 

insurance coverage and group health 

plans 52) and § 155.420(d) and 

§ 155.725(a)(3) (the special enrollment 

rights for QHPs). The proposed rule 

directs that the election period would be 

30 calendar days, which is generally 

consistent with the HIPAA standard. 

However, we request comment as to 

whether another standard, such as 60 

calendar days, generally consistent with 

the Exchange standard, is more 

appropriate.53 The proposed rule also 

would include standards regarding the 

effective dates of coverage modeled 

upon the effective dates of coverage 

provided for the QHP special 

enrollment events under § 155.420(b). 

We also request comments on whether 

health insurance issuers in the 

individual market should provide to 

enrollees in their products a notice of 

special enrollment rights similar to what 

is currently provided to enrollees in 

group health plans (§ 146.117(c)). 

In addition, the proposed rule would 

include provisions allowing issuers 

with network plans to limit guaranteed 

availability to employers with eligible 

individuals who live, work, or reside in 

the plans’ service areas. While PHS Act 

section 2702(c)(1)(A) does not explicitly 

include a corresponding exception 

allowing issuers to limit the sale of 

individual market coverage to 

individuals who live or reside in the 

individual market plan’s service area, 

failing to recognize such an exception 

would eliminate an issuer’s ability to 

define a service area for its individual 

market business within a state. 

Moreover, references to persons with 

individual market coverage in paragraph 

(c)(1) and subparagraph (c)(1)(B) of PHS 

Act section 2702 suggest that such 

persons with individual market 

coverage also were intended to be 

described in paragraph (c)(1)(A). 

Accordingly, the proposed rule would 

clarify that individual market coverage 

also may limit enrollment to those 

individuals who live or reside in a 

service area. 

Issuers with network plans also 

would not have to offer coverage to 

employers and individuals if they 

demonstrated to the appropriate state 

authority that they lacked the capacity 

to deliver services adequately to 

additional groups or individuals due to 

their existing contractual obligations to 

current group contract holders and 

enrollees. Issuers would need to apply 

the denial of guaranteed availability 

uniformly to all employers and 

individuals, without regard to the 

enrollees’ claims experience or health 

status-related factors. Issuers invoking 

this exception generally would be 

barred from offering new coverage for at 

least 180 calendar days after coverage is 

denied, as directed by PHS Act section 

2702(c)(2). 

As noted, PHS Act section 2702 does 

not include an explicit guaranteed 

availability exception allowing issuers 

to limit the offering of certain products 

to members of bona fide associations. 

However, in the appropriate 

circumstances, we think that the 

network capacity exception to 

guaranteed availability could be used to 

provide a basis for limiting enrollment 

in certain products to bona fide 

association members. Additionally, 

while the guaranteed availability 

exception for bona fide association 

coverage is not allowed under the 

statute, we are interested in whether 

and how a transition or exception 

process for bona fide association 

coverage could be structured to 

minimize disruption while maintaining 

consumer protections. We seek 

comment on this issue. 

Similarly, issuers would not have to 

offer coverage to employers and 

individuals, uniformly and without 

regard to claims experience, if they 

demonstrate to their applicable state 

authority (if required) that they lack the 

financial capacity to sell additional 

coverage. Issuers invoking this 

exception also would be barred from 

offering new coverage for at least 180 

calendar days, as directed by PHS Act 

section 2702(d)(2). 

Lastly, the proposed rule would 

include as a minimum standard a more 

detailed marketing standard in 

connection with guaranteed availability 

that had not been included in the earlier 

HIPAA rule. Nonetheless, it is similar to 

the guidance we provided in Health 

Care Financing Administration Bulletin 

No. 98–01 that interpreted the HIPAA 

provisions related to guaranteed 

availability in the individual and small 

group markets. Bulletin No. 98–01 

stated that the PHS Act prohibited 

issuers from setting agent commissions 

for sales to HIPAA-eligible individuals 

and small groups so low that they were 

discouraged from marketing policies to 

such individuals and groups.54 Pursuant 

to section 1311(c)(1)(A) of the 

Affordable Care Act, QHP issuers are 

required to comply with applicable state 

laws and regulations regarding 

marketing by health insurance issuers 

and not employ marketing practices or 

benefit designs that will have the effect 

of discouraging the enrollment of 

individuals with significant health 

needs in QHPs (§ 156.225). The 

proposed rule would adopt this 

standard and apply it to the entire 

marketplace in order to ensure 

consistency in the marketing of plans 

inside and outside of the Exchanges and 

leverage existing state oversight 

mechanisms. 

The intent of this policy is for states 

to continue their traditional role of 

regulating marketing activities of 

issuers, consistent with § 156.225. We 

reiterated this point in guidance issued 

on November 29, 2011, where we 

indicated that we will apply existing 

state standards on marketing materials 

in states where a federally-facilitated 

Exchange operates.55 We note that the 

NAIC’s Model Unfair Trade Practices 

Act 880–1 has been adopted in a 

‘‘substantially similar manner’’ by 46 

states, and the NAIC’s Advertisements 

of Accident and Sickness Insurance 

Model Regulation 40–1 has been 

adopted in a ‘‘substantially similar 

manner’’ by 44 states. Both the Model 

Act and Regulation include 

comprehensive marketing standards for 

issuers.56

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deception or the capacity or tendency to mislead or 

deceive.’’ 

57Prior to being amended and renumbered as 

PHS Act section 2703 by the Affordable Care Act, 

the HIPAA guaranteed renewability requirements 

for the group market were found at PHS Act section 

2712. The HIPAA guaranteed renewability 

requirements continue to apply with respect to 

grandfathered group market coverage in 2014 and 

beyond (and with respect to all group market 

coverage before 2014). Section 1251 of the 

Affordable Care Act specifically excludes 

grandfathered health plans from the effect of the 

amendments in the Affordable Care Act. The 

Affordable Care Act did not modify PHS Act section 

2742, which continues to require guaranteed 

renewability in the individual market, including 

with respect to grandfathered health plans in the 

individual market. 

58Although PHS Act section 2703 does not 

contain a corresponding exception for uniform 

modification of coverage in the individual market, 

PHS Act section 2742 continues to provide a basis 

for such an exception in the individual market. 

We propose these marketing 

standards to minimize the potential for 

the adverse selection that could result if 

plans sold through Exchanges were 

subject to different marketing standards 

from plans sold outside of the 

Exchanges. A common standard 

covering the entire insurance market 

can protect the efficient operation of all 

markets and reduce confusion for 

consumers. As stated in Bulletin No. 

98–01, which interpreted the HIPAA 

guaranteed availability requirement, 

marketing practices that fall below these 

standards represent a failure by issuers 

to offer required coverage. We propose 

that all issuers comply with state laws 

regulating the marketing of insurance 

unless the state has no laws regulating 

marketing or has laws which are below 

the federal minimum standard, in which 

case the federal minimum standard 

would govern. We solicit comment on 

this federal minimum standard. 

Concerns have been raised about the 

ability of individuals to manipulate 

guaranteed availability each year. While 

PHS Act section 2703 allows an issuer 

to nonrenew coverage for an individual 

who has not paid premiums, PHS Act 

section 2702 does not include an 

exception allowing issuers to refuse to 

cover individuals with histories of nonpayment under other policies either 

with the same issuer or other issuers. 

Nonetheless, we recognize the concerns 

that such potential gaming raises in 

relation to adverse selection, fairness to 

consumers maintaining continuous 

coverage, and the financial stability of 

issuers participating in the individual 

market. We solicit comments on 

possible ways to discourage consumers 

from abusing guaranteed availability 

rights (for example, by ensuring 

enrollees cannot use open and special 

enrollment periods to facilitate such 

abuses) while ensuring consumers are 

guaranteed the protections afforded to 

them under the law. 

C. Guaranteed Renewability of Coverage 

(Proposed § 147.106) 

PHS Act section 2703 directs that any 

health insurance issuer offering health 

insurance coverage in the individual or 

group market must renew coverage at 

the option of the plan sponsor or 

individual, with certain exceptions, 

which are more fully discussed below in 

connection with the proposed rule text. 

PHS Act section 2703 is based largely 

on the HIPAA provision for group 

market guaranteed renewability, but 

generally expands its scope to include 

both the group and individual 

markets.57 While section 2703 does not 

include the individual market in its 

guaranteed renewability exceptions for 

uniform modifications of coverage and 

loss of bona fide association 

membership, nonetheless, we believe 

PHS Act section 2742 continues to 

provide a basis for those exceptions. 

This proposed rule generally is based on 

the corresponding HIPAA rule 

(§ 146.152). 

The proposed rule would direct 

health insurance issuers offering health 

insurance coverage in the individual or 

group market to renew or continue in 

force the coverage at the option of the 

plan sponsor or individual, as 

applicable, with certain exceptions. 

These exceptions include: (1) 

Nonpayment of premiums by the plan 

sponsor, or individual, as applicable; (2) 

an act or practice that constitutes fraud 

or an intentional misrepresentation of 

material fact under the terms of 

coverage performed by the plan sponsor 

or individual, as applicable; (3) in the 

case of group health insurance coverage, 

the plan sponsor has failed to comply 

with a material plan provision relating 

to employer contribution or group 

participation rules pursuant to 

applicable state law; (4) the issuer is 

ceasing to offer coverage of this type, 

acting uniformly without regard to 

claims experience or health statusrelated factor (an issuer may also modify 

the health insurance coverage for a plan 

offered to a group health plan at 

renewal); (5) for network plans, there is 

no longer any enrollee under the plan 

who lives, resides, or works in the 

service area of the issuer (or in the area 

for which the issuer is authorized to do 

business); and in the case of the small 

group market, the issuer could limit the 

employers that may apply for coverage 

to those with eligible individuals who 

live, work, or reside in the service area 

for such network plan; and (6) for 

coverage made available in the small or 

large group market only through one or 

more bona fide associations, if the 

employer’s membership in the 

association ceases, but only if the 

coverage terminated uniformly without 

regard to any health status-related factor 

relating to any covered individual. In 

the case of health insurance coverage 

that is made available by a health 

insurance issuer in the small or large 

group market to employers only through 

one or more associations, the reference 

to ‘‘plan sponsor’’ is deemed, with 

respect to coverage provided to an 

employer member of the association, to 

include a reference to such employer. 

In addition, the proposed rule would 

set requirements for issuers closing 

blocks of business. In any case where an 

issuer decides to discontinue offering a 

particular plan offered in the group or 

individual market, that plan may be 

discontinued by the issuer in 

accordance with applicable state law in 

the particular market under certain 

circumstances. An issuer who elects to 

discontinue offering all health insurance 

coverage in a market (or markets) in a 

state may not issue coverage in the 

state’s market (or markets) involved 

during the 5-year period beginning on 

the date of discontinuation of the last 

coverage not renewed, as directed by 

PHS Act section 2703(c)(2)(B). 

Only at the time of renewal may 

issuers modify the health insurance 

coverage for a plan offered to a group 

health plan in the large group market, 

and small group market if, for coverage 

available in this market (other than only 

through one or more bona fide 

associations), the modification is 

consistent with state law and is effective 

uniformly among group health plans 

with that plan.58

PHS Act section 2703(b)(6) retains a 

guaranteed renewability exception for 

an employer’s loss of membership in a 

bona fide association. Although not the 

subject of this proposed rule, PHS Act 

section 2742(b)(5) continues to provide 

a guaranteed renewability exception for 

an individual’s loss of membership in a 

bona fide association. 

Under § 155.430(b), an Exchange may 

terminate an enrollee’s coverage, and 

permit a QHP issuer to terminate such 

coverage, under certain circumstances. 

These circumstances are: (1) The 

enrollee is no longer eligible for 

coverage in a QHP; (2) payments of 

premiums for coverage of the enrollee 

cease and any grace period(s) have been 

exhausted; (3) the enrollee’s coverage is 

rescinded due to fraud or 

misrepresentation; (4) a QHP terminates 

or is decertified; or (5) the enrollee 

changes from one QHP to another 

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59By law, issuers are required to transition all 

non-grandfathered small group and individual 

market coverage issued prior to January 1, 2014, to 

the appropriate single risk pool in the first plan year 

(small group market) or the first policy year 

(individual market) beginning on or after January 1, 

2014. 

60American Academy of Actuaries’ Rate Filing 

Task Force, Report to the NAIC’s A&H Working 

Group of the Life & Health Actuarial Task Force, 

at 3–4. See also NAIC, White Paper: An Exploration 

of Potential Regulatory Measures Intended to 

Prevent Individuals at Later Durations of NonGroup Major Medical Products from Receiving 

Higher Rate Increases than Those at Early 

Durations (2008). 

during an annual open enrollment 

period or special enrollment period. 

Although some QHP termination of 

coverage events correspond to PHS Act 

non-renewal events (for example, 

nonpayment of premiums), other events 

do not (for example, a QHP’s loss of 

certification). With respect to those 

instances, we request comments on 

whether an issuer would have to renew 

that coverage on a non-QHP basis, 

outside the Exchange, if applicable, to 

affected enrollees. 

We are aware that issuers may need 

to make some plan design changes for 

non-grandfathered coverage issued 

between March 23, 2010 and January 1, 

2014 in order to comply with the 

standards of the Affordable Care Act 

that are effective for the 2014 plan and 

policy years. In addition, on an ongoing 

basis, issuers may need to make some 

cost-sharing adjustments at renewal to 

ensure that policyholders’ plans remain 

at the same actuarial value level from 

year to year. We believe that issuers can 

make these types of policy changes 

consistent with the uniform 

modification of coverage requirements 

under PHS Act sections 2703 and 2742, 

and solicit comments on whether our 

interpretation should be explicitly 

incorporated into text of the final rule. 

D. Applicability of the Proposed Rules 

Under PHS Sections 2701, 2702, and 

2703 and Section 1312(c) of the 

Affordable Care Act to Student Health 

Insurance Coverage 

Section 1560(c) of the Affordable Care 

Act provides that nothing in title I of the 

Affordable Care Act, or an amendment 

made by title I, ‘‘shall be construed to 

prohibit an institution of higher 

education (as such term is defined for 

purposes of the Higher Education Act of 

1965) from offering a student health 

insurance plan, to the extent that such 

requirement is otherwise permitted 

under applicable federal, state, or local 

law.’’ Title I of the Affordable Care Act 

includes the rating, guaranteed 

availability, guaranteed renewability, 

and single risk pool provisions that are 

discussed in this proposed rule. 

We have interpreted section 1560(c) 

to mean that if particular requirements 

in the Affordable Care Act would have, 

as a practical matter, the effect of 

prohibiting an institution of higher 

education from offering a student health 

plan otherwise permitted under federal, 

state or local law, such requirements 

would be inapplicable pursuant to the 

rule of construction in section 1560(c). 

We previously provided student 

health insurance coverage with 

exceptions from the HIPAA guaranteed 

availability and renewability 

requirements applicable to the 

individual market (§ 147.145(b)(1)). 

Consistent with that policy, this 

proposed rule would provide student 

health insurance coverage with 

exceptions from the Affordable Care 

Act’s guaranteed availability and 

renewability requirements to ensure that 

enrollment in these policies is limited to 

students and their dependents. 

Under this proposed rule, student 

health insurance coverage would be 

included in an issuer’s individual 

market single risk pool, as described 

below. Nonetheless, given the 

differences between the student health 

insurance market and other forms of 

individual market coverage, we solicit 

comment on whether the final rule 

should allow issuers to maintain a 

separate risk pool for student health 

insurance coverage. We also seek 

comment on whether the final rule 

should provide any modifications with 

respect to the generally applicable 

individual market rating rules in 

connection with student health 

insurance coverage. 

E. Single Risk Pool (Proposed § 156.80) 

Section 1312(c)(1) and (2) of the 

Affordable Care Act states that a health 

insurance issuer must consider all of its 

enrollees in all health plans (other than 

grandfathered health plans) offered by 

the issuer to be members of a single risk 

pool in the individual market and small 

group market, respectively.59 This 

requirement applies to health plans both 

inside and outside of an Exchange for 

both markets. Section 1312(c)(3) of the 

Affordable Care Act provides a state 

with an option to merge its individual 

and small group markets, in which case 

all non-grandfathered plans’ risk would 

be merged. To support the accuracy of 

the risk adjustment methodology, we 

propose that states that intend to merge 

their individual and small group market 

pools in 2014 inform us no later than 30 

days after the publication of the final 

rule. Lastly, section 1312(c)(4) of the 

Affordable Care Act renders 

inapplicable any state law requiring 

grandfathered health plans to be 

included in the single risk pool(s). 

The proposed rule would largely 

codify the statutory language and clarify 

that the single risk pool requirement 

applies on a state-by-state basis and 

only to forms of non-grandfathered 

individual and small group market 

coverage subject to PHS Act section 

2701. Thus, excepted benefit and shortterm limited duration policies, for 

example, would not be subject to the 

single risk pool requirement. Also, this 

requirement would not be enforced 

against health insurance coverage issued 

to plans with fewer than two 

participants who are current employees 

(for example, retiree-only plans) (see 75 

FR 34538, 34539–40 (June 17, 2010)). 

Section 1312(c) of the Affordable Care 

Act represents a change from current 

market practice. Today, issuers often 

maintain several separate risk pools 

within their individual and small group 

market business, often as a way to 

segment risk and further underwrite 

premiums. For example, the NAIC’s 

Small Employer Health Insurance 

Availability Model Act (1993 Version), 

adopted by a majority of states, allows 

issuers to maintain up to nine blocks of 

business in the small group market, 

subject to a limitation that the index 

rates between the blocks not vary by 

more than 20 percent. A 2004 study by 

the American Academy of Actuaries 

noted that the current regulatory climate 

in most states allows issuers to open 

and close books of business in the 

individual market at will, effectively 

causing many long-term policyholders 

in closed blocks to face very high 

premium increases at renewal because 

issuers can refuse to pool their claims 

experience with that of the newer or 

healthier policyholders.60

Beginning in 2014, issuers are no 

longer able to deny coverage based on 

applicants’ health status and are limited 

in the types of rating factors they can 

apply in setting premiums in the 

individual and small group markets. 

Without a single risk pool rule, these 

prohibitions against traditional 

underwriting could incentivize issuers 

to find ways to segment the market into 

separate risk pools and charge 

differential premiums based on 

segmented risk, a de facto mechanism 

for underwriting. As a result, this 

statutory requirement that an issuer 

consider all of its enrollees in all plans 

(other than grandfathered plans) offered 

by the issuer to be members of a single 

risk pool in the individual market or 

small group market, respectively, 

prevents issuers from creating separate 

pools in order to segment high risk and 

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61However, as described in § 147.102 of this 

proposed rule, the specific premiums charged for 

particular enrollees would be permitted to vary 

based on family size, geographic rating area, and 

age and tobacco use, within limits. 

low risk enrollees. While risk 

adjustment will address some risk 

segmentation, the single risk pool 

requirement provides another layer of 

protection against adverse selection 

among plans and protects consumers by 

requiring issuers to consider the risk of 

all enrollees when developing and 

pricing unique plans. 

To implement the single risk pool 

protection, we propose that the claims 

experience of the enrollees in all nongrandfathered plans of an health 

insurance issuer in the individual or 

small group market within a state (or 

both, if the risk pools of the individual 

and small group market are merged 

within a state) be combined so that the 

premium rate of a particular plan is not 

adversely impacted by the health status 

or claims experience of its enrollees. For 

rates effective starting January 1, 2014, 

a health insurance issuer would use the 

estimated total combined claims 

experience of all non-grandfathered 

plans deriving from providing essential 

health benefits within a state market to 

establish an index rate (average rate) for 

the relevant market. The index rate 

would be utilized to set the rates for all 

non-grandfathered plans of the issuer in 

the market. After setting the index rate, 

an issuer would make a market-wide 

adjustment to the index rate based on 

the total expected market-wide 

payments and charges under the risk 

adjustment and reinsurance programs in 

a state. 

The premium rate for any given plan 

could not vary from the resulting index 

rate, except for the following factors: 61

• The actuarial value and cost-sharing 

design of the plan; 

• The plan’s provider network and 

delivery system characteristics, as well 

as utilization management practices. 

This factor is intended to pass savings 

onto consumers where issuers are able 

to negotiate better discounts, construct 

efficient networks, or manage care more 

efficiently; 

• Plan benefits in addition to the 

essential health benefits. The additional 

benefits must be pooled with similar 

benefits provided in other plans to 

determine the allowable rate variation 

for plans that offer these benefits; and 

• With respect to catastrophic plans, 

the expected impact of the specific 

eligibility categories for those plans. 

The index rate, the market-wide 

adjustment based on total expected 

payments and charges for the risk 

adjustment and reinsurance programs, 

and the variations for individual plans 

would have to be actuarially justified. 

Furthermore, all such actuarially 

justified adjustments would have to be 

implemented by issuers in a transparent 

fashion, consistent with state and 

federal rate review processes. We seek 

comment on the approach described 

above, and on the proposed planspecific adjustments to the index rate. 

This proposed rule would apply both 

when rates are initially established for 

a plan and at renewal. We expect that 

percentage renewal increases generally 

would be similar across all plans in the 

same risk pool, but might differ 

somewhat due to the permitted product 

differences described above. We are 

considering allowing additional 

flexibility in product pricing in 2016 

after issuers have accumulated 

sufficient claims data. We request 

comments on this approach. 

F. CMS Enforcement in Group and 

Individual Insurance Market (Various 

Provisions in Parts 144 and 150) 

Part 150 of title 45 of the CFR sets 

forth our enforcement processes for all 

of the requirements of title XXVII of the 

PHS Act with respect to health 

insurance issuers and non-federal 

governmental group health plans. The 

scope of part 150 includes our processes 

for enforcing the requirements of title 

XXVII of the PHS Act added by the 

Affordable Care Act, given that the 

statutory enforcement provisions that 

part 150 implements, PHS Act sections 

2723 and 2761, apply to all of parts A 

and B of title XXVII. 

This proposed rule would make a 

number of conforming changes in 

various sections of parts 144 and 150 

intended to clarify the applicability of 

enforcement procedures to the PHS Act 

requirements added by the Affordable 

Care Act. For example, we are proposing 

to replace the term ‘‘HIPAA 

requirements’’ with ‘‘PHS Act 

requirements’’ throughout part 150 to 

make clear that the part 150 processes 

would be used for enforcing not only 

the requirements emanating from 

HIPAA, but also the Affordable Care Act 

and other legislation enacted 

subsequent to HIPAA. Similarly, the 

proposed rule would add, where 

appropriate, references to part 147 (that 

is, the Affordable Care Act’s group and 

individual market requirements) 

alongside references to parts 146 and 

148 (the group and individual market 

requirements pre-dating the Affordable 

Care Act). 

While these proposed changes should 

clarify to stakeholders our interpretation 

concerning part 150, the lack of these 

revisions in part 150 currently in no 

way prejudices our continued use of 

part 150 in connection with enforcing 

the requirements of part 147 prior to the 

issuance of a final rule. 

G. Enrollment in Catastrophic Plans 

(Proposed § 156.155) 

Section 1302(e) of the Affordable Care 

Act outlines standards for offering 

catastrophic plans, which we propose to 

codify in § 156.155. In paragraph (a)(1), 

we propose that a plan is a catastrophic 

plan if it meets all applicable 

requirements for health insurance 

coverage in the individual market 

(including but not limited to those 

requirements described in 45 CFR parts 

147 and 148) and is offered only in the 

individual market. In proposed 

paragraph (a)(2), we specify that a 

catastrophic plan does not offer 

coverage at the bronze, silver, gold, or 

platinum coverage levels described in 

section 1302(d) of the Affordable Care 

Act and in proposed paragraph (a)(3), 

we clarify that a catastrophic plan does 

not provide coverage of essential health 

benefits until the enrolled individual 

reaches the annual limitation in cost 

sharing in section 1302(c)(1) of the 

Affordable Care Act. Proposed 

paragraph (a)(4) codifies the statutory 

requirement that a catastrophic plan 

must cover at least three primary care 

visits per year before reaching the 

deductible. We do not propose here to 

prohibit an issuer from imposing cost 

sharing in connection with these 

primary care visits so long as other 

applicable law (for example, PHS Act 

section 2713) permits. 

In paragraph (a)(5), we propose 

codifying the statutory criteria 

identified in section 1302(e)(2) of the 

Affordable Care Act that lists the 

individuals who are permitted to enroll 

in a catastrophic plan. In paragraph 

(a)(5)(i), we propose that individuals 

younger than age 30 before the 

beginning of the plan year are eligible to 

enroll in catastrophic plans. If an 

individual enrolled in a catastrophic 

plan reaches age 30 during a plan year, 

we propose that the individual can 

remain enrolled in the catastrophic plan 

for the remainder of the plan year. In 

paragraph (a)(5)(ii), we propose that the 

second group of individuals eligible to 

enroll in a catastrophic plan are those 

who have been certified as exempt from 

the individual responsibility payment 

because they cannot afford minimum 

essential coverage, or they are eligible 

for a hardship exemption. 

In paragraph (b), we propose to codify 

the exception found in section 

1302(e)(1)(B)(i) of the Affordable Care 

Act by proposing that a health plan may 

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not impose cost-sharing requirements 

(such as a copayment, coinsurance, or 

deductible) for preventive services 

identified in PHS Act section 2713. We 

note that a catastrophic plan must 

provide coverage for such services 

without regard to whether the enrollee 

accessing the service has reached the 

cost-sharing maximum. 

In paragraph (c), we propose that if 

more than one person is covered by a 

single catastrophic plan, such as a nonself only plan, then each individual 

enrolled must meet at least one of the 

two eligibility criteria in proposed 

paragraph (a)(5). For example, a couple 

could enroll in a catastrophic family 

plan if one of them was under age 30 

and the other had received a certificate 

of exemption in accordance with section 

1302(e)(2)(B) of the Affordable Care Act. 

H. Rate Increase Disclosure and Review 

(Part 154) 

To account for the market changes in 

2014, many of which are detailed in this 

proposed rule; to fulfill the statutory 

requirement beginning in 2014 that the 

Secretary, in conjunction with the 

states, monitor premium increases of 

health insurance coverage offered 

through an Exchange and outside of an 

Exchange; and in an effort to streamline 

data collection for issuers and states, we 

propose three changes to the existing 

rate review program under 45 CFR part 

154. 

First, we propose to amend 

§ 154.200(a)(2) and (b), so that states 

seeking state-specific thresholds submit 

proposals to CMS by August 1 of each 

year; that the Secretary publish a notice 

no later than September 1 of each year 

concerning whether a state-specific 

threshold applies in a state; and that any 

state-specific threshold be effective on 

January 1 of each year following the 

Secretary’s notice. We are proposing 

these changes in order to align with the 

timing of rate submissions of QHPs in 

the Exchanges, as well as market-wide 

rating rules created by the Affordable 

Care Act, which are effective January 1, 

2014. We welcome comments on these 

proposed changes in the submission 

date and the effective date of statespecific thresholds. 

Second, we propose to amend 

§ 154.215 to direct health insurance 

issuers to submit data and 

documentation regarding rate increases 

on a standardized form in a manner 

determined by the Secretary. Beginning 

in 2014, section 2794(b)(2)(A) of the 

Affordable Care Act directs that the 

Secretary, in conjunction with states, 

‘‘monitor premium increases of health 

insurance coverage offered through an 

Exchange and outside of an Exchange.’’ 

The purpose of this policy is to identify 

patterns that could indicate market 

disruption, which could occur given the 

additional standards that apply to 

qualified health plans, and to oversee 

the new, market-wide reforms. To assist 

the Secretary in carrying out this new 

monitoring function, we propose 

modifying the rate review standards by 

extending the requirement that health 

insurance issuers report information 

about rate increases above the review 

threshold to all rate increases, as is 

already the policy in the vast majority 

of states. Under this proposal, each 

issuer would submit the same set of files 

for all of their products in the same 

market, pursuant to work conducted in 

partnership with the NAIC to ensure 

consistency between the NAIC’s System 

for Electronic Rate and Form Filing 

(SERFF) and HHS’s Health Insurance 

Oversight System (HIOS) and to 

promote efficiency in data collection for 

states and issuers. The same type of 

information is currently collected by 

most states today, but in a variety of 

non-standardized formats. States would 

continue to have the authority to collect 

additional information, above this 

baseline, to conduct more thorough 

reviews or rate monitoring. The review 

threshold, described in § 154.200, 

would continue to be used to determine 

which rates must be reviewed rather 

than just reported. 

Under the current rate review 

program, CMS collects rate filing 

information from issuers proposing 

increases of 10 percent or greater, 

including in states with Effective Rate 

Review Programs. This data collection 

allows the Secretary to ensure the 

public disclosure of information on 

such increases as required by the 

statute. Collecting rate filing 

information on all rate increases in 

applicable markets would provide CMS, 

in partnership with states, the necessary 

data to gauge how 2014 market changes 

are affecting rate changes for consumers 

both inside and outside the Exchange 

and to fulfill its obligation under section 

2794(b)(2)(A) of the PHS Act. 

Additionally, the improved data 

collection would allow states and CMS, 

where applicable, to adapt their rate 

review processes to include the changes 

to the individual and small group 

markets that begin in 2014. Primary 

among these changes to the individual 

and small group market is the single risk 

pool requirement. Beginning with rates 

effective in 2014, pursuant to section 

1312(c) of the Affordable Care Act, all 

rates must be based on claims 

experience calculated from all claims of 

all products an issuer has within a state 

in either the individual or small group 

market (or both if the state merges the 

individual and small group markets into 

a combined risk pool). This means that 

products can no longer be reviewed as 

completely unique, but rather must 

include experience of the entire market 

(single risk pool). Accordingly, when 

any product has a rate increase, all other 

products with enrollment or projected 

enrollment would be reported to assure 

the single risk pool requirement was 

appropriately implemented to promote 

fair market competition. 

Additionally, collecting rate filing 

data in a standardized format, as 

proposed, would reduce the burden on 

issuers because the data would be used 

for purposes beyond rate review, 

including Exchange functions like QHP 

certification and premium tax credit and 

cost-sharing reduction verification. 

Rather than requiring multiple data 

submissions to conduct these various 

reviews, this proposal would provide 

state and federal regulators the 

information they need in one place. 

CMS incorporated feedback from state 

regulators facilitated through the NAIC 

and health plans in developing this 

proposal. 

CMS will propose for comment 

through the Paperwork Reduction Act of 

1995 (PRA) process a standardized data 

template form for health insurance 

issuers to use for submitting the data for 

rate increases. The template was 

developed with input from the NAIC 

and other stakeholders. The goal of a 

standardized data template is to provide 

state regulators with a baseline of 

information necessary to conduct the 

review and approval of products sold 

inside and outside an Exchange as new 

market rules go into effect in 2014. In 

order to help assure a competitive 

health insurance market, CMS 

anticipates releasing only information 

collected that is determined to not 

include trade secrets and is approved 

for release under the Freedom of 

Information Act. 

This data collection is intended to 

create greater uniformity for effective 

rate review information, creating 

efficiencies and also providing issuers 

with a standardized, electronic format 

for submitting this uniform data. Issuers 

would no longer be required to submit 

the same type of data in different 

formats to different regulators. We 

request comments through the 

corresponding PRA comment process on 

the proposed information collection 

authorized under § 154.215, as proposed 

to be amended, and the additional 

burden, if any, it would impose on 

health insurance issuers and the states. 

The improved rate review data and 

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information collection outlined in the 

PRA would allow issuers to submit a 

baseline set of rate review data in a 

standardized form and format, which 

should, on net, reduce the burden of 

providing similar data in multiple 

formats to each state and the federal 

government. We also welcome 

comments on the need for and impact 

of the extension of the reporting 

requirement below the review threshold 

and whether alternative approaches to 

monitoring and oversight should be 

considered (e.g., auditing). 

Third, we propose to modify the 

standards for an Effective Rate Review 

Program in response to the market 

changes in 2014 for rate filings subject 

to review. We propose revisions in 

§ 154.301(a)(3) so that a state with an 

Effective Rate Review Program would 

review the following additional 

elements as part of its rate review 

process: (1) The reasonableness of 

assumptions used by the health 

insurance issuer to estimate the rate 

impact of the federal reinsurance and 

risk adjustment programs; and (2) The 

health insurance issuer’s data related to 

implementation and ongoing utilization 

of a market-wide single risk pool, 

essential health benefits, actuarial 

values, and other market reforms rules 

as required by the Affordable Care Act. 

The 10 percent review threshold, as 

finalized in § 154.200 (76 FR 29964), 

will remain unchanged. Thus, only 

proposed rate increases of 10 percent or 

more will be subject to a determination 

of whether they are unreasonable, 

unless the Secretary changes the 

threshold in a time and manner 

specified in 76 FR 29964, or a state 

requests (and the Secretary approves) a 

different threshold under § 154.200. 

Additionally, we propose to revise 

§ 154.301(a)(4) by adding additional 

factors that states must take into 

consideration when conducting their 

examinations. Specifically, we propose 

that, in reviewing the impact of costsharing changes, the impact on the 

actuarial value of the health plan must 

be considered in light of the 

requirement under section 1302(d) of 

the Affordable Care Act that a plan meet 

one of the metal levels in terms of 

actuarial value. We also propose that, in 

reviewing benefit changes to a plan, a 

state must consider the impact of the 

changes on the plan’s essential health 

benefits and non-essential health 

benefits. The impact of the changes on 

pricing, including the rating limitations 

on age and tobacco use under PHS Act 

section 2701, must also be considered. 

We also propose to add new 

paragraphs (xii), (xiv), (xv), and (xvi) to 

§ 154.301(a)(4), to ensure that states take 

into account, to the extent possible, the 

following additional factors (which are 

necessary to carry out some of the 

market reforms going into effect in 2014) 

when conducting an examination of a 

rate review filing: 

• Other standardized ratio tests (in 

addition to the medical loss ratio) 

recommended or required by statute, 

regulation, or best practices; 

• The impacts of geographic factors 

and variations; 

• The impact of changes within a 

single risk pool to all products or plans 

within the risk pool; and 

• The impact of federal reinsurance 

and risk adjustment payments and 

charges. 

The above proposed revisions and 

additions to § 154.301(a)(4) are driven 

by provisions of the Affordable Care Act 

that are effective in 2014. CMS intends 

to work with states to ensure states 

continue to have Effective Rate Review 

Programs. Comments are solicited on 

the impact on states created by these 

proposed changes and whether there are 

additional factors that should be 

considered in reviewing rate increases 

starting in 2014. 

In § 154.301(b), we propose revisions 

to ensure that a state with an Effective 

Rate Review Program makes available 

on its Web site, at a minimum, the same 

information in Parts I, II, and III of each 

Rate Filing Justification that CMS makes 

available on its Web site. We propose 

that a state may, instead of providing 

access to the information contained in 

Parts I, II, and III of each Rate Filing 

Justification, provide a link to CMS’s 

Web site where consumers can find 

such information. 

Finally, in § 154.225 and § 154.330, 

we propose to replace the term 

‘‘Preliminary Justification’’ with the 

term ‘‘Rate Filing Justification,’’ to 

reflect more appropriately the rate filing 

information that would be reported 

under this proposed rule. 

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 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. This proposed rule contains 

information collection requirements 

(ICRs) that are subject to review by 

OMB. A description of these provisions 

is given in the following paragraphs 

with an estimate of the annual burden, 

summarized in Table IV.1. In order to 

fairly evaluate whether an information 

collection should be approved by OMB, 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this proposed rule that 

contain information collection 

requirements (ICRs). 

A. ICRs Regarding State Disclosures 

[§ 147.102(a)(1)(iii), § 147.102(a)(1)(iv), 

§ 147.102(b)(1), § 147.102(c)(2), 

§ 147.102(c)(3), § 147.102(e), § 156.80 

(c)] 

The proposed rule would direct states 

to submit to CMS information on their 

rating and risk pooling requirements if 

different than the federal standards. In 

§ 147.102(a)(1)(iii), we propose that a 

state inform CMS if it adopts a narrower 

age rating ratio than 3:1, and in 

§ 147.102(a)(1)(iv), we propose that a 

state inform CMS if it adopts a narrower 

rating ratio for tobacco use than 1.5:1. In 

§ 147.102(b)(1), we propose that a state 

submit information to CMS regarding its 

geographic rating areas. In 

§ 147.102(c)(2), we propose that a state 

with pure community rating submit 

information to CMS about its uniform 

family tiers and corresponding 

multipliers, if any. In § 147.102(c)(3), we 

propose that a state inform CMS if it 

requires premiums to be based on 

average enrollee amounts in the small 

group market. In § 147.102(e), we 

propose that a state submit information 

on its uniform age rating curve to CMS. 

Finally, in § 156.80(c), we propose that 

a state inform CMS if it elects to merge 

its individual and small group market 

risk pools. Because we do not know 

how many states will choose to 

determine their own geographical rating 

areas, age rating curves, and family tier 

structures; adopt narrower age or 

tobacco rating factors; require premiums 

to be based on average enrollee amounts 

in the small group market; or merge 

their individual and small group market 

risk pools, we have estimated the 

burden for one state. We seek comments 

on how many states are likely to submit 

their own rating and risk pooling rules. 

The burden associated with this 

requirement is the time involved for 

states to provide to CMS information on 

the rating factors and requirements 

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applicable to their small group and 

individual markets. If a state adopts 

narrower rating ratios for age or tobacco 

use, or chooses to merge their 

individual and small group market risk 

pools, the state will inform CMS. We 

estimate that it will take 20 minutes for 

a state to prepare and submit a report to 

CMS for each of these disclosures, for a 

total burden of one hour and a cost of 

approximately $31 for all three reports 

combined. If a state develops 

geographical rating areas (some states 

will default to one rating area for the 

entire state), it will provide a report on 

the rating areas to CMS. We estimate 

that it will take one hour for a state to 

prepare and submit a report to CMS on 

its geographical rating areas, for a 

burden of one hour and a cost of 

approximately $31. If a state develops 

an age rating curve, the state will report 

the state’s age rating curve to CMS. We 

anticipate that most states will default 

to national age curve. For states that 

designate their own curve, we estimate 

that it will take three hours for each 

state to prepare and submit a report on 

its age rating curve, for a burden of three 

hours and a cost of $92. If a state is 

community rated and designates a 

uniform family tier structure, the state 

will report family tier structure 

information to CMS. We estimate that 

very few states will designate family tier 

structures and that it will take one hour 

to prepare and submit a report to CMS. 

The burden for reporting family tier 

structure information is estimated to be 

one hour, and a cost of approximately 

$31. If a state requires premiums in the 

small group market to be based on 

average enrollee amounts, it will submit 

that information to CMS. We estimate 

that it will take one hour for a state to 

prepare and submit the report on small 

group market premiums to CMS, for a 

burden of one hour and a cost of 

approximately $31. The total burden for 

all disclosures is seven hours and 

approximately $215 per state, if a state 

needs to disclose all seven rating 

requirements. 

TABLE IV.1—ANNUAL REPORTING, RECORDKEEPING AND DISCLOSURE BURDEN

Regulation section(s) 

OMB 

Control 

No. 

Number of 

respondents Responses 

Burden 

per response 

(hours) 

Total 

annual 

burden 

(hours) 

Hourly 

labor 

cost of 

reporting 

($) 

Total 

labor 

cost of 

reporting 

($) 

Total 

capital/ 

maintenance 

costs 

($) 

Total cost 

($) 

Age Ratio: § 147.102(a)(1)(iii); Tobacco 

Ratio: 147.102(a)(1)(iv); Rating areas: 

§ 147.102(b)(1); Family Tier: 

§ 147.102(c)(2); Small Group Market Premium: § 147.102(c)(3); Age rating curve: 

§ 147.102(e); Risk Pool Merger: 

§ 156.80(c).

N.A ....... 1 7 1 7 30.67 214.69 0 214.69 

B. ICRs Regarding Rate Increase 

Disclosure and Review (§ 154.215, 

§ 154.301) 

This proposed rule would require that 

health insurance issuers use a 

standardized data form, as specified by 

the Secretary, to report information 

about a proposed rate increase. In 

addition, this proposed rule would 

direct states with Effective Rate Review 

Programs to consider additional 

information (as a baseline) in their rate 

review processes. The existing 

information collection requirement 

(OMB Control Number 0938–1141) 

includes a data template that is 

currently used by issuers seeking rate 

increases to submit data to CMS. CMS 

is publishing an updated data template 

for public comment, in accordance with 

the Paperwork Reduction Act of 1995 

(44 U.S.C. chapter 35). 

To obtain copies of the supporting 

statement and any related forms for the 

proposed paperwork collections 

referenced above, access CMS’s Web 

Site at http://www.cms.gov/Paperwork

ReductionActof1995/PRAL/list.asp#Top

OfPage or email your request, including 

your address, phone number, OMB 

number, and CMS document identifier, 

to Paperwork@cms.hhs.gov, or call the 

Reports Clearance Office at 410–786– 

1326. 

If you comment on these information 

collection requirements, please do 

either of the following: 

1. Submit your comments 

electronically as specified in the 

ADDRESSES section of this proposed rule; 

or 

2. Submit your comments to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Attention: CMS Desk Officer, 

CMS–9972–P. Fax: (202) 395–5806; or 

Email: OIRA_submission@omb.eop.gov. 

V. Regulatory Impact Analysis 

In accordance with the provisions of 

Executive Order 12866, this proposed 

rule was reviewed by the Office of 

Management and Budget. 

A. Summary 

As stated earlier in this preamble, this 

proposed rule would implement the 

Affordable Care Act’s requirements on 

health insurance coverage related to fair 

health insurance premiums, guaranteed 

availability, guaranteed renewability, 

single risk pools, and catastrophic 

plans. These provisions are generally 

effective for plan or policy years 

beginning on or after January 1, 2014. In 

addition, this proposed rule would 

amend the standards for health 

insurance issuers and states regarding 

reporting, utilization, and collection of 

data under the rate review program. 

CMS has crafted this proposed rule to 

implement the protections intended by 

Congress in the most economically 

efficient manner possible. We have 

examined the effects of this proposed 

rule as required by Executive Order 

13563 (76 FR 3821, January 21, 2011), 

Executive Order 12866 (58 FR 51735, 

September 1993, Regulatory Planning 

and Review), the Regulatory Flexibility 

Act (RFA) (September 19, 1980, Pub. L. 

96–354), the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4), 

Executive Order 13132 on Federalism, 

and the Congressional Review Act (5 

U.S.C. 804(2)). In accordance with OMB 

Circular A–4, CMS has quantified the 

benefits, costs and transfers where 

possible, and has also provided a 

qualitative discussion of the benefits, 

costs and transfers that may stem from 

this proposed rule. 

B. Executive Orders 13563 and 12866 

Executive Order 12866 (58 FR 51735) 

directs agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects; distributive impacts; and 

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equity). Executive Order 13563 (76 FR 

3821, January 21, 2011) is supplemental 

to and reaffirms the principles, 

structures, and definitions governing 

regulatory review as established in 

Executive Order 12866. 

Section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

proposed rule—(1) Having an annual 

effect on the economy of $100 million 

or more in any one year, or adversely 

and materially affecting a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or state, local or tribal 

governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating a serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. 

A regulatory impact analysis (RIA) 

must be prepared for rules with 

economically significant effects (e.g., 

$100 million or more in any 1 year), and 

a ‘‘significant’’ regulatory action is 

subject to review by the OMB. OMB has 

designated this proposed rule as a 

‘‘significant regulatory action.’’ Even 

though at this time it is uncertain 

whether it is likely to have economic 

impacts of $100 million or more in any 

one year, CMS has provided an 

assessment of the potential costs, 

benefits, and transfers associated with 

this proposed regulation. 

1. Need for Regulatory Action 

Sections 1302(e) and 1312(c) of the 

Patient Protection and Affordable Care 

Act (Affordable Care Act), and sections 

2701, 2702, and 2703 of the Public 

Health Service Act (PHS Act), as added 

and amended by the Affordable Care 

Act, create certain standards related to 

fair health insurance premiums, 

guaranteed availability, guaranteed 

renewability, risk pools, and 

catastrophic plans applicable to nongrandfathered health insurance coverage 

starting in 2014. These proposed 

regulations would provide the necessary 

guidance to implement these important 

consumer protections. The current 

individual and small group health 

insurance markets generally are viewed 

as dysfunctional, placing consumers at 

a disadvantage due to the high cost of 

health insurance coverage, resulting 

from factors such as lack of competition, 

adverse selection, and limited 

transparency. In addition to 

affordability concerns, many people 

have difficulty finding and enrolling in 

coverage options. If employer-based 

coverage is not available, a person may 

find that affordable individual market 

coverage is not available due to medical 

underwriting. 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 

and make insurance affordable and 

accessible to millions of Americans who 

currently do not have affordable options 

available to them. In addition, this 

proposed rule would amend the existing 

rate review standards under section 

2794 of the PHS Act to reflect the new 

market conditions in 2014. 

2. Summary of Impacts 

In accordance with OMB Circular A– 

4, Table V.1 below depicts an 

accounting statement summarizing 

CMS’s assessment of the benefits, costs, 

and transfers associated with this 

regulatory action. The period covered by 

the regulatory impact analysis (RIA) is 

2013–2017. 

CMS anticipates that the provisions of 

these proposed regulations would 

ensure increased access and improve 

affordability of health insurance 

coverage in the individual and small 

group markets. Individuals who are 

currently unable to obtain affordable 

coverage because of their medical 

history, their health status, gender or 

age will be able to obtain such coverage 

once the proposed rules are in effect 

along with other provisions of the 

Affordable Care Act, leading to an 

increase in the number of people with 

health insurance. Newly insured 

individuals and individuals with 

expanded coverage will have increased 

access to health care, improving 

utilization of preventive care and health 

outcomes and protection from the risk 

of catastrophic medical expenditures, 

leading to financial security. In 

addition, an issuer seeking a rate 

increase would submit data and 

documentation about the rate increase 

using a standardized format, which 

would provide CMS the data necessary 

for monitoring rate increases, enable 

consistent reporting between CMS and 

the states and eliminate issuer burden 

arising from having to use different 

formats for submitting the data to states 

and to CMS. In accordance with 

Executive Order 12866, CMS expects 

that the benefits of this proposed 

regulatory action would justify the 

costs. 

TABLE V.1—ACCOUNTING TABLE

Benefits: 

Qualitative: 

* Increase in enrollment in the individual market leading to improved access to health care for the previously uninsured, especially individuals with medical conditions, which will result in improved health and protection from the risk of catastrophic medical expenditures 

* Lower premium rates in the individual market due to the improved risk profile of the insured, competition, and pooling 

* A common marketing standard covering the entire insurance market, reducing adverse selection, improving market oversight and competition and reducing search costs for consumers 

* Decrease in administrative costs for issuers due to elimination of medical underwriting and coverage exclusions 

* Prevent duplication of effort for rate review filings subject to review by setting forth a standardized template for both non-QHPs and QHPs 

* Provide state departments of insurance with more capacity to conduct meaningful rate review and approval of products sold inside and 

outside an Exchange by using a standardized data template 

Costs ...................................................... Estimate 62 Year dollar Discount rate Period covered 

Annualized Monetized ($/year) .............. $16 million ............................................. 2012 7% 2013–2017 

$16 million ............................................. 2012 3% 2013–2017 

Administrative costs related to submission of data by issuers seeking rate increases below the rate review threshold 

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62These estimates are exclusive of each other. 

Therefore, the total cost is estimated to be no higher 

than $16 million. 

63 GAO, Private Health Insurance: Estimates of 

Individuals with Preexisting Conditions Range from 

36 Million to 122 Million, GAO–12–439, March 

2012. 

64 Kaiser Family Foundation, Focus on Health 

Reform: Health Insurance Market Reforms: Rate 

Restrictions, June 2012. 

65Source: U.S. Census Bureau, Current 

Population Survey, 2012 Annual Social and 

Economic Supplement, Table HI01. Health 

TABLE V.1—ACCOUNTING TABLE—Continued 

Qualitative: 

* Costs incurred by issuers to comply with provisions in the proposed rule. 

* Costs incurred by states choosing to establish rating areas and age rating curves. 

* Costs related to possible increases in utilization of health care for the newly insured. 

* Costs incurred by states for disclosure of rate increases, if applicable. 

Transfers: 

Qualitative: 

* Lower rates for individuals in the individual and small group market who are older and/or in relatively poor health, and women; and potentially higher rates for some young men which will be mitigated by provisions such as premium tax credits, risk stabilization programs, access to catastrophic plans, and the minimum coverage provision. 

* Reduction in uncompensated care for providers who treat the uninsured and increase in payments from issuers. 

* Decrease in out-of-pocket expenditures by the newly insured and increase in health care spending by issuers, which will be more than offset by an increase in premium revenue. 

3. Anticipated Benefits, Costs and 

Transfers 

In developing this proposed rule, 

CMS carefully considered its potential 

effects including both costs and 

benefits. Because of data limitations, 

CMS did not attempt to quantify all of 

the benefits, costs and transfers 

resulting from this proposed rule. 

Nonetheless, CMS was able to identify 

several potential qualitative impacts 

which are discussed below. 

There are diverse state laws and 

industry practices currently in place 

that result in a wide variation in 

premium rates (henceforth referred to as 

‘‘rates’’) and coverage for individual and 

group health insurance markets. 

Regarding the individual market, only 

five states have both guaranteed issue 

for at least some products and modified 

or pure community rating requirements, 

while in other states, issuers can deny 

health insurance coverage or charge 

higher premiums to people with 

medical conditions.63 Currently, 11 

states and the District of Columbia have 

rate bands, which allow issuers to vary 

rates only within a certain range of the 

average rate, two states bar rating based 

on age, and five states bar rating based 

on tobacco use in the individual 

market.64 In the small group market, 36 

states and the District of Columbia have 

rate bands, 12 states have community 

rating requirements, two states do not 

allow rating based on age and 16 do not 

allow rating based on tobacco use. In 

many states, women are charged higher 

premiums than men—only 14 states bar 

gender rating in the individual market 

while 15 states do not allow gender 

rating in the small group market. Of the 

states that bar gender rating in the 

individual market, only three of those 

states require maternity coverage in all 

policies, meaning that women in the 

other states can be charged additional 

premiums for maternity coverage. 

Currently, only five states have 

guaranteed issue in the individual 

market. Studies show that 48 states 

require guaranteed renewability in small 

group market while all 50 states provide 

some level of guaranteed renewability in 

the individual market. In addition, 

HIPAA already provides guaranteed 

renewability of coverage to individuals 

and employers, irrespective of state law. 

Therefore, this provision is not expected 

to have any significant effect in that 

regard. 

Starting in 2014, issuers in the 

individual and small group markets will 

only be allowed to vary rates based on 

age and tobacco use within specified 

ranges, family size, and geography (the 

fair health insurance premium 

requirement). Issuers generally will 

accept every individual and employer 

that applies for health insurance 

coverage (the guaranteed availability 

requirement), and must also renew or 

continue health insurance coverage at 

the option of the plan sponsor or 

individual (the guaranteed renewability 

requirement). In addition, issuers must 

have single risk pools for each of the 

individual and small group markets, or 

a single merged risk pool, if a state so 

elects, which will include all 

individuals enrolled in all nongrandfathered plans in the applicable 

market (the single risk pool 

requirement). 

The provisions of the proposed rule 

will affect the characteristics of 

enrollees, enrollment and premium 

rates in the individual and small group 

markets. In addition, there are other 

provisions of the Affordable Care Act 

that will be effective by 2014, such as 

establishment of the Exchanges, 

premium tax credits, and the minimum 

coverage provision, that relate to the 

provisions in this proposed rule. These 

provisions will improve access to and 

affordability of health insurance 

coverage. Therefore, it is appropriate to 

take into consideration the effect of all 

these provisions in this analysis, even 

though not all of them are the focus of 

this proposed rule. It should be noted 

that the impact of these provisions may 

vary between states, because of the 

differences in current regulatory 

frameworks. 

We solicit information and data on 

any industry practices and procedures 

that would be affected by the 

implementation of these provisions and 

any related costs and savings, including 

administrative, operating, and 

information technology related costs, 

and anticipated effects on premium 

rates and financial performance. 

The provisions of this proposed rule 

would also modify the existing Effective 

Rate Review Program to take into 

account market rule changes in 2014. 

Specifically, a state must include 

additional elements in its rate review 

process, like a review of the 

reasonableness of assumptions used by 

the health insurance issuer to estimate 

the rate impact of the federal 

reinsurance and risk adjustment 

programs and review of the health 

insurance issuer’s data related to 

implementation and ongoing utilization 

of a market-wide single risk pool, 

essential health benefits, actuarial 

values, and other market reforms rules 

as required by the law. 

a. Benefits 

In 2011, 48.6 million people in the 

United States were uninsured.65 In 

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Insurance Coverage Status and Type of Coverage by 

Selected Characteristics: 2011. 

66Cathy Schoen Michelle M. Doty, Ruth H. 

Robertson and Sara R. Collins, Affordable Care Act 

Reforms Could Reduce The Number Of 

Underinsured U.S. Adults by 70 Percent, Health 

Affairs, 30, no.9 (2011):1762–1771. 

67The Henry J. Kaiser Family Foundation, The 

Uninsured: A Primer, Key Facts About Americans 

Without Health Insurance, Washington, DC, 2011, 

citing a number of studies on the effects of being 

uninsured; ASPE, The Value of Health Insurance: 

Few of the Uninsured Have Adequate Resources to 

Pay Potential Hospital Bills, 2011 (http://aspe.hhs.

gov/health/reports/2011/valueofinsurance/

rb.shtml); Sara R. Collins, Ruth Robertson, Tracy 

Garber, and Michelle M. Doty, The Income Divide 

in Health Care: How the Affordable Care Act Will 

Help Restore Fairness to the U.S. Health System, 

The Commonwealth Fund, February 2012; J. Doyle, 

Health Insurance, Treatment and Outcomes: Using 

Auto Accidents as Health Shocks, Review of 

Economics and Statistics, 87(2): 256–270, 2005; S. 

Dorn, Uninsured and Dying Because of It: Updating 

the Institute of Medicine Analysis on the Impact of 

Uninsurance on Mortality, Urban Institute, 2008; 

Cathy Schoen, Michelle M. Doty, Ruth H. Robertson 

and Sara R. Collins, Affordable Care Act Reforms 

Could Reduce The Number Of Underinsured U.S. 

Adults by 70 Percent, Health Affairs, 30, no.9 

(2011):1762–1771. 

68 ‘‘Estimates for the Insurance Coverage 

Provisions of the Affordable Care Act Updated for 

the Recent Supreme Court Decision,’’ Congressional 

Budget Office, July 2012. 

69T. Gross and Notowidigdo, Health Insurance 

and the Consumer Bankruptcy Decision: Evidence 

from Expansions of Medicaid, Journal of Public 

Economics, 95(7–8):767–778, 2011; J. Doyle, Health 

Insurance, Treatment and Outcomes: Using Auto 

Accidents as Health Shocks, Review of Economics 

and Statistics, 87(2): 256–270, 2005; Amy 

Finkelstein, et al., The Oregon Health Insurance 

Experiment: Evidence from the First Year, National 

Bureau of Economic Research Working Paper No. 

17190, July 2011; Institute of Medicine, Care 

without coverage: too little, too late, National 

Academies Press, 2002; J. Ayanian et al., Unmet 

Health Needs of Uninsured Adults in the United 

States, JAMA 284(16):2061–9, 2000; Andrew P. 

Wilper, et al., Health Insurance and Mortality in 

U.S. Adults. American Journal of Public Health, 

99(12) 2289–2295, 2009; S. Dorn, Uninsured and 

Dying Because of It: Updating the Institute of 

Medicine Analysis on the Impact of Uninsurance on 

Mortality, Urban Institute, 2008; Jack Hadley, 

Insurance Coverage, Medical Care Use, and Shortterm Health Changes Following an Unintentional 

Injury or the Onset of a Chronic Condition, JAMA. 

2007;297(10):1073–1084. doi: 10.1001/ 

jama.297.10.1073; K. Cook et al., Does major illness 

cause financial catastrophe?, Health Services 

Research 45, no. 2, 2010. 

70Source: U.S. Census Bureau, Current 

Population Survey, 2012 Annual Social and 

Economic Supplement, Table HI06. Health 

Insurance Coverage Status by State for All People: 

2011. 71 Kaiser Family Foundation, Focus on Health 

Reform: Massachusetts Health Care Reform: Six 

Years Later, June 2012. 72 GAO, Private Health Insurance: Estimates of 

Individuals with Preexisting Conditions Range from 

36 Million to 122 Million, GAO–12–439, March 

2012. 73ASPE, At Risk: Preexisting Conditions Could 

Affect 1 in 2 Americans: 129 Million People Could 

Be Denied Affordable Coverage Without Health 

Reform, November 2011. 

74Michelle 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. 

75Sara 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. 

76Congressional 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. 

addition, an estimated 29 million adults 

were underinsured in 2010.66 Studies 

have shown that people without health 

insurance have reduced access to health 

care, higher out-of-pocket costs, higher 

mortality rates and receive less 

preventive care.67 Uninsured and 

underinsured people are also more 

likely to be unable to pay their medical 

bills, have medical debt, and experience 

financial difficulties. 

The provisions of this proposed rule 

and other changes implemented by the 

Affordable Care Act will increase 

enrollment in the individual and small 

group markets. According to the 

Congressional Budget Office (CBO), 

there will be approximately 23 million 

enrollees in Exchange coverage by 2016. 

CBO estimates that, by 2016, the 

number of uninsured will be reduced to 

up to 30 million.68 Access to 

catastrophic plans is likely to further 

increase the number of insured. Newly 

insured individuals and individuals 

with expanded coverage will have 

access to better health care and 

experience a reduction in out-of-pocket 

costs. Ample research demonstrates that 

access to insurance coverage improves 

utilization of preventive care, improves 

health outcomes, and creates less 

financial debt, which would lead to 

better financial security.69 The State of 

Massachusetts passed similar health 

reforms in 2006, and now has the lowest 

uninsured rate in the country. In 2011, 

only 3.4 percent of Massachusetts 

residents were uninsured.70 This has 

resulted in increased access to health 

care, including preventive care and 

fewer individuals with high out-ofpocket spending.71

Research shows that individuals in 

relatively poor health experience 

difficulty obtaining health insurance 

coverage. This results in lack of 

adequate access to health care and 

higher out-of-pocket expenses for these 

individuals. According to a recent study 

by GAO, between 36 million and 122 

million adults age 19 to 64 years old (or 

between 20 and 66 percent of the adult 

population) have medical conditions 

that could result in issuers denying 

them coverage or charging higher 

premiums.72 Of these, an estimated 88– 

89 percent live in states that do not have 

insurance protections provided by the 

fair health insurance premium and 

guaranteed availability provisions of the 

Affordable Care Act. The GAO study 

estimated that health care expenditures 

for adults with medical conditions are, 

on average, between $1,504 and $4,844 

more per year than for other adults. 

Similarly, a study by HHS found that 

there are between 50 million and 129 

million non-elderly individuals with a 

medical condition, including between 4 

and 17 million children under age 18, 

and up to 25 million of these adults and 

children are uninsured.73 A 2007 study 

by the Commonwealth Fund found that 

36 percent of adults ages 19 to 64 were 

denied coverage or charged a higher 

price because of their medical 

conditions.74 Another study found that, 

in 2010, 35 percent of nonelderly adults 

who shopped for health insurance 

coverage in the individual market were 

denied coverage or received coverage 

exclusions for medical conditions.75

The Affordable Care Act’s provision on 

guaranteed availability will bar issuers 

from denying coverage to individuals 

based on their health status or any other 

factor, and the provision on fair 

insurance premiums will prevent 

issuers from charging a higher premium 

to individuals based on health status. 

The proposed rule will ensure that 

individuals who would have been 

denied coverage or charged excessively 

high premium rates, for reasons such as 

medical conditions or high expected 

medical costs, will now be able to 

obtain health insurance at an affordable 

cost. In addition, young adults and 

people for whom coverage would 

otherwise be unaffordable will have 

access to a catastrophic plan that will 

have a lower premium, protect against 

high out-of-pocket costs, and cover 

recommended preventive services 

without cost sharing. 

The provisions of this proposed rule 

and other changes implemented by the 

Affordable Care Act will increase 

enrollment in the individual market. An 

analysis by the Congressional Budget 

Office (CBO) and the staff of the Joint 

Committee on Taxation (JCT) 76

estimated that the characteristics of 

enrollees in the individual market will 

be significantly different, especially due 

to the addition of people who would 

have been uninsured in the absence of 

the Affordable Care Act. CBO and JCT 

estimated that relatively more new 

enrollees in the individual market 

would be younger and healthier and 

likely to use less medical care, and the 

addition of new enrollees would result 

in average premium rates in the market 

being 7 to 10 percent lower in 2016 all 

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77Congressional 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. 

78R. Cebul et al., Unhealthy Insurance Markets: 

Search Frictions and the Cost and Quality of Health 

Insurance, American Economic Review 101(5): 

1842–1847, 2011. 79Finkelstein, A, McKnight R: ‘‘What Did 

Medicare Do? The Initial Impact of Medicare on 

Mortality and Out Of Pocket Medical Spending ’’ 

Journal of Public Economics 2008, 92:1644–1668. 80Finkelstein, A., ‘‘The Aggregate Effects of 

Health Insurance: Evidence from the Introduction of 

Medicare,’’ National Bureau of Economic Research. 

Working Paper No. 11619, Sept, 2005. 

else held constant. According to CBO 

and JCT, the characteristics of people in 

the large and small group markets 

would change slightly, and projected 

premium rate changes would range from 

a 1 percent decrease to a 2 percent 

increase. 

Currently, health insurance issuers 

may maintain several blocks of 

business, or ‘‘pools,’’ for their 

individual and small group market 

business. Most states place some 

restrictions on the number of small 

group blocks of business. However, the 

individual market generally has not 

been subject to similar restrictions. In 

the past, some issuers used separate 

pools to segment risks, resulting in large 

rate increases for less-healthy enrollees. 

A single risk pool will tend to lower 

rates in the individual market by 

including younger, healthier individuals 

in the pool and ensuring that newer and 

more long-term policyholders are 

pooled together. In the small group 

market, a single risk pool will stabilize 

rates. 

The guaranteed availability provision 

may result in some adverse selection— 

individuals with poor health who 

would have been denied coverage before 

in some states will now be able to obtain 

health insurance. However, according to 

CBO and JCT,77 adverse selection will 

be mitigated principally by the 

minimum coverage provision and the 

availability of premium tax credits, 

which will make insurance affordable 

for millions of Americans for whom it 

is currently unaffordable. Other factors 

such as fixed open enrollment periods 

will also help to mitigate adverse 

selection. The Affordable Care Act also 

establishes transitional reinsurance and 

temporary risk corridor programs and a 

permanent risk adjustment program, 

which will provide payments to issuers 

providing coverage to high-risk 

individuals, to mitigate the potential 

effects of adverse selection. These 

programs will provide payment stability 

to issuers and reduce uncertainty in 

insurance risk in the individual market 

and in the small group market, in the 

case of the permanent risk adjustment 

program. 

Administrative costs for issuers will 

be lowered because of the elimination of 

medical underwriting and banning 

coverage exclusions. Costs should 

decrease for processing new 

applications for coverage and 

implementing the ban on coverage 

exclusions in the individual and small 

group markets. This, in turn, could 

contribute to lower premium rates. 

The proposed rule also would require 

all health insurance issuers marketing 

group or individual health insurance 

coverage to comply with the same 

marketing standards as issuers offering 

QHPs within the Exchanges. This 

minimizes the potential for the adverse 

selection that could result if plans sold 

through Exchanges were subject to 

different marketing standards from 

plans sold outside of the Exchanges. A 

common standard covering the entire 

insurance market would also ensure 

consistency in market oversight, 

increase competition and reduce search 

costs for consumers.78

The proposed amendments to the 

Effective Rate Review Program would 

help issuers to avoid significant 

duplication of effort for filings subject to 

review by using the same standardized 

template for both non-QHPs and QHPs. 

Issuers would also no longer be required 

to submit the same type of data in 

different formats to different regulators. 

Additionally, the use of a standardized 

data template would provide state 

departments of insurance and CMS as 

applicable with more information to 

conduct the review and approval of 

products sold inside and outside an 

Exchange, monitor rates to detect 

patterns that could signal market 

disruption, and oversee the market-wide 

rules. 

b. Costs 

Under the proposed rule, issuers will 

likely incur some one-time, fixed costs 

in order to comply with the provisions 

of the final rule, including 

administrative expenditures for systems 

and software updates and changes in 

marketing. In addition, states may incur 

costs in order to establish geographic 

rating areas and uniform age rating 

curves. 

In addition to these administrative 

costs, insurance coverage can lead to 

increased utilization of health services 

for individuals who become newly 

insured. While a portion of this 

increased utilization may be 

economically inefficient, studies that 

estimated the effects of Medicare found 

that the cost of this inefficiency is likely 

more than offset by the benefit of risk 

reduction.79 80

We solicit data on the timing, nature 

and magnitude of these potential 

administrative and other costs and 

savings associated with the proposed 

rules relative to current practices, 

including merging the individual and 

small group markets into a single risk 

pool in a state, if the state chooses to do 

so. We also request information on 

whether the changes in rating rules 

would require issuers to undertake any 

systems and operational changes, and 

we solicit data on any related costs and 

potential savings as well as potential 

effects on premiums and financial 

performance. We are also soliciting 

information on how standardizing rating 

areas could affect rates. In addition, we 

are requesting information on any 

potential costs incurred by states to 

establish rating areas and uniform age 

rating curves if they choose to do so. 

The proposed rule would also direct 

states to provide information to CMS 

about their rating and risk pooling 

practices in several key areas, as 

applicable. They include: age and 

tobacco rating factors, age rating curves, 

family tier structure, composite rating in 

the small group market, geographical 

rating areas, and combined individual 

and small group market risk pools. As 

discussed in the Collection of 

Information Requirements section, we 

estimate a total burden of approximately 

$215 for a state to submit information in 

all seven areas. 

Health insurance issuers seeking rate 

increases below the rate review 

threshold would submit data using the 

standardized data template and would 

incur administrative costs to prepare 

and submit the data. Based on CMS’s 

experience with the 2011 MLR reporting 

year, there are 2,010 health insurance 

issuers (company/state combinations) 

offering coverage in the individual 

market in all states and 1,050 issuers 

offering coverage in the small group 

market in all states, while there are 

2,294 unique issuers offering products 

in one or both markets. Most issuers 

would already have to provide this 

information to their respective states. 

We anticipate a total of 7,650 

submissions for rate review increases 

annually in both markets. Based on past 

experience, we anticipate that 

approximately 1,200 of these 

submissions will be for rate increases at 

or above the threshold and the 

remaining 6,450 submissions will be for 

rate increases below the threshold. We 

assume that each submission will 

require 11 hours of work by an actuary 

(at a cost of $225 per hour), including 

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Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Proposed Rules 70609 

81Sara 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. 82National Women’s Law Center, Turning to 

Fairness: Insurance discrimination against women 

today and the Affordable Care Act, Washington, DC, 

March 2012. 

83Families USA, Hidden Health Tax: Americans 

Pay a Premium (Washington, DC: Families USA, 

2009) (http://familiesusa2.org/assets/pdfs/hiddenhealth-tax.pdf). 

minimal time required for 

recordkeeping. Therefore, the increase 

in administrative costs for all issuers 

seeking rate increases below the 

threshold would be approximately $16 

million, with an average of $7,000 per 

issuer. It should be noted that there are 

administrative efficiencies gained by 

helping issuers to avoid significant 

duplication of effort for filings subject to 

review by using the same standardized 

template for both non-QHPs and QHPs 

across all states, and because the vast 

majority of states currently require all 

rate increases to be filed; these 

efficiencies are not quantified in this 

rule. 

Additionally, all issuers seeking rate 

increases would need to adjust their 

systems to provide the data required in 

the standardized data template. We seek 

comments on the extent of these costs 

and plan to incorporate an estimate in 

the final rule. 

For filings subject to review, states 

with Effective Rate Review Programs 

would be expected to use the data 

submissions in their reviews; however, 

it is not expected to increase review 

costs. 

c. Transfers 

As discussed elsewhere in the 

preamble, most aspects of rating 

methodology today are left to the 

discretion of health insurance issuers, 

subject to oversight by the states. In 

most states, issuers may vary premium 

rates based on a number of factors such 

as age, health status, and gender. In 

2010, 60 percent of non-elderly adults 

who shopped for insurance coverage in 

the individual market had difficulty 

finding affordable coverage.81 Also, as a 

result of current gender rating, premium 

rates for women are significantly higher 

than those for men. According to a 

study by the National Women’s Law 

Center, 92 percent of best-selling plans 

currently practice gender rating.82 The 

provision of fair premiums will allow 

issuers to vary rates based on only a 

limited number of factors and within 

specified ranges. Since rating based on 

gender and health will no longer be 

allowed, rates for some older, less 

healthy adults and women may 

decrease. While these rules could 

increase rates for younger, healthier 

adults and for some men, other factors 

will mitigate the effects of reformed 

rating practices, such as choices of and 

competition among plans on Exchanges, 

greater pooling of risks through the 

Exchanges, premium tax credits, the risk 

stabilization programs, access to 

catastrophic plans, and the minimum 

coverage provision. 

As people who were previously 

uninsured obtain coverage, their out-ofpocket expenses are expected to 

decrease while the issuers’ spending 

will increase, which is expected to be 

mitigated by an increase in premium 

revenues. Expansion in health insurance 

coverage will also reduce the amount of 

uncompensated care for providers that 

treat the uninsured. Millions of people 

without health insurance now use 

health care services for which they do 

not fully pay, shifting the 

uncompensated cost of their care to 

health care providers, people who do 

have insurance (in the form of higher 

premiums), and state and local 

governments.83 Providers of 

uncompensated care try to recover the 

money by increasing the amounts 

charged to insurance companies, which 

results in higher premiums for 

individuals with private insurance. The 

cost of uncompensated care for the 

previously uninsured will be transferred 

from the providers (for example, 

hospitals and physicians), governmental 

programs and charitable organizations 

to the individuals and issuers of their 

health insurance coverage. Reduction in 

the number of uninsured would reduce 

the amount of uncompensated care and 

could lead to a decrease in private 

health insurance rates. 

C. Regulatory Alternatives 

Under Executive Order 12866, CMS is 

required to consider alternatives to 

issuing rules and alternative regulatory 

approaches. 

Under the proposed rule, all issuers in 

a state would use a uniform age rating 

curve. CMS considered the alternative 

of allowing issuers to set their own 

rating curve. Under the alternative, 

issuers would have more flexibility and 

might incur lower upfront, fixed costs 

(for example, systems and software 

updates) to comply with the proposed 

rule. A uniform age rating curve, 

however, would improve the accuracy 

of risk adjustment, increase consumer 

transparency when comparing prices 

across plans, and make it simpler to 

identify the second lowest cost silver 

plan for purposes of obtaining tax 

credits. 

CMS also considered the alternatives 

of including a tobacco component for 

the rating curve and keeping the rating 

factor for tobacco use separate from the 

wellness program rules. These 

alternatives would reduce flexibility for 

the issuers with respect to rating for 

tobacco use and would provide no 

alternative to the tobacco surcharge, 

which could discourage disclosure of 

tobacco use. Under the proposed rule, a 

health insurance issuer in the small 

group market would be able to 

implement the tobacco use surcharge to 

employees only in connection with a 

wellness program that effectively allows 

tobacco users to reduce their premiums 

to the level of non-tobacco users by 

participating in a tobacco cessation 

program or satisfying another reasonable 

alternative. This proposal is designed to 

discourage underreporting of tobacco 

use and encourage tobacco users to 

enter cessation programs and improve 

their health and reduce health care 

costs. 

CMS believes that the provisions of 

this proposed rule strike the best 

balance of extending protections of the 

Affordable Care Act to consumers while 

preserving the availability of such 

coverage and minimizing market 

disruptions to the extent possible. 

D. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires agencies that issue a rule to 

analyze options for regulatory relief of 

small businesses if a rule has a 

significant impact on a substantial 

number of small entities. The RFA 

generally defines a ‘‘small entity’’ as— 

(1) a proprietary firm meeting the size 

standards of the Small Business 

Administration (SBA), (2) a nonprofit 

organization that is not dominant in its 

field, or (3) a small government 

jurisdiction with a population of less 

than 50,000 (states and individuals are 

not included in the definition of ‘‘small 

entity’’). CMS uses as its measure of 

significant economic impact on a 

substantial number of small entities a 

change in revenues of more than 3 to 5 

percent. 

As discussed in the Web Portal final 

rule published on May 5, 2010 (75 FR 

24481), CMS examined the health 

insurance industry in depth in the 

Regulatory Impact Analysis we prepared 

for the proposed rule on establishment 

of the Medicare Advantage program (69 

FR 46866, August 3, 2004). In that 

analysis it was determined that there 

were few, if any, insurance firms 

underwriting comprehensive health 

insurance policies (in contrast, for 

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84Table of Small Business Size Standards 

Matched to North American Industry Classification 

System Codes, effective March 26, 2012, U.S. Small 

Business Administration, available at www.sba.gov. 

example, to travel insurance policies or 

dental discount policies) that fell below 

the size thresholds for ‘‘small’’ business 

established by the SBA (currently $7 

million in annual receipts for health 

issuers).84

In addition, CMS used the data from 

Medical Loss Ratio annual report 

submissions for the 2011 MLR reporting 

year to develop an estimate of the 

number of small entities that offer 

comprehensive major medical coverage. 

These estimates may overstate the actual 

number of small health insurance 

issuers that would be affected, since 

they do not include receipts from these 

companies’ other lines of business. It is 

estimated that there are 22 small entities 

each with less than $7 million in earned 

premiums that offer individual or group 

health insurance coverage and would 

therefore be subject to the requirements 

of this proposed regulation. These small 

entities account for less than five 

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. For 

these reasons, CMS expects that this 

proposed rule will not affect small 

issuers. 

This rule proposes requirements that 

may affect health insurance premiums 

in the small group market. We expect 

that many employers that purchase 

health insurance coverage in the small 

group market would meet the SBA 

standard for small entities. As 

mentioned earlier in the impact 

analysis, the impact on premiums is 

likely to be small and may even lead to 

lower rates in the small group market. 

E. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act (UMRA) of 1995 

requires that agencies assess anticipated 

costs and benefits before issuing any 

proposed rule that includes a Federal 

mandate that could result in any 

expenditure in any one year by state, 

local or tribal governments, in the 

aggregate, or by the private sector, of 

$100 million in 1995 dollars, updated 

annually for inflation. In 2012, that 

threshold level is approximately $139 

million. 

UMRA does not address the total cost 

of a proposed rule. Rather, it focuses on 

certain categories of cost, mainly those 

‘‘Federal mandate’’ costs resulting 

from—(1) imposing enforceable duties 

on state, local, or tribal governments, or 

on the private sector; or (2) increasing 

the stringency of conditions in, or 

decreasing the funding of, state, local, or 

tribal governments under entitlement 

programs. 

This proposed rule would give state 

governments the option to establish 

rating areas within the state and 

uniform age rating curves. There are no 

mandates on local or tribal 

governments. State governments may 

incur administrative cost related to the 

option of establishing rating areas and 

uniform age rating curves. However, if 

the state government does not act, CMS 

may establish the rating areas and 

uniform age rating curve in that state. 

State governments would also incur 

administrative costs related to 

disclosure of rating and pooling 

requirements to CMS, which are 

estimated to be $215 per state. The 

private sector (for example, health 

insurance issuers) will incur 

administrative costs related to the 

implementation of the provisions in this 

proposed rule. This proposed rule 

would not impose an unfunded 

mandate on local or tribal governments. 

However, consistent with policy 

embodied in UMRA, this proposed rule 

has been designed to be the least 

burdensome alternative for state, local 

and tribal governments, and the private 

sector while achieving the objectives of 

the Affordable Care Act. 

F. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule that imposes substantial 

direct requirement costs on state and 

local governments, preempts state law, 

or otherwise has Federalism 

implications. 

As discussed earlier in the preamble, 

states are the primary regulators of 

health insurance coverage. States would 

continue to apply state laws regarding 

health insurance coverage. However, if 

any state law or requirement prevents 

the application of a Federal standard, 

then that particular state law or 

requirement would be preempted. If 

CMS determines that a state does not 

meet the criteria for an Effective Rate 

Review Program, then CMS would 

review a rate increase subject to review 

to determine whether it is unreasonable. 

If a state does meet the criteria, then 

CMS would adopt that state’s 

determination of whether a rate increase 

is unreasonable. States would continue 

to apply state law requirements 

regarding rate and policy filings. State 

requirements that are more stringent 

than the Federal requirements would be 

not be preempted by this proposed rule. 

Accordingly, states have significant 

latitude to impose requirements with 

respect to health insurance coverage 

that are more restrictive than the 

Federal law. 

In compliance with the requirement 

of Executive Order 13132 that agencies 

examine closely any policies that may 

have Federalism implications or limit 

the policymaking discretion of the 

states, CMS has engaged in efforts to 

consult with and work cooperatively 

with affected states, including 

consulting with National Association of 

Insurance Commissioners. 

Throughout the process of developing 

this proposed rule, CMS has attempted 

to balance the states’ interests in 

regulating health insurance issuers and 

Congress’s intent to provide uniform 

protections to consumers in every state. 

By doing so, it is CMS’s view that it has 

complied with the requirements of 

Executive Order 13132. Under the 

requirements set forth in section 8(a) of 

Executive Order 13132, and by the 

signatures affixed to this rule, HHS 

certifies that the CMS Center for 

Consumer Information and Insurance 

Oversight has complied with the 

requirements of Executive Order 13132 

for the attached proposed rule in a 

meaningful and timely manner. 

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 144 

Health care, Health insurance, 

Reporting and recordkeeping 

requirements. 

45 CFR Part 147 

Health care, Health insurance, 

Reporting and recordkeeping 

requirements, and state regulation of 

health insurance. 

45 CFR Part 150 

Administrative practice and 

procedure, Health care, Health 

insurance, Penalties, Reporting and 

recordkeeping requirements. 

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45 CFR Part 154 

Administrative practice and 

procedure, Claims, Health care, Health 

insurance, Health plans, Penalties, 

Reporting and recordkeeping 

requirements. 

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, Indians, 

Individuals with disabilities, Loan 

programs-health, 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. 

For the reasons set forth in the 

preamble, the Department of Health and 

Human Services proposes to amend 45 

CFR parts 144, 147, 150, 154, and 156 

as set forth below: 

PART 144—REQUIREMENTS 

RELATING TO HEALTH INSURANCE 

COVERAGE 

1. The authority citation for part 144 

continues to read as follows: 

Authority: Secs. 2701 through 2763, 2791, 

and 2792 of the Public Health Service Act (42 

U.S.C. 300gg through 300gg-63, 300gg-91, 

and 300gg-92). 

2. Section 144.101 is amended by 

revising paragraphs (d)(1) and (d)(2) to 

read as follows: 

§ 144.101 Basis and purpose. 

* * * * * 

(d) * * * 

(1) States that fail to substantially 

enforce one or more provisions of part 

146 concerning group health insurance, 

one or more provisions of part 147 

concerning group or individual health 

insurance, or the requirements of part 

148 of this subchapter concerning 

individual health insurance. 

(2) Insurance issuers in States 

described in paragraph (d)(1) of this 

section. 

* * * * * 

3. Section 144.102 is revised to read 

as follows: 

§ 144.102 Scope and applicability. 

(a) For purposes of 45 CFR parts 144 

through 148, all health insurance 

coverage is generally divided into two 

markets—the group market and the 

individual market. The group market is 

further divided into the large group 

market and the small group market. 

(b) The protections afforded under 45 

CFR parts 144 through 148 to 

individuals and employers (and other 

sponsors of health insurance offered in 

connection with a group health plan) 

are determined by whether the coverage 

involved is obtained in the small group 

market, the large group market, or the 

individual market. 

(c) Coverage that is provided to 

associations, but not related to 

employment, and sold to individuals is 

not considered group coverage under 45 

CFR parts 144 through 148. If the 

coverage is offered to an association 

member other than in connection with 

a group health plan, or is offered to an 

association’s employer-member that is 

maintaining a group health plan that has 

fewer than two participants who are 

current employees on the first day of the 

plan year, the coverage is considered 

individual health insurance coverage for 

purposes of 45 CFR parts 144 through 

148. The coverage is considered 

coverage in the individual market, 

regardless of whether it is considered 

group coverage under state law. If the 

health insurance coverage is offered in 

connection with a group health plan as 

defined at 45 CFR 144.103, it is 

considered group health insurance 

coverage for purposes of 45 CFR parts 

144 through 148. 

(d) Provisions relating to CMS 

enforcement of parts 146, 147, and 148 

are contained in part 150 of this 

subchapter. 

PART 147—HEALTH INSURANCE 

REFORM REQUIREMENTS FOR THE 

GROUP AND INDIVIDUAL HEALTH 

INSURANCE MARKETS 

4. The authority citation for part 147 

continues to read as follows: 

Authority: Secs. 2701 through 2763, 2791, 

and 2792 of the Public Health Service Act (42 

U.S.C. 300gg through 300gg-63, 300gg-91, 

and 300gg-92), as amended. 

5. Section 147.102 is added to read as 

follows: 

§ 147.102 Fair health insurance premiums. 

(a) In general. With respect to the 

premium rate charged by a health 

insurance issuer for health insurance 

coverage offered in the individual or 

small group market— 

(1) The rate may vary with respect to 

the particular plan or coverage involved 

only by determining the following: 

(i) Whether the plan or coverage 

covers an individual or family. 

(ii) Rating area, as established in 

accordance with paragraph (b) of this 

section. 

(iii) Age, except that the rate must not 

vary by more than 3:1 for like 

individuals of different age who are age 

21 and older and that the variation in 

rate must be actuarially justified for 

individuals under age 21, consistent 

with the uniform age rating curve under 

paragraph (e) of this section. For 

purposes of identifying the appropriate 

age adjustment under this paragraph 

and the age band in paragraph (d) of this 

section applicable to a specific enrollee, 

the enrollee’s age as of the date of policy 

issuance or renewal shall be used. 

Nothing in this paragraph prevents a 

state from requiring the use of a ratio 

narrower than 3:1 in connection with 

establishing rates for individuals who 

are age 21 and older. A state that uses 

a narrower ratio shall submit to CMS 

information on its ratio in accordance 

with the date and format specified by 

CMS. 

(iv) Tobacco use, except that such rate 

shall not vary by more than 1.5:1 for like 

individuals who vary in tobacco usage. 

(See § 147.110, related to prohibiting 

discrimination based on health status 

and programs of health promotion or 

disease prevention.) Nothing in this 

paragraph prevents a state from 

requiring the use of a ratio narrower 

than 1.5:1 in connection with 

establishing rates for individuals who 

vary in tobacco usage. A state that uses 

a narrower ratio shall submit to CMS 

information on its ratio in accordance 

with the date and format specified by 

CMS. 

(2) The rate must not vary with 

respect to the particular plan or 

coverage involved by any other factor 

not described in paragraph (a)(1) of this 

section. 

(b) Rating area. (1) A state may 

establish rating areas within that state 

for purposes of applying this section 

and the requirements of title XXVII the 

Public Health Service Act and title I of 

the Patient Protection and Affordable 

Care Act. A state that establishes rating 

areas shall submit to CMS information 

on its rating areas in accordance with 

the date and format specified by CMS. 

(2) If a state’s rating areas are not 

consistent with paragraph (b)(3) of this 

section, or if a state does not establish 

rating areas, the standard under 

paragraph (b)(3)(i) of this section shall 

apply unless CMS establishes rating 

areas within the state applying one of 

the standards under paragraph (b)(3)(ii) 

of this section. 

(3) A state’s rating areas will be 

presumed adequate if one of the 

following requirements are met: 

(i) There is only one rating area 

within the state. 

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(ii) There are no more than seven 

rating areas based on the one of the 

following geographic divisions: 

counties, three-digit zip codes, or 

metropolitan statistical areas/nonmetropolitan statistical areas. 

(4) Notwithstanding paragraph (b)(3) 

of this section, a state may propose to 

CMS for approval other existing 

geographic divisions on which to base 

rating areas or a number of rating areas 

greater than seven. 

(c) Application of variations based on 

age or tobacco use. With respect to 

family coverage under health insurance 

coverage, the rating variations permitted 

under paragraphs (a)(1)(iii) and (a)(1)(iv) 

of this section must be applied based on 

the portion of the premium attributable 

to each family member covered under 

the coverage. 

(1) Per-member rating. The total 

premium for family coverage must be 

determined by summing the premiums 

for each individual family member. In 

determining the total premium for 

family members, premiums for no more 

than the three oldest family members 

who are under age 21 must be taken into 

account. 

(2) Family tiers under community 

rating. If a state does not permit any 

rating variation for factors that 

otherwise would be permitted under 

paragraphs (a)(1)(iii) and (a)(1)(iv) of 

this section, the state may elect to 

require that premiums for family 

coverage be determined by using 

uniform family tiers and the 

corresponding multipliers established 

by the state. A state that establishes 

uniform family tiers and corresponding 

multipliers shall submit to CMS 

information on its uniform family tiers 

and corresponding multipliers in 

accordance with the date and format 

specified by CMS. If a state does not 

establish uniform family tiers and the 

corresponding multipliers, the permember rating methodology under 

paragraph (c)(1) of this section will 

apply in that state. 

(3) Application to small group market. 

In the case of the small group market, 

the total premium charged to the group 

shall be determined by summing the 

premiums of covered participants and 

beneficiaries in accordance with 

paragraph (c)(1) or (c)(2) of this section, 

as applicable. Nothing in this section 

shall preclude a state from requiring 

issuers to offer, or an issuer from 

voluntarily offering, to a group 

premiums that are based on average 

enrollee amounts, provided that the 

total group premium is the same total 

amount derived in accordance with 

paragraph (c)(1) or (c)(2) of this section, 

as applicable. A state that requires 

premiums based on average enrollee 

amounts shall submit to CMS 

information on its election in 

accordance with the date and format 

specified by CMS. 

(d) Uniform age bands. The following 

uniform age bands apply for rating 

purposes under paragraph (a)(1)(iii) of 

this section: 

(1) Child age bands. A single age band 

for individuals age 0 to 20. 

(2) Adult age bands. One-year age 

bands starting at age 21 and ending at 

age 63. 

(3) Older adult age bands. A single 

age band for individuals age 64 and 

older. 

(e) Uniform age rating curves. Each 

state must establish a uniform age rating 

curve for rating purposes under 

paragraph (a)(1)(iii) of this section and 

submit to CMS information on its 

uniform age rating curve in accordance 

with the date and format specified by 

CMS. If a state does not establish a 

uniform age rating curve by a date 

specified by CMS, a default uniform age 

rating curve established by CMS shall 

apply in that state which takes into 

account the rating variation permitted 

for age under state law. 

(f) Special rule for large group market. 

If a state permits health insurance 

issuers that offer coverage in the large 

group market in the state to offer such 

coverage through an Exchange starting 

in 2017, the provisions of this section 

applicable to coverage in the small 

group market shall apply to all coverage 

offered in the large group market in the 

state. 

(g) Applicability date. The provisions 

of this section apply for plan years (in 

the individual market, for policy years) 

beginning on or after January 1, 2014. 

(h) Grandfathered health plans. This 

section does not apply to grandfathered 

health plans. 

6. Section 147.104 is added to read as 

follows: 

§ 147.104 Guaranteed availability of 

coverage. 

(a) Guaranteed availability of 

coverage in the individual and group 

market. Subject to paragraphs (b) 

through (d) of this section, a health 

insurance issuer that offers health 

insurance coverage in the individual or 

group market in a state must offer to any 

individual or employer in the state all 

products that are approved for sale in 

the applicable market, and must accept 

any individual or employer that applies 

for any of those products. 

(b) Enrollment periods. A health 

insurance issuer may restrict enrollment 

in health insurance coverage to open or 

special enrollment periods. 

(1) Open enrollment periods—(i) 

Group market. A health insurance issuer 

in the group market must permit an 

employer to purchase health insurance 

coverage for a group health plan at any 

point during the year. In the case of 

health insurance coverage offered in the 

small group market, a health insurance 

issuer may decline to offer coverage to 

a plan sponsor that is unable to comply 

with a material plan provision relating 

to employer contribution or group 

participation rules, as defined in 

§ 147.106(b)(3), pursuant to applicable 

state law and, in the case of a QHP 

offered in the SHOP, as permitted by 

§ 156.285(c) of this subchapter. With 

respect to coverage in the small group 

market, and in the large group market if 

such coverage is offered in a Small 

Business Health Options Program 

(SHOP) in a state, coverage shall become 

effective consistent with the dates 

described in § 155.725(h) of this 

subchapter. 

(ii) Individual market. A health 

insurance issuer in the individual 

market must permit an individual to 

purchase health insurance coverage 

during the initial and annual open 

enrollment periods described in 

§ 155.410(b) and (e) of this subchapter, 

with such coverage becoming effective 

consistent with the dates described in 

§ 155.410(c) and (f) of this subchapter. 

(2) Special enrollment periods. A 

health insurance issuer in the group 

market and individual market shall 

establish special enrollment periods for 

qualifying events as defined under 

section 603 of the Employee Retirement 

Income Security Act of 1974, as 

amended. Enrollees shall be provided 

30 calendar days after the date of the 

qualifying event to elect coverage, with 

such coverage becoming effective 

consistent with the dates described in 

§ 155.420(b) of this subchapter. These 

special enrollment periods are in 

addition to any other special enrollment 

periods that are required under federal 

and state law. 

(c) Special rules for network plans. (1) 

In the case of a health insurance issuer 

that offers health insurance coverage in 

the group and individual market 

through a network plan, the issuer may 

do the following: 

(i) Limit the employers that may 

apply for the coverage to those with 

eligible individuals in the group market 

who live, work, or reside in the service 

area for the network plan, and limit the 

individuals who may apply for the 

coverage in the individual market to 

those who live or reside in the service 

area for the network plan. 

(ii) Within the service area of the 

plan, deny coverage to employers and 

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individuals if the issuer has 

demonstrated to the applicable state 

authority (if required by the state 

authority) the following: 

(A) It will not have the capacity to 

deliver services adequately to enrollees 

of any additional groups or any 

additional individuals because of its 

obligations to existing group contract 

holders and enrollees. 

(B) It is applying paragraph (c)(1) of 

this section uniformly to all employers 

and individuals without regard to the 

claims experience of those individuals, 

employers and their employees (and 

their dependents) or any health statusrelated factor relating to such 

individuals, employees, and 

dependents. 

(2) An issuer that denies health 

insurance coverage to an individual or 

an employer in any service area, in 

accordance with paragraph (c)(1)(ii) of 

this section, may not offer coverage in 

the individual or group market, as 

applicable, within the service area to 

any individual or employer, as 

applicable, for a period of 180 calendar 

days after the date the coverage is 

denied. This paragraph (c)(2) does not 

limit the issuer’s ability to renew 

coverage already in force or relieve the 

issuer of the responsibility to renew that 

coverage. 

(3) Coverage offered within a service 

area after the 180-day period specified 

in paragraph (c)(2) of this section is 

subject to the requirements of this 

section. 

(d) Application of financial capacity 

limits. (1) A health insurance issuer may 

deny health insurance coverage in the 

group or individual market if the issuer 

has demonstrated to the applicable state 

authority (if required by the state 

authority) the following: 

(i) It does not have the financial 

reserves necessary to underwrite 

additional coverage. 

(ii) Is applying this paragraph (d)(1) 

uniformly to all employers or 

individuals in the group or individual 

market, as applicable, in the state 

consistent with applicable state law and 

without regard to the claims experience 

of those individuals, employers and 

their employees (and their dependents) 

or any health status-related factor 

relating to such individuals, employees, 

and dependents. 

(2) An issuer that denies group health 

insurance coverage to any employer or 

individual in a state under paragraph 

(d)(1) of this section may not offer 

coverage in the group or individual 

market, as applicable, in the state before 

the later of either of the following dates: 

(i) The 181st day after the date the 

issuer denies coverage. 

(ii) The date the issuer demonstrates 

to the applicable state authority, if 

required under applicable state law, that 

the issuer has sufficient financial 

reserves to underwrite additional 

coverage. 

(3) Paragraph (d)(2) of this section 

does not limit the issuer’s ability to 

renew coverage already in force or 

relieve the issuer of the responsibility to 

renew that coverage. 

(4) Coverage offered after the 180-day 

period specified in paragraph (d)(2) of 

this section is subject to the 

requirements of this section. 

(5) An applicable state authority may 

provide for the application of this 

paragraph (d) on a service-area-specific 

basis. 

(e) Marketing. A health insurance 

issuer and its officials, employees, 

agents and representatives must comply 

with any applicable state laws and 

regulations regarding marketing by 

health insurance issuers and cannot 

employ marketing practices or benefit 

designs that will have the effect of 

discouraging the enrollment of 

individuals with significant health 

needs in health insurance coverage. 

(f) Applicability date. The provisions 

of this section apply for plan years (in 

the individual market, for policy years) 

beginning on or after January 1, 2014. 

(g) Grandfathered health plans. This 

section does not apply to grandfathered 

health plans. 

7. Section 147.106 is added to read as 

follows: 

§ 147.106 Guaranteed renewability of 

coverage. 

(a) General rule. Subject to paragraphs 

(b) through (d) of this section, a health 

insurance issuer offering health 

insurance coverage in the individual or 

group market is required to renew or 

continue in force the coverage at the 

option of the plan sponsor or the 

individual, as applicable. 

(b) Exceptions. An issuer may 

nonrenew or discontinue health 

insurance coverage offered in the group 

or individual market based only on one 

or more of the following: 

(1) Nonpayment of premiums. The 

plan sponsor or individual, as 

applicable, has failed to pay premiums 

or contributions in accordance with the 

terms of the health insurance coverage, 

including any timeliness requirements. 

(2) Fraud. The plan sponsor or 

individual, as applicable, has performed 

an act or practice that constitutes fraud 

or made an intentional 

misrepresentation of material fact in 

connection with the coverage. 

(3) Violation of participation or 

contribution rules. In the case of group 

health insurance coverage, the plan 

sponsor has failed to comply with a 

material plan provision relating to 

employer contribution or group 

participation rules, pursuant to 

applicable state law. For purposes of 

this paragraph (b) the following apply: 

(i) The term ‘‘employer contribution 

rule’’ means a requirement relating to 

the minimum level or amount of 

employer contribution toward the 

premium for enrollment of participants 

and beneficiaries. 

(ii) The term ‘‘group participation 

rule’’ means a requirement relating to 

the minimum number of participants or 

beneficiaries that must be enrolled in 

relation to a specified percentage or 

number of eligible individuals or 

employees of an employer. 

(4) Termination of plan. The issuer is 

ceasing to offer coverage in the market 

in accordance with paragraph (c) or (d) 

of this section and applicable state law. 

(5) Enrollees’ movement outside 

service area. For network plans, there is 

no longer any enrollee under the plan 

who lives, resides, or works in the 

service area of the issuer (or in the area 

for which the issuer is authorized to do 

business); and in the case of the small 

group market, the issuer applies the 

same criteria it would apply in denying 

enrollment in the plan under 

§ 147.104(c)(1)(i). 

(6) Association membership ceases. 

For coverage made available in the 

small or large group market only 

through one or more bona fide 

associations, if the employer’s 

membership in the bona fide association 

ceases, but only if the coverage is 

terminated uniformly without regard to 

any health status-related factor relating 

to any covered individual. 

(c) Discontinuing a particular 

product. In any case in which an issuer 

decides to discontinue offering a 

particular product offered in the group 

or individual market, that product may 

be discontinued by the issuer in 

accordance with applicable state law in 

the applicable market only if the 

following occurs: 

(1) The issuer provides notice in 

writing to each plan sponsor or 

individual, as applicable, provided that 

particular product in that market (and to 

all participants and beneficiaries 

covered under such coverage) of the 

discontinuation at least 90 calendar 

days before the date the coverage will be 

discontinued. 

(2) The issuer offers to each plan 

sponsor or individual, as applicable, 

provided that particular product the 

option, on a guaranteed issue basis, to 

purchase all (or, in the case of the large 

group market, any) other health 

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insurance coverage currently being 

offered by the issuer to a group health 

plan or individual health insurance 

coverage in that market. 

(3) In exercising the option to 

discontinue that product and in offering 

the option of coverage under paragraph 

(c)(2) of this section, the issuer acts 

uniformly without regard to the claims 

experience of those sponsors or 

individuals, as applicable, or any health 

status-related factor relating to any 

participants or beneficiaries covered or 

new participants or beneficiaries who 

may become eligible for such coverage. 

(d) Discontinuing all coverage. (1) An 

issuer may elect to discontinue offering 

all health insurance coverage in the 

individual or group market, or all 

markets, in a state in accordance with 

applicable state law only if the issuer 

meets all of the following conditions: 

(i) The issuer provides notice in 

writing to the applicable state authority 

and to each plan sponsor or individual, 

as applicable, (and all participants and 

beneficiaries covered under the 

coverage) of the discontinuation at least 

180 calendar days prior to the date the 

coverage will be discontinued. 

(ii) All health insurance policies 

issued or delivered for issuance in the 

state in the applicable market (or 

markets) are discontinued and not 

renewed. 

(2) An issuer that elects to 

discontinue offering all health insurance 

coverage in a market (or markets) in a 

state as described in this paragraph (d) 

may not issue coverage in the applicable 

market (or markets) and state involved 

during the 5-year period beginning on 

the date of discontinuation of the last 

coverage not renewed. 

(e) Exception for uniform 

modification of coverage. Only at the 

time of coverage renewal may issuers 

modify the health insurance coverage 

for a product offered to a group health 

plan in the following: 

(1) Large group market. 

(2) Small group market if, for coverage 

available in this market (other than only 

through one or more bona fide 

associations), the modification is 

consistent with state law and is effective 

uniformly among group health plans 

with that product. 

(f) Application to coverage offered 

only through associations. In the case of 

health insurance coverage that is made 

available by a health insurance issuer in 

the small or large group market to 

employers only through one or more 

associations, the reference to ‘‘plan 

sponsor’’ is deemed, with respect to 

coverage provided to an employer 

member of the association, to include a 

reference to the employer. 

(g) Applicability date. The provisions 

of this section apply for plan years (in 

the individual market, for policy years) 

beginning on or after January 1, 2014. 

(h) Grandfathered health plans. This 

section does not apply to grandfathered 

health plans. 

8. Section 147.145 is amended by 

revising paragraph (b)(1) to read as 

follows: 

§ 147.145 Student health insurance 

coverage. 

* * * * * 

(b) Exemptions from the Public Health 

Service Act— (1) Guaranteed 

availability and guaranteed 

renewability. (i) For purposes of sections 

2741(e)(1) and 2742(b)(5) of the Public 

Health Service Act, student health 

insurance coverage is deemed to be 

available only through a bona fide 

association. 

(ii) For purposes of section 2702(a) of 

the Public Health Service Act, a health 

insurance issuer that offers student 

health insurance coverage shall not be 

required to accept persons who are not 

students or dependents of students in 

such coverage. 

(iii) For purposes of section 2703(a) of 

the Public Health Service Act, a health 

insurance issuer that offers student 

health insurance coverage shall not be 

required to renew or continue coverage 

for individuals who are no longer 

students or dependents of students. 

* * * * * 

PART 150—CMS ENFORCEMENT IN 

GROUP AND INDIVIDUAL INSURANCE 

MARKETS 

9. The authority citation for part 150 

continues to read as follows: 

Authority: Secs. 2701 through 2763, 2791, 

and 2792 of the Public Health Service Act (42 

U.S.C. 300gg through 300gg–63, 300gg–91, 

and 300gg–92), as amended. 

10. Section 150.101 is amended by 

revising paragraphs (a) and (b)(2) to read 

as follows: 

§ 150.101 Basis and scope. 

(a) Basis. CMS’s enforcement 

authority under sections 2723 and 2761 

of the PHS Act and its rulemaking 

authority under section 2792 of the PHS 

Act provide the basis for issuing 

regulations under this part 150. 

(b) * * * 

(2) Enforcement with respect to health 

insurance issuers. The states have 

primary enforcement authority with 

respect to the requirements of title 

XXVII of the PHS Act that apply to 

health insurance issuers offering 

coverage in the group or individual 

health insurance market. If CMS 

determines under subpart B of this part 

that a state is not substantially enforcing 

title XXVII of the PHS Act, including 

the implementing regulations in parts 

146, 147, and 148 of this subchapter, 

CMS enforces them under subpart C of 

this part. 

11. Section 150.103 is amended by— 

a. Removing the definition of ‘‘HIPAA 

requirements;’’ 

b. Revising the definition of 

‘‘Individual health insurance policy or 

individual policy;’’ and 

c. Adding the definition of ‘‘PHS Act 

requirements’’ in alphabetical order. 

The revision and addition read as 

follows: 

§ 150.103 Definitions. 

* * * * * 

Individual health insurance policy or 

individual policy means the legal 

document or contract issued by the 

issuer to an individual that contains the 

conditions and terms of the insurance. 

Any association or trust arrangement 

that is not a group health plan as 

defined in § 144.103 of this subchapter 

or does not provide coverage in 

connection with one or more group 

health plans is individual coverage 

subject to the requirements of parts 147 

and 148 of this subchapter. The term 

‘‘individual health insurance policy’’ 

includes a policy that is – 

(1) Issued to an association that makes 

coverage available to individuals other 

than in connection with one or more 

group health plans; or 

(2) Administered, or placed in a trust, 

and is not sold in connection with a 

group health plan subject to the 

provisions of parts 146 and 147 of this 

subchapter. 

PHS Act requirements means the 

requirements of title XXVII of the PHS 

Act and its implementing regulations in 

parts 146, 147, and 148 of this 

subchapter. 

* * * * * 

12. In 45 CFR part 150, remove the 

words ‘‘HIPAA requirement’’ or 

‘‘HIPAA requirements,’’ and add in their 

place ‘‘PHS Act requirement’’ or ‘‘PHS 

Act requirements,’’ respectively, 

wherever they appear in the following 

places. 

a. Section 150.103, in the definition of 

‘‘Complaint’’. 

b. In the heading of subpart B of part 

150. 

c. Section 150.201. 

d. Section 150.203, in the 

introductory text and paragraphs (a) and 

(b). 

e. Section 150.205(d) and (e)(1). 

f. Section 150.207, in the section 

heading and text. 

g. Section 150.209. 

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h. Section 150.211, in the 

introductory text. 

i. Section 150.213(b) and (c). 

j. Section 150.217, in the introductory 

text. 

k. Section 150.219(a). 

l. Section 150.221(a). 

m. Section 150.301. 

n. Section 150.303(a) introductory 

text, (a)(3), and (b). 

o. Section 150.305(a)(1), (b)(2), and 

(c)(2). 

p. Section 150.309. 

q. Section 150.311, in the 

introductory text and paragraphs (d), (f) 

introductory text, (f)(3), and (g). 

r. Section 150.313(a) and (e)(3)(iv). 

s. Section 150.317(a)(1) and (a)(3). 

t. Section 150.319(b)(1) introductory 

text, (b)(1)(ii), and (b)(1)(iii). 

u. Section 150.343(a). 

v. Section 150.465(c). 

PART 154—HEALTH INSURANCE 

ISSUER RATE INCREASES: 

DISCLOSURE AND REVIEW 

REQUIREMENTS 

13. The authority citation for part 154 

continues to read as follows: 

Authority: Section 2794 of the Public 

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

14. Section 154.200 is amended by 

revising paragraphs (a)(2) and (b) to read 

as follows: 

§ 154.200 Rate increases subject to 

review. 

(a) * * * 

(2) * * * A State-specific threshold 

shall be based on factors impacting rate 

increases in a State to the extent that the 

data relating to such State-specific 

factors is available by August 1. States 

interested in proposing a State-specific 

threshold for approval are required to 

submit a proposal to the Secretary by 

August 1. 

(b) The Secretary will publish a notice 

no later than September 1 of each year, 

to be effective on January 1 of the 

following year, concerning whether a 

threshold under paragraph (a)(1) or 

(a)(2) of this section applies to the State; 

except that, with respect to the 12- 

month period that begins on September 

1, 2011, the threshold under paragraph 

(a)(1) of this section applies. 

* * * * * 

15. Section 154.215 is revised to read 

as follows: 

§ 154.215 Submission of rate filing 

justification. 

(a) If any product is subject to a rate 

increase, a health insurance issuer must 

submit a Rate Filing Justification for all 

products on a form and in a manner 

prescribed by the Secretary. 

(b) The Rate Filing Justification must 

consist of the following Parts: 

(1) Standardized data template (Part 

I), as described in paragraph (d) of this 

section. 

(2) Written description justifying the 

rate increase (Part II), as described in 

paragraph (e) of this section. 

(3) Rating filing documentation (Part 

III), as described in paragraph (f) of this 

section. 

(c) A health insurance issuer must 

complete and submit Parts I and III of 

the Rate Filing Justification described in 

paragraphs (b)(1) and (b)(3) of this 

section to CMS and, as long as the 

applicable State accepts such 

submissions, to the applicable State for 

any rate increase. If a rate increase is 

subject to review, then the health 

insurance issuer must also complete and 

submit to CMS and, if applicable, the 

State Part II of the Rate Filing 

Justification described in paragraph 

(b)(2) of this section. 

(d) Content of standardized data 

template (Part I): The standardized data 

template must include the following as 

determined appropriate by the 

Secretary: 

(1) Historical and projected claims 

experience. 

(2) Trend projections related to 

utilization, and service or unit cost. 

(3) Any claims assumptions related to 

benefit changes. 

(4) Allocation of the overall rate 

increase to claims and non-claims costs. 

(5) Per enrollee per month allocation 

of current and projected premium. 

(6) Three year history of rate increases 

for the product associated with the rate 

increase. 

(e) Content of written description 

justifying the rate increase (Part II): The 

written description of the rate increase 

must include a simple and brief 

narrative describing the data and 

assumptions that were used to develop 

the rate increase and including the 

following: 

(1) Explanation of the most significant 

factors causing the rate increase, 

including a brief description of the 

relevant claims and non-claims expense 

increases reported in the rate increase 

summary. 

(2) Brief description of the overall 

experience of the policy, including 

historical and projected expenses, and 

loss ratios. 

(f) Content of rate filing 

documentation (Part III): The rate filing 

documentation must include an 

actuarial memorandum that contains the 

reasoning and assumptions supporting 

the data contained in Part I of the Rate 

Filing Justification. Parts I and III must 

be sufficient to conduct an examination 

satisfying the requirements of 

§ 154.301(a)(3) and (4) and determine 

whether the rate increase is an 

unreasonable increase. Instructions 

concerning the requirements for the rate 

filing documentation will be provided 

in guidance issued by CMS. 

(g) If the level of detail provided by 

the issuer for the information under 

paragraphs (d) and (f) of this section 

does not provide sufficient basis for 

CMS to determine whether the rate 

increase is an unreasonable rate increase 

when CMS reviews a rate increase 

subject to review under § 154.210(a), 

CMS will request the additional 

information necessary to make its 

determination. The health insurance 

issuer must provide the requested 

information to CMS within 10 business 

days following its receipt of the request. 

(h) Posting of the disclosure on the 

CMS Web site: 

(1) CMS promptly will make available 

to the public on its Web site the 

information contained in Part II of each 

Rate Filing Justification. 

(2) CMS will make available to the 

public on its Web site the information 

contained in Parts I and III of each Rate 

Filing Justification that is not a trade 

secret or confidential commercial or 

financial information as defined in 

CMS’s Freedom of Information Act 

regulations, 45 CFR 5.65. 

(3) CMS will include a disclaimer on 

its Web site with the information made 

available to the public that explains the 

purpose and role of the Rate Filing 

Justification. 

(i) CMS will include information on 

its Web site concerning how the public 

can submit comments on the proposed 

rate increases that CMS reviews. 

16. Section 154.220 is revised to read 

as follows: 

§ 154.220 Timing of providing the rate 

filing justification. 

A health insurance issuer must 

submit a Rate Filing Justification for all 

rate increases that are filed in a State on 

or after April 1, 2013, or effective on or 

after January 1, 2014 in a State that does 

not require the rate increase to be filed, 

as follows: 

(a) If a State requires that a proposed 

rate increase be filed with the State 

prior to the implementation of the rate, 

the health insurance issuer must submit 

to CMS and the applicable State the 

Rate Filing Justification on the date on 

which the health insurance issuer 

submits the proposed rate increase to 

the State. 

(b) For all other States, the health 

insurance issuer must submit to CMS 

and the State the Rate Filing 

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70616 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Proposed Rules 

Justification prior to the implementation 

of the rate increase. 

§ 154.225 [Amended] 

17a. In § 154.225(a),introductory text, 

remove the words ‘‘Preliminary 

Justification’’ and add in their place 

‘‘Rate Filing Justification.’’ 

§ 154.230 [Amended] 

17b. In § 154.230(b) and (c)(1), remove 

the words ‘‘Preliminary Justification’’ 

and add in their place ‘‘Rate Filing 

Justification.’’ 

18. Section 154.301 is amended as 

follows: 

a. Amending paragraph (a)(3)(i) by 

removing ‘‘; and’’ and adding in its 

place a period. 

b. Amending paragraphs (a)(4)(i), 

(a)(4)(ii), and (a)(4)(vi) through (a)(4)(x) 

by removing the semicolons and 

replacing them with periods. 

c. Amending paragraph (a)(3)(xi) by 

removing ‘‘: and’’ and adding in its 

place a period. 

d. Revising paragraphs (a)(4)(iii) 

through (a)(4)(v), and (b). 

e. Redesignating paragraph (a)(4)(xii) 

as paragraph (a)(4)(xiii) and adding new 

paragraphs (a)(3)(iii), (a)(3)(iv), 

(a)(4)(xii), and (a)(4)(xiv) through 

(a)(4)(xvi). 

The revisions and additions read as 

follows: 

§ 154.301 CMS’s determinations of 

effective rate review programs. 

(a) * * * 

(3) * * * 

(iii) The reasonableness of 

assumptions used by the health 

insurance issuer to estimate the rate 

impact of the Federal reinsurance and 

risk adjustment programs under sections 

1341 and 1343 of the Affordable Care 

Act. 

(iv) The health insurance issuer’s data 

related to implementation and ongoing 

utilization of a market-wide single risk 

pool, essential health benefits, actuarial 

values and other market reforms rules as 

required by the Affordable Care Act. 

(4) * * * 

(iii) The impact of cost-sharing 

changes by major service categories, 

including actuarial values. 

(iv) The impact of benefit changes, 

including essential health benefits and 

non-essential health benefits. 

(v) The impact of changes in enrollee 

risk profile and pricing, including rating 

limitations for age and tobacco use 

under section 2701 of the Public Health 

Service Act. 

* * * * * 

(xii) Other standardized ratio tests 

recommended or required by statute, 

regulation, or best practices. 

* * * * * 

(xiv) The impacts of geographic 

factors and variations. 

(xv) The impact of changes within a 

single risk pool to all products or plans 

within the risk pool. 

(xvi) The impact of Federal 

reinsurance and risk adjustment 

payments and charges under sections 

1341 and 1343 of the Affordable Care 

Act. 

* * * * * 

(b) Public disclosure and input. In 

addition to satisfying the provisions in 

paragraph (a) of this section, a State 

with an Effective Rate Review Program 

must provide, for the rate increases it 

reviews, access from its Web site to at 

least the information contained in Parts 

I, II, and III of the Rate Filing 

Justification that CMS makes available 

on its Web site (or provide CMS’s Web 

address for such information) and have 

a mechanism for receiving public 

comments on those proposed rate 

increases. 

* * * * * 

PART 156—HEALTH INSURANCE 

ISSUER STANDARDS UNDER THE 

AFFORDABLE CARE ACT, INCLUDING 

STANDARDS RELATED TO 

EXCHANGES 

19. The authority citation for part 156 

continues to read as follows: 

Authority: Title I of the Affordable Care 

Act, sections 1301–1304, 1311–1312, 1321, 

1322, 1324, 1334, 1342–1343, and 1401– 

1402, Pub. L. 111–148, 124 Stat. 119 (42 

U.S.C. 18042). 

20. Section 156.80 is added to subpart 

A to read as follows: 

§ 156.80 Single risk pool. 

(a) Individual market. A health 

insurance issuer shall consider the 

claims experience of all enrollees in all 

health plans (other than grandfathered 

health plans) subject to section 2701 of 

the Public Health Service Act and 

offered by such issuer in the individual 

market in a state, including those 

enrollees who do not enroll in such 

plans through the Exchange, to be 

members of a single risk pool. 

(b) Small group market. A health 

insurance issuer shall consider the 

claims experience of all enrollees in all 

health plans (other than grandfathered 

health plans) subject to section 2701 of 

the Public Health Service Act and 

offered by such issuer in the small 

group market in a state, including those 

enrollees who do not enroll in such 

plans through the Exchange, to be 

members of a single risk pool. 

(c) Merger of the individual and small 

group markets. A state may require the 

individual and small group insurance 

markets within a state to be merged into 

a single risk pool if the state determines 

appropriate. A state that requires such 

merger of risk pools shall submit to 

CMS information on its election in 

accordance with the date and format 

specified by CMS. 

(d) Index rate—(1) In general. Each 

plan year or policy year, as applicable, 

a health insurance issuer shall establish 

an index rate for a state market based on 

the total combined claims costs for 

providing essential health benefits 

within the single risk pool of that state 

market. The index rate shall be adjusted 

on a market-wide basis based on the 

total expected market-wide payments 

and charges under the risk adjustment 

and reinsurance programs in the state. 

The premium rate for all of the health 

insurance issuer’s plans in the relevant 

state market must use the applicable 

index rate, as adjusted for total expected 

market-wide payments and charges 

under the risk adjustment and 

reinsurance programs, subject only to 

the adjustments permitted in paragraph 

(d)(2) of this section. 

(2) Permitted plan-level adjustments 

to the index rate. For plan years or 

policy years beginning on or after 

January 1, 2014, a health insurance 

issuer may vary premium rates for a 

particular plan from its index rate for a 

relevant state market based only on the 

following actuarially justified planspecific factors: 

(i) The actuarial value and costsharing design of the plan. 

(ii) The plan’s provider network, 

delivery system characteristics, and 

utilization management practices. 

(iii) The benefits provided under the 

plan that are in addition to the essential 

health benefits. These additional 

benefits must be pooled with similar 

benefits within the single risk pool and 

the claims experience from those 

benefits must be utilized to determine 

rate variations for plans that offer those 

benefits in addition to essential health 

benefits. 

(iv) With respect to catastrophic 

plans, the expected impact of the 

specific eligibility categories for those 

plans. 

(e) Grandfathered health plans in the 

individual and small group market. A 

state law requiring grandfathered health 

plans to be included in a single risk 

pool described in paragraph (a) or (b) of 

this section shall not apply. 

(f) Applicability date. The provisions 

of this section apply for plan years (as 

that term is defined in § 144.103 of this 

subchapter) in the group market, and for 

policy years (as that term is defined in 

§ 144.103 of this subchapter) in the 

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individual market, beginning on or after 

January 1, 2014. 

21. Section 156.155 is added to 

subpart B to read as follows: 

§ 156.155 Enrollment in catastrophic 

plans. 

(a) General rule. A health plan is a 

catastrophic plan if it meets the 

following conditions: 

(1) Meets all applicable requirements 

for health insurance coverage in the 

individual market (including but not 

limited to those requirements described 

in parts 147 and 148 of this subchapter), 

and is offered only in the individual 

market. 

(2) Does not provide a bronze, silver, 

gold, or platinum level of coverage 

described in section 1302(d) of the 

Affordable Care Act. 

(3) Provides coverage of the essential 

health benefits under section 1302(b) of 

the Affordable Care Act once the annual 

limitation on cost sharing in section 

1302(c)(1) of the Affordable Care Act is 

reached. 

(4) Provides coverage for at least three 

primary care visits per year before 

reaching the deductible. 

(5) Covers only individuals who meet 

either of the following conditions: 

(i) Have not attained the age of 30 

prior to the first day of the plan year. 

(ii) Have received a certificate of 

exemption for the reasons identified in 

section 1302(e)(2)(B)(i) or (ii) of the 

Affordable Care Act. 

(b) Coverage of preventive health 

services. A catastrophic plan may not 

impose any cost-sharing requirements 

(such as a copayment, coinsurance, or 

deductible) for preventive services, in 

accordance with section 2713 of the 

Public Health Service Act. 

(c) Application for family coverage. 

For other than self-only coverage, each 

individual enrolled must meet the 

requirements of paragraph (a)(4) of this 

section. 

Dated: May 15, 2012. 

Marilyn Tavenner, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: August 6, 2012. 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2012–28428 Filed 11–20–12; 11:15 am] 

BILLING CODE 4120–01–P 

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