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[Federal Register Volume 76, Number 99 (Monday, May 23, 2011)]
[Rules and Regulations]
[Pages 29964-29988]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12631]

[[Page 29963]]

Vol. 76

Monday,

No. 99

May 23, 2011

Part IV

Department of Health and Human Services

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45 CFR Part 154

Rate Increase Disclosure and Review; Final Rule

Federal Register / Vol. 76 , No. 99 / Monday, May 23, 2011 / Rules 
and Regulations

[[Page 29964]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 154

[CMS-9999-FC]
RIN 0938-AQ68

Rate Increase Disclosure and Review

AGENCY: Center for Consumer Information and Insurance Oversight, 
Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period implements requirements 
for health insurance issuers regarding disclosure and review of 
unreasonable premium increases under section 2794 of the Public Health 
Service Act. The final rule establishes a rate review program to ensure 
that all rate increases that meet or exceed a specified threshold are 
reviewed by a State or CMS to determine whether they are unreasonable 
and that certain rate information be made public.

DATES: Effective date. This rule is effective on July 18, 2011.
    Comment date. We will consider comments on Sec.  154.102 regarding 
the definitions of ``individual market'' and ``small group market'' 
that are received at one of the addresses provided in the ADDRESSES 
section of this rule no later than 5 p.m. EST on July 18, 2011.

ADDRESSES: In commenting please refer to file code CMS-9999-FC. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the 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-9999-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-9999-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 4:00 p.m. To schedule an appointment to view public comments, 
phone (800) 743-3591.

FOR FURTHER INFORMATION CONTACT: Sally McCarty, (301) 492-4489 (or by 
e-mail: ratereview@hhs.gov).

SUPPLEMENTARY INFORMATION: Comment Subject Areas: We will consider 
comments on how individual and small group coverage sold through 
associations should be treated under the rate review process 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.
    Section 1003 of the Affordable Care Act adds a new section 2794 of 
the PHS Act which directs the Secretary of the Department of Health and 
Human Services (the Secretary), in conjunction with the States, to 
establish a process for the annual review of ``unreasonable increases 
in premiums for health insurance coverage.'' The statute provides that 
this process shall require health insurance issuers to submit to the 
Secretary and the applicable State justifications for unreasonable 
premium increases prior to the implementation of the increases.
    On December 23, 2010, we published a proposed rule entitled ``Rate 
Increase Disclosure and Review.'' Sixty comments were received by the 
end of the comment period. Commenters included several State insurance 
regulators; the National Association of Insurance Commissioners 
(``NAIC''); many consumer, retiree, and patient organizations; health 
care providers; health insurance issuers and related trade associations 
(collectively, ``industry''); an organization representing the 
actuarial profession; and others.

II. Provisions of the Proposed Rule and Responses to Comments

    In this section of the preamble, we summarize each section of the 
proposed rule, discuss the public comments received on each section (if 
any), and provide responses to the comments.

A. Subpart A--General Provisions

1. Basis and Scope (Sec.  154.101)
    Section 154.101 of the proposed rule indicated that this rule would 
implement section 2794 of the PHS Act. Specifically, the rule would 
establish

[[Page 29965]]

disclosure requirements on health insurance issuers offering health 
insurance coverage in the small group or individual markets concerning 
rate increases that are above a specific threshold and designated as 
subject to review. The rule proposed to establish the process by which 
such increases are reviewed to determine whether they are unreasonable.
    Comment: One consumer commenter expressed concern that the proposed 
rule did not include authority for CMS to require an issuer to rescind 
an unreasonable rate or otherwise impose penalties on such issuer for 
proposing an unreasonable rate.
    Response: Section 2794 of the PHS Act only provides CMS with the 
authority to require justification and disclosure of proposed rate 
increases. However, if an issuer fails to comply with the requirements 
set forth in this final rule, CMS could seek a court order against the 
issuer to enforce compliance.
    Some States have the authority to deny proposed rate increases, and 
the grants awarded under section 2794(b) of the PHS Act provided 
supplemental performance funding for States that have or seek such 
authority. In addition, States receiving grants under section 2794(b) 
of the PHS Act will be required to make recommendations to State 
Exchanges regarding whether issuers should be excluded from 
participation in the Exchanges based on patterns or practices of 
excessive or unjustified premium increases. Section 1311(e)(2) of the 
Affordable Care Act requires Exchanges to take the States' 
recommendations into consideration when determining whether to make 
health plans available through the Exchanges.
2. Definitions (Sec.  154.102)
    Certain key definitions in Sec.  154.102 of the proposed rule are 
discussed below.
    a. Individual Market and Small Group Market. The proposed rule 
would have defined ``individual market'' and ``small group market'' as 
they are defined under the applicable State rate filing laws, if the 
State laws included such definitions. Under the proposed rule, if a 
State rate filing law did not include definitions for the individual 
market or the small group market, the definitions under the PHS Act 
would be used, with the exception that a small group would be defined 
to include employers with 50 or fewer employees.
    Comment: State regulators, industry, and other commenters agreed 
that CMS generally should defer to State rate filing laws concerning 
the definitions for the individual market and the small group market. 
One State regulator commenter requested clarification as to whether 
short-term limited duration coverage was required to be included in the 
proposed rule's definition of individual market, if the State excluded 
such coverage from its own definition.
    Response: The final rule continues to defer to State rate filing 
law definitions for individual market and small group market including 
in cases in which the State definition of individual market excludes 
short-term limited duration coverage. This rule, therefore, does not 
require that a State with an Effective Rate Review Program review 
proposed rate increases for short-term limited duration coverage if the 
State's rate filing law does not consider short-term limited duration 
coverage to be individual market coverage.
    Comment: Five commenters specifically expressed concern that the 
proposed rule, as drafted, would not cover association coverage sold to 
individuals and small employers in some States and recommended that the 
final rule include them in its scope.
    One State regulator commented that a large percentage of small 
employers purchase health insurance coverage through associations in 
her State. Under that State's law, small employers purchasing through 
an association are considered one large group not subject to the 
provisions of State law that apply to small group coverage. However, 
the commenter noted that rate increases are based on each small 
employer's own experience, and not that of the entire association, so 
that rate-setting for association coverage sold to small groups is not 
the same as that for large employer coverage. She recommended that 
association coverage be treated consistently for purposes of section 
2794 of the PHS Act and other PHS Act provisions. As CMS Insurance 
Standards Bulletin Transmittal Nos. 02-02 and 02-03 makes clear, PHS 
Act requirements generally apply to individual market and small group 
market coverage sold through associations in the same manner as they 
apply to other individual market and small group market coverage sold 
directly to consumers and small employers.
    Another State regulator voiced similar concerns, noting that his 
State had more small employers with association coverage than small 
employers with coverage in the traditional small group market. This 
State regulator urged that the final rule categorize individual and 
small employer coverage based on the purchasers of such coverage.
    A major trade association representing issuers found the proposed 
rule ambiguous concerning the regulation of product filings in the 
individual and small group markets offered through out-of-state 
associations and group trusts. The commenter noted that in some cases, 
a group policy is issued in one State, with certificates being issued 
to individuals or small groups in other States. Since many States only 
review rates for policies issued in their States, their rate review 
laws would not apply to coverage sold through out-of-state associations 
and group trusts.
    Similarly, one large issuer noted that CMS's deference to State 
rate filing law definitions could result in some individual market 
products sold through associations and group trusts not receiving any 
review by States or CMS. This commenter recommended that consistent 
filing requirements and rate review standards be applied to all 
products marketed to individuals, regardless of the technical insurance 
arrangement that might be involved, and that CMS review rates for 
individual market products sold through associations and group trusts 
in cases where States did not. The commenter thought this approach 
would ensure uniform consumer protection and advance competition by 
subjecting all issuers to the same rules.
    Lastly, one consumer commenter stated that all coverage marketed to 
individuals and small employers should be subject to the same review, 
regardless of whether the coverage was marketed directly to consumers 
or through associations.
    Response: Given the fact that we did not include a discussion on 
the association health plan issue in the proposed rule, we are not 
making a determination regarding this issue in this final rule, but 
instead are seeking comments and additional data on the definitions of 
``individual market'' and ``small group market'' in Sec.  154.102 of 
this final rule in relation to whether to provide that individual and 
small employer policies sold through associations are to be included in 
the rate review process, even if the State excludes such coverage from 
its definitions of individual and small group market coverage. Given 
the comments received and our policy goals with regard to rate review, 
we are inclined to amend the definitions of individual market and small 
group market in Sec.  154.102 to include coverage sold to individuals 
and small groups through associations in all cases. However, as 
indicated above, we are interested in receiving further comments on 
Sec.  154.102 for future consideration. If we were to amend the 
definitions of ``individual market'' and ``small group market'' in 
Sec.  154.102 to

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include individual coverage and small employer coverage sold through 
associations in the rate review process, the amendment will only be 
applied prospectively.
    We recognize that some States may be unable to review proposed rate 
increases for coverage sold through associations in circumstances in 
which such association coverage is viewed as large group coverage under 
State law and State law does not provide for review of rate increases 
in the large group market, or the State otherwise lacks legal authority 
to review such rates. In that case, CMS could review the proposed 
increases for those products. Whether or not a State does or may be 
unable to review rate increases for association coverage is not a 
criteria for determining whether it has an Effective Rate Review 
Program.
    In addition, we are seeking comments to address the following 
questions:
    1. Do States currently review rate increases for association and 
out-of-State trust coverage sold to individuals and small groups, 
regardless of whether the policies are sitused in or outside of their 
States?
    2. How many such rate filings do States receive for association and 
out-of-State trust coverage?
    3. How prevalent are association and out-of-State trust coverage 
arrangements? What percentage of individual market and small group 
market business is sold through associations and out-of-State trusts?
    4. In which States is association and out-of-State trust coverage 
commonly purchased by individuals and small groups? Where are out-of-
State trusts typically sitused?
    5. Why do some individuals and small employers purchase coverage 
through associations and out-of-State trusts rather than the 
traditional markets? Are there particular groups of individuals or 
types of small employers that typically purchase coverage through 
associations and out-of-State trusts? What organizations (other than 
issuers) typically sponsor, endorse, or market association and out-of-
State trust arrangements?
    6. How do rate increases for association and out-of-State trust 
coverage sold to individuals and small groups compare to rate increases 
in the traditional market? What explains the differences (if any) 
between rate increases for association and out-of-State trust coverage 
and traditional market coverage?
    Once we receive and review the comments, we will make a 
determination on whether to amend Sec.  154.102 of the rule to include 
individual and small employer health insurance coverage sold through 
associations in the rate review process. Meanwhile, nothing prohibits a 
State from reviewing rates of coverage sold through associations if it 
already does so or amends its laws in the future to do so.
    b. Product. The proposed rule would define ``product'' as a package 
of health insurance coverage benefits with a discrete set of rating and 
pricing methodologies offered in a State.
    Comment: Several industry commenters raised concerns that the 
definition of product was not consistent with State definitions and 
urged CMS to defer to such State definitions. Some commenters further 
contended that it would be administratively cumbersome to develop a new 
Federal product classification system that did not align with existing 
State classification systems.
    Response: While we have not modified the proposed rule's definition 
of product in this final rule, we believe that the definition is 
sufficiently flexible to accommodate existing State definitions, and 
that, as a practical matter, issuers will not have to reclassify their 
products to comply with the rate review process. Further, this 
definition is intended to track closely with the definition of health 
insurance product for purposes of the web portal, 45 CFR 159.110. We 
expect that in most cases issuers will be able to use their existing 
identification numbers for health insurance products under the Health 
Insurance Oversight System (HIOS) for reporting rate increases to CMS.
    c. Rate Increase. The proposed rule would define ``rate increase'' 
as an increase in the rates of a specific product in the individual or 
small group market.
    Comment: Several industry commenters supported CMS' decision to 
base the threshold standards on rates, rather than premiums. They noted 
that the distinction between premiums and rates was explained in the 
proposed rule's preamble and recommended that this discussion be 
incorporated into the final rule itself.
    Response: We do not believe it is necessary to repeat the 
discussion in the proposed rule, as we are adopting the proposal 
described in that discussion, and that discussion applies to this final 
rule.
    d. State. The proposed rule would define ``State'' using the 
definition provided in section 2791(d)(14) of the PHS Act.

    Note:  We note that the definition in 2791(d)(14) of the PHS Act 
includes the States, the District of Columbia, Puerto Rico, the 
Virgin Islands, Guam, American Samoa, and Northern Mariana Islands.

3. Applicability (Sec.  154.103)
    The proposed rule generally would be applicable to all health 
insurance issuers offering coverage in the small group or individual 
markets in a State. The proposed rule would not apply to grandfathered 
health plan coverage, as defined in 45 CFR 147.140, and to insurance 
coverage that meets the ``excepted benefits'' definition set forth in 
section 2791(c) of the PHS Act.
    Comment: State regulators, industry, and employers generally agreed 
that the large group market should not be subject to the final rule, 
noting that large employers are sophisticated purchasers, that rates 
generally are based on each large employer's own experience, and that 
the proposed rule's filing requirements were not aligned with State 
large group market practices. In contrast, some provider commenters and 
a labor organization recommended that the large group market be subject 
to the final rule, noting the rate increases that large groups have 
faced and the consolidation that has occurred in the health insurance 
industry. Lastly, one State regulator noted that rates for mid-sized 
employers (that is, those with 51 to 99 employees) are only partially 
experience-rated and that a rate review process could be warranted for 
them, as well.
    Response: We understand that many employer groups at the smaller 
end of the large group spectrum are only partially experience-rated, 
but we have not included them in the scope of the final rule because 
few States review rates for large groups. However, we will monitor rate 
increases in that market segment using a variety of sources including 
data from the rate review grant program and assess whether future 
amendments to the final rule may be warranted.
    Comment: One commenter suggested that grandfathered plans be 
included within the scope of the final rule.
    Response: Section 1251 of the Affordable Care Act provides that 
section 2794 of the PHS Act does not apply to coverage that was in 
effect on March 23, 2011 and retains grandfather status. If coverage 
loses its grandfather status, then PHS Act section 2794 of the PHS Act 
will apply.
    Comment: One provider commenter recommended that dental and vision 
plans be included within the scope of the final rule. The commenter 
stated that rates for these products have increased significantly due 
to lack of

[[Page 29967]]

regulation and noted the importance of such coverage to children.
    Response: We have maintained the exclusion for excepted benefits 
(including limited scope dental and vision benefits) as defined under 
section 2791(c) of the PHS Act because we believe Federal and State 
resources are most effectively focused on increases that affect the 
affordability of basic medical coverage. We do not believe that rate 
increases for excepted benefit plans such as limited scope dental and 
vision benefits have the same impact on individuals and small employers 
as rate increases for basic medical coverage that includes benefits for 
hospital and physician services. States may review these rates if 
permitted under State law.
    Comment: One commenter recommended that retiree-only plans be 
included within the scope of the final rule when current or former 
employees pay for substantial portions of the premium increases.
    Response: While it is possible that some State filing laws may 
apply to such coverage, we have not required that health insurance 
coverage provided to retiree-only plans be subject to this rule. We 
note that many retiree-only plans are self-funded and thus would not 
constitute health insurance coverage subject to section 2794 of the PHS 
Act.

B. Subpart B--Disclosure and Review Provisions

1. Rate Increases Subject to Review (Sec.  154.200)
    Under the proposed rule, CMS or the applicable State would review 
those rate increases that meet or exceed specified thresholds to 
determine if they are unreasonable. (We understand that many States 
review all rate increases in the applicable markets; nothing in this 
rule affects State laws or practices with respect to rate increases 
below the relevant threshold.) Rate increases would be subject to 
review if they are 10 percent or more and either: (1) are filed in a 
State on or after July 1, 2011; or (2) are in a State that does not 
require rate increases to be filed, and are effective on or after July 
1, 2011. For rate increases filed in a State during calendar year 2012 
and thereafter, or effective in calendar year 2012 and thereafter in a 
State that does not require rate increases to be filed, rate increases 
that meet or exceed State-specific thresholds determined by the 
Secretary for the applicable calendar year (or 10 percent if applicable 
State-specified thresholds are not determined by the Secretary) would 
be subject to review. The State-specific thresholds would be published 
in the Federal Register no later than the September 15th prior to each 
calendar year to which they apply.
    To determine whether the specified threshold is met or exceeded, 
the weighted average increase for all enrollees subject to the rate 
increase would be used. Rate increases during the 12 month period that 
precedes the date on which a rate increase is effective are aggregated 
to determine whether the specified threshold is met or exceeded.
    Comment: Some State regulator and industry commenters believed that 
the proposed rule underestimated the number of rate increases that 
would be above the 10 percent threshold, with some commenters claiming 
that virtually all proposed rate increases would be captured under that 
threshold. Industry commenters contended that the 10 percent threshold 
did not represent a fair balance of capturing a reasonable number of 
proposed rate increases and did not track with recent rate increase 
trends. Some State regulator and industry commenters noted that section 
2794 of the PHS Act called for the review of ``unreasonable'' 
increases, and that increases above 10 percent are not necessarily 
unreasonable. Other industry commenters asserted that the threshold was 
arbitrary and low. They claimed this threshold would stigmatize 
actuarially appropriate rates, bias State review, deluge consumers with 
confusing information, and place significant administrative burdens on 
issuers. Industry commenters recommended that the threshold be based on 
a broader range of factors including medical cost inflation, adverse 
selection, deductible leveraging, and required benefit changes, among 
others.
    Consumer, provider, and some State regulator commenters, in 
contrast, argued that the 10 percent threshold was too high. Commenters 
listed numerous concerns including: (1) The threshold did not consider 
the cumulative impact of increases from multiple years and could 
encourage issuers to target just below the threshold; (2) many rate 
increases below 10 percent could be problematic from an actuarial 
perspective; and (3) a threshold designed to be above medical trend 
would not pressure issuers into taking steps to moderate growth in 
medical costs. In addition, some commenters recommended that all 
proposed increases be subject to review.
    Response: We believe that 10 percent continues to be an appropriate 
initial threshold for determining which rates will be subject to review 
based on the analysis of the trend in health care costs and rate 
increases provided in the preamble to the proposed rule. The 10 percent 
transitional threshold balances the need to provide more disclosure to 
consumers while avoiding undue administrative burdens on other 
stakeholders. This threshold should not cause consumers to be 
overwhelmed with information since they likely will only review rate 
information concerning their current plans or those which they are 
considering buying. With respect to the commenter focusing on the word 
``unreasonable'' in section 2794, we believe that to identify and 
review unreasonable rates prior to implementation, it is necessary to 
review potentially unreasonable rates to assess their reasonableness. 
Lastly, we note that the 10 percent threshold is intended to be 
transitional, until State-specific thresholds are put in place.
    Comment: Several commenters suggested that the proposed July 1, 
2011 effective date for the rate review program did not provide States 
and health insurance issuers with adequate time to come into compliance 
with a final rule. Many State regulator commenters suggested that the 
proposed effective date be delayed until January 1, 2012 and noted that 
later effective dates would allow the rate review program to begin with 
State-specific thresholds rather than the 10 percent threshold. One 
State regulator commenter suggested that the effective date be 6 months 
after promulgation of the final rule. One industry commenter proposed 
that the effective date be July 1, 2012, expressing concern that there 
would not be enough time between issuance of the final rule and a July 
1, 2011 effective date for issuers to develop and implement necessary 
system changes. Several industry commenters stated that they currently 
are in the process of developing rates for July 1, 2011 effective dates 
and recommended that the proposed rule not apply to those rates in 
States without current rate filing requirements.
    Response: In response to these comments, we have moved the 
effective date in this final rule from July 1, 2011 to September 1, 
2011 and maintained the initial, transitional 10 percent threshold. 
This effective date is intended to ensure that proposed 2012 rate 
increases meeting or exceeding the 10 percent threshold will be 
reviewed by either CMS or the applicable State. Further delay could 
mean that many rate increases for 2012 will not be subject to review. 
We do not deem further delay in starting the rate review program to be 
desirable given that stakeholders now have been able to provide us with 
valuable feedback concerning the program's design and we

[[Page 29968]]

are prepared to initiate the program. We note that issuers will not be 
required to provide data beyond what the majority of States already 
require to be filed in support of proposed rate increases. We will be 
offering further guidance and training to assist issuers in complying 
with their obligations under the program.
    Comment: State regulator and industry commenters generally 
expressed support for State-specific thresholds. Some consumer 
commenters expressed concern that use of State-specific thresholds 
would reward inefficient insurance markets with higher thresholds. They 
recommended either the use of a national threshold or the lower of a 
national or State-specific threshold. Alternatively, some consumer 
commenters recommended that CMS apply downward adjustments to State-
specific thresholds in inefficient insurance markets. State regulator 
commenters recommended that States be able to establish their own 
review thresholds, or that, at a minimum, CMS consult with States in 
developing the State-specific thresholds. State regulator commenters 
also recommended that the final rule provide more detail on CMS's 
process for determining State-specific thresholds and include a process 
by which States could ask CMS to reconsider State-specific thresholds 
they considered inappropriate. Industry commenters generally were 
supportive of more State involvement in developing State-specific 
thresholds.
    Many commenters provided recommendations on the methodology for 
establishing the State-specific thresholds applicable to 2012. Industry 
commenters raised concerns that a threshold tracking loosely with 
medical trend, but not other factors, would not sufficiently account 
for expected rate increases and emphasized that the threshold's 
underlying factors should have an appropriate actuarial basis. 
Additionally, some industry commenters said that the threshold should 
take into account possible impacts from the Affordable Care Act on 
proposed increases. As noted, many consumer and provider commenters 
stated that the 10 percent threshold was too high and recommended that 
CMS use lower thresholds in 2012. Some consumer commenters stated that 
the threshold should be based solely on medical trends, while others 
recommended that it be based on multiple factors, including adjustments 
for inefficient insurance markets and issuers' medical loss ratios.
    Many commenters urged CMS to act quickly to develop the State-
specific thresholds for 2012, noting that health insurance issuers were 
already developing their proposed rates and that even if the State-
specific thresholds were released by September 15, 2011, most of the 
2012 increases would be missed. Several commenters noted the need to 
monitor State-specific thresholds closely on an ongoing basis to keep 
up with market trends and address potentially unintended consequences 
(for example, under- or over-inclusive thresholds).
    Response: As noted earlier, the 10 percent threshold is intended to 
be transitional and we believe that this initial phase of the rate 
review program will enable CMS and the States to gather information 
that will be helpful in developing the State-specific thresholds. CMS 
will immediately begin work with the States and the NAIC to develop a 
process and identify data and methodologies for setting State-specific 
thresholds, so that the first State-specific thresholds can be 
effective for the twelve-month period beginning on September 1, 2012. 
We plan to update the State-specific thresholds annually, although the 
10 percent threshold will apply in a State if a State-specific 
threshold has not been established for that State. We will publish a 
notice concerning the applicable thresholds no later than June 1 of 
each year beginning in 2012.
    Comment: Commenters offered various interpretations concerning how 
rate increases should be calculated and how the weighting concept 
should work under the proposed rule, while others asked for 
clarification on these issues. Specifically, one commenter understood 
the proposed rule to mean that rate increases would be calculated as 
the overall average percentage increase between the old premium and the 
new premium, while another believed that rate increases would be 
calculated as the percentage change between the old revenue and the new 
projected revenue. With respect to weighting, some commenters 
interpreted the proposed rule to mean that the increase percentage be 
weighted by the number of policies, arguing that a subgroup with a 
lower premium should not be treated the same as another subgroup with a 
larger premium but an equal percentage increase.
    Response: We have modified the final rule to clarify the issues 
raised by these comments. We believe that the rule's method for 
calculating a rate increase (that is, the average increase over all 
policies weighted by premium volume) is arithmetically identical to 
calculating the rate increase as the overall average percentage 
increase between the old premium and the new premium. In addition, the 
rule's method for calculating a rate increase could be applied such 
that it is the same as calculating the rate increase as the percentage 
change between the old revenue and the new projected revenue. With 
respect to weighting, we note that weighting should not be done based 
on the number of policies; rather, premium volume is the appropriate 
weighting factor.
2. Unreasonable Rate Increase (Sec.  154.205)
    The proposed rule would set three criteria that CMS would use in 
determining whether a rate increase is excessive, unjustified, or 
unfairly discriminatory, and, therefore, unreasonable. First, an 
increase would be considered excessive if it causes the premium to be 
unreasonably high in relation to benefits. In making this 
determination, CMS would consider whether: (1) The rate increase would 
result in a projected medical loss ratio below the applicable Federal 
standard; (2) one or more of the assumptions is not supported by 
substantial evidence; and (3) the choice of assumptions (or combination 
thereof) is unreasonable. Second, an increase would be considered 
unjustified if the issuer provides data or documentation that is 
incomplete, inadequate, or otherwise does not provide a basis to 
determine whether the increase is reasonable. Third, an increase would 
be considered unfairly discriminatory if it results in premium 
differences between insureds with similar risks that are not permitted 
under State law or, if there is no applicable State law, does not 
reasonably correspond to expected differences in costs.
    Comment: Commenters representing State regulators, industry, and a 
professional association expressed concern that the definition of 
``unreasonable rate increase'' in the proposed rule did not include a 
prong related to the adequacy of the proposed rates.
    Response: We acknowledge that inadequate rate increases can be 
problematic. For example, inadequate rate increases can lead to larger 
increases for consumers in subsequent years or even have a negative 
impact on an issuer's overall financial condition. Section 2794 of the 
PHS Act is not primarily concerned with rate increases that are too low 
and does not identify adequacy among the criteria to be considered when 
determining unreasonableness. Therefore, we did not include adequacy as 
a prong of the unreasonableness test that we will use when reviewing 
rates under the final

[[Page 29969]]

rule. We note that many States do explicitly consider the adequacy of 
rates during their reviews, and nothing in this regulation prevents or 
prohibits a State from continuing to consider this factor in their 
review in the future.
3. Review of Rate Increases Subject to Review by CMS or by a State 
(Sec.  154.210)
    The proposed rule sets forth the factors that would be used by CMS 
to determine whether CMS would review rate increases subject to review 
or whether CMS would adopt the determinations made by a State. To the 
extent that a State had an Effective Rate Review Program in a given 
market, as determined by CMS, and provided to CMS its final 
determinations whether an increase is unreasonable, CMS would adopt 
that State's determinations. A State's final determination would need 
to include an explanation of its analysis and be provided to CMS within 
five business days following its determination. In all other 
situations, CMS would review rate increases subject to review.
    Comment: One commenter argued that since section 2794 of the PHS 
Act requires CMS to establish a rate review process ``in conjunction 
with States,'' CMS lacked authority to review rates in those States 
that did not have Effective Rate Review Programs. In contrast, a 
commenter representing business groups expressed support for the 
proposed rule's approach to CMS establishing a rate review program in 
conjunction with the States.
    Response: We interpret the requirement that the rate review program 
be established ``in conjunction with States'' as requiring that it 
defer to rate review in the States to the extent consistent with the 
goals of the Affordable Care Act. The rate review program established 
by this rule defers to State law and provides that, for States with 
Effective Rate Review Programs, CMS will adopt their determinations as 
to whether rate increases are unreasonable. We do not view this 
requirement as barring CMS from reviewing rates or collecting any 
information in those States that do not have Effective Rate Review 
Programs.
4. Submission of Disclosure to CMS for Rate Increases Subject to Review 
(Sec.  154.215)
    The proposed rule would require health insurance issuers to submit 
a ``Preliminary Justification'' for all rate increases subject to 
review. Parts I (rate increase summary) and II (written description 
justifying the rate increase) would be provided to CMS and the 
applicable State (if the State receives such submissions). In addition, 
Part III (rate filing documentation) would be provided to CMS when it 
is reviewing the rate increase. Health insurance issuers may submit a 
combined Preliminary Justification for rate increases affecting 
multiple products if their claims experience is aggregated and the rate 
increases are the same across all of the aggregated products.
    Part I of the Preliminary Justification would be required to 
include: (1) Historical and projected claims experience; (2) trend 
projections related to utilization and service or unit cost; (3) any 
claims assumptions related to benefit changes; (4) allocation of the 
overall rate increase to claims and non-claims costs; (5) per enrollee 
per month allocation of current and projected premium; (6) current loss 
ratio and projected loss ratio; (7) three-year history of rate 
increases for the product associated with the rate increase; and (8) 
employee and executive compensation data from the health insurance 
issuer's annual financial statements.
    Part II would include a simple, brief narrative describing the data 
and assumptions used to develop the rate increase, including the rating 
methodology, the most significant factors causing the increase, and a 
brief description of the policies' overall experience.
    Part III, submitted in cases where CMS is reviewing a rate 
increase, would be required to include the following elements: (1) 
Description of the type of policy, benefits, renewability, general 
marketing method, and issue age limits; (2) scope and reason for the 
rate increase; (3) average annual premium per policy, before and after 
the rate increase; (4) past experience and any other alternative or 
additional data used; (5) a description of how the rate increase was 
determined, including the general description and source of each 
assumption used; (6) the cumulative loss ratio and a description of how 
it was calculated; (7) the projected future loss ratio and a 
description of how it was calculated; (8) the projected lifetime loss 
ratio that combines cumulative and future experience and a description 
of how it was calculated; (9) the Federal medical loss ratio standard 
in the applicable market to which the rate increase applies, accounting 
for any adjustments allowable under Federal law; and (10) if the 
projected future loss ratio is less than the applicable Federal medical 
loss ratio, a justification for this outcome. CMS would accept a copy 
of a rate filing submitted to a State that included each of these 
elements. CMS would request additional information from health 
insurance issuers if their Part III submissions lacked sufficient 
information for CMS to determine whether rate increases were 
unreasonable. Issuers would have five business days to supply the 
additional information. The data which issuers are required to provide 
in the Preliminary Justification contains less detail and therefore 
will be less burdensome for issuers than what is called for in the NAIC 
Model for Individual Health Insurance Rate Filings. This data is 
readily available to issuers and is generally included in rate filings 
which they make today.
    CMS would promptly make Parts I and II of the Preliminary 
Justifications available through the healthcare.gov Web site. In 
addition, in cases where CMS receives Part III, CMS would post on the 
CCIIO Web site any information not designated as ``confidential,'' as 
defined under CMS's Freedom of Information Act regulations, 45 CFR 
5.65. CMS would review information designated as ``confidential'' and 
would post it only if CMS determined that such information was, in 
fact, subject to disclosure under 45 CFR 5.65. Lastly, the 
healthcare.gov Web site would include a prominent disclaimer that 
stated: ``The Preliminary Justification is the initial summary 
information regarding the rate increase subject to review and does not 
represent a determination that the rate increase subject to review is 
an unreasonable rate increase.''
    Comment: Consumer commenters recommended strengthening the proposed 
rule's disclosure requirements by requiring additional information in 
Part I, II, and III of the Preliminary Justifications concerning 
average rate increases, historical rate increases, medical price and 
utilization changes, provider reimbursement and contracts, 
administrative costs (including costs related to medical management, 
marketing, lobbying, travel and association dues), and transfers of 
funds to affiliated companies. Provider commenters recommended similar 
disclosures concerning rate increases and administrative costs. One 
consumer commenter also suggested that sample rates be provided for 
persons with the same ages and family composition so that consumers 
could see how rate increases compared between health insurance issuers. 
Some State regulator commenters recommended that certain elements of 
the Preliminary Justification be revised or omitted to conform more 
closely to current reporting requirements imposed on issuers. One State 
regulator commenter recommended that executive compensation information 
not be

[[Page 29970]]

included in the Preliminary Justification, or, alternatively, that CMS 
explain how this information would help States evaluate a proposed 
increase.
    Many industry commenters argued that much of the information 
required in the Preliminary Justification would not be useful to 
consumers and could cause them unfairly to view the proposed rates as 
unreasonable. For example, they asserted that rate increase history and 
employee compensation generally were not taken into account during 
actuarial reviews. They also expressed concern that a large proportion 
of consumers would receive a confusing deluge of information concerning 
rates subject to review, given their estimates on the volume of 
proposed increases that would exceed the thresholds.
    Response: We generally believe that Parts I and II of the 
Preliminary Justification will provide consumers with sufficient detail 
concerning the factors influencing proposed rate increases, without 
being unduly confusing to consumers. Accordingly, the final rule 
continues to provide that Part I and II will be publicly posted. We 
have modified or eliminated certain reporting elements in the final 
rule as recommended by State regulator commenters. In Part I, medical 
loss ratio data has been removed because it can be computed from 
remaining Part I elements and therefore was redundant. (We note that 
medical loss ratio data continues to be a distinct reporting 
requirement for Part III.) The requirement to report executive and 
employee compensation data was also removed because these amounts would 
represent only a very small proportion of an overall rate increase when 
allocated by product and member month, and, consequently, would not be 
helpful to consumers in showing the primary rate increase drivers. We 
also added the phrase ``as determined by the Secretary'' in Sec.  
154.215(e) to allow HHS discretion in the future to respond to changes 
in the market and input from stakeholders as to what elements in Part I 
are most helpful to consumers. Finally, we removed the explanation of 
the rating methodology from Part II in order to keep Part II brief, 
non-technical, and understandable to consumers.
    Comment: Some industry commenters recommended that CMS allow 
issuers to aggregate and report multiple products at the same level of 
aggregation as permitted under State law, without requiring that the 
same rate increase be applied to all of the aggregated products. These 
commenters stated it would be administratively burdensome for CMS to 
adopt an aggregation standard that differed from current State 
requirements. Many consumer and provider commenters expressed concern 
that allowing aggregated filings for products would mask rate increase 
variations between different products.
    Response: Our understanding is that some States review rate filings 
at a product level, while other States review rate filings on an 
aggregated product basis, particularly in community-rated environments. 
The final rule maintains the proposed rule's standard, which 
accommodates both State approaches. Where filings are made on an 
aggregated product basis, the same claim experience must have been used 
to develop the increases and the proposed increases must be the same 
for each of the different products to ensure that issuers cannot mask 
high increases for certain products within the combined filings. To the 
extent that this approach represents a change for some issuers, the 
burden should be minimal since the rule merely requires that they 
report existing information in a different fashion. We believe that 
this aggregation standard appropriately balances the need for increased 
transparency with current State rate filing requirements and actuarial 
practices.
    Comment: Many consumer commenters urged that Part III of the 
Preliminary Justification not be given confidential treatment, 
reasoning that the public's right to information concerning rate 
increases outweighed issuers' proprietary interests in such 
information. One commenter noted that, for example, issuers potentially 
could designate actuarial memoranda and risk-based capital information 
as confidential, thereby leaving consumers without important 
information needed to scrutinize proposed rate increases. Another 
consumer commenter recommended that issuers be required to submit data 
on provider reimbursement and contracts and that issuers not be 
permitted to designate such data as confidential. While provider 
commenters generally recommended that as much information as possible 
from the Preliminary Justification be publicly released, they expressed 
concern about maintaining the confidentiality of provider reimbursement 
rates. Industry commenters were concerned about the impact of 
disclosing market sensitive information and generally recommended that 
the information in Part III be kept confidential and not disclosed. 
Industry commenters requested that CMS provide additional information 
on how the ``confidential'' information exemption under the Freedom of 
Information Act (FOIA), 5 U.S.C. section 552, would apply so that they 
could designate information in Part III of the Preliminary 
Justification appropriately. They also requested more guidance on CMS's 
review and appeal process for FOIA requests and disclosures.
    Response: The final rule essentially adopts the confidentiality 
approach taken in the proposed rule; that is, information contained in 
Part III of a Preliminary Justification will be posted on our Web site 
unless the FOIA exemption for trade secrets and confidential commercial 
or financial information applies. As a Federal agency, we generally are 
required to utilize the FOIA standard in determining confidentiality. 
As discussed in more detail in the preamble to the proposed rule, CMS's 
FOIA rule, 45 CFR Part 5, establishes the process and standards that 
generally apply to determining whether information designated as 
confidential is subject to disclosure. Issuers will be able to 
designate the information that they believe is protected by the 
exemption and we will determine whether the exemption applies.
    We reviewed the approaches currently taken by States concerning the 
public disclosure of rate filings. Some States make all parts of a rate 
filing public; some States provide standards for which parts of a rate 
filing will be made public; and other States follow a freedom of 
information process and standard under State law that is similar to 
FOIA. Based on a review of State filing guidelines and State Web sites, 
it appears at least 12 states do not redact any information when making 
rate filings available to the public. Given that Part III is based on 
State rate filing requirements, this means that many States do not 
regard the types of information found in Part III to be confidential or 
protected from disclosure. Based on the fact that the information 
contained in Part III appears to be widely available across the country 
and that many States already are making this information available, it 
may be difficult for an issuer to assert that the information in Part 
III is confidential or protected from disclosure under Federal law.
    Comment: Industry commenters recommended that issuers be provided 
additional time beyond five business days to respond to an inquiry from 
CMS regarding an incomplete Part III of the Preliminary Justification. 
Commenters noted that, for example, a more complex request might 
require an issuer to gather and organize information from different 
internal departments, which could take longer than five business days.

[[Page 29971]]

    Response: We have modified the final rule so that, after receiving 
a request from CMS, an issuer will have 10 business days to respond to 
provide additional Part III information.
    Comment: Several State regulator, consumer, and industry commenters 
expressed concerns that the proposed rule's disclaimer language would 
be misleading to consumers and that a clearer description of both the 
purpose of the Preliminary Justification and the rate review process 
was needed. State regulator and industry commenters requested an 
explicit statement that rates subject to review had not yet been 
determined to be unreasonable by a State or CMS. Commenters also 
recommended including statements regarding: (1) The availability of 
additional information if a rate was determined to be unreasonable; (2) 
the actuarial factors that impact the reasonableness of rates; (3) the 
possibility that a proposed increase might change prior to 
implementation; and (4) whether a product was available for purchase 
notwithstanding review of its proposed rates.
    Response: We have modified the final rule to state more generally 
that a disclaimer will accompany the Preliminary Justifications posted 
on our Web site. Guidance concerning this disclaimer will be provided 
at a later date and the commenters' concerns will be considered when 
that guidance is developed.
5. Timing of Preliminary Justification (Sec.  154.220)
    The proposed rule provides that if a State requires a proposed rate 
increase to be filed with the State prior to implementation of the 
increase, the health insurance issuer must send CMS and the applicable 
State the Preliminary Justification on the date the issuer submits the 
proposed increase to the State. For all other States, the health 
insurance issuer must send CMS and the applicable State the Preliminary 
Justification prior to the implementation of the rate increase.
    Comment: A few State regulator commenters suggested that 
Preliminary Justifications should not be posted unless a rate was found 
to be unreasonable. These commenters expressed concern that posting 
Preliminary Justifications prior to the proposed increases' evaluation 
would cause consumer confusion, lead to unsuitable replacements of 
coverage, and provide opportunities for misuse of information. In 
addition, commenters noted that some States did not allow disclosures 
concerning rate filing information until rates are approved. In 
contrast, other State regulator commenters supported the requirement 
that the Preliminary Justification be posted immediately upon receipt. 
Several consumer commenters recommended that policyholders and the 
public be given adequate notice of proposed rate increases prior to 
increases going into effect. These commenters generally suggested that 
issuers file proposed rates with the States and give consumers notice 
of the proposed increases 60 or 90 days before they go into effect. One 
commenter suggested that patient advocacy groups be given specific 
notice concerning proposed increases that were higher than medical 
inflation.
    Response: Section 2794 of the Act requires that issuers submit to 
the Secretary and the relevant State a justification for an 
unreasonable rate increase before the rate is implemented. We 
considered two alternatives to implement that provision. The first 
would be to establish a federal regulatory requirement that a rate 
cannot go into effect until it has been reviewed and determined to be 
reasonable or unreasonable. At that point, justifications could be 
submitted only for those rates that were determined to be unreasonable, 
prior to their being implemented. Such a federal requirement would be 
inconsistent with the ``file and use'' laws in many States, which 
provide that a rate may go into effect as soon as it is filed. We 
concluded that overriding State law in this respect was not the best 
approach.
    Alternatively, the approach taken in the proposed rule, which 
requires a Preliminary Justification to be submitted at the time a rate 
increase subject to review is filed, assures that there will be a 
justification for increases for all rate increases that ultimately are 
determined to be unreasonable, without requiring any change in current 
State law or practice for reviewing rates. We believe that requiring 
the posting of the Preliminary Justification before a final 
determination is made both satisfies the requirements of the Affordable 
Care Act and assures that consumers will better understand why their 
issuers are proposing rate increases that meet or exceed the subject to 
review threshold.
    In addition, the disclaimer language on our Web site will be 
modified to better inform consumers of the purpose of the Preliminary 
Justification and to make clear that its posting is not a determination 
that the proposed rate increase is unreasonable.
6. Determination by CMS or a State of an Unreasonable Rate Increase 
(Sec.  154.225)
    When CMS reviews a rate increase subject to review, it will post on 
its Web site a final determination and a brief explanation of its 
analysis within five business days following the determination. If the 
rate increase is determined to be unreasonable, CMS will also provide 
this information to the health insurance issuer.
    When a State reviews an increase subject to review, CMS will adopt 
the State's final determination and post it on the CMS Web site. If a 
State determines that the rate increase is unreasonable, but the health 
insurance issuer is legally permitted to implement the increase under 
State law, CMS will provide the State's final determination and 
explanation to the issuer within five business days of CMS receiving 
the information from the State.
    Comment: One State commenter suggested that States with Effective 
Rate Review Programs not be required to post brief explanations and 
analyses that were more in-depth than those posted by CMS in cases 
where it reviews rates.
    Response: We have modified the final rule to clarify that the brief 
explanations and analyses posted by CMS and States are intended to be 
consistent in format and content.
    Comment: Numerous industry commenters suggested that CMS establish 
safe harbors or expedited rate review procedures. For example, some 
commenters suggested that if a health insurance issuer's proposed rate 
increases were expected to satisfy the Federal medical loss ratio 
standard, the increases should be exempt from review. Another commenter 
suggested that proposed rates in insurance markets that were determined 
to be competitive should either be exempt from review or subject to an 
expedited process. One commenter stated generally that the review 
process applied should vary based on the circumstances of the proposed 
increase.
    Response: We have not modified the final rule to provide safe 
harbors or expedited rate review procedures given that many factors are 
relevant in determining whether a particular proposed rate increase is 
unreasonable, thus supporting the need for a more detailed review 
process.
7. Submission and Posting of Final Justifications for Unreasonable Rate 
Increases (Sec.  154.230)
    If a health insurance issuer declines to implement a rate increase 
that has been determined to be unreasonable, or

[[Page 29972]]

chooses to implement a lower increase, under the proposed rule, the 
issuer would be required to provide CMS timely notice of its decision. 
A lower increase that meets or exceeds the applicable thresholds for 
review would require a new Preliminary Justification. However, if an 
issuer chooses to lower its request for a proposed increase while the 
increase is under review and before a determination or unreasonableness 
has been made, the issuer can do so by filing a modification to the 
filing under review. If the revised rate falls below the review 
threshold, the review will cease and the revised rate will be displayed 
on the posting.
    If a health insurance issuer implements an unreasonable rate 
increase, it must, within 10 days of the later of implementing the 
increase or receiving the final determination, provide CMS with a 
``Final Justification'' responding to CMS's or the State's 
determination, using information consistent with that provided by the 
issuer in the Preliminary Justification. The health insurance issuer 
must prominently post on its Web site: (1) the portions of the 
Preliminary Justification posted on the CMS Web site; (2) CMS's or the 
State's final determination; and (3) the issuer's Final Justification. 
This information must be made available on the issuer's Web site for at 
least three years. In addition, CMS will make an issuer's Final 
Justification available through the healthcare.gov Web site for three 
years.

    Note:  We did not receive any major comments on this section.

C. Subpart C--Effective Rate Review Programs

CMS's Determination of Effective Rate Review Programs (Sec.  154.301)
    Under the proposed rule, CMS would apply the following criteria in 
evaluating whether a State has an Effective Rate Review Program for the 
individual market and small group market, including different types of 
products within those markets. CMS will examine information publicly 
available concerning each States' authority to receive the data needed 
in order to review a proposed rate increase. This includes State 
statutes, regulations, bulletins, filing guidance, and so forth. CMS 
will also review available information that describes each State's 
practices in conducting rate reviews. This information primarily 
consists of State applications for rate review grants, quarterly 
reports of activity undertaken with grant funds, and conversations 
between CMS staff and state regulators relating to grant activities.
    CMS will then conduct a phone call with each State insurance 
regulator to confirm the information CMS has gathered and to ask for 
any additional information the State believes is relevant to the 
determination of whether it has an Effective Rate Review Program.
    CMS will notify States of its determinations by July 1, 2011, two 
months in advance of the date filings are first due pursuant to this 
regulation. States will have the right to bring any new information 
bearing on this decision to CMS at any time, and CMS will consider 
whether based on this new information the State should be determined to 
have an Effective Rate Review Program. CMS will also monitor States 
that have determined to be effective in order to ascertain that their 
processes continue to satisfy the requirements of the regulation.
    CMS would consider whether the State receives data and 
documentation from issuers concerning rate increases sufficient to 
conduct an examination of the reasonableness of the assumptions used to 
develop proposed rate increases, the validity of the historical data 
underlying the assumptions, and the issuers' data related to past 
projections and actual experience. CMS also would consider whether the 
State conducts effective and timely reviews of the information 
submitted by issuers in support of proposed rate increases. The 
examination would need to include an analysis of: (1) Medical trend 
changes by major service categories; (2) utilization changes by major 
service categories; (3) cost-sharing changes by major service 
categories; (4) benefit changes; (5) changes in enrollee risk profile; 
(6) impact of over- or under-estimate of medical trend in previous 
years on the current rate; (7) reserve needs; (8) administrative costs 
related to programs that improve health care quality; (9) other 
administrative costs; (10) applicable taxes and licensing or regulatory 
fees; (11) medical loss ratio; and (12) the health insurance issuer's 
risk-based capital status relative to national standards. Finally, the 
State's determination whether a rate increase is unreasonable would 
need to be made under a standard set forth in State statute or 
regulation.
    CMS would determine whether a State has an Effective Rate Review 
Program for each market based on documentation and information received 
by CMS from the State or any other information otherwise available to 
CMS indicating that its rate review program meets these criteria. CMS 
would reserve the right to determine that a State no longer had an 
Effective Rate Review Program if it no longer met these criteria. The 
NAIC individual rate filing guidelines--the basis of many states 
current rate review practices--require the collection and review of a 
larger, more detailed set of data than the review criteria provided in 
the rule. Thus, the review criteria provided in the rule incorporates 
practices that are already in place in many states.
    Comment: The NAIC recommended that the final rule allow flexibility 
for States to conduct rate reviews within their statutory frameworks. 
One State regulator commenter recommended that the final rule defer to 
State law on what constitutes an Effective Rate Review Program and not 
require States to conform to any Federal definition of an Effective 
Rate Review Program. In the alternative, the commenter suggested that 
the NAIC establish rate review standards that could be required for 
State accreditation. In addition, some commenters including State 
regulators and an organization representing the actuarial profession 
generally recommended that reviews conducted by CMS and the States 
should be subject to the same standards under the final rule. For 
example, the commenter believed that the lists of informational 
elements required under Sec.  154.215(g)(1) and Sec.  154.301(a)(3) 
should be the same. Industry commenters argued that review standards in 
the proposed rule did not reflect the variation that currently exists 
among the States and the rule could drive States towards a national 
standard. Industry commenters also expressed concern that the criteria 
were overly prescriptive and that their application could be unduly 
subjective. Consumer and provider commenters expressed concern that the 
proposed rule's standards overall were too low and that States with 
limited review capabilities could be designated as having effective 
programs. Commenters also noted that the effectiveness of State review 
processes in practice, in addition to a State's statutory authority, 
was relevant to determining if an Effective Rate Review Program existed 
in a State.
    Response: We believe it is necessary for the rule to set forth 
minimum review standards so that CMS can determine which States meet 
those standards and subsequently defer to their determinations 
concerning whether proposed rate increases are unreasonable. We agree 
with commenters that the minimum standards for reviews for CMS and the 
States should be consistent. Therefore, we have modified the proposed 
rule in this final rule so that the information that CMS will review in 
Part III of the Preliminary Justification will be the same information 
that will be reviewed

[[Page 29973]]

as part of a State Effective Rate Review Program under Sec.  
154.301(a)(3) and (4). In addition, we have modified Sec.  
154.301(a)(4) to clarify that CMS and States with Effective Rate Review 
Programs will have to take into consideration the various factors 
listed in paragraph (4) to the extent applicable to the filing under 
review. This change is meant to reflect that reviewers for CMS or the 
State will have flexibility to use their expert judgment in evaluating 
the relevance of the different factors in the context of a particular 
rate filing.
    Comment: Many consumer commenters urged that public hearings and 
comment periods be required as part of an Effective Rate Review 
Program. One commenter recommended that excessive or frequent increases 
give rise to public hearings. Another commenter suggested that the 
public hearings be held at the health insurance issuer's expense if the 
proposed increase exceeded medical inflation. Lastly, one commenter 
suggested that issuers be required to mail information to consumers 
concerning proposed rate increases and their opportunities to 
participate in the rate review process.
    Response: We did not include public hearings as a required element 
for Effective Rate Review Programs in deference to the fact that most 
States today do not hold public hearings as part of the rate review 
process. However, in response to the comments urging a greater 
opportunity for input from the public, we modified the final rule to 
require that in order to be deemed to have an Effective Rate Review 
Program, a State must: (1) Provide access on a State Web site to Parts 
I and II of the Preliminary Justifications for those proposed rate 
increases that meet or exceed the threshold, and (2) have a mechanism 
for receiving public comments on those proposed rate increases. For 
example, a State could provide Web site access either by directly 
posting the relevant Parts I and II on its own Web site or by posting a 
regularly-updated list of the relevant Parts I and II with a link to 
the CMS Web site where they can be found. States could choose to accept 
public comments through the mail, their Web sites, public hearings, or 
other means. We believe that posting the Parts I and II of the 
Preliminary Justifications and allowing public input will encourage 
public participation in the rate review process, but be less burdensome 
than requiring all States with Effective Rate Review Programs to hold 
public hearings. In addition, we added a parallel requirement in Sec.  
154.215 that we accept public comments on the proposed rate increases 
we review. We note that CMS has encouraged States to undertake efforts 
to increase the transparency of their rate review programs under the 
grants authorized by PHS Act section 2794 and that many States are 
responding with innovative programs to increase public input. We also 
note that this is a criteria for States with Effective Rate Review 
Programs and not a requirement for a health insurance issuer filing for 
a rate increase.
    Comment: Several consumer commenters stated that States should be 
required to have prior approval authority over proposed rate increases 
in order to qualify as having Effective Rate Review Programs.
    Response: Prior approval authority over proposed rate increases can 
be an important part of a State's rate review program. States that have 
or propose this authority qualify for a supplemental performance grant 
under the grants provided under section 2794(b) of the PHS Act. Section 
2794 of the PHS Act requires CMS to establish a process for reviewing 
unreasonable rates; it does not provide CMS with prior approval 
authority. We therefore did not think it would be appropriate for CMS 
to mandate that States have prior approval authority in order to 
qualify as having Effective Rate Review Programs.
    Comment: Several State regulator and industry commenters asked for 
clarification concerning the role of medical loss ratios in the rate 
review process.
    Response: Both Federal and State medical loss ratios are relevant 
to the rate review process. We recognize that aggregation standards and 
relevant time periods differ between this rule and the Federal medical 
loss ratio interim final rule, 45 CFR part 158. For purposes of this 
rule, when CMS is reviewing rates, we will consider whether a product, 
along with the other products in the same market with which it will be 
aggregated for purposes of the Federal medical loss ratio, will be 
reasonably likely to satisfy the Federal medical loss ratio standards 
on a projected basis. We note that an issuer's explanation with regard 
to its projected medical loss ratio in a Part III submission has no 
bearing on its obligations under section 2718 of the PHS Act (for 
example, medical loss ratio rebates). In addition, CMS will consider 
whether a product satisfies the applicable State medical loss ratio 
standards in those States in which it reviews rates. In the absence of 
a State standard for the individual market, CMS will apply NAIC Model 
134-1, ``Guidelines for Filing of Rates for Individual Health Insurance 
Forms.'' In the absence of a State standard for the small group market, 
CMS will apply NAIC Model 134-1 until it releases its own guidelines 
for the small group market. The CMS guidelines will be released in 
future guidance and will be developed following a review of current 
State requirements and practices, medical loss ratio data, and other 
relevant information concerning the small group market.
    Comment: Some State regulator and industry commenters recommended 
that CMS not mandate that risk-based capital information be reviewed as 
part of the rate review process, stating that use of such information 
is not part of most State rate review processes. Consumer commenters 
emphasized that the overall financial condition of an issuer is 
relevant and should be taken into account.
    Response: We understand that few States specifically consider risk-
based capital information as part of the rate review process, although 
many States do consider more general information concerning issuers' 
capital and surplus. Therefore, we deleted risk-based capital as a 
factor in the final rule and have replaced it with capital and surplus. 
We believe that information concerning an issuer's capital and surplus 
may be useful in certain instances (for example, where an issuer has 
low surplus levels and needs to build reserves, or conversely where an 
issuer might be able to moderate a rate increase without causing 
solvency concerns). In addition, we note that capital and surplus 
information is only one of several items that would be taken into 
account as part of the rate review process, many of which will be of 
greater importance than capital and surplus information in making a 
determination of whether a proposed rate is unreasonable.
    Comment: Several commenters suggested different ways to use the 
Rate Review Grant Program to support State efforts to conduct effective 
rate reviews. Some consumer groups urged that the grant program be used 
to award funds, either directly or through States, to voluntary health 
agencies and other groups to educate the public about the rate review 
process and to assist them in selecting coverage appropriate to their 
individual circumstances. One consumer group commenter suggested that 
grant funds be used to develop rate review models that include 
financial incentives for issuers that meet predetermined goals and that 
implement cost containment, quality improvement, and clinical 
effectiveness measures. Another consumer group commenter recommended 
that the grant program should be used to encourage states to enact 
legislation necessary to

[[Page 29974]]

secure rate review and prior approval authority.
    Response: Grants awarded during Cycle I of the Rate Review Grant 
Program are being used to improve State rate review programs in a 
number of ways. Grant funds are being used to hire actuaries, improve 
information technology systems, and expand State rate review authority. 
Transparency is another goal of the rate review grant program and many 
States submitted work plans to improve public engagement in the rate 
review process. Cycle II grants, to be awarded in the Fall of 2011, 
will be awarded to States that have developed, or are in the process of 
developing, Effective Rate Review Programs. In Cycle II, CMS also will 
offer supplemental awards to States that have or obtain prior approval 
authority during the three-year grant period. Improving quality, 
implementing cost containment, and clinical effectiveness measures, 
while laudable goals, are outside the scope of the rate review rule.

III. Provisions of the Final Rule

    For the most part, this final rule incorporates the provisions of 
the proposed rule. Those provisions of this final rule that differ from 
the proposed rule are as follows:
     Applicability (Sec.  154.103). We deleted extraneous 
language.
     Rate increases subject to review (Sec.  154.200). We 
streamlined language concerning when the 10 percent or State-specific 
threshold will be applicable, provided additional information on State-
specific thresholds, and clarified the rate increase calculation 
formula. In addition, we changed the program's effective date from July 
1, 2011 to September 1, 2011. We also changed the date of the 
publication of state specific threshold to no later than June 1 of each 
year for the 12 month period that begins on September 1.
     Review of rate increases subject to review by CMS or by a 
State (Sec.  154.210). We clarified that CMS and the States will 
provide similar explanations on final determinations concerning 
unreasonable rates.
     Submission of disclosure to CMS for rate increases subject 
to review (Sec.  154.215). We replaced or deleted certain elements 
required for Parts I and II of the Preliminary Justification. In 
addition, we conformed the information requirements for Part III of the 
Preliminary Justification submitted to CMS to be the same as the 
information requirements for an Effective Rate Review Program 
maintained by a State; clarified that further instructions for Part III 
will be provided in guidance; and provided issuers with 10 business 
days (instead of 5 business days) to respond to a request for more 
information from CMS concerning a Part III submission. We shortened the 
language describing how CMS will treat confidential information in Part 
III under FOIA. We stated that the disclaimer that will accompany the 
Preliminary Justifications will be provided in guidance. Lastly, we 
added a requirement that CMS accept public comments on the proposed 
rate increases it reviews.
     Timing of Providing the Preliminary Justification (Sec.  
154.220). We clarified the section's title and changed the program's 
effective date from July 1, 2011 to September 1, 2011.
     Determination by CMS or a State of an unreasonable rate 
increase (Sec.  154.225). We clarified that CMS will make timely 
determinations whether proposed rate increases are unreasonable and 
that CMS and the States will provide similar explanations on final 
determinations concerning unreasonable rates. In addition, we made a 
technical correction to clarify that CMS will provide a State's final 
determination to an issuer within five business days (rather than five 
days) of receipt.
     Submission and posting of Final Justifications for 
unreasonable rate increases (Sec.  154.230). We made a technical 
correction to clarify that issuers have 10 business days (rather than 
10 days) to submit a Final Justification.
     CMS's determinations of Effective Rate Review Programs 
(Sec.  154.301). We clarified that States will need to take into 
account the listed factors in conducting their rate reviews. We 
replaced the risk-based capital factor with a capital and surplus 
factor. We required that States provide access to Parts I and II of the 
Preliminary Justifications through their Web sites and accept public 
comments on them. Lastly, we clarified that CMS will determine whether 
a State had an Effective Rate Review Program based on the information 
available to CMS and that CMS will revisit these determinations in 
light of changed circumstances.

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.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We requested comments on these requirements in the proposed rule. 
In addition, on March 1, 2011, CMS published a draft version of the 
Preliminary Justification in the Federal Register and requested public 
comments as required under the Paperwork Reduction Act (PRA). The 
public comment period closed on May 2, 2011, and 9 comments were 
submitted from consumer advocacy organizations, health insurance 
issuers, a state regulatory organization, and an actuarial professional 
association.
    CMS has reviewed all of the comments and will release as soon as 
possible but no later than 7-10 days after publication of this final 
rule an updated version of the preliminary justification that 
incorporates the feedback received through the PRA comment process. The 
description of the preliminary justification in the final rule outlines 
the overall structure of the updated preliminary justification that is 
still pending release.
    A description of the information collection requests is given in 
the following paragraphs with an estimate of the annual burden, and 
summarized in table A. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing each 
collection of information. Because we have not yet made a determination 
on the comments received pertaining to the draft forms published on 
March 1, 2011, these estimates are not final and are subject to change. 
Further, the information collection requirements associated with this 
final rule will not become effective until approved by OMB. HHS will 
issue a notice in the Federal Register announcing OMB approval once it 
is obtained.

A. Background

    Section 2794 requires the Secretary to develop, in conjunction with 
the States, a process for the annual review of unreasonable rate 
increases. The

[[Page 29975]]

regulation establishes a rate review program to ensure that all rate 
increases that meet or exceed an established threshold are reviewed by 
a State or CMS to determine whether the rate increases are 
unreasonable. Under the regulation, if CMS determines that a State has 
an Effective Rate Review Program in a given market, using the criteria 
set forth in the rule, CMS will adopt that State's determinations 
regarding whether rate increases in that market are unreasonable, 
provided that the State reports its final determinations to CMS, and 
explains the bases of its determinations. For all other States or 
markets, CMS will conduct its own review of rates that meet or exceed 
the applicable threshold to determine whether they are unreasonable.
    Section 2794 directs the Secretary to ensure the public disclosure 
of information on unreasonable rate increases and justification for 
those increases. The regulation therefore develops a process to ensure 
the public disclosure of information on unreasonable rate increases and 
justifications for those increases. Section 2794 also requires that 
health insurance issuers submit a justification for an unreasonable 
rate increase to CMS and the relevant State prior to its 
implementation. The regulation therefore establishes various reporting 
requirements for health insurance issuers, including a Preliminary 
Justification for a proposed rate increase, a Final Justification for 
any rate increase determined by a State or CMS to be unreasonable, and 
a notification requirement for unreasonable rate increases which the 
issuer will not implement.

B. Information Collection Requirements (ICRs) Regarding the Rate Review 
Preliminary Justification Form (Sec. Sec.  154.215 and 154.220)

    This final rule describes the Preliminary Justification that each 
health insurance issuer would be required to submit to both CMS and 
States, if it is seeking to implement a rate increase that meets or 
exceeds the threshold described in Sec.  154.200. The Preliminary 
Justification includes data supporting the potential rate increase as 
well as a written explanation of the rate increase. For those rates CMS 
will be reviewing, issuers' submissions must also include supplemental 
data and information that CMS will need to make a valid actuarial 
determination regarding whether a rate increase is unreasonable.
    Each health insurance issuer seeking to implement a rate increase 
that meets or exceeds the established threshold would be required to 
complete a Preliminary Justification. The Preliminary Justification 
consists of three Parts. Part I consists of a document (Excel 
spreadsheet) to be completed by issuers for all proposed rate increases 
that meet or exceed the threshold. Part II of the Preliminary 
Justification is a brief written narrative explaining the methodology 
used to derive the rate increase. Issuers would be required to submit 
to both CMS and the applicable State Parts I and II prior to 
implementation of a rate increase, regardless of whether CMS is 
reviewing the rate increase or adopting the State's review. Issuers 
typically calculate these figures in order to develop their rates and 
submit a rate filing to State regulators. The data elements and 
methodologies are commonly calculated by issuers and are often required 
by States that review rates.
    Issuers will be required to complete Part III of the Preliminary 
Justification only when CMS rather than the State is reviewing a rate 
increase to determine whether it is unreasonable or not, and submit 
Part III to CMS only (and not to the applicable State). Part III of the 
Preliminary Justification defines an additional set of information that 
issuers must submit only when CMS is reviewing a rate increase. The 
information provided under Part III will allow CMS to make a valid 
actuarial determination as to whether the rate increase is unreasonable 
or not. If an issuer completes and submits Part III of the Preliminary 
Justification, but does not provide sufficient information for CMS to 
conduct its review, CMS will request the additional information 
necessary to make its determination. Issuers have 10 business days to 
respond to any request for outstanding information from CMS.
    Using 2010 data, CMS estimates the number of rate filings in 2010 
that would have been subject to the rule had it been in force to be 
between 4,580 and 5,059 in the individual and small group markets 
nationwide. CMS estimates that the total number of rate filings is 
expected to increase slightly in 2011, due in part to an increased 
number of issuers required to file based on those factors discussed in 
the impact analysis section.
    Therefore, CMS estimates that, in 2011, there would be 6,733 rate 
filings subject to the rule. As discussed in the impact analysis 
section, CMS estimates that approximately 974 of these rate filings 
will require review under the rule because they meet or exceed the 
established threshold. CMS estimates the total number of burden hours 
to be 10,714.

C. ICRs Regarding State Determinations (Sec.  154.210 and Sec.  
154.225)

    Under the final rule, if CMS determines that a State has satisfied 
specific criteria for an Effective Rate Review Program under Sec.  
154.301, CMS would adopt the State's determinations regarding whether a 
rate increase that meets or exceeds the established threshold is 
unreasonable, providing the State reports its final determinations to 
CMS and explains the basis of its determination as required under Sec.  
154.210(b)(2). As discussed in the impact analysis section, since many 
States are already performing these functions, the cost burden to 
States would be small and would largely be offset by rate review grants 
provided by CMS to help States improve their rate review processes. In 
those cases where a State does not have an Effective Rate Review 
Program, CMS will make its own determinations regarding whether a rate 
increase that meets or exceeds the established threshold is 
unreasonable.
    CMS and the States would post on their Web sites the information 
contained in each Preliminary Justification for each rate increase 
subject to review under Sec.  154.200. For consumer clarity, CMS will 
also post on its Web site the final disposition of each rate increase 
reviewed by either CMS or a State. Therefore, either a State or CMS 
would make a final disposition for all rate increases reviewed under 
the rule, similar to current rate filing practices under the NAIC 
System for Electronic Rate and Form Filing (``SERFF'') or similar 
State-based filing systems.
    As explained in the impact analysis section, CMS estimates that 974 
rates would be reviewed under the rule because they meet or exceed the 
established threshold and that 25 to 35 States, in whole or in part 
based on market segment, would be reporting to CMS and posting 
dispositions on approximately two-thirds of these rates (or 649 
filings) for at least one market. The RIA also estimates that reporting 
information from the State to CMS will require approximately 20 minutes 
per filing. Thus the annual burden for this requirement is 
approximately 214 hours. CMS believes that posting the final 
disposition would not pose any additional burden on States.

D. ICRs Regarding the Final Justification and Final Notification (Sec.  
154.230)

    The final rule requires health insurance issuers to submit to CMS 
and the relevant State a Final Justification for any unreasonable rate 
increase that would be implemented and to display this information on 
their Web sites. If an

[[Page 29976]]

issuer is legally permitted to implement an unreasonable rate increase 
and declines to implement the increase, the issuer will provide notice 
to CMS that it will not implement the increase. As discussed in the 
impact analysis section, CMS estimates that 417 issuers will submit an 
estimated 468 to 1,723 rates for review and that it will take between 6 
to 16 hours to complete the entire justification process. CMS estimates 
that 974 rates will meet or exceed the threshold and for the purposes 
of providing an upper bound of the potential number of final 
notifications further assumes issuers will implement 100 percent of 
rates found unreasonable.

E. ICRs Regarding CMS' Determinations of Effective Rate Review Programs 
(Sec.  154.301)

    As discussed earlier in the preamble, CMS will determine whether a 
State's rate review program meets the requirements of an Effective Rate 
Review Program set forth in Sec.  154.301(a) based on information 
received from the State through the grant process, through review of 
applicable State law, and through any other information otherwise 
available to CMS. The information collection for the ``Grants to States 
for Health Insurance Premium Review'' is approved under OMB Control 
number 0938-1121. Since CMS does not believe additional data from 
States are necessary to make these determinations, we assume the 
additional burden from this provision is zero.

                                                                                Table A--Estimated Annual Burden
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Hourly
                                                                                                                  Burden per     Total      labor cost  Total labor  Total capital/
              Regulation section(s)                        OMB control No.             Number of     Number of     response      annual         of        cost of      maintenance    Total cost
                                                                                      respondents    responses     (hours)       burden     reporting    reporting      costs ($)        ($)
                                                                                                                                (hours)        ($)          ($)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   154.210 ICRs Regarding State               0938-New........................              35          649          .33          214          200       42,800               0       42,800
 Determinations.
Sec.  Sec.   154.215, and 154.220, ICRs           0938-New........................             417          974           11       10,714          200    2,142,800               0    2,142,800
 Regarding the Rate Review Preliminary
 Justification Form.
Sec.   154.230, ICRs Regarding the Final          0938-New........................             417          974           .5          487          200       97,400               0       97,400
 Justification.
Sec.   154.230, ICRs Regarding the Final          0938-New........................             417          974           .5          487          200       97,400               0       97,400
 Notification.
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
    Total.......................................  ................................             452        3,571  ...........       11,902  ...........    2,380,400  ..............    2,380,400
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    We initiated an information collection request under a separate 
notice and comment period from that associated with the proposed rule 
that was published on December 23, 2010 (75 FR 81004). Specifically, 
the 60-day Federal Register notice soliciting public comment on the 
aforementioned information collection requirements was published on 
March 1, 2011 (76 FR 11248) and the comment period closed on May 2, 
2011. We plan to publish the requisite 30-day Federal Register notice 
to announce the formal submission of the information collection request 
to OMB and to announce another opportunity for the public to submit 
comments in the near future.

V. Response to Comments

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

VI. Regulatory Impact Analysis

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

A. Summary

    As stated earlier in the preamble, this final rule implements 
section 2794 of the PHS Act (as added by Section 1003 of the Affordable 
Care Act), which requires the Secretary, in conjunction with the 
States, to establish a process for the annual review of unreasonable 
increases in health insurance premiums (referred to in the rule as 
``rates''). This final rule outlines the methodology by which CMS would 
review proposed rate increases. This regulation implements statutory 
provisions designed to help make private health insurance more 
affordable, and to increase the transparency of the process by which 
health insurance issuers calculate premiums. CMS has quantified costs 
where possible and provided a qualitative discussion of the benefits 
and of the transfers and costs that may stem from this regulation.
    In the preamble to this regulation, we solicit comments on whether 
we should amend the final rule to include individual and small employer 
coverage sold through associations in the rate review process. This 
final regulation does not specifically include such coverage in the 
rate review process unless the State reviews it as either individual 
coverage or small employer coverage. Many States currently consider 
coverage sold through associations as large group coverage, in which 
case it would not be subject to the rate review process of this 
regulation. Since we did not specifically require in this regulation 
that coverage sold through associations be included in the rate review 
process, we did not include in this RIA an estimate of the additional 
burden of including association coverage in the rate review process. We 
do, however, include below a separate estimate of the burden associated 
with including association coverage in the rate review process for the 
purpose of soliciting comments on the burden estimate.
    In the proposed rule we requested comments on the burden and cost 
estimates in the RIA but did not receive any such comments.

B. Executive Order 13563 and 12866

    Executive Orders 13563 and 12866 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated a ``significant regulatory 
action'' although not economically significant, under section 3(f) of 
Executive Order 12866.

[[Page 29977]]

Accordingly, the rule has been reviewed by the Office of Management and 
Budget.
    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 final rule would likely not have economic impacts 
of $100 million or more in any one year, nor would it adversely or 
materially affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
tribal governments or communities. This assessment is based primarily 
on the administrative costs to issuers of completing the Preliminary 
Justification form they are required to submit when proposing rate 
increases of 10 percent or greater, and on the costs to States and the 
Federal government of reviewing these justifications. As discussed 
below, CMS is not able to quantify the effect of this final rule on 
rates charged by issuers, and it is possible that the effect on rates 
will be large enough to cause the final rule to be considered a major 
rule. CMS solicited comments on this issue in the proposed rule but did 
not receive any response.
    Nevertheless, CMS opted to provide an assessment of the potential 
costs, benefits, and transfers associated with this final rule.
1. Need for Regulatory Action
    Consistent with the provisions in section 2794 of the PHS Act, this 
final rule requires health insurance issuers offering non-grandfathered 
coverage in the individual and small group markets to report 
information concerning rate increases to CMS and the applicable State 
if the proposed increase is 10 percent or higher. Section 2794(a) of 
the PHS Act requires the Secretary to ``establish a process for the 
annual review of unreasonable increases in premiums for health 
insurance coverage.'' The section further provides that issuers 
``submit to the Secretary and the relevant State a justification for an 
unreasonable premium increase prior to the implementation of the 
increase.''
    Many States currently review rate filings in all or some portion of 
the insurance market, therefore, the burden of implementing this final 
rule on States will be small. In the States that do not currently 
conduct effective rate review, CMS will initially review those rate 
filings that meet or exceed the 10 percent threshold. CMS anticipates 
that those States will use the rate review grants described in the 
preamble to enhance their capacity for review. Moreover, CMS 
anticipates gradually transitioning rate review responsibilities to 
these States as they build their capacity and as a result, reducing 
Federal costs over time.
    In addition, this final rule requires issuers proposing rate 
increases 10 percent and above to provide a Preliminary Justification 
for the proposed increase. That Preliminary Justification will use data 
typically assembled by the issuers in computing their rate request. 
Because the Preliminary Justification requires the restating of 
existing data rather than the generation of new information, CMS 
expects the burden on issuers in filing the justification will be 
relatively small.
2. Summary of Impacts
    In accordance with OMB Circular A-4, Table 1 below depicts an 
accounting statement summarizing CMS' assessment of the benefits, 
costs, and transfers associated with this regulatory action. CMS 
limited the period covered by the regulatory impact analysis (RIA) to 
2011 through 2013. Estimates are not provided for subsequent years 
because there will be significant changes in the marketplace in 2014 
related to the offering of new individual and small group plans through 
the health insurance Exchanges, and the wide ranging scope of these 
changes makes it difficult to project results for 2014 and beyond.
    As described in this RIA, CMS estimates that this regulatory action 
will result in better information for consumers about their health 
insurance premiums and is likely to lower premiums. The final rule also 
imposes costs on insurers associated with preparing and filing proposed 
rate increases, and imposes costs on State and Federal governments 
associated with reviewing proposed rate increases. In accordance with 
Executive Order 12866, CMS believes that the benefits of this 
regulatory action justify the costs.

                                            Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
    * Increased transparency in health insurance markets, promoting competition
    * To the extent that unreasonable rate increases are prevented as a result of this rule, reduction in the
     deadweight loss to the economy from the exercise of monopolistic power by issuers
----------------------------------------------------------------------------------------------------------------
Costs:                                  Low       Mid-range       High         Year       Discount      Period
                                       estimate     estimate     estimate       dollar         rate      covered
                                                                                            percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/             11           15           20         2010  ...........    2011-2013
 year)
----------------------------------------------------------------------------------------------------------------
                                             10           14           19         2010  ...........    2011-2013
----------------------------------------------------------------------------------------------------------------
One-time costs to create systems to report data, and annual costs related to reporting data to the Secretary,
 providing rate increase justifications, and costs to the States and Federal government of reviewing the
 justifications
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
----------------------------------------------------------------------------------------------------------------
    * To the extent that rate increases are reduced as a result of this rule, money will be transferred from
     issuers/shareholders to consumers.
----------------------------------------------------------------------------------------------------------------

[[Page 29978]]

3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
a. Benefits
    Reliable information on prices is a prerequisite for well-
functioning competitive markets. Consumers in the individual and small-
group health insurance markets, which are highly concentrated, may have 
difficulty knowing whether an increase in their premium is actuarially 
justifiable--for example, because it is due to a change in the scope of 
covered services--or whether it is the result of insurers exercising 
market power to set rates above the level that is actuarially 
justifiable.
    The final rule subjects proposed rate increases of 10 percent or 
more to additional scrutiny in order to safeguard against this exercise 
of market power by insurers. The final rule's reporting requirements 
should result in better information for consumers about prices, 
promoting competition and potentially increasing the volume of trade, 
thereby yielding a net benefit to society.
b. Costs
    CMS has identified the primary sources of costs that will be 
associated with this final rule as the costs to issuers associated with 
reporting, recordkeeping, notifications, and the costs to State and 
Federal governments of conducting reviews of the justifications filed 
by issuers.
    CMS estimates that issuers will incur approximately $10 million to 
$15 million in one-time administrative costs, and $0.6 million to $5.5 
million in annual ongoing administrative costs related to complying 
with the requirements of this final rule from 2011 through 2013. In 
addition, States will incur very small additional costs for reporting 
the results of their reviews to the Federal government, and the Federal 
government will incur approximately $0.7 million to $5.9 million in 
annual costs to conduct reviews of justifications filed by issuers in 
States that do not perform effective reviews. Additional details 
relating to these costs are discussed later in this regulatory impact 
analysis.

C. Estimated Number of Affected Entities and Number of Rate Filings 
Meeting or Exceeding the Threshold and Subject to Review

    Section 2794 of the PHS Act specifies that the rate review 
provisions apply to health insurance issuers offering individual or 
group health insurance coverage, not including grandfathered health 
plans. As discussed earlier in the preamble, in this context, the term 
``issuer'' has the same meaning provided in 45 CFR 144.103, which 
states that an issuer is ``an insurance company, insurance service, or 
insurance organization (including an HMO) that is required to be 
licensed to engage in the business of insurance in a State and that is 
subject to State law that regulates insurance (within the meaning of 
section 514(b)(2) of ERISA).'' As discussed in the preamble, the rate 
review provisions in this final rule apply to issuers that offer 
individual and small group coverage, and these issuers will be required 
to submit a Preliminary Justification for rate increases meeting or 
exceeding the rate review threshold of 10 percent, to file with the 
Secretary and the applicable State a Final Justification for those rate 
increases found unreasonable, and disclose information about the 
proposed increase, if implemented, on their Web sites. The following 
sections summarize CMS' estimates of the number of entities and rate 
filings that would be affected by the requirements being implemented in 
this final rule.

D. Estimated Number of Affected Entities

    The rate review provisions will apply to all health insurance 
issuers offering coverage in the individual and small group markets 
except for grandfathered plans. The number of issuers is 311 in the 
individual market and 342 in the small group market, for a total of 417 
(unduplicated) issuers, as determined for the interim final rule for 
implementing the medical loss ratio requirements under the Affordable 
Care Act (Federal Register, December 1, 2010).
    Table 2 shows the estimated distribution of the 417 issuers 
offering coverage in the individual and small group markets for the 
analytic sample used in this RIA.\1\ Approximately 75 percent (311) of 
these issuers offer coverage in the individual market and 82 percent 
(342) offer coverage in the small group market. Additionally, CMS 
estimates that there are 34.8 million enrollees in coverage that will 
be subject to the requirements being proposed in this final rule, 
including approximately 10.6 million enrollees in individual market 
coverage and 24.2 million enrollees in small group coverage (estimated 
based on ``life years'' for 2009 NAIC Health and Life Blank filers, 
which excludes data for companies that are not required to file annual 
statements with NAIC).\2\
---------------------------------------------------------------------------

    \1\ The analytic sample excludes companies that are regulated by 
the Department of Managed Health Care in California, as well as 
small, single-State insurers that are not required by State 
regulators to submit NAIC annual financial statements. The excluded 
companies are estimated to account for approximately 9 percent of 
the comprehensive major medical fully insured market. In addition, 
among the 579 companies that filed with the NAIC, 137 were excluded 
because of data anomalies. These 137 excluded companies are 
estimated to account for approximately 5 percent of the individual 
market and less than one percent of the group market.
    \2\ As noted above, issuers that are regulated by the Department 
of Managed Health Care in California are not required to file annual 
statements with the NAIC, and are not included in the estimates 
provided here.

             Table 2--Estimated Number of Issuers Subject to the Rate Review Requirements by Market
----------------------------------------------------------------------------------------------------------------
                                                  Issuers                        Enrollees \2\
                                                (companies)                    -----------------
                                                  offering
                 Description                    coverage 1 3      % of total      Number  (in       % of total
                                             -----------------                     thousands)
                                                   Number
----------------------------------------------------------------------------------------------------------------
Total (Unduplicated)........................              417            100.0           34,792            100.0
Number Offering Coverage In:                  ...............  ...............  ...............  ...............
    Individual Market.......................              311             74.6           10,603             30.5
    Small Group Market \4\..................              342             82.0           24,189             69.5
----------------------------------------------------------------------------------------------------------------
\1\ Issuers represents companies (for example, NAIC company codes).
\2\ Enrollment represents ``life years'' (total member months divided by 12).
\3\ Total issuers represents 2009 NAIC Health and Life Blank filers with valid data, which excludes
  approximately 8 percent of comprehensive major medical premium among NAIC filers. Also excludes data for
  companies that are regulated by the California Department of Managed Health Care.
\4\ Small group is defined based on the current definition (for example, 2 to 50 employees).

[[Page 29979]]

E. Estimated Number of Rate Filings

    This section of the regulatory impact assessment provides estimates 
of the number of filings that would be subject to review under this 
final rule.
1. Estimation Methods and Sources of Uncertainty
    In the proposed rule, CMS estimated the total number of rate 
filings using data on the number of filings in 2010 made through the 
NAIC System for Electronic Rate and Form Filing (``SERFF''). However, 
not all issuers are required to file through SERFF, and CMS is required 
to make assumptions about the total number of filings in 2010, as well 
as the expected change in the number of filings between 2010 and 2011.
    For the proposed rule, CMS conducted research to compile 
information regarding the regulatory structure in place by State and 
market. CMS analyzed information provided by States in their 
applications for rate review grants, analyzed State Department of 
Insurance Web sites, and surveyed State Insurance Department staff via 
telephone to obtain information regarding the number of licensed 
issuers and filings in the individual and small group markets. In its 
original estimate for the number of filings, CMS used ten 
representative States with relatively complete data to estimate the 
average number of filings that could be expected per State and by 
market. Those average values were used for all States to estimate the 
total number of filings in the individual and small group markets.
    CMS also gathered information from State Insurance Departments to 
obtain data for 2008 through 2010 on the estimated number of filings 
processed, by market, and approval/rejection rate, stratified by the 
magnitude of the increase. Separately CMS received from the NAIC an 
extract showing the final disposition for all comprehensive major 
medical filings in SERFF for the first three quarters of calendar year 
2010, by market type. This information was used to estimate the total 
number of filings in 2010 received and processed by the 49 States and 
the District of Columbia which use SERFF.
    Another SERFF extract provided the number of comprehensive major 
medical filings filed for 2009 by 31 States. All 19 States that did not 
use the field ``market type'' were excluded from the extract. Using the 
data pertaining to the 31 States included in the 2009 data, CMS 
estimated the proportion of filings submitted by quarter, and used that 
distribution, along with the 2010 data, to project the number of 
filings for all States using SERFF for the 4th quarter of 2010. The 
increase in the number of number of filings from 2009 to 2010, by State 
and market, was added to the 2010 estimates to trend the number of 
filings forward to 2011. CMS has determined that there is insufficient 
data to estimate the number of rate filings beyond 2011.
    For this final rule, in addition to reviewing the 2010 SERFF data, 
CMS reviewed data on the number of rate filings included in the grant 
reports submitted by the States to CMS for the 4th quarter of 2010. 
Since this is data directly reported by the States to CMS, we believe 
that this is more reliable than what is reported in SERFF, which 
contains data from the health insurance issuers. There were 26 States 
for which both SERFF and the grant reports contained the number of rate 
filings for the fourth quarter of 2010. In comparing the numbers, the 
numbers of rate filings in the grant reports were higher than the SERFF 
numbers by 26 percent. Although we did not have the numbers for all the 
States, the data for the 26 States is a sufficient representative 
sample because it is statistically significant and it reflects a 
representative cross-section of the set of different types of State 
filing authority. Accordingly, based on the grant reports data, we 
increased the rate filing estimates of the proposed rule by 26 percent 
for this final rule.
    Although there is some uncertainty concerning the number of filings 
in 2011, a much larger source of uncertainty is uncertainty about the 
number of filings that will have proposed rate increases greater than 
or equal to 10 percent. Data on rate requests made by issuers are 
available from a handful of States, and CMS has used these data to 
estimate the proportion of rate filings with requested rate increases 
of 10 percent or greater. However, given the small number of States for 
which data is available, there is substantial uncertainty about the 
number of filings in 2010 with proposed rate increases that are greater 
than or equal to 10 percent. Further, even if CMS had precise data on 
the distribution of rate increase requests in 2010, it is unclear to 
what extent that distribution might change in 2011 as a result of this 
final rule. Given the combination of data imperfections and limitations 
and behavioral uncertainties, CMS has chosen to provide a range of 
estimates, based on a range of assumptions.
2. Estimated Number of Rate Filings Meeting or Exceeding the Threshold 
and Subject to Review
    Twenty-five States require issuers to use the NAIC System for 
Electronic Rate and Form Filing (SERFF) and many issuers also use SERFF 
for filings in States that have no SERFF requirement. Based on the 
number of SERFF filings from 31 States for the first three quarters of 
2010 and the 2010 4th quarter number of rate filings in both SERFF and 
the grant reports, CMS estimates a range of rate filings from 4,580 to 
5,059 in the individual and small group markets for all States for all 
of 2010.
    The total number of filings in 2011 is expected to be larger than 
the number of filings in 2010 in part due to an increased number of 
issuers required to file and additional filings to meet the 
justification requirements.\3\ Based on actuarial estimates using data 
from 2009 and 2010, CMS estimates that the number of 2011 rate filings 
will be in the range of 6,121 to 7,343 (see Table 3).
---------------------------------------------------------------------------

    \3\ According to the Kaiser Family Foundation, a number of 
States have already enhanced their rate review and filing process 
under their current authority and several other States will seek 
additional authority to review rates from their legislature. See 
Rate Review: Spotlight on State Efforts to Make Health Insurance 
More Affordable, Kaiser Family Foundation, December 2010.
---------------------------------------------------------------------------

    Issuers are not required to submit Preliminary Justifications for 
their grandfathered enrollees. The percentage of individuals covered 
under policies that will lose grandfathered status in the individual 
market is estimated to be 40 to 67 percent, according to Grandfathered 
Health Plan Regulation (Federal Register, June 17, 2010). The 
percentage of small group plans relinquishing their grandfathered 
status in the small group market is estimated to be 20 to 42 percent in 
2011. CMS uses 40 percent, 54 percent, and 67 percent for the low, mid, 
and high estimates of the percentage of non-grandfathered rate filings 
in the individual market and 20 percent, 30 percent and 42 percent in 
the small group market.
    An issuer will be required to submit a Preliminary Justification 
report to the Secretary and the applicable State if the rate increase 
is 10 percent or higher. The estimates in this regulatory impact 
analysis are based on this provision of the final rule.
    Data from a small group of States for their individual market show 
the percentage of rate requests at or above 10 percent ranged from 50 
percent to 72 percent during the time period 2008 to

[[Page 29980]]

2010.\4\ The fraction of enrollees in plans requesting an increase of 
10 percent or greater ranged from 34 percent to 77 percent. CMS uses 50 
percent, 60 percent, and 70 percent as the low, mid, and high estimates 
for the percentage of rate requests at or above the rate review 
threshold of 10 percent in the individual market, and 35 percent, 50 
percent, and 75 percent for the percentage of enrollees affected.
---------------------------------------------------------------------------

    \4\ The sources for the rate increases in the individual market 
are: Iowa list of proposed rate increases as of October 25, 2010, 
http://www.iid.state.ia.us/docs/0_Multi-year%20A&H%20Rate%20Increase_PPACA%20Types.pdf; Illinois list of 
proposed rate increases as of September 2010, http://www.insurance.illinois.gov/Reports/special_reports/IMMHPRFR.pdf; 
North Carolina rate filings, http://infoportal.ncdoi.net/filelookup.jsp?divtype=3; Oregon list of proposed rate increases as 
of November 30, 2010, http://www.oregoninsurance.org/insurer/rates_forms/health_rate_filings/health-rate-filing-search.html; 
Pennsylvania announcement of each proposed rate increases, http://www.pabulletin.com/secure/search.html; and Washington list of 
proposed rate increases from the State.
---------------------------------------------------------------------------

    Data on rate requests in the small group market are available from 
three States (Colorado and Oregon, data for 2009 and 2010, and 
Minnesota, 2007 through 2010).\5\ On average, approximately 35 percent 
of rate requests were for 10 percent or greater, and with one 
exception, in each State and year combination, between 20 percent and 
40 percent of rate requests were above that threshold. CMS uses 20 
percent, 30 percent, and 40 percent for the low, medium, and high-range 
estimates of the percentage of rate requests at or above the rate 
review threshold of 10 percent in the small group market. For the 
percentage of enrollees affected in the small group market, CMS 
estimates 15 percent, 30 percent, and 50 percent.\6\
---------------------------------------------------------------------------

    \5\ The sources for the rate increases in the small group market 
are: Colorado list of rate increases, http://www.dora.state.co.us/pls/real/Ins_RAF_Report.main; Minnesota list of final rate 
increases from the State; and Oregon list of proposed rate 
increases, http://www.oregoninsurance.org/insurer/rates_forms/health_rate_filings/health-rate-filing-search.html.
    \6\ Rate filings in which each of the products covered in the 
filing are grandfathered plans will not be subject to the provisions 
of this final rule. However, in the small group market, CMS believes 
that most filings are made for products which are still being 
actively marketed. To the extent that there are filings in the 
individual market that include no products which are being actively 
marketed, the estimates provided here of the number of filings that 
will be subject to review are overestimates of the true burden that 
will be imposed by this final rule.
---------------------------------------------------------------------------

    The following table (Table 3) shows the low, mid and high range 
estimates (468, 974, and 1,723) of the number of filings that will be 
subject to review and require the submission of a justification report 
because the proposed rate increase is 10 percent or greater.

                             Table 3--Estimated Number of Filings Subject to Review
----------------------------------------------------------------------------------------------------------------
                                                                    Individual      Small group        Total
----------------------------------------------------------------------------------------------------------------
Estimated number of filings for 2011:
    Low Range...................................................           1,395           4,726           6,121
    Mid Range...................................................           1,571           5,162           6,733
    High Range..................................................           1,746           5,597           7,343
Percent of filings subject to review (non-grandfathered):
    Low Range...................................................             40%             20%  ..............
    Mid Range...................................................             54%             30%  ..............
    High Range..................................................             67%             42%  ..............
Number of filings subject to review:
    Low Range...................................................             558             945           1,503
    Mid Range...................................................             848           1,549           2,397
    High Range..................................................           1,170           2,351           3,521
Estimated percentage of filings meeting or exceeding threshold:
    Low Range...................................................             50%             20%  ..............
    Mid Range...................................................             60%             30%  ..............
    High Range..................................................             70%             40%  ..............
Estimated number of filings meeting or exceeding threshold:
    Low Range...................................................             279             189             468
    Mid Range...................................................             509             465             974
    High Range..................................................             819             940           1,759
----------------------------------------------------------------------------------------------------------------

3. Estimated Number of Additional Filings Subject to Review if Coverage 
Sold Through Associations Are Subject to the Rate Review Process
    In this preamble, we discuss a proposal to amend the definitions of 
individual and small group markets in order for individual and small 
group coverage sold through associations to be subject to the rate 
review process. While we did not make this change in the final rule, we 
solicit comments in the preamble on this issue and indicate that we may 
amend the final rule after the comment period to include individual and 
small group coverage sold through associations in the rate review 
process. Although we did not estimate the burden of including coverage 
sold through associations for the PRA package or for this RIA, an 
estimate is provided below for purposes of soliciting comments on the 
potential burden of including individual and small group coverage sold 
through associations in the rate review process.
    In reviewing data submitted by health insurance issuers to the 
NAIC, it is estimated that there would be 986 filings annually that 
would have to be submitted for individual or small group coverage sold 
through associations.\7\ In applying the factors for non-grandfathered 
coverage (.42) and filings above the 10% threshold (.45), both of which 
are discussed above, this results in a total of 186 additional filings 
that would be subject to rate review. We further estimate that 34 
percent of these filings would occur in States that require prior 
approval before a rate increase can be implemented, in which case the 
rate filings are already subject to review by a State. Accordingly, 123 
additional filings above the 10% threshold would occur if coverage sold 
through associations were subject to the rate review process, all of 
which would be reviewed by CMS.
---------------------------------------------------------------------------

    \7\ The data on which this estimate is based may exclude some 
issuers selling association coverage in States that do not require 
issuers to include data on this coverage in their annual financial 
reports submitted to the NAIC. In addition, this estimate did not 
take into account data for companies that are regulated by the 
California Department of Managed Health Care.

---------------------------------------------------------------------------

[[Page 29981]]

    We welcome comments on any aspect of this burden estimate. We also 
welcome any additional data on the additional number of rate filings 
that would occur if individual and small group coverage sold through 
associations is subject to the rate review process.

F. Estimated Administrative Costs Related to Rate Review Provisions

    As stated earlier in this preamble, this final rule will implement 
the reporting requirements of section 2794, describing the type of 
information that will be included in the Preliminary Justification to 
the Secretary and the applicable State and the disclosure that will be 
made available to consumers on the issuer's Web site if the rate 
increase is found to be unreasonable. CMS has quantified the primary 
sources of start-up costs that issuers in the individual and small 
group market will incur to bring themselves into compliance with this 
final rule, as well as the ongoing annual costs that they will incur 
related to these requirements. These costs and the methodology used to 
estimate them are discussed below.
    In order to assess the potential administrative effect of the 
requirements in this final rule, CMS consulted with the NAIC and 
industry experts to gain insight into the tasks and level of effort 
required. Based on these discussions, CMS estimates that issuers will 
incur one-time start-up costs associated with developing teams to 
review the requirements in this final rule, and developing processes 
for capturing the necessary data (for example, automating systems). CMS 
estimates that issuers will also incur ongoing annual costs relating to 
data collection, completing the justification reports, conducting a 
final internal review, submitting the reports to the Secretary and 
applicable State, record retention, and Web site notifications.
1. One-Time Start-Up Costs
    Based on discussions with NAIC and industry experts, start-up costs 
are estimated at $25,000 to $35,000 per issuer, calculated from 
assumptions of 125 to 175 hours at $200 per hour (senior actuary fee) 
to review the requirements for this final rule and developing processes 
for data collection.
2. Ongoing Costs Related to Rate Review Reporting
    For each rate review reporting year, issuers offering coverage in 
the individual and small group markets will be required to submit a 
Preliminary Justification to the Secretary and applicable State prior 
to the implementation of a rate increase for each proposed rate 
increase of 10 percent or greater.
    Ongoing annual costs are estimated at 6 to 16 hours per 
justification report at $200 per hour or $1,200 to $3,200 per report. 
Most of the hours are for populating the justification reports with an 
additional hour for record retention and Web site notification.
    CMS estimates that the one-time costs relating to the rate review 
reporting requirements in this final rule will range from $10 million 
to $15 million, and that annual costs will be between $0.6 million and 
$5.5 million per year (Table 4).

                                   Table 4--Estimated Costs for Reporting, Record Retention, and Website Notification
                                                                    [Actual dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Estimated                  Estimated    Estimated
                                                                 Total        Total      Estimated     average      Estimated     average      average
                         Description                           number of    number of   total hours    cost per    total cost     cost per     cost per
                                                                issuers      reports        (1)        hour (2)                    issuer       report
--------------------------------------------------------------------------------------------------------------------------------------------------------
LOW RANGE ASSUMPTIONS:
    One-Time Costs..........................................          417          468       52,125         $200   $10,425,000      $25,000      $22,276
    Ongoing Costs...........................................          417          468        2,808          200       561,600        1,347        1,200
                                                             -------------------------------------------------------------------------------------------
        Total Year One Costs................................          417          468       54,933          200    10,986,600       26,347       23,476
MID RANGE ASSUMPTIONS
    One-Time Costs..........................................          417          974       62,550          200    12,510,000       30,000       12,844
    Ongoing Costs...........................................          417          974       10,714          200     2,142,800        5,139        2,200
                                                             -------------------------------------------------------------------------------------------
        Total Year One Costs................................          417          974       73,264          200    14,652,800       35,139       15,044
HIGH RANGE ASSUMPTIONS
    One-Time Costs..........................................          417        1,759       72,975          200    14,595,000       35,000        8,471
    Ongoing Costs...........................................          417        1,759       27,568          200     5,513,600       13,222        3,200
                                                             -------------------------------------------------------------------------------------------
        Total Year One Costs................................          417        1,759      100,543          200    20,108,600       48,222       11,671
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Estimated costs are stated in 2010 dollars.
(1) Estimated number of one-time start up hours and annual ongoing hours.
(2) Actuary salary/fee.

3. Estimated Costs to the States and Federal Government Related to Rate 
Review Provisions
    Section 2794 directs the Secretary, in conjunction with the States, 
to establish a process for the annual review of unreasonable increases 
in premiums for health insurance coverage. In doing so, both the 
Federal Government and States will incur certain administrative costs. 
However, CMS estimates that the additional costs to the States will be 
negligible given that the majority already conducts some level of rate 
review, and the costs to the Federal Government and States will be 
extremely small.
4. Estimated Costs to the Federal Government
    States currently have primary responsibility for the review of rate 
increases and will continue to under this final rule. If a State does 
not have an Effective Rate Review Program in place for all or some 
markets within the State, CMS will review rate increases that meet or 
exceed the 10 percent threshold and make its own determinations of 
whether the rate increases were excessive, unjustified, or unfairly 
discriminatory, or otherwise unreasonable, within those markets. This 
activity could be conducted with in-house resources and/or with the use 
of contracted services. Given the fact that, as noted above, some 
States do not have review authority in either the

[[Page 29982]]

small group or individual markets, and assuming filings are evenly 
distributed across markets, CMS estimates a range between 28 percent 
and 36 percent of the rate filings requiring review in 2011 will fall 
under CMS's review responsibility. Based on these filing estimates and 
the necessary actuarial expertise, this rate review process would range 
in cost from $0.7 million to $5.9 million.
    Table 5 describes the assumptions used in the estimates for the 
administrative costs to the Federal Government associated with its rate 
review activities.

                                       Table 5--Estimated Actuarial Rates
----------------------------------------------------------------------------------------------------------------
                    Estimated actuarial rates                           Low             Mid            High
----------------------------------------------------------------------------------------------------------------
Principal Actuaries.............................................         $340.00         $350.00         $360.00
Support Actuaries...............................................          200.00          234.00          275.00
Actuarial Analyst...............................................          120.00          150.00          180.00
Administrative Support..........................................           80.00          100.00          120.00
----------------------------------------------------------------------------------------------------------------
            Estimated time to complete average review                          Average time required
----------------------------------------------------------------------------------------------------------------
Principal Actuaries.............................................            4.25            5.50            6.75
Support Actuaries...............................................            8.50            9.50           11.00
Actuarial Analyst...............................................           12.00           14.00           15.00
Administrative Support..........................................            9.00            9.50           12.00
Actuarial Staff Hours...........................................           24.75           29.00           32.75
                                                                 -----------------------------------------------
    Total Staff Hours...........................................           33.75            38.5           44.75
----------------------------------------------------------------------------------------------------------------
                                                                        Low             Mid            High
----------------------------------------------------------------------------------------------------------------
Estimated Cost per Review.......................................          $5,305          $7,198          $9,595
Number of Rate Reviews..........................................             131             321             620
                                                                 -----------------------------------------------
    Total Expected Contracting Cost.............................        $695,167      $2,313,581      $5,948,900
----------------------------------------------------------------------------------------------------------------

    In addition to the costs to the Federal government of conducting 
rate reviews in States that do not conduct effective reviews, there 
will be a small, largely one-time cost to the Federal government to 
determine whether States are conducting effective reviews.
5. Estimated Costs to States
    CMS recognizes that States have significant experience reviewing 
rate increases. As discussed earlier in this preamble, most States have 
existing Effective Rate Review Programs that will meet the requirements 
of this regulation in substituting for CMS' review of rate filings that 
meet or exceed the threshold. Rate review grants provided by CMS are 
expected to increase the effectiveness of State rate review processes, 
but are not a direct measure of the cost of this regulation.
    CMS estimates that the cost burden on States will be small because 
most States currently conduct rate review. For these States the 
incremental costs and requirements of this regulation will be minimal. 
Some States do not already have a rate review process or have a process 
that applies to only a portion of the individual and small group 
markets that this regulation addresses. In these States, the 
implementation costs to develop effective rate review processes at the 
State level will be offset by the rate review grants provided by CMS. 
However, from a Federal budget perspective, these Federal costs from 
grants will be largely balanced by a decrease in the Federal cost of 
performing reviews directly. For States not currently conducting 
effective rate review, there are likely a variety of factors affecting 
the decision to institute an effective rate review process, including 
the need for resources, as well as potential legislative hurdles. The 
rate review grants are expected to help States overcome some of these 
hurdles.
    States with Effective Rate Review Programs will be required to 
report on their rate review activities to the Secretary. CMS believes 
that this reporting requirement will involve minimal cost. CMS 
estimates that reporting information from the State to CMS will require 
approximately 20 minutes per filing. Based on an actuary's fee of $200 
per hour, CMS estimates an average cost per filing of $66.60. The 
estimated cost of reporting the two-thirds of filings meeting or 
exceeding the 10 percent threshold, which are reviewed by States, is 
$42,800.

G. Transfers

    The final rule will likely result in lower premiums, although the 
magnitude of this effect is difficult to predict. To the extent that 
premiums are lower as a result of the final rule, this represents a 
transfer from insurers/shareholders to consumers. The experience of 
States that engage in rate review, summarized in Table 6, suggests that 
the review process may result in premium increases that are lower than 
they would otherwise be.\8\
---------------------------------------------------------------------------

    \8\ Data provided by States on recent rate review actions from 
informal discussions between CMS and State Department of Insurance 
actuaries.

[[Page 29983]]

                                       Table 6--State Rate Review Actions
                                        [State filings from 2005 to 2010]
----------------------------------------------------------------------------------------------------------------
                                              Number of       Range of rate    Range of actual   Number of rate
         State                Market           filings          requests          increases        reductions
----------------------------------------------------------------------------------------------------------------
A.....................  Individual......                96            7%-40%            0%-21%                15
                        Small Group.....                21           14%-26%            9%-22%                 5
B.....................  Individual......                31            4%-30%            1%-25%                14
                        Small Group.....                37            1%-17%            1%-17%                 5
C.....................  Combined........                34            1%-32%            1%-32%                 8
----------------------------------------------------------------------------------------------------------------

    It is difficult, however, to draw strong conclusions from this 
information about the effects of additional rate review on rates 
because we are uncertain about insurers' behavioral response. Further, 
a substantial number of States currently operate effective rate review 
processes, and it is likely that any potential effect in these States 
will be less than in States that have not previously had a strong rate 
review process.
    Although CMS did not estimate the impact of this proposed 
regulation on the reduction in premium rate increases, CMS estimates 
that comprehensive major medical premiums are $28 billion in the 
individual market and $95 billion in the small group market, for a 
total of $123 billion in 2011 (Medical Loss Ratio Regulation Technical 
Appendix, December 1, 2010 and National Health Expenditure projection 
factors). The percentage of individuals covered under policies that 
will lose grandfathered status in the individual market is estimated to 
be 40 to 67 percent (Grandfathered Health Plan Regulation, June 17, 
2010). The percentage of small group plans relinquishing their 
grandfathered status in the small group market is estimated to be 20 to 
42 percent in 2011 (Grandfathered Health Plan Regulation, June 17, 
2010). Thus, CMS estimates that approximately $30 to $59 billion of 
premiums will be written by issuers in the individual and small group 
markets to non-grandfathered subscribers. Given the magnitude of the 
premiums that may be affected, CMS invited comments in the proposed 
rule on how to calculate premium savings so as to determine whether the 
$100 million threshold is met but did not receive any responses.

H. 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 described below.
1. Establish a Lower or Higher Threshold for Rate Increase Review
    Section 2794(a) requires the Secretary, in conjunction with the 
States to conduct an annual review of unreasonable increases in 
premiums. In establishing a threshold for rate increases that would be 
subject to review, CMS: (1) Examined national trends in rate increases 
and health care costs; and (2) weighed the administrative burden on 
issuers and States against the level of protection for consumers.
    In the proposed rule, CMS proposed a threshold of 10 percent. 
Comments received from issuers indicated that this was too low and that 
a 10 percent threshold would virtually capture all proposed rate 
increases thereby imposing a large burden on issuers and state 
regulators. Consumer advocates, on the other hand, felt that the 
threshold was too high since there would be rate increases below 10 
percent that will be unreasonable. Consumer advocates also feared that 
issuers could game the process by keeping their rate increases at no 
higher than 9.9 percent.
    If CMS established a threshold lower than 10 percent, this would 
impose a larger burden on issuers, States, and CMS, and CMS judged that 
it would not yield a substantial benefit for consumers. In addition, 
CMS has also taken into consideration the fact that many States, as 
discussed below, conduct a rate review process for all rate increases 
without regard to the magnitude of the increase, and we expect the 
number of States conducting the reviews to increase. Therefore, as a 
practical matter, in a growing number of States, the prospect that an 
unreasonable increase that is also below the 10 percent threshold would 
be implemented without review is mitigated by the State review 
processes.
    CMS recognizes that there may be rate increases that fall below the 
10 percent threshold that are unjustified. However, given the practice 
of many States to review all increases, CMS considered the costs and 
benefits of the additional Federal resources to potentially catch 
unjustified or unreasonable rates versus fairness to consumers and the 
additional administrative burden for insurers. CMS decided against 
spending additional resources to potentially catch only a small number 
of unreasonable rates below the threshold.
    CMS also examined establishing a threshold higher than 10 percent 
for rate increases that would be subject to review. However, in 
attempting to strike the balance discussed above, CMS decided on the 10 
percentage point threshold. Specifically, with a threshold higher than 
10 percent, consumers would face greater exposure to rate increases 
that were either unjustified or excessive with no assurance that those 
rates were given a careful review.
2. Establish a Threshold Based on the Market Share of the Insurer
    An alternative approach would have established a lower threshold 
for insurers with larger market share, with the justification that such 
insurers were more likely to be able to exert market power. However, 
analysis of data from a limited number of States suggested showed no 
evidence that larger insurers proposed higher rates of increase. 
Further, to the extent that market power exists in the individual 
market because subscribers with health problems are unable to switch to 
a competing insurer, this power exists equally for small companies as 
for large ones. As a result, CMS decided to utilize a uniform threshold 
for all insurers, regardless of their size.
3. Apply Rate Review Standards to the Large Group Market
    As discussed in the Preamble, CMS discussed applying this final 
rule to the large group market as well as the individual and small 
group markets. Comments were received in response to the proposed rule 
that supported including the large group market in the rate review 
process. However, because of the current rate-setting practices of the 
large group market and States' limited authority over this segment of 
the market, CMS concluded that this regulation should only apply to the 
individual and small group markets.

[[Page 29984]]

4. Including Individual and Small Group Coverage Sold Through 
Associations in the Rate Review Process
    We generally deferred in the proposed rule to the State definitions 
of individual and small group markets. In response to the proposed 
rule, we received comments indicating that, in some States, association 
coverage is considered to be large group coverage, resulting in 
individual and small group coverage sold through associations not being 
subject to the rate review process. We considered amending the 
definitions of individual market and small group market for the final 
rule in order to include all individual and small group coverage in the 
rate review process. However, since including all individual and small 
group coverage sold through associations in the rate review process 
could have a large impact on the markets in some States, we are 
incorporating the proposed definitions of individual market and small 
group market into the final rule and solicit additional comments on 
this issue, with the possibility of amending the final rule after 
receiving comments in order to include coverage sold through 
associations in the rate review process.

I. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies that issue a 
regulation to analyze options for regulatory relief of small businesses 
if a final rule has a significant impact on a substantial number of 
small entities. The RFA generally defines a ``small entity'' as: (1) A 
proprietary firm meeting the size standards of the Small Business 
Administration (SBA), (2) a nonprofit organization that is not dominant 
in its field, or (3) a small government jurisdiction with a population 
of less than 50,000 (States and individuals are not included in the 
definition of ``small entity''). CMS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses, if a final rule has a significant impact on a 
substantial number of small entities. For purposes of the RFA, small 
entities include small businesses, nonprofit organizations, and small 
government jurisdictions. Small businesses are those with sizes below 
thresholds established by the Small Business Administration (SBA). We 
examined the health insurance industry in depth in the Regulatory 
Impact Analysis we prepared for the proposed rule on establishment of 
the Medicare Advantage program (69 FR 46866, August 3, 2004). In that 
analysis we determined that there were few if any insurance firms 
underwriting comprehensive health insurance policies (in contrast, for 
example, to travel insurance policies or dental discount policies) that 
fell below the size thresholds for ``small'' business established by 
the SBA.
    Further, the one-time costs of this final rule are approximately 
$25,000 per covered entity (regardless of size or non-profit status) 
and approximately $4,000 annually in ongoing costs. Numbers of this 
magnitude do not remotely approach the amounts necessary to be 
considered a ``significant economic impact'' on firms with revenues of 
tens of millions of dollars (usually hundreds of millions or billions 
of dollars annually). Accordingly, we have determined, and certify, 
that this final rule will not have a significant economic impact on a 
substantial number of small entities and that a regulatory flexibility 
analysis is not required.
    In addition, section 1102(b) of the Social Security Act requires us 
to prepare a regulatory impact analysis if a final 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 will not affect small rural 
hospitals. Therefore, the Secretary has determined that this final rule 
will not have a significant impact on the operations of a substantial 
number of small rural hospitals.

J. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits before issuing any 
final 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 final rule. Rather, it 
focuses on certain categories of cost, mainly those ``Federal mandate'' 
costs resulting from: (1) Imposing enforceable duties on State, local, 
or tribal governments, or on the private sector; or (2) increasing the 
stringency of conditions in, or decreasing the funding of, State, 
local, or tribal governments under entitlement programs.
    This final rule includes no mandates on State, local, or tribal 
governments. Under the final rule, issuers would be required to submit 
rate justification reports for rate increases of 10 percent or greater 
directly to CMS. A State may voluntarily choose to use its existing 
rate review process, if deemed an Effective Rate Review Program, to 
make a determination as to whether a rate increase is unreasonable. If 
a State chooses to review the rate increase, the State would be 
required to submit to CMS the final determination and an explanation of 
its analysis. However, if a State chooses not to do so, CMS would 
review a rate increase subject to review to determine whether it is 
unreasonable. Thus, the law and this regulation do not impose an 
unfunded mandate on States. However, consistent with policy embodied in 
UMRA, this final rule has been designed to be the least burdensome 
alternative for State, local and tribal governments, and the private 
sector while achieving the objectives of the Affordable Care Act.

K. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. In CMS' view, while the requirements proposed in this 
final rule would not impose substantial direct costs on State and local 
governments, this final rule has federalism implications due to direct 
effects on the distribution of power and responsibilities among the 
State and Federal governments relating to determining the 
reasonableness of rate increases for coverage that State-licensed 
health insurance issuers offer in the individual and small group 
markets.
    CMS recognizes that there are federalism implications with regard 
to CMS' evaluation of Effective Rate Review Programs and its subsequent 
review of rate increases. Under Subpart C of this final rule, CMS 
outlines those criteria that States would have to meet in order to be 
deemed to have an Effective Rate Review Program. If CMS determines that 
a State does not meet those criteria, then CMS would review a rate 
increase subject to review to determine whether it is unreasonable. If 
a State does meet the criteria, then CMS would adopt that State's 
determination of whether a rate increase is unreasonable.
    States would continue to apply State law requirements regarding 
rate and policy filings. State rate review processes that are more 
stringent than

[[Page 29985]]

the Federal requirements likely would be deemed effective and satisfy 
the requirements under this final rule. Accordingly, States have 
significant latitude to impose requirements with respect to health 
insurance issuers that are more restrictive than the Federal law.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have federalism 
implications or limit the policy making discretion of the States, CMS 
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 (NAIC), participating in a NAIC workgroup on rate reviews 
and consulting with State insurance officials on an individual basis.
    Throughout the process of developing this final rule, CMS has 
attempted to balance the States' interests in regulating health 
insurance issuers, and Congress' intent to provide uniform protections 
to consumers in every State. By doing so, it is CMS' view that it has 
complied with the requirements of Executive Order 13132. Under the 
requirements set forth in section 8(a) of Executive Order 13132, and by 
the signatures affixed to this regulation, CMS certifies that the 
Center for Consumer Information and Insurance Oversight has complied 
with the requirements of Executive Order 13132 for the attached final 
rule in a meaningful and timely manner.

List of Subjects in 45 CFR Part 154

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, Penalties, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services amends 45 CFR Subtitle A, Subchapter B, by adding 
part 154 to read as follows:

PART 154--HEALTH INSURANCE ISSUER RATE INCREASES: DISCLOSURE AND 
REVIEW REQUIREMENTS

Subpart A--General Provisions
Sec.
154.101 Basis and scope.
154.102 Definitions.
154.103 Applicability.
Subpart B--Disclosure and Review Provisions
154.200 Rate increases subject to review.
154.205 Unreasonable rate increases.
154.210 Review of rate increases subject to review by CMS or by a 
State.
154.215 Submission of disclosure to CMS for rate increases subject 
to review.
154.220 Timing of providing the Preliminary Justification.
154.225 Determination by CMS or a State of an unreasonable rate 
increase.
154.230 Submission and posting of Final Justifications for 
unreasonable rate increases.
Subpart C--Effective Rate Review Programs
154.301 CMS's determinations of Effective Rate Review Programs.

    Authority:  Section 2794 of the Public Health Service Act (42 
USC 300gg-94).

Subpart A--General Provisions

Sec.  154.101  Basis and scope.

    (a) Basis. This part implements section 2794 of the Public Health 
Service (PHS) Act.
    (b) Scope. This part establishes the requirements for health 
insurance issuers offering health insurance coverage in the small group 
or individual markets to report information concerning unreasonable 
rate increases to the Centers for Medicare & Medicaid Services (CMS). 
This part further establishes the process by which it will be 
determined whether the rate increases are unreasonable rate increases 
as defined in this part.

Sec.  154.102  Definitions.

    As used in this part:
    CMS means the Centers for Medicare & Medicaid Services.
    Effective Rate Review Program means a State program that CMS has 
determined meets the requirements set forth in Sec.  154.301(a) and (b) 
for the relevant market segment in the State.
    Federal medical loss ratio standard means the applicable medical 
loss ratio standard for the State and market segment involved, 
determined under subpart B of 45 CFR part 158.
    Health insurance coverage has the meaning given the term in section 
2791(b)(1) of the PHS Act.
    Health insurance issuer has the meaning given the term in section 
2791(b)(2) of the PHS Act.
    Individual market has the meaning given the term under the 
applicable State's rate filing laws, except that where State law does 
not define the term, it has the meaning given in section 2791(e)(1)(A) 
of the PHS Act.
    Product means a package of health insurance coverage benefits with 
a discrete set of rating and pricing methodologies that a health 
insurance issuer offers in a State.
    Rate increase means any increase of the rates for a specific 
product offered in the individual or small group market.
    Rate increase subject to review means a rate increase that meets 
the criteria set forth in Sec.  154.200.
    Secretary means the Secretary of the Department of Health and Human 
Services.
    Small group market has the meaning given under the applicable 
State's rate filing laws, except that where State law does not define 
the term, it has the meaning given in section 2791(e)(5) of the PHS 
Act; provided, however, that for the purpose of this definition, ``50'' 
employees is substituted for ``100'' employees in the definition of 
``small employer'' under section 2791(e)(4).
    State has the meaning given the term in section 2791(d)(14) of the 
PHS Act.
    Unreasonable rate increase means:
    (1) When CMS is conducting the review required by this part, a rate 
increase that CMS determines under Sec.  154.205 is:
    (i) An excessive rate increase;
    (ii) An unjustified rate increase; or
    (iii) An unfairly discriminatory rate increase.
    (2) When CMS adopts the determination of a State that has an 
Effective Rate Review Program, a rate increase that the State 
determines is excessive, unjustified, unfairly discriminatory, or 
otherwise unreasonable as provided under applicable State law.

Sec.  154.103  Applicability.

    (a) In general. The requirements of this part apply to health 
insurance issuers offering health insurance coverage in the individual 
market and small group market.
    (b) Exceptions. The requirements of this part do not apply to 
grandfathered health plan coverage as defined in 45 CFR Sec.  147.140, 
or to excepted benefits as described in section 2791(c) of the PHS Act.

Subpart B--Disclosure and Review Provisions

Sec.  154.200  Rate increases subject to review.

    (a) A rate increase filed in a State on or after September 1, 2011, 
or effective on or after September 1, 2011, in a State that does not 
require a rate increase to be filed, is subject to review if:
    (1) The rate increase is 10 percent or more, applicable to a 12-
month period that begins on September 1, as calculated under paragraph 
(c) of this section; or
    (2) The rate increase meets or exceeds a State-specific threshold 
applicable to

[[Page 29986]]

a 12-month period that begins on September 1, as calculated under 
paragraph (c) of this section, determined by the Secretary. In 
establishing a State-specific threshold, the Secretary shall consult 
with the State and may consider relevant information provided by other 
interested parties. A State-specific threshold shall be based on 
factors impacting rate increases in a State to the extent that data 
relating to such State-specific factors is available.
    (b) The Secretary will publish a notice no later than June 1 of 
each year concerning whether a threshold under paragraph (a)(1) or (2) 
of this section applies to a State; except that, with respect to the 
12-month period that begins on September 1, 2011, the threshold under 
paragraph (a)(1) of this section applies.
    (c) A rate increase meets or exceeds the applicable threshold set 
forth in paragraph (a) of this section if the average increase for all 
enrollees weighted by premium volume meets or exceeds the applicable 
threshold.
    (d) If a rate increase that does not otherwise meet or exceed the 
threshold under paragraph (c) of this section meets or exceeds the 
threshold when combined with a previous increase or increases during 
the 12-month period preceding the date on which the rate increase would 
become effective, then the rate increase must be considered to meet or 
exceed the threshold and is subject to review under Sec.  154.210, and 
such review shall include a review of the aggregate rate increases 
during the applicable 12-month period.

Sec.  154.205  Unreasonable rate increases.

    (a) When CMS reviews a rate increase subject to review under Sec.  
154.210(a), CMS will determine that the rate increase is an 
unreasonable rate increase if the increase is an excessive rate 
increase, an unjustified rate increase, or an unfairly discriminatory 
rate increase.
    (b) The rate increase is an excessive rate increase if the increase 
causes the premium charged for the health insurance coverage to be 
unreasonably high in relation to the benefits provided under the 
coverage. In determining whether the rate increase causes the premium 
charged to be unreasonably high in relationship to the benefits 
provided, CMS will consider:
    (1) Whether the rate increase results in a projected medical loss 
ratio below the Federal medical loss ratio standard in the applicable 
market to which the rate increase applies, after accounting for any 
adjustments allowable under Federal law;
    (2) Whether one or more of the assumptions on which the rate 
increase is based is not supported by substantial evidence; and
    (3) Whether the choice of assumptions or combination of assumptions 
on which the rate increase is based is unreasonable.
    (c) The rate increase is an unjustified rate increase if the health 
insurance issuer provides data or documentation to CMS in connection 
with the increase that is incomplete, inadequate or otherwise does not 
provide a basis upon which the reasonableness of an increase may be 
determined.
    (d) The rate increase is an unfairly discriminatory rate increase 
if the increase results in premium differences between insureds within 
similar risk categories that:
    (1) Are not permissible under applicable State law; or
    (2) In the absence of an applicable State law, do not reasonably 
correspond to differences in expected costs.

Sec.  154.210  Review of rate increases subject to review by CMS or by 
a State.

    (a) Except as provided in paragraph (b) of this section, CMS will 
review a rate increase subject to review to determine whether it is 
unreasonable, as required by this part.
    (b) CMS will adopt a State's determination of whether a rate 
increase is an unreasonable rate increase, if the State:
    (1) Has an Effective Rate Review Program as described in Sec.  
154.301; and
    (2) The State provides to CMS, on a form and in a manner prescribed 
by the Secretary, its final determination of whether a rate increase is 
unreasonable, which must include a brief explanation of how its 
analysis of the relevant factors set forth in Sec.  154.301(a)(3) 
caused it to arrive at that determination, within five business days 
following the State's final determination.
    (c) CMS will post and maintain on its Web site a list of the States 
with market segments that meet the requirements of paragraph (b) of 
this section.

Sec.  154.215  Submission of disclosure to CMS for rate increases 
subject to review.

    (a) For each rate increase subject to review, a health insurance 
issuer must submit a Preliminary Justification for each product 
affected by the increase on a form and in the manner prescribed by the 
Secretary.
    (b) The Preliminary Justification must consist of the following 
Parts:
    (1) Rate increase summary (Part I), as described by paragraph (e) 
of this section;
    (2) Written description justifying the rate increase (Part II), as 
described by paragraph (f) of this section; and
    (3) When CMS is reviewing the rate increase under Sec.  154.210(a), 
rate filing documentation (Part III), as described by paragraph (g) of 
this section.
    (c) A health insurance issuer must complete and submit Parts I and 
II of the Preliminary Justification described in paragraphs (b)(1) and 
(2) of this section to CMS and, as long as the applicable State accepts 
such submissions, to the applicable State for any rate increase subject 
to review. If a rate increase subject to review is for a product 
offered in the individual market or small group market and CMS is 
reviewing the rate increase under Sec.  154.210(a), then the health 
insurance issuer must also complete and submit Part III of the 
Preliminary Justification described in paragraph (b)(3) of this section 
to CMS only.
    (d) The health insurance issuer may submit a single, combined 
Preliminary Justification for rate increases subject to review 
affecting multiple products, if the claims experience of all products 
has been aggregated to calculate the rate increases and the rate 
increases are the same across all products.
    (e) Content of rate increase summary (Part I): The rate increase 
summary must include the following as determined appropriate by the 
Secretary:
    (1) Historical and projected claims experience;
    (2) Trend projections related to utilization, and service or unit 
cost:
    (3) Any claims assumptions related to benefit changes;
    (4) Allocation of the overall rate increase to claims and non-
claims costs;
    (5) Per enrollee per month allocation of current and projected 
premium; and
    (6) Three year history of rate increases for the product associated 
with the rate increase.
    (f) Content of written description justifying the rate increase 
(Part II): The written description of the rate increase must include a 
simple and brief narrative describing the data and assumptions that 
were used to develop the rate increase and include the following:
    (1) Explanation of the most significant factors causing the rate 
increase, including a brief description of the relevant claims and non-
claims expense increases reported in the rate increase summary; and
    (2) Brief description of the overall experience of the policy, 
including historical and projected expenses, and loss ratios.
    (g) Content of rate filing documentation (Part III): (1) The rate 
filing documentation must be sufficient for CMS to conduct an 
examination satisfying the requirements of

[[Page 29987]]

Sec.  154.301(a)(3) and (4) and determine whether the rate increase is 
an unreasonable increase. Instructions concerning the requirements for 
the rate filing documentation will be provided in guidance issued by 
CMS.
    (2) If the health insurance issuer is also required to submit a 
rate filing to a State in connection with the rate increase under State 
law, CMS will accept a copy of the filing provided that the filing 
includes all of the information described in paragraph (g)(1) of this 
section.
    (h) If the level of detail provided by the issuer for the 
information under paragraph (g) of this section does not provide 
sufficient basis for CMS to determine whether the rate increase is an 
unreasonable rate increase, CMS will request the additional information 
necessary to make its determination. The health insurance issuer must 
provide the requested information to CMS within 10 business days 
following its receipt of the request.
    (i) Posting of the disclosure on the CMS Web site: (1) CMS promptly 
will make available to the public on its Web site the information 
contained in Parts I and II of each Preliminary Justification.
    (2) CMS will make available to the public on its Web site the 
information contained in Part III of each Preliminary Justification 
that is not a trade secret or confidential commercial or financial 
information as defined in CMS's Freedom of Information Act regulations, 
45 CFR 5.65.
    (3) CMS will include a disclaimer on its Web site with the 
information made available to the public that explains the purpose and 
role of the Preliminary Justification.
    (j) CMS will include information on its Web site concerning how the 
public can submit comments on the proposed rate increases that CMS 
reviews.

Sec.  154.220  Timing of providing the Preliminary Justification.

    A health insurance issuer must submit a Preliminary Justification 
for all rate increases subject to review that are filed in a State on 
or after September 1, 2011, or effective on or after September 1, 2011 
in a State that does not require the rate increase subject to review to 
be filed, as follows:
    (a) If a State requires that a proposed rate increase be filed with 
the State prior to the implementation of the rate, the health insurance 
issuer must submit to CMS and the applicable State the Preliminary 
Justification on the date on which the health insurance issuer submits 
the proposed rate increase to the State.
    (b) For all other States, the health insurance issuer must submit 
to CMS and the State the Preliminary Justification prior to the 
implementation of the rate increase.

Sec.  154.225  Determination by CMS or a State of an unreasonable rate 
increase.

    (a) When CMS receives a Preliminary Justification for a rate 
increase subject to review and CMS reviews the rate increase under 
Sec.  154.210(a), CMS will make a timely determination whether the rate 
increase is an unreasonable rate increase.
    (1) CMS will post on its Web site its final determination and a 
brief explanation of its analysis, consistent with the form and manner 
prescribed by the Secretary under Sec.  154.210(b)(2), within five 
business days following its final determination.
    (2) If CMS determines that the rate increase is an unreasonable 
rate increase, CMS will also provide its final determination and brief 
explanation to the health insurance issuer within five business days 
following its final determination.
    (b) If a State conducts a review under Sec.  154.210(b), CMS will 
adopt the State's determination of whether a rate increase is 
unreasonable and post on the CMS Web site the State's final 
determination described in Sec.  154.210(b)(2).
    (c) If a State determines that the rate increase is an unreasonable 
rate increase and the health insurance issuer is legally permitted to 
implement the unreasonable rate increase under applicable State law, 
CMS will provide the State's final determination and brief explanation 
to the health insurance issuer within five business days following 
CMS's receipt thereof.

Sec.  154.230  Submission and posting of Final Justifications for 
unreasonable rate increases.

    (a) If a health insurance issuer receives from CMS a final 
determination by CMS or a State that a rate increase is an unreasonable 
rate increase, and the health insurance issuer declines to implement 
the rate increase or chooses to implement a lower increase, the health 
insurance issuer must submit to CMS timely notice that it will not 
implement the rate increase or that it will implement a lower increase 
on a form and in the manner prescribed by the Secretary.
    (b) If a health insurance issuer implements a lower increase as 
described in paragraph (a) of this section and the lower increase does 
not meet or exceed the applicable threshold under Sec.  154.200, such 
lower increase is not subject to this part. If the lower increase meets 
or exceeds the applicable threshold, the health insurance issuer must 
submit a new Preliminary Justification under this part.
    (c) If a health insurance issuer implements a rate increase 
determined by CMS or a State to be unreasonable, within the later of 10 
business days after the implementation of such increase or the health 
insurance issuer's receipt of CMS's final determination that a rate 
increase is an unreasonable rate increase, the health insurance issuer 
must:
    (1) Submit to CMS a Final Justification in response to CMS's or the 
State's final determination, as applicable. The information in the 
Final Justification must be consistent with the information submitted 
in the Preliminary Justification supporting the rate increase; and
    (2) Prominently post on its Web site the following information on a 
form and in the manner prescribed by the Secretary:
    (i) The information made available to the public by CMS and 
described in Sec.  154.215(i);
    (ii) CMS's or the State's final determination and brief explanation 
described in Sec.  154.225(a) and Sec.  154.210(b)(2), as applicable; 
and
    (iii) The health insurance issuer's Final Justification for 
implementing an increase that has been determined to be unreasonable by 
CMS or the State, as applicable.
    (3) The health insurance issuer must continue to make this 
information available to the public on its Web site for at least three 
years.
    (d) CMS will post all Final Justifications on the CMS Web site. 
This information will remain available to the public on the CMS Web 
site for three years.

Subpart C--Effective Rate Review Programs

Sec.  154.301  CMS's determinations of Effective Rate Review Programs.

    (a) Effective Rate Review Program. In evaluating whether a State 
has an Effective Rate Review Program, CMS will apply the following 
criteria for the review of rates for the small group market and the 
individual market, and also, as applicable depending on State law, the 
review of rates for different types of products within those markets:
    (1) The State receives from issuers data and documentation in 
connection with rate increases that are sufficient to conduct the 
examination described in paragraph (a)(3) of this section.
    (2) The State conducts an effective and timely review of the data 
and

[[Page 29988]]

documentation submitted by a health insurance issuer in support of a 
proposed rate increase.
    (3) The State's rate review process includes an examination of:
    (i) The reasonableness of the assumptions used by the health 
insurance issuer to develop the proposed rate increase and the validity 
of the historical data underlying the assumptions; and
    (ii) The health insurance issuer's data related to past projections 
and actual experience.
    (4) The examination must take into consideration the following 
factors to the extent applicable to the filing under review:
    (i) The impact of medical trend changes by major service 
categories;
    (ii) The impact of utilization changes by major service categories;
    (iii) The impact of cost-sharing changes by major service 
categories;
    (iv) The impact of benefit changes;
    (v) The impact of changes in enrollee risk profile;
    (vi) The impact of any overestimate or underestimate of medical 
trend for prior year periods related to the rate increase;
    (vii) The impact of changes in reserve needs;
    (viii) The impact of changes in administrative costs related to 
programs that improve health care quality;
    (ix) The impact of changes in other administrative costs;
    (x) The impact of changes in applicable taxes, licensing or 
regulatory fees;
    (xi) Medical loss ratio; and
    (xii) The health insurance issuer's capital and surplus.
    (5) The State's determination of whether a rate increase is 
unreasonable is made under a standard that is set forth in State 
statute or regulation.
    (b) Public disclosure and input. In addition to satisfying the 
provisions in paragraph (a) of this section, a State with an Effective 
Rate Review Program must provide access from its Web site to the Parts 
I and II of the Preliminary Justifications of the proposed rate 
increases that it reviews and have a mechanism for receiving public 
comments on those proposed rate increases.
    (c) CMS will determine whether a State has an Effective Rate Review 
Program for each market based on information available to CMS that a 
rate review program meets the criteria described in paragraphs (a) and 
(b) of this section.
    (d) CMS reserves the right to evaluate from time to time whether, 
and to what extent, a State's circumstances have changed such that it 
has begun to or has ceased to satisfy the criteria set forth in 
paragraphs (a) and (b) of this section.

    Dated: May 3, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 18, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2011-12631 Filed 5-19-11; 11:15 am]
BILLING CODE 4120-01-P
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