```

[Federal Register Volume 76, Number 235 (Wednesday, December 7, 2011)]
[Rules and Regulations]
[Pages 76574-76594]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31289]

[[Page 76573]]

Vol. 76

Wednesday,

No. 235

December 7, 2011

Part IV

Department of Health and Human Services

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45 CFR Part 158

Medical Loss Ratio Requirements Under the Patient Protection and 
Affordable Care Act; Final Rule

Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / 
Rules and Regulations

[[Page 76574]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 158

[CMS-9998-FC]
RIN 0938-AQ71

Medical Loss Ratio Requirements Under the Patient Protection and 
Affordable Care Act

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period revises the regulations 
implementing medical loss ratio (MLR) requirements for health insurance 
issuers under the Public Health Service Act in order to address the 
treatment of ``mini-med'' and expatriate policies under these 
regulations for years after 2011; modify the way the regulations treat 
ICD-10 conversion costs; change the rules on deducting community 
benefit expenditures; and revise the rules governing the distribution 
of rebates by issuers in group markets.

DATES: Effective date. This rule is effective on January 3, 2012.
    Comment date. We will consider comments on Sec.  
158.150(b)(2)(i)(A)(6) and (c)(5) regarding the treatment of ICD-10 
conversion costs, and Sec.  158.242(b) and Sec.  158.260 regarding the 
process for providing rebates to group enrollees and reporting of 
rebates that are received at one of the addresses provided in the 
ADDRESSES section of this rule no later than 5 p.m. EST on January 6, 
2012.
    Applicability Date. The amendments to Part 158 generally apply 
beginning January 1, 2012, to health insurance issuers offering group 
or individual health insurance coverage.

ADDRESSES: In commenting please refer to file code CMS-9998-FC. Because 
of staff and resource limitations, we cannot accept comments by email 
or facsimile (Fax) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-9998-FC, P.O. Box 8010, 
Baltimore, MD 21244-8010.
    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-9998-FC, 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 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, 
please 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.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will be also 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) 743-3591.

FOR FURTHER INFORMATION CONTACT: Carol Jimenez, (301) 492-4457.

SUPPLEMENTARY INFORMATION: 
    Comment Subject Areas: We will consider comments on the treatment 
of ICD-10 conversion costs, and the process for providing rebates to 
group enrollees, as discussed in this final rule with comment period 
that are received by the date and time indicated in the DATES section 
of this final rule with comment period.

I. Background

    The Patient Protection and Affordable Care Act (Pub. L. 111-148) 
was enacted on March 23, 2010; the Health Care and Education 
Reconciliation Act (Pub. L. 111-152) was enacted on March 30, 2010. In 
this preamble, we refer to the two statutes collectively as the 
Affordable Care Act. The Affordable Care Act reorganizes, amends, and 
adds to the provisions of Part A of title XXVII of the Public Health 
Service Act (PHS Act) relating to group health plans and health 
insurance issuers in the group and individual markets.
    A request for information relating to the medical loss ratio (MLR) 
provisions of PHS Act section 2718 was published in the Federal 
Register on April 14, 2010 (75 FR 19297). On December 1, 2010, HHS 
published an interim final rule (75 FR 74864) with 60 day public 
comment period, entitled ``Health Insurance Issuers Implementing 
Medical Loss Ratio (MLR) Requirements Under the Patient Protection and 
Affordable Care Act,'' that added a new 45 CFR Part 158. A technical 
correction to the interim final rule was issued on December 30, 2010 
(75 FR 82277).

II. Provisions of the Interim Final Rule and Responses to Comments

    We received approximately 90 public comments on the December 1, 
2010 interim final rule with comment period. Commenters included 
consumer and patient organizations, insurance regulators, health 
insurance issuers, provider groups, actuarial professional group, and 
others. In this final rule, we do not address all of the comments we 
received on the interim final rule, but only those comments that 
pertain to the provisions in this final rule: (1) Rules regarding the 
treatment of ``mini-med'' and expatriate policies; (2) rules governing 
how ICD-10 conversion costs, fraud reduction expenses, and community 
benefit expenditures are accounted for; and (3) rules regarding

[[Page 76575]]

the distribution of rebates in group markets. In this section of the 
preamble, we summarize the provisions of the interim final rule and 
respond to the public comments received on these subjects.

A. ``Mini-med'' Policies (45 CFR 158.110(b)(2), 158.120(d)(3), and 
158.221(b)(3))

    For purposes of the MLR requirements, the interim final rule 
provided separate treatment for mini-med policies with total annual 
benefit limits of $250,000 or less by requiring issuers to report mini-
med experience separately from other experience, by State and by 
market, for the 2011 MLR reporting year. Issuers of mini-med policies 
with total annual benefit limits of $250,000 or less were also directed 
to use a special methodology for calculating the MLR numerator for 
calendar year 2011 reporting and rebate purposes. Specifically, 
incurred claims and activities that improve health care quality are 
multiplied by 2.00 in calculating the MLR for mini-med policies. 
Issuers of mini-med policies were directed to submit a report for each 
of the first three quarters of the 2011 MLR reporting year as provided 
under Sec.  158.110(b), in addition to the annual report required of 
all issuers subject to MLR standards. The authority for this treatment 
of special circumstances is provided under section 2718(c) of the PHS 
Act, which directs HHS to ``take into account the special circumstances 
of smaller plans, different types of plans, and newer plans.''
    The preamble to the interim final rule notes that, after reviewing 
the quarterly filings of the mini-med policies' 2011 experience, CMS 
would make a determination as to whether this treatment of special 
circumstances should continue and, if so, whether it should be modified 
beyond the 2011 MLR reporting year.
    Comment: We received comments that both support and oppose an 
adjustment for issuers of mini-med policies. Commenters that supported 
a special methodology for mini-med experience generally claimed that 
the unique cost structure of mini-med policies make issuers unable to 
meet the statutory MLR without an adjustment to the reporting 
methodology. Specifically, issuers of mini-med policies asserted that 
such plans have higher administrative costs relative to benefits paid, 
as compared to other more comprehensive coverage, as a result of--(1) 
Higher enrollee turnover; (2) shorter enrollment periods; and (3) lower 
incurred claims due to high deductibles and limited coverage. Two 
commenters asserted that an adjustment is necessary to preserve access 
to mini-med policies for employers and participants.
    Three commenters requested that HHS extend until 2014 the 2011 
special circumstances methodology of a multiplier of 2.00 for mini-med 
policies. These commenters stated that the unique structure of these 
plans would remain consistent between 2011 and 2014, after which a 
total prohibition on annual dollar limits under PHS Act section 2711 
will be in effect, other than for grandfathered plans in the individual 
market. These commenters asserted that without this MLR treatment for 
the interim years, before new coverage options and premium tax credits 
are available through the Affordable Insurance Exchanges, issuers may 
withdraw from the market. This withdrawal could leave employers unable 
to afford other health care coverage for their employees, leaving some 
consumers without affordable health care coverage that will be 
available to them in 2014.
    Many commenters, however, opposed any continuation of this 
methodology for issuers of mini-med policies. Consumer advocates, 
healthcare organizations, and a labor organization asserted that mini-
med policies do not need a special circumstances adjustment. They noted 
that issuers did not request such an adjustment during the public 
comment period of the National Association of Insurance Commissioners 
(NAIC) model rule making process and that the NAIC did not recommend 
such an adjustment. They also asserted that issuers of mini-med 
policies should be required to operate with the same efficiency as more 
robust policies and to meet the statutory MLR standard. Two commenters 
did not support extending the adjustment for mini-med policies any 
longer than 2014.
    Response: In determining the appropriate treatment for mini-med 
policies with total annual benefit limits of $250,000 or less with 
respect to MLR, we considered commenters' concerns about loss of 
coverage if issuers of mini-med policies exit the market absent 
separate MLR treatment. We also considered commenters' concerns about 
the need for issuers to operate efficiently and provide valuable 
coverage.
    In the interim final rule, we requested three quarters of data, 
including amount of premium spent on claims, quality improving 
activities, non-claims costs, and taxes. This final rule is being 
issued after receiving and analyzing two quarters of this data. We 
believe it is necessary to determine the final MLR policy as to the 
treatment of mini-med policies, despite the fact that we have not yet 
analyzed the third quarter data, because otherwise we could not issue 
rules in time for the special circumstances adjustment to be effective 
for 2012 and to minimize the chance that issuers may withdraw these 
policies due to uncertainty about MLR requirements. After analyzing the 
first and second quarter data, seeking to strike a balance that ensures 
continued access for consumers while ensuring that they receive value 
for their premium dollar, we have determined that in 2012, the 
appropriate multiplier for mini-med policy experience is 1.75, in 2013, 
the appropriate multiplier is 1.50, and in 2014, the appropriate 
multiplier is 1.25.
    The Department only addresses mini-med policy experience for the 
2012, 2013, and 2014 MLR reporting years. Section 2711 of the PHS Act 
provides that for policy years beginning on and after January 1, 2014, 
when the Affordable Insurance Exchanges will be in place to provide 
consumers with better, more affordable coverage options, non-
grandfathered plans in all markets and grandfathered plans in the large 
and small group markets will no longer be permitted to have annual 
dollar limits. Thus, policies with annual limits under Sec.  
158.110(d)(3) will no longer exist in those markets. We have applied a 
multiplier through the 2014 MLR reporting year to account for mini-med 
policies with a plan year that begins after January 1, 2013 and ends 
sometime in 2014.
    Based upon the data we received from the first and second quarterly 
reports of 2011, without any multiplier, in 2011, seven of the 12 
issuers in the individual market, and six of the 15 issuers in the 
large group market would not meet the MLR of 80 and 85 percent, 
respectively. With the multiplier of 2.00, three of the 12 issuers in 
the individual market would not meet the MLR standard \1\, and all 
issuers in the small group or large group market would meet the MLR 
standard.
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    \1\ This analysis takes into consideration issuers that operate 
in States which have been granted an adjustment to the MLR standard 
for the individual market, pursuant to Sec.  158.301.
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    A graduated allowance for an adjustment of 1.75 in 2012, 1.50 in 
2013 and 1.25 in 2014 will incentivize issuers to reduce their 
administrative expenses and operate more efficiently to ensure that 
they meet the MLR standard while minimizing issuer market withdrawal, 
maintaining access to coverage for consumers and ensuring that they 
receive greater value from these policies

[[Page 76576]]

until 2014. We plan on publishing the data used in this analysis in the 
spring of 2012.

B. ``Expatriate'' Policies (45 CFR 158.110(b)(2), 158.120(d)(4), and 
158.221(b)(4))

    The interim final rule defines expatriate policies as ``group 
policies that provide coverage for employees working outside their 
country of citizenship, employees working outside of their country of 
citizenship and outside the employer's country of domicile, and non-
U.S. citizens working in their home country * * *'' (45 CFR 
158.120(d)(4)). Several public comments were received regarding the 
definition of expatriate policies. In this final rule, we are amending 
the definition of expatriate policies to read ``group policies that 
provide coverage to employees, substantially all of whom are: Working 
outside their country of citizenship; working outside of their country 
of citizenship and outside the employer's country of domicile; or non-
U.S. citizens working in their home country * * *.'' We add the phrase 
``substantially all of whom are'' to ensure that issuers do not 
classify a policy as an expatriate policy when expatriates account for 
only a limited proportion of the covered population.
    The preamble to the interim final rule states that expatriate 
policies issued by non-U.S. issuers for services rendered outside the 
United States are not subject to the MLR regulation, nor are expatriate 
policies written on a form not filed with and approved by a State 
insurance department. Issuers must report expatriate policy experience 
separately from other experience for the 2011 MLR reporting year and 
must aggregate that experience on a national level for the large group 
market and the small group market. The definition of expatriate 
policies does not include policies issued in the individual market.
    Section 158.221(b)(4) directs issuers of expatriate policies to use 
a separate methodology for calculating the MLR numerator for reporting 
and rebate purposes for the 2011 MLR reporting year. Specifically, 
incurred claims and activities that improve health care quality are to 
be multiplied by a factor of 2.00 in calculating the MLR. The interim 
final rule directs issuers to submit a report for each of the first 
three quarters of the 2011 MLR reporting year. The preamble to the 
interim final rule notes that, after reviewing the quarterly filings of 
the expatriate policies based on 2011 experience, we will make a 
determination as to whether this treatment should continue or be 
modified beyond the 2011 MLR reporting year.
    Comment: CMS received six comments regarding the treatment of 
expatriate policies in the interim final rule. The majority of the 
commenters supported the interim final rule's treatment of expatriate 
policies for the 2011 MLR reporting year. Specifically, issuers and 
trade associations supported the special methodology for calculating 
the MLR numerator for expatriate policies, noting that these policies 
have higher administrative costs as a result of (1) Providing 
international access to providers; (2) maintaining emergency evacuation 
services; and (3) navigating health care and legal systems in different 
countries. These policies may also have unpredictable experience 
depending on the location of the enrollees. One issuer stated that a 
large portion of international policies are sold through brokers, and 
high broker fees contribute to the increased administrative cost. We 
received no comments opposing a special circumstances adjustment for 
expatriate policies.
    Other issuers and commenters suggested that the interim final 
rule's adjustment to the MLR numerator does not do enough to relieve 
expatriate issuers from the MLR standards provided in the Affordable 
Care Act. One issuer claimed that the MLR reporting requirement creates 
an unlevel playing field because U.S. issuers must disclose proprietary 
cost structure information under the MLR reporting requirements, while 
foreign issuers would not be required to do so. Two commenters 
specifically suggested that the adjustment for expatriate policies 
should extend beyond the 2011 MLR reporting year, either temporarily or 
permanently.
    Response: We recognize the unique administrative costs associated 
with expatriate policies as evidenced from the public comments and the 
first two quarterly reports of 2011.\2\ Commenters asserted that the 
costs of: (1) Identifying and credentialing providers worldwide in 
countries with different licensing and other requirements; (2) 
processing claims submitted in various languages; (3) standardizing 
billing procedures; (4) providing translation and other services to 
enrollees; and (5) helping subscribers locate qualified providers 
internationally justify a separate methodology that takes into account 
these special circumstances. After reviewing the first and second 
quarter data, we have determined that continuing a special 
circumstances adjustment of a multiplier of 2.00 to the numerator of 
the MLR is appropriate for expatriate policies.
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    \2\ CMS is basing its determination on two quarters of data for 
the same reasons set forth above with respect to mini-med policies.
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    According to the year-to-date second quarter data provided by 
issuers of expatriate policies, without applying the special 
circumstances adjustment provided in the interim final rule, the 
majority of issuers in the large group market \3\ reported credibility-
adjusted MLRs significantly below 85 percent MLR standard. However, 
with the multiplier of 2.00, we estimate that issuers' credibility-
adjusted MLRs will meet the MLR standards, thus ensuring that Americans 
working abroad will still have access to U.S.-based coverage.
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    \3\ No issuers of expatriate policies in the small group market 
had credible experience in 2011. However, they may become credible 
in 2012, when issuers' MLRs will generally be calculated based on 
multiple years of experience and data.
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    Based on the reported data and on information from stakeholders 
concerning this unique market, we believe that a multiplier of two is 
appropriate to ensure that issuers remain in the expatriate market. As 
discussed previously, expatriate policies have significantly different 
and additional administrative costs than do policies that provide 
primarily domestic coverage. In addition, the experience of expatriate 
policies is subject to more variability than other types of policies, 
due to the fact that they primarily cover care in all parts of the 
world in a wide variety of health care systems, which also makes 
pricing to a particular MLR standard much more difficult. Due to this 
inherent uncertainty in pricing and their unique administrative costs, 
we have determined that it is appropriate to provide this special 
circumstances multiplier to expatriate policies. We understand that the 
experience of expatriate policies is significantly more variable than 
the experience of other types of policies, warranting a larger 
adjustment to account for this. This multiplier of two applies to 
expatriate policies beginning in the 2012 MLR reporting year, and 
applies indefinitely.
    We believe that the MLR standards do not materially affect U.S. 
issuers' ability to compete with foreign issuers, in part because U.S. 
employers want to provide their employees who are working abroad and 
their dependents with comprehensive health insurance that meets the 
unique needs of expatriates and provides benefits that are comparable 
to the coverage of their U.S.-based employees. Also, U.S.-based issuers 
generally will not be required to disclose any proprietary financial 
structure information that is not already

[[Page 76577]]

being provided to the States through the NAIC's Supplemental Health 
Care Exhibit (SHCE).

C. Fraud Reduction Expenses (45 CFR 158.140(b)(2)(iv) and 
158.150(c)(8))

    The interim final rule describes the types of expenses that are 
adjustments to claims under the MLR disclosure and reporting 
requirements. Specifically, under Sec.  158.140(b)(2)(iv), the amount 
of claim payments recovered through fraud reduction efforts, not to 
exceed the amount of fraud reduction expenses, can be included in 
incurred claims. Fraud reduction efforts include fraud prevention as 
well as fraud recovery. In addition, the interim final rule provides 
that fraud prevention activities are excluded from quality improvement 
activities (QIA).
    Comment: We received 12 comments on the treatment of fraud 
prevention activities in the interim final rule. Eleven of the 
commenters supported the inclusion of fraud prevention activities as 
QIA. Specifically on this point, issuers argued that fraud prevention 
activities improve patient safety, and deter the use of medically 
unnecessary services, thus providing a higher level of health care 
quality. Commenters asserted that, by not including all fraud reduction 
efforts as QIA, issuers would reduce their fraud reduction efforts, 
which would decrease patient safety and quality of care. Two commenters 
added that by prohibiting plans from including the costs they incur for 
fraud prevention activities as QIA, the rule likens the costs to wages, 
overhead, and advertising expenses. Two trade associations asserted 
that HHS should be consistent with the Administration's efforts to 
prevent fraud in government programs, stating that excluding fraud 
prevention as QIA undermines the federal government's efforts to 
prevent, detect, and prosecute fraud. Two commenters provided 
information regarding the savings that fraud prevention programs can 
provide issuers. This information suggested that among large issuers 
surveyed, the net savings from anti-fraud operations were more than $3 
per enrollee in 2008, that medium sized issuers reported $1 savings per 
enrollee, and that small issuers estimated $2.70 savings per enrollee.
    Not all commenters supported characterizing fraud prevention 
activities as QIA. A provider association expressed concerns that 
Pharmacy Benefit Managers may improperly try to categorize certain 
activities as fraud detection due to the lack of a clear definition for 
fraud detection and recovery. This commenter asserted that excluding 
fraud prevention activities from QIA is an appropriate way to apportion 
medical costs versus administrative costs, and urged HHS to allow only 
those efforts to reduce fraud, as defined by Medicare, to be allowed to 
be deducted from an issuer's administrative costs.
    Response: We considered the comments regarding fraud reduction 
expenses, and are maintaining the MLR treatment of fraud reduction 
expenses provided in the interim final rule. We will continue to 
exclude fraud prevention activities from QIA. The current treatment of 
fraud reduction efforts under the MLR rule is consistent with the 
NAIC's position and adequately addresses the concerns of issuers, while 
still recognizing that many fraud prevention efforts are not directly 
targeted towards quality improvement. We recognize the importance of 
fraud reduction expenses and the disincentive it could create if these 
expenses were treated solely as non-claims and non-quality improving 
expenses. Thus, allowing payments recovered through fraud reduction 
efforts as adjustments to incurred claims gives issuers the opportunity 
to recoup monies invested to deter fraud. Modifying the interim final 
rule to allow an unlimited adjustment would undermine the purpose of 
requiring issuers to meet the MLR standard in the Affordable Care Act.
    We believe that issuers will continue to invest in fraud reduction, 
including fraud prevention, regardless of the MLR treatment and 
encourage issuers to do so. Issuers have incentives to reduce fraud 
regardless of how this expense is classified within the MLR, as 
demonstrated from the comments and data provided by issuers. By 
allowing fraud reduction expenses as an adjustment to incurred claims, 
up to the amount of fraudulent claims recovered, the interim final rule 
mitigates any disincentive issuers may have to invest in these 
programs. We appreciate the comments from the industry regarding the 
savings that result from fraud reduction efforts, which support the MLR 
policy in the interim final rule that the amount of claims payments 
recovered through fraud reduction efforts, not to exceed the amount of 
fraud reduction expenses, should be included in incurred claims.

D. ICD-10 Conversion Expenses (45 CFR 158.150(b)(2)(i)(A)(6) and 
(c)(5))

    Under Sec.  158.150(a), health insurance issuers are required to 
submit an annual report to the Secretary documenting their expenditures 
for activities that improve health care quality. As provided by Sec.  
158.150(b), in order for an activity to be considered a QIA, it must be 
designed, among other things, to improve health quality and increase 
the likelihood of desired health outcomes in ways that are capable of 
being objectively measured and of producing verifiable results and 
achievements. In addition, the activity must be primarily designed to--
(1) Improve health outcomes; (2) prevent hospital readmissions; (3) 
improve patient safety; or (4) implement, promote and increase wellness 
and health activities. Health Information Technology (HIT) expenditures 
that meet the requirements under Sec.  158.150 are considered QIA. The 
list of activities excluded as QIA includes--(1) Those activities 
designed primarily to control or contain costs; and (2) those that 
establish or maintain a claims adjudication system, including costs 
directly related to upgrades in HIT that are designed primarily or 
solely to improve claims payment capabilities or to meet regulatory 
requirements for processing claims (for example, costs of implementing 
new administrative simplification standards and code sets adopted 
pursuant to the Health Insurance Portability and Accountability Act 
(HIPAA), 42 U.S.C. 1320d-2, as amended, including ICD-10 requirements). 
The preamble to the interim final rule stated that CMS would examine 
the reported conversion costs of ICD-10 to determine whether the policy 
to exclude these costs from QIA should be revisited. In addition, the 
interim final rule specifically requested comments on whether ICD-10 
should be included as a QIA.
    Comment: Provider associations and advocacy groups supported the 
interim final rule's treatment of ICD-10. Specifically, provider 
associations contended that ICD-10 does not have any bearing on the 
treatment that an enrollee receives, and that there is no direct impact 
on patient outcomes, even if it benefits the medical community as a 
whole. Commenters also noted that issuers will achieve greater 
administrative efficiency with ICD-10's more detailed coding, allowing 
claims to be paid more efficiently. For these reasons, such commenters 
asserted that these costs are administrative in nature and should be 
excluded from QIA. A consumer advocate further suggested that excluding 
ICD-10 costs from QIA would prevent issuers from reclassifying 
administrative tasks as QIAs.
    Issuers opposed the interim final rule's treatment of ICD-10 
conversion costs, asserting that ICD-10 costs are a QIA because they 
are meant to improve data collection for diagnoses and medical 
procedure coordination, patient

[[Page 76578]]

safety, health outcomes, and medical research. They also stated that 
ICD-10 conversion allows for alignment of quality and wellness 
programs, which are QIA. In support of classifying ICD-10 expenses as 
QIA, a health insurance issuer stated that ICD-10 coding can improve 
health plans' ability to share data among clinicians for the purpose of 
quality improvement and care coordination activities, thereby allowing 
for a better understanding of diagnoses and better treatment. An issuer 
and an industry association asserted that because ICD-10 implementation 
is a legal requirement, the burden of cost should not be on the 
issuers.
    Finally, issuers acknowledged that conversion costs can be tracked 
and separated from maintenance costs through current accounting 
processes, and most supported excluding ICD-10 maintenance costs 
occurring after October 1, 2013 from QIA.
    Response: In response to the comments highlighting the dual nature 
of ICD-10, we considered the impact of ICD-10 on improving data 
collection for diagnoses and medical procedure coordination, patient 
safety, health outcomes, and medical research. In addition, we 
consulted with the Office of E-Health Standards and Services (OESS) 
within CMS. OESS oversees ICD-10 and considers some of the impact of 
ICD-10 to be QIA, and supports the treatment of ICD-10 set forth in 
this final rule.
    We also recognize that ICD-10 has some claims processing functions 
as well. This final rule recognizes the dual nature of ICD-10 and 
includes as QIA ICD-10 conversion costs incurred in 2012 and 2013 up to 
0.3 percent of an issuer's earned premium in the relevant State market 
in each of those years. Analysis of the 2010 SHCE filings reveals that 
ICD-10 expenses, as a percent of earned premium, account for less than 
0.02 percent of issuer spending in each market (individual, small group 
and large group). However, significant ICD-10 conversion efforts will 
be made in 2012 and 2013, as issuers cannot convert to ICD-10 until 
after January 1, 2012, when the new version 5010 standards for 
electronic health care transactions will be upgraded. Federal HIPAA 
regulations direct that the ICD-10 transition must be completed by 
October 2013. The industry provided a range of percentages using their 
projected expenditures of ICD-10 conversion costs on their MLRs, if 
allowed as a QIA. After reviewing the data provided by issuers and 2010 
SHCE filings, we chose a cap that allows as QIA amounts that issuers 
projected spending on ICD-10 conversion, without permitting issuers to 
include claims adjudication systems costs in QIA.
    In addition, ICD-10 maintenance costs are excluded from QIA in this 
final rule, based on the industry's collective comments stating that 
separating conversion costs from maintenance costs is feasible, and 
based on their support for excluding ICD-10 maintenance costs from QIA.
    We request further comment on the treatment of ICD-10 conversion 
costs adopted in this final rule. Specifically, we are soliciting 
comments on whether including as QIA ICD-10 conversion costs as a QIA 
is appropriate, and if the cap set at up to 0.3 percent of an issuer's 
earned premium is an appropriate amount based on past and future ICD-10 
conversion expenses.

E. Community Benefit Expenditures (45 CFR 158.160(b)(2)(vi) and 
158.162(b)(1)(vii), (c)(1))

    In the interim final rule, we requested comment on the treatment of 
community benefit expenditures. The interim final rule allows a not-
for-profit, tax-exempt issuer to deduct from earned premium the amount 
of its community benefit expenditures, limited to the State premium tax 
rate applicable to for-profit issuers. The interim final rule also 
requires a not-for-profit issuer to report community benefit 
expenditures ``in lieu of taxes * * * but not to exceed the amount of 
taxes [it] would otherwise be required to pay.'' (45 CFR 
158.162(c)(1)).
    Comment: CMS received nine comments on the treatment of community 
benefit expenditures, including from six issuers, a labor union, a law 
firm, and an issuer coalition organization. Seven commenters agreed 
that the MLR rule should not discourage not-for-profit issuers from 
providing services and financial support to the community. Three 
commenters expressed concern that limiting community benefit 
expenditures deductibility would discourage community benefit 
expenditures and community investment. Two commenters suggested that 
the definition of community benefit expenditures be expanded to include 
expenses not specifically targeted at increasing access to health care. 
Another commenter suggested that community benefit expenditures be 
considered QIA.
    Some commenters expressed concern that the treatment of community 
benefit expenditures in the interim final rule would result in unequal 
treatment among not-for-profit issuers, and between not-for-profit and 
for-profit issuers, for several reasons. Five commenters noted that the 
community benefit expenditures deduction would not be uniformly 
available to a not-for-profit issuer because State premium tax rates 
vary by State, and within some States, vary by issuer type (for 
example, PPO or HMO). They also suggested that the varying premium tax 
rates by type of issuer within a State would result in confusion when 
determining which premium tax rate to apply to the community benefit 
expenditures limit. The commenters asserted that in States without a 
premium tax, a not-for-profit issuer's community benefit expenditures 
would not be deductible and therefore its MLR would be relatively lower 
than an issuer in a State with a premium tax.
    Six commenters suggested that a flat national community benefit 
expenditures deduction limit would result in a more even playing field, 
as well as simplify the administrative burden in determining community 
benefit expenditures deduction limits. Five commenters proposed a flat 
deduction limit ranging from three to five percent of earned premium. 
Another commenter proposed allowing not-for-profit issuers to deduct 
all community benefit expenditures from earned premium.
    Four commenters asserted that because of the different corporate 
structures, business plans, missions, and tax liabilities of not-for-
profit and for-profit issuers, it would be speculative and burdensome 
to determine what a not-for-profit issuer's hypothetical tax liability 
would be if it were a for-profit issuer. Finally, issuers expressed 
concern that not-for-profit issuers have fundamentally different 
missions than for-profit issuers, that tax liability is determined 
based on a series of credits and adjustments built into a taxable 
issuer's business plan, and that it would be too burdensome and 
speculative for a tax-exempt or not-for-profit issuer to estimate its 
``but for'' tax liability.
    Response: Although we share the concern that the MLR standard 
should not discourage a not-for-profit issuer from spending on 
community benefit expenditures, we are not persuaded that the 
definition of community benefit expenditures should generally be 
expanded and maintain the definition currently in Sec.  158.160(c)(2). 
We note that existing laws pertaining to not-for-profit issuer status 
and the benefits associated with this status continue to apply. 
However, based on the comments regarding the variance of State premium 
tax rates by type of issuer, in this final rule the community benefit 
expenditures deduction is revised to

[[Page 76579]]

help ameliorate such disparate effects. Currently, 48 States have 
premium taxes, but tax rates in many States differ for different kinds 
of plans and in some States they differ for not-for-profit and for-
profit issuers. Several States do not tax HMOs or not-for-profit 
issuers at all. In this final rule, we modify Sec.  158.162(b)(1)(vii) 
to allow an issuer to deduct either the amount it paid in State premium 
taxes, or the amount of its community benefit expenditures up to a 
maximum of the highest State premium tax rate in the State, whichever 
is greater. This treatment does not create a disincentive against 
community benefit expenditures, while equalizing some of the 
disparities that were identified in comments to the interim final rule.
    We also considered the comments regarding a hypothetical tax 
reporting requirement in Sec.  158.162(c)(1) and agree that it is not 
necessary. Because of the modification to the community benefit 
expenditures deduction limit, it is no longer necessary for an issuer 
to report community benefit expenditures limited by its hypothetical 
tax liability, and thus this final rule removes that requirement. By 
removing Sec.  158.162(c)(1) of the interim final rule, this final rule 
simplifies the reporting requirement.
    Section 158.160(b)(2)(vi) of the interim final rule directs issuers 
to report non-claims costs by type, including all community benefit 
expenditures. This reporting standard applies regardless of whether an 
issuer elects to adjust earned premium for community benefit 
expenditures, as permitted by Sec.  158.162(b)(1)(vii) in this final 
rule.

F. Rebates to Enrollees in Group Markets (45 CFR 158.241(b), 
158.242(b), 158.243(a)(1), 158.250, and 158.260(c))

    In Sec.  158.242(b), the interim final rule directs issuers in the 
large and small group markets that have not met the applicable MLR 
standard to provide any owed rebate to the policyholder and each 
subscriber, ``in amounts proportionate to the amount of premium each 
paid.'' The interim final rule also allows an issuer to enter into an 
agreement with the group policyholder to distribute the rebates on 
behalf of the issuer if the policyholder agrees to distribute it 
proportionately as directed and provide detailed documentation 
regarding the distribution to each subscriber. However, under the 
interim final rule, the issuer remains liable for complying with all of 
its obligations under the statute and for maintaining records that 
demonstrate rebates were provided accurately to individual enrollees.
    Comment: CMS received several comments regarding rebate 
distribution in the group market. Generally, commenters supported the 
pro rata distribution of rebates to the policyholder and each 
subscriber. Many commenters, however, expressed significant concern 
about the logistical and tax problems inherent in the interim final 
rule's mechanism for providing rebates in the group markets. For 
example, several issuers expressed concern that the issuer lacks access 
to the information needed to distribute rebates to individual enrollees 
covered under a group policy, asserting that the policyholder (and not 
the issuer) has information regarding the premium contribution amount 
from the employer and the employee. A few commenters expressed their 
concern that it is unfair for issuers to remain liable under the 
interim final rule, even when the issuer enters into an agreement with 
a policyholder, since issuers are unable to monitor or control the 
actions of the policyholder.
    Issuers, trade associations, and a State regulator recommended that 
issuers be allowed to distribute rebates to policyholders, and that the 
policyholder should become responsible for distributing rebates to 
enrollees. Two commenters noted that the proposed distribution 
treatment should be governed by the Employee Retirement Income Security 
Act of 1974, as amended (ERISA). However, one commenter asserted that 
rebates should not be considered plan assets under ERISA for which plan 
administrators owe a fiduciary duty.
    A few commenters also recommended allowing issuers to rely on the 
representations made by policyholders that they calculated and 
disbursed rebates as required and that making a good faith effort to 
obtain the information from policyholders should fulfill issuers' 
reporting obligations under the interim final rule.
    Subsequent to the closing of the public comment period on the 
interim final rule, CMS received several inquiries to our public email 
address asking about the tax implications to issuers, employers, and 
consumers, as a result of the mechanism for providing rebates 
established in the interim final rule.
    Response: In response to the comments we received and the inquiries 
to our public email address, we examined the issue in consultation with 
the Departments of Labor and Treasury. Requiring issuers to apportion 
and pay rebates directly to policyholders and each of their subscribers 
(who are generally employees) in the group health plan context, as 
provided by the interim final rule, has unintended administrative 
consequences as well as potential tax consequences for issuers, 
employers, and consumers. For the portion of the premiums that were 
paid with pre-tax dollars (that is, through an Internal Revenue Code 
section 125 cafeteria plan), which is the case for a significant 
proportion of group enrollees, rebates paid to enrollees may be treated 
as wages, raising issues as to the application of employment taxes and 
the potential that an issuer may have to administer any applicable 
withholding obligations.
    While the above burdens and logistical problems could be avoided by 
simply providing for rebates to be paid to the policyholder (for 
example, employer), the statute directs that enrollees receive the 
benefit of rebates and we are committed to ensuring that this is the 
case. Having considered the tax and other logistical implications of 
providing rebates to enrollees in a group health plan, the effect on 
consumers, and the burden on issuers and employers, this final rule 
directs issuers in the group markets to provide rebates to the group 
policyholder but, as discussed below, includes protections designed to 
satisfy, in a practical way, the objective of benefitting subscribers 
and their related enrollees. In providing rebates to the group 
policyholder, the final rule maintains the definition of enrollee for 
purposes of the rebate provisions, found in Sec.  158.240(b), which 
states that ``enrollee'' means the subscriber, policyholder, and/or 
government entity that paid the premium for health care coverage 
received by an individual during the relevant MLR reporting year. 
Issuers must provide rebates, if any, to policyholders covered during 
the MLR reporting year on which the rebate is based.
    The final rule establishes separate standards for ERISA-covered 
group health plans and plans that are neither covered by ERISA nor are 
governmental plans (for example, church plans). The handling of rebates 
by ERISA-covered plans and church plans are not subject to direct CMS 
regulation. Thus, the separate standards for such plans in the final 
rule are designed to acknowledge the different legal and regulatory 
frameworks that apply to those plans while still establishing, either 
directly or through reliance on other applicable legal standards, such 
as ERISA, a requirement that is consistent with the statutory directive 
that MLR rebates benefit enrollees. Non-Federal governmental plans are 
subject to direct regulation by CMS and we are issuing

[[Page 76580]]

an interim final rule contemporaneous with this final rule that 
addresses rebates to such plans.
    Many group health plans are employee benefit plans that are subject 
to ERISA. Through consultation regarding this final rule, the 
Department of Labor has advised CMS that, in the context of ERISA-
covered group health plan coverage, rebates paid to the policyholder in 
accordance with Sec.  158.242(b) of this final rule may have plan 
asset, fiduciary responsibility, and prohibited transaction 
implications under Title I of ERISA. Distributions from insurance 
companies to their policyholders, including employee benefit plans, 
take a variety of forms, including refunds, dividends, demutualization 
payments and excess surplus distributions. ERISA, Department of Labor 
rulings, and other authority currently provide guidance on the proper 
handling of such distributions to employee benefit plans covered under 
Title I of ERISA. To the extent MLR rebates constitute plan assets of 
an ERISA-covered group health plan, decisions regarding the handling 
and allocation of the rebate would have to be made by a plan fiduciary 
consistent with ERISA. The Department of Labor has also advised that it 
is publishing guidance on its Web site at http://www.dol.gov/ebsa/healthreform, contemporaneously with this final rule, regarding the 
duties of employers/plan sponsors and other fiduciaries responsible 
under sections 403, 404 and 406 of ERISA for decisions relating to MLR 
rebates. Accordingly, rebates paid in connection with policies for 
ERISA-covered employee benefit plans may constitute plan assets that 
are required to be handled in accordance with the requirements of 
ERISA.
    With respect to non-Federal governmental plans, there currently is 
no similar legal framework set forth in Federal law governing 
distributions from issuers to their plan policyholders. Accordingly, 
under the authority in section 2792 of the PHS Act to promulgate 
regulations determined ``appropriate'' to ``carry out'' the provisions 
of part A of title XXVII of the PHS Act, which include PHS Act section 
2718, we are, in a separate interim final rule being published 
contemporaneously with this final rule, directing that the portion of 
rebates attributable to the amount of premium paid by subscribers of 
non-Federal governmental plans be used for the benefit of subscribers, 
which ensures that enrollees in such plans similarly receive the 
benefit of rebates.
    With respect to rebates paid to a policyholder that is a group 
health plan but is not a governmental plan and not subject to ERISA, 
for example a church plan, this final rule provides that an issuer may 
make rebate payment to the policyholder if the issuer receives written 
assurance from the policyholder that the rebate will be used for the 
benefit of current subscribers using one of the options prescribed for 
non-Federal governmental plans. Without such written assurance, the 
issuer must pay directly the policyholder's subscribers covered by the 
policy during the MLR reporting year on which the rebate is based.
    The purpose of the MLR is to provide enrollees value for their 
premium dollar, and issuers must meet the applicable MLR standard or 
pay rebates based upon aggregated market data in each State. The law 
does not provide for a group health plan MLR or an individual enrollee 
MLR. Thus, rebates are not based upon a particular group health plan's 
experience or a particular subscriber's experience. We believe that 
distributing rebates to subscribers in the manner prescribed by this 
final rule and the interim final rule published contemporaneously with 
this final rule accomplishes the purpose of the MLR requirement, while 
streamlining the rebate process for consumers, employers, and issuers. 
Because the final rule and the interim final rule published 
contemporaneously with this final rule provide that rebates are to be 
distributed to the policyholder for subscribers of group health plans, 
the final rule modifies Sec.  158.241(b) regarding rebates to former 
enrollees, so that Sec.  158.241(b) now applies only to former 
enrollees in the individual market.
    The final rule also provides that issuers must provide notice of 
rebates, if any, to current group health plan subscribers as well as 
group policyholders, and to subscribers in the individual market. The 
notice of rebates to policyholders and subscribers of group health 
plans will be prescribed by the Secretary of Health and Human Services, 
in consultation with the Secretary of Labor.
    The notice must include information about the MLR and its purpose, 
the MLR standard, the issuer's MLR, and the rebate being provided. In 
addition, the notice to policyholders and current subscribers in plans 
that are not subject to ERISA must contain an explanation as to how the 
rebate will be handled. If the plan is subject to ERISA, the notice to 
policyholders and subscribers must contain an explanation that the 
policyholder may have obligations under ERISA's fiduciary 
responsibility provisions with respect to the handling and allocation 
of the rebate and contact information for questions concerning the 
handling and allocation of the rebate under their plan. As noted above, 
the Department of Labor is publishing guidance on its Web site 
contemporaneously with the publication of this final rule that provides 
guidance on the duties of policyholders under ERISA with respect to the 
handling and allocation of rebates in the case of policies that cover 
an employee benefit plan subject to ERISA.
    If the policyholder is a non-Federal governmental plan, the notice 
to the policyholder and subscribers must contain an explanation that 
the policyholder must use the portion of the rebate attributable to 
subscribers' contribution to premium in certain ways for the benefit of 
current subscribers. If the policyholder is not a governmental plan and 
not subject to ERISA, the notice must contain an explanation that the 
policyholder must agree to use the portion of the rebate attributable 
to subscribers' contribution to premium for the benefit of current 
subscribers or the issuer will pay the rebate directly to the 
policyholder's subscribers.
    We believe that the above notice requirement will not only provide 
policyholders and subscribers with information on rebates to be paid, 
and how they will benefit from them, but greater transparency on how 
premium dollars are used by issuers, and how the issuer's MLR compares 
to the standard set by Congress. We believe that these latter two 
purposes would also be served by a notice to policyholders and 
subscribers with MLR information from issuers that do not owe rebates. 
In addition to providing policyholders and subscribers with material 
information on how their premium dollars are used, the provision of 
such a notice would create an incentive to spend as high a percentage 
of premium dollars on care and quality improvement as possible, rather 
than just enough to avoid paying rebates.
    Because the interim final rule did not discuss the possibility of a 
notice requirement for issuers that do not owe rebates, and the public 
has not had an opportunity to comment on such a requirement, we have 
not included it in this final rule but intend to amend this rule 
pursuant to comments. We invite comment on the fact that the current 
notice requirement only applies to issuers that owe rebates, and that 
as a result, policyholders and subscribers of issuers not owing rebates 
would not receive MLR information. We also invite comment on the idea 
of the provision of notices to subscribers and policyholders not 
receiving rebates at the same time

[[Page 76581]]

that subscribers and policyholders receiving notices of rebates get 
theirs in 2012 and beyond.
    We also are considering whether it would be useful to include 
information in notices about the issuer's prior year MLR, so that 
enrollees could see whether the issuer is doing a better or worse job 
than the year before of efficiently using premium revenue. Information 
showing a less favorable MLR in the current year than that from the 
year before could be useful to policyholders and subscribers in 
predicting what might be expected to happen the next year, and thus in 
making plan choices. Again, because we did not discuss or seek comment 
on such a requirement in the interim final rule, we invite public 
comment on whether we should impose a requirement that it be included 
for all MLR notices in 2012 and/or subsequent years.
    Under Sec.  158.242(b)(4) of the final rule, if a group health 
plan, regardless of whether it is subject to ERISA, has been terminated 
at the time of rebate payment and the issuer cannot, despite reasonable 
efforts, locate the policyholder or employer whose employees were 
enrolled in the group health plan, the issuer must distribute the 
entire rebate (both the policyholder and subscriber's portions of the 
rebate) to the subscribers of the group health plan enrolled during the 
MLR reporting year on which the rebate was calculated by dividing the 
rebate equally among all subscribers entitled to a rebate. Since 
issuers do not know how much of a group health plan premium was paid by 
the policyholder and how much each subscriber contributed, issuers 
would not be able to divide rebates based upon each subscriber's 
contribution.
    The final rule also modifies the minimum threshold for issuer 
payments of rebates in the group market from $5.00 per subscriber to a 
total of $20.00 for the policyholder portion and subscriber portion of 
the rebate combined when the rebate is paid directly to the 
policyholder. When an issuer pays the rebate directly to each 
subscriber in a group health plan, as provided in Sec.  158.242(b)(3) 
and (4), or pays rebates in the individual market, the minimum rebate 
threshold remains at $5.00 per subscriber. Finally, in Sec.  
158.260(c), the final rule modifies issuers' rebate reporting 
requirements to conform to changes in how rebates are provided in group 
markets, which we believe also simplifies the reporting requirements.
    We request comment on the treatment of rebates in group markets. We 
request comments specifically on whether the mechanism provided in this 
final rule solves or meaningfully reduces the logistical challenges of 
providing rebates to group health plans and their subscribers and on 
other potential solutions to these challenges while ensuring that 
enrollees benefit when rebates are paid.

III. Provisions of the Final Rule

    Those provisions of this final rule that differ from the interim 
final rule are:
     Mini-med Plans. Issuers of policies with total annual 
benefit limits of $250,000 or less must continue for 2012, 2013 and 
2014 to report mini-med experience separately from other experience and 
must continue to aggregate it by State and by (individual, small group, 
or large group) market. Issuers of mini-med policies must apply a 
special circumstances adjustment to the numerator of their MLR by 
multiplying the total of the incurred claims plus expenditures for 
activities that improve health care quality by a factor of 1.75 for the 
2012 MLR reporting year, 1.50 for the 2013 MLR reporting year and 1.25 
for the 2014 MLR reporting year. For the 2012, 2013 and 2014 MLR 
reporting years, mini-med experience will be reported annually, but not 
quarterly.
     Expatriate Plans. Issuers of expatriate plans must 
continue to aggregate and report the experience from these policies on 
a national basis, separately for the large group market and small group 
market, and separately from other policies. Issuers of expatriate 
policies must apply a special circumstances adjustment to the numerator 
of their MLR by multiplying the total of the incurred claims plus 
expenditures for activities that improve health care quality by a 
factor of 2.0 beginning with the 2012 MLR reporting year. This applies 
indefinitely. Expatriate experience will be reported annually, but not 
quarterly. The definition of expatriate policies is amended to read 
``group policies that provide coverage to employees, substantially all 
of whom are: Working outside their country of citizenship; working 
outside of their country of citizenship and outside the employer's 
country of domicile; or non-U.S. citizens working in their home 
country.''
     ICD-10 Conversion Expenses. Activities that are considered 
quality improvement activities (QIA) include, for each of the 2012 and 
2013 MLR reporting years, ICD-10 conversion costs up to 0.3 percent of 
an issuer's earned premium in the relevant State market. Comments are 
solicited on this issue.
     Community Benefit Expenditures. The amount an issuer may 
deduct from earned premium is the higher of either the total amount 
paid in State premium tax, or actual community benefit expenditures up 
to the highest premium tax rate in the State. In addition, not-for-
profit issuers are no longer required to estimate the amount of taxes 
they would have paid if they were for-profit.
     Recipients of Rebates. The rebate distribution process for 
group markets provides that issuers generally distribute rebates to 
group policyholders. Comments are solicited on this issue. With respect 
to policyholders that are a group health plan but not a governmental 
plan or subject to ERISA, issuers must obtain written assurance from 
the policyholder that rebates will be used for the benefit of current 
subscribers or otherwise must pay the rebates directly to subscribers 
covered by the policy during the MLR reporting year on which the rebate 
is based. Issuers must distribute the entire rebate directly to 
subscribers if the group health plan has been terminated. In addition, 
the amount for a de minimis rebate in the group market is less than 
$20.00 per group health plan for rebates that are distributed to the 
policyholder. There are conforming changes made to the reporting 
requirements. Enrollees are required to receive a rebate notification.

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. 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; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

[[Page 76582]]

ICRs Regarding MLR and Rebate Reporting and Notice Requirement (Sec.  
158.101 Through Sec.  158.170, and Sec.  158.250)

    For purposes of MLR and rebate reporting under Part 158, this final 
rule does not impose any new reporting requirements and generally 
conforms to the requirements under the interim final regulation. 
However, CMS plans to publish for public comment, in accordance with 
the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35), the annual 
MLR reporting form that issuers will be required to submit to CMS 
starting in June 2012 for the 2011 reporting year as well as the notice 
of rebates that issuers will be required to send to policyholders and 
subscribers starting in August 2012 for the 2011 report year, in the 
near future.
    One exception is that mini-med and expatriate issuers are no longer 
required to submit quarterly reports, beginning in MLR reporting year 
2012. The quarterly report information collection requirements are 
currently approved under OMB control number 0938-1132. Due to the 
elimination of the quarterly reporting requirement for mini-med and 
expatriate issuers, it is estimated that annual reporting costs for 
such issuers will be reduced by a total of approximately $2.8 million.
    CMS has submitted a copy of these final regulations to OMB in 
accordance with 44 U.S.C. 3507(d) for review of the information 
collections. If you comment on this information collection and 
recordkeeping requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this final rule with comment period; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
9998-FC, Fax: (202) 395-6974; or Email: OIRA_submission@omb.eop.gov.

V. Response to Comments

    Because of the large number of public comments CMS receives on 
Federal Register documents, CMS is not able to acknowledge or respond 
to them individually. A discussion of the comments CMS received is 
included in the preamble of this document.

VI. Regulatory Impact Statement

A. Summary

    This final rule is designed to address several specific issues that 
have arisen regarding section 2718 of the PHS Act, which sets forth 
standards for reporting of certain medical loss ratio (MLR) related 
data to the Secretary on an annual basis by issuers offering coverage 
in the individual and group markets, and calculating and providing 
rebates to policyholders in the event that an issuer's MLR fails to 
meet or exceed the statutory standard. This final rule establishes 
standardized methodologies designed to take into account the special 
circumstances of mini-med policies and expatriate policies in the 
methodologies for calculating measures of the activities that are used 
to calculate an issuer's MLR. This final rule also addresses ICD-10 
conversion costs, expenses related to fraud reduction activities, 
community benefit expenditures and the distribution of rebates in the 
group market. These provisions are generally effective beginning 
January 1, 2012.
    CMS is publishing this final rule to implement the protections 
intended by Congress in the most economically efficient manner 
possible. CMS has examined the effects of this rule as required by 
Executive Order 12866 (58 FR 51735, September 1993, Regulatory Planning 
and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, 
Pub. L. 96-354), section 1102(b) of the Social Security Act, the 
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 
13132 on Federalism, and the Congressional Review Act (5 U.S.C. 
804(2)). In accordance with OMB Circular A-4, CMS has quantified the 
benefits, costs and transfers where possible, and has also provided a 
qualitative discussion of some of the benefits, costs and transfers 
that may stem from this final rule.

B. Executive Orders 12866 and 13563

    Executive Order 12866 (58 FR 51735) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects; distributive impacts; and equity). 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 rule (1) 
Having an annual effect on the economy of $100 million or more in any 
one year, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or Tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any one 
year); and a ``significant'' regulatory action is subject to review by 
the Office of Management and Budget (OMB). As discussed below, CMS has 
concluded that this rule is not likely to have economic impacts of $100 
million or more in any one year, and therefore does not meet the 
definition of ``economically significant rule'' under Executive Order 
12866. Nevertheless, CMS has provided an assessment of the potential 
costs, benefits, and transfers associated with this final regulation.
1. Need for Regulatory Action
    Consistent with the provisions in Section 2718 of the PHS Act, this 
final rule establishes methodologies for calculating the MLR to 
accommodate the special circumstances of two different types of plans, 
mini-med policies and expatriate policies, and a mechanism for 
providing rebates to enrollees in group health plans when the MLR 
standard is not met by an issuer. This final rule also addresses ICD-10 
conversion costs, expenses related to fraud reduction activities and 
community benefit expenditures. Section 2718(b) of the PHS Act 
(captioned ``ensuring that consumers receive value for their premium 
payments'') requires issuers to provide an annual rebate to each 
enrollee if the ratio of the amount of premium revenue expended on 
reimbursement for clinical services and activities that improve quality 
is less than the applicable minimum standard and specifies how the 
rebate is to be calculated.
2. Summary of Impacts
    In accordance with OMB Circular A-4, Table VI.1 below depicts an 
accounting statement summarizing CMS's assessment of the benefits, 
costs, and transfers associated with this regulatory action. Tables 
VI.1.1-VI.1.5 list benefits, costs and transfers for each individual 
provision. For purposes of this regulatory impact analysis, CMS has 
updated relevant information that

[[Page 76583]]

was presented in the December 1, 2010 MLR interim final rule (75 FR 
74892) based on the provisions of this final rule. CMS has limited the 
period covered by this regulatory impact analysis (RIA) to 2012-2013. 
Estimates are not provided for subsequent years because there will be 
significant changes in the marketplace in 2014 related to the offering 
of new individual and small group plans through the Affordable 
Insurance Exchanges. In addition, this RIA focuses only on the 
modifications to the provisions in the interim final rule and estimates 
the effects of those modifications relative to a baseline of no 
modifications. As discussed earlier, CMS anticipates that the 
adjustments to the MLR methodology in this final regulation will help 
ensure that consumers receive value for their premium dollars, have 
continued access to insurance coverage options, and encourage 
efficiency in the disbursement of rebates to group health plan 
enrollees. Additionally, CMS believes that allowing issuers of group 
health plans to distribute all rebates to the policyholder for the 
benefit of subscribers will avoid any increase in tax and 
administrative burdens for consumers and issuers. Elimination of 
quarterly reporting requirements for mini-med and expatriate policies 
will reduce related reporting costs for issuers of those policies. 
Allowing for inclusion of community benefit expenditures in the MLR 
calculation for issuers without requiring not-for-profit issuers to 
calculate hypothetical tax liability will also reduce reporting costs 
for issuers. Executive Order 12866 also requires consideration of the 
``distributive impacts'' and ``equity'' of a regulation. As described 
in this RIA, the adjustment in the MLR methodology for mini-med 
policies will result in an increase in rebate payments to enrollees in 
those policies, while the adjustments in MLR methodology to account for 
costs related to ICD-10 conversion and community benefit expenditures 
in some States will result in reduced rebate payments to affected 
enrollees. Distributing group health plan rebates to the policyholders 
for the benefit of subscribers will also transfer the benefits of those 
rebates from enrollees who leave the plan to new enrollees in the plan. 
In accordance with Executive Order 12866, CMS believes that the 
benefits of this regulatory action justify the costs. The regulatory 
impact analysis does not include estimates related to fraud reduction 
activities since this final rule does not change the policy or 
treatment of fraud reduction expenses.

                                      Table VI.1--Accounting Table: Summary
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Increase in quality of medical care as a result of increased spending on quality improving activities by
    issuers of mini-med policies.
   * Improved health as a result of increased spending on medical care by issuers of mini-med policies.
   * Continued access to mini-med and expatriate health policies for consumers.
   * Benefits to consumers by encouraging issuers to undertake community benefit expenditures.
----------------------------------------------------------------------------------------------------------------
Costs:                                      Estimate           Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/     ($4.2 million).......              2011                 7         2012-2013
 year).
                                     ($4.4 million).......              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of mini-med and expatriate policies due to elimination of requirement to
 file quarterly reports and change in method of disbursement of rebates for group health plans.
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Increased spending on quality-improving activities by issuers of mini-med policies.
   * Increased spending on medical care by issuers of mini-med policies.
   * Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and
    report hypothetical tax liabilities.
   * Reduced tax burden for group health plan enrollees relating to the change in the method of disbursement of
    rebate payments.
   * Increased administrative costs for policyholders that disburse rebates to group health plan subscribers.
----------------------------------------------------------------------------------------------------------------
Transfers:                                  Estimate           Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/     $2.4 million.........              2011                 7         2012-2013
 year).
                                     $2.6 million.........              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies,
 resulting from adjustment in MLR methodology for mini-med policies.
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Savings for consumers and reduced profit for issuers of mini-med policies.
   * Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
    markets, resulting from adjustment in MLR methodology to account for community benefit expenditures and ICD-
    10 conversion costs.
   * Transfer of benefits of rebate dollars disbursed to the group health plan from enrollees who leave the
    group health plan to enrollees new to the group health plan.
----------------------------------------------------------------------------------------------------------------

                                Table VI.1.1--Accounting Table: Mini-Med Policies
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Increase in quality of medical care as a result of increased spending on quality improving activities by
    issuers of mini-med policies.
   * Improved health as a result of increased spending on medical care by issuers of mini-med policies.

[[Page 76584]]

 
   * Continued access to mini-med health policies for consumers.
----------------------------------------------------------------------------------------------------------------
Costs:                                      Estimate           Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/     ($2.5 million).......              2011                 7         2012-2013
 year).
                                     ($2.6 million).......              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of mini-med policies due to elimination of requirement to file quarterly
 reports.
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Increased spending on quality-improving activities by issuers of mini-med policies.
   * Increased spending on medical care by issuers of mini-med policies.
----------------------------------------------------------------------------------------------------------------
Transfers:                                  Estimate           Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/     $2.4 million.........              2011                 7         2012-2013
 year).
                                     $2.6 million.........              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies,
 resulting from adjustment in MLR methodology for mini-med policies.
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Savings for consumers and reduced profit for issuers of mini-med policies.
----------------------------------------------------------------------------------------------------------------

                               Table VI.1.2--Accounting Table: Expatriate Policies
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Continued access to expatriate health policies for consumers.
----------------------------------------------------------------------------------------------------------------
Costs:                                      Estimate           Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/     ($80,000)............              2011                 7         2012-2013
 year).
                                     ($85,000)............              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of expatriate policies due to elimination of requirement to file quarterly
 reports.
----------------------------------------------------------------------------------------------------------------

                                  Table VI.1.3--Accounting Table: ICD-10 Costs
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
    markets, resulting from adjustment in MLR methodology to account for ICD-10 conversion costs.
----------------------------------------------------------------------------------------------------------------

                         Table VI.1.4--Accounting Table: Community Benefit Expenditures
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Benefits to consumers by encouraging issuers to undertake community benefit expenditures.
----------------------------------------------------------------------------------------------------------------
Costs:
----------------------------------------------------------------------------------------------------------------
   * Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and
    report hypothetical tax liabilities.
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
    markets resulting from adjustment in MLR methodology to account for community benefit expenditures.
----------------------------------------------------------------------------------------------------------------

[[Page 76585]]

                    Table VI.1.5--Accounting Table: Distribution of Rebates in Group Markets
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Costs:                                        Estimate         Year dollar      Discount rate    Period covered
                                                                                   percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year)...    ($1.6 million)              2011                 7         2012-2013
                                            ($1.7 million)              2011                 3         2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs due to change in method of disbursement of rebates for group health plans.
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Reduced tax burden for group health plan subscribers relating to the change in the method of disbursement
    of rebate payments.
   * Increased administrative costs for policyholders that disburse rebates to group health plan enrollees.
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Transfer of benefits of rebate dollars disbursed to the group health plan from subscribers who leave the
    group health plan to subscribers new to the group health plan.
----------------------------------------------------------------------------------------------------------------

3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
    The medical loss ratio (MLR) is a measurement that, stated simply, 
measures the percentage of total premiums that insurance companies 
spend on health care and quality initiatives, versus what they spend on 
administration, marketing and profit. The MLR interim final rule (75 FR 
74892) provided an overall discussion of the anticipated benefits, 
costs and transfers associated with the MLR provisions. In the 
following sections, we discuss some of the anticipated benefits, costs 
and transfers associated with the adjustment of the MLR methodology for 
mini-med and expatriate policies, accounting of ICD-10 conversion costs 
and community benefit expenditures in the MLR, and change in the 
process for disbursement of rebates for enrollees in group health 
plans.
a. Benefits
    In developing this final 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 of 
this rule. Nonetheless, CMS was able to identify several potential 
qualitative benefits which are discussed below.
    Mini-med and expatriate policies tend to have relatively higher 
administrative costs compared to other types of policies due to their 
special circumstances. As discussed earlier in the preamble, commenters 
claimed that mini-med issuers have a unique cost structure--low 
premiums, high administrative costs (for example, as a result of high 
turnover) and low incurred claims (because of high deductibles and 
limited coverage)--that make some issuers unable to meet the statutory 
MLR without any adjustment to the claim reporting methodology. Under 
the interim final rule, for the MLR reporting year 2011, the total of 
the incurred claims and expenditures for activities that improve 
healthcare quality for mini-med issuers with total annual benefit 
limits of $250,000 or less is multiplied by a factor of 2.00. The level 
of the adjustment is changed from a multiplier of 2.00 under the 
interim final rule to a multiplier of 1.75 for the 2012 MLR reporting 
year, 1.50 for the 2013 MLR reporting year and 1.25 for the 2014 MLR 
reporting year under the final rule. We have applied a multiplier 
through the 2014 MLR reporting year to account for mini-med policies 
with a plan year that begins after January 1, 2013 and ends sometime in 
2014. Based on analysis of 2011 quarterly data submitted by mini-med 
issuers, CMS anticipates that with the adjustment to MLR methodology 
provided in this final rule, a majority of issuers in this market would 
reach the applicable MLR standard, and that all issuers who would be 
subject to rebates will remain profitable in the markets in which they 
would be paying rebates. The adjustment minimizes potential market 
withdrawal by issuers and preserves access to benefits for individuals 
served by these policies. Issuers that do not otherwise meet the MLR 
standard may attempt to do so by increasing quality promoting 
activities, expanding covered benefits or reducing cost sharing, and 
reducing administrative costs. Increased spending on quality improving 
activities and medical care would result in better quality of medical 
care and better health for enrollees in these plans. There are 25 
issuers of mini-med policies with approximately 932,000 enrollees 
collectively and we expect that this rule should not have an effect on 
mini-med issuers' participation in the market.
    As discussed earlier in the preamble, expatriate policies have 
unique administrative costs, as evidenced from public comments and the 
first two quarterly reports submitted by issuers of expatriate 
policies. These unique costs arise from factors such as identifying and 
credentialing international providers, processing claims in different 
languages, standardizing billing procedures and providing translation 
and other services to enrollees. Under the interim final rule, for the 
MLR reporting year 2011, the total of the incurred claims and 
expenditures for activities that improve healthcare quality for 
expatriate experience is multiplied by a factor of 2.00. The level of 
the adjustment remains at a multiplier of 2.00 under this final rule. 
The reasons for this level of adjustment are discussed earlier in 
Section II.B., which include the volatility of the expatriate 
experience. Based on analysis of 2011 quarterly data submitted by 
issuers of expatriate policies, CMS anticipates that with the 
adjustments to MLR methodology provided in this final rule, all issuers 
in this market would reach the applicable MLR standard. Maintaining the 
multiplier of 2.00 would not result in any change in rebates being paid 
to enrollees, but should help ensure that issuers of expatriate 
policies generally are able to meet the requirements of section 2718 as 
well as help ensure that the MLR standard does not cause issuers to 
leave the market. There are eight issuers of expatriate policies that 
submitted quarterly reports, with approximately 288,000 enrollees.
    Under the interim final rule, a not-for-profit issuer could deduct 
from earned premium community benefit expenditures, limited to the 
amount of State premium taxes the issuer would otherwise pay if it were 
a for-profit issuer. A not-for-profit issuer was also required to 
report community benefit expenditures up to the amount of taxes it 
would have paid if it were a for-profit

[[Page 76586]]

issuer. As discussed earlier in the preamble, commenters expressed 
concern that variations in State premium tax rates, by State and by 
type of issuer and the fact that some States do not have a premium tax, 
created an uneven playing field. Commenters also expressed concern 
about the difficulties and burden in calculating hypothetical tax 
liability. The final rule provides that an issuer will be able to 
deduct from earned premium the greater of the amount actually spent on 
community benefit expenditures limited to the State's highest premium 
tax rate, or the amount it pays in State premium tax. Issuers that 
otherwise do not meet the MLR standard may increase community benefit 
expenditures if their current expenditure levels or premium taxes are 
lower than the maximum amount they would be able to deduct under the 
final rule. CMS anticipates that this may encourage community benefit 
expenditures and allow for more equitable treatment of issuers and 
eliminate the reporting burden inherent in not-for-profit issuers 
calculating a hypothetical tax liability.
b. Costs
    Under the final rule, the multiplier for the numerator of the MLR 
for mini-med policies has been lowered from 2.00 to 1.75 for the 2012 
MLR reporting year, 1.50 for the 2013 MLR reporting year and 1.25 for 
the 2014 MLR reporting year. Based on analysis of 2011 quarterly data 
submitted by mini-med issuers, CMS anticipates that most issuers in 
this market would reach the applicable MLR standard. Issuers that do 
not otherwise meet the MLR standard may attempt to do so by increasing 
spending on quality improving activities and by increasing covered 
benefits or lowering consumers' cost-sharing, which would increase 
issuer spending on medical care.
    There are some cost savings as a result of this final rule.
    Issuers of mini-med and expatriate policies were directed to submit 
a report for each of the first three quarters of the 2011 MLR reporting 
year as provided under Sec.  158.110(b), in addition to the annual 
report required of all issuers. Beginning in MLR reporting year 2012, 
these issuers will no longer submit quarterly reports. The elimination 
of this requirement will reduce these issuers' administrative burden 
related to reporting, approximately $2.8 million dollars annually.
    This final rule also provides standardized ways to account for 
community benefit expenditures in the MLR methodology. Not-for-profit 
issuers will no longer need to calculate and report hypothetical tax 
liability and this will reduce administrative burdens related to 
reporting for these issuers.
    Finally, this rule provides for a more efficient and cost effective 
way for issuers in group markets to disburse rebate payments to 
enrollees by allowing issuers in group markets to provide rebates to 
the policyholders for distribution. This provision will lower 
administrative costs related to rebate disbursement for issuers of 
group health plans by approximately $1.8 million annually, and will 
largely eliminate the tax burden on employers and consumers inherent in 
the prior rebate mechanism. Policyholders will experience an increase 
in administrative costs related to the disbursement of rebates, 
although these administrative costs will be offset by eliminating the 
administrative burden and tax consequences inherent in the prior rebate 
mechanism.
c. Transfers
    To the extent that issuers' MLR experience falls short of the 
minimum MLR standard, they must provide rebates to enrollees. These 
rebates would reflect transfer of income from the issuers or their 
shareholders to the policyholders.
    Under the interim final rule, for the 2011 MLR reporting year, the 
total of the incurred claims and expenditures for activities that 
improve healthcare quality for mini-med experience is multiplied by a 
factor of 2.00. The level of the adjustment is changed from a 
multiplier of 2.00 under the interim final rule to a multiplier of 1.75 
for the 2012 MLR reporting year, 1.50 for the 2013 MLR reporting year 
and 1.25 for the 2014 MLR reporting year under the final rule. The 
adjustment of the MLR methodology for mini-med policies will result in 
higher rebate payments to enrollees, estimated to be approximately $1.3 
million in 2012 and $4.1 million in 2013, assuming the spending 
patterns included in the 2011 quarterly data do not change. However, 
the final rule also allows issuers to account for ICD-10 conversion 
costs and community benefit expenditures in the MLR, both up to a 
specified cap, which will lower rebate payments. In addition, issuers 
of mini-med policies that do not otherwise meet the MLR standard may 
attempt to do so by increasing spending on quality promoting activities 
and medical care, which would result in savings for consumers and 
reduced profits for issuers.
    In addition, this final rule allows issuers in group markets to 
disburse rebate payments to enrollees by allowing issuers to provide 
rebates to the policyholder for distribution. This change in the 
process for disbursement of rebate payments for enrollees in group 
health plans may result in a transfer of benefits from enrollees who 
have left the group health plan to enrollees new to the group health 
plan.
4. Overview of Data Sources, Methods, and Limitations
    As discussed in the MLR interim final regulation, the most complete 
source of data on the number of licensed entities offering fully 
insured, private comprehensive major medical coverage in the individual 
and group markets is the National Association of Insurance 
Commissioners' (NAIC) Annual Financial Statements and Policy Experience 
Exhibits database. These data contain multiple years of information on 
issuers' revenues, expenses, and enrollment, collected on various NAIC 
financial exhibits (commonly referred to as ``Blanks'') including 
Supplemental Health Care Exhibits (SHCEs) that issuers submit to State 
insurance regulators through the NAIC. The NAIC has four different 
Blanks for different types of issuers: Health; Life; Property & 
Casualty; and Fraternal issuers.\4\
---------------------------------------------------------------------------

    \4\ If a company's premiums and reserve ratios for its health 
insurance products equals 95 percent or more of their total business 
for both the current and prior reporting years, a company files its 
annual statement using the Health Blank. Otherwise, a company files 
the annual statement associated with the type of license held in its 
domiciliary State, for example, the Life, Property & Casualty, or 
Fraternal Blank.
---------------------------------------------------------------------------

    In the interim final rule, our analysis relied on 2009 data from 
the NAIC database. A total of 618 issuers offering comprehensive major 
medical coverage filed annual financial statements in 2009, with the 
Health and Life Blank filers accounting for approximately 99 percent of 
all comprehensive major medical premiums earned. For this reason we 
restricted our analysis to Health and Life Blank companies. 
Comprehensive major medical coverage \5\--including coverage offered in 
the individual and group markets that is subject to this final 
regulation--accounted for approximately 47.8 percent of all Accident 
and Health (A&H) premiums in 2009. Although the NAIC data represent the 
best available data source with which to estimate impacts of the MLR 
regulation, the data

[[Page 76587]]

contain certain limitations; we developed imputation methods to account 
for these limitations and we made several additional data edits that 
led us to exclude 176 companies from the analysis. We used the 
remaining 442 companies to estimate the regulatory impacts that were 
discussed in the interim final rule, as well as the regulatory impacts 
that are discussed below. Please see the regulatory impact analysis of 
the interim final rule (75 FR 74892) for additional methodological 
information.
---------------------------------------------------------------------------

    \5\ Comprehensive major medical coverage sold to associations 
and trusts has been included in individual comprehensive major 
medical coverage for purposes of the RIA. CMS's estimates exclude 
Medigap coverage, which in the NAIC data is reported separately from 
comprehensive major medical coverage offered in the individual and 
group markets. The 2009 NAIC data does not allow us to identify 
mini-med policies or expatriate policies separately.
---------------------------------------------------------------------------

    Although the 2009 NAIC data do not allow us to identify mini-med 
policies or expatriate policies separately, under the interim final 
rule, for the 2011 MLR reporting year issuers of mini-med and 
expatriate policies were required to report MLR data on a quarterly 
schedule under Sec.  158.110(b). CMS has received, to date, two 
quarterly reports from these issuers. These quarterly reports are the 
best source of data for the experience of these policies.
    In addition, data from NAIC's 2010 SHCE has recently become 
available, and we are in the process of reviewing this information.\6\ 
We have reported some preliminary estimates from this data in this 
impact analysis.
---------------------------------------------------------------------------

    \6\ The 2010 SHCE data includes data for each issuer by market 
(individual, small and large group) and by State. It also includes 
data such as QIA expenses, ICD-10 implementation costs, underwriting 
gain/loss and taxes and fees.
---------------------------------------------------------------------------

5. MLR and Rebate Estimation Methodology
    Consistent with the methodology that was used in the RIA for the 
interim final rule, the following formula has been used for estimating 
companies' adjusted MLRs for the mini-med, expatriate markets, rounded 
to the nearest thousandth decimal place as dictated in the regulation:

Adjusted MLR = (i + q/p-t-f) + c + u

Where i = incurred claims

q = expenditures on quality improving activities
p = earned premiums
t = Federal and State taxes
f = licensing and regulatory fees
c = credibility adjustment, if any
u = low, medium, or high assumptions to account for quality 
improving activities, unknown behavioral changes and data 
measurement error.

    We then calculate rebates for a company whose adjusted MLR value in 
a State (or on a national basis for expatriate policies) falls below 
the minimum MLR standard in a given market using the following 
formulas:

Rebates = [(m-a) * (p - t - f)]

Where m = the applicable minimum MLR standard for a particular 
market
a = an issuer's adjusted MLR for a particular State and market.

    Finally, to estimate impacts under the final rule, for each year, 
we assume that the number of issuers, enrollment, and experience are 
stable over time.
6. ``Mini-med'' Policies
    The term ``mini-med'' policy is used here to generally refer to 
policies that often cover the same types of medical services as 
comprehensive medical policies, but have annual benefit limits at or 
below $250,000. We therefore have been using this figure as a proxy for 
capturing this type of policy. Under the interim final rule, for the 
2011 MLR reporting year, HHS allowed a methodological change to address 
the special circumstances of mini-med policies. Mini-med policy issuers 
applied an adjustment to their reported experience to address the 
unusual expense and premium structure of these policies. Specifically, 
in the case of a policy with a total of $250,000 or less in annual 
limits, the total of the incurred claims and expenditures for 
activities that improve health care quality reported was multiplied by 
a factor of 2.00. Under this final rule, this factor will be 1.75 for 
the 2012 MLR reporting year, 1.50 for the 2013 MLR reporting year and 
1.25 for the 2014 MLR reporting year. A graduated allowance for the 
adjustment of 1.75 in 2012, 1.50 in 2013 and 1.25 in 2014 will 
incentivize issuers to reduce their administrative expenses and operate 
more efficiently to ensure that they meet the MLR standard while 
minimizing issuer market withdrawal, maintaining access to coverage for 
consumers and ensuring that they receive greater value from these 
policies until 2014. We have applied a multiplier through the 2014 MLR 
reporting year to account for mini-med policies with a plan year that 
begins after January 1, 2013 and ends sometime in 2014.
    Under the interim final rule, for the 2011 MLR reporting year, 
issuers of mini-med policies were required to report three quarters of 
MLR data on a schedule specified under Sec.  158.110(b), in addition to 
the annual report required of all issuers. Issuers of mini-med policies 
have submitted two quarterly reports thus far based on 2011 data. Table 
VI.2 shows the estimated distribution of issuers offering coverage in 
the mini-med market. Based on the reports that have been submitted, 
there are 25 issuers offering mini-med policies in 2011, including 12 
issuers in the individual market, four issuers in the small group 
market and 15 issuers in the large group market, which cover more than 
300 life-years each in a given State.\7\ Only five mini-med issuers 
offer policies in multiple markets, and of those five only one issuer 
offers such policies in all three markets. In addition, 11 issuers 
offer mini-med policies in only one State, while 14 offer policies in 
multiple States. There are 277 issuer/State/market combinations.
---------------------------------------------------------------------------

    \7\ Not all issuers have 1,000 or more life-years and thus are 
not credible in each State in which they have mini-med business, but 
may become partially credible in the 2012 or 2013 reporting year 
when issuers combine two or three years of experience, respectively.

        Table VI.2--Estimated Number of Mini-Med Policy Issuers Subject to Medical Loss Ratios by Market
----------------------------------------------------------------------------------------------------------------
                                                                   Number of issuers            Enrollment
                                                               -------------------------------------------------
                          Description                                       Percentage               Percent of
                                                                  Number     of total      Number       total
----------------------------------------------------------------------------------------------------------------
Total  of Issuers....................................         25           100    931,866           100
By Market:
    Individual................................................         12            48    234,859            25
    Small Group...............................................          4            16     18,770             2
    Large Group...............................................         15            60    678,237            73
----------------------------------------------------------------------------------------------------------------
Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies,
  each with more than 300 life-years of experience. (2) Enrollment represents ``life-years'' (life-years are the
  total number of months of enrollees' coverage during the MLR reporting year, divided by 12 if based upon a
  full year of reporting).

[[Page 76588]]

    Analysis of data shows that in the absence of any recognition of 
special circumstances, the 2011 credibility-adjusted MLRs for issuers 
of mini-med policies range from six \8\ percent to 134 percent in the 
individual market, with a mean of 67 percent and a median of 66 
percent; 62 percent to 96 percent in the small group market, with a 
mean of 70 percent and a median of 73 percent; and 62 percent to 105 
percent in the large group market, with a mean of 75 percent and a 
median of 71 percent. The large variations in the MLRs may be explained 
by variations in products, deductibles and premiums. For example, a 
plan with a low premium but a very high deductible will have very few 
claims, resulting in a very low MLR, while a plan with a higher premium 
but lower deductible would have more claims and would have a higher 
MLR. For the 2011 MLR reporting year, based on multiplying total 
incurred claims and expenditures for activities that improve health 
care quality by a factor of 2.00 (consistent with the provisions in the 
interim final rule), it is estimated that three issuers of mini-med 
policies will pay rebates of approximately $1.1 million in the 
individual market while no mini-med issuers will pay rebates in the 
small or large group markets.\9\
---------------------------------------------------------------------------

    \8\ This six percent MLR is for an issuer that sells a policy 
with a $50,000 deductible and thus has very low claims.
    \9\ In the absence of any recognition of any special 
circumstances adjustment, CMS estimates that seven mini-med issuers 
would have paid rebates of approximately $53 million in the 
individual market and six mini-med issuers would have paid rebates 
of approximately $120 million in the large group market.
---------------------------------------------------------------------------

    We use 2011 data to estimate the effects of the change in MLR 
methodology and assume no changes in issuers' behavior or quality 
improvement activities beyond what was reported in the quarterly 
filing. As shown in Table VI.3, it is estimated that with a multiplier 
of 1.75, four of the 25 issuers will pay rebates of $2.4 million to 
45,838 enrollees. With a multiplier of 1.50, six of the 25 issuers 
would pay rebates of $5.2 million to 73,427 enrollees. Therefore, a 
reduction in the multiplier from 2.00 to 1.75 in the 2012 MLR reporting 
year and a further reduction to 1.50 in the 2013 MLR reporting year 
will result in higher rebates being paid to enrollees, with more 
issuers affected and more enrollees receiving rebates. It is important 
to note, however, that issuers can change their spending targets to 
adjust to meet MLR targets moving forward.

                                                     Table VI.3--Estimated Annual Rebate Payments by Mini-Med Policy Issuers by Market, 2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Multiplier = 1 (no adjustment)           Multiplier = 2                 Multiplier = 1.75                Multiplier = 1.50
                                                             -----------------------------------------------------------------------------------------------------------------------------------
                                                                         Number of                        Number of                        Number of                        Number of
                           Market                             Number of  enrollees  Estimated  Number of  enrollees  Estimated  Number of  enrollees  Estimated  Number of  enrollees  Estimated
                                                               affected             rebate ($   affected             rebate ($   affected             rebate ($   affected             rebate ($
                                                               issuers   receiving   million)   issuers   receiving   million)   issuers   receiving   million)   issuers   receiving   million)
                                                                           rebates                          rebates                          rebates                          rebates
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Market...........................................          7    176,204      $53.0          3     43,463       $1.1          4     45,838       $2.4          5     62,699       $5.0
Small Group Market..........................................          0          0        0.0          0          0          0          0          0        0.0          0          0        0.0
Large Group Market..........................................          6    575,786      120.4          0          0        0.0          0          0        0.0          1     10,728        0.2
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    Total...................................................         13    751,990      173.4          3     43,463        1.1          4     45,838        2.4          6     73,427        5.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies with more than 300 life-years of experience in at least one State.

    Beginning in MLR reporting year 2012, issuers of mini-med policies 
will only submit an annual report and will no longer be required to 
submit quarterly reports. Therefore, this will significantly reduce the 
annual costs related to MLR reporting for issuers. Issuers of mini-med 
policies were required to submit a report for each of the first three 
quarters of the 2011 MLR reporting year as provided under Sec.  
158.110(b) for each large group market, small group market, and 
individual market within each State in which the issuer conducts 
business. Therefore, in addition to the annual report which is required 
of all issuers, mini-med issuers were required to submit a total of 277 
reports three times a year. The burden estimates included in the 
information collection requirement for the quarterly reports estimated 
that each quarterly report would require 62.4 hours with an hourly 
labor cost of $52.46; therefore the estimated total annual 
administrative cost for all mini-med issuers for all quarterly reports 
would be approximately $2.7 million. Each year, the cost reduction 
associated with eliminating the quarterly reporting requirement will be 
approximately $2.7 million for all issuers of mini-med policies. CMS 
anticipates that the adjustment in MLR methodology and reduction in 
reporting costs will allow issuers to remain profitable and ensure 
continued access to coverage for enrollees in this market, while 
bringing increased value to consumers.
7. Expatriate Policies
    Expatriate policies provide coverage for employees, substantially 
all of whom are: working outside of their country of citizenship; 
working outside of their country of citizenship and outside the 
employer's country of domicile; or non-U.S. citizens working in their 
home country. As discussed earlier in the preamble, based on public 
comments and review of data submitted by expatriate policy issuers, the 
unique nature of these policies results in a higher percentage of 
administrative costs in relation to premiums than policies that provide 
coverage primarily within the United States. Under the interim final 
rule, for the 2011 MLR reporting year, issuers were required to report 
the experience of these expatriate policies separately from other 
coverage, as provided in Sec.  158.120(d)(4), and the calculation of 
claims and quality improving activities for these policies was to be 
multiplied by a factor of 2.00, as provided in Sec.  158.221(b). Under 
this final rule, beginning in MLR reporting year 2012, this factor will 
remain 2.00.
    Issuers of expatriate policies were required in 2011 to report 
three quarters of MLR data on a quarterly schedule specified under 
Sec.  158.110(b), in addition to the annual report required of all 
issuers. Issuers of expatriate policies have submitted two quarterly 
reports thus far based on 2011 data. Table VI.4 shows the estimated 
distribution of issuers offering coverage in the

[[Page 76589]]

expatriate market. Based on the reports that have been submitted, there 
are eight issuers in offering expatriate coverage in 2011--two issuers 
in the small group market and seven issuers in the large group market. 
Only one issuer offers policies in both markets. There are nine issuer/
market combinations.

       Table: VI.4--Estimated Number of Expatriate Policy Issuers Subject to Medical Loss Ratios by Market
----------------------------------------------------------------------------------------------------------------
                                                                 Number of issuers             Enrollment
                                                             ---------------------------------------------------
                         Description                                      Percentage                Percent of
                                                                Number     of total      Number        total
----------------------------------------------------------------------------------------------------------------
Total  of Issuers..................................          8           100    287,789            100
By Market:
    Small Group.............................................          2            25        903            0.3
    Large Group.............................................          7          87.5    286,887           99.7
----------------------------------------------------------------------------------------------------------------
Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of expatriate policies,
  each with more than 300 life-years of experience. (2) Enrollment represents ``life-years''.

    Analysis of data shows that in the 2011 MLR reporting year, in the 
absence of any recognition of special circumstances, issuers of 
expatriate policies had adjusted MLRs that range from 32 percent to 61 
percent in the small group market and from 49 percent to 85 percent, 
with a mean of 69 percent and median of 72 percent, in the large group 
market. For 2011, based on multiplying total incurred claims and 
expenditures for activities that improve health care quality by a 
factor of 2.00 (consistent with the provisions in the interim final 
rule), it is estimated that no issuer of expatriate policies will pay 
any rebates.\10\
---------------------------------------------------------------------------

    \10\ In the absence of any recognition of any special 
circumstances adjustment, CMS estimates that four issuers in the 
large group market would have paid rebates of approximately $145 
million, while no issuer would have paid rebates in the small group 
market.
---------------------------------------------------------------------------

    We use 2011 data to estimate the effects of maintaining the 
multiplier of 2.00 and assume no changes in issuers' behavior and 
quality improvement activities beyond what was reported in the 
quarterly filing. It is estimated that with a multiplier of 2.00, no 
issuer will likely have an MLR below the threshold in 2012 and 2013, 
consistent with the policy in the first year. This should help ensure 
that the MLR standard does not cause issuers to leave the market.
    Beginning in MLR reporting year 2012, expatriate policy issuers 
will submit only an annual report and will no longer be required to 
submit quarterly reports. The interim final rule required issuers of 
mini-med policies to submit a report for each of the first three 
quarters of the 2011 MLR reporting year as provided under Sec.  
158.110(b) for each large group market, small group market, and 
individual market, combining data from all states in which the issuer 
conducts business. Therefore, in addition to the annual report required 
of all issuers, expatriate issuers were required to submit a total of 
nine reports three times a year. The burden estimates included in the 
information collection requirement for the quarterly reports estimated 
that each quarterly report would require 62.4 hours with an hourly 
labor cost of $52.46. Therefore, estimated total annual cost for all 
expatriate policy issuers for all quarterly reports would be 
approximately $88,000. The provisions in this final rule will reduce 
the annual costs related to MLR reporting for issuers. This cost 
reduction will be approximately $88,000 for all expatriate policy 
issuers per year. CMS anticipates that the adjustment in MLR 
methodology and reduction in reporting costs will allow issuers to 
remain viable and ensure continued access to coverage for enrollees in 
this market.
8. ICD-10 Conversion Costs
    In the interim final rule, HHS adopted the NAIC's recommendation to 
exclude the conversion of International Classification of Disease (ICD) 
code sets from ICD-9 to ICD-10 as a quality improvement activity. 
However, there is general recognition that the conversion to ICD-10 
will enhance the provision of quality care through the collection of 
better and more refined data. As discussed earlier in the preamble, 
some believe that ICD-10 coding can improve health plans' ability to 
share data among clinicians for quality improvement and care 
coordination activities, thereby allowing for a better understanding of 
diagnoses and better treatment. This final rule provides that for each 
of the MLR reporting years 2012 and 2013, issuers may account for ICD-
10 conversion costs of up to 0.3 percent of earned premiums in the 
relevant State market as a quality improving activity in their MLR 
calculation. In addition, ICD-10 maintenance costs will continue to be 
excluded from QIA in the final rule, based on the industry's comments 
that separating conversion costs from maintenance costs is feasible. 
The industry provided a range of percentages using their projected 
expenditures of ICD-10 conversion costs on their MLRs, if allowed as a 
QIA. After reviewing the data provided by issuers and 2010 SHCE 
filings, CMS chose a cap that allows as QIA amounts that issuers 
projected spending on ICD-10 conversion, without permitting issuers to 
include claims adjudication systems costs in QIA.
    Preliminary analysis of 2010 SHCE data indicates that issuers 
reported ICD-10 conversion costs as representing less than 0.02 percent 
of earned premiums for individual, small group and large group 
comprehensive major medical coverage. However, ICD-10 conversion costs 
are expected to be higher for 2011 through 2013 since implementation 
efforts had only begun in 2010 but conversion to ICD-10 must be 
completed by October 2013. As stated earlier in the preamble, one 
issuer estimated that ICD-10 implementation will cost the entire 
industry between $50-70 million each year for 2011 through 2013. 
Another issuer anticipated spending $9.4 million in 2011 on ICD-10 
implementation. An industry association commented that a study of 20 
health insurance plans found that the costs averaged about $12 per 
member, with small health plans paying around $38 per member and large 
health plans paying around $11 per member. However, none of these 
comments indicate whether these estimates apply to issuers subject to 
the MLR requirements, Medicare, Medicaid, self-insured, or other types 
of plans or the time frame spanned by these estimates. In the absence 
of data on actual costs related to ICD-10 conversion that will be 
included in the 2012 and 2013 MLR calculations, it is difficult to 
estimate the effect of this provision on issuers and rebates. Even so, 
we expect that accounting for these costs in MLR calculation will only 
have a small effect on MLRs and rebates.

[[Page 76590]]

9. Community Benefit Expenditures
    In the interim final rule, HHS adopted the NAIC's recommendation to 
allow community benefit expenditures (as defined in Sec.  
158.162(c)(2)) by not-for-profit plans to be excluded from premium 
revenue up to the State premium tax rate, and requiring that not-for-
profit issuers report their actual community benefit expenditures up to 
the amount they would have paid in Federal and State taxes if they had 
been for-profit. As discussed elsewhere in the preamble, this final 
rule provides that issuers will be able to deduct either the amount it 
paid in State premium taxes or the amount of its community benefit 
expenditures up to a maximum of the highest State premium tax rate in 
the State, whichever is greater. This creates a level playing field 
among issuers in States that have different premium tax rates for 
different types of plans, for example, PPOs and HMOs.
    In the absence of reliable data on the total number of not-for-
profit issuers offering major medical coverage and on community benefit 
expenditures, we are unable to quantify the effect of this provision. 
Five commenters proposed a flat deduction limit ranging between 3 to 5 
percent of earned premium. Currently, 48 States have premium taxes, but 
tax rates in many States differ for different kinds of plans and in 
some States they differ for not-for-profit and for-profit issuers. 
Several States do not tax HMOs or not-for-profit issuers at all. State 
premium taxes range between 0.4 percent and 4.265 percent, according to 
data provided by the NAIC, and these taxes have been accounted for in 
the MLR and rebate calculations in the interim final rule. It is not 
known how many issuers will include community benefit expenditures or 
State premium tax liability in their MLR calculation, or how much 
community benefit expenditures will be included in the MLR calculation. 
Rebates may be reduced for issuers in States with a higher maximum 
premium tax rate than they are required to pay (for example, an issuer 
is an HMO and the State has a higher premium tax rate for PPOs) and who 
have higher community benefit expenditures than the applicable premium 
tax rate.
    As discussed earlier in the preamble, CMS anticipates that this 
treatment will encourage community benefit expenditures. Issuers that 
otherwise do not meet the MLR standard may increase community benefit 
expenditures if their current expenditure levels or premium taxes are 
lower than the maximum amount they would be able to deduct under the 
final rule. This provision will also allow more equitable treatment of 
issuers, and reduce significantly the reporting burden related to 
community benefit expenditures, as not-for-profit issuers no longer 
need to calculate and report hypothetical tax liabilities.
10. Distribution of Rebates to Enrollees in Group Markets
    Section 2718(b)(1)(A) of the PHS Act requires an issuer to provide 
``an annual rebate to each enrollee'' if the issuer does not meet the 
applicable MLR standard. The interim final rule directs issuers of 
group coverage to provide rebates to the policyholder and each 
subscriber in amounts proportionate to the amount of premium each paid. 
The interim final rule also allows an issuer to delegate its rebate 
disbursement obligation to group policyholders, though the issuer 
remains liable for complying with all its obligations under the statute 
and for maintaining records that demonstrated rebates were provided 
accurately. As discussed elsewhere in this preamble, commenters 
expressed concern that the issuer lacks access to the information 
needed to distribute rebates, asserting that the policyholder, and not 
the issuer, has information regarding the premium contribution amount 
from the employer and the employee.
    This final rule provides that issuers will distribute rebates to 
the policyholder to be used for the benefit of subscribers. For 
policyholders that are a group health plan but are not a governmental 
plan or subject to ERISA, an issuer must obtain written assurance from 
the policyholder that rebates will be used for the benefit of current 
subscribers using one of the options permitted for non-Federal 
governmental plans as described in the interim final rule issued 
contemporaneously with this final rule; otherwise, the issuer must 
evenly distribute the rebate directly to the policyholder's subscribers 
covered by the policy during the MLR reporting year on which the rebate 
is based.
    Disbursing rebates directly to subscribers would result in a tax 
burden for consumers and also a tax-administration burden for the 
issuers making the payment, as most premiums are paid with pre-tax 
dollars and thus the rebates may be wages subject to withholding 
obligations. Because issuers would not otherwise be paying wages to 
these individuals, the administrative burden of administering any 
applicable withholding obligations could be significant in total. If 
the rebates are disbursed to the policyholder (generally the employer) 
for the benefit of subscribers (generally the employees), they must be 
used in a way that benefits subscribers (in the case of ERISA plans, 
consistent with their fiduciary obligations) but minimizes any tax 
administration issues for employers and enrollees, while consumers 
would still receive the benefit of the rebates. Subscribers who no 
longer are covered under the group health plan, however, generally 
would not receive the benefits from the rebates distributed through the 
policyholder. Therefore, there would be a transfer of benefits from 
enrollees who leave the plan to new enrollees in the same plan. We 
expect this transfer to be small since persistence rates in group 
health plans tend to be high.
    Group health plan issuers will also experience savings due to the 
fact that rebate payments will no longer be required to be sent to a 
large number of individuals. In the interim final rule, the average 
cost of sending rebate payments was estimated to be $1 per check. For 
the years 2012 and 2013, it was estimated that each year 0.8 million 
enrollees in the small group market and 1 million enrollees in the 
large group market would receive rebates and 50 percent of these 
enrollees would receive rebate checks. Assuming that all issuers of 
group coverage distribute rebates to policyholders, we estimate that 
this will lead to an annual reduction in administrative costs of 
approximately $1.8 million for these issuers. However, policyholders 
will experience an increase in administrative costs related to the 
disbursement of rebates. The actual cost would depend on whether the 
policyholders send rebate checks or whether the rebates are disbursed 
through future premium reductions or through payroll. These costs will 
also be offset by eliminating the administrative burden and tax 
consequences inherent in the prior rebate mechanism.

C. Regulatory Alternatives

    Under the Executive Order, CMS is required to consider alternatives 
to issuing regulations and alternative regulatory approaches. CMS 
considers a variety of regulatory alternatives below.
1. Mini-Med and Expatriate Policies
    One alternative to the MLR methodology set forth in this final rule 
is to provide no adjustments in the MLR calculation for the experience 
of these policies. Without any adjustments to the MLR methodology for 
issuers of mini-med policies with total annual benefit limits of 
$250,000 or less, CMS estimates that in 2011, seven issuers would have 
paid rebates of approximately $53 million in the

[[Page 76591]]

individual market and six issuers would pay approximately $120 million 
in the large group market. Without any adjustments to MLR methodology 
for issuers of expatriate policies, CMS estimates that in 2011, four 
issuers in the large group market would have paid rebates of 
approximately $145 million.
    Another alternative was to maintain the multiplier of 2.00 provided 
in the interim final rule, for mini-med policies with total annual 
benefit limits of $250,000 or less. Based on 2011 data, with a 
multiplier of 2.00, three issuers of mini-med policies in the 
individual market would have paid an estimated $1.1 million in rebates 
while no issuers in the small or large group markets would have paid 
rebates. As described elsewhere in this preamble, CMS has concluded 
that the MLR methodology set forth in the final rule will best balance 
the goals of providing value to consumers and ensuring that consumers 
have continued access to coverage in these markets.
2. Distribution of Rebates in the Group Market
    One alternative to the MLR methodology set forth in this final rule 
is to require issuers to send rebate payments directly to subscribers 
in group health plans. As described previously, this would result in 
increased tax burden for consumers with group coverage and for their 
employers, as well as increased administrative costs for issuers 
associated with rebate payments. As discussed earlier, the average 
annual cost per issuer of sending rebate checks was estimated to be 
between $43,962 and $71,467 in the interim final rule.
3. ICD-10 Conversion Expenses and Community Benefit Expenditures
    With respect to ICD-10 conversion costs, one alternative to the MLR 
methodology set forth in this final rule was to exclude these costs 
from QIA. As discussed previously, this would result in slightly lower 
MLRs for issuers and therefore higher rebate payments for issuers that 
fail to meet the MLR standard.
    With respect to community benefit expenditures, one alternative to 
the MLR methodology set forth in this final rule was to allow only a 
not-for-profit, tax-exempt issuer to deduct from earned premium the 
amount of its community benefit expenditures, limited to the State 
premium tax rate applicable to for-profit issuers and also require a 
not-for-profit issuer to report community benefit expenditures ``in 
lieu of taxes * * * but not to exceed the amount of taxes [it] would 
otherwise be required to pay.'' As discussed previously, this would 
result in lower MLRs for some issuers and therefore higher rebate 
payments for issuers that fail to meet the MLR standard.

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies that issue a 
regulation to analyze options for regulatory relief of small businesses 
if a rule has a significant impact on a substantial number of small 
entities. The RFA generally defines a ``small entity'' as: (1) A 
proprietary firm meeting the size standards of the Small Business 
Administration (SBA); (2) a nonprofit organization that is not dominant 
in its field; or (3) a small government jurisdiction with a population 
of less than 50,000 (States and individuals are not included in the 
definition of ``small entity''). HHS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent.
    The Regulatory Flexibility Act only requires an analysis to be 
conducted for those final rules for which a Notice of Proposed Rule 
Making was required. Accordingly, we have determined that a regulatory 
flexibility analysis is not required for this final rule. However, CMS 
has considered the likely impact of this final rule on small entities.
    As discussed in the Web Portal final rule published on May 5, 2010 
(75 FR 24481), HHS examined the health insurance industry in depth in 
the Regulatory Impact Analysis we prepared for the proposed rule on 
establishment of the Medicare Advantage program (69 FR 46866, August 3, 
2004). In that analysis the Department determined that there were few 
if any insurance firms underwriting comprehensive health insurance 
policies (in contrast, for example, to travel insurance policies or 
dental discount policies) that fell below the size thresholds for 
``small'' business established by the SBA (currently $7 million in 
annual receipts for health issuers).\11\
---------------------------------------------------------------------------

    \11\ ``Table of Size Standards Matched to North American 
Industry Classification System Codes,'' effective November 5, 2010, 
U.S. Small Business Administration, available at http://www.sba.gov.
---------------------------------------------------------------------------

    For the MLR interim final rule, the Department used the data set 
created from 2009 NAIC Health and Life Blank annual financial statement 
data to develop an updated estimate of the number of small entities 
that offer comprehensive major medical coverage in the individual and 
small group markets, and are therefore subject to the MLR reporting 
requirements. For purposes of this analysis, the Department used total 
Accident and Health (A&H) earned premiums as a proxy for annual 
receipts. These estimates may overstate the actual number of small 
health insurance issuers that would be affected, since they do not 
include receipts from these companies' other lines of business.
    In the MLR interim final rule (75 FR 74892), the Department 
estimated that there are 28 small entities with less than $7 million in 
A&H earned premiums that offer individual or group comprehensive major 
medical coverage, and would therefore be subject to the requirements of 
this final regulation. These small entities accounted for 6 percent of 
the estimated 442 total issuers that the Department estimated would be 
affected by the MLR requirements. The Department estimated that 86 
percent of these small issuers are subsidiaries of larger carriers, 75 
percent only offer coverage in a single State, 68 percent only offer 
individual or group comprehensive coverage in a single market, 46 
percent also offer other types of A&H coverage, and 29 percent are Life 
Blank filers.
    CMS has estimated that the provisions of the final rule do not 
impose any additional costs on small entities. There are, however, some 
cost savings as a result of this final rule. There will be an increase 
in rebates for some issuers of mini-med policies with total annual 
benefit limits of $250,000 or less, though no small entities are 
affected. The changes in MLR methodology to account for inclusion of 
ICD-10 costs and community benefit expenditures will also lead to 
reduction in rebates and will therefore, not affect any small entities 
adversely.
    CMS believes that these estimates overstate the number of small 
entities that will be affected by the requirements in this final 
regulation, as well as the relative impact of these requirements on 
these entities because the Department has based its analysis on 
issuers' total A&H earned premiums (rather than their total annual 
receipts). Therefore, the Secretary certifies that these final 
regulations will not have significant impact on a substantial number of 
small entities. In addition, section 1102(b) of the Social Security Act 
requires us to prepare a regulatory impact analysis if a rule may have 
a significant economic impact on the operations of a substantial number 
of small rural hospitals. This analysis must conform to the provisions 
of section 604 of the RFA. This final rule would not affect small rural 
hospitals. Therefore, the Secretary has determined that this rule would 
not have a significant impact on the

[[Page 76592]]

operations of a substantial number of small rural hospitals.

E. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that includes a Federal mandate that could result in 
expenditure in any one year by State, local or Tribal governments, in 
the aggregate, or by the private sector, of $100 million in 1995 
dollars, updated annually for inflation. In 2011, that threshold level 
is approximately $136 million.
    UMRA does not address the total cost of a rule. Rather, it focuses 
on certain categories of cost, mainly those ``Federal mandate'' costs 
resulting from: (1) Imposing enforceable duties on State, local, or 
Tribal governments, or on the private sector; or (2) increasing the 
stringency of conditions in, or decreasing the funding of, State, 
local, or Tribal governments under entitlement programs.
    Consistent with policy embodied in UMRA, this final regulation has 
been designed to be the least burdensome alternative for State, local 
and Tribal governments, and the private sector while achieving the 
objectives of the Affordable Care Act.
    This final regulation contains MLR methodology adjustments and 
rebate payment requirements for private sector firms (for example, 
health insurance issuers offering coverage in the mini-med, expatriate, 
individual and group markets). CMS estimates that none of these 
provisions impose additional costs on consumers or private sector 
firms, and will lead to reduced administrative costs to issuers. There 
will be a reduction in rebates paid by issuers in individual, small and 
group markets due to inclusion of ICD-10 conversion costs and community 
benefit expenditures. Rebates paid by issuers of mini-med policies will 
increase by an estimated $59 million annually. It includes no mandates 
on State, local, or Tribal governments.

F. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. In CMS's view, while this final rule does not impose 
substantial direct requirement costs on State and local governments, 
this final regulation has Federalism implications due to direct effects 
on the distribution of power and responsibilities among the State and 
Federal governments relating to determining and enforcing minimum MLR 
standards and rebate requirements relating to coverage that State-
licensed health insurance issuers offer in the individual and group 
markets.
    However, CMS anticipates that the Federalism implications (if any) 
are substantially mitigated because the Affordable Care Act does not 
provide any role for the States in terms of receiving or analyzing the 
data or enforcing the requirements of Section 2718 of the PHS Act.
    As discussed in the MLR interim final rule, States may continue to 
apply State law requirements except to the extent that such 
requirements prevent the application of the Affordable Care Act 
requirements that are the subject of this rulemaking. State insurance 
laws that are more stringent than the Federal requirements are unlikely 
to ``prevent the application of'' the Affordable Care Act and to be 
preempted.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policy making discretion of the States, the 
Department has engaged in efforts to consult with and work 
cooperatively with affected States, including participating in 
conference calls with and attending conferences of the National 
Association of Insurance Commissioners, and consulting with State 
insurance officials on an individual basis.
    Throughout the process of developing this final regulation, to the 
extent feasible within the specific preemption provisions of HIPAA as 
it applies to the Affordable Care Act, the Department has attempted to 
balance the States' interests in regulating health insurance issuers, 
and Congress' intent to provide uniform minimum protections to 
consumers in every State. By doing so, it is the Department's view that 
we have complied with the requirements of Executive Order 13132. 
Pursuant to the requirements set forth in section 8(a) of Executive 
Order 13132, and by the signatures affixed to this regulation, the 
Department certifies that the Centers for Medicare & Medicaid Services 
has complied with the requirements of Executive Order 13132 for the 
attached final regulation in a meaningful and timely manner.

G. Congressional Review Act

    This final regulation is not subject to the Congressional Review 
Act provisions of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (5 U.S.C. 801 et seq.).

List of Subjects in 45 CFR Part 158

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, Penalties, Reporting and recordkeeping 
requirements.
    Accordingly, the interim final rule amending 45 CFR part 158, which 
was published at 75 FR 74864 on December 1, 2010, and further amended 
by a correction on December 30, 2010, is adopted as final with the 
following changes:

PART 158--ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE 
REQUIREMENTS

0
1. The authority citation for part 158 continues to read as follows:

    Authority: Section 2718 of the Public Health Service Act (42 
U.S.C. 300gg-18), as amended.

Sec.  158.110  [Amended]

0
2. Section 158.110 is amended by--
0
a. Removing in paragraph (b)(1) the phrase ``Except as provided in 
paragraph (b)(2) of this section, the'' and adding ``The'' in its 
place.
0
b. Removing paragraph (b)(2).
0
c. Removing the paragraph designation for paragraph (b)(1).

0
3. Section 158.120 is amended by revising paragraphs (d)(3) and (4) to 
read as follows:

Sec.  158.120  Aggregate reporting.

* * * * *
    (d) * * *
    (3) An issuer with policies that have a total annual limit of 
$250,000 or less must report the experience from such policies 
separately from other policies.
    (4) An issuer with group policies that provide coverage to 
employees, substantially all of whom are: Working outside their country 
of citizenship; working outside of their country of citizenship and 
outside the employer's country of domicile; or non-U.S. citizens 
working in their home country, must aggregate and report the experience 
from these policies on a national basis, separately for the large group 
market and small group market, and separately from other policies.

0
4. Section 158.150 is amended by--
0
a. Adding paragraph (b)(2)(i)(A)(6).
0
b. Revising paragraph (c)(5).
    The addition and revision read as follows:

Sec.  158.150  Activities that improve health care quality.

* * * * *

[[Page 76593]]

    (b) * * *
    (2) * * *
    (i) * * *
    (A) * * *
    (6) For each of the 2012 and 2013 MLR reporting years, implementing 
ICD-10 code sets that are designed to improve quality and are adopted 
pursuant to the Health Insurance Portability and Accountability Act 
(HIPAA), 42 U.S.C. 1320d-2, as amended, limited to 0.3 percent of an 
issuer's earned premium as defined in Sec.  158.130 of this subpart.
* * * * *
    (c) * * *
    (5) Establishing or maintaining a claims adjudication system, 
including costs directly related to upgrades in health information 
technology that are designed primarily or solely to improve claims 
payment capabilities or to meet regulatory requirements for processing 
claims, including maintenance of ICD-10 code sets adopted pursuant to 
the Health Insurance Portability and Accountability Act (HIPAA), 42 
U.S.C. 1320d-2, as amended.
* * * * *

0
5. Section 158.162 is amended by--
0
a. Revising paragraph (b)(1)(vii).
0
b. Revising paragraph (c).
    The revisions read as follows:

Sec.  158.162  Reporting of Federal and State taxes.

* * * * *
    (b) * * *
    (1) * * *
    (vii) In lieu of reporting amounts described in paragraph 
(b)(1)(vi) of this section, an issuer may choose to report payment for 
community benefit expenditures as described in paragraph (c) of this 
section, limited to the highest premium tax rate in the State for which 
the report is being submitted.
* * * * *
    (c) Community benefit expenditures. Community benefit expenditures 
means expenditures for activities or programs that seek to achieve the 
objectives of improving access to health services, enhancing public 
health and relief of government burden. This includes any of the 
following activities that:
    (1) Are available broadly to the public and serve low-income 
consumers;
    (2) Reduce geographic, financial, or cultural barriers to accessing 
health services, and if ceased to exist would result in access problems 
(for example, longer wait times or increased travel distances);
    (3) Address Federal, State or local public health priorities such 
as advancing health care knowledge through education or research that 
benefits the public;
    (4) Leverage or enhance public health department activities such as 
childhood immunization efforts; and
    (5) Otherwise would become the responsibility of government or 
another tax-exempt organization.

0
6. Section 158.221 is amended by revising paragraphs (b)(3) and (4) to 
read as follows:

Sec.  158.221  Formula for calculating an issuer's medical loss ratio.

* * * * *
    (b) * * *
    (3) The numerator of the MLR for policies that are reported 
separately under Sec.  158.120(d)(3) of this part must be the amount 
specified in paragraph (b) of this section, except that for the 2012 
MLR reporting year, the total of the incurred claims and expenditures 
for activities that improve health care quality are then multiplied by 
a factor of 1.75, for the 2013 MLR reporting year, the total of the 
incurred claims and expenditures for activities that improve health 
care quality are then multiplied by a factor of 1.50, and for the 2014 
MLR reporting year, the total of the incurred claims and expenditures 
for activities that improve health care quality are then multiplied by 
a factor of 1.25.
    (4) The numerator of the MLR for policies that are reported 
separately under Sec.  158.120(d)(4) of this part must be the amount 
specified in paragraph (b) of this section, except that the total of 
the incurred claims and expenditures for activities that improve health 
care quality are then multiplied by a factor of 2.00.
* * * * *

0
7. Section 158.241 is amended by revising paragraph (b) to read as 
follows:

Sec.  158.241  Form of rebate.

* * * * *
    (b) Former enrollees in the individual market. Rebates owing to 
former enrollees in the individual market must be paid in the form of 
lump-sum check or lump-sum reimbursement using the same method that was 
used for payment, such as credit card or direct debit.
0
8. Section 158.242 is amended by revising paragraph (b) to read as 
follows:

Sec.  158.242  Recipients of rebates.

* * * * *
    (b) Large group and small group markets. Except as provided in 
paragraphs (b)(3) and (4) of this section, an issuer must meet its 
obligation to provide any rebate to persons covered under a group 
health plan by providing it to the policyholder.
    (1) [Reserved.]
    (2) [Reserved.]
    (3) If the policyholder is a group health plan that is not a 
governmental plan and not subject to the Employee Retirement Income 
Security Act of 1974, as amended (29 U.S.C. 1001 et seq.) (ERISA), 
rebates may only be paid to the policyholder if the issuer receives a 
written assurance from the policyholder that the rebates will be used 
to benefit enrollees; otherwise, the issuer must distribute the rebate 
directly to the subscribers of the group health plan covered by the 
policy during the MLR reporting year on which the rebate is based by 
dividing the entire rebate, including the amount proportionate to the 
amount of premium paid by the policyholder, in equal amounts to all 
subscribers entitled to a rebate without regard to how much each 
subscriber actually paid toward premiums.
    (4) If the group health plan has been terminated at the time of 
rebate payment and the issuer cannot, despite reasonable efforts, 
locate the policyholder whose plan participants or employees were 
enrolled in the group health plan, the issuer must distribute the 
rebate directly to the subscribers of the terminated group health plan 
by dividing the entire rebate, including the amount proportionate to 
the amount of premium paid by the policyholder, in equal amounts to all 
subscribers entitled to a rebate without regard to how much each 
subscriber actually paid toward premiums.

0
9. Section 158.243 is amended by revising paragraph (a)(1) to read as 
follows:

Sec.  158.243  De minimis rebates.

    (a) * * *
    (1) For a group policy for which the issuer distributes the rebate 
to the policyholder, if the total rebate owed to the policyholder and 
the subscribers combined is less than $20 for a given MLR reporting 
year; or for a group policy for which the issuer distributes the rebate 
directly to the subscribers, as provided in Sec.  158.242(a)(3) and (4) 
of this subpart, if the total rebate owed to each subscriber is less 
than $5.
* * * * *

0
10. Section 158.250 is revised to read as follows:

Sec.  158.250  Notice of rebates.

    (a) Notice of rebates to policyholders and subscribers of group 
health plans. For each MLR reporting year, at the time any rebate of 
premium is provided to a policyholder of a group health plan in 
accordance with this part, an issuer must provide each policyholder who 
receives a rebate and subscribers whose

[[Page 76594]]

policyholder receives a rebate, or each subscriber who receives a 
rebate directly from an issuer, the following information in a form 
prescribed by the Secretary:
    (1) A general description of the concept of an MLR;
    (2) The purpose of setting an MLR standard;
    (3) The applicable MLR standard;
    (4) The issuer's MLR, adjusted in accordance with the provisions of 
this subpart;
    (5) The issuer's aggregate premium revenue as reported in 
accordance with Sec.  158.130 of this part, minus any Federal and State 
taxes and licensing and regulatory fees that may be excluded from 
premium revenue as described in Sec.  158.162(a)(1) and (b)(1) of this 
part;
    (6) The rebate percentage and the amount owed to enrollees, as 
defined in section 158.240(b), based upon the difference between the 
issuer's MLR and the applicable MLR standard; and
    (7) The fact that, as provided by this subpart, the total 
aggregated rebate for the group health plan is being provided to the 
policyholder:
    (i) If the policy provides benefits for a plan subject to ERISA, a 
statement that the policyholder may have additional obligations under 
ERISA's fiduciary responsibility provisions with respect to the 
handling of rebates and contact information for questions regarding the 
rebate;
    (ii) If the policyholder is a non-Federal governmental plan, the 
proportion of the rebate attributable to subscribers' contribution to 
premium must be used for the benefit of subscribers, using one of the 
methods set forth in Sec.  158.242(b)(1) of this subpart; and
    (iii) If the policyholder is a group health plan that is not a 
governmental plan and is not subject to ERISA,
    (A) The policyholder has provided written assurance that the 
proportion of the rebate attributable to subscribers' contribution to 
premium will be used for the benefit of current subscribers, using one 
of the methods set forth in Sec.  158.242(b)(1) of this subpart, or
    (B) If the policyholder did not provide such written assurance, the 
issuer must distribute the rebate evenly among the policyholder's 
subscribers covered by the policy during the MLR reporting year on 
which the rebate is based.
    (b) Notice of rebates to subscribers in the individual market. For 
each MLR reporting year, at the time any rebate of premium is provided 
to a subscriber in the individual market in accordance with this part, 
an issuer must provide each subscriber that is receiving the rebate the 
following information in a form prescribed by the Secretary:
    (1) A general description of the concept of an MLR;
    (2) The purpose of setting an MLR standard;
    (3) The applicable MLR standard;
    (4) The issuer's MLR, adjusted in accordance with the provisions of 
this subpart;
    (5) The issuer's aggregate premium revenue as reported in 
accordance with Sec.  158.130 of this part, minus any Federal and State 
taxes and licensing and regulatory fees that may be excluded from 
premium revenue as described in Sec.  158.162(a)(1) and (b)(1) of this 
part; and
    (6) The rebate percentage and amount owed to enrollees based upon 
the difference between the issuer's MLR and the applicable MLR 
standard.

0
11. Section 158.260 is amended by revising paragraphs (c)(1) through 
(5) to read as follows:

Sec.  158.260  Reporting of rebates.

* * * * *
    (c) * * *
    (1) Number of subscribers in the individual, small group and large 
group markets to whom the issuer paid a rebate directly, and number of 
small group and large group policyholders receiving a rebate on behalf 
of enrollees;
    (2) Amount of rebates provided as premium credit;
    (3) Amount of rebates provided as lump sum payment regardless of 
whether in cash, reimbursement to an enrollee's credit card, or direct 
payment to an enrollee's bank account;
    (4) Amount of rebates that were de minimis as provided in Sec.  
158.243 of this subpart and the number of enrollees who did not receive 
a rebate because it was de minimis; and
    (5) Amount of unclaimed rebates, a description of the methods used 
to locate the applicable enrollees, and a description of how the 
unclaimed rebates were disbursed.

    Dated: November 2, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: November 29, 2011.
Kathleen Sebelius,
 Secretary, Department of Health and Human Services.
[FR Doc. 2011-31289 Filed 12-2-11; 11:15 am]
BILLING CODE 4120-01-P
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