This document is scheduled to be published in the

Federal Register on 12/07/2012 and available online at

http://federalregister.gov/a/2012-29184, and on FDsys.gov

DEPARTMENT OF HEALTH AND HUMAN SERVICES 

45 CFR Parts 153, 155, 156, 157 and 158 

[CMS-9964-P] 

RIN 0938-AR51 

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

Parameters for 2014 

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

ACTION: Proposed rule. 

SUMMARY: This proposed rule provides further detail and parameters related to: the 

risk adjustment, reinsurance, and risk corridors programs; cost-sharing reductions; user 

fees for a Federally-facilitated Exchange; advance payments of the premium tax credit; a 

Federally-facilitated Small Business Health Option Program; and the medical loss ratio 

program. The cost-sharing reductions and advanced payments of the premium tax credit, 

combined with new insurance market reforms, will significantly increase the number of 

individuals with health insurance coverage, particularly in the individual market. The 

premium stabilization programs – risk adjustment, reinsurance, and risk corridors – will 

protect against adverse selection in the newly enrolled population. These programs, in 

combination with the medical loss ratio program and market reforms extending 

guaranteed availability (also known as guaranteed issue) protections and prohibiting the 

use of factors such as health status, medical history, gender, and industry of employment 

to set premium rates, will help to ensure that every American has access to high-quality, 

affordable health insurance. 
 2 

DATES: To be assured consideration, comments must be received at one of the 

addresses provided below, no later than 5 p.m. on [OFR--insert date 30 days after the date 

of filing for public inspection at OFR.] 

ADDRESSES: In commenting, please refer to file code CMS-9964-P. Because of staff 

and resource limitations, we cannot accept comments by facsimile (FAX) transmission. 

 You may submit comments in one of four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit electronic comments on this regulation to 

http://www.regulations.gov. Follow the "Submit a comment" instructions. 

 2. By regular mail. You may mail written comments to the following address 

ONLY: 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

Attention: CMS-9964-P, 

P.O. Box 8016, 

Baltimore, MD 21244-8016. 

Please allow sufficient time for mailed comments to be received before the close 

of the comment period. 

3. By express or overnight mail. You may send written comments to the 

following address ONLY: 

 Centers for Medicare & Medicaid Services, 

 Department of Health and Human Services, 

 Attention: CMS-9964-P, 

 Mail Stop C4-26-05, 

 7500 Security Boulevard, 
 3 

Baltimore, MD 21244-1850. 

4. By hand or courier. Alternatively, you may deliver (by hand or courier) 

your written comments ONLY to the following addresses prior to the close of the 

comment period: 

a. For delivery in Washington, DC-- 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

Room 445-G, Hubert H. Humphrey Building, 

 200 Independence Avenue, SW., 

 Washington, DC 20201 

(Because access to the interior of the Hubert H. Humphrey Building is not readily 

available to persons without Federal government identification, commenters are 

encouraged to leave their comments in the CMS drop slots located in the main lobby of 

the building. A stamp-in clock is available for persons wishing to retain a proof of filing 

by stamping in and retaining an extra copy of the comments being filed.) 

b. For delivery in Baltimore, MD-- 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

7500 Security Boulevard, 

Baltimore, MD 21244-1850. 

If you intend to deliver your comments to the Baltimore address, call telephone 

number (410) 786-7195 in advance to schedule your arrival with one of our staff 

members. 

 Comments erroneously mailed to the addresses indicated as appropriate for hand 

or courier delivery may be delayed and received after the comment period. 
 4 

For information on viewing public comments, see the beginning of the 

"SUPPLEMENTARY INFORMATION" section. 

FOR FURTHER INFORMATION CONTACT: 

Sharon Arnold at (301) 492-4286, Laurie McWright at (301) 492-4311, or Jeff Wu at 

(301) 492-4305 for general information. 

Adrianne Glasgow at (410) 786-0686 for matters related to reinsurance. 

Michael Cohen at (301) 492-4277 for matters related to the methodology for determining 

the reinsurance contribution rate and payment parameters. 

Grace Arnold at (301) 492-4272 for matters related to risk adjustment, the HHS risk 

adjustment methodology, or the distributed data collection approach for the HHSoperated risk adjustment and reinsurance programs. 

Adam Shaw at (410) 786-1091 for matters related to risk corridors. 

Johanna Lauer at (301) 492-4397 for matters related to cost-sharing reductions, advance 

payments of the premium tax credits, or user fees. 

Rex Cowdry at (301) 492-4387 for matters related to the Small Business Health Options 

Program. 

Carol Jimenez at (301) 492-4457 for matters related to the medical loss ratio program. 

SUPPLEMENTARY INFORMATION: 

 Inspection of Public Comments: All comments received before the close of the 

comment period are available for viewing by the public, including any personally 

identifiable or confidential business information that is included in a comment. We post 

all comments received before the close of the comment period on the following Web site 

as soon as possible after they have been received: http://www.regulations.gov. Follow 

the search instructions on that Web site to view public comments. 
 5 

 Comments received timely will also be available for public inspection as they are 

received, generally beginning approximately 3 weeks after publication of a document, at 

the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security 

Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-

3951. 

Table of Contents 

I. Executive Summary 

II. Background 

III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 

2014 

A. Provisions for the State Notice of Benefit and Payment Parameters 

B. Provisions and Parameters for the Permanent Risk Adjustment Program 

1. Approval of State-Operated Risk Adjustment 

2. Risk Adjustment User Fees 

3. Overview of the Risk Adjustment Methodology HHS Would 

Implement when Operating Risk Adjustment on Behalf of a State 

4. State Alternate Methodology 

5. Risk Adjustment Data Validation 

C. Provisions and Parameters for the Transitional Reinsurance Program 

1. State Standards Related to the Reinsurance Program 

2. Contributing Entities and Excluded Entities 

3. National Contribution Rate 

 4. Calculation and Collection of Reinsurance Contributions 

5. Eligibility for Reinsurance Payments Under Health Insurance Market 

Rules 
 6 

 6. Reinsurance Payment Parameters 

7. Uniform Adjustment to Reinsurance Payments 

8. Supplemental State Reinsurance Parameters 

9. Allocation and Distribution of Reinsurance Contributions 

10. Data Collection Standards for Reinsurance Payments 

D. Provisions for the Temporary Risk Corridors Program 

 1. Definitions 

 2. Risk Corridors Establishment and Payment Methodology 

 3. Risk Corridors Data Requirements 

 4. Manner of Risk Corridor Data Collection 

E. Provisions for the Advance Payment of the Premium Tax Credit and CostSharing Reduction Programs 

1. Exchange Responsibilities with Respect to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

2. Exchange Functions: Certification of Qualified Health Plans 

3. QHP Minimum Certification Standards Relating to Advance Payments 

of the Premium Tax Credit and Cost-Sharing Reductions 

4. Health Insurance Issuer Responsibilities with Respect to Advance 

Payments of the Premium Tax Credit and Cost-Sharing Reductions 

F. Provisions on User Fees for a Federally-facilitated Exchange (FFE) 

G. Distributed Data Collection for the HHS-Operated Risk Adjustment and 

Reinsurance Programs 

 1. Background 

 2. Issuer Data Collection and Submission Requirements 

 3. Risk Adjustment Data Requirements 
 7 

 4. Reinsurance Data Requirements 

H. Small Business Health Options Program 

I. Medical Loss Ratio Requirements under the Patient Protection and 

Affordable Care Act 

1. Treatment of Premium Stabilization Payments, and Timing of Annual 

MLR Reports and Distribution of Rebates 

2. Deduction of Community Benefit Expenditures 

3. Summary of Errors in the MLR Regulation 

IV. Collection of Information Requirements 

V. Response to Comments 

VI. Regulatory Impact Analysis 

A. Statement of Need 

B. Overall Impact 

C. Impact Estimates of the Payment Notice Provisions 

D. Regulatory Flexibility Act 

E. Unfunded Mandates 

F. Federalism 

G. Congressional Review Act 

Regulations Text 

Acronyms 

Affordable Care Act The Affordable Care Act of 2010 (which is the collective term for 

the Patient Protection and Affordable Care Act (Pub. L. 111–148) 

and the Health Care and Education Reconciliation Act (Pub. L. 

111–152)) 

APTC Advance payment of the premium tax credit 
 8 

AV Actuarial Value 

CFR Code of Federal Regulations 

CHIP Children’s Health Insurance Program 

CMS Centers for Medicare & Medicaid Services 

EHB Essential Health Benefits 

ERISA Employee Retirement Income Security Act 

ESI Employer sponsored insurance 

FFE Federally-facilitated Exchange 

FPL Federal Poverty Level 

GAAP Generally accepted accounting principles 

HCC Hierarchical condition category 

HHS United States Department of Health and Human Services 

HIPAA Health Insurance Portability and Accountability Act of 1996 (Pub. 

L. 104–191) 

IHS Indian Health Service 

IRS Internal Revenue Service 

MLR Medical Loss Ratio 

NAIC National Association of Insurance Commissioners 

OMB Office of Management and Budget 

OPM United States Office of Personnel Management 

PHS Act Public Health Service Act 

PRA Paperwork Reduction Act of 1985 

QHP Qualified Health Plan 

SHOP Small Business Health Options Program 

The Code Internal Revenue Code of 1986 
 9 

I. Executive Summary 

A. Purpose 

Beginning in 2014, individuals and small businesses will be able to purchase 

private health insurance through competitive marketplaces, called Affordable Insurance 

Exchanges, or “Exchanges.” Individuals who enroll in health plans through Exchanges 

may receive premium tax credits to make health insurance more affordable, and financial 

assistance to cover cost sharing for health care services. The premium tax credits, 

combined with the new insurance reforms, will significantly increase the number of 

individuals with health insurance coverage, particularly in the individual market. 

Premium stabilization programs – risk adjustment, reinsurance, and risk corridors – 

protect against adverse selection in the newly enrolled population. These programs, in 

combination with the medical loss ratio program and market reforms extending 

guaranteed availability (also known as guaranteed issue) protections, prohibiting the use 

of factors such as health status, medical history, gender, and industry of employment to 

set premium rates, will help to ensure that every American has access to high-quality, 

affordable health insurance. 

Premium stabilization programs: The Affordable Care Act establishes transitional 

reinsurance and temporary risk corridors programs, and a permanent risk adjustment 

program to provide payments to health insurance issuers that cover higher-risk 

populations and to more evenly spread the financial risk borne by issuers. 

The transitional reinsurance program and the temporary risk corridors program, 

which begin in 2014, are designed to provide issuers with greater payment stability as 

insurance market reforms are implemented. The reinsurance program will reduce the 

uncertainty of insurance risk in the individual market by partially offsetting risk of highcost enrollees. The risk corridors program, which is a Federally administered program, 
 10 

will protect against uncertainty in rates for qualified health plans by limiting the extent of 

issuer losses and gains. On an ongoing basis, the risk adjustment program is intended to 

provide increased payments to health insurance issuers that attract higher-risk 

populations, such as those with chronic conditions, and reduce the incentives for issuers 

to avoid higher-risk enrollees. Under this program, funds are transferred from issuers 

with lower-risk enrollees to issuers with higher-risk enrollees. 

In the Premium Stabilization Rule (77 FR 17220), we laid out a regulatory 

framework for these three programs. In that rule, we stated that the specific payment 

parameters for those programs would be published in this proposed rule. In this proposed 

rule, we expand upon these standards, and propose payment parameters for these 

programs. 

Advanced payments of the premium tax credit and cost-sharing reductions: This 

proposed rule proposes standards for advanced payments of the premium tax credit and 

for cost-sharing reductions. These programs assist low- and moderate-income Americans 

in affording health insurance on an Exchange. Section 1401 of the Affordable Care Act 

amended the Internal Revenue Code (26 U.S.C.) to add section 36B, allowing an 

advance, refundable premium tax credit to help individuals and families afford health 

insurance coverage. Section 36B of the Code was subsequently amended by the 

Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111–309) (124 Stat. 3285 

(2010)); the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange 

Subsidy Overpayments Act of 2011 (Pub. L. 112–9) (125 Stat. 36 (2011)); and the 

Department of Defense and Full-Year Continuing Appropriations Act, 2011 (Pub. L. 

112–10) (125 Stat. 38 (2011)). The section 36B credit is designed to make a qualified 

health plan affordable by reducing a taxpayer’s out-of-pocket premium cost. 
 11 

Under section 1411 of the Affordable Care Act, an Exchange makes an advance 

determination of tax credit eligibility for individuals enrolling in coverage through the 

Exchange and seeking financial assistance. Using information available at the time of 

enrollment, the Exchange determines: (1) whether the individual meets the income and 

other requirements for advance payments, and (2) the amount of the advance payments. 

Advance payments are made monthly under section 1412 of the Affordable Care Act to 

the issuer of the qualified health plan (QHP) in which the individual enrolls. 

Section 1402 of the Affordable Care Act provides for the reduction of cost 

sharing for certain individuals enrolled in QHPs offered through the Exchanges and 

section 1412 of the Affordable Care Act provides for the advance payment of these 

reductions to issuers. This assistance will help low- and moderate-income qualified 

individuals and families afford the out-of-pocket spending associated with health care 

services provided through QHP coverage. The law directs issuers to reduce cost sharing 

for essential health benefits for individuals with household incomes between 100 and 400 

percent of the Federal Poverty Level (FPL) who are enrolled in a silver level QHP 

through an individual market Exchange and are eligible for advance payment of premium 

tax credits. The statute also directs issuers to eliminate cost sharing for Indians (as 

defined in section 4(d) of the Indian Self-Determination and Education Assistance Act) 

with a household income at or below 300 percent of the FPL who are enrolled in a QHP 

of any “metal” level (that is, bronze, silver, gold, or platinum) through the individual 

market in the Exchange, and prohibits issuers of QHPs from requiring cost sharing for 

Indians, regardless of household income, for items or services furnished directly by the 

Indian Health Service, an Indian Tribe, a Tribal Organization, or an Urban Indian 

Organization, or through referral under contracted health services. 
 12 

HHS published a bulletin1 outlining an intended regulatory approach to 

calculations of actuarial value and implementation of cost-sharing reductions on February 

24, 2012 (the “AV/CSR Bulletin”). Specifically, HHS outlined an intended regulatory 

approach for the calculation of AV, de minimis variation standards, silver plan variations 

for individuals eligible for cost-sharing reductions, and advance payments of cost-sharing 

reductions to issuers, among other topics. In the Exchange Establishment Rule, we 

established eligibility standards for these cost-sharing reductions. In this proposed rule, 

we establish standards governing the administration of cost-sharing reductions and 

provide specific payment parameters for the program. 

Federally-facilitated Exchange user fees: Section 1311(d)(5)(A) of the 

Affordable Care Act contemplates an Exchange charging assessments or user fees to 

participating issuers to generate funding to support its operations. As the operator of a 

Federally-facilitated Exchange, HHS has the authority, under this section of the statute, to 

collect and spend such user fees. In addition, 31 U.S.C. 9701 provides for an agency to 

establish a charge for a service provided by the agency. Office of Management and 

Budget Circular A-25 Revised (“Circular A-25R”) establishes Federal policy regarding 

user fees and specifies that a user charge will be assessed against each identifiable 

recipient for special benefits derived from Federal activities beyond those received by the 

general public. In this proposed rule, we establish a user fee for issuers participating in a 

Federally-facilitated Exchange. 

Small Business Health Options Program: Section 1311(b)(1)(B) of the 

Affordable Care Act directs each State that chooses to operate an Exchange to establish a 

Small Business Health Options Program (SHOP) that provides health insurance options 

 

1 Available at: http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf. 
 13 

for small businesses. The Exchange Establishment Rule sets forth standards for the 

administration of SHOP Exchanges. In this proposed rule, we clarify and expand upon 

the standards established in that final rule. 

Medical loss ratio program: Public Health Service (PHS) Act section 2718 

generally requires health insurance issuers to submit an annual MLR report to HHS and 

provide rebates to consumers if they do not achieve specified MLRs. On December 1, 

2010, we published an interim final rule, entitled “Health Insurance Issuers Implementing 

Medical Loss Ratio (MLR) Requirements under the Patient Protection and Affordable 

Care Act,” (75 FR 74864) that established standards for the MLR program. Since then, 

we have made several revisions and technical corrections to those rules. We propose in 

this proposed rule to amend the regulations to specify how issuers are to account for 

payments or receipts for risk adjustment, reinsurance, and risk corridors, and to change 

the timing of the annual MLR report and distribution of rebates required of issuers to 

allow for accounting of the premium stabilization programs. This proposed rule also 

proposes to amend the regulations to revise the treatment of community benefit 

expenditures in the MLR calculation for issuers exempt from Federal income tax. 

B. Summary of the Major Provisions

This proposed rule fills in the framework established by the Premium 

Stabilization Rule by proposing provisions and parameters for the three premium 

stabilization programs — the permanent risk adjustment program, the transitional 

reinsurance program, and the temporary risk corridors program. It also proposes key 

provisions governing advance payments of the premium tax credit, cost-sharing 

reductions, and user fees for Federally-facilitated Exchanges. Finally, it proposes a 

number of amendments relating to the SHOP and the medical loss ratio program. 
 14 

Risk Adjustment: The goal of the Affordable Care Act risk adjustment program 

is to mitigate the impacts of possible adverse selection and stabilize the premiums in the 

individual and small group markets as and after insurance market reforms are 

implemented. In this proposed rule, we propose a number of standards and parameters 

for implementing the risk adjustment program, including: 

• Provisions governing a State operating a risk adjustment program; 

• The risk adjustment methodology HHS will use when operating risk 

adjustment on behalf of a State, including the risk adjustment model, the 

payments and charges methodology, and the data collection approach; and 

• An outline of the data validation process we propose to use when operating 

risk adjustment on behalf of a State. 

Reinsurance: The Affordable Care Act directs that a transitional reinsurance 

program be established in each State to help stabilize premiums for coverage in the 

individual market from 2014 through 2016. In this proposed rule, we propose a number 

of standards and parameters for implementing the reinsurance program, including: 

• Provisions excluding certain types of health coverage from reinsurance 

contributions; 

• The national per capita contribution rate to be paid by health insurance issuers 

and self-insured group health plans along with the methodology to be used for calculating 

the contributions due from a health insurance issuer or self-insured group health plan; 

• Provisions establishing eligibility for reinsurance payments; 

• The national reinsurance payment parameters and the approach we propose to 

use to calculate and administer the reinsurance program; and 

• The distributed data collection approach we propose to use to implement the 

reinsurance program. 
 15 

Risk Corridors: The temporary risk corridors program permits the Federal 

government and QHPs to share in profits or losses resulting from inaccurate rate setting 

from 2014 to 2016. In this proposed rule, we propose to permit a QHP to include profits 

and taxes within its risk corridors calculations. We also propose an annual schedule for 

the program and standards for data submissions. 

Advance Payments of the Premium Tax Credit: Sections 1401 and 1411 of the 

Affordable Care Act provide for advance payments of the premium tax credit for lowand moderate-income enrollees in QHPs on Exchanges. In this proposed rule, we 

propose a number of standards governing the administration of this program, including: 

• Provisions governing the reduction of premiums by the amount of any 

advance payments of the premium tax credit; and 

• Provisions governing the allocation of premiums to essential health benefits. 

Cost-Sharing Reductions: Sections 1402 and 1412 of the Affordable Care Act 

provide for reductions in cost sharing on essential health benefits for low- and moderateincome enrollees in qualified silver level health plans in individual market Exchanges. It 

also provides for reductions in cost sharing for Indians enrolled in QHPs at any metal 

level. In this proposed rule, we propose a number of standards governing the costsharing reduction program, including: 

• Provisions governing the design of variations of QHPs with cost-sharing 

structures for enrollees of various income levels and for Indians; 

• The maximum out-of-pocket limits applicable to the various plan variations; 

• Provisions governing the assignment and reassignment of enrollees to plan 

variations; 

• Provisions governing issuer submissions of estimates of cost-sharing 

reductions, which are paid in advance to issuers by the Federal government; and 
 16 

• Provisions governing reconciliation of these advance estimates against actual 

cost-sharing reductions provided. 

User Fees: This proposed rule proposes a per billable member user fee applicable 

to issuers participating in a Federally-facilitated Exchange. This proposed rule also 

outlines HHS’s approach to calculating the fee. 

SHOP: Beginning in 2014, SHOP Exchanges will allow small employers to offer 

employees a variety of QHPs. In this proposed rule, we propose several standards and 

processes for implementing SHOP Exchanges, including: 

• Standards governing the definitions and counting methods used to determine 

whether an employer is a small or large employer; 

• A safe harbor method of employer contribution in a Federally-facilitated 

SHOP (FF-SHOP); 

• The default minimum participation rate; 

• QHP standards linking Exchange and FF-SHOP participation and ensuring 

broker commissions in FF-SHOP that are the same as those in the outside market; and 

• Allowing Exchanges and SHOPs to selectively list only brokers registered 

with the Exchange or SHOP (and adopting that policy for FFEs and FF-SHOPs). 

MLR: The MLR program requires issuers to rebate a portion of premiums if their 

MLRs fall short of the applicable MLR standard for the reporting year. MLR is 

calculated as a ratio of claims plus quality improvement activities to premium revenue, 

with adjustments for taxes, regulatory fees, and the premium stabilization programs. In 

this proposed rule, we propose a number of standards governing the MLR program, 

including: 

• Provisions accounting for risk adjustment, reinsurance, and risk corridors in 

the MLR calculation; 
 17 

• A revised timeline for MLR reporting and rebates; and 

• Provisions modifying the treatment of community benefit expenditures. 

C. Costs and Benefits

The provisions of this proposed rule, combined with other provisions in the 

Affordable Care Act, will improve the individual insurance market by making insurance 

more affordable and accessible to millions of Americans who currently do not have 

affordable options available to them. The shortcomings of the individual market today 

have been widely documented.2 

These limitations of the individual market are made evident by how few people 

actually purchase coverage in the individual market. In 2011, approximately 48.6 million 

people were uninsured in the United States,3

 while only around 10.8 million were 

enrolled in the individual market.4 The relatively small fraction of the target market that 

actually purchases coverage in the individual market in part reflects people’s resources, 

how expensive the product is relative to its value, and how difficult it is for many people 

to access coverage. 

The provisions of this proposed rule, combined with other provisions in the 

Affordable Care Act, will improve the functioning of both the individual and the small 

group markets while stabilizing premiums. The transitional reinsurance program will 

serve to stabilize premiums in the individual market. Reinsurance will attenuate 

individual market rate increases that might otherwise occur because of the immediate 

 

2

 Michelle M. Doty et al., Failure to Protect: Why the Individual Insurance Market Is Not a Viable Option 

for Most U.S. Families: Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2007, 

The Commonwealth Fund, July 2009; Sara R. Collins, Invited Testimony: Premium Tax Credits Under The 

Affordable Care Act: How They Will Help Millions Of Uninsured And Underinsured Americans Gain 

Affordable, Comprehensive Health Insurance, The Commonwealth Fund, October 27, 2011. 

3 Source: U.S. Census Bureau, Current Population Survey, 2012 Annual Social and Economic Supplement,

Table HI01. Health Insurance Coverage Status and Type of Coverage by Selected Characteristics: 2011. 

4 Source: CMS analysis of June 2012 Medical Loss Ratio Annual Reporting data for 2011 MLR reporting 

year, available at http://cciio.cms.gov/resources/data/mlr.html.
 18 

enrollment of higher risk individuals, potentially including those currently in State highrisk pools. In 2014, it is anticipated that reinsurance payments will result in premium 

decreases in the individual market of between 10 and 15 percent relative to expected 

premiums without reinsurance. 

The risk corridors program will protect QHP issuers in the individual and small 

group market against inaccurate rate setting and will permit issuers to lower rates by not 

adding a risk premium to account for perceived uncertainties in the 2014 through 2016 

markets. 

The risk adjustment program protects against adverse selection by allowing 

issuers to set premiums according to the average actuarial risk in the individual and small 

group market without respect to the type of risk selection the issuer would otherwise 

expect to experience with a specific product offering in the market. This should lower 

the risk premium issuers would otherwise price into premiums in the expectation of 

enrolling individuals with unknown health status. In addition, it mitigates the incentive 

for health plans to avoid unhealthy members. The risk adjustment program also serves to 

level the playing field inside and outside of the Exchange, as payments and charges are 

applied to all non-grandfathered individual and small group plans. 

Provisions addressing the advance payments of the premium tax credit and costsharing reductions will help provide for premium tax credits and the reduction or 

elimination of cost sharing for certain individuals enrolled in QHPs offered through the 

Exchanges. This assistance will help many low-and moderate-income individuals and 

families obtain health insurance. For many people, cost sharing is a barrier to obtaining 
 19 

needed health care.5 The availability of premium tax credits through Exchanges starting 

in 2014 will result in lower net premium rates for many people currently purchasing 

coverage in the individual market, and will encourage younger and healthier enrollees to 

enter the market, improving the risk pool and leading to reductions in premium rates for 

current policyholders.6

 

The provisions addressing SHOP Exchanges will reduce the burden and costs of 

enrolling employees in small group plans, and give small businesses many of the cost 

advantages and choices that large businesses already have. Additionally, SHOP 

Exchanges will allow for employers to preserve control over health plan choices while 

saving employers money by spreading insurers’ administrative costs across more 

employers. 

The provisions addressing the MLR program will result in a more accurate 

calculation of MLR and rebate amounts, since it will reflect issuers’ claims-related 

expenditures, after adjusting for the premium stabilization programs. 

We solicit comments on additional strategies consistent with the Affordable Care 

Act that HHS or States might deploy to help make rates affordable in the current market 

and encourage timely enrollment in coverage in 2014. Ensuring that premiums are 

affordable is a priority for HHS as well as States, consumers, and insurers, so we 

welcome suggestions for the proposed rule on ways to achieve this goal while 

implementing these essential consumer protections. 

 

5 Brook, Robert H., John E. Ware, William H. Rogers, Emmett B. Keeler, Allyson Ross Davies, Cathy D. 

Sherbourne, George A. Goldberg, Kathleen N. Lohr, Patricia Camp and Joseph P. Newhouse. The Effect of 

Coinsurance on the Health of Adults: Results from the RAND Health Insurance Experiment. Santa Monica, 

CA: RAND Corporation, 1984. Available at: http://www.rand.org/pubs/reports/R3055. 6 Congressional Budget Office, Letter to Honorable Evan Bayh, providing an Analysis of Health Insurance 

Premiums Under the Patient Protection and Affordable Care Act, November 30, 2009; Sara R. Collins, 

Invited Testimony: Premium Tax Credits Under The Affordable Care Act: How They Will Help Millions 

Of Uninsured And Underinsured Americans Gain Affordable, Comprehensive Health Insurance, The 

Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The Coverage and Cost Effects of 

Implementation of the Affordable Care Act in New York State, Urban Institute, March 2012. 
 20 

Issuers may incur some one-time fixed costs to comply with the provisions of the 

final rule, including administrative and hardware costs. However, issuer revenues and 

expenditures are also expected to increase substantially as a result of the expected 

increase in the number of people purchasing individual market coverage. That 

enrollment is projected to exceed current enrollment by 50 percent.7

 We are soliciting 

comments on the nature and magnitude of these costs and benefits to issuers, and the 

potential effect of the provisions of this rule on premium rates and financial 

performance. 

In addition, States may incur administrative and operating costs if they choose to 

establish their own programs. We are also requesting information on such costs. In 

accordance with Executive Orders 12866 and 13563, we believe that the benefits of this 

regulatory action would justify the costs. 

II. Background 

 Starting in 2014, individuals and small businesses will be able to purchase private 

health insurance through State-based competitive marketplaces called Affordable 

Insurance Exchanges (Exchanges). The Department of Health and Human Services 

(HHS), the Department of Labor, and the Department of the Treasury are working in 

close coordination to release guidance related to Exchanges in several phases. The 

Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 

2010. The Health Care and Education Reconciliation Act (Pub. L. 111-152) was enacted 

on March 30, 2010. We refer to the two statutes collectively as the Affordable Care Act 

in this proposed rule. 

A. Premium Stabilization 

 

7

 Congressional Budget Office, http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-

Coverage%20Estimates.pdf (Table 3). 
 21 

 A proposed regulation was published in the Federal Register on July 15, 2011 

(76 FR 41930) to implement health insurance premium stabilization policies in the 

Affordable Care Act. A final rule implementing the health insurance premium 

stabilization programs (that is, risk adjustment, reinsurance, and risk corridors) (Premium 

Stabilization Rule) (77 FR 17220) was published in the Federal Register on March 23, 

2012. We published a white paper on risk adjustment concepts on September 12, 2011 

(Risk Adjustment White Paper). We published a bulletin on May 1, 2012, outlining our 

intended approach to implementing risk adjustment when we are operating risk 

adjustment on behalf of a State (Risk Adjustment Bulletin). On May 7-8, 2012, we 

hosted a public meeting in which we discussed that approach (Risk Adjustment Spring 

Meeting). 

 We published a bulletin on May 31, 2012, outlining our intended approach to 

making reinsurance payments to issuers when we are operating the reinsurance program 

on behalf of a State (Reinsurance Bulletin). The Department solicited comment on 

proposed operations for both reinsurance and risk adjustment when we are operating the 

program on behalf of a State. 

B. Cost-Sharing Reductions

 We published a bulletin outlining an intended regulatory approach to calculating 

actuarial value and implementing cost-sharing reductions on February 24, 2012 (AV/CSR 

Bulletin). In that bulletin, we outlined an intended regulatory approach for the design of 

plan variations for individuals eligible for cost-sharing reductions, and advance payments 

and reimbursement of cost-sharing reductions to issuers, among other topics. We 

reviewed and considered comments to the AV/CSR Bulletin in developing section III.E. 

of this proposed rule. 

C. Advance Payments of the Premium Tax Credit 
 22 

 A proposed regulation relating to the health insurance premium tax credit was 

published by the Department of the Treasury in the Federal Register on August 17, 2011 

(76 FR 50931). A final rule relating to the health insurance premium tax credit was 

published by the Department of the Treasury in the Federal Register on May 23, 2012 

(26 CFR 1 and 602). 

D. Exchanges 

 A Request for Comment relating to Exchanges was published in the Federal 

Register on August 3, 2010 (75 FR 45584). An Initial Guidance to States on Exchanges 

was issued on November 18, 2010. A proposed regulation was published in the Federal 

Register on July 15, 2011 (76 FR 41866) to implement components of the Exchange. A 

proposed regulation regarding Exchange functions in the individual market, eligibility 

determinations, and Exchange standards for employers was published in the Federal 

Register on August 17, 2011 (76 FR 51202). A final rule implementing components of 

the Exchanges and setting forth standards for eligibility for Exchanges (Exchange 

Establishment Rule) was published in the Federal Register on March 27, 2012 (77 FR 

18310). 

E. Market Reform Rules

 A notice of proposed rulemaking relating to market reforms and effective rate 

review was published in the Federal Register on November 26, 2012 (77 FR 70584) 

(proposed Market Reform Rule). 

F. Essential Health Benefits and Actuarial Value

 A notice of proposed rulemaking relating to essential health benefits and actuarial 

value was published in the Federal Register on November 26, 2012 (77 FR 70644) 

(proposed EHB/AV Rule). 

G. Medical Loss Ratio 
 23 

HHS published a request for comment on PHS Act section 2718 in the Federal 

Register on April 14, 2010 (75 FR 19297), and published an interim final rule with 60 

day comment period relating to the medical loss ratio (MLR) program on December 1, 

2010 (75 FR 74864). A final rule with 30 day comment period (MLR Final Rule) was 

published in the Federal Register on December 7, 2011 (76 FR 76574). 

H. Tribal Consultations 

 This proposed rule may be of interest to, and affect, American Indians/Alaska 

Natives. Therefore, we plan to consult with Tribes during the comment period and prior 

to publishing a final rule. 

III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 

2014 

A. Provisions for the State Notice of Benefit and Payment Parameters

In §153.100(c), we established a deadline of March 1 of the calendar year 

prior to the applicable benefit year for States to publish a State notice of benefit and 

payment parameters if the State wishes to modify the parameters for the reinsurance 

program or the risk adjustment methodology set forth in the applicable HHS notice of 

benefit and payment parameters. We recognize that, for this initial benefit year (that 

is, for benefit year 2014), it may be difficult for States to publish such a notice by the 

required deadline. We therefore propose to modify §153.100(c) to require that, for 

benefit year 2014 only, a State must publish a State notice by March 1, 2013, or by 

the 30th day following publication of the final HHS notice of benefit and payment 

parameters, whichever is later. If a State that chooses to operate reinsurance or risk 

adjustment does not publish the State notice within that timeframe, the State would: 

(1) adhere to the data requirements for health insurance issuers to receive reinsurance 

payments that are specified in the annual HHS notice of benefit and payment 
 24 

parameters for the applicable benefit year; (2) forgo the collection of additional 

reinsurance contributions under §153.220(d) and the use of additional funds for 

reinsurance payments under §153.220(d)(3); (3) forgo the use of more than one 

applicable reinsurance entity; and (4) adhere to the risk adjustment methodology and 

data validation standards published in the annual HHS notice of benefit and payment 

parameters. 

B. Provisions and Parameters for the Permanent Risk Adjustment Program 

The risk adjustment program is a permanent program created by the Affordable 

Care Act that transfers funds from lower risk, non-grandfathered plans to higher risk, 

non-grandfathered plans in the individual and small group markets, inside and outside the 

Exchanges. In subparts D and G of the Premium Stabilization Rule, we established 

standards for the administration of the risk adjustment program. A State approved or 

conditionally approved by the Secretary to operate an Exchange may establish a risk 

adjustment program, or have HHS do so on its behalf. 

In the Premium Stabilization Rule, we established that a risk adjustment program 

is operated using a risk adjustment methodology. States operating their own risk 

adjustment program may use a risk adjustment methodology developed by HHS, or may 

elect to submit an alternate methodology to HHS for approval. In the Premium 

Stabilization Rule, we also laid out standards for States and issuers with respect to the 

collection and validation of risk adjustment data. 

In section III.B.1. of this proposed rule, we propose standards for HHS approval 

of a State-operated risk adjustment program (regardless of whether a State elects to use 

the HHS-developed methodology or an alternate, Federally certified risk adjustment 

methodology). This approval process would be distinct from the approval process for 

State-based Exchanges. In section III.B.2. of this proposed rule, we propose a fee to 
 25 

support HHS operation of the risk adjustment program. This fee is a per-capita fee 

applied to issuers of risk adjustment covered plans in States where HHS is operating the 

risk adjustment program. 

In section III.B.3. of this proposed rule, we describe the methodology that HHS 

would use when operating a risk adjustment program on behalf of a State. This 

methodology would be used to assign a plan average risk score based upon the relative 

average risk of a plan’s enrollees, and to apply a payment transfer formula to determine 

risk adjustment payments and charges. We also describe the HHS-operated data 

collection approach, and the schedule for operating the HHS-operated risk adjustment 

program. States operating a risk adjustment program can use this methodology, or 

submit an alternate methodology, as described in section III.B.4. of this proposed rule. 

Finally, in section III.B.5. of this proposed rule, we describe the data validation 

process we propose to use when operating a risk adjustment program on behalf of a State. 

We propose that issuers contract with independent auditors to conduct an initial 

validation audit of risk adjustment data, and that we conduct a second validation audit of 

a sample of risk adjustment data validated in the initial validation audit to verify the 

findings of the initial validation audit. We propose that this process be implemented over 

time, such that payment adjustments based on data validation findings would not be made 

in the initial years. We also describe a proposed framework for appeals of data validation 

findings. 

1. Approval of State-Operated Risk Adjustment 

a. Risk Adjustment Approval Process 

In the Premium Stabilization Rule, we laid out minimum standards for States that 

choose to operate risk adjustment. In §153.310(a), we specified that a State that elects to 

operate an Exchange is eligible to establish a risk adjustment program. In §153.310(a)(2) 
 26 

and (a)(3), we specified that HHS would carry out risk adjustment functions on behalf of 

the State if the State was not eligible to operate risk adjustment, or if the State deferred 

operation of risk adjustment to HHS. Under our authority in section 1321(a) of the 

Affordable Care Act on standards for operation of risk adjustment programs and section 

1343(b) of the Affordable Care act on criteria and methods to be used in carrying out risk 

adjustment activities, we now propose to add §153.310(a)(4) such that, beginning in 

2015, HHS would carry out the risk adjustment functions on behalf of a State if the State 

is not approved by HHS (that is, does not meet the standards proposed in §153.310(c)) to 

operate a risk adjustment program prior to State publication of its notice of benefit and 

payment parameters. We believe an approval process for State-operated risk adjustment 

programs will promote confidence in these programs so that they can effectively protect 

against the effects of adverse selection. 

We propose that a new paragraph (c), entitled “State responsibilities for risk 

adjustment,” set forth a State’s responsibilities with regard to risk adjustment program 

operations. With this change, we also propose to redesignate paragraphs (c) and (d) to 

paragraphs (e) and (f) of §153.310. We note that the State must ensure that the entity it 

selects to operate risk adjustment complies with the standards established in §153.310(b). 

In paragraph §153.310(c)(1), we propose that if a State is operating a risk 

adjustment program for a benefit year, the State administer the program through an entity 

that meets certain standards. These standards would ensure the entity has the capacity to 

operate the risk adjustment program throughout the benefit year, and is able to administer 

the risk adjustment methodology. We will work with States to ensure that entities are 

ready to operate a risk adjustment program by the beginning of the applicable benefit 

year. 
 27 

As proposed in §153.310(c)(1)(i), the entity must be operationally ready to 

administer the applicable Federally certified risk adjustment methodology and process the 

resulting payments and charges. We believe that it is important for a State to demonstrate 

that its risk adjustment entity has the capacity to implement the applicable Federally 

certified risk adjustment methodology so that issuers may have confidence in the 

program, and so that the program can effectively mitigate the effects of potential adverse 

selection. To meet this standard, a State would demonstrate that the risk adjustment 

entity: (1) has systems in place to implement the data collection approach, to calculate 

individual risk scores, and calculate issuers’ payments and charges in accordance with the 

applicable Federally certified risk adjustment methodology; and (2) has tested, or has 

plans to test, the functionality of the system that would be used for risk adjustment 

operations prior to the start of the applicable benefit year. States would also demonstrate 

that the entity has legal authority to carry out risk adjustment program operations, and has 

the resources to administer the applicable risk adjustment methodology in its entirety, 

including the ability to make risk adjustment payments and collect risk adjustment 

charges. 

We propose in paragraph §153.310(c)(1)(ii) that the entity have relevant 

experience to operate a risk adjustment program. To meet this standard, a State would 

demonstrate that the entity has on staff, or has contracted with, individuals or firms with 

experience relevant to the implementation of a risk adjustment methodology. This 

standard is intended to ensure that the entity has the resources and staffing necessary to 

successfully operate the risk adjustment program. 

We propose in paragraph §153.310(c)(2) that a State seeking to operate its own 

risk adjustment program ensure that the risk adjustment entity complies with all 

applicable provisions of subpart D of 45 CFR part 153 in the administration of the 
 28 

applicable Federally certified risk adjustment methodology. In particular, the State would 

ensure that the entity complies with the privacy and security standards set forth in 

§153.340. 

We propose in §153.310(c)(3) that the State conduct oversight and monitoring of 

risk adjustment activities in order for HHS to approve the State’s risk adjustment 

program. Because the integrity of the risk adjustment program has important 

implications for issuers and enrollees, we propose to consider the State’s plan to monitor 

the conduct of the entity. HHS would examine the State’s requirements for data integrity 

and the maintenance of records, and the State’s standards for issuers’ use of risk 

adjustment payments. We will provide more detail about oversight in future rulemaking. 

Finally, we propose in §153.310(d) that a State submit to HHS information that 

establishes that it and its risk adjustment entity meet the criteria set forth in §153.310(c). 

Under the proposed §153.310(a)(4), HHS would operate risk adjustment in the State, 

under the HHS-developed methodology, if the State does not receive approval prior to the 

March deadline for publication of the State notice of benefit and payment parameters. 

Thus, if a State wishes to operate risk adjustment for benefit year 2015, it would have to 

be approved prior to publication of the State notice of benefit and payment parameters for 

benefit year 2015 (publication of which must occur by March 1, 2014). We will issue 

future guidance on application dates, procedures, and standards. 

We welcome comments on these proposed provisions. 

b. Risk Adjustment Approval Process for Benefit Year 2014 

For benefit year 2014, we recognize there are unique timing issues for approving 

a State-operated risk adjustment program. States would not know whether they are 

eligible to operate a risk adjustment program until they are approved or conditionally 

approved to operate an Exchange for the 2014 benefit year. In addition, the set of 
 29 

Federally certified risk adjustment methodologies and the State-operated risk adjustment 

program approval process will not be finalized until the final Payment Notice is effective. 

Given these timing constraints, we are proposing a transitional policy for benefit 

year 2014. We would not require that a State-operated risk adjustment program receive 

approval for benefit year 2014. Instead, we propose a transitional process shortly after 

the provisions of §153.310(a)(4), (c), and (d) become effective. We are requesting that 

States planning to operate risk adjustment in benefit year 2014 consult with HHS to 

determine the capacity of the State to operate risk adjustment. In these consultations, 

HHS would ask States to identify the entity they select to operate risk adjustment, and to 

describe its plans for risk adjustment operations in the State. This consultative process 

would apply for benefit year 2014; however, we intend that States obtain formal approval 

under the proposed process for benefit year 2015 and subsequent years. 

For benefit year 2015 and subsequent benefit years, the proposed approval 

process would continue to involve ongoing consultations with States and their selected 

risk adjustment entities. In the course of these consultations, we would provide States 

and proposed entities with our ongoing views on whether they are adequately 

demonstrating the capacity of the entity to operate all risk adjustment functions. If the 

State does not produce the requested evidence or make the requested changes in the 

specified timeframe, HHS may determine that the relevant criteria were not met, and may 

decline to approve that State’s risk adjustment program. We welcome comments on this 

proposal. 

2. Risk Adjustment User Fees 

If a State is not approved to operate or chooses to forgo operating its own risk 

adjustment program, HHS would operate risk adjustment on the State’s behalf. We 

intend to collect a user fee to support the administration of HHS-operated risk 
 30 

adjustment. This fee would apply to issuers of risk adjustment covered plans in States in 

which HHS is operating the risk adjustment program. 

Circular No. A-25R establishes Federal policy regarding user fees, and specifies 

that a user charge will be assessed against each identifiable recipient for special benefits 

derived from Federal activities beyond those received by the general public. The risk 

adjustment program will provide special benefits as defined in section 6(a)(1)(b) of 

Circular No. A-25R to an issuer of a risk adjustment covered plan because it will mitigate 

the financial instability associated with risk selection as other market reforms go into 

effect. The risk adjustment program will also contribute to consumer confidence in the 

insurance industry by helping to stabilize premiums across the individual and small group 

health insurance markets. 

We propose to determine HHS’ total costs for administering risk adjustment 

programs on behalf of States by examining HHS’s contract costs of operating the risk 

adjustment program. These contracts cover development of the model and methodology, 

collections, payments, account management, data collection, program integrity and audit 

functions, operational and fraud analytics, stakeholder training, and operational support. 

We do not propose to set the user fee to cover Federal personnel. 

We would set the user fee rate as a national per capita rate, which would spread 

the cost of the program across issuers of risk adjustment covered plans based on 

enrollment. We would divide HHS’s projected total costs for administering the risk 

adjustment programs on behalf of States by the expected number of enrollees in risk 

adjustment covered plans in HHS-operated risk adjustment programs. 

An issuer of a risk adjustment covered plan in a State where HHS is operating risk 

adjustment would pay a risk adjustment user fee equal to the product of its annual 

enrollment in the risk adjustment covered plan multiplied by the annual per capita risk 
 31 

adjustment user fee rate specified in the annual notice of benefit and payment parameters 

for the applicable benefit year. We would calculate the total user fee that would be 

charged to each issuer based on the issuer’s monthly enrollment, as provided to HHS 

using the data collection approach for the risk adjustment program. This approach would 

ensure that user fees are appropriately tied to enrollment and spread across issuers. We 

expect that the use of existing data collection and submission methods would minimize 

burden on issuers, while promoting accuracy. 

We anticipate that the total cost for HHS to operate the risk adjustment program 

on behalf of States for 2014 would be less than $20 million, and that the per capita risk 

adjustment user fee would be no more than $1.00 per enrollee per year. 

HHS would collect risk adjustment user fees from issuers of risk adjustment 

covered plans in June of the year after the applicable benefit year to align with payments 

and charges processing, to provide issuers the time to fully comply with the data 

collection and submission standards, and to permit HHS to perform the user fee 

calculations based on actual monthly enrollment counts from the benefit year. 

We seek comment on this proposed assessment of user fees to support HHSoperated risk adjustment programs. 

3. Overview of the risk adjustment methodology HHS would implement when operating 

risk adjustment on behalf of a State 

The goal of the risk adjustment program is to stabilize the premiums in the 

individual and small group markets as and after insurance market reforms are 

implemented. The risk adjustment methodology proposed here, which HHS would use 

when operating risk adjustment on behalf of a State, is based on the premise that 

premiums should reflect the differences in plan benefits and plan efficiency, not the 

health status of the enrolled population. 
 32 

Under §153.20, a risk adjustment methodology is made up of five elements: 

• The risk adjustment model uses an individual’s recorded diagnoses, 

demographic characteristics, and other variables to determine a risk score, which is a 

relative measure of how costly that individual is anticipated to be. 

• The calculation of plan average actuarial risk and the calculation of payments 

and charges average all individual risk scores in a risk adjustment covered plan, make 

certain adjustments, and calculate the funds transferred between plans. In this proposed 

rule, these two elements of the methodology are presented together as the payment 

transfer formula. 

• The data collection approach describes HHS’ approach to obtaining data, 

using the distributed model described in section III.G. of this proposed rule that is 

required for the risk adjustment model and the payment transfer formula. 

• The schedule for the risk adjustment program describes the timeframe for risk 

adjustment operations. 

States approved to operate risk adjustment may utilize this risk adjustment 

methodology, or they may submit an alternate methodology as described in section 

III.B.4. of this proposed rule. 

The risk adjustment methodology addresses three considerations: (1) the newly 

insured population; (2) plan metal levels and permissible rating variation; and (3) the 

need for inter-plan transfers that net to zero. Risk adjustment payments or charges would 

be calculated from the payment transfer formula described in section III.B.3.c. of this 

proposed rule. The key feature of the HHS risk adjustment methodology is that the risk 

score alone does not determine whether a plan is assessed charges or receives payments. 

Transfers depend not only on a plan’s average risk score, but also on its plan-specific cost 

factors relative to the average of these factors within a risk pool within a State. 
 33 

As discussed in greater detail below, the risk adjustment methodology developed by 

HHS: 

• Is developed on commercial claims data for a population similar to the 

expected population to be risk adjusted; 

• Uses the hierarchical condition categories (“HCC”) grouping logic used in the 

Medicare population, with HCCs refined and selected to reflect the expected risk 

adjustment population; 

• Calculates risk scores with a concurrent model (current year diagnoses predict 

current year costs); 

• Establishes 15 risk adjustment models, one for each combination of metal level 

(platinum, gold, silver, bronze, catastrophic) and age group (adults, children, infants); 

• Results in “balanced” payment transfers within a risk pool within a market 

within a State; 

• Adjusts payment transfers for plan metal level, geographic rating area, induced 

demand, and age rating, so that transfers reflect health risk and not other cost differences; 

and 

• Transfers funds between plans within a market within a State. 

a. Risk Adjustment Applied to Plans in the Individual and Small Group Markets 

 Section 1343(c) of the Affordable Care Act stipulates that risk adjustment is to 

apply to non-grandfathered health insurance coverage offered in the individual and small 

group markets. We previously defined a “risk adjustment covered plan” in §153.20 as 

health insurance coverage offered in the individual or small group markets, excluding 

plans offering excepted benefits and certain other plans, including “any other plan 

determined not to be a risk adjustment covered plan in the annual HHS notice of benefit 

and payment parameters.” We propose to amend this definition by replacing “and any 
 34 

plan determined not to be a risk adjustment covered plan in the annual HHS notice of 

benefit and payment parameters” with “and any plan determined not to be a risk 

adjustment covered plan in the applicable Federally certified risk adjustment 

methodology.” We note that, under this revised definition, we would describe any plans 

not determined to be risk adjustment covered plans under the HHS risk adjustment 

methodology in the annual notice of benefit and payment parameters, which is subject to 

notice and comment. 

We describe below our proposed treatment of certain types of plans (specifically, 

plans not subject to market reforms, student health plans, and catastrophic plans), and our 

proposed approach to risk pooling for risk adjustment purposes when a State merges 

markets for the purposes of the single risk pool provision described in section 1312(c) of 

the Affordable Care Act. States may propose different approaches to these plans and to 

risk pooling in State alternate methodologies, subject to the requirements established at 

§153.330(b) in this proposed rule. 

Plans not subject to market reforms: Certain types of plans offering nongrandfathered health insurance coverage in the individual and small group markets would 

not be subject to the insurance market reforms proposed in the Market Reform Rule and 

the EHB/AV proposed rule. In addition, plans providing benefits through policies that 

begin in 2013, with renewal dates in 2014, would not be subject to these requirements 

until renewal in 2014. The law specifies that the risk adjustment program is to assess 

charges on non-grandfathered health insurance coverage in the individual and small 

group markets with less than average actuarial risk and to make payments to nongrandfathered health insurance coverage in these markets with higher than average 

actuarial risk. We interpret actuarial risk to mean predictable risk that the issuer has not 

been able to compensate for through exclusion or pricing. In the current market, plans 
 35 

are generally not subject to the insurance market reforms that begin in 2014 described at 

§147.102 (fair health insurance premiums), §147.104 (guaranteed availability of 

coverage, subject to the student health insurance provisions at §147.145), §147.106 

(guaranteed renewability of coverage, subject to the student health insurance provisions 

at §147.145), §156.80 (single risk pool), and Subpart B 156 (essential health benefits 

package), and so are generally able to minimize actuarial risk by excluding certain 

conditions (for example, maternity coverage for women of child-bearing age), denying 

coverage to those with certain high-risk conditions, and by pricing individual premiums 

to cover the costs of providing coverage to an individual with those conditions. 

We propose to use the authority in section 1343(b) of the Affordable Care Act to 

“establish criteria and methods to be used in carrying out ... risk adjustment activities” to 

treat plans not subject to insurance market reforms at §147.102 (fair health insurance 

premiums), §147.104 (guaranteed availability of coverage, subject to the student health 

insurance provisions at §147.145), §147.106 (guaranteed renewability of coverage, 

subject to the student health insurance provisions at §147.145), §156.80 (single risk 

pool), and Subpart B 156 (essential health benefits package), as follows. Because we 

believe that plans not subject to these market reform rules are able to effectively 

minimize actuarial risk, we believe these plans would have uniform and virtually zero 

actuarial risk. We therefore propose to treat these plans separately, such that these plans 

would not be subject to risk adjustment charges and would not receive risk adjustment 

payments. Also, these plans would not be subject to the issuer requirements described in 

subparts G and H of part 153. We note that plans issued in 2013 and subject to these 

requirements upon renewal would become subject to risk adjustment upon renewal, and 

would comply with the requirements established in subparts G and H of part 153 at that 

time. 
 36 

Student health plans: Only individuals attending a particular college or university 

are eligible to enroll in a student health plan (as described in §147.145) offered by that 

college or university. We believe that student health plans, because of their unique 

characteristics, will have relatively uniform actuarial risk. We therefore propose to use 

the authority in section 1343(b) of the Affordable Care Act to “establish criteria and 

methods to be used in carrying out ... risk adjustment activities” to treat these plans as a 

separate group that would not be subject to risk adjustment charges and would not receive 

risk adjustment payments. Therefore, these plans would not be subject to the issuer 

requirements described in subparts G and H of part 153. 

 Catastrophic plans: Unlike metal level coverage, only individuals age 30 and 

under, or individuals for whom insurance is deemed to be unaffordable as specified in 

section 1302(e) of the Affordable Care Act, are eligible to enroll in catastrophic plans. 

Because of the unique characteristics of this population, we propose to use our authority 

to establish “criteria and methods” to risk adjust catastrophic plans in a separate risk pool 

from the general (metal level) risk pool. Catastrophic plans with less than average 

actuarial risk compared with other catastrophic plans would be assessed charges, while 

catastrophic plans with higher than average actuarial risk compared with other 

catastrophic plans would receive payments. The specific mechanisms for assessing risk, 

and calculating payments and charges, are described below. We are not, however, 

proposing to exempt these plans from the requirements in subparts G and H of part 153. 

Merger of markets: Section 1312(c) of the Affordable Care Act directs issuers to 

use a single risk pool for a market – the individual or small group market – when 

developing rates and premiums. Section 1312(c)(3) gives States the option to merge the 

individual and small group market into a single risk pool. To align risk pools for the risk 

adjustment program and rate development, we would merge markets when operating risk 
 37 

adjustment on behalf of a State if the State elects to do the same for single risk pool 

purposes. In such a case, rather than transferring funds between individual market plans 

only and between small group market plans only, we would transfer funds between all 

individual and small group market plans, considered as one market. When the individual 

and small group markets are merged, the State average premium, described in section 

III.B.3.c. below, would be the average premium of all applicable individual and small 

group market plans in the applicable risk pool, and normalization described in section 

III.B.3.c. below would occur across all plans in the applicable risk pool in the individual 

and small group market. 

Risk adjustment in State of licensure: Risk adjustment is a State-based program 

in which funds are transferred within a State within a market, as described above. In 

general, a risk adjustment methodology will be linked to the rate and benefit requirements 

applicable under State and Federal law in a particular State. Such requirements may 

differ from State to State, and apply to policies filed and approved by the department of 

insurance in a State.8 However, a plan licensed in a State (and therefore subject to that 

State’s rate and benefit requirements) may enroll individuals in multiple States. To help 

ensure that policies in the small group market are subject to risk adjustment programs 

linked to the State rate and benefit requirements applicable to that policy, we propose in 

§153.360 that a risk adjustment covered plan be subject to risk adjustment in the State in 

which the policy is filed and approved. We welcome comments on these proposals. 

b. Overview of the HHS Risk Adjustment Model 

We developed the HHS risk adjustment model in consultation with States, 

providers, issuers, and consumers on methodological choices by soliciting comment on 

 

8 State Jurisdictional and Extraterritorial Issues White Paper: States’ Treatment of Regulatory Jurisdiction 

Over Single Employer Group Health Insurance (unpublished white paper- available from NAIC Research 

Library or in NAIC Proceedings I, 2009) NAIC,3/17/09.
 38 

the choices in preamble to the proposed Premium Stabilization Rule and in the Risk 

Adjustment White Paper.9

 We also engaged in discussions with these stakeholders at the 

Risk Adjustment Spring Meeting and in user group calls with States. 

Each HHS risk adjustment model predicts plan liability for an enrollee based on 

that person’s age, sex, and diagnoses (risk factors), producing a risk score. We propose 

separate models for adults, children, and infants to account for cost differences in each of 

these age groups. The adult and child models are additive; that is, the relative costs 

assigned to an individual’s age, sex, and diagnoses are added together to produce a risk 

score. Infant risk scores are determined by inclusion in one of 25 mutually exclusive 

groups based on the infant’s maturity and the severity of its diagnoses. If applicable, the 

risk score is multiplied by a cost-sharing reduction adjustment. 

The enrollment-weighted average risk score of all enrollees in a particular risk 

adjustment covered plan within a geographic rating area are then input into the payment 

transfer formula, as described in section III.B.3.c. of this proposed rule, to determine an 

issuer’s payment or charge for a particular plan. 

Each HHS risk adjustment model predicts individual-level risk scores, but is 

designed to predict average group costs to account for risk across plans.10 This method 

accords with the Actuarial Standard Board’s Actuarial Standard of Practice for risk 

classification.11 

(1) Data Used to Develop the HHS Risk Adjustment Model 

Each HHS risk adjustment model was calibrated using de-identified data from the 

Truven Health Analytics 2010 MarketScan® Commercial Claims and Encounters 

 

9

 http://cciio.cms.gov/resources/files/riskadjustment_whitepaper_web.pdf 

10 American Academy of Actuaries: Risk Assessment and Risk Adjustment, Issue Brief. May 2010. 11 Actuarial Standard of Practice No. 12: Risk Classification (for All Practice Areas). Actuarial Standards Board, Doc. 

No. 101. December 2005. 
 39 

database (MarketScan) for individuals living in all States, aged 0-64, enrolled in 

commercial health insurance plans. The database contains enrollee-specific clinical 

utilization, expenditures, and enrollment across inpatient, outpatient, and prescription 

drug services from a selection of large employers and health plans. The database 

includes de-identified data from approximately 100 payers, and has more than 500 

million claims from insured employees, their spouses, and dependents. Active 

employees, early retirees, individuals on COBRA continuation coverage, and their 

dependents are included in the database. The enrollment data files contain information for 

any person enrolled in one of the employer or individual health plans at any point during 

a year. Enrollees were classified as enrolled in fee-for-service (“FFS”) plans or 

encounter-type plans, with most FFS plans being preferred provider organization 

(“PPO”) plans, and the majority of encounter-type plans being health maintenance 

organization (“HMO”) plans. An individual could have been enrolled for as few as one 

and as many as 365 days in a year, and could have been enrolled in one or more years. In 

operation, the same rules will be applied with respect to enrollment. 

Diagnoses for model calibration were extracted from facility and professional 

claims. Facility claims were extracted only from bill types that were hospital inpatient, 

hospital outpatient, rural health clinic, federally qualified health center, or community 

mental health center. For professional and outpatient facility claims, diagnoses were 

generally extracted from claims where the procedure (CPT code) indicated a face-to-face 

visit with a qualified clinician. Diagnoses from procedures that did not meet these 

criteria (for example, durable medical equipment, pathology/laboratory, and diagnostic 

radiology) were not included. The concurrent modeling sample (approximately 20 

million individuals) was generated using the following criteria: (1) the enrollee had to be 
 40 

enrolled in a FFS plan12; (2) the enrollee must not have incurred any claims paid on a 

capitated basis13; and (3) the enrollee must have been enrolled in a plan with drug 

benefits and mental health and substance abuse coverage. The final database reflects our 

best approximation of the essential health benefits package under the Affordable Care 

Act, which also includes prescription drug and mental health and substance abuse 

coverage. 

MarketScan expenditure data includes gross covered charges, which were defined 

as: 

Gross covered charges = submitted charges – non-covered charges – pricing reductions

Inpatient, outpatient, and prescription drug expenditures for each enrollee were 

calculated by summing gross covered charges in, respectively, the inpatient, outpatient, 

and prescription drug services files. Total expenditures were defined as the sum of 

inpatient, outpatient, and prescription drug expenditures. Plan liability expenditures for a 

given plan type (platinum, gold, silver, bronze, catastrophic) were defined by applying 

the applicable standardized benefit design, as discussed in section III.B.3.b.10., to total 

expenditures. To more accurately reflect expected expenditures for 2014, the 2010 total 

expenditures were increased for projected cost growth.14 Average monthly expenditures 

were defined as the enrollee’s expenditures for the enrollment period divided by the 

number of enrollment months. Annualized expenditures (total or plan liability) were 

defined as average monthly expenditures multiplied by 12. Data for each individual was 

weighted by months of enrollment divided by 12. 

(2) Concurrent Model 

 

12 We limited the modeling sample to enrollees in FFS plans because costs on non-FFS claims may not 

represent the full cost of care associated with a disease. 13 In 2010 the MarketScan database, even FFS plan types can have carve-out services paid on a capitated 

basis, which are less reliable for predicted expenditure calculations. 

14 We used the same projected cost growth as was used in the development of the AV calculator. 
 41 

The HHS risk adjustment model is a concurrent model. A concurrent model takes 

diagnoses from a given period to predict cost in that same period. This is in contrast to a 

prospective model, which would use data from a prior period to predict costs in a future 

period. We are proposing to use a concurrent model because 2013 diagnostic data will 

not be available for use in the model in 2014. In addition, we anticipate that enrollees 

may move between plans, or between programs. A concurrent model would be better 

able to handle changes in enrollment than a prospective model because individuals newly 

enrolling in health plans may not have prior data available that can be used in risk 

adjustment. 

(3) Prescription Drugs 

At this time, we have elected not to include prescription drug use as a predictor in 

each HHS risk adjustment model. While use of particular prescription drugs may be 

useful for predicting expenditures, we believe that inclusion of prescription drug 

information could create adverse incentives to modify discretionary prescribing. We seek 

comments on possible approaches for future versions of the model to include prescription 

drug information while avoiding adverse incentives. 

(4) Principles of Risk Adjustment and the Hierarchical Condition Category (HCC) 

Classification System 

A diagnostic classification system determines which diagnosis codes should be 

included, how the diagnosis codes should be grouped, and how the diagnostic groupings 

should interact for risk adjustment purposes. The ten principles that were used to develop 

the hierarchical condition category (HCC) classification system for the Medicare risk 

adjustment model guided the creation of the HHS risk adjustment model we propose to 

use when HHS operates risk adjustment on behalf of a State. Those principles are: 
 42 

Principle 1—Diagnostic categories should be clinically meaningful. Each 

diagnostic category is a set of International Classification of Diseases, Ninth Revision, 

Clinical Modification (“ICD-9-CM”) codes. 15 These codes should all relate to a 

reasonably well-specified disease or medical condition that defines the category. 

Principle 2—Diagnostic categories should predict medical (including drug) 

expenditures. Diagnoses in the same HCC should be reasonably homogeneous with 

respect to their effect on both current (this year’s) costs (concurrent risk adjustment) or 

future (next year’s) costs (prospective risk adjustment). 

Principle 3—Diagnostic categories that will affect payments should have 

adequate sample sizes to permit accurate and stable estimates of expenditures. 

Diagnostic categories used in establishing payments should have adequate sample sizes 

in available data sets. 

Principle 4—In creating an individual’s clinical profile, hierarchies should be 

used to characterize the person’s illness level within each disease process, while the 

effects of unrelated disease processes accumulate. Related conditions should be treated 

hierarchically, with more severe manifestations of a condition dominating (and zeroing 

out the effect of) less serious ones. 

Principle 5—The diagnostic classification should encourage specific coding.

Vague diagnostic codes should be grouped with less severe and lower-paying diagnostic 

categories to provide incentives for more specific diagnostic coding. 

Principle 6—The diagnostic classification should not reward coding proliferation. 

The classification should not measure greater disease burden simply because more ICD9-CM codes are present. 

 

15 Please note that in future years we will update the calibration of the HHS risk adjustment model to 

account for the transition from ICD-9-CM codes to ICD-10-CM codes. 
 43 

Principle 7—Providers should not be penalized for recording additional diagnoses 

(monotonicity). This principle has two consequences for modeling: (1) no HCC should 

carry a negative payment weight; and (2) a condition that is higher-ranked in a disease 

hierarchy (causing lower-rank diagnoses to be ignored) should have at least as large a 

payment weight as lower-ranked conditions in the same hierarchy. (There may be 

exceptions, as when a coded condition represents a radical change of treatment of a 

disease process.) 

Principle 8—The classification system should be internally consistent (transitive). 

If diagnostic category A is higher-ranked than category B in a disease hierarchy, and 

category B is higher-ranked than category C, then category A should be higher-ranked 

than category C. Transitivity improves the internal consistency of the classification 

system and ensures that the assignment of diagnostic categories is independent of the 

order in which hierarchical exclusion rules are applied. 

Principle 9—The diagnostic classification should assign all ICD-9-CM codes 

(exhaustive classification). Because each diagnostic code potentially contains relevant 

clinical information, the classification should categorize all ICD-9-CM codes. 

Principle 10—Discretionary diagnostic categories should be excluded from 

payment models. Diagnoses that are particularly subject to intentional or unintentional 

discretionary coding variation or inappropriate coding by health plans/providers, or that 

are not clinically or empirically credible as cost predictors, should not increase cost 

predictions. Excluding these diagnoses reduces the sensitivity of the model to coding 

variation, coding proliferation, gaming, and upcoding. 

(5) CMS HCC Diagnostic Classification System 

The HCCs in the Medicare risk adjustment model are referred to as CMS HCCs. 

The HCCs in the HHS risk adjustment model are referred to as HHS HCCs. The CMS 
 44 

HCC diagnostic classification provides the diagnostic framework for the classification 

and selection of HCCs for the HHS risk adjustment model. The CMS HCC risk 

adjustment model uses patient diagnoses and demographic information to prospectively 

predict medical spending for beneficiaries in Medicare Part C managed care plans. The 

CMS HCC classification system was reviewed and adapted to account for the different 

population to create the HHS HCC classification. 

The CMS HCC diagnostic classification system begins by classifying over 14,000 

ICD-9-CM diagnosis codes into diagnostic groups, or DXGs. Each ICD-9-CM code 

maps to exactly one DXG, which represents a well-specified medical condition or set of 

conditions. DXGs are further aggregated into Condition Categories, or CCs. CCs 

describe a broader set of similar diseases. Although they are not as homogeneous as 

DXGs, diseases within a CC are related clinically and with respect to cost. Hierarchies 

are imposed among related CCs, so that a person is coded for only the most severe 

manifestation among related diseases. 

After imposing hierarchies, CCs become Hierarchical Condition Categories, or 

HCCs. Although HCCs reflect hierarchies among related disease categories, for unrelated 

diseases, HCCs accumulate. For example, a female with rheumatoid arthritis and breast 

cancer has (at least) two separate HCCs coded, and her predicted cost would reflect 

increments for both conditions. The model’s structure thus provides, and predicts from, a 

detailed comprehensive clinical profile for each individual. 

Three major characteristics of the CMS HCC classification system required 

modification for use with the HHS risk adjustment model: (1) population; (2) type of 

spending; and (3) prediction year. The CMS HCCs were developed using data from the 

aged and/or disabled Medicare population. Although every ICD-9-CM diagnosis code is 

mapped and categorized into a diagnostic grouping, for some conditions (such as 
 45 

pregnancy) the sample size in the Medicare population is quite low. With larger sample 

sizes in the commercial population, HCCs were re-examined for infant, child, and adult 

subpopulations. Additionally, the CMS HCCs are configured to predict medical 

spending, while HHS HCCs predict both medical and drug spending. Finally, the CMS 

HCC classification is primarily designed for use with a prospective risk adjustment 

model, using base year diagnoses and demographic information to predict the next year’s 

spending. Each HHS risk adjustment model is concurrent, using current year diagnoses 

and demographics to predict the current year’s spending. Medical conditions may predict 

current year costs that differ from future costs; HCC and DXG groupings should reflect 

those differences. 

As such, HCCs and DXGs may not be the same between the Medicare and HHS 

risk adjustment models. For example, the newborn hierarchy was reconfigured in the 

HHS risk adjustment model to include new HCCs and DXGs to account for major cost 

differences in the youngest premature newborns and in neonatal disorders. Adjustments 

such as these resulted in 264 classification HCCs in the HHS risk adjustment model. 

In designing the diagnostic classification for the HHS risk adjustment model, 

principles 7 (monotonicity), 8 (transitivity), and 9 (exhaustive classification) were 

prioritized. For example, if the expenditure weights for the models did not originally 

satisfy monotonicity, constraints were imposed to create models that did. However, 

tradeoffs were often required among other principles. For example, clinical 

meaningfulness is often best served by creating a very large number of detailed clinical 

groupings. However, a large number of groupings may not allow for adequate sample 

sizes for each category. 

(6) Principles for HCC Selection 
 46 

 We selected 127 of the full classification of 264 HHS HCCs for inclusion in the 

HHS risk adjustment model. In determining which HCCs to include in the HHS risk 

adjustment model, HCCs that were more appropriate for a concurrent model or for the 

expected risk adjustment population (for example, low birth weight babies were included 

in the HHS risk adjustment model). We considered the basic criteria below to determine 

which HCCs should be included in the HHS risk adjustment model: 

• Whether the HCC represents clinically significant medical conditions with 

significant costs for the target population; 

• Whether there will be a sufficient sample size to ensure stable results for the 

HCC; 

• Whether excluding the HCC would exclude (or limit the impact of) diagnoses 

particularly subject to discretionary coding; 

• Whether the HCC identifies chronic or systematic conditions that represent 

insurance risk selection or risk segmentation, rather than random acute events; 

• Do not represent poor quality of care; and 

• Whether the HCC is applicable to the model age group. 

Consistent with the risk adjustment principles described previously, each HHS risk 

adjustment model excludes HHS HCCs containing diagnoses that are vague or 

nonspecific (for example, symptoms), discretionary in medical treatment or coding (for 

example, osteoarthritis), or not medically significant (for example, muscle strain). Each 

HHS risk adjustment model also excludes HHS HCCs that do not add to costs. 

(7) Grouping of HCCs 

To balance the competing goals of improving predictive power and limiting 

coding variability to create a relatively simple risk adjustment model, a number of HHS 

HCCs were grouped into sets equivalent to a single HCC. HHS HCCs were grouped (1) 
 47 

to reduce model complexity; (2) to avoid including HHS HCCs with small sample size; 

(3) to limit upcoding by severity within an HCC hierarchy; and (4) to reduce additivity 

within disease groups (but not across disease groups) to decrease the sensitivity of the 

model to coding proliferation. After grouping, the number of HHS HCCs included in the 

proposed HHS risk adjustment model was effectively reduced from 127 to 100.16

(8) Demographics 

In addition to the HHS HCCs included in the HHS risk adjustment model, 

enrollee risk scores are calculated from demographic factors. There are 18 age/sex 

categories for adults, and 8 age/sex categories for children. As described below, age/sex 

categories for infants are not used. Adults are defined as ages 21+, children are ages 2-

20, and infants are ages 0-1. The age categories for adult male and female are ages 21-

24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54, 55-59, and 60+. The age categories for 

children male and female are ages 2-4, 5-9, 10-14, and 15-20. This is consistent with the 

CMS HCC model, which also uses five year increments for age groups. In operation, age 

will be defined as age as of the enrollee’s last day of enrollment in risk adjustment 

covered plans within an issuer in the applicable benefit year. For individuals who do not 

have any of the HHS HCCs included in the proposed HHS risk adjustment model, 

predicted expenditures are based solely on their demographic risk factors. In the 

calibration data set, 19 percent of adults, nine percent of children, and 45 percent of 

infants have HCCs included in the risk adjustment models. 

(9) Separate Adult, Child and Infant Models 

Due to the inherent clinical and cost differences in the adult (age 21+), child (age 

2-20), and infant (age 0-1) populations, HHS developed separate risk adjustment models 

 

16 In addition, we imposed several additional constraints –HCC coefficient values were made equal if a 

lower-ranked HCC in a disease hierarchy had a higher coefficient than a higher-ranked HCC; the 10 

principles of risk adjustment models described in section III.B.3.b.4. were generally followed. 
 48 

for each age group. The models for adults and children generally have similar 

specifications, including demographic age/sex categories and HHS HCCs, but differ 

slightly due to clinical and cost differences. However, infants have certain costs related 

to hospitalization at birth and can have severe and expensive conditions that do not apply 

to adults or children, while having relatively low frequencies for most HHS HCCs 

included in the model compared to adults and children. Therefore, HHS proposes to use 

a separate infant model. 

The infant model utilizes a mutually exclusive groups approach in which infants 

are assigned a maturity category (by gestation and birth weight) and a severity category. 

There are 5 maturity categories: Extremely Immature; Immature; Premature/Multiples; 

Term; and Age 1. For the maturity category, age 0 infants would be assigned to one of 

the first four categories and age 1 infants would be assigned to the Age 1 category. There 

are 5 severity categories based on the clinical severity and associated costs of the nonmaturity HCCs: Severity Level 1 (Lowest Severity) to Severity Level 5 (Highest 

Severity). All infants (age 0 or 1) are assigned to a severity category based on the highest 

severity of their non-maturity HCCs. The 5 maturity categories and 5 severity categories 

would be used to create 25 mutually-exclusive interaction terms to which each infant is 

assigned. An infant who has HCCs in more than one severity category would be assigned 

to the highest of those severity categories. An infant who has no HCCs or only a 

newborn maturity HCC would be assigned to Severity Level 1 (Lowest). Finally, 

evidence suggests that male infants have higher costs than female infants due to increased 

morbidity and neonatal mortality.17 To account for these differences by sex, there are 2 

 

17 Mathews, T.J., M.S. & Marian F. MacDormon, Ph.D., Division of Vital Statistics. Infant Mortality 

Statistics From the 2007 Period Linked Birth/Infant Death Data Set. National Vital Statistic Reports. Vol. 

59. No. 6. (June 29, 2011). Available at: www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_06.pdf 
 49 

male-age indicator variables: Age 0 Male and Age 1 Male. The male-age variable would 

be added to the interaction term to which the infant is assigned. 

We understand that there may be cases in which there is no separate infant birth 

claim from which to gather diagnoses. For example, at an operational level mother and 

infant claims may be bundled such that infant diagnoses appear on the mother’s record. 

Where newborn diagnoses appear on the mother’s claims, HHS is exploring the 

feasibility of associating those codes with the appropriate infant. This assumes that the 

mother and infant enrollment records exist and can be matched, which may also pose 

operational problems in some cases. Alternatively, we are considering requiring issuers 

to provide separate mother and infant claims when they have received a combined claim. 

We seek comment on the operational feasibility of both of these approaches. 

Tables 5 and 6 contain descriptions of how the severity and maturity are defined. 

(10) Selection of plan liability model 

We propose separate risk adjustment models for each metal level because plans at 

different metal levels would have different liability for enrollees with the same 

expenditure patterns. 

We considered using a total expenditure approach to estimating the HHS risk 

adjustment model. A total expenditure risk adjustment model would use the 

demographic age/sex categories, HHS HCCs included in the model, and any other 

independent variables to predict all of the costs associated with an enrollee, whether those 

costs are incurred by the enrollee or the issuer. In a total expenditure model, two 

individuals of the same age with the same set of HCCs would have the same risk score 

regardless of the metal level plan type in which the individuals were enrolled. However, 

we do not believe that this approach would accurately capture plan liability levels due to 

the non-linear nature of liability for plans at different metal levels. In particular, 
 50 

deductibles are anticipated to be highest in bronze plans and lowest in platinum plans. 

Plan liabilities for plan types (platinum, gold, silver, bronze, and catastrophic) were 

defined by applying standardized benefit design parameters for each given metal level to 

total expenditures. We estimated average plan liability for each of the plan types, and 

created an adult, child, and infant model for each plan type. 

(11) Disease interactions 

We propose that the HHS risk adjustment models for adults include interaction 

factors. Including interactions improves model performance for low- and high-cost 

individuals and better reflects plan liability across metal levels. 

Disease interactions were created using the silver model by first creating a single 

severity illness indicator. We elected to use the silver model to create interaction terms 

because we expect enrollment to be highest in silver plans due to the availability of 

premium tax credits and cost-sharing reductions in those plans. The severity illness 

indicator variable was interacted with individual HCCs or HCC groups, and the predicted 

costs of the interaction variables were then grouped into three cost categories: low, 

medium and high. Interaction groups in the medium and high cost categories were 

included in the HHS risk adjustment model as shown at the bottom of Table 1 below. An 

individual is determined to have the severity indicator if they have one or more of the 

HCCs listed in Table 2. 

An individual with at least one of the HCCs that comprises the severity illness 

indicator variable and at least one of the HCCs interacted with the severity illness 

indicator variable would be assigned a single interaction factor. A hierarchy is imposed 

on these interaction groups such that an individual with a high cost interaction is 

excluded from having a medium cost interaction. The high or the medium interaction 

factor would be added to demographic and diagnosis factors of the individual. 
 51 

(12) List of factors to be employed in the model 

The proposed HHS risk adjustment models predict annualized plan liability 

expenditures using age and sex categories and the HHS HCCs included in the HHS risk 

adjustment model. Dollar coefficients were estimated for these categories and HCCs 

using weighted least squares regression, where the weight was the fraction of the year 

enrolled. 

For each model, the factors were the statistical regression dollar values for each 

category or HCC in the model divided by a weighted average plan liability for the full 

modeling sample. The factors represent the predicted relative incremental expenditures 

for each category or HCC. For a given enrollee, the sums of the factors for the enrollee’s 

category and HCCs are the total relative predicted expenditures for that enrollee. Table 1 

contains factors for each adult model, including the interactions. Table 3 contains the 

factors for each child model. Table 5 contains the factors for each infant model. 

TABLE 1: Adult Risk Adjustment Model Factors 

Factor Platinum Gold Silver Bronze Catastrophic

Demographic Factors

Age 21-24, Male 0.258 0.208 0.141 0.078 0.062 

Age 25-29, Male 0.278 0.223 0.150 0.081 0.064 

Age 30-34, Male 0.338 0.274 0.187 0.101 0.079 

Age 35-39, Male 0.413 0.339 0.240 0.140 0.113 

Age 40-44, Male 0.487 0.404 0.293 0.176 0.145 

Age 45-49, Male 0.581 0.487 0.365 0.231 0.195 

Age 50-54, Male 0.737 0.626 0.484 0.316 0.269 

Age 55-59, Male 0.863 0.736 0.580 0.393 0.339 

Age 60-64, Male 1.028 0.880 0.704 0.487 0.424 

Age 21-24, Female 0.433 0.350 0.221 0.101 0.072 

Age 25-29, Female 0.548 0.448 0.301 0.156 0.120 

Age 30-34, Female 0.656 0.546 0.396 0.243 0.203 

Age 35-39, Female 0.760 0.641 0.490 0.334 0.293 

Age 40-44, Female 0.839 0.713 0.554 0.384 0.338 

Age 45-49, Female 0.878 0.747 0.583 0.402 0.352 

Age 50-54, Female 1.013 0.869 0.695 0.486 0.427 
 52 

Age 55-59, Female 1.054 0.905 0.726 0.507 0.443 

Age 60-64, Female 1.156 0.990 0.798 0.559 0.489 

Diagnosis Factors

HIV/AIDS 5.485 4.972 4.740 4.740 4.749 

Septicemia, Sepsis, 

Systemic 

Inflammatory 

Response 

Syndrome/Shock 

13.696 13.506 13.429 13.503 13.529 

Central Nervous 

System Infections, 

Except Viral 

Meningitis 

7.277 7.140 7.083 7.117 7.129 

Viral or Unspecified 

Meningitis 4.996 4.730 4.621 4.562 4.550 

Opportunistic 

Infections 9.672 9.549 9.501 9.508 9.511 

Metastatic Cancer 25.175 24.627 24.376 24.491 24.526 

Lung, Brain, and 

Other Severe 

Cancers, Including 

Pediatric Acute 

Lymphoid Leukemia 

11.791 11.377 11.191 11.224 11.235 

Non-Hodgkin`s 

Lymphomas and 

Other Cancers and 

Tumors 

6.432 6.150 6.018 5.983 5.970 

Colorectal, Breast 

(Age < 50), Kidney, 

and Other Cancers 

5.961 5.679 5.544 5.500 5.483 

Breast (Age 50+) and 

Prostate Cancer, 

Benign/Uncertain 

Brain Tumors, and 

Other Cancers and 

Tumors 

3.509 3.294 3.194 3.141 3.121 

Thyroid Cancer, 

Melanoma, 

Neurofibromatosis, 

and Other Cancers 

and Tumors 

1.727 1.559 1.466 1.353 1.315 

Pancreas Transplant 

Status/Complications 9.593 9.477 9.411 9.434 9.439 

Diabetes with Acute 

Complications 1.331 1.199 1.120 1.000 0.957 

Diabetes with 

Chronic 

Complications 

1.331 1.199 1.120 1.000 0.957 
 53 

Diabetes without 

Complication 1.331 1.199 1.120 1.000 0.957 

Protein-Calorie 

Malnutrition 14.790 14.790 14.786 14.862 14.883 

Mucopolysaccharidosis 2.335 2.198 2.130 2.071 2.052 

Lipidoses and 

Glycogenosis 2.335 2.198 2.130 2.071 2.052 

Amyloidosis, 

Porphyria, and Other 

Metabolic Disorders 

2.335 2.198 2.130 2.071 2.052 

Adrenal, Pituitary, 

and Other Significant 

Endocrine Disorders 

2.335 2.198 2.130 2.071 2.052 

Liver Transplant 

Status/Complications 18.445 18.197 18.105 18.165 18.188 

End-Stage Liver 

Disease 6.412 6.102 5.974 6.001 6.012 

Cirrhosis of Liver 2.443 2.255 2.177 2.137 2.125 

Chronic Hepatitis 1.372 1.228 1.152 1.071 1.046 

Acute Liver 

Failure/Disease, 

Including Neonatal 

Hepatitis 

4.824 4.634 4.548 4.547 4.550 

Intestine Transplant 

Status/Complications 77.945 78.110 78.175 78.189 78.195 

Peritonitis/Gastrointe

stinal 

Perforation/Necrotizi

ng Enterocolitis 

13.144 12.823 12.681 12.743 12.764 

Intestinal Obstruction 7.257 6.922 6.789 6.842 6.864 

Chronic Pancreatitis 6.682 6.385 6.269 6.309 6.329 

Acute 

Pancreatitis/Other 

Pancreatic Disorders 

and Intestinal 

Malabsorption 

3.614 3.380 3.281 3.245 3.234 

Inflammatory Bowel 

Disease 2.894 2.640 2.517 2.398 2.355 

Necrotizing Fasciitis 7.878 7.622 7.508 7.545 7.559 

Bone/Joint/Muscle 

Infections/Necrosis 7.878 7.622 7.508 7.545 7.559 

Rheumatoid Arthritis 

and Specified 

Autoimmune 

Disorders 

3.414 3.135 3.009 2.987 2.982 
 54 

Systemic Lupus 

Erythematosus and 

Other Autoimmune 

Disorders 

1.263 1.124 1.051 0.954 0.921 

Osteogenesis 

Imperfecta and Other 

Osteodystrophies 

3.524 3.300 3.184 3.126 3.107 

Congenital/Develop

mental Skeletal and 

Connective Tissue 

Disorders 

3.524 3.300 3.184 3.126 3.107 

Cleft Lip/Cleft Palate 2.168 1.978 1.891 1.815 1.793 

Hemophilia 49.823 49.496 49.321 49.330 49.329 

Myelodysplastic 

Syndromes and 

Myelofibrosis 

15.404 15.253 15.182 15.214 15.224 

Aplastic Anemia 15.404 15.253 15.182 15.214 15.224 

Acquired Hemolytic 

Anemia, Including 

Hemolytic Disease of 

Newborn 

7.405 7.198 7.099 7.090 7.089 

Sickle Cell Anemia 

(Hb-SS) 7.405 7.198 7.099 7.090 7.089 

Thalassemia Major 7.405 7.198 7.099 7.090 7.089 

Combined and Other 

Severe 

Immunodeficiencies 

5.688 5.489 5.402 5.419 5.423 

Disorders of the 

Immune Mechanism 5.688 5.489 5.402 5.419 5.423 

Coagulation Defects 

and Other Specified 

Hematological 

Disorders 

3.080 2.959 2.899 2.880 2.872 

Drug Psychosis 3.776 3.517 3.389 3.302 3.274 

Drug Dependence 3.776 3.517 3.389 3.302 3.274 

Schizophrenia 3.122 2.854 2.732 2.647 2.624 

Major Depressive 

and Bipolar 

Disorders 

1.870 1.698 1.601 1.476 1.436 

Reactive and 

Unspecified 

Psychosis, 

Delusional Disorders 

1.870 1.698 1.601 1.476 1.436 

Personality Disorders 1.187 1.065 0.974 0.836 0.790 

Anorexia/Bulimia 

Nervosa 3.010 2.829 2.732 2.657 2.631 
 55 

Prader-Willi, Patau, 

Edwards, and 

Autosomal Deletion 

Syndromes 

5.387 5.219 5.141 5.101 5.091 

Down Syndrome, 

Fragile X, Other 

Chromosomal 

Anomalies, and 

Congenital 

Malformation 

Syndromes 

1.264 1.171 1.099 1.015 0.985 

Autistic Disorder 1.187 1.065 0.974 0.836 0.790 

Pervasive 

Developmental 

Disorders, Except 

Autistic Disorder 

1.187 1.065 0.974 0.836 0.790 

Traumatic Complete 

Lesion Cervical 

Spinal Cord 

11.728 11.537 11.444 11.448 11.449 

Quadriplegia 11.728 11.537 11.444 11.448 11.449 

Traumatic Complete 

Lesion Dorsal Spinal 

Cord 

10.412 10.205 10.108 10.111 10.111 

Paraplegia 10.412 10.205 10.108 10.111 10.111 

Spinal Cord 

Disorders/Injuries 6.213 5.969 5.861 5.843 5.836 

Amyotrophic Lateral 

Sclerosis and Other 

Anterior Horn Cell 

Disease 

3.379 3.094 2.967 2.927 2.919 

Quadriplegic 

Cerebral Palsy 2.057 1.810 1.681 1.610 1.589 

Cerebral Palsy, 

Except Quadriplegic 0.729 0.596 0.521 0.437 0.408 

Spina Bifida and 

Other 

Brain/Spinal/Nervou

s System Congenital 

Anomalies 

0.727 0.590 0.522 0.467 0.449 

Myasthenia 

Gravis/Myoneural 

Disorders and 

Guillain-Barre 

Syndrome/Inflammat

ory and Toxic 

Neuropathy 

5.174 4.999 4.921 4.900 4.891 

Muscular Dystrophy 2.118 1.928 1.848 1.771 1.745 

Multiple Sclerosis 7.441 6.971 6.764 6.830 6.850 
 56 

Parkinson`s, 

Huntington`s, and 

Spinocerebellar 

Disease, and Other 

Neurodegenerative 

Disorders 

2.118 1.928 1.848 1.771 1.745 

Seizure Disorders 

and Convulsions 1.578 1.411 1.321 1.229 1.199 

Hydrocephalus 7.688 7.552 7.486 7.492 7.493 

Non-Traumatic 

Coma, and Brain 

Compression/Anoxic 

Damage 

9.265 9.102 9.022 9.026 9.025 

Respirator 

Dependence/Tracheo

stomy Status 

40.054 40.035 40.022 40.105 40.131 

Respiratory Arrest 12.913 12.707 12.612 12.699 12.728 

Cardio-Respiratory 

Failure and Shock, 

Including 

Respiratory Distress 

Syndromes 

12.913 12.707 12.612 12.699 12.728 

Heart Assistive 

Device/Artificial 

Heart 

33.372 33.025 32.877 32.978 33.014 

Heart Transplant 33.372 33.025 32.877 32.978 33.014 

Congestive Heart 

Failure 3.790 3.648 3.587 3.591 3.594 

Acute Myocardial 

Infarction 11.904 11.451 11.258 11.423 11.478 

Unstable Angina and 

Other Acute 

Ischemic Heart 

Disease 

6.369 6.001 5.861 5.912 5.935 

Heart 

Infection/Inflammati

on, Except 

Rheumatic 

6.770 6.611 6.537 6.530 6.528 

Specified Heart 

Arrhythmias 3.363 3.193 3.112 3.063 3.046 

Intracranial 

Hemorrhage 10.420 10.062 9.907 9.943 9.959 

Ischemic or 

Unspecified Stroke 4.548 4.304 4.215 4.242 4.256 

Cerebral Aneurysm 

and Arteriovenous 

Malformation 

5.263 5.000 4.890 4.867 4.859 
 57 

Hemiplegia/ 

Hemiparesis 5.979 5.846 5.794 5.858 5.881 

Monoplegia, Other 

Paralytic Syndromes 4.176 4.024 3.959 3.938 3.931 

Atherosclerosis of 

the Extremities with 

Ulceration or 

Gangrene 

11.941 11.801 11.745 11.844 11.876 

Vascular Disease 

with Complications 8.228 7.996 7.896 7.922 7.932 

Pulmonary 

Embolism and Deep 

Vein Thrombosis 

4.853 4.642 4.549 4.539 4.537 

Lung Transplant 

Status/Complications 31.457 31.161 31.030 31.131 31.161 

Cystic Fibrosis 10.510 10.142 9.957 9.960 9.962 

Chronic Obstructive 

Pulmonary Disease, 

Including 

Bronchiectasis 

1.098 0.978 0.904 0.810 0.780 

Asthma 1.098 0.978 0.904 0.810 0.780 

Fibrosis of Lung and 

Other Lung 

Disorders 

2.799 2.657 2.596 2.565 2.556 

Aspiration and 

Specified Bacterial 

Pneumonias and 

Other Severe Lung 

Infections 

9.052 8.934 8.883 8.913 8.924 

Kidney Transplant 

Status 10.944 10.576 10.432 10.463 10.482 

End Stage Renal 

Disease 37.714 37.356 37.193 37.352 37.403 

Chronic Kidney 

Disease, Stage 5 2.189 2.048 1.995 1.990 1.992 

Chronic Kidney 

Disease, Severe 

(Stage 4) 

2.189 2.048 1.995 1.990 1.992 

Ectopic and Molar 

Pregnancy, Except 

with Renal Failure, 

Shock, or Embolism 

1.377 1.219 1.120 0.912 0.828 

Miscarriage with 

Complications 1.377 1.219 1.120 0.912 0.828 

Miscarriage with No 

or Minor 

Complications 

1.377 1.219 1.120 0.912 0.828 
 58 

Completed 

Pregnancy With 

Major Complications 

3.778 3.285 3.134 2.931 2.906 

Completed 

Pregnancy With 

Complications 

3.778 3.285 3.134 2.931 2.906 

Completed 

Pregnancy with No 

or Minor 

Complications 

3.778 3.285 3.134 2.931 2.906 

Chronic Ulcer of 

Skin, Except 

Pressure 

2.515 2.371 2.313 2.304 2.304 

Hip Fractures and 

Pathological 

Vertebral or 

Humerus Fractures 

9.788 9.570 9.480 9.521 9.536 

Pathological 

Fractures, Except of 

Vertebrae, Hip, or 

Humerus 

1.927 1.805 1.735 1.648 1.620 

Stem Cell, Including 

Bone Marrow, 

Transplant 

Status/Complications 

30.944 30.908 30.893 30.917 30.928 

Artificial Openings 

for Feeding or 

Elimination 

11.093 10.939 10.872 10.943 10.965 

Amputation Status, 

Lower 

Limb/Amputation 

Complications 

7.277 7.087 7.009 7.056 7.073 

Interaction Factors

Severe illness x 

Opportunistic 

Infections 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Metastatic Cancer 12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Lung, Brain, and 

Other Severe 

Cancers, Including 

Pediatric Acute 

Lymphoid Leukemia 

12.094 12.327 12.427 12.527 12.555 
 59 

Severe illness x NonHodgkin`s 

Lymphomas and 

Other Cancers and 

Tumors 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Myasthenia 

Gravis/Myoneural 

Disorders and 

Guillain-Barre 

Syndrome/Inflammat

ory and Toxic 

Neuropathy 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Heart 

Infection/Inflammati

on, Except 

Rheumatic 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Intracranial 

Hemorrhage 

12.094 12.327 12.427 12.527 12.555 

Severe illness x HCC 

group G06 (HCC 

Group 6 includes 

Myelodysplastic 

Syndromes and 

Myelofibrosis, and 

Aplastic Anemia) 

12.094 12.327 12.427 12.527 12.555 

Severe illness x HCC 

group G08 (HCC 

Group 8 includes 

Combined and Other 

Severe 

Immunodeficiencies, 

and Disorders of the 

Immune Mechanism) 

12.094 12.327 12.427 12.527 12.555 

Severe illness x EndStage Liver Disease 2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Acute Liver 

Failure/Disease, 

Including Neonatal 

Hepatitis 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Atherosclerosis of 

the Extremities with 

Ulceration or 

Gangrene 

2.498 2.648 2.714 2.813 2.841 
 60 

Severe illness x 

Vascular Disease 

with Complications 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Aspiration and 

Specified Bacterial 

Pneumonias and 

Other Severe Lung 

Infections 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Artificial Openings 

for Feeding or 

Elimination 

2.498 2.648 2.714 2.813 2.841 

Severe illness x HCC 

group G03 (HCC 

Group 3 includes 

Necrotizing Fasciitis 

and 

Bone/Joint/Muscle 

Infections/Necrosis) 

2.498 2.648 2.714 2.813 2.841 

TABLE 2: HHS HCCs in the Severity Illness Indicator Variable 

Description 

Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock 

Peritonitis/Gastrointestinal Perforation/Necrotizing Enter colitis 

Seizure Disorders and Convulsions 

Non-Traumatic Coma, Brain Compression/Anoxic Damage 

Respirator Dependence/Tracheostomy Status 

Respiratory Arrest 

Cardio-Respiratory Failure and Shock, Including Respiratory Distress 

Syndromes 

Pulmonary Embolism and Deep Vein Thrombosis 

TABLE 3: Child Risk Adjustment Model Factors 

Factor Platinum Gold Silver Bronze Catastrophic 

Demographic Factors

Age 2-4, Male 0.283 0.209 0.106 0.019 0.000 

Age 5-9, Male 0.196 0.140 0.064 0.005 0.000 

Age 10-14, Male 0.246 0.189 0.110 0.047 0.033 

Age 15-20, Male 0.336 0.273 0.191 0.114 0.095 

Age 2-4, Female 0.233 0.165 0.071 0.019 0.000 

Age 5-9, Female 0.165 0.113 0.048 0.005 0.000 

Age 10-14, Female 0.223 0.168 0.095 0.042 0.031 

Age 15-20, Female 0.379 0.304 0.198 0.101 0.077 
 61 

Factor Platinum Gold Silver Bronze Catastrophic 

Diagnosis Factors

HIV/AIDS 2.956 2.613 2.421 2.228 2.166 

Septicemia, Sepsis, 

Systemic Inflammatory 

Response 

Syndrome/Shock 

17.309 17.142 17.061 17.081 17.088 

Central Nervous System 

Infections, Except Viral 

Meningitis 

12.636 12.409 12.296 12.313 12.319 

Viral or Unspecified 

Meningitis 3.202 3.004 2.896 2.750 2.702 

Opportunistic Infections 20.358 20.262 20.222 20.201 20.189 

Metastatic Cancer 34.791 34.477 34.307 34.306 34.300 

Lung, Brain, and Other 

Severe Cancers, Including 

Pediatric Acute Lymphoid 

Leukemia 

11.939 11.618 11.436 11.358 11.334 

Non-Hodgkin`s 

Lymphomas and Other 

Cancers and Tumors 

9.354 9.071 8.908 8.806 8.774 

Colorectal, Breast (Age < 

50), Kidney, and Other 

Cancers 

3.689 3.480 3.337 3.188 3.143 

Benign/Uncertain Brain 

Tumors, and Other 

Cancers and Tumors18

3.308 3.084 2.954 2.814 2.769 

Thyroid Cancer, 

Melanoma, 

Neurofibromatosis, and 

Other Cancers and Tumors 

1.530 1.368 1.254 1.114 1.066 

Pancreas Transplant 

Status/Complications 18.933 18.476 18.264 18.279 18.289 

Diabetes with Acute 

Complications 2.629 2.354 2.198 1.904 1.799 

Diabetes with Chronic 

Complications 2.629 2.354 2.198 1.904 1.799 

Diabetes without 

Complication 2.629 2.354 2.198 1.904 1.799 

Protein-Calorie 

Malnutrition 13.930 13.794 13.726 13.751 13.759 

Mucopolysaccharidosis 6.177 5.867 5.696 5.642 5.625 

Lipidoses and 

Glycogenosis 6.177 5.867 5.696 5.642 5.625 

 

18 This HCC also includes Breast (Age 50+) and Prostate Cancer. 
 62 

Factor Platinum Gold Silver Bronze Catastrophic 

Congenital Metabolic 

Disorders, Not Elsewhere 

Classified 

6.177 5.867 5.696 5.642 5.625 

Amyloidosis, Porphyria, 

and Other Metabolic 

Disorders 

6.177 5.867 5.696 5.642 5.625 

Adrenal, Pituitary, and 

Other Significant 

Endocrine Disorders 

6.177 5.867 5.696 5.642 5.625 

Liver Transplant 

Status/Complications 18.322 18.048 17.922 17.898 17.888 

End-Stage Liver Disease 12.960 12.754 12.650 12.622 12.614 

Cirrhosis of Liver 1.177 1.027 0.920 0.871 0.833 

Chronic Hepatitis 1.177 1.027 0.920 0.807 0.775 

Acute Liver 

Failure/Disease, Including 

Neonatal Hepatitis 

6.255 6.092 6.003 5.972 5.966 

Intestine Transplant 

Status/Complications 106.169 106.704 106.991 107.180 107.222 

Peritonitis/Gastrointestinal 

Perforation/Necrotizing 

Enterocolitis 

16.784 16.360 16.156 16.171 16.179 

Intestinal Obstruction 5.715 5.451 5.307 5.210 5.178 

Chronic Pancreatitis 16.692 16.315 16.148 16.163 16.166 

Acute Pancreatitis/Other 

Pancreatic Disorders and 

Intestinal Malabsorption 

3.843 3.685 3.584 3.471 3.434 

Inflammatory Bowel 

Disease 5.049 4.673 4.471 4.320 4.271 

Necrotizing Fasciitis 5.829 5.551 5.398 5.318 5.292 

Bone/Joint/Muscle 

Infections/Necrosis 5.829 5.551 5.398 5.318 5.292 

Rheumatoid Arthritis and 

Specified Autoimmune 

Disorders 

2.689 2.473 2.327 2.171 2.122 

Systemic Lupus 

Erythematosus and Other 

Autoimmune Disorders 

1.397 1.249 1.139 0.996 0.951 

Osteogenesis Imperfecta 

and Other 

Osteodystrophies 

1.536 1.410 1.311 1.211 1.183 

Congenital/Developmental 

Skeletal and Connective 

Tissue Disorders 

1.536 1.410 1.311 1.211 1.183 

Cleft Lip/Cleft Palate 1.785 1.573 1.441 1.281 1.228 

Hemophilia 46.388 45.839 45.551 45.541 45.535 
 63 

Factor Platinum Gold Silver Bronze Catastrophic 

Myelodysplastic 

Syndromes and 

Myelofibrosis 

29.387 29.168 29.063 29.075 29.078 

Aplastic Anemia 29.387 29.168 29.063 29.075 29.078 

Acquired Hemolytic 

Anemia, Including 

Hemolytic Disease of 

Newborn 

7.791 7.476 7.308 7.229 7.203 

Sickle Cell Anemia (HbSS) 7.791 7.476 7.308 7.229 7.203 

Thalassemia Major 7.791 7.476 7.308 7.229 7.203 

Combined and Other 

Severe 

Immunodeficiencies 

5.690 5.455 5.339 5.270 5.247 

Disorders of the Immune 

Mechanism 5.690 5.455 5.339 5.270 5.247 

Coagulation Defects and 

Other Specified 

Hematological Disorders 

4.909 4.754 4.650 4.543 4.511 

Drug Psychosis 4.067 3.816 3.693 3.596 3.566 

Drug Dependence 4.067 3.816 3.693 3.596 3.566 

Schizophrenia 5.536 5.127 4.916 4.775 4.730 

Major Depressive and 

Bipolar Disorders 1.779 1.591 1.453 1.252 1.188 

Reactive and Unspecified 

Psychosis, Delusional 

Disorders 

1.779 1.591 1.453 1.252 1.188 

Personality Disorders 0.935 0.832 0.723 0.511 0.441 

Anorexia/Bulimia Nervosa 2.565 2.372 2.252 2.146 2.111 

Prader-Willi, Patau, 

Edwards, and Autosomal 

Deletion Syndromes 

3.606 3.347 3.239 3.201 3.189 

Down Syndrome, Fragile 

X, Other Chromosomal 

Anomalies, and Congenital 

Malformation Syndromes 

2.403 2.203 2.093 1.982 1.943 

Autistic Disorder 1.673 1.500 1.372 1.177 1.112 

Pervasive Developmental 

Disorders, Except Autistic 

Disorder 

0.963 0.850 0.723 0.511 0.441 

Traumatic Complete 

Lesion Cervical Spinal 

Cord 

18.394 18.224 18.156 18.210 18.228 

Quadriplegia 18.394 18.224 18.156 18.210 18.228 
 64 

Factor Platinum Gold Silver Bronze Catastrophic 

Traumatic Complete 

Lesion Dorsal Spinal Cord 18.394 18.224 18.156 18.210 18.228 

Paraplegia 18.394 18.224 18.156 18.210 18.228 

Spinal Cord 

Disorders/Injuries 4.668 4.416 4.287 4.181 4.150 

Amyotrophic Lateral 

Sclerosis and Other 

Anterior Horn Cell 

Disease 

14.484 14.155 13.995 13.958 13.954 

Quadriplegic Cerebral 

Palsy 5.717 5.367 5.223 5.251 5.262 

Cerebral Palsy, Except 

Quadriplegic 1.899 1.672 1.557 1.447 1.412 

Spina Bifida and Other 

Brain/Spinal/Nervous 

System Congenital 

Anomalies 

0.943 0.785 0.686 0.592 0.562 

Myasthenia 

Gravis/Myoneural 

Disorders and GuillainBarre 

Syndrome/Inflammatory 

and Toxic Neuropathy 

5.301 5.071 4.950 4.861 4.832 

Muscular Dystrophy 3.122 2.915 2.800 2.698 2.669 

Multiple Sclerosis 5.370 4.996 4.806 4.769 4.752 

Parkinson`s, Huntington`s, 

and Spinocerebellar 

Disease, and Other 

Neurodegenerative 

Disorders 

3.122 2.915 2.800 2.698 2.669 

Seizure Disorders and 

Convulsions 2.188 2.012 1.882 1.702 1.644 

Hydrocephalus 6.791 6.630 6.550 6.521 6.513 

Non-Traumatic Coma, and 

Brain 

Compression/Anoxic 

Damage 

9.073 8.882 8.788 8.753 8.735 

Respirator 

Dependence/Tracheostomy 

Status 

34.717 34.532 34.471 34.623 34.668 

Respiratory Arrest 14.998 14.772 14.669 14.691 14.696 
 65 

Factor Platinum Gold Silver Bronze Catastrophic 

Cardio-Respiratory Failure 

and Shock, Including 

Respiratory Distress 

Syndromes 

14.998 14.772 14.669 14.691 14.696 

Heart Assistive 

Device/Artificial Heart 25.734 25.262 25.057 25.189 25.225 

Heart Transplant 25.734 25.262 25.057 25.189 25.225 

Congestive Heart Failure 6.292 6.159 6.073 6.013 5.992 

Acute Myocardial 

Infarction 4.568 4.453 4.410 4.433 4.448 

Unstable Angina and 

Other Acute Ischemic 

Heart Disease 

4.568 4.453 4.410 4.433 4.448 

Heart 

Infection/Inflammation, 

Except Rheumatic 

12.842 12.655 12.573 12.590 12.597 

Hypoplastic Left Heart 

Syndrome and Other 

Severe Congenital Heart 

Disorders 

7.019 6.823 6.668 6.528 6.480 

Major Congenital 

Heart/Circulatory 

Disorders 

2.257 2.143 2.018 1.870 1.828 

Atrial and Ventricular 

Septal Defects, Patent 

Ductus Arteriosus, and 

Other Congenital 

Heart/Circulatory 

Disorders 

1.411 1.319 1.206 1.078 1.047 

Specified Heart 

Arrhythmias 4.483 4.276 4.141 4.052 4.026 

Intracranial Hemorrhage 21.057 20.757 20.616 20.617 20.618 

Ischemic or Unspecified 

Stroke 8.498 8.373 8.324 8.360 8.363 

Cerebral Aneurysm and 

Arteriovenous 

Malformation 

4.704 4.464 4.344 4.280 4.250 

Hemiplegia/Hemiparesis 5.561 5.404 5.334 5.315 5.310 

Monoplegia, Other 

Paralytic Syndromes 5.561 5.404 5.334 5.315 5.310 

Atherosclerosis of the 

Extremities with 

Ulceration or Gangrene 

10.174 9.937 9.799 9.688 9.641 

Vascular Disease with 

Complications 11.571 11.355 11.257 11.260 11.272 

Pulmonary Embolism and 

Deep Vein Thrombosis 13.894 13.661 13.557 13.591 13.604 
 66 

Factor Platinum Gold Silver Bronze Catastrophic 

Lung Transplant 

Status/Complications 100.413 100.393 100.412 100.660 100.749 

Cystic Fibrosis 13.530 13.006 12.743 12.739 12.742 

Chronic Obstructive 

Pulmonary Disease, 

Including Bronchiectasis 

0.521 0.458 0.354 0.215 0.175 

Asthma 0.521 0.458 0.354 0.215 0.175 

Fibrosis of Lung and Other 

Lung Disorders 5.812 5.657 5.555 5.472 5.450 

Aspiration and Specified 

Bacterial Pneumonias and 

Other Severe Lung 

Infections 

10.730 10.615 10.549 10.566 10.571 

Kidney Transplant Status 18.933 18.476 18.264 18.279 18.289 

End Stage Renal Disease 43.158 42.816 42.659 42.775 42.808 

Chronic Kidney Disease, 

Stage 5 11.754 11.581 11.472 11.374 11.340 

Chronic Kidney Disease, 

Severe (Stage 4) 11.754 11.581 11.472 11.374 11.340 

Ectopic and Molar 

Pregnancy, Except with 

Renal Failure, Shock, or 

Embolism 

1.191 1.042 0.917 0.674 0.590 

Miscarriage with 

Complications 1.191 1.042 0.917 0.674 0.590 

Miscarriage with No or 

Minor Complications 1.191 1.042 0.917 0.674 0.590 

Completed Pregnancy 

With Major Complications 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy 

With Complications 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy with 

No or Minor 

Complications 

3.419 2.956 2.778 2.498 2.437 

Chronic Ulcer of Skin, 

Except Pressure 1.570 1.479 1.394 1.314 1.289 

Hip Fractures and 

Pathological Vertebral or 

Humerus Fractures 

7.389 7.174 7.022 6.882 6.842 

Pathological Fractures, 

Except of Vertebrae, Hip, 

or Humerus 

2.353 2.244 2.128 1.965 1.912 

Stem Cell, Including Bone 

Marrow, Transplant 

Status/Complications 

30.558 30.485 30.466 30.522 30.538 
 67 

Factor Platinum Gold Silver Bronze Catastrophic 

Artificial Openings for 

Feeding or Elimination 14.410 14.247 14.197 14.340 14.383 

Amputation Status, Lower 

Limb/Amputation 

Complications 

10.174 9.937 9.799 9.688 9.641 

TABLE 4: Infant Risk Adjustment Models Factors 

Group Platinum Gold Silver Bronze Catastrophic

Extremely Immature * Severity 

Level 5 (Highest) 393.816 392.281 391.387 391.399 391.407 

Extremely Immature * Severity 

Level 4 225.037 223.380 222.424 222.371 222.365 

Extremely Immature * Severity 

Level 3 60.363 59.232 58.532 58.247 58.181 

Extremely Immature * Severity 

Level 2 60.363 59.232 58.532 58.247 58.181 

Extremely Immature * Severity 

Level 1 (Lowest) 60.363 59.232 58.532 58.247 58.181 

Immature * 

Severity Level 5 (Highest) 207.274 205.589 204.615 204.629 204.644 

Immature * 

Severity Level 4 89.694 88.105 87.188 87.169 87.178 

Immature * 

Severity Level 3 45.715 44.305 43.503 43.394 43.379 

Immature * 

Severity Level 2 33.585 32.247 31.449 31.221 31.163 

Immature * 

Severity Level 1 (Lowest) 33.585 32.247 31.449 31.221 31.163 

Premature/Multiples * Severity 

Level 5 (Highest) 173.696 172.095 171.169 171.111 171.108 

Premature/Multiples * Severity 

Level 4 34.417 32.981 32.155 31.960 31.925 

Premature/Multiples * Severity 

Level 3 18.502 17.382 16.694 16.311 16.200 

Premature/Multiples * Severity 

Level 2 9.362 8.533 7.967 7.411 7.241 

Premature/Multiples * Severity 

Level 1 (Lowest) 6.763 6.144 5.599 4.961 4.771 

Term * 

Severity Level 5 (Highest) 132.588 131.294 130.511 130.346 130.292 

Term * 

Severity Level 4 20.283 19.222 18.560 18.082 17.951 

Term * 

Severity Level 3 6.915 6.286 5.765 5.092 4.866 
 68 

Group Platinum Gold Silver Bronze Catastrophic

Term * 

Severity Level 2 3.825 3.393 2.925 2.189 1.951 

Term * 

Severity Level 1 (Lowest) 1.661 1.449 0.998 0.339 0.188 

Age1 * 

Severity Level 5 (Highest) 62.385 61.657 61.217 61.130 61.108 

Age1 * 

Severity Level 4 10.855 10.334 9.988 9.747 9.686 

Age1 * 

Severity Level 3 3.633 3.299 3.007 2.692 2.608 

Age1 * 

Severity Level 2 2.177 1.930 1.665 1.320 1.223 

Age1 * 

Severity Level 1 (Lowest) 0.631 0.531 0.333 0.171 0.137 

Age 0 Male 0.629 0.587 0.574 0.533 0.504 

Age 1 Male 0.117 0.102 0.094 0.065 0.054 

TABLE 5: HHS HCCS Included in Infant Model Maturity Categories 

Maturity Category HCC/Description 

Extremely 

Immature 

Extremely Immature Newborns, Birthweight < 500 Grams 

Extremely 

Immature 

Extremely Immature Newborns, Including Birthweight 500-749 Grams 

Extremely 

Immature 

Extremely Immature Newborns, Including Birthweight 750-999 Grams 

Immature Premature Newborns, Including Birthweight 1000-1499 Grams 

Immature Premature Newborns, Including Birthweight 1500-1999 Grams 

Premature/Multiples Premature Newborns, Including Birthweight 2000-2499 Grams 

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

Newborns 

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

Age 1 All age 1 infants 

TABLE 6: HHS HCCS Included in Infant Model Severity Categories 

Severity Category HCC 

Severity Level 5 

(Highest) Metastatic Cancer 

Severity Level 5 Pancreas Transplant Status/Complications 

Severity Level 5 Liver Transplant Status/Complications 

Severity Level 5 End-Stage Liver Disease 

Severity Level 5 Intestine Transplant Status/Complications 

Severity Level 5 Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis 
 69 

Severity Category HCC 

Severity Level 5 Respirator Dependence/Tracheostomy Status 

Severity Level 5 Heart Assistive Device/Artificial Heart 

Severity Level 5 Heart Transplant 

Severity Level 5 Congestive Heart Failure 

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

Severity Level 5 Lung Transplant Status/Complications 

Severity Level 5 Kidney Transplant Status 

Severity Level 5 End Stage Renal Disease 

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

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

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

Leukemia 

Severity Level 4 Mucopolysaccharidosis 

Severity Level 4 Major Congenital Anomalies of Diaphragm, Abdominal Wall, and Esophagus, 

Age < 2 

Severity Level 4 Myelodysplastic Syndromes and Myelofibrosis 

Severity Level 4 Aplastic Anemia 

Severity Level 4 Combined and Other Severe Immunodeficiencies 

Severity Level 4 Traumatic Complete Lesion Cervical Spinal Cord 

Severity Level 4 Quadriplegia 

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

Severity Level 4 Quadriplegic Cerebral Palsy 

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

Syndrome/Inflammatory and Toxic Neuropathy 

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

Severity Level 4 Respiratory Arrest 

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

Syndromes 

Severity Level 4 Acute Myocardial Infarction 

Severity Level 4 Heart Infection/Inflammation, Except Rheumatic 

Severity Level 4 Major Congenital Heart/Circulatory Disorders 

Severity Level 4 Intracranial Hemorrhage 

Severity Level 4 Ischemic or Unspecified Stroke 

Severity Level 4 Vascular Disease with Complications 

Severity Level 4 Pulmonary Embolism and Deep Vein Thrombosis 

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

Infections 

Severity Level 4 Chronic Kidney Disease, Stage 5 

Severity Level 4 Hip Fractures and Pathological Vertebral or Humerus Fractures 

Severity Level 4 Artificial Openings for Feeding or Elimination 

Severity Level 3 HIV/AIDS 

Severity Level 3 Central Nervous System Infections, Except Viral Meningitis 

Severity Level 3 Opportunistic Infections 

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

Severity Level 3 Colorectal, Breast (Age < 50), Kidney and Other Cancers 
 70 

Severity Category HCC 

Severity Level 3 Benign/Uncertain Brain Tumors, and Other Cancers and Tumors19 

Severity Level 3 Lipidoses and Glycogenosis 

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

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

Severity Level 3 Intestinal Obstruction 

Severity Level 3 Necrotizing Fasciitis 

Severity Level 3 Bone/Joint/Muscle Infections/Necrosis 

Severity Level 3 Osteogenesis Imperfecta and Other Osteodystrophies 

Severity Level 3 Cleft Lip/Cleft Palate 

Severity Level 3 Hemophilia 

Severity Level 3 Disorders of the Immune Mechanism 

Severity Level 3 Coagulation Defects and Other Specified Hematological Disorders 

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

Severity Level 3 Traumatic Complete Lesion Dorsal Spinal Cord 

Severity Level 3 Paraplegia 

Severity Level 3 Spinal Cord Disorders/Injuries 

Severity Level 3 Cerebral Palsy, Except Quadriplegic 

Severity Level 3 Muscular Dystrophy 

Severity Level 3 Parkinson`s, Huntington`s, and Spinocerebellar Disease, and Other 

Neurodegenerative Disorders 

Severity Level 3 Hydrocephalus 

Severity Level 3 Unstable Angina and Other Acute Ischemic Heart Disease 

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

Congenital Heart/Circulatory Disorders 

Severity Level 3 Specified Heart Arrhythmias 

Severity Level 3 Cerebral Aneurysm and Arteriovenous Malformation 

Severity Level 3 Hemiplegia/Hemiparesis 

Severity Level 3 Cystic Fibrosis 

Severity Level 3 Fibrosis of Lung and Other Lung Disorders 

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

Severity Level 2 Viral or Unspecified Meningitis 

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

Severity Level 2 Diabetes with Acute Complications 

Severity Level 2 Diabetes with Chronic Complications 

Severity Level 2 Diabetes without Complication 

Severity Level 2 Protein-Calorie Malnutrition 

Severity Level 2 Congenital Metabolic Disorders, Not Elsewhere Classified 

Severity Level 2 Amyloidosis, Porphyria, and Other Metabolic Disorders 

Severity Level 2 Cirrhosis of Liver 

Severity Level 2 Chronic Pancreatitis 

Severity Level 2 Inflammatory Bowel Disease 

Severity Level 2 Rheumatoid Arthritis and Specified Autoimmune Disorders 

Severity Level 2 Systemic Lupus Erythematosus and Other Autoimmune Disorders 

Severity Level 2 Congenital/Developmental Skeletal and Connective Tissue Disorders 

 

19 This HCC also includes Breast (Age 50+) and Prostate Cancer. 
 71 

Severity Category HCC 

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

Severity Level 2 Sickle Cell Anemia (Hb-SS) 

Severity Level 2 Drug Psychosis 

Severity Level 2 Drug Dependence 

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

Malformation Syndromes 

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

Severity Level 2 Seizure Disorders and Convulsions 

Severity Level 2 Monoplegia, Other Paralytic Syndromes 

Severity Level 2 Atherosclerosis of the Extremities with Ulceration or Gangrene 

Severity Level 2 Chronic Obstructive Pulmonary Disease, Including Bronchiectasis 

Severity Level 2 Chronic Ulcer of Skin, Except Pressure 

Severity Level 1 

(Lowest) 

Chronic Hepatitis 

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

Severity Level 1 Thalassemia Major 

Severity Level 1 Autistic Disorder 

Severity Level 1 Pervasive Developmental Disorders, Except Autistic Disorder 

Severity Level 1 Multiple Sclerosis 

Severity Level 1 Asthma 

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

Severity Level 1 Amputation Status, Lower Limb/Amputation Complications 

Severity Level 1 No Severity HCCs 

(13) Adjustments to Model discussed in the Risk Adjustment White Paper 

We discussed the possibility of including adjustments to the HHS risk adjustment 

model to account for cost-sharing reductions and reinsurance payments in the Risk 

Adjustment White Paper, and sought comment. We propose to include an adjustment for 

the receipt of cost-sharing reductions in the model, but not to adjust for receipt of 

reinsurance payments in the model. 

(i) Cost-sharing reductions adjustments 

We propose an adjustment to the HHS risk adjustment models for individuals who 

receive cost-sharing reductions. The Affordable Care Act establishes cost-sharing 

reductions for enrollees in individual market plans in Exchanges based on their income 

and/or Indian status. Individuals who qualify for cost-sharing reductions may utilize 
 72 

health care services at a higher rate than would be the case in the absence of cost-sharing 

reductions. This higher utilization (to the extent not covered by required cost sharing by 

the enrollees or cost-sharing reductions reimbursed by the Federal government) would 

neither be paid by cost sharing reductions nor built into premiums. This adjustment to the 

HHS risk adjustment models would be based on the adjustment for induced demand for 

advanced payment of cost-sharing reductions described in section III.E. of this proposed 

rule. The proposed adjustment factors are set forth in Table 7. These adjustments would 

be multiplicative, and applied after demographic, diagnosis, and interaction factors are 

summed. 

We plan to evaluate this adjustment in the future, once data from the first few 

years of risk adjustment are available. We seek comment on this approach. 

TABLE 7: Cost-Sharing Reduction Adjustment 

Household Income Plan AV Induced Utilization Factor 

Non-Indian CSR Recipients 

100-150% of FPL Plan Variation 94% 1.12 

150-200% of FPL Plan Variation 87% 1.12 

200-250% of FPL Plan Variation 73% 1.00 

>250% of FPL Standard Plan 70% 1.00 

Indian CSR Recipients 

<300% of FPL Platinum (90%) 1.15 

<300% of FPL Gold (80%) 1.12 

<300% of FPL Silver (70%) 1.07 

<300% of FPL Bronze (60%) 1.00 

>300% of FPL 1.00 

(ii) Reinsurance Adjustments 

Section 1341 of the Affordable Care Act establishes a three-year transitional 

reinsurance program in the individual market, raising the question of whether to account 

for these reinsurance payments when developing the HHS risk adjustment models. Some 

reinsurance payments would be made for low-risk individuals with unexpected high-cost 

expenditures (for example, due to an accident) that may not be accounted for in the risk 
 73 

adjustment models. However, plans that receive risk adjustment payments for their 

higher-than-average risk enrollees may also be eligible to receive reinsurance payments 

for the same high-risk enrollees. Adjusting for reinsurance payments in the HHS risk 

adjustment model would address the concerns that reinsurance and risk adjustment could 

compensate twice for the same high-risk individuals. 

Despite this potential, we propose not to adjust for reinsurance in the HHS risk 

adjustment model for a number for reasons. First, removing reinsurance payments from 

risk adjustment would reduce protections for issuers of reinsurance-eligible plans that 

enroll high-cost individuals. Second, it would be difficult to determine what portion of 

reinsurance payments were made for conditions included in each HHS risk adjustment 

model, and the appropriate model adjustment for these payments. Finally, because the 

size of the reinsurance pool declines over its three-year duration, the methodology to 

account for reinsurance payments would need to be modified each year for the HHS risk 

adjustment model. 

(14) Model performance statistics 

To evaluate model performance, we examined their R-squared and predictive 

ratios. The R-squared statistic, which calculates the percentage of individual variation 

explained by a model, measures the predictive accuracy of the model overall. The 

predictive ratios measure the predictive accuracy of a model for different validation 

groups or subpopulations. The predictive ratio for each of the HHS risk adjustment 

models is the ratio of the weighted mean predicted plan liability for the model sample 

population to the weighted mean actual plan liability for the model sample population. 

The predictive ratio represents how well the model does on average at predicting plan 

liability for that subpopulation. A subpopulation that is predicted perfectly would have a 

predictive ratio of 1.0. For each of the HHS risk adjustment models, the R-squared 
 74 

statistic and the predictive ratio are in the range of published estimates for concurrent risk 

adjustment models.20 The R-squared statistic for each model is shown in Table 8. 

We welcome comment on these proposed risk adjustment models. 

TABLE 8: R-Squared Statistic for HHS Risk Adjustment Models 

Risk Adjustment Model R-Squared Statistic 

Platinum Adult 0.360 

Platinum Child 0.307 

Platinum Infant 0.292 

Gold Adult 0.355 

Gold Child 0.302 

Gold Infant 0.289 

Silver Adult 0.352 

Silver Child 0.299 

Silver Infant 0.288 

Bronze Adult 0.351 

Bronze Child 0.296 

Bronze Infant 0.289 

Catastrophic Adult 0.350 

Catastrophic Child 0.295 

Catastrophic Infant 0.289 

c. Overview of the payment transfer formula 

Plan average risk scores are calculated as the member month-weighted average of 

individual enrollee risk scores, as shown in section III.B.3.b. of this proposed rule. We 

defined the calculation of plan average actuarial risk and the calculation of payments and 

charges in the Premium Stabilization Rule. Here, we combine these concepts into a risk 

adjustment payment transfer formula. In this section, we refer to payments and charges 

generically as transfers. Under §153.310(e), as proposed to renumbered, HHS would 

invoice issuers of risk adjustment covered plans for transfers by June 30 of the year 

following the applicable benefit year. 

 

20 Winkleman, Ross and Syed Mehmud. “A Comparative Analysis of Claims-Based Tools for Health Risk 

Assessment.” Society of Actuaries. April 2007. 
 75 

We propose to calculate risk adjustment transfers after the close of the applicable 

benefit year, following the completion of issuer risk adjustment data reporting. As 

discussed in detail below, the payment transfer formula includes a set of cost adjustment 

terms that require transfers to be calculated at the geographic rating area level for each 

plan (thus, HHS would calculate two separate transfer amounts for a plan that operates in 

two rating areas). Payment transfer amounts would be aggregated at the issuer level (that 

is, at the level of the entity licensed by the State) such that each issuer would receive an 

invoice and a report detailing the basis for the net payment that would be made or the 

charge that would be owed. The invoice would also include plan-level risk adjustment 

information that may be used in the issuer’s risk corridors calculations. 

The proposed payment transfer formula is designed to provide a per member per 

month (PMPM) transfer amount. The PMPM transfer amount derived from the payment 

transfer formula would be multiplied by each plan’s total member months for the benefit 

year to determine the total payment due or charge owed by the issuer for that plan in a 

rating area. 

(1) Rationales for a Transfer Methodology Based on State Average Premiums 

Risk adjustment transfers are intended to reduce the impact of risk selection on 

premiums while preserving premium differences related to other cost factors, such as the 

actuarial value, local patterns of utilization and care delivery, local differences in the cost 

of doing business, and, within limits established by the Affordable Care Act, the age of 

the enrollee. Risk adjustment payments would be fully funded by the charges that are 

collected from plans with lower risk enrollees (that is, transfers within a State would net 

to zero). 

In the Risk Adjustment White Paper, we presented several approaches for 

calculating risk adjustment transfers using the State average premium and plans’ own 
 76 

premiums. The approaches that used plans’ own premiums resulted in unbalanced 

payment transfers, requiring a balancing adjustment to yield transfers that net to zero. 

These examples also demonstrated that the balancing adjustments could introduce 

differences in premiums across plans that were not consistent with features of the plan 

(for example, AV or differences in costs and utilization patterns across rating areas). A 

balancing adjustment would likely vary from year to year, and could add uncertainty to 

the rate development process (that is, plan actuaries would need to factor the uncertainty 

of the balancing adjustment into their transfer estimates). 

Therefore, we propose a payment transfer formula that is based on the State 

average premium for the applicable market, as described in section III.B.3.a. of this 

proposed rule. The State average premium provides a straightforward and predictable 

benchmark for estimating transfers. As shown in the examples in the Risk Adjustment 

White Paper, transfers net to zero when the State average premium is used as the basis for 

calculating transfers. 

Plan premiums differ from the State average premium due to a variety of factors, 

such as differences in cost-sharing structure or regional differences in utilization and unit 

costs. The proposed payment transfer formula applies a set of cost factor adjustments to 

the State average premium so that it will better reflect plan liability. These adjustments 

to the State average premium result in transfers that compensate plans for liability 

differences associated with risk selection, while preserving premium differences related 

to the other cost factors described above. 

(2) Conceptual overview of the payment transfer formula 

 In this section, we provide a broad overview of the payment transfer formula that 

we propose to use when operating risk adjustment on behalf of a State. We discuss at a 
 77 

conceptual level our proposal to use the State average premium as the basis of the 

formula and the components of the formula. 

(i) Calculating transfers using the State average Premium 

The payment transfer formula proposed for 2014 is based on the difference 

between two plan premium estimates: (1) a premium based on plan-specific risk 

selection; and (2) a premium without risk selection. Transfers are intended to bridge the 

gap between these two premium estimates: 

Conceptually, the goal of payment transfers is to provide plans with payments to 

help cover their actual risk exposure beyond the premiums the plans would charge 

reflecting allowable rating and their applicable cost factors. In other words, payments 

would help cover excess actuarial risk due to risk selection. 

Both of these premium estimates would be based on the State average premium. 

The State average premium is the average premium requirement for providing insurance 

to the applicable market population. The proposed payment transfer formula develops 

plan premium estimates by adjusting the State average premium to account for planspecific characteristics such as benefit differences. This approach also assumes that all 

plans have premiums that can be decomposed into the State average premium and a set of 

adjustment factors, and that all plans would have the same premium if the adjustment 

factors were held constant across plans. Finally, the derivation of the payment transfers 

also assumes that plans “price to cost,” that is, that competition among plans for enrollees 

drives plans' premiums to their premium requirements. Therefore, we may consider 
 78 

“premiums” to be “costs” or “premium requirements.” The payment transfer formula 

includes the following premium adjustment terms: 

• Plan average risk score: multiplying the plan average risk score by the State 

average premium shows how a plan’s premium would differ from the State average 

premium based on the risk selection experienced by the plan. 

• Actuarial value: a particular plan’s premium may differ from the State average 

premium based on the plan’s cost sharing structure, or actuarial value. An AV 

adjustment is applied to the State average premium to account for relative differences 

between a plan’s AV and the market average AV. 

• Permissible rating variation: plan rates may differ based on allowable age 

rating factors. The rating adjustment accounts for the impact of allowable rating factors 

on the premium that would be realized by the plan. 

• Geographic cost differences: differences in unit costs and utilization may lead 

to differences in the average premium between intra-State rating areas, holding other cost 

factors (for example, benefit design) constant. The geographic cost adjustment accounts 

for cost differences across rating areas. 

• Induced demand: enrollee spending patterns may vary based on the 

generosity of cost-sharing. The induced demand adjustment accounts for greater 

utilization of health care services induced by lower enrollee cost sharing in higher metal 

level plans. 

The State average premium is multiplied by these factors to develop the plan 

premium estimates used in the payment transfer formula. The factors are relative 

measures that compare how plans differ from the market average with respect to the cost 

factors (that is to say, the product of the adjustments is normalized to the market average 

product of the cost factors). 
 79 

In the absence of these adjustments, transfers would reflect liability differences 

attributed to cost factors other than risk selection. For example, in the absence of the AV 

adjustment, a low AV plan with lower-risk enrollees would be overcharged because the 

State average premium would not be scaled down to reflect the fact that the plan’s AV is 

lower than the average AV of plans operating in the market in the State. 

The figure below shows how the State average premium, the plan average risk 

score, and other plan-specific cost factors are used to develop the two plan premium 

estimates that are used to calculate payment transfers: 

(ii) Estimating the Plan Premium With Risk Selection 

The first premium term in the proposed payment transfer formula, the plan 

premium estimate reflecting risk selection, is calculated as the product of the State 

average premium and the normalized product of the plan average risk score, the plan 

geographic cost factor, and the plan induced demand factor. 

The formula below shows how the plan premium estimate reflecting risk selection 

would be calculated: 

Where, 

 = State average premium, 

 = plan i's plan liability risk score, 

IDFi = plan i's induced demand factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment, 

and the denominator is summed across all plans in the risk pool in the market in the State. 
 80 

The key factor in the premium reflecting risk selection is the plan average risk 

score, which would be calculated from the HHS risk adjustment models. The plan 

average risk score is a relative measure of plan liability based on the health status of a 

plan’s enrollees. The State average premium is multiplied by the plan average risk score 

to estimate plan liability based on the risk selection present in its enrollee population. 

However, because the HHS risk adjustment models do not account for plan liability 

differences attributable to induced demand or geographic cost differences, those cost 

factors must be included in the estimate of the premium with risk selection. 

The denominator of the adjustment term normalizes the product of the plan cost 

factors to the State average product of the cost factors. The normalized product of the 

plan cost factors provides an estimate of how a plan’s liability differs from the market 

average due to underlying differences in its cost factors, including risk selection, induced 

demand and geographic cost differences. 

The premium reflecting risk selection does not include an AV adjustment because 

the risk score reflects the plan’s AV. Additionally, the premium estimate reflecting risk 

selection does not include the allowable rating factor adjustment. Thus, the difference 

between the premium estimates (that is, the premium with and the premium without risk 

selection) provides an estimate of plan liability attributed to risk selection that is not 

compensated for through allowable premium rating – our measure of actuarial risk. 

(iii) Estimating the Plan Premium Without Risk Selection 

The second premium term in the proposed payment transfer formula, the plan 

premium estimate not reflecting risk selection, would be calculated as the product of the 

State average premium and the normalized product of the plan AV, plan allowable rating 

factor, the induced demand factor, and a geographic cost factor. The formula below 

shows how this term would be calculated: 
 81 

Where, 

 = State average premium, 

AVi= plan i's metal level AV, 

ARFi= allowable rating factor 

IDFi = plan i's induced demand factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment, 

and the denominator is summed across all plans in the risk pool in the market in the State. 

The normalized adjustment terms would account for how a plan’s AV, allowed 

rating variation, induced demand, and geographic cost factors jointly vary from the State 

average product of these terms. The normalized product of the adjustment terms would be 

multiplied by the State average premium to estimate the extent to which the plan’s 

premium requirement would differ from the premium requirement for the State average 

plan due to cost factors unrelated to risk selection. 

(iv) Risk Adjustment Payment Transfer Formula 

Transfers would be calculated as the difference between the plan premium 

estimate reflecting risk selection and the plan premium estimate not reflecting risk 

selection – the two premium estimates described above. Therefore, the proposed 2014 

HHS risk adjustment payment transfer formula is: 
 82 

Where, 

 = State average premium, 

 = plan i's plan liability risk score, 

AVi= plan i's metal level AV, 

ARFi= allowable rating factor 

IDFi = plan i's allowable rating factor, 

GCFi = plan i’s geographic cost factor, 

si = plan i’s share of State enrollment, 

and the denominator is summed across all plans in the risk pool in the market in the State. 

The difference between the two premium estimates in the payment transfer 

formula would determine whether a plan would pay a risk transfer charge or receive a 

risk transfer payment. Note that the value of the plan average risk score by itself does not 

determine whether a plan would be assessed a charge or receive a payment – even if the 

risk score is greater than 1.0, it is possible that the plan would be assessed a charge if the 

premium compensation that the plan may receive through its rating practices (as 

measured through the allowable rating factor) exceeds the plan’s predicted liability 

associated with risk selection. 

Plans with higher AV would, other things being equal, also have higher risk 

scores. This is due to the fact that the metal level-specific risk adjustment models that are 

used to predict plan liability assume different cost sharing and levels of plan liability. 

Thus, the risk score for two identical sets of enrollees would differ depending on the 

metal level model used. Thus, a bronze plan with an average risk score of 1.1 would 

likely have more adverse selection than a gold plan with an average risk score of 1.1 

(because the bronze plan risk adjustment model assumes a lower level of plan liability 

than the gold plan model). 

Risk adjustment transfers are calculated at the risk pool level. Each State will 

have a risk pool for all of its metal-level plans. Catastrophic plans will be treated as a 

separate risk pool for purposes of risk adjustment. Individual and small group market 
 83 

plans will either be pooled together or treated as separate risk pools, as described in 

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

(v) Normalization and Budget Neutral Transfers 

As discussed above, each of the two premium terms in the payment transfer 

formula would be divided by its average. This means that each “normalized” term would 

average to 1.0. Thus, the average of the difference between these terms would be zero. 

This is the fundamental property of the payment transfer formula that ensures that 

transfers across a risk pool would net to zero. 

Note that the individual factors in the proposed payment transfer formula do not 

need to independently average to 1.0. For example, the average risk score for a State 

may not equal 1.0 due to the underlying differences in the health status of the State’s 

population and the national sample used to calibrate the model. It is not necessary to 

separately renormalize plan average risk scores to the State average risk score because 

the payment transfer formula normalizes the product of the risk score, the induced 

demand factor and the geographic cost factor. The individual scales for PLRS, IDF, 

GCF, and ARF are not specified because the payment transfer formula applies to the 

plan-specific value relative to the State average. 

(vi) Calculation of Transfer Formula Inputs 

In this section, we describe each component of the proposed payment transfer 

formula, and explain how it is computed and how it affects transfers. 

(A) Plan Average Risk Score 

The plan average risk score represents the plan’s overall risk exposure. The 

proposed plan average risk score calculation includes an adjustment to account for the 

family rating rules proposed in the Market Reform Rule, which caps the number of 

children that can count toward the build-up of family rates at three. If risk scores were 
 84 

calculated as the member month-weighted average of all enrollee risk scores, plan 

average risk scores would tend to misrepresent the risk issuers take on for family policies 

that include children that do not count toward family rates. In general, children tend to 

have lower risk scores than adults, and without an adjustment the average risk score for 

family policies including more than three children would tend to be lower than the 

average risk score of family policies with three or fewer children, despite the fact that 

family policies with more than three children face more uncompensated risk. 

The formula below shows the proposed plan average risk score calculation 

including the risk of all members on the policy, including those children not included in 

the premium. 

where 

PLRSi is plan i's average plan liability risk score, the subscript e denotes each enrollee 

within the plan, 

PLRSe is each enrollee’s individual plan liability risk score, 

Me is the number of months during the risk adjustment period the enrollee e is enrolled in 

the plan, and 

Mb is the number of months during the risk adjust period the billable member b is 

enrolled in the plan (billable members exclude children who do not count towards family 

rates). 

The proposed payment transfer formula uses the plan average risk score to 

calculate transfers. The plan average risk scores would be calculated using the applicable 

risk adjustment model described in section III.B.3.b. of this proposed rule. The plan 

liability models would produce risk scores that reflect the health status of the plan’s 

enrollees and the AV of the plan. The AV adjustment in the proposed payment transfer 

formula would help ensure that transfers do not compensate plans for differences in AV 

(for which the plans may charge an appropriate premium). 
 85 

(B) Billable Members 

With the exception of the plan average risk score calculation discussed above, all 

of the other calculations used in the proposed payment transfer formula are based on 

billable members (that is, children who do not count toward family policy premiums are 

excluded). Member months, the State average premium, the allowable rating factor, and 

the geographic cost factor are all calculated based on billable members. 

(C) State Average Premium 

As noted above, we propose to use the State average premium as the basis of 

calculating payment transfers. The average premium calculation would be based on the 

total premiums assessed to enrollees, including the portion of premiums that are 

attributable to administrative costs. The State average premium would be calculated as 

the enrollment-weighted mean of all plan average premiums of risk adjustment covered 

plans in the applicable risk pool in the applicable market in the State. The State average 

premium calculation is based on billable member months and excludes member months 

for children that do not count toward family policy rates. Plan average premiums would 

be calculated from the actual premiums charged to their enrollees, weighted by the 

number of months enrolled. 

The proposed equations for these average premiums are: 

and 
 86 

The first equation calculates the State average premium as the average of 

individual plan averages, weighted by each plan’s share of statewide enrollment in the 

risk pool in the market, (based on billable member months). The second equation 

shows how the plan averages are calculated. This is the weighted mean over all 

subscribers s of subscriber premiums Ps, with Ms representing the number of billable 

member months of enrollment under the policy of each subscriber s. 

(D) Actuarial Value 

The proposed AV adjustment in the payment transfer formula would account for 

relative differences in plan liability due to differences in actuarial value. The AV 

adjustment helps to achieve the goal of compensating plans for risk selection while 

allowing other determinants of premiums – including the generosity of plan benefits – to 

be reflected in premiums. If the payment transfer formula were to ignore actuarial value, 

it would effectively force low-AV plans to subsidize high-AV plans. This is because the 

State average premium is calculated from all plans at all metal levels in the risk pool in 

the market. As a result, in the absence of an actuarial value adjustment, a bronze plan 

with a low risk score would see its transfer charge increased based on a State average 

premium that includes plans with more generous benefits. 

The AV adjustment would be based on the metal level actuarial value associated 

with each plan type (for example, all bronze health plans would be assigned an AV factor 

of .6 in the proposed payment transfer formula). Using the metal level actuarial value as 

the basis for this adjustment provides a simple and straightforward approach for 

estimating the impact of benefit design on plan liability. The standard metal level 

actuarial values approximate plan liability for the standard population (that is, plan 

liability in the absence of risk selection). Additionally, the adjustment should not be 
 87 

based on a plan’s actuarial value, including the de minimis range as computed by the AV 

calculator. The cost sharing assumptions in the HHS risk adjustment models correspond 

to the standard metal level actuarial values (for example, 0.6 a bronze plan), so the 

actuarial value adjustment in the payment transfer formula must also correspond to the 

standard metal level actuarial values. 

Table 9 shows the AV adjustment that would be used for each category of metal 

level plans. 

TABLE 9: Actuarial Value Adjustment Used for Each Metal Level in the Payment 

Transfer Formula 

Metal Level AV Adjustment 

Catastrophic 0.57 

Bronze 0.60 

Silver 0.70 

Gold 0.80 

Platinum 0.90 

(E) Allowable rating variation 

PHS Act section 2701, as added by the Affordable Care Act, establishes standards 

for plan premium rating. Rates can vary based on three enrollee characteristics – age, 

family size, and tobacco use – and geographic area within each State. Furthermore, the 

law limits the amount by which premiums may vary by age; the most expensive age 

group’s rating cannot be more than three times as high as the lowest (for adults age 21 or 

above), and rating based on tobacco use cannot exceed a 50 percent increment. Plans 

cannot base premiums on enrollee health status. In the proposed Market Reform Rule, 

we have issued proposed standards related to the rating rules under the Affordable Care 

Act. The proposed payment transfer formula discussed above assumes the rating 

standards of the proposed Market Reform Rule. The final payment transfer formula may 

require updating in the final Payment Notice to reflect any changes to the rating standards 

in the final Market Reform Rule. 
 88 

The proposed Allowable Rating Factor (ARF) adjustment in the payment transfer 

formula would account only for age rating. Tobacco use, wellness discounts, and family 

rating requirements would not be included in the payment transfer formula for the 

reasons specified below. Geographic cost variation is treated as a separate adjustment in 

the payment transfer formula. 

Age rating is permitted within limits to enable plans to be partially compensated 

for risk based on enrollee age. Under the proposed Market Reform Rule, each State 

would have a standard age curve that all issuers would be required to use. The 3:1 age 

rating restriction applies to the adults aged 21 and older. Age bands for individuals under 

21 would not be subject to the 3:1 restriction, but their corresponding rating factors 

would still be specified in the standard age curves. Each plan’s allowable rating factor 

would be calculated as the enrollment-weighted average of the age factor, based on the 

applicable standard age curve, across all of a plan’s enrollees. In operation, for the age 

rating factor included in the payment transfer formula, age would be calculated as the 

enrollee’s age at the time of enrollment, as outlined in the proposed Market Reform Rule. 

Under the proposed Market Reform Rule, premiums for families with three or 

fewer children would be calculated as the sum of individual rates for each individual 

within the family. These individual rates would be based on each person’s age, tobacco 

use, and geographic rating area. For families with more than three children, the family 

premium would be built up from the individual premiums of the parents plus the three 

oldest children. Additional children would not be reflected in the family premium. The 

proposed payment transfer formula does not include an explicit adjustment related to the 

family rating requirements, as rate setting would not include a family rating factor. 

Tobacco rating and wellness discounts are also not included in the proposed 

allowable rating factor adjustment. These rating factors are discretionary. HHS proposes 
 89 

not to include adjustments for these rating factors in the payment transfer formula to 

maintain issuer flexibility with respect to tobacco and wellness discount rating that is 

allowed by the Affordable Care Act. 

Table 10 shows a simplified example of how the ARF values would be calculated 

for three plans. 

TABLE 10: Example Allowable Rating Factor Calculation 

Age Band State AgeRating CurvePlan A Plan B Plan C State 

 Enrollment percentages (Share of member-months) 

21 1.000 33.30% 40.00% 10.00% 31.70% 

(Age bands from 22-39 omitted)

40 1.278 33.30% 40.00% 20.00% 33.30% 

(Age bands from 41-63 omitted)

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

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

ARF 1.758 1.511 2.456 1.793 

In Table 10, three plans constitute the entire risk pool in the market in the State. In 

practice, each State age rating curve would have 44 adult bands: one for each year from 

21 to 63, plus a 64-and-older band. In this example, we simplify by considering only 

three bands: 21, 40, and 64 and older. The second column shows the relative premiums 

for each age band; note that these values conform to the 3:1 rating restriction. 

Three plans are presented in the next three columns, followed by statewide totals. 

We assume Plan A’s enrollment of 300,000 member-months is equally distributed among 

the three age bands. Enrollment in Plan B is weighted toward younger ages, while Plan C 

captures a disproportionately older population. Statewide, these enrollments add up to a 

31.7 percent share in the age 21 band, 33.3 percent in 40 and older age band, and 35.0 

percent in 64 and older age band. 
 90 

Plan-specific ARF values are calculated similarly. For example, Plan C’s ARF is 

the sum of three products: 1.000*0.10 + 1.278*0.20 + 3.000*0.70 = 2.456. This value 

indicates that within the 3:1 rating restriction, Plan C would be expected to collect 

premiums that are higher than the State average due to Plan C’s enrollments skewing 

older. Plan A’s enrollees are slightly younger than the State average, which is also 

reflected in its 1.758 ARF, and Plan B’s enrollment is younger than Plan A. 

(F) Induced Demand 

Induced demand reflects differences in enrollee spending patterns attributable to 

differences in the generosity of plan benefits (as opposed to risk selection). Induced 

demand is a function of plan benefit design. We believe risk adjustment should not 

compensate a plan for differences in plan liability that are not attributed to the underlying 

health and demographic characteristics of the plan’s enrollees. In the absence of an 

induced demand adjustment, relative differences in induced demand may not be reflected 

in a plan’s post-transfer premiums. In other words, plans with relatively high AV and 

induced demand could receive larger transfers, allowing them to reduce the premium 

impact of induced demand. For example, a plan that experiences 10 percent higher 

utilization due to induced demand would have a post-transfer premium that is less than 10 

percent above an otherwise identical plan without induced demand. 

The expenditure data underlying the AV calculator includes an induced demand 

factor for each metal level. We propose to use the same induced demand factors in the 

payment transfer formula, shown in Table 11. 

TABLE 11: Induced Demand Adjustment Used for Each Metal Level in the 

Payment Transfer Formula 

Metal Level Induced Demand Adjustment 

Catastrophic 1.00 

Bronze 1.00 

Silver 1.03 

Gold 1.08 
 91 

Metal Level Induced Demand Adjustment 

Platinum 1.15 

(G) Geographic Area Cost Variation 

The proposed geographic cost factor (GCF) would be an adjustment in the 

payment transfer formula because there are some plan costs – such as input prices or 

utilization rates – that vary geographically and are likely to affect plan premiums. By 

including the adjustment, these costs would be reflected in premiums, rather than being 

offset by transfers. 

Excluding this adjustment would cause transfers to subsidize high-risk plans in 

high-cost areas at the expense of low-risk plans in low-cost areas. In a low-cost area, for 

example, a plan with lower-than-average risk enrollees would face a charge scaled to 

State average costs, which would be larger than would be appropriate in an area where 

costs are low. At the same time, the payment received by higher-than-average risk plans 

would be larger than necessary to compensate for the plan’s excess risk. This would 

disadvantage low-risk plans relative to high-risk plans in the low-cost area. The opposite 

would be true in high-cost areas. 

GCFs would be calculated for each rating area. These factors would be calculated 

based on the observed average silver plan premiums in a geographic area relative to the 

Statewide average silver plan premium. Using only silver plans as the basis of the 

adjustment would help control for differences in premiums across rating areas due to 

differential enrollment patterns in the available plan types. Additionally, the silver plan 

premiums used to calculate the adjustment must be standardized for age to isolate 

geographic cost differences in premiums. 

Calculation of the GCF would involve three steps. First, the average premium 

would be computed for each silver plan in each rating area (using the same formula that 
 92 

is used to compute plan premiums in the State average premium calculation discussed 

above). The calculation would be: 

Where, 

, is the average premium for plan i

s indexes all subscribers enrolled in the plan 

Ms is the number of billable member months for billable members under the 

policy of subscriber s 

Ps is the premium for subscriber s.

The second step would be to generate a set of plan average premiums that 

standardizes the premiums for age rating. Plan premiums are standardized for age by 

dividing the average plan premium by the plan rating factor, the enrollment-weighted 

rating factor applied to all billable members (discussed above). This formula would be: 

Where, is plan i's age standardized average premium, 

, is the average premium for plan i, and 

ARFi is the allowable rating factor. 

The third and final step would compute a GCF for each area and assign it to all 

plans in that area. This would be accomplished with the following calculation: 

This equation divides the enrollment-weighted average of standardized silverlevel plan premiums in a geographic area by the average of those premiums Statewide. 

The numerator’s summation is over all silver-level plans within plan i's geographic area, 
 93 

so . Similarly, the summation in the denominator is over all silver-level 

plans in the State, so . 

Using these formulas, the enrollment-weighted statewide average of plan GCF 

values would equal 1.0, so deviations from 1.0 can be interpreted as the percentage by 

which any geographic area’s costs deviate from the State average. In other words, a GCF 

equal to 1.15 indicates that the plan operates in a geographic area where costs are, on 

average, 15 percent higher than the Statewide average. 

(H) Calculation of the Plan Transfer Payments 

The PMPM transfer payment calculated from the proposed payment transfer 

formula would be multiplied by the total number of plan member months for billable 

members to calculate the total plan level payment. As discussed above, transfers would 

be calculated at the plan level within rating areas (that is, a plan operating in two rating 

areas would be treated as two separate plans for the purposes of calculating transfers). 

We welcome comment on this proposed payment transfer formula. 

d. Overview of the data collection approach 

In §153.20, we propose a technical correction to the definition of risk adjustment 

data collection approach. We propose to delete “and audited” so that the definition of 

risk adjustment data collection approach means “the specific procedures by which risk 

adjustment data is to be stored, collected, accessed, transmitted, validated and the 

applicable timeframes, data formats, and privacy and security standards.” This technical 

correction clarifies that auditing of risk adjustment data is not part of the risk adjustment 

data collection approach. Risk adjustment data should be audited during the data 

validation process, which is not a part of the risk adjustment methodology or data 

collection approach. 
 94 

We also propose to modify §153.340(b)(3) by adding the additional restriction 

that “Use and disclosure of personally identifiable information is limited to those 

purposes for which the personally identifiable information was collected (including for 

purposes of data validation).” This addition will further ensure the privacy and security 

of potentially sensitive data by limiting the use or disclosure of any personally 

identifiable information collected as a part of this program. 

The data collection approach HHS proposes to use when operating risk 

adjustment on behalf of the State is described in the applicable sections of section III.G. 

of this proposed rule and in the new proposed §153.700 through §153.730. 

We welcome comment on this proposed data collection approach. 

e. Schedule for risk adjustment 

Under §153.610(a), issuers of risk adjustment covered plans will provide HHS 

with risk adjustment data in the form and manner specified by HHS. Under the HHSoperated risk adjustment program, issuers will not send, but must make available to HHS, 

anonymized claims and enrollment data, as specified in section III.G. of this proposed 

rule, for benefit year 2014 beginning January 1, 2014. Enrollee risk scores will be 

calculated based on enrollee enrollment periods and claims dates of service that occur 

between January 1, 2014 and December 31, 2014. Enrollee risk scores for subsequent 

benefit years will be calculated based on claims and enrollment periods for that same 

benefit year. 

As set forth in the proposed §153.730, claims to be used in the risk score 

calculation must be made available to HHS by April 30 of the year following the benefit 

year. We believe this date provides for ample claims runout to ensure that diagnoses for 

the benefit year are captured, while providing HHS sufficient time to run enrollee risk 
 95 

score, plan average risk, and payments and charges calculations and meet the June 30 

deadline described at the redesignated §153.310(e). 

We welcome comment on this proposed schedule for risk adjustment. 

4. State alternate methodology 

a. Technical correction 

The Premium Stabilization Rule established standards for States that establish their 

own risk adjustment programs. Under the proposed revision to §153.310, a State may 

establish a risk adjustment program if it elects to operate an Exchange and is approved to 

operate risk adjustment in the State. If a State does not meet the requirements to operate 

risk adjustment, HHS will carry out all functions of risk adjustment on behalf of the 

State. In §153.320(a), we established that Federally certified methodologies must be 

used in the operation of the risk adjustment program, and defined the process by which a 

methodology may become Federally certified. In this proposed rule, we modify 

§153.320(a)(1) and (a)(2) to clarify that these methodologies must be published in “the 

applicable annual” notice of benefit and payment parameters as opposed to “an annual” 

HHS notice of benefit and payment parameters. This proposed change makes clear that 

methodologies must be certified for use each year. 

b. State alternate risk adjustment methodology evaluation criteria 

The Premium Stabilization Rule specified the information that a State will need to 

provide to support its request for HHS to certify an alternate risk adjustment 

methodology. In §153.330(a), we specified the elements required to be included with the 

request to HHS for certification of an alternate risk adjustment methodology. Section 

153.330(a)(1)(i) states that a request for certification for an alternate methodology must 

include the elements specified in §153.320(b), which includes a complete description of: 

(1) the risk adjustment model; (2) the calculation of plan average actuarial risk; (3) the 
 96 

calculation of payments and charges; (4) the risk adjustment data collection approach; 

and (5) the schedule for the risk adjustment program. Section 153.330(a)(1)(ii) states that 

the alternate methodology request must also include the calibration methodology and 

frequency of calibration, and §153.330(a)(1)(iii) provides that the request must include 

statistical performance metrics specified by HHS. Section 153.330(a)(2) requires that the 

request also include certain descriptive and explanatory information relating to the 

alternate methodology. 

Under our existing regulations, States wishing to submit an alternate risk 

adjustment methodology should do so by submitting the information described in this 

proposed rule to HHS at AlternateRAMethodology@cms.hhs.gov. As described in 

preamble to the Premium Stabilization Rule, at the Risk Adjustment Spring Meeting, and 

in technical assistance calls with States, requests for State alternate methodologies will be 

accepted up to 30 days after publication of this proposed rule. We will review a State’s 

request for certification of its alternate methodology only if it has submitted an Exchange 

Blueprint application and has indicated on that application its intent to operate a risk 

adjustment program in the State (or, in later years, if it is operating or has been approved 

to operate an Exchange). We expect to work with States as they develop their alternate 

methodologies. 

We noted in the Premium Stabilization Rule that we would provide greater detail 

about the process for receiving Federal certification of alternate risk adjustment 

methodologies in this proposed rule. We propose the following evaluation criteria to 

certify alternate risk adjustment methodologies. We propose to redesignate paragraph (b) 

of §153.330 to paragraph (c), and are proposing a new paragraph (b) that sets forth the 

evaluation criteria for alternate risk adjustment methodologies. In the new 

§153.330(b)(1), we propose to consider whether the alternate risk adjustment 
 97 

methodology meets criteria that correspond to the elements of the alternate methodology 

request described in paragraph §153.330(a)(1) and (2). Specifically, we will be 

evaluating the extent to which an alternate risk adjustment methodology: 

(i) Explains the variation in health care costs of a given population; 

(ii) Links risk factors to daily clinical practices and is clinically meaningful to 

providers; 

(iii) Encourages favorable behavior among providers and health plans and 

discourages unfavorable behavior; 

(iv) Uses data that is complete, high in quality, and available in a timely fashion; 

(v) Is easy for stakeholders to understand and implement; 

(vi) Provides stable risk scores over time and across plans; and 

(vii) Minimizes administrative costs. 

For example, to determine the extent that an alternate methodology explains the 

variation in health care costs of a given populations, we would consider whether the risk 

adjustment model was calibrated from data reflecting the applicable market benefits, was 

calibrated on a sample that is reasonably representative of the anticipated risk adjustment 

population, and was calibrated using a sufficient sample to ensure stable weights across 

time and plans. In addition, in evaluating this criterion, we would consider whether the 

methodology has suitably categorized the types of plans subject or not subject to risk 

adjustment, given the overall approach taken by the methodology and the goal of the 

program to account for plan average actuarial risk. States must provide a rationale for the 

methodology’s approach to the plans subject to risk adjustment. Under this proposed 

criteria, we would also evaluate the State’s method for calculating payments and charges, 

as described in section III.B.4.c., below. 
 98 

We also note that we would consider whether the alternate methodology 

discriminates against vulnerable populations or creates inappropriate incentives. 

Alternate methodologies must not discriminate against individuals because of age, 

disability, or expected length of life, and should take into account the health care needs of 

diverse segments of the risk adjustment population, including women, children, persons 

with disabilities, and other vulnerable groups. 

In the proposed §153.330(b)(2), we would consider whether the alternate 

methodology complies with the requirements of subpart D, especially §153.310(e) (as 

proposed to be renumbered) and §153.340. Section 153.310(e) requires alternate 

methodologies to have a schedule that provides annual notification to issuers of risk 

adjustment covered plans of payments and charges by June 30 of the year following the 

benefit year. Section 153.340(b)(1) sets forth a number of minimum requirements for 

data collection under risk adjustment, including standards relating to data privacy and 

security. While the Federal approach will not directly collect data from insurers, but 

instead will use a distributed approach that will not include personally identifiable 

information, the Premium Stabilization Rule gave States the flexibility to design their 

own data collection approach, provided privacy and security standards are met. The 

privacy and security of enrollees’ data is of paramount importance to HHS, and the data 

collection approach in an alternate methodology must protect personally identifiable 

information, if any, that is stored, transmitted, or analyzed, to be certified. The 

application for certification of the alternate methodology should identify which data 

elements contain personally identifiable information, and should specify how the State 

would meet these data and privacy security requirements. 

In §153.330(b)(3), we propose to consider whether the alternate risk adjustment 

methodology accounts for payment transfers across metal levels. We believe that sharing 
 99 

risk across metal levels is a critical part of a risk adjustment methodology as new market 

reforms are implemented because of the need to mitigate adverse selection across metal 

levels, as well as within metal levels. The proposed HHS risk adjustment methodology 

transfers funds between plans across metal levels, and under this proposal, State alternate 

methodologies must do so as well. 

For reasons described previously, under the proposed HHS risk adjustment 

methodology, we propose to apply risk adjustment to catastrophic plans in their own risk 

pool – that is, we would transfer funds between catastrophic plans, but not between 

catastrophic plans and metal level plans. For a number of plans, such as student health 

plans and plans not subject to the market reform rules, we have proposed not to transfer 

payments under the HHS risk adjustment methodology. However, as discussed above, 

we believe that States should have the flexibility to submit a methodology that transfers 

funds between these types of plans (either in their own risk pool or with the other metal 

levels). 

 In §153.330(b)(4), we propose to consider whether the elements of the alternate 

methodology align with each other. For example, the data collected through the data 

collection approach should align with the data required by the risk adjustment model to 

calculate individual risk scores. 

Alternate methodologies submitted by States that are approved as Federally 

certified risk adjustment methodologies for 2014 will be published in the final 2014 HHS 

notice of benefit and payment parameters. We envision working closely with States 

during the development of their alternate methodologies to ensure that they meet the 

criteria described above. We expect to have a number of meetings with any State 

proposing an alternate methodology during the certification process. During these 

meetings, we intend to provide input to States on whether their proposed alternate 
 100 

methodologies meet the given criteria. States will then have the opportunity to modify 

their alternate methodologies and request further review. We are committed to working 

with States in a collaborative fashion on these matters. 

c. Payment and Charges 

In the preamble to the Premium Stabilization Rule, we noted that we plan to 

establish a national method for calculation of payments and charges. The goal of the 

proposed payment transfer formula is to reduce the impact of risk selection on premiums 

while ensuring that payments and charges net to zero. A national method for the 

calculation of payments and charges would ensure a degree of consistency in the risk 

adjustment program from State to State, while allowing States to vary other elements of 

the program. However, we recognize that a uniform national method could limit States’ 

flexibility in developing their alternate risk adjustment methodologies. 

The proposed payment transfer formula (regardless of whether for a plan liability 

or total expenditure approach, as described in section III.B.3.10. utilizes the plan average 

risk score and the State average premium. The proposed HHS payment transfer formula 

is based on a plan liability model. States can adapt this formula to a total expenditure 

model by replacing the plan liability risk score in the formula with the total expenditure 

risk score of a plan, and multiplying the total expenditure risk score by an adjustment for 

AV. We propose to provide States the flexibility to select the adjustments used for the 

calculation of payments and charges in their alternate methodologies. The proposed HHS 

payment transfer formula will make adjustments for AV, age rating factor, geographic 

cost differences, and induced demand. States have the option of including or excluding 

any of these adjustments. States may also include other adjustments in the calculation of 

payments and charges under their alternate methodologies. Adjustments can be added to 

or removed from the basic payment transfer formula as long as these factors are 
 101 

normalized, so that transfers net to zero. We will work with States on a one-on-one basis 

in developing their payment transfer formulae for their alternate methodologies.

States may construct particular adjustment factors in different ways. For 

example, HHS would determine an adjustment for geographic cost differences by 

comparing the area premium to the State average premium. A State may elect to develop 

a different factor to adjust for geographic cost differences. As described above, we ask 

States to provide the adjustments, the associated factors or curves, and the rationale for 

the adjustments they plan to use for their alternate methodologies as part of their response 

to the criterion proposed in §153.330(b)(1). We believe this approach ensures a degree of 

consistency while allowing States flexibility for calculating payments and charges. 

5. Risk Adjustment Data Validation 

In §153.350, we specified standards applicable to States, or HHS on behalf of 

States, in validating risk adjustment data. Specifically, we required States operating risk 

adjustment programs and HHS to establish a process to appeal findings from data 

validation and allow the State, or HHS on behalf of the State, to adjust risk adjustment 

payments and charges based on data validation findings. The credibility of risk 

adjustment data, which results from a reliable data validation process, is important to 

establishing issuer confidence in the risk adjustment program. Moreover, as error rates 

derived from the results of data validation may be used to make adjustments to the plan 

average actuarial risk calculated for a risk adjustment covered plan, the data validation 

process will ensure that such transfers accurately reflect each plan’s average enrollee risk. 

In this proposed rule, we build upon guidance released in the Risk Adjustment Bulletin 

and in discussions held with stakeholders at the Risk Adjustment Spring Meeting to 

define data validation standards applicable to issuers of risk adjustment covered plans 

when HHS operates risk adjustment on behalf of a State. 
 102 

We propose that, beginning in 2014, HHS conduct a six-stage data validation 

program when operating risk adjustment on behalf of a State: (1) sample selection; (2) 

initial validation audit; (3) second validation audit; (4) error estimation; (5) appeals; and 

(6) payment adjustments. We discuss these concepts in greater detail below. We note 

States are not required to adopt this HHS data validation methodology. 

a. Data Validation Standards When HHS Operates Risk Adjustment 

We propose to add a new subsection, §153.630, which sets forth risk adjustment 

data validation standards applicable to all issuers of risk adjustment covered plans when 

HHS is operating risk adjustment. In §153.630(a), we propose a general standard that 

issuers of risk adjustment covered plans have an initial and second validation audit of risk 

adjustment data. These are the second and third stages of the six-stage data validation 

program described below. 

b. Data Validation Process When HHS Operates Risk Adjustment 

(1) Sample Selection 

Under the Premium Stabilization Rule, HHS will validate a statistically valid 

sample from each issuer that submits data for risk adjustment every year. As described 

above, sample selection is the first stage of HHS’ six-stage risk adjustment data 

validation process. HHS would select the sample for each issuer of a risk adjustment 

covered plan in accordance with standards discussed in this section. HHS would ensure 

that the data validation process reviews an adequate sample size of enrollees such that the 

estimated payment errors will be statistically sound and so that enrollee-level risk score 

distributions reflect enrollee characteristics for each issuer. The sample would cover 

applicable subpopulations for each issuer. For example, enrollees with and without risk 

adjustment diagnoses would be included in the sample. In determining the appropriate 

sample size for data validation, we recognize the need to strike a balance between 
 103 

ensuring statistical soundness of the sample and minimizing the operational burden on 

issuers, providers, and HHS. 

We expect that each issuer’s initial validation audit sample within a State will 

consist of approximately 300 enrollees, with up to two-thirds of the sample consisting of 

enrollees with HCCs. 

Note that any assumptions used by HHS that underlie the sample size 

determinations in the initial years of the program may be updated as we gain experience 

performing data validation for risk adjustment. Additionally, we will continue to 

evaluate population distributions to determine the sample subpopulations. We seek 

comment on this approach to sample selection, particularly on use of existing data 

validation program results that could be used to derive comparable estimates under this 

program. 

(2) Initial Validation Audit 

Once the audit samples are selected by HHS, issuers would conduct independent 

audits of the risk adjustment data for their initial validation audit sample enrollees, as set 

forth in §153.630(b). In §153.630(b)(1), we propose that issuers of risk adjustment 

covered plans engage one or more auditors to conduct these independent initial validation 

audits. We propose in §153.630(b)(2) through (4) that issuers ensure that initial 

validation auditors are reasonably capable of performing the audit, that the audit is 

completed, that the auditor is free from conflicts of interest, and that the auditor submits 

information regarding the initial validation audit to HHS in the manner and timeframe 

specified by HHS. These proposed requirements would ensure that the initial validation 

audit is conducted according to minimum audit standards, and that issuers or auditors 

transmit necessary information to HHS for use in the second validation audit. 
 104 

For the enrollees included in the HHS-specified audit sample, issuers of risk 

adjustment covered plans would provide enrollment and medical record documentation to 

the initial validation auditor to validate the demographic and health status data of each 

enrollee, as described above.21 We anticipate that issuers would have considerable 

autonomy in selecting their initial validation auditors. However, initial validation 

auditors must conduct data validation audits in accordance with audit standards 

established by HHS. We have identified three methods for establishing these standards: 

● HHS or an HHS-designated entity could prospectively certify auditors for these 

audits; 

● HHS could develop standards that issuers and initial validation auditors would 

follow, without any requirement of prior HHS certification or approval of auditors; or 

● HHS could issue non-binding, “best practice” guidelines for issuers and 

auditors. 

We request comment on these approaches and on any standards or best practices 

that should be applicable. Upon conclusion of the initial validation audit process, issuers 

of risk adjustment covered plans would be required to submit audit findings to HHS in 

accordance with the standards established by HHS. 

(3) Second Validation Audit 

We propose to retain an independent second validation auditor to verify the 

accuracy of the findings of the initial validation audit. We would select a sub-sample of 

initial validation audit sample enrollees for review by the second validation auditor. We 

would provide additional information pertaining to its approach for selecting the second 

validation audit sub-sample in future guidance. The second validation auditor would 

 

21 We note that issuers will need to link information on the dedicated distributed data environments with the 

information specified this proposed rule for data validation purposes. 
 105 

only review enrollee information that was or was to be originally presented during the 

initial validation audit. 

In §153.630(c), we establish standards for issuers of risk adjustment covered 

plans related to HHS’ second validation audit of risk adjustment data. These 

requirements establish minimum standards for issuer compliance with the second 

validation audit. We propose that an issuer of a risk adjustment covered plan comply 

with, and ensure the initial validation auditor complies with, HHS and the second 

validation auditor in connection with the second validation audit. Specifically, issuers 

would submit (or ensure their initial validation auditor submits) data validation 

information, as specified by HHS, from their initial validation audit for each enrollee 

included in the second validation audit sub-sample. Issuers would also transmit all 

information to HHS or its second validation auditor in an electronic format to be 

determined by HHS. The second validation auditor would inform the issuers of error 

findings based on their review of enrollees in the second validation audit subsample. 

(4) Error Estimation 

We would estimate risk score error rates based on the findings from the data 

validation process. Risk adjustment errors may include any findings that result in a 

change to the demographic or health status components of an enrollee’s risk score. This 

may include errors due to incorrect diagnosis coding, invalid documentation, missing or 

insufficient medical record documentation, or incorrect determination of enrollee 

demographic information. We are considering estimating changes in plan average 

actuarial risk for the issuer error rates calculated from data validation activities, with a 

suitable confidence interval. We plan to conduct analyses to determine the most effective 

methodology for adjusting plan risk scores for calculating risk adjustment payment 

transfers. 
 106 

Upon completion of the second validation audit and error estimation stages of 

HHS’s data validation process, we would provide each issuer with enrollee-level audit 

results and error estimates at the issuer level, based on the methodology described above. 

We are requesting comments on the described error estimation concepts. 

c. Appeals 

In accordance with §153.350(d), we provide an administrative process to appeal 

findings with respect to data validation. We propose in §153.630(d) that issuers may 

appeal the findings of a second validation audit or the application of a risk score error rate 

to its risk adjustment payments and charge. We anticipate that appeals would be limited 

to instances in which the audit was not conducted in accordance with second validation 

audit standards established by HHS. We will provide further detail on this process in 

future guidance or regulation, as appropriate. 

d. Payment Adjustments 

In accordance with 153.350(b), HHS may adjust charges and payments to a risk 

adjustment covered plan based on the recalculation of plan average actuarial risk 

following the data validation process. We anticipate that HHS would use a prospective 

approach when making such payment adjustments. We believe a prospective approach is 

appropriate because we anticipate issuers’ error estimates to be relatively stable from year 

to year. Further, we believe it is necessary to use a prospective approach to allow issuers 

and HHS sufficient time to complete the validation and appeals processes. Transfers for 

a given benefit year would likely be invoiced before the data validation process for that 

benefit year is completed. The prospective approach would ensure that issuers would not 

be subject to a second transfer for the benefit year. We would use an issuer’s data 

validation error estimates from the prior year to adjust the issuer’s average risk score in 

the current year for transfers. We request comments on this approach. 
 107 

As described previously, because the risk adjustment program transfers funds 

between issuers in a zero sum manner, trust in the system is important for the success of 

the program. We have proposed the data validation process described here to ensure that 

issuers comply with risk adjustment standards and to promote confidence in the risk 

adjustment program. As such, we propose in paragraph §153.630(e) that HHS may 

adjust payments and charges for issuers that do not comply with the initial or second 

validation audit standards set forth in §153.630(b) and (c). We seek comment on the 

types of adjustments that may be assessed on issuers that do not comply with parameters 

set forth in this proposed rule. 

e. Proposed HHS-Operated Data Validation Process for Benefit Years 2014 and 2015 

We propose that issuers of risk adjustment covered plans adhere to the data 

validation process outlined above beginning with data for the 2014 benefit year. 

However, we recognize the complexity of the risk adjustment program and the data 

validation process, and the uncertainty in the market that will exist in 2014. In particular, 

we are concerned that adjusting payments and charges without first gathering information 

on the prevalence of error could lead to a costly and potentially ineffective audit program. 

 Therefore, we are proposing that issuers conduct an initial validation audit and that we 

conduct a second validation audit for benefit year 2014 and 2015, but that we would not 

adjust payments and charges based on validation findings during these first two years of 

the program (that is, we would not adjust payments and charges based on validation 

results on data from the 2014 and 2015 benefit years). However, we would conduct all 

aspects of the data validation program other than adjusting payments and charges (though 

we would make adjustments under the proposed §153.630(e)) during the first two years 

of the program, including requiring the initial validation and second validation audits, and 

calculating error rates for each issuer. We believe that the data validation conducted 
 108 

during the first two years of the program will serve an important educational purpose for 

issuers and providers. Although we are proposing not to adjust payments and charges as a 

correction based on error estimates discovered, we note that other remedies, such as 

prosecution under the False Claims Act, may be applicable to issuers not in compliance 

with the risk adjustment program requirements. We have tried to balance the need to 

provide assurance to issuers that all risk adjustment data is adequate and that calculations 

are appropriate with the desire to limit burden and uncertainty in the initial years of 

program operation. 

This approach was taken with the Medicare Part C risk adjustment program – the 

data validation audit process was observed for several years before payment adjustments 

were made. We plan to work with issuers during the first two years of the data validation 

program, and will seek additional input on how to improve the process. We are 

requesting comments on this approach, particularly with respect to improvements to the 

data validation process generally, whether there are alternatives to forgoing changes to 

payments and charges that we should adopt, and what methods we should adopt to ensure 

data integrity in the first two years of the program. 

As part of our effort to refine the data validation program during the first two 

years, we are considering publishing a report on the error rates discovered during these 

first two years, and propose to use these results to inform our audit program. For this 

report, we may conduct special studies of the second validation audits aimed at 

comparing the error rate results of the initial validation auditors and second validation 

audits. For example, the second validation audits may be used to assess the extent to 

which auditor error contributed to the initial validation audit risk score error rate findings, 

and to determine whether discrepancies between the results of the two audits may result 
 109 

in adjustments to the estimated error rates calculated for the initial validation audit 

process. 

The second validation audits could also be used to assess the accuracy of the 

initial audit error rates at either the auditor or issuer level. Conducting the second 

validation audits at the auditor level in future years would allow us to examine the 

accuracy of the initial validation audit without having to draw large initial validation 

audit record samples from each issuer that participates in risk adjustment. We anticipate 

that a small number of audit firms will perform the majority of initial audits. We seek 

comment on the approaches outlined here, as well as additional approaches to data 

validation for risk adjustment. 

f. Data Security and Transmission 

In §153.630(f), we establish data security and transmission requirements for 

issuers related to the HHS data validation process. These requirements establish the 

manner in which issuers and auditors must transmit audit information, and ensure that 

any enrollee information that is transmitted is protected. In §153.630(f)(1), we propose 

that issuers submit any risk adjustment data and source documentation specified by HHS 

for the initial and second validation audits to HHS in the manner and timeframe 

established by HHS. We propose in §153.630(f)(2) that, in connection with the initial 

validation audit, the second validation audit, and any appeals, an issuer must ensure that 

it and its initial validation auditor complies with the security standards described at 

§164.308, §164.310, and §164.312. 

C. Provisions and Parameters for the Transitional Reinsurance Program 

The Affordable Care Act directs that a transitional reinsurance program be 

established in each State to help stabilize premiums for coverage in the individual market 

from 2014 through 2016. The reinsurance program is designed to alleviate the need to 
 110 

build into premiums the risk of enrolling individuals with significant unmet medical 

needs. By stabilizing premiums in the individual market equitably throughout the United 

States, the reinsurance program is intended to help millions of Americans purchase 

affordable health insurance, reduce unreimbursed usage of hospital and other medical 

facilities by the uninsured, and thereby lower medical expenses and premiums for all 

people with private health insurance. 

We aim to administer the reinsurance program to provide reinsurance payments in 

an efficient, fair, and accurate manner, where they are needed most, to effectively 

stabilize premiums nationally. In addition, we intend to implement the reinsurance 

program in a manner that minimizes the administrative burden of collecting contributions 

and making reinsurance payments. For example, HHS intends to collect contributions 

from health insurance issuers and self-insured group health plans22 in all States, including 

States that elect to operate their reinsurance programs. This would allow for a centralized 

and streamlined process for the collection of contributions, and would avoid 

inefficiencies related to using different processes in different States. This would also 

eliminate the need for States to send to HHS the contributions collected for the U.S. 

Treasury. Federal collections will also leverage economies of scale, reducing the overall 

administrative costs of the reinsurance program. 

We also intend to simplify collections by using a national per capita uniform 

contribution rate. Collection based on a per capita rate is simpler and easier to implement 

than other methods. In addition, in the HHS-operated reinsurance program, we propose 

 

22 As discussed in more detail below, Section 1341 of the Affordable Care Act provides that health 

insurance issuers and “third party administrators on behalf of group health plans” must make contributions 

to an applicable reinsurance entity. Although self-insured group health plans are ultimately liable for 

reinsurance contributions, a third-party administrator or administrative-services-only contractor may be 

utilized for transfer of the reinsurance contributions. For consistency, throughout this proposed rule, we 

will refer to these contributing entities as self-insured group health plans. 
 111 

to calculate reinsurance payments using the same distributed approach for data collection 

that we propose for operating risk adjustment on behalf of States.23 This will permit 

issuers to receive reinsurance payments using the same systems established for the risk 

adjustment program, resulting in less administrative burden and lower costs, while 

maintaining the security of identifiable health information. 

In this proposed rule, we propose modifications and refinements to the 

reinsurance program standards for States and issuers. These modifications further reduce 

the administrative burden of collecting contributions and making reinsurance payments, 

and will more effectively stabilize premiums in the individual markets in all States across 

the country. In particular, we propose uniform reinsurance payment parameters to be 

used across all States. These payment parameters would be used to calculate reinsurance 

payments in all States, regardless of whether the State or HHS on behalf of the State 

operates the reinsurance program. We also propose that HHS will collect contributions 

from health insurance issuers and self-insured group health plans in all States, including 

States that elect to operate their own reinsurance programs. In addition, we propose a 

national, uniform calendar under which reinsurance contributions will be collected from 

all contributing entities, and reinsurance payments will be disbursed to issuers of nongrandfathered individual market plans. Furthermore, we propose to distribute reinsurance 

payments based on the need for reinsurance payments in each State. Because reinsurance 

contributions and reinsurance needs will vary significantly between States, we believe a 

policy of disbursing reinsurance payments solely in a State in which the contributions are 

collected would not meet the States’ individual reinsurance needs, would not fulfill 

HHS’s obligation to provide equitable allocation of these funds under section 

 

23 See our discussion of this distributed approach in section III.G. of this proposed rule. 
 112 

1341(b)(2)(B) of the Affordable Care Act as well as would disbursing reinsurance 

payments in the manner proposed in this proposed rule. 

We note that these proposals reflect changes from policies set forth in the 

Premium Stabilization Rule. The principal proposed changes from the policies in the 

Premium Stabilization Rule include: 

• Uniform reinsurance payment parameters to be used by all States; 

• A uniform reinsurance contribution collection and payment calendar; 

• A one-time annual reinsurance contribution collection, instead of quarterly 

collections in a benefit year; 

• Collection of reinsurance contributions by HHS under the national 

contribution rate from both health insurance issuers and self-insured group health plans; 

• A limitation on States’ ability to change reinsurance payment parameters from 

those that HHS establishes in the annual HHS notice of benefit and payment parameters 

— a State may only propose supplemental reinsurance payment parameters if the State 

elects to collect additional funds for reinsurance payments or use additional State funds 

for reinsurance payments; and 

• A limitation on States that seek additional reinsurance funds for administrative 

expenses, such that the State must have its applicable reinsurance entity collect those 

additional funds. 

These modifications are proposed in addition to other regulatory changes outlined 

below to ensure effective administration of the transitional reinsurance program. 

1. State Standards Related to the Reinsurance Program 

a. State notice of benefit and payment parameters 

 HHS intends to establish a reinsurance contribution and payment process and 

reinsurance payment parameters that will be applicable in all States, and proposes to 
 113 

amend the requirements set forth in the Premium Stabilization Rule accordingly. First, 

instead of allowing a State establishing its own reinsurance program to modify, via a 

State notice of benefit and payment parameters, the data collection frequency for issuers 

to receive reinsurance payments from those specified in this proposed rule, we propose 

that all States be required to use the annual payment schedule set forth in this proposed 

rule. As such, we propose to amend §153.100(a)(1) to remove the reference to State 

modification of data collection frequency. Under this proposal, the frequency with which 

data must be submitted for reinsurance payments would follow a national schedule. 

Under §153.100(a)(1), HHS would continue to allow a State establishing a reinsurance 

program to modify the data requirements for health insurance issuers to receive 

reinsurance payments, provided that the State publishes a State notice of benefit and 

payment parameters and specifies these modifications in that notice. 

We propose to also amend §153.100 by deleting subparagraph (a)(5), and to add 

§153.232 to direct a State that elects to collect additional reinsurance contributions for 

purposes of making additional reinsurance payments or to use additional funds for 

reinsurance payments under §153.220(d) to publish supplemental State reinsurance 

payment parameters in its State notice of benefit and payment parameters under proposed 

§153.100(a)(2). 

The Premium Stabilization Rule stated that a State establishing a reinsurance 

program may either directly collect additional reinsurance contributions for 

administrative expenses and reinsurance payments when a State elects to collect from 

health insurance issuers, or may elect to have HHS collect contributions from health 

insurance issuers for administrative expenses. However, we now propose to change this 

policy such that a State operating its own reinsurance program will no longer be 

permitted to have HHS collect additional funds for administrative expenses. To create 
 114 

the most effective reinsurance program, we are proposing to collect reinsurance 

contributions on behalf of all States from both health insurance issuers and self-insured 

group health plans in the aggregate, and we propose to disburse reinsurance payments 

based on a State’s need for reinsurance payments, not based on where the contributions 

were collected. As a result, HHS will no longer be able to attribute additional funds for 

administrative expenses back to a State. We propose to amend §153.100(a)(3) to clarify 

that these additional contributions may only be collected by a State operating its own 

reinsurance program in that State. 

We also propose to delete §153.110(d)(5) and §153.210(a)(2)(iii), because we 

propose to disburse reinsurance contributions in proportion to the need for reinsurance 

payments. Thus, a State’s allocation of reinsurance contributions among applicable 

reinsurance entities is no longer necessary. Accordingly, we also propose to delete 

§153.110(d)(2), which requires that a State notice include an estimate of the number of 

enrollees in fully insured plans with the boundaries of each reinsurance entity. 

We further propose that HHS collect all contributions under a national 

contribution rate from all health insurance issuers in all States. We therefore propose to 

delete all requirements regarding the State collection of reinsurance contributions from 

health insurance issuers under the national contribution rate, including §153.100(a)(2) 

and §153.110(b), removing the requirement that a State publish a State notice of benefit 

and payment parameters to announce its intention to collect reinsurance contributions 

from health insurance issuers. We also propose to delete §153.110(d)(4) which requires 

States to publish in their State notices an estimate of the reinsurance contributions that 

will be collected by each applicable reinsurance entity. 
 115 

b. Reporting to HHS 

We propose to amend §153.210 by adding paragraph (e), which directs a State 

that establishes a reinsurance program to provide information regarding all requests for 

reinsurance payments received from all reinsurance-eligible plans for each quarter during 

the benefit year. We propose to use this information to monitor requests for reinsurance 

payments and reinsurance contribution amounts throughout the benefit year, to ensure 

equitable reinsurance payments in all States. 

To provide issuers in the individual market with information to assist in 

developing rates in subsequent benefit years, we propose in §153.240(b)(2) that a State, 

or HHS on behalf of the State, provide issuers of reinsurance-eligible plans with quarterly 

estimates of the expected requests for reinsurance payments for the reinsurance-eligible 

plan under both the national payment parameters and any State supplemental payments 

parameters set forth under §153.232, as determined by HHS or the State’s reinsurance 

entity, as applicable. These quarterly estimates would provide issuers with the timely 

information that is needed to support the calculation of expected claims assumptions that 

are key to rate development and ultimately, premium stabilization. We expect that an 

issuer of a reinsurance-eligible plan will use this information to estimate total reinsurance 

payments to be received for future benefit years, and will use its best estimates of future 

payments to reduce premiums. It is our expectation that reinsurance payments will be 

used in the rate setting process to reduce premiums, fulfilling the goals of the reinsurance 

program. 

The national reinsurance payment parameters are calculated to expend all 

reinsurance contributions collected under the national contribution rate. Similarly, the 

additional funds collected by the State for reinsurance payments or additional State funds 

are to be reasonably calculated, under proposed §153.232(a)(2), to cover all additional 
 116 

reinsurance payments projected to be made under the State supplemental payment 

parameters. Because the national payment parameters and State supplemental payment 

parameters apply to two separate funds, we believe that it is important for a State to 

distinguish between reinsurance payments made under the two different sets of 

parameters so that reinsurance-eligible plans can understand how each reinsurance 

program will likely affect claims costs. HHS intends to collaborate with issuers and 

States to develop these early notifications. We therefore propose in §153.240(b) that 

each State, or HHS on behalf of the State, ensure that each applicable reinsurance entity 

provides to issuers the expected requests for reinsurance payments made under §153.410 

and §152.232 for all reinsurance-eligible plans in the State within 60 days of the end of 

each quarter, with a final report for a benefit year sent to issuers no later than June 30 of 

the year following the applicable benefit year. 

For efficient administration of the reinsurance program, HHS must ensure that 

reinsurance contributions are appropriately spent on reinsurance payments. To this end, 

we intend to obtain reports regarding reinsurance payments and administrative expenses 

from States that establish a reinsurance program. We intend to provide details of these 

reports in future regulation and guidance, along with similar standards for Exchanges, the 

risk adjustment program, and other Affordable Care Act programs. 

c. Additional State Collections 

Under the current §153.220(g) of the Premium Stabilization Rule (which we now 

propose to redesignate as paragraph (d)), a State operating its own reinsurance program 

may elect to collect more than the amounts based on the national contribution rate set 

forth in the annual HHS notice of benefit and payment parameters for administrative 

expenses of the applicable reinsurance entity or additional reinsurance payments. Under 

§153.220(h)(1) of the Premium Stabilization Rule (now proposed to be designated as 
 117 

§153.220(d)(2)), a State must notify HHS within 30 days after publication of the draft 

annual HHS notice of benefit and payment parameters for the applicable benefit year of 

the additional contribution rate that it elects to collect. 

We note that although the proposed §153.220(d) specifies that a State may elect to 

collect additional reinsurance contributions for administrative expenses or reinsurance 

payments, nothing in section 1341 of the Affordable Care Act or this proposed rule gives 

a State the authority to collect from self-insured group health plans covered by ERISA, 

and that Federal law generally preempts State law that relates to an ERISA-covered plan. 

d. State Collections 

We propose that HHS collect reinsurance contributions from all contributing 

entities regardless of whether a State elects to operate the reinsurance program or have 

HHS operate the reinsurance program on its behalf. As reinsurance payments will be 

calculated based on aggregate contributions collected and total requests for reinsurance 

payments nationally, we believe that a centralized collection process for all contributing 

entities will facilitate the allocation and disbursement of funds. This will also streamline 

the contribution submissions process for health insurance issuers who operate in multiple 

States. 

We propose to amend §153.220(a) to set forth that if a State establishes a 

reinsurance program, HHS will collect all reinsurance contributions from all contributing 

entities for that State under the national contribution rate. We, therefore, propose to 

delete §153.220(a)(2), as we are no longer requiring a State to ensure that the applicable 

reinsurance entity accepts contributions for reinsurance contribution enrollees who reside 

in that State with respect to health insurance issuers from HHS. In accordance with the 

proposed change regarding State collections, we also propose to delete §153.220(b) of the 

Premium Stabilization Rule, which directs a State operating its own reinsurance program 
 118 

to notify HHS of its intention to collect from its health insurance issuers for the 2014 

benefit year by December 1, 2012. If finalized as proposed, we would consider any 

notification a State made to HHS pursuant to §153.220(b) of the Premium Stabilization 

Rule prior to the finalization of this proposed rule to be withdrawn. We propose to delete 

§153.220(f) of the Premium Stabilization Rule which includes requirements on the State 

collection of reinsurance contributions from health insurance issuers. 

 Section 153.220(e) of the Premium Stabilization Rule requires that reinsurance 

contributions are allocated as required in the annual HHS notice of benefit and payment 

parameters for the applicable benefit year such that contributions allocated for 

reinsurance payments within the State are only used for reinsurance payments, and 

contributions allocated for payments to the U.S. Treasury are paid in the timeframe and 

manner established by HHS. We also propose that any additional contributions collected 

under §153.220(d)(1)(ii) and allocated for reinsurance payments under the State 

supplemental reinsurance payment parameters must be used to make reinsurance 

payments. We also propose under §153.220(d)(3) that States may use additional funds, 

which were not collected as additional reinsurance contributions, to make reinsurance 

payments under the State supplemental reinsurance payment parameters. This would 

allow States to use other revenue sources, including funds collected for State high-risk 

pools as discussed below, for supplemental reinsurance payments, as determined by a 

State. This proposal ensures that additional State collections for reinsurance payments 

and other State funds, as applicable, may be used to reduce premiums. 

e. High-Risk Pools 

We are not proposing further requirements for State high-risk pools beyond those 

currently provided at §153.250. As stated in that section, a State must eliminate or 

modify its high-risk pool to the extent necessary to carry out the transitional reinsurance 
 119 

program. However, any changes made to a State high-risk pool must comply with the 

terms and conditions of Grants to States for Operation of Qualified High-Risk Pools 

(CFDA 93.780), as applicable. Under §153.400(a)(2)(iii), State high-risk pools are 

excluded from making reinsurance contributions and cannot receive reinsurance 

payments. Because State high-risk pools and the transitional reinsurance program both 

target high-cost enrollees, high-risk pools can operate in parallel with the reinsurance 

program, serving a distinct subset of the target population. States have the flexibility to 

decide whether to maintain, phase out, or eliminate their high-risk pools. 

The Affordable Care Act permits a State to coordinate its high-risk pool with the 

reinsurance program “to the extent not inconsistent” 24 with the statute. Thus, a State 

may coordinate the entry of the State’s high-risk pool enrollees into the Exchange. HHS 

is examining ways in which a State could continue its program to complement Exchange 

coverage. We clarify that nothing in the Premium Stabilization Rule prevents a State that 

establishes its own reinsurance program from using State money designated for its own 

high-risk pool towards the reinsurance program. However, a State may not use funds 

collected for the reinsurance program for its high-risk pool. As indicated in the Premium 

Stabilization Rule, funds collected for the transitional reinsurance program can only be 

used for the purpose of making payments under the reinsurance program or for 

administering that program. Finally, a State could designate its high-risk pool as its 

applicable reinsurance entity, provided that the high-risk pool meets all applicable criteria 

for being an applicable reinsurance entity. 

 

24 See section 1341(d) of the Affordable Care Act. 
 120 

2. Contributing Entities and Excluded Entities 

Section 1341 of the Affordable Care Act provides that health insurance issuers 

and third party administrators on behalf of group health plans must make payments to an 

applicable reinsurance entity. Thus, with respect to insured coverage, issuers are liable 

for making reinsurance contributions. With respect to self-insured group health plans, the 

plan is liable, although a third-party administrator or administrative-services-only 

contractor may be utilized to transfer reinsurance contributions on behalf of a self-insured 

group health plan, at that plan’s discretion. A self-insured, self-administered group 

health plan without a third-party administrator or administrative-services-only contractor 

would make its reinsurance contributions directly.25 

Under section 1341(b)(3)(B)(i) of the Affordable Care Act, contribution amounts 

for reinsurance are to reflect, in part, an issuer’s “fully insured commercial book of 

business for all major medical products.” We interpret this statutory language to mean 

that an issuer will not be required to make reinsurance contributions for coverage that is 

non-commercial, or that is not “major medical coverage.”26 We believe it is implicit in 

the statute that contributions are not required for health insurance coverage that is not 

regulated by a State department of insurance and written on a policy form filed with and 

approved by a State department of insurance (but contributions are generally required for 

self-insured plans even though they are not regulated by a State department of insurance). 

We discuss below our intent to exclude certain types of plans. 

 

25In the Certain Preventive Services under the Affordable Care Act Advanced Notice of Proposed 

Rulemaking (77 FR 16501) published March 21, 2012, potential changes to the reinsurance contributions 

were contemplated with regard to a potential religious accommodation for contraception coverage for 

certain self-funded plans. If the rules regarding the religious accommodation include changes to the 

reinsurance contribution, this policy may be changed accordingly. 

26 We note that under the definition of reinsurance-eligible plan in §153.20, if a plan is excluded from 

making reinsurance contributions, the plan is excluded from the reinsurance program altogether, (that is, a 

plan excluded from making reinsurance contributions cannot receive reinsurance payments). 
 121 

Major medical coverage: Section 1341(b)(3)(B)(i) of the Affordable Care Act 

refers to “major medical products,” but does not define the term. For the purpose of the 

reinsurance program, our view is that coverage provided under a major medical product 

(which we refer to in Part 153 as “major medical coverage”) is health coverage, which 

may be subject to reasonable enrollee cost sharing, for a broad range of services and 

treatments including diagnostic and preventive services, as well as medical and surgical 

conditions provided in various settings, including inpatient, outpatient, and emergency 

room settings.27 Thus, for purposes of the reinsurance program, we believe that coverage 

that is limited in scope (for example, dread disease coverage, hospital indemnity 

coverage, stand-alone vision coverage, or stand-alone dental coverage) or extent (for 

example, coverage that is not subject to the Public Health Service Act section 2711 and 

its implementing regulations) would not be major medical coverage. 

In this proposed rule, we also propose to clarify that when an individual has both 

Medicare coverage and employer-provided group health coverage, Medicare Secondary 

Payer (MSP) rules under section 1862(b) of the Social Security Act would be applicable, 

and the group health coverage would be considered major medical coverage only if the 

group health coverage is the primary payer of medical expenses (and Medicare is the 

individual’s secondary payer) under the MSP rules. For example, a working 68-year-old 

employee enrolled in a group health plan who, under the MSP rules, is a beneficiary for 

whom Medicare is the secondary payer would be counted for purposes of reinsurance 

contributions. However, a 68-year-old retiree enrolled in a group health plan who, under 

the MSP rules, is a beneficiary for whom Medicare is the primary payer would not be 

 

27 See Section 7F of the National Association of Insurance Commissioners (NAIC) Model Regulation to 

Implement the Accident and Sickness Insurance Minimum Standards Model Act, (MDL-171) for a 

definition of major medical expense coverage. Available at: 

http://naic.org/committees_index_model_description_a_c.htm#accident_health.
 122 

counted for purposes of reinsurance contributions. Similarly, an individual covered 

under a group health plan with only Medicare Part A (hospitalization) benefits (where 

Medicare is the primary payer), would not be counted for purposes of reinsurance 

contributions because the group health coverage would not be considered major medical 

coverage. We also intend that individuals entitled to Medicare because of disability or 

end-stage renal disease that have other primary coverage under the MSP rules be treated 

consistently with the working aged, as outlined above. We seek comment on this 

proposal. 

Commercial book of business: Section 1341(b)(3)(B)(i) of the Affordable Care 

Act refers to a “commercial book of business,” which we interpret to refer to large and 

small employer group policies and individual market policies. For example, products 

offered by an issuer under Medicare Part C or D would be part of a “governmental” book 

of business, not a commercial book of business. Similarly, a plan or coverage offered by 

a Tribe to Tribal members and their spouses and dependents, and other persons of Indian 

descent closely affiliated with the Tribe in the capacity of the Tribal members as Tribal 

members (and not in their capacity as current or former employees of the Tribe or their 

dependents) would not be part of a commercial book of business, but a plan or coverage 

offered by the Federal government, a State government or a Tribe to employees (or 

retirees or dependents) because of a current or former employment relationship would be 

part of a commercial book of business. We seek comment on this interpretation. 

Policy filed and approved in a State. We propose that a group or individual policy 

for health insurance coverage not filed and approved in a State be excluded from 

reinsurance contributions. To illustrate, if group coverage for employees substantially all 

of whom work outside the United States – “expatriate coverage” – is not written on a 

form filed with and approved by a State department of insurance, we propose to exclude 
 123 

it from reinsurance contributions because that coverage is not within the jurisdiction of a 

State department of insurance and the Affordable Care Act generally does not apply. On 

the other hand, insured group “expatriate” coverage written on a form filed with and 

approved by a State department of insurance would be subject to the Affordable Care Act 

and required to make reinsurance contributions. Individual coverage for overseas travel 

would be similarly treated. 

Therefore, we propose to amend §153.400(a)(1) to state that a contributing entity 

must make reinsurance contributions on behalf of its self-insured group health plans and 

health insurance coverage except to the extent that: 

(1) The plan or coverage is not major medical coverage; 

(2) In the case of health insurance coverage, the coverage is not considered to be 

part of an issuer’s commercial book of business; or 

(3) In the case of health insurance coverage, the coverage is not issued on a form 

filed and approved by a State insurance department.28 We seek comment on this 

proposal. 

Under the requirements proposed in §153.400(a)(1), and for clarity, we propose in 

§153.400(a)(2) to explicitly exclude the following types of plans and coverage from 

reinsurance contributions. 

 (a) Excepted benefits: We are not proposing a change in policy with respect to 

plans or health insurance coverage that consist solely of excepted benefits as defined by 

section 2791(c) of the PHS Act, as currently described in §153.400(a)(2) of the Premium 

Stabilization Rule. 

 

28We note that contributions are generally required for self-insured plans even if not regulated by a State 

department of insurance because self-insured plans are not typically regulated by these entities. 
 124 

 (b) Private Medicare, Medicaid, CHIP, State high-risk pools, and basic health 

plans: Both Medicare and Medicaid have fee-for-service or traditional components, as 

well as managed care components, in which private health insurance issuers, under 

contract with HHS, deliver the requisite benefits. As discussed in the preamble to the 

Premium Stabilization Rule, these private Medicare or Medicaid plans are excluded from 

reinsurance contributions because they are not part of a commercial book of business. 

We also clarify that for purposes of reinsurance contributions, programs under the CHIP, 

Federal and State high-risk pools (including the Pre-Existing Condition Insurance Plan 

Program under section 1101 of the Affordable Care Act), and basic health plans 

described in section 1331 of the Affordable Care Act are similarly excluded from 

reinsurance contributions because they are not part of a commercial book of business. 

 (c) Health Reimbursement Arrangements (HRAs) integrated with a group health 

plan: HRAs are group health plans that are governed by IRS Notice 2002-45 (2002-2 CB 

93) and subsequent guidance. An employer credits an amount to each eligible 

employee’s HRA which the employees may use for allowable medical expenses. An 

HRA that is integrated with a group health plan is excluded from reinsurance 

contributions because it is integrated with major medical coverage.29 We note that 

reinsurance contributions generally would be required for that group health plan. 

 (d) Health saving accounts (HSAs): Eligible individuals covered by a high 

deductible health plan may have the option of contributing to an HSA. An HSA is an 

individual arrangement governed by section 223(d) of the Code and subsequent guidance 

that consists of a tax-favored account held in trust to accumulate funds that can be used to 

pay qualified medical expenses of the beneficiary. An HSA is offered along with a high 

 

29 The preamble to interim final regulations under section 2711 of the PHS Act provides that an HRA 

satisfies the prohibition on annual and lifetime limits in section 2711 when it is integrated as part of a group 

health plan with other coverage that satisfies section 2711. See 75 FR 37190-37191.
 125 

deductible health plan. For purposes of reinsurance contributions, we believe that an 

HSA is not major medical coverage because it consists of a fixed amount of funds that 

are available for both medical and non-medical purposes, and would be excluded from 

reinsurance contributions. We note that reinsurance contributions generally would be 

required for the high deductible health plan because we believe that it would constitute 

major medical coverage. 

 (e) Health flexible spending arrangements (FSAs): Health FSAs are usually 

funded by an employee’s voluntary salary reduction contributions under section 125 of 

the Code. Because section 9005 of the Affordable Care Act limits the annual amount that 

may be contributed by an employee to a health FSA to $2,500, we believe that a health 

FSA is not major medical coverage under this rule, and therefore would be excluded from 

reinsurance contributions. 

 (f) Employee assistance plans, disease management programs, and wellness 

programs: Employee assistance plans, disease management programs, and wellness 

programs typically provide ancillary benefits to employees that in many cases do not 

constitute major medical coverage. Employers, plan sponsors, and health insurance 

issuers have flexibility in designing these programs to provide services to provide 

additional benefits to employees, participants, and beneficiaries. If the program (whether 

self-insured or insured) does not provide major medical coverage, we propose to exclude 

it from reinsurance contributions. We also note that employers that provide one or more 

of these ancillary benefits often sponsor major medical plans, which will be subject to 

reinsurance contributions, absent other excluding circumstances. 

 (g) Stop-loss and indemnity reinsurance policies: For the purpose of reinsurance, 

we propose to exclude stop-loss insurance and indemnity reinsurance because they do not 

constitute major medical coverage for the applicable covered lives. Generally, a stop-loss 
 126 

policy is an insurance policy that protects against health insurance claims that are 

catastrophic or unpredictable in nature and provides coverage to self-insured group health 

plans once a certain level of risk has been absorbed by the plan. Stop-loss insurance 

allows an employer to self-insure for a set amount of claims costs, with the stop-loss 

insurance covering most or all of the remainder of the claims costs that exceed the set 

amount. An indemnity reinsurance policy is an agreement between two or more 

insurance companies under which the reinsuring company agrees to accept and to 

indemnify the issuing company for all or part of the risk of loss under policies specified 

in the agreement and the issuing company retains its liability to, and its contractual 

relationship with, the applicable lives covered. We believe these types of policies were 

not intended to be subject to the reinsurance program. No inference is intended as to 

whether stop-loss or reinsurance policies constitute health insurance policies for purposes 

other than reinsurance contributions. 

 (h) Military Health Benefits: TRICARE is the component of the Military Health 

System that furnishes health care insurance to active duty and retired personnel of the 

uniformed services (and covered dependents) through private issuers under contract. 

Although TRICARE coverage is provided by private issuers, it is not part of a 

commercial book of business because the relationship between the uniformed services 

and service members differs from the traditional employer-employee relationship in 

certain important respects. For example, service members may not resign from duty 

during a period of obligated service, may not form unions, and may be subject to 

discipline for unexcused absences from duty. Consequently, our view is that such 

military health insurance is excluded from reinsurance contributions. 

In addition to TRICARE, the Military Health System also includes health care 

services that doctors, dentists, and nurses provide to uniformed services members on 
 127 

military bases and ships. The Veterans Health Administration within the U.S. 

Department of Veterans Affairs provides health care to qualifying veterans of the 

uniformed services at its outpatient clinics, hospitals, medical centers, and nursing 

homes. Similarly, because we do not consider these programs to be part of a commercial 

book of business, our view is that such military health programs are excluded from 

reinsurance contributions. 

 (i) Tribal coverage: As discussed above, we propose to exclude plans or 

coverage (whether fully insured or self-insured) offered by a Tribe to Tribal members and 

their spouses and dependents (and other persons of Indian descent closely affiliated with 

the Tribe) in the capacity of the Tribal members as Tribal members (and not in their 

capacity as current or former employees of the Tribe or their dependents) as this would 

not be part of a commercial book of business. However, a plan or coverage offered by 

the Federal government, a State government or a Tribe to employees (or retirees or 

dependents) because of a current or former employment relationship would be part of a 

commercial book of business. Similarly, coverage provided to Indians through programs 

operated under the authority of the Indian Health Service (IHS), Tribes or Tribal 

organizations, or Urban Indian organizations, as defined in section 4 of the Indian Health 

Care Improvement Act would be excluded from reinsurance contributions because it is 

not part of a commercial book of business. We note, however, that a plan or coverage 

offered by a Tribe to its employees (or retirees or dependents) on account of a current or 

former employment relationship would not be excluded. 

3. National Contribution Rate 

a. 2014 Rate 

As described in §153.220(c) (previously designated as §153.220(e)), we intend to 

publish in the annual HHS notice of benefit and payment parameters the national per 
 128 

capita reinsurance contribution rate for the upcoming benefit year. We read section 1341 

of the Affordable Care Act to specify the total contribution amounts to be collected from 

contributing entities (reinsurance pool) as $10 billion in 2014, $6 billion in 2015, and $4 

billion in 2016. Additionally, we read sections 1341(b)(3)(B)(iv) and 1341(b)(4) of the 

Affordable Care Act to direct the collection of funds for contribution to the U.S. Treasury 

each year as $2 billion in 2014, $2 billion in 2015, and $1 billion in 2016. These 

amounts, payable to the U.S. Treasury, total $5 billion, which we note is the same amount 

as that appropriated for the Early Retiree Reinsurance Program under section 1102 of the 

Affordable Care Act. It has been suggested that the collection of the $2 billion in funds 

payable to the U.S. Treasury for 2014 should be deferred until 2016, thereby lowering the 

contribution rate in 2014, while ensuring that the total amount specified by law is 

returned to the U.S. Treasury by the end of this temporary program. We seek comment 

on whether such a delayed collection would be consistent with the statutory requirements 

described above and whether there are other steps that could be taken to reduce the 

burden of these collections on contributing entities. Finally, section 1341(b)(3)(B)(ii) of 

the Affordable Care Act allows for the collection of additional amounts for administrative 

expenses. Taken together, these three components make up the total dollar amount to be 

collected from contributing entities for each of the three years of the reinsurance program 

under the national per capita contribution rate. 

Each year, the national per capita contribution rate will be calculated by dividing 

the sum of the three amounts (the national reinsurance pool, the U.S. Treasury 

contribution, and administrative costs) by the estimated number of enrollees in plans that 

must make reinsurance contributions: 
 129 

As an illustration, under the Affordable Care Act, the 2014 national reinsurance 

pool is $10 billion, and the contribution to the U.S. Treasury is $2 billion. The amount to 

be collected for administrative expenses for benefit year 2014 would be $20.3 million (or 

0.2 percent of the $10 billion dispersed), discussed in greater detail below. The HHS 

estimate of the number of enrollees in plans that must make reinsurance contributions 

that total the $12.02 billion described above yields a per capita contribution rate of $5.25 

per month in benefit year 2014. We seek comment on this calculation. 

Section 153.220(c) (previously designated as §153.220(e)) provides that HHS will 

set in the annual HHS notice of benefit and payment parameters for the applicable benefit 

year the national contribution rate and the proportion of contributions collected under the 

national contribution rate to be allocated to reinsurance payments, payments to the U.S. 

Treasury, and administrative expenses. In Table 12 below, we specify these proportions 

(or amounts, as applicable): 

TABLE 12: Proportion of Contributions Collected under the National Contribution 

Rate for Reinsurance Payments, Payments to U.S. Treasury and Administrative 

Expenses 

 

Proportion or amount for: If total contribution 

collections under the 

national contribution rate 

are less than or equal to 

$12.02 billion 

If total contribution 

collections under the 

national contribution rate 

are more than $12.02 

billion 

Reinsurance payments 83.2 percent ($10 

billion/$12.02 billion) 

The difference between 

total national collections 

and those contributions 

allocated to the U.S. 

Treasury and administrative 

expenses 

Payments to the U.S. 

Treasury 

16.6 percent ($2 

billion/$12.02 billion) 

$2 billion 

Administrative expenses 0.2 percent ($20.3 $20.3 million 
 130 

million/$12.02 billion) 

As shown in Table 12, if the total amount of contributions collected is less than 

equal to $12.02 billion, we propose to allocate approximately 83.2 percent of the 

reinsurance contributions collected to reinsurance payments, 16.6 percent of the 

reinsurance contributions collected to the U.S. Treasury and 0.2 percent of the 

reinsurance contributions collected to administrative expenses. 

Section III.C.6. of this proposed rule provides details on the methodology we used 

to develop enrollment estimates for the national per capita contribution rate. 

b. Federal Administrative Fees 

As described in the Premium Stabilization Rule, HHS would collect reinsurance 

contributions from self-insured group health plans, even if a State is operating its own 

reinsurance program. As noted above, we propose that HHS also collect reinsurance 

contributions from health insurance issuers, even if a State is operating its own 

reinsurance program. In this proposed rule, we estimate the Federal administrative 

expenses of operating the reinsurance program in 2014 to be approximately $20.3 

million, or approximately 0.2 percent of the $10 billion in reinsurance funds to be 

distributed in 2014. We believe this figure reflects the Federal government’s significant 

economies of scale in operating the program, and estimate a national per capita 

contribution rate of $0.11 annually for HHS administrative expenses. 

 As shown in Table 13, we expect to apportion the annual per capita amount of 

$0.11 of administrative expenses as follows: $0.055 of the total amount collected per 

capita for administrative fees for the collection of contributions from health insurance 

issuers and self-insured group health plans; and $0.055 of the total amount collected per 
 131 

capita for administrative fees for reinsurance payment activities, supporting the 

administration of payments to issuers of reinsurance-eligible plans. 

TABLE 13: Breakdown of Administrative Expenses (annual, per capita) 

Item Estimated Cost 

Collecting contributions from health insurance issuers and 

self-insured group health plans 

$0.055 

Payment activities $0.055 

Total annual per capita fee for HHS to perform all 

reinsurance functions 

$0.11 

If HHS operates the reinsurance program on behalf of a State, HHS would retain 

the annual per capita fee for HHS to perform all reinsurance functions, which would be 

$0.11. If a State operates its own reinsurance program, HHS would transfer $0.055 of the 

per capita administrative fee to the State for purposes of administrative expenses incurred 

in making reinsurance payments, and retain the remaining $0.055 to offset the costs of 

contribution collection. We note that the administrative expenses for reinsurance 

payments will be distributed in proportion to the State-by-State total requests for 

reinsurance payments made under the national payment parameters. We seek comment 

on this approach, and other reasonable, administratively simple approaches that may be 

used to calculate administrative costs. 

4. Calculation and Collection of Reinsurance Contributions 

a. Calculation of Reinsurance Contribution Amount and Timeframe for Collections 

We intend to administer the reinsurance program in a manner that minimizes the 

administrative burden on health insurance issuers and self-insured group health plans, 

while ensuring that contributions are calculated accurately. Thus, we propose in 

§153.400(a) and §153.240(b)(1), respectively, to collect and pay out reinsurance funds 

annually to minimize the costs of administering the program and the burden on 

contributing entities. If we were to collect and make reinsurance payments throughout 
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the benefit year, we would likely be required to hold the disbursement of a large portion 

of the reinsurance payments until the end of the benefit year to ensure an equitable 

allocation of payments. This would deprive contributing entities of the use of those funds 

during the benefit year, and we believe that the proposed §153.400(a) and §153.240(b)(1) 

would address this issue. However, we note that this approach would delay the receipt of 

some reinsurance payments for individual market issuers, and solicit comment on the 

benefits and burdens for issuers, States, and other stakeholders of a more frequent 

collections and payment cycle. 

Under the Premium Stabilization Rule, HHS would collect reinsurance 

contributions through a per capita assessment on contributing entities. To clarify how 

this assessment is made, we propose to add §153.405, which provides that the reinsurance 

contribution of a contributing entity be calculated by multiplying the average number of 

covered lives of reinsurance contribution enrollees during the benefit year for all of the 

contributing entity’s plans and coverage that must pay reinsurance contributions, by the 

national contribution rate for the applicable benefit year. 

We also propose to amend §153.405(b) to require that, no later than November 15 

of benefit year 2014, 2015, and 2016, as applicable, a contributing entity must submit to 

HHS an annual enrollment count of the average number of covered lives of reinsurance 

contribution enrollees for each benefit year. The count must be determined as specified 

in proposed §153.405(d), (e), (f), or (g) as applicable. We propose to amend §153.400(a) 

so that each contributing entity makes reinsurance contributions at the national 

contribution rate annually and in a manner specified by HHS. We also propose to amend 
 133 

§153.400(a) so that each contributing entity makes reinsurance contributions under any 

additional applicable State supplemental contribution rate, if a State elects to collect 

additional contributions for administrative expenses or reinsurance payments under 

§153.220(d), annually and in a manner specified by the State. We believe this annual 

collection schedule will ensure a more accurate count of a contributing entity’s average 

covered lives, and would avoid the need for any initial estimates and subsequent 

reconciliation to account for fluctuations in enrollment during the course of the benefit 

year. 

 Under §153.405(c)(1), within 15 days of submission of the annual enrollment 

count or by December 15, whichever is later, HHS will notify each contributing entity of 

the reinsurance contribution amounts to be paid based on that annual enrollment count. 

We specify in §153.405(c)(2) that a contributing entity remit contributions to HHS within 

30 days after the date of the notification of contributions due for the applicable benefit 

year. The amount to be paid by the contributing entity must be based upon the 

notification received under §153.405(c)(1). 

 Counting Methods for Health Insurance Issuers: In §153.405(d), we propose a 

number of methods that a health insurance issuer may use to determine the average 

number of covered lives of reinsurance contribution enrollees under a health insurance 

plan for a benefit year for purposes of the annual enrollment count. These methods 

promote administrative efficiencies by building on the methods permitted for purposes of 

the fee to fund the Patient-Centered Outcomes Research Trust Fund (the PCORTF Rule), 

modified so that a health insurance issuer may determine an annual enrollment count 
 134 

during the fourth quarter of the benefit year.30 Thus, under each of these methods, the 

number of covered lives will be determined based on the first nine months of the benefit 

year. 

(1) Actual Count Method: Under the PCORTF Rule, an issuer may use the 

“actual count method” to determine the number of lives covered under the plan for the 

plan year by calculating the sum of the lives covered for each day of the plan year and 

dividing that sum by the number of days in the plan year. We propose that, for 

reinsurance contributions purposes, a health insurance issuer would add the total number 

of lives covered for each day of the first nine months of the benefit year and divide that 

total by the number of days in those nine months. 

(2) Snapshot Count Method: Under the PCORTF Rule, a health insurance issuer 

may use the “snapshot count method” generally by adding the total number of lives 

covered on a certain date during the same corresponding month in each quarter, or an 

equal number of dates for each quarter, and dividing the total by the number of dates on 

which a count was made. For reinsurance contributions purposes, an issuer would add 

the totals of lives covered on a date (or more dates if an equal number of dates are used 

for each quarter) during the same corresponding month in each of the first three quarters 

of the benefit year, (provided that the dates used for the second and third quarters must be 

within the same week of the quarter as the date used for the first quarter), and divide that 

total by the number of dates on which a count was made. For this purpose, the same 

months must be used for each quarter (for example, January, April and July). 

(3) Member Months Method or State Form Method: Under the PCORTF Rule, a 

health insurance issuer may use the “Member Months Method” or “State Form Method” 

 

30 See the proposed rule published on April 17, 2012 (77 FR 22691). Once the PCORTF Rule is finalized, 

we may modify the methods of reporting contained in this rulemaking. 
 135 

by using data from the NAIC Supplemental Health Exhibit or similar data from other 

State forms. However, data from these forms may be out of date at the time of the annual 

enrollment count submission, and we believe that it is important that health insurance 

issuers achieve an accurate count of covered lives, particularly for individual market 

plans. We expect that the individual market would be subject to large increases in 

enrollment between 2014 and 2016. Therefore, we propose a modified counting method 

based upon the ratio of covered lives per policy in the NAIC or State form. Specifically, 

we propose that health insurance issuers using this method multiply the average number 

of policies for the first nine months of the applicable benefit year by the ratio of covered 

lives per policy calculated from the NAIC Supplemental Health Care Exhibit (or from a 

form filed with the issuer’s State of domicile for the most recent time period). Issuers 

would count the number of policies in the first nine months of the applicable benefit year 

by adding the total number of policies on one date in each quarter, or an equal number of 

dates for each quarter (or all dates for each quarter), and dividing the total by the number 

of dates on which a count was made. 

 For example, if a health insurance issuer indicated on the NAIC form for the most 

recent time period that it had 2,000 policies covering 4,500 covered lives, it would apply 

the ratio of 4,500 divided by 2,000, equaling 2.25 to the number of policies it had over 

the first three quarters of the applicable benefit year. If the issuer had an average of 

2,300 policies in the three quarters of the applicable benefit year, it would report 2.25 

multiplied by 2,300 as the number of covered lives for the purposes of reinsurance 

contributions. 

Counting Methods for Self-Insured Group Health Plans: In §153.405(e), we 

propose a number of methods that a self-insured group health plan may use to determine 

the average number of covered lives for purposes of the annual enrollment count. These 
 136 

methods mirror the methods permitted to sponsors of self-insured group health plans 

under the PCORTF Rule, modified slightly for timing, so that enrollment counts may be 

obtained on a more current basis. 

(1) Actual Count Method or Snapshot Count Method: We propose that selfinsured plans, like health insurance issuers, may use the actual count method or snapshot 

count method as described above. 

(2) Snapshot Factor Method: Under the PCORTF Rule, a plan sponsor generally 

may use the “snapshot factor method” by adding the totals of lives covered on any date 

(or more dates if an equal number of dates are used for each quarter) during the same 

corresponding month in each quarter, and dividing that total by the number of dates on 

which a count was made, except that the number of lives covered on a date is calculated 

by adding the number of participants with self-only coverage on the date to the product of 

the number of participants with coverage other than self-only coverage on the date and a 

factor of 2.35. 31 For this purpose, the same months must be used for each quarter (for 

example, January, April, July, and October). For reinsurance contributions purposes, a 

self-insured group health plan would use this PCORTF counting method over the first 

three quarters of the benefit year, provided that for this purpose, the corresponding dates 

for the second and third quarters of the benefits year must be within the same week of the 

quarter as the date selected for the first quarter. 

(3) Form 5500 Method: Under the PCORTF Rule, a plan sponsor may use the 

“Annual Return/Report of Employee Benefit Plan” filed with the Department of Labor 

(Form 5500) by using data from the Form 5500 for the last applicable plan year. We 

 

31 The preamble to the proposed PCORTF Rule explains that “the 2.35 dependency factor reflects that all 

participants with coverage other than self-only have coverage for themselves and some number of 

dependents. The Treasury Department and the IRS developed the factor, and other similar factors used in 

the regulations, in consultation with Treasury Department economists and in consultation with plan 

sponsors regarding the procedures they currently use for estimating the number of covered individuals.”
 137 

propose that, for purposes of reinsurance contributions, a self-insured group health plan 

may also rely upon such data, even though the data may reflect enrollment in a previous 

benefit year. Our modeling of the 2014 health insurance marketplace, discussed in 

section III.C.6. of this proposed rule, suggests that enrollment in self-insured group health 

plans is less likely to fluctuate than enrollment in the individual market. Thus, we 

propose that a self-insured group plan may calculate the number of lives covered for a 

plan that offers only self-only coverage by adding the total participants covered at the 

beginning and end of the benefit year, as reported on the Form 5500, and dividing by 

two. Additionally, a self-insured group plan that offers self-only coverage and coverage 

other than self-only coverage may calculate the number of lives covered by adding the 

total participants covered at the beginning and the end of the benefit year, as reported on 

the Form 5500. 

Counting Methods for Plans with Self-insured and Insured Options: An employer 

may sponsor a group health plan that offers one or more coverage options that are selfinsured and one or more other coverage options that are insured. In §153.405(f), we 

propose that to determine the number of covered lives of reinsurance contribution 

enrollees under a group health plan with both self-insured and insured options for a 

benefit year must use one of the methods specified in either §153.405(d)(1) or 

§153.405(d)(2) – the “actual count” method or “snapshot count” for health insurance 

issuers. 

Aggregation of self-insured group health plans and health insurance plans: We 

propose in §153.405(g)(1) that if a plan sponsor maintains two or more group health 

plans or health insurance plans (or a group health plan with both insured and self-insured 

components) that collectively provide major medical coverage for the same covered lives, 

which we refer to as “multiple plans” for the purpose of the reinsurance program, then 
 138 

these multiple plans must be treated as a single self-insured group health plan for 

purposes of calculating any reinsurance contribution amount due under paragraph (c) of 

this section. This approach would prevent the double counting of a covered life for major 

medical coverage offered across multiple plans, and prohibit plan sponsors that provide 

such major medical coverage from splitting the coverage into separate arrangements to 

avoid reinsurance contributions on the grounds that it does not offer major medical 

coverage. 

For purposes of §153.405(g)(1), the plan sponsor is responsible for paying the 

applicable fee. We propose to define “plan sponsor” in proposed §153.405(g)(2) based 

on the definition of the term in the PCORTF Rule.32 We propose to define “plan 

sponsor” as: 

 (A) The employer, in the case of a plan established or maintained by a single 

employer; 

(B) The employee organization, in the case of a plan established or maintained by 

an employee organization; 

(C) The joint board of trustees, in the case of a multi-employer plan (as defined in 

section 414(f) of the Code); 

(D) The committee, in the case of a multiple employer welfare arrangement; 

(E) The cooperative or association that establishes or maintains a plan established 

or maintained by a rural electric cooperative or rural cooperative association (as such 

terms are defined in section 3(40)(B) of ERISA); 

(F) The trustee, in the case of a plan established or maintained by a voluntary 

employees’ beneficiary association (meaning that the association is not merely serving as 

 

32 If the definition of “plan sponsor” is revised in the final PCORTF Rule, we intend to revise the definition 

proposed herein to maintain consistency.
 139 

a funding vehicle for a plan that is established or maintained by an employer or other 

person); 

(G) In the case of a plan, the plan sponsor of which is not described in (A) 

through (F) above, the person identified or designated by the terms of the document 

under which the plan is operated as the plan sponsor, provided that designation is made 

and consented to, by no later than the date by which the count of covered lives for that 

benefit year is required to be provided. After that date, the designation for that benefit 

year may not be changed or revoked, and a person may be designated as the plan sponsor 

only if the person is one of the persons maintaining the plan (for example, one of the 

employers that is maintaining the plan with one or more other employers); or 

(H) In the case of a plan the sponsor of which is not described in (A) through (F) 

above, and for which no identification or designation of a plan sponsor has been made 

pursuant (G), each employer or employee organization that maintains the plan (with 

respect to employees of that employer or employee organization), and each board of 

trustees, cooperative or association that maintains the plan. 

Exceptions: We propose two exceptions to this aggregation rule, in 

§153.405(g)(3). First, if the benefits provided by any health insurance or self-insured 

group health plans are limited to excepted benefits within the meaning of section 2791(c) 

of the PHS Act (such as stand-alone dental or vision benefits), the excepted benefits 

coverage need not be aggregated with other plans for purposes of this section. Second, if 

benefits provided by any health insurance or self-insured group health plan are limited to 

prescription drug coverage, that prescription drug coverage need not be aggregated so as 

to reduce the burden on sponsors who have chosen to structure their coverage in that 

manner. As discussed in section III.C.2. of this proposed rule, coverage that consists 

solely of prescription drug or excepted benefits is not major medical coverage. If 
 140 

enrollees have major medical coverage and separate coverage consisting of prescription 

drug or excepted benefits, reinsurance contributions only would be required with respect 

to the major medical coverage. Reinsurance contributions would not be required with 

respect to the same enrollees’ prescription drug or excepted benefits coverage, and 

consequently, double counting of covered lives will not occur. 

 Multiple Plans: In §153.405(g)(4), we propose counting requirements for multiple 

plans in which at least one of the plans is an insured plan (covered in §153.405(g)(4)(i)), 

and multiple self-insured group health plans not including an insured plan (covered in 

§153.405(g)(4)(ii)). First, we anticipate that a plan sponsor will generate or obtain a list 

of the participants in each plan and then analyze the lists to identify those participants 

that have major medical coverage across all the plans collectively. To calculate the 

average number of covered lives of reinsurance contribution enrollees across multiple 

plans, we propose that a plan sponsor must use one of the methods applicable to health 

insurance plans or self-insured group health plans under §153.405(d) and §153.405(e), 

respectively, applied across the multiple plans as a whole. We also propose to require 

reporting to HHS or the applicable reinsurance entity concerning multiple plans, as 

discussed in §153.405(g)(4). Additionally, it is important to note that the reinsurance 

program operates on a benefit year basis as discussed in section III.C.5. of this proposed 

rule, which is defined at §153.20 of this part (by reference to §155.20) as the calendar 

year, and the applicable counting methods all apply on that basis, no matter the plan year 

applicable to particular plans. 

 Multiple Group Health Plans Including an Insured Plan: When one or more of the 

multiple group health plans is an insured plan, we propose that the actual count method 

for health insurance issuers in §153.405(d)(1) or the snapshot count method for health 

insurance issuers in §153.405(d)(2) must be used. We propose to prohibit the use of the 
 141 

“Member Months Method” or “State Form Method” to count covered lives across 

multiple insured plans because those methods would not easily permit aggregate 

counting, since the identities of the covered lives are not available on the applicable 

forms. We propose that the plan sponsor must determine and report, in a timeframe and 

manner established by HHS, to HHS (or, the applicable reinsurance entity if the multiple 

plans all consist solely of health insurance plans and the applicable reinsurance entity of a 

State is collecting contributions from health insurance issuers in such State): (1) the 

average number of covered lives calculated; (2) the counting method used; and (3) the 

names of the multiple plans being treated as a single group health plan as determined by 

the plan sponsor and reported to HHS. 

 Multiple Self-Insured Group Health Plans Not Including an Insured Plan: We 

describe the counting provisions applicable to multiple self-insured group health plans 

(that is, when none of the plans is an insured plan) in proposed paragraph (g)(4)(ii) of this 

section. There are four counting methods available for self-insured plans which are set 

forth in proposed §153.405(e)(1) through §153.405(e)(4) of this section. Proposed 

§153.405(e)(1) permits a plan sponsor to use the actual count method under 

§153.405(d)(1) or the snapshot count method under §153.405(d)(2) that are also available 

for insured plans. Proposed paragraph (e)(2) permits an additional method (the snapshot 

factor method) for self-insured plans. We propose not to permit a plan sponsor to use the 

fourth method, the “Form 5500 Method” as described in proposed §153.405(e)(3) to 

count covered lives across multiple self-insured plans because that method would not 

easily permit aggregate counting, since the identities of the covered lives are not available 

on that form. Thus, we propose three possible methods for multiple self-insured plans 

under paragraph (g)(4)(ii). We further propose that the plan sponsor must report, in a 

timeframe and manner established by HHS, to HHS: (1) the average number of covered 
 142 

lives calculated; (2) the counting method used; and (3) the names of the multiple plans 

being treated as a single group health plan as determined by the plan sponsor. 

 Consistency with PCORTF Rule Not Required: We intend to allow a contributing 

entity to use a different counting method for the annual enrollment count of covered lives 

for purposes of reinsurance contributions from that used for purposes of the return 

required in connection with the PCORTF Rule. Because time periods and counting 

methods may differ, we would not require that a contributing entity submit consistent 

estimates of its covered lives in the return required in connection with the PCORTF Rule 

and the annual enrollment count required for reinsurance contributions (although these 

counts should be performed in accordance with the rules of the counting method chosen). 

However, when calculating the average number of covered lives across two or more plans 

under proposed paragraph (g), the same counting method must be used across all of the 

multiple plans, because they would be treated as a single plan for counting purposes. 

We welcome comments on this approach to counting covered lives for 

reinsurance contributions. 

b. State Use of Contributions Attributed to Administrative Expenses 

To achieve the purposes of the reinsurance program, reinsurance contributions 

collected must be appropriately spent on reinsurance payments, payments to the U.S. 

Treasury, and on reasonable expenses to administer the reinsurance program. Therefore, 

we provide guidance on three restrictions that we intend to propose on the use of 

reinsurance contributions for administrative expenses, to permit States that participate in 

the reinsurance program to accurately estimate the cost of administrative expenses. 

While we will provide details of those standards in future regulation and guidance, along 

with similar standards for Exchanges, the risk adjustment program, and other Affordable 

Care Act programs, we provide below an overview of our intentions. 
 143 

First, we intend to apply the prohibition described in section 1311(d)(5)(B) of the 

Affordable Care Act to the reinsurance program so that reinsurance funds intended for 

administrative expenses cannot be used for staff retreats, promotional giveaways, 

excessive executive compensation, or promotion of Federal or State legislative or 

regulatory modifications. Second, we intend to propose that reinsurance funds intended 

for administrative expenses may not be used for any expense not necessary to the 

operation and administration of the reinsurance program. Third, we intend to propose 

that an applicable reinsurance entity must allocate any shared, indirect, or overhead costs 

between reinsurance-related and other State expenses based on generally accepted 

accounting principles, consistently applied. An applicable reinsurance entity would be 

required to provide HHS, in a timeframe and manner specified by HHS, a report setting 

forth and justifying its allocation of administrative costs. We welcome comments on 

these intended proposals. 

5. Eligibility for Reinsurance Payments under Health Insurance Market Rules 

We are proposing to add §153.234 to clarify that, under either the reinsurance 

national payment parameters or the State supplemental reinsurance payment parameters, 

if applicable, a reinsurance-eligible plan’s covered claims costs for an enrollee incurred 

prior to the application of 2014 market reform rules – §147.102 (fair health insurance 

premiums), §147.104 (guaranteed availability of coverage, subject to the student health 

insurance provisions at §147.145), §147.106 (guaranteed renewability of coverage, 

subject to the student health insurance provisions at §147.145), §156.80 (single risk 

pool), and Subpart B 156 (essential health benefits package) – do not count toward either 

the national or State supplemental attachment points, reinsurance caps, or coinsurance 

rates. Unlike plans subject to the market reform rules under the Affordable Care Act, 

plans not subject to these 2014 market reforms rules may use several mechanisms to 
 144 

avoid claims costs for newly insured, high-cost individuals by excluding certain 

conditions (for example, maternity coverage for women of child-bearing age), by denying 

coverage to those with certain high-risk conditions, and by pricing individual premiums 

to cover the costs of providing coverage to such individuals. (We note that student health 

plan eligibility would be subject to the modified guaranteed availability and guaranteed 

issue requirements only, to the extent that they apply, as set forth in §147.145, and we 

would require that the student health plans only meet those modified requirements to be 

eligible for reinsurance payments.) The market reform rules will be effective for the 

individual market for policy years33 beginning on or after January 1, 2014, and as a result, 

policies that are issued in 2013 will be subject to these rules at the time of renewal in 

2014, and therefore, become eligible for reinsurance payments at the time of renewal in 

2014. 

We believe that providing reinsurance payments only to those reinsurance-eligible 

plans that are subject to the 2014 market reform rules better reflects the reinsurance 

program’s purpose of mitigating premium adjustments to account for risk from newly 

insured, high-cost individuals. We also propose that State-operated reinsurance programs 

similarly limit eligibility for reinsurance payments. We recognize that this policy 

contrasts with the approach proposed for State-operated risk adjustment programs, under 

which HHS is proposing to permit States to choose to risk adjust plans not subject to the 

2014 market reform rules. Because some States may have enacted State-specific rating 

and market reforms that they believe would justify the inclusion of these plans in risk 

adjustment before these plans’ renewal dates, permitting State flexibility on the 

 

33 As defined at 45 CFR 144.103, “policy year means in the individual health insurance market the 12-

month period that is designated as the policy year in the policy documents of the individual health 

insurance coverage. If there is no designation of a policy year in the policy document (or no such policy 

document is available), then the policy year is the deductible or limit year used under the coverage. If 

deductibles or other limits are not imposed on a yearly basis, the policy year is the calendar year.” 
 145 

applicability of risk adjustment to plans not subject to the 2014 market reform rules 

furthers the goals of the risk adjustment program. However, we believe that State 

flexibility for eligibility for reinsurance payments does not further the goal of the 

reinsurance program. 

Also, we intend to operate the reinsurance program on a calendar year basis, 

which we believe makes the most sense from policy and administrative perspectives. 

First, we believe that there is ambiguity in section 1341 of the Affordable Care Act as to 

whether the reinsurance program is to be administered on a plan year or calendar year 

basis. Some provisions of section 1341 concerning contributions from and payments to 

issuers use the term “plan year.” However, other provisions of section 1341—notably 

sections 1341(b)(4), 1341(b)(3)(B)(iv) and 1341(c)(1)(A)—contemplate that the 

transitional reinsurance program would run with the calendar year. Second, a calendar 

year based program would ensure adequate collections in the early part of the program 

and to preserve fairness in making reinsurance payments. Third, implementing the 

reinsurance program on a calendar year basis permits the reinsurance program schedule 

to coincide with the MLR and the temporary risk corridors program schedules, both of 

which operate on a calendar year basis. Finally, we believe that the purpose of the 

reinsurance program is to stabilize premiums beginning in 2014, when the Exchanges 

begin to operate. We believe that the statute reflects this intent in section 1341(c)(1)(A) 

of the Affordable Care Act, which states that the purpose of an applicable reinsurance 

entity is “to help stabilize premiums for coverage in the individual market in a State 

during the first three years of operation of an Exchange for such markets within the State 

when the risk of adverse selection related to new rating rules and market changes is 

greatest.” 

We welcome comments on this proposal. 
 146 

6. Reinsurance Payment Parameters 

 As described in the Premium Stabilization Rule, reinsurance payments to eligible 

issuers will be made for a portion of an enrollee’s claims costs paid by the issuer that 

exceeds an attachment point, subject to a reinsurance cap. The coinsurance rate, 

attachment point, and reinsurance cap are the reinsurance “payment parameters.” Section 

1341(b)(2)(B) of the Affordable Care Act directs the Secretary, in establishing standards 

for the transitional reinsurance program to include a formula for determining the amount 

of reinsurance payments to be made to issuers for high-risk individuals that provides for 

the equitable allocation funds. Using the Secretary’s authority under this provision, we 

propose to amend the policy described in the Premium Stabilization Rule by establishing 

uniform, “national” reinsurance payment parameters that will be applicable to the 

reinsurance program for each State, whether or not operated by a State. We believe that 

using uniform, national payment parameters would result in equitable access to the 

reinsurance funds across States, while furthering the goal of premium stabilization across 

all States by disbursing reinsurance contributions where they are most needed. 

The primary purpose of the transitional reinsurance program is to stabilize 

premiums by setting the reinsurance payment parameters to achieve the greatest impact 

on rate setting, and therefore, premiums, through reductions in plan risk, while 

complementing the current commercial reinsurance market. In contrast to commercial 

reinsurance, which is used to protect against risk, the primary purpose of the reinsurance 

program is to stabilize premiums in the individual market from 2014 through 2016. The 

reinsurance program is designed to protect against issuers’ potential perceived need to 

raise premiums due to the implementation of the 2014 market reform rules, specifically 

guaranteed availability. Even though HHS expects that any potential new high-cost 

claims from newly insured individuals would be balanced out by low-cost claims from 
 147 

many newly insured individuals who enter the individual market as a result of the 

availability of premium tax credits, more affordable coverage, the minimum coverage 

provision, and greater transparency and competition in the market, the reinsurance 

program is designed to alleviate the concern of new high-cost claims from newly insured 

individuals. 

Therefore, we propose that the 2014 national payment parameters be established 

at an attachment point of $60,000, when reinsurance payments would begin, a national 

reinsurance cap of $250,000, when the reinsurance program stops paying claims for a 

high-cost individual, and a uniform coinsurance rate of 80 percent, meant to reimburse a 

proportion of claims between the attachment point and reinsurance cap while giving 

issuers an incentive to contain costs. These three proposed payment parameters would 

help offset high-cost enrollees, without interfering with traditional commercial 

reinsurance, which typically has attachment points in the $250,000 range. We estimate 

that these national payment parameters will result in total requests for reinsurance 

payments of approximately $10 billion. With the coinsurance rate, reinsurance cap, and 

attachment point fixed uniformly across all States, we believe that the reinsurance 

program would have the greatest equitable impact on premiums across all States. We 

believe that these proposed national payment parameters best address the reinsurance 

program’s goals to promote national premium stabilization and market stability while 

providing plans incentives to continue effective management of enrollee costs. We 

intend to continue to monitor individual market enrollment and claims patterns to 

appropriately disburse reinsurance payments throughout each of the benefit years. 

To assist with the development of the payment parameters, HHS developed a 

model that estimates market enrollment incorporating the effects of State and Federal 

policy choices and accounting for the behavior of individuals and employers, the 
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Affordable Care Act Health Insurance Model (ACAHIM). The outputs of the ACAHIM, 

especially the estimated enrollment and expenditure distributions, were used to analyze a 

number of policy choices relating to benefit and payment parameters, including the 

national reinsurance contribution rate and national reinsurance payment parameters. 

The ACAHIM generates a range of national and State-level outputs for 2014, 

including the level and composition of enrollment across markets given the eligible 

population in a State. The ACAHIM is described below in two sections: (1) the approach 

for estimating 2014 enrollment and (2) the approach for estimating 2014 expenditures. 

Because enrollment projections are key to estimating the reinsurance payment parameters 

for the reinsurance program, HHS paid much attention to the underlying data sources and 

assumptions for the ACAHIM. The ACAHIM uses recent Current Population Survey 

(CPS) data adjusted for small populations at the State level, exclusion of undocumented 

immigrants, and population growth to 2014, to assign individuals to the various coverage 

markets. 

More specifically, the ACAHIM assigns each individual to a single health 

insurance market as their baseline (pre-Affordable Care Act) insurance status. In 

addition to assuming that individuals currently in Medicare, TRICARE, or Medicaid will 

remain in such coverage, the ACAHIM takes into account the probability that a firm will 

offer employment-based coverage based on the CPS distribution of coverage offers for 

firms of a similar size and industry. Generally, to determine the predicted insurance 

enrollment status for an individual or family (the “health insurance unit” or “HIU”) in 

2014, the ACAHIM calculates the probability that the firm will offer insurance, then 

models Medicaid eligibility, and finally models eligibility for advance payments of the 

premium tax credit and cost-sharing reductions under the Exchange. Whenever a 

transition to another coverage market is possible, the ACAHIM takes into account the 
 149 

costs and benefits of the decision for the HIU and assigns a higher probability of 

transition to those with the greatest benefit. The ACAHIM also assumes that uninsured 

individuals will take up individual market coverage as informed by current take-up rates 

of insurance across States, varying by demographics and incomes and adjusting for post 

Affordable Care Act provisions, such as advance payments of the premium tax credit and 

cost-sharing reductions. 

 Estimated expenditure distributions from the ACAHIM are used to set the 

uniform, national reinsurance payment parameters so that estimated contributions align 

with estimated payments for eligible enrollees. The ACAHIM uses the Health 

Intelligence Company, LLC (HIC) database from calendar year 2010, with the claims 

data trended to 2014 to estimate total medical expenditures per enrollee by age, gender, 

and area of residence. The expenditure distributions are further adjusted to take into 

account plan benefit design, or, “metal” level (that is, “level of coverage,” as defined in 

156.20) of individual insurance coverage in an Exchange. To describe a State’s coverage 

market, the ACAHIM computes the pattern of enrollment using the model’s predicted 

number and composition of participants in a coverage market. These estimated 

expenditure distributions were the basis for the national reinsurance payment parameters. 

7. Uniform Adjustment to Reinsurance Payments 

We propose to amend §153.230 by specifying in subparagraph (d) that HHS will 

adjust reinsurance payments by a uniform, pro rata adjustment rate in the event that HHS 

determines that the amount of total requests for reinsurance payments under the national 

reinsurance payment parameters will exceed the amount of reinsurance contributions 

collected under the national contribution rate during a given benefit year. The total 

amount of contributions considered for this purpose would include any contributions 
 150 

collected but unused under the national contribution rate during any previous benefit 

year. 

For example, in 2014, if total requests for reinsurance payments under the 

national reinsurance payment parameters are $10.1 billion and only $10 billion is 

collected for reinsurance payments under the national contribution rate, then all requests 

for reinsurance payments would be reduced by approximately 1 percent. However, if 

HHS determines that the total reinsurance contributions collected under the national 

contribution rate for the applicable benefit year are equal to or more than the total 

requests for reinsurance payments calculated using the national reinsurance payment 

parameters, then no such adjustment will be applied, and all requests for reinsurance 

payments will be paid in full under the national payment parameters. Any unused 

reinsurance funds would be used for the next benefit year’s reinsurance payments. This 

uniform pro rata adjustment would ensure that claims are paid at the same rate out of the 

national reinsurance fund, and promote equitable access to the national reinsurance fund 

across all States while furthering the goal of premium stabilization under the Affordable 

Care Act. We invite comment on this policy. 

8. Supplemental State Reinsurance Parameters 

While we propose uniform, national payment parameters applicable to all States 

as discussed above, we are also proposing to add §153.232(a), which specifies the 

manner in which States may modify the national reinsurance payment parameters 

established in the HHS notice of benefit and payment parameters. Specifically, we 

propose that a State that establishes its own reinsurance program may only modify the 

national reinsurance payment parameters by establishing State supplemental payment 

parameters that cover an issuer’s claims costs beyond the national reinsurance payments 

parameters. Furthermore, reinsurance payments under these State supplemental 
 151 

payments parameters may only be made with additional funds the State collects for 

reinsurance payments under §153.220(d)(1)(ii) or State funds applied to the reinsurance 

program under §153.220(d)(3). We believe that this approach would not prohibit States 

from collecting additional amounts for reinsurance payments, as provided for under 

section 1341(b)(3)(B) of the Affordable Care Act, while allowing nationwide access to 

the reinsurance payments from the contributions collected under the national reinsurance 

contribution rate. 

We propose in §153.232(a) that a State may set State supplemental reinsurance 

payments parameters by adjusting the national reinsurance payment parameters in one or 

more of the following ways: (1) decreasing the national attachment point; (2) increasing 

the national reinsurance cap; or (3) increasing the national coinsurance rate. In other 

words, a State may not alter the national reinsurance payment parameters in a manner 

that could result in reduced reinsurance payments. We seek comment on this approach, 

including whether there should be any limitations as to how a State may supplement the 

national reinsurance payment parameters. 

To provide issuers with greater certainty for premium rate setting purposes, we 

propose that a State ensure that any additional funds for reinsurance payments it collects 

under §153.220(d)(1)(ii) or State funds under §153.220(d)(3) as applicable are reasonably 

calculated to cover additional reinsurance payments that are projected to be made under 

the State’s supplemental reinsurance payment parameters for a given benefit year. We 

believe that the State must also ensure that such parameters are applied to all reinsuranceeligible plans in that State in the same manner. We further propose in §153.232(b) that 

contributions collected under §153.220(d)(1)(ii) or additional funds collected under 

§153.220(d)(3), as applicable, must be applied toward requests for reinsurance payments 
 152 

made under the State supplemental reinsurance payments parameters for each benefit 

year commencing in 2014 and ending in 2016. 

We also propose in §153.232(c) that, as applicable, a health insurance issuer of a 

non-grandfathered individual market plan becomes eligible for reinsurance payments 

under a State’s supplemental reinsurance parameters, if its incurred claims costs for an 

individual enrollee’s covered benefits during a benefit year: (1) exceed the supplemental 

State attachment point; (2) exceed the national reinsurance cap; or (3) exceed the national 

attachment point, if the State has established a State supplemental coinsurance rate. This 

would allow reinsurance payments made under the State supplemental payment 

parameters to “wrap around” the national reinsurance payment parameters so that the 

State could apply any additional contributions it collects under proposed §153.220(d) 

towards reinsurance payments beyond the national reinsurance payment parameters. In 

this way, HHS can distribute funds under the national payments formula to where they 

are needed most, while allowing States that elect to run their own program the flexibility 

to supplement nationally calculated reinsurance payments. As mentioned previously, 

States would be required to separate in its reporting to issuers the reinsurance payments 

paid under the national reinsurance payment parameters and State supplemental 

reinsurance payment parameters. 

To ensure that reinsurance payments under State supplemental payment 

parameters do not overlap with the national reinsurance payment parameters, we propose 

the method for calculating State supplemental reinsurance payments. Specifically, we 

propose in §153.232(d) that supplemental reinsurance payments with respect to a health 

insurance issuer’s claims costs for an individual enrollee’s covered benefits must be 

calculated by taking the sum of: (1) the product of such claims costs between the 

supplemental State attachment point and the national attachment point multiplied by the 
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national coinsurance rate (or applicable State supplemental coinsurance rate); (2) the 

product of such claims costs between the national reinsurance cap and the supplemental 

State reinsurance cap multiplied by the national coinsurance rate (or applicable State 

supplemental coinsurance rate); and (3) the product of such claims costs between the 

national attachment point and the national reinsurance cap multiplied by the difference 

between the State supplemental coinsurance rate and the national coinsurance rate. 

For example, in 2014 a State may elect to establish supplemental State 

reinsurance payment parameters that modify all three national reinsurance payment 

parameters, by establishing a State supplemental attachment point of $50,000, a State 

supplemental coinsurance rate of 100 percent, and a State supplemental reinsurance cap 

of $300,000. Under these supplemental State reinsurance payment parameters, the State 

must use its additional contributions to pay up to $98,000 of the issuer costs under 

$300,000 or the sum of: $10,000 (100 percent of an issuer’s costs between the State’s 

2014 supplemental attachment point of $50,000 and the 2014 national attachment point 

$60,000); and $50,000 (100 percent of an issuer’s costs between the 2014 national 

reinsurance cap of $250,000 and the 2014 State supplemental reinsurance cap $300,000); 

and $38,000 (the product of an issuer’s costs between $60,000 and $250,000 multiplied 

by the difference between the State’s supplemental coinsurance rate (100 percent) and the 

national coinsurance rate (80 percent). Contributions collected under the national 

contribution rate would be applied to an issuer’s claims costs above the 2014 national 

attachment point, subject to the national coinsurance rate and national reinsurance cap. 

Alternatively, a second State may elect to establish a State supplemental 

attachment point of $40,000 in 2014, but elect not to establish a supplemental State 

coinsurance rate or reinsurance cap. That State would then use any additional 

contributions it collects to cover up to $16,000 or 80 percent (the 2014 national 
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coinsurance rate) of an issuer’s claims costs between $40,000 (the 2014 supplemental 

State attachment point) and $60,000 (the 2014 national attachment point). As in the first 

example, contributions collected under the national contribution rate would be applied to 

an issuer’s claims costs above the 2014 national attachment point, subject to the national 

coinsurance rate and national reinsurance cap. 

Similar to payment calculations under the national reinsurance payments 

parameters, we propose in §153.232(e) that if all requested reinsurance payments under 

the State supplemental reinsurance parameters calculated in a State for a benefit year will 

exceed all the additional funds a State collects for reinsurance payments under 

§153.220(d)(1)(ii) or State funds under §153.220(d)(3) as applicable, the State must 

determine a uniform pro rata adjustment to be applied to all such requests for reinsurance 

payments in the State. Each applicable reinsurance entity in the State must reduce all 

such requests for reinsurance payments under the State supplemental reinsurance 

payment parameters for the applicable benefit year by that adjustment. 

Finally, in §153.232(f), we propose that a State must ensure that reinsurance 

payments made to issuers under the State supplemental reinsurance payment parameters 

do not exceed the issuer’s total paid amount for the reinsurance-eligible claim(s) and any 

remaining additional funds collected under §153.220(d)(1)(ii) must be used for 

reinsurance payments under the State supplemental parameters in subsequent benefit 

years. We seek comment on this proposal, including other areas of flexibility that could 

be provided to State-operated reinsurance programs. 

9. Allocation and Distribution of Reinsurance Contributions 

Section 153.220(d) of the Premium Stabilization Rule currently provides that 

HHS would distribute reinsurance contributions collected for reinsurance payments from 

a State to the applicable reinsurance entity for that State. We propose to replace this 
 155 

section with proposed §153.235(a), which provides that HHS will allocate and distribute 

the reinsurance contributions collected under the national contribution rate based on the 

need for reinsurance payments, regardless of where the contribution was collected. As 

previously stated in this proposed rule, HHS will disburse all contributions collected 

under the national contribution rate from all States for the applicable benefit year, based 

on all available contributions and the aggregate requests for reinsurance payments, net of 

the pro rata adjustment, if any. We believe that this method of disbursing reinsurance 

contributions will allow the transitional reinsurance program to equitably stabilize 

premiums across the nation, and permit HHS to direct reinsurance funds based on the 

need for reinsurance payments. Consistent with this proposal, we propose to amend 

§153.220(a) to clarify that even if a State establishes a reinsurance program, HHS would 

directly collect from health insurance issuers, as well as self-insured group health plans, 

the reinsurance contributions for enrollees who reside in that State. 

10. Reinsurance Data Collection Standards 

a. Data Collection Standards for Reinsurance Payments 

 Section 153.240(a) directs a State’s applicable reinsurance entity to collect data 

needed to determine reinsurance payments as described in §153.230. We propose to 

amend §153.240(a) by adding subparagraph (1) to direct a State to ensure that its 

applicable reinsurance entity either collect or be provided access to the data necessary to 

determine reinsurance payments from an issuer of a reinsurance-eligible plan. We note 

that this data would include data related to cost-sharing reductions because reinsurance 

payments are not based on a plan’s paid claims amounts that are reimbursed by costsharing reduction amounts. The applicable reinsurance entity, therefore, must reduce a 

plan’s paid claims amount considered for reinsurance payments attributable to costsharing reductions. When HHS operates a reinsurance program on behalf of a State, 
 156 

HHS would utilize the same distributed data collection approach that we propose to use 

for risk adjustment, as described in section III.G. of this proposed rule. This proposed 

amendment would clarify that an applicable reinsurance entity may either use a 

distributed data collection approach for its reinsurance program or directly collect 

privacy-protected data from issuers to determine an issuer’s reinsurance payments. The 

distributed data collection approach would not involve the direct collection of data; 

instead, HHS or the State would access data on plans’ secure servers. 

 We also propose to amend §153.240(a) by adding subparagraph (3), directing 

States to provide a process through which an issuer of a reinsurance-eligible plan that 

does not generate individual enrollee claims in the normal course of business (such as a 

capitated plan) may request reinsurance payments (or submit data to be considered for 

reinsurance payments) based on estimated costs of encounters for the plan in accordance 

with the requirements of §153.410. We propose to direct States to ensure that such 

requests (or a subset of such requests) are subject to (to the extent required by the State) a 

data validation program. A State would have the flexibility to design a data validation 

program that meets its adopted methodology and State-specific circumstances. This 

proposed amendment would enable certain reinsurance-eligible plans, such as staff-model 

health maintenance organizations, that do not generate claims with associated costs in the 

normal course of business to provide data to request and receive reinsurance payments. 

When HHS operates a reinsurance program on behalf of a State, issuers of 

capitated plans would generate claims for encounters, and derive costs for those claims 

when submitting requests for reinsurance payments (or submitting data to be considered 

for reinsurance payments). It is our understanding that many capitated plans currently 

use some form of encounter data pricing methodology to derive claims, often by imputing 

an amount based upon the Medicare fee-for-service equivalent price or the usual, 
 157 

customary, and reasonable equivalent that would have been paid for the service in the 

applicable market. A capitated plan should use its principal internal methodology for 

pricing encounters, such as the methodology in use for other State or Federal programs 

(for example, a methodology used for the Medicare Advantage market). If a plan has no 

such methodology, or has an incomplete methodology, it would be permitted to 

implement a methodology or supplement the methodology in a manner that yields 

derived claims that are reasonable in light of the specific market that the plan is serving. 

Capitated plans, like all plans that submit reinsurance payment requests (or data to be 

considered for reinsurance payments) in the HHS-operated program, will be subject to 

validation and audit. Because capitated plans already use pricing methodologies, we 

believe this proposed policy would permit capitated plans to participate in the reinsurance 

program with a minimal increase in administrative burden. We welcome comments on 

this approach. 

b. Notification of Reinsurance Payments 

 We propose to add §153.240(b)(1) which directs a State, or HHS on behalf of the 

State, to notify issuers of the total amount of reinsurance payments that will be made no 

later than June 30 of the year following the benefit year. This corresponds with the date 

on which a State or HHS must notify issuers of risk adjustment payments and charges. 

As such, by June 30 of the year following the applicable benefit year, issuers will be 

notified of reinsurance payments and risk adjustment payments and charges, allowing 

issuers to account for their total reinsurance payments and risk adjustment payments and 

charges when submitting data for the risk corridors and MLR programs. To provide 

issuers in the individual market with information to assist in development of premiums 

and rates in subsequent benefit years, we also propose in new §153.240(b)(2) that a State 

provide quarterly notifications of estimates to each reinsurance-eligible plan of the 
 158 

expected requests for reinsurance payments for each quarter. HHS intends to collaborate 

with issuers and States to develop these early notifications. We welcome comments on 

this proposal. 

c. Privacy and Security Standards 

We propose to amend §153.240 by adding paragraph (d)(1), to require a State 

operating its own reinsurance program to ensure that the applicable reinsurance entity’s 

collection of personally identifiable information is limited to information reasonably 

necessary for use in the calculation of reinsurance payments and that use and disclosure 

of personally identifiable information is limited to those purposes for which the 

personally identifiable information was collected (including for purposes of data 

validation). This proposal aligns with corresponding language for the risk adjustment 

program. The term “personally identifiable information” is a broadly used term across 

Federal agencies, and has been defined in the Office of Management and Budget 

Memorandum M-07-16 (May 22, 2007).34 To reduce duplicative guidance or potentially 

conflicting regulatory language, we are not defining personally identifiable information 

in this proposed rule, and incorporate the aforementioned definition in to this proposed 

rule. 

We also propose to amend §153.240 by adding paragraph (d)(2) to require that an 

applicable reinsurance entity implement specific privacy and security standards to ensure 

enrollee privacy, and to protect sensitive information. Specifically, this provision would 

require an applicable reinsurance entity to provide administrative, physical, and technical 

safeguards for personally identifiable information that may be used to request reinsurance 

payments. This provision is meant to ensure that an applicable reinsurance entity 

 

34 Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf. 
 159 

complies with the same privacy and security standards that apply to issuers and providers, 

specifically the security standards described at §164.308, §164.310, and §164.312. 

d. Data Collection 

We propose to add new §153.420(a) to address data collection issues, including 

the distributed data collection approach that HHS intends to use when operating the 

reinsurance program on behalf of a State. We propose that issuers of plans eligible for 

and seeking reinsurance payments submit or make accessible data (including data on 

cost-sharing reductions to permit the calculation of enrollees’ claims costs incurred by the 

issuer), in accordance with the reinsurance data collection approach established by the 

State, or HHS on behalf of the State. 

In §153.420(b), we propose that an issuer of a reinsurance-eligible plan submit 

data to be considered for reinsurance payments for the applicable benefit year by April 30 

of the year following the end of the applicable benefit year. The April 30 deadline would 

apply to all issuers of reinsurance-eligible plans, regardless of whether HHS or the State 

is operating reinsurance. We welcome comments on this proposal. 

D. Provisions for the Temporary Risk Corridors Program

1. Definitions 

In the Premium Stabilization Rule, we stated in response to comments that we 

intended to propose that taxes and profits be accounted for in the risk corridors 

calculation, in a manner consistent with the MLR program. We, therefore, propose the 

following amendments and additions to the definitions in this section. 

We propose to amend §153.500 by defining “taxes” with respect to a QHP as 

Federal and State licensing and regulatory fees paid with respect to the QHP as described 

in §158.161(a), and Federal and State taxes and assessments paid for the QHP as 

described in §158.162(a)(1) and §158.162(b)(1). This definition aligns with the fees and 
 160 

taxes deductible from premiums in the MLR calculation. We use this definition to define 

“after tax premiums earned” which we propose to mean, with respect to a QHP, 

premiums earned minus taxes. 

We propose to revise the definition of “administrative costs” in §153.500 to mean, 

with respect to a QHP, the total non-claims costs incurred by the QHP issuer for the 

QHP, including taxes. We note that under this broader definition, administrative costs 

may also include fees and assessments other than “taxes,” as defined above. 

Using the definitions above, we propose to amend §153.500 by defining “profits” 

with respect to a QHP to mean the greater of: (1) 3 percent of after-tax premiums earned; 

and (2) premiums earned by the QHP minus the sum of allowable costs and 

administrative costs of the QHP. Thus, we propose to define profits for a QHP through 

the use of the risk corridors equation; however, we provide for a minimum 3 percent 

profit margin so that the risk corridors program will protect a reasonable profit margin 

(subject to the 20 percent cap on allowable administrative costs as described below). We 

believe that permitting issuers of QHPs to retain a reasonable profit margin will afford 

them greater assurance of achieving reasonable financial results given the expected 

changes in the market in 2014 through 2016, and will encourage the issuers to reduce the 

risk premium built into their rates. Long-term industry trends suggest an average 

industry underwriting margin of approximately 2 percent.35 However, our understanding 

is that the 2 percent margin includes many plans with significant, unexpected 

underwriting losses, and includes lines of business that typically have lower underwriting 

margins than those customarily earned in the individual and small group markets. MLR 

data from 2011 on 30 large issuers suggest an average underwriting margin of 

 

35 Borsch, Matthew, CFA, and Wass, Sam, Equity Research Report, Americas: Managed Care, Decline in 

Blue Cross Margins Shows the Industry-Wide Downturn, Goldman Sachs Group, Inc. (August 28, 2012). 
 161 

approximately 3 percent, once individual issuer negative results are removed. We believe 

that a calculation with significant negative margins removed better reflects reasonable 

issuer projections of underwriting profit. We welcome comments on the estimates, data 

sources, and appropriate profit margin to use in the risk corridor calculation. 

Finally, using the definition of profits discussed above, we propose to revise the 

definition of “allowable administrative costs” in §153.500 so that it means, with respect 

to a QHP, the sum of administrative costs, other than taxes, and profits earned, which 

sum is limited to 20 percent of after-tax premiums earned (including any premium tax 

credit under any governmental program), plus taxes. This definition reflects the inclusion 

of profits and taxes discussed above, and clarifies that the 20 percent cap on allowable 

administrative costs applies to taxes, other than taxes deductible from premium revenue 

under the MLR rules, a result that is consistent with the way these taxes are accounted for 

by the MLR rules. 

The following example illustrates the operation of the risk corridors calculation as 

proposed in this proposed rule: 

• Premiums earned: Assume a QHP with premiums earned of $200. 

• Allowable costs: Assume allowable costs of $140, including expenses for 

health care quality and health information technology, and other applicable adjustments. 

Risk adjustment and reinsurance payments are after-the-fact adjustments to allowable 

costs for purposes of determining risk corridors amounts, and allowable costs must be 

reduced by the amount of any cost-sharing reductions received from HHS. 

• Non-Claims Costs: Assume that the QHP has non-claims costs of $50, of 

which $15 are properly allocable to licensing and regulatory fees and taxes and 

assessments described in §158.161(a), §158.162(a)(1), and §158.162(b)(1) (that is, 

“taxes”). 
 162 

The following calculations result: 

• Taxes: Under the proposed definition of taxes, the QHP’s taxes will be $15. 

• Administrative costs are proposed to be defined as non-claims costs. In this 

case, those costs would be $50. Administrative costs other than taxes would be $35. 

• After-tax premiums earned are proposed to be defined as premiums earned 

minus taxes, or in this case $200 - $15 = $185. 

• Profits are proposed to be defined as the greater of: 3 percent of premiums 

earned, or 3 percent * $200 = $6; and premiums earned by the QHP minus the sum of 

allowable costs and administrative costs, or $200 – ($140 + $50) = $200 - $190 = $10. 

Therefore, profits for the QHP would be $10, which is greater than $6. 

• Allowable administrative costs are proposed to be defined as the sum of 

administrative costs, other than taxes, plus profits earned by the QHP, which sum is 

limited to 20 percent of after-tax premiums earned by the QHP (including any premium 

tax credit under any governmental program), plus taxes. 

= ($35 + $10), limited to 20 percent of $185, plus $15 

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

= $37, plus $15 

= $52. 

• The target amount is defined as premiums earned reduced by allowable 

administrative costs, or $200 - $52 = $148. 

• The risk corridors ratio is the ratio of allowable costs to target amount, or the 

ratio of $140 to $148, or approximately 94.6 percent (rounded to the nearest one-tenth of 

one percent), meaning that the QHP issuer would be required to remit to HHS 50 percent 

of approximately (97 percent - 94.6 percent) = 50 percent of 2.4 percent, or 
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approximately 1.2 percent of the target amount, or approximately 0.012 * $148, or 

approximately $1.78. 

We propose these amendments to account for taxes and profits in a manner 

broadly consistent with the MLR calculation. As described in the Premium Stabilization 

Rule, we seek alignment between the MLR and risk corridors program when practicable 

so that similar concepts in the two programs are handled in a similar manner, and similar 

policy goals are reflected. Otherwise, there would be the potential for the Federal 

government to subsidize MLR rebate payments, or for an issuer to make risk corridors 

payments even though no MLR rebates would have been required. 

We welcome comments on these proposals. 

2. Risk corridors establishment and payment methodology

We propose to add paragraph (d) to §153.510, which would specify the due date 

for QHP issuers to remit risk corridors charges to HHS. Under this provision, an issuer 

would be required to remit charges within 30 days after notification of the charges. 

We propose a schedule for the risk corridors program, as follows. By June 30 of 

the year following an applicable benefit year, under the redesignated §153.310(e), issuers 

of QHPs will have been notified of risk adjustment payments and charges for the 

applicable benefit year. By that same date, under proposed §153.240(b)(1), QHP issuers 

also would have been notified of all reinsurance payments to be made for the applicable 

benefit year. As such, we propose in §153.530(d) that the due date for QHP issuers to 

submit all information required under §153.530 of the Premium Stabilization Rule is July 

31 of the year following the applicable benefit year. We note that in section III.I. of this 

proposed rule, we are proposing that the MLR reporting deadline be revised to align with 

this schedule. 

We welcome comments on these proposals. 
 164 

3. Risk Corridors Data Requirements 

In §153.530 of the Premium Stabilization Rule, we stated that to support the risk 

corridors program calculations, a QHP must submit data related to actual premium 

amounts collected, including premium amounts paid by parties other than the enrollee in 

a QHP, specifically advance premium tax credits. We further specified that risk 

adjustment and reinsurance payments be regarded as after-the-fact adjustments to 

allowable costs for purposes of determining risk corridors amounts, and allowable costs 

be reduced by the amount of any cost-sharing reductions received from HHS. For 

example, if a QHP incurred $200 in allowable costs for a benefit year, but received a risk 

adjustment payment of $25, made reinsurance contributions of $10, received reinsurance 

payments of $35, and received cost-sharing reduction payments of $15, its allowable 

costs would be $135 ($200 allowable costs - $25 risk adjustment payments received + 

$10 reinsurance contributions made - $35 reinsurance payments received – $15 costsharing reduction payments). 

As noted in section III.E. of this proposed rule, we are proposing an approach to 

reimbursement of cost-sharing reductions that would add an additional reimbursement 

requirement for cost-sharing reductions by providers with whom the issuer has a fee-forservice compensation arrangement. As described in section III.E., we propose that 

issuers be reimbursed for, in the case of a benefit for which the issuer compensates the 

provider in whole or in part on a fee-for-service basis, the actual amount of cost-sharing 

reductions provided to the enrollee for the benefit and reimbursed to the provider by the 

issuer. However, cost-sharing reductions on benefits rendered by providers for which the 

issuer provides compensation other than on a fee-for-service arrangement (such as a 

capitated system) would not be held to this standard. 
 165 

It is our understanding that, in most fee-for-service arrangements, cost-sharing 

reductions will be passed through to the fee-for-service provider, and as such a QHP’s 

allowable costs should not include either enrollee cost sharing or cost-sharing reductions 

reimbursed by HHS. However, in contrast in capitated arrangements, cost-sharing 

reduction payments should be accounted for as a deduction from allowable costs because 

we assume in a competitive market that capitation payments (which are reflected directly 

in an issuer’s allowable costs) will be raised to account for the reductions in providers’ 

cost-sharing income, and that the issuer will retain the cost-sharing reduction payments. 

Therefore, we are proposing to amend §153.530(b)(2)(iii) so that allowable costs 

are reduced by any cost-sharing reduction payments received by the issuer for the QHP to 

the extent not reimbursed to the provider furnishing the item or service. 

4. Manner of Risk Corridor Data Collection 

 We also propose to amend §153.530(a),(b), and (c) to specify that we will address 

the manner of submitting required risk corridors data in future guidance rather than in this 

HHS notice of benefit and payment parameters. 

E. Provisions for the Advance Payments of the Premium Tax Credit and Cost-Sharing

Reduction Programs

1. Exchange Responsibilities with Respect to Advance Payments of the Premium Tax 

Credit and Cost-Sharing Reductions 

a. Special Rule for Family Policies 

 We propose to amend §155.305(g)(3), currently entitled “special rule for multiple 

tax households.” Currently, this provision sets forth a rule for determining the costsharing reductions applicable to individuals who are, or who are expected to be, in 

different tax households but who enroll in the same QHP policy. This provision includes 

a hierarchy of cost-sharing eligibility categories. Our proposed amendment would 
 166 

rename this paragraph “special rule for family policies,” add a category for qualified 

individuals who are not eligible for any cost-sharing reductions, and add text to explicitly 

address situations in which Indians (as defined in §155.300(a)) and non-Indians enroll in 

a family policy. The proposed amendment would extend the current policy with respect 

to tax households such that individuals on a family policy would be eligible to be 

assigned to the most generous plan variation for which all members of the family are 

eligible. We note that nothing in this provision precludes qualified individuals with 

different levels of eligibility for cost-sharing reductions from purchasing separate policies 

to secure the highest cost-sharing reductions for which they are respectively eligible. We 

expect that Exchanges will assist consumers in understanding the relative costs and 

benefits of enrolling in a family policy versus several individual policies. 

The following example demonstrates the applicability of this provision: 

• Example: A and B are parent and child who live together, but are each in 

separate tax households. A and B purchase a silver level QHP family policy in the 

individual market on an Exchange. A has a household income of 245 percent of the FPL, 

while B has a household income of 180 percent of the FPL. Individually, A would be 

eligible for enrollment in the 73 percent AV silver plan variation (that is, with higher 

cost-sharing requirements), and B in the 87 percent AV silver plan variation (that is, with 

lower cost-sharing requirements). Under the proposed provision, A and B would 

collectively qualify for the 73 percent AV silver plan variation, but not the 87 percent AV 

silver plan variation. 

HHS recognizes that this policy may limit the cost-sharing reductions that 

members of a family could receive if the family chooses to enroll in a family policy; 

however, section 1402 of the Affordable Care Act does not permit an individual to 

receive benefits under the Federal cost-sharing reductions program for which the 
 167 

individual is ineligible. In addition, because deductibles and out-of-pocket limits are 

calculated at the policy level, as opposed to the individual level, it would be operationally 

difficult to establish separate cost-sharing requirements for different enrollees within the 

same policy. We discuss this policy further with regard to Indians in section III.E.4.i. of 

this proposed rule. We welcome comments on this proposal and its effect on families. 

b. Recalculation of Advance Payments of the Premium Tax Credit and Cost-Sharing 

Reductions 

We propose to add paragraph (g) to §155.330, related to eligibility 

redeterminations during a benefit year, to clarify how changes during a benefit year in a 

tax filer’s situation that are reported or identified in accordance with §155.330 affect 

eligibility for advance payments of the premium tax credit and cost-sharing reductions. 

As discussed in the Exchange Establishment Rule, an Exchange must redetermine a tax 

filer’s eligibility for advance payments of the premium tax credit and cost-sharing 

reductions either as a result of a self-reported change by an individual under §155.330(b) 

or as a result of periodic data matching as described in §155.330(d). 

As described in 26 CFR 1.36B-4(a)(1), a tax filer whose premium tax credit for 

the taxable year exceeds the tax filer’s advance payments may receive the excess as an 

income tax refund, and a tax filer whose advance payments for the taxable year exceed 

the tax filer’s premium tax credit would owe the excess as additional income tax liability, 

subject to the limits specified in 26 CFR 1.36B-4(a)(3). Consequently, it is important 

when calculating advance payments that the Exchange act to minimize any projected 

discrepancies between the advance payments and the final premium tax credit amount, 

which would be determined by the IRS after the close of the tax year. Thus, we propose 

in §155.330(g)(1)(i) that when an Exchange is recalculating the amounts of advance 

payments of the premium tax credit available due to an eligibility redetermination made 
 168 

during the benefit year, an Exchange must account for any advance payments already 

made on behalf of the tax filer in the benefit year for which information is available to the 

Exchange, such that the recalculated advance payment amount is projected to result in 

total advance payments for the benefit year that correspond to the tax filer’s projected 

premium tax credit for the benefit year, calculated in accordance with 26 CFR 1.36B-3. 

We propose in § 155.330(g)(1)(ii) to specify that the advance payment provided on the 

tax filer’s behalf must be greater than or equal to zero, and must comply with 26 CFR 

1.36B-3(d), which limits advance payments to the total premiums for the QHPs (and 

stand-alone dental plans, if applicable) selected. 

The following example demonstrates the applicability of this provision: 

• Tax filer A is determined eligible for enrollment in a QHP through the 

Exchange and for advance payments of the premium tax credit during open enrollment 

prior to 2014 based on an expected household income for the year 2014 of $33,510 (300 

percent of the FPL). Tax filer A seeks to purchase coverage in a rating area where the 

premium for the second lowest cost silver plan is $300 per month. As such, the 

maximum amount of advance payments of the premium tax credit per month would be 

calculated as follows: 300 – ((1/12)*(9.5%*33,510)) = $35. During the month of June, 

the tax filer reports an expected decrease in annual household income such that tax filer 

A’s projected household income for the year 2014 will now be $27,925 (250 percent of 

the FPL). Thus, the maximum amount of advance payments of the premium tax credit 

per month would be calculated as follows: 300 – ((1/12)*(8.05%*27,925)) = $113. 

However, the Exchange’s recalculation of advance payments of the premium tax credit 

must take into account the advance payments already made on behalf of tax filer A. The 

Exchange must first multiply $113 by 12 months to calculate the expected tax credit for 

the entire year ($1,356), subtract the amount already paid for the first six months ($210), 
 169 

and then divide the difference by the number of months remaining in the year (six), 

which results in a recalculated maximum advance payment for the remaining months of 

$191. In this example, we assume that the taxpayer has elected to have the maximum 

advance payment for which he or she is eligible to be paid to his or her selected QHP 

issuer. 

If a tax filer is determined eligible for advance payments of the premium tax 

credit during the benefit year but did not previously receive advance payments of the 

premium tax credit, the Exchange would calculate the advance payments in accordance 

with the process described above, without subtracting any previous payments. We 

reiterate that the provision of all advance payments of the premium tax credit must be 

consistent with section 36B of the Code and its implementing regulations, including the 

requirement that premium tax credits (and advance payments) are available only for 

“coverage months” during which the individual is eligible and enrolled in a QHP through 

the Exchange. We also considered taking a different approach if an eligibility 

redetermination during the benefit year results in an increase in advance payments of the 

premium tax credit—we considered proposing that in such a situation, HHS would make 

retroactive payments to the QHP issuer for all prior months of the benefit year to reflect 

the increased advance payment amount, not to exceed the total premium for each month. 

This approach would permit us to pay out more of the full premium tax credit amount 

prior to the close of the tax year. Without retroactive payments, in the case of a 

redetermination late in the year, we would have a limited ability to pay out an increase 

because of the limitation that the premium tax credit – and thus the advance payments of 

the premium tax credit not exceed the total premium for the month. Following this 

alternative approach in the case of increases in advance payments of the premium tax 

credit during the benefit year could also help address any outstanding premium amounts 
 170 

owed by an enrollee to a QHP issuer. We solicit comments regarding whether we should 

adopt this approach, and how QHP issuers should be required to provide the retroactive 

payments to enrollees. 

In §155.330(g)(2), we propose that, when redetermining eligibility for costsharing reductions during the benefit year, an Exchange must determine an individual to 

be eligible for the category of cost-sharing reductions that corresponds to the individual’s 

expected annual household income for the benefit year, as determined at redetermination. 

Section 1402(f)(3) of the Affordable Care Act provides that eligibility determinations for 

cost-sharing reductions are made on the basis of the expected annual household income 

for the same taxable year for which the advance payment determination is made under 

section 1412(b) of the Affordable Care Act. Therefore, if a mid-year change in income 

triggers use of a new annual household income figure for purposes of determining 

eligibility for advance payments of the premium tax credit, eligibility for cost-sharing 

reductions must also be redetermined using the new figure. However, unlike the 

premium tax credit, cost-sharing reductions are not reconciled at the end of the year by 

tax filers. As such, redeterminations of eligibility for cost-sharing reductions should not 

take into account the amount of cost-sharing reductions already provided on an 

individual’s behalf. 

 The following example demonstrates the applicability of this provision: 

• Tax filer B is determined eligible for enrollment in a QHP through the 

Exchange and for cost-sharing reductions during open enrollment prior to 2014 and 

enrolls in a silver plan QHP. Tax filer B is assigned to a plan variation in January 2014 

based on an expected annual household income of 150 percent of the FPL. During the 

month of June, the tax filer self-reports an increase in expected household income such 

that tax filer B’s expected annual household income will now be at 200 percent of the 
 171 

FPL. The Exchange must redetermine the tax filer’s eligibility for cost-sharing 

reductions for the remainder of the benefit year following the effective date of 

redetermination at 200 percent of the FPL, which is the tax filer’s expected annual 

household income, and the tax filer should then be assigned to the plan variation designed 

to provide cost-sharing reductions for individuals with that expected annual household 

income. 

c. Administration of Advance Payments of the Premium Tax Credit and Cost-Sharing 

Reductions 

 We propose to add two paragraphs to §155.340. First, we propose to add 

paragraph (e) to §155.340, which would provide that if one or more individuals in a tax 

household who are eligible for advance payments of the premium tax credit(s) 

collectively enroll in more than one policy through the Exchange (whether by enrolling in 

more than one policy under a QHP, enrolling in more than one QHP, or enrolling in one 

or more QHPs and one or more stand-alone dental plans) for any month in a benefit year, 

the Exchange must allocate the advance payment of the premium tax credit(s) in 

accordance with the methodology proposed in §155.340(e)(1) and (2). We note that an 

Exchange, under §155.340(a), must submit to HHS the dollar amount of the advance 

payment that will be made to each QHP on behalf of the enrollee. 

We propose the following allocation methodology: as described in 

§155.340(e)(1), the Exchange must first allocate the portion of the advance payment of 

the premium tax credit(s) that is less than or equal to the aggregate adjusted monthly 

premiums for the QHP policies, as defined under 26 CFR 1.36B-3(e), properly allocated 

to EHB, among the QHP policies in proportion to the respective portions of the premiums 

for the policies properly allocated to EHB. As described in proposed §155.340(e)(2), any 

remaining advance payment of the premium tax credit(s) must be allocated among the 
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stand-alone dental policies in proportion to the respective portions of the adjusted 

monthly premiums for the stand-alone dental policies properly allocated to the pediatric 

dental EHB. The portion of the adjusted monthly premium for a QHP policy or a standalone dental policy that is allocated to EHB would be determined based on the 

information that the QHP issuer submits, under the proposed §156.470, and described in 

section III.E.2. of this proposed rule. For example, if a family collectively eligible for 

advance payments of the premium tax credit purchases two QHPs and a stand-alone 

dental plan, with a $500 adjusted monthly premium allocated to EHB, a $400 adjusted 

monthly premium allocated to EHB, and a $100 adjusted monthly premium allocated to 

the pediatric dental essential health benefit, respectively, the Exchange must allocate 

five-ninths of the advance payment of the premium tax credit (up to $500) to the first 

QHP, and four-ninths (up to $400) to the second QHP. If there is any remaining advance 

payment of the premium tax credit, this will be allocated to the stand-alone dental plan. 

This rule ensures a pro rata allocation (by premium) of the advance payment of the 

premium tax credit to the QHPs, while ensuring that the advance payment of premium 

tax credits are only for (and based on) the portion of premiums for EHB. We welcome 

comments on this proposal. 

 Second, we propose to add paragraph (f) to §155.340, which sets forth standards 

for an Exchange when it is facilitating the collection and payment of premiums to QHP 

issuers and stand-alone dental plans on behalf of enrollees, as permitted under 

§155.240(c). Consistent with our proposed provision in §156.460(a), §155.340(f)(1) 

would direct the Exchange to reduce the portion of the premium for the policy collected 

from the enrollee by the amount of the advance payment of the premium tax credit for the 

applicable month(s) when the Exchange elects to collect premiums on behalf of QHPs. 

Because the Exchange is responsible for premium collections in these circumstances, the 
 173 

Exchange must also take responsibility for lowering the premium costs charged to 

enrollees by the amount of the credit. Proposed §155.340(f)(2) would direct Exchanges 

to display the amount of the advance payment of the premium tax credit for the 

applicable month(s) on an enrollee’s billing statement. This is the Exchange equivalent 

of the requirement for QHP issuers proposed in §156.460(b). Both rules are drafted for 

the same purpose: to ensure that an enrollee is aware of the total cost of the premium so 

that he or she may verify that the correct advance payment of the premium tax credit has 

been applied. We welcome comments on this proposal. 

2. Exchange Functions: Certification of Qualified Health Plans 

 We propose to add §155.1030. This section would set forth standards for 

Exchanges to ensure that QHPs in the individual market on the Exchange meet the 

requirements related to advance payments of the premium tax credit and cost-sharing 

reductions, as proposed in §156.215 and described below. We propose these standards 

under section 1311(c) of the Affordable Care Act, which provides for the Secretary to 

establish criteria for the certification of health plans as QHPs, as well as section 

1321(a)(1), which provides general rulemaking authority for title I of the Affordable 

Care, including the establishment of programs for the provision of advance payments of 

the premium tax credit and cost-sharing reductions. We believe that it is appropriate to 

incorporate these standards into the QHP certification criteria because Exchanges are the 

primary entities that interact with and oversee QHPs. 

 In §155.1030(a)(1), we propose that the Exchange ensure that each issuer that 

offers or seeks to offer a QHP in the individual market on the Exchange submit the 

required plan variations, as proposed in §156.420, for each of its health plans proposed to 

be offered in the individual market on the Exchange. Further we propose that the 

Exchange must certify that the plan variations meet the requirements detailed in 
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§156.420. We expect that an Exchange would collect prior to each benefit year the 

information necessary to validate that the issuer meets the requirements for silver plan 

variations, as detailed in §156.420(a), and collect for certification the information 

necessary to validate that the issuer meets the requirements for zero and limited cost 

sharing plan variations, as detailed in §156.420(b) . We expect that this data collection 

would include the cost-sharing requirements for the plan variations, such as the annual 

limitation on cost sharing, and any reductions in deductibles, copayments or coinsurance. 

In addition, the Exchange would collect or calculate the actuarial values of each QHP and 

silver plan variation, calculated under §156.135 of the proposed EHB/AV Rule. We 

propose in §155.1030(a)(2) that the Exchange provide the actuarial values of the QHPs 

and silver plan variations to HHS. As described in §156.430, HHS would use this 

information to determine the payments to QHP issuers for the value of the cost-sharing 

reductions. 

 In §155.1030(b)(1), we propose to require the Exchange to collect certain 

information that an issuer must submit under §156.470 that would allow for the 

calculation of the advance payments of cost-sharing reductions and the premium tax 

credit. Specifically, in §156.470(a), we propose that an issuer provide to the Exchange 

annually for approval, for each metal level health plan (that is, a health plan at any of the 

four levels of coverage, as defined in §156.20) offered, or proposed to be offered, in the 

individual market on the Exchange, an allocation of the rate and the expected allowed 

claims costs for the plan, in each case, to: (1) EHB, other than services described in 

§156.280(d)(1),36 and (2) any other services or benefits offered by the health plan not 

described in clause (1). We propose this annual submission of the rate allocation 

 

36 45 CFR 156.280(e)(1)(i) provides that if a QHP provides coverage of services described in paragraph 

(d)(1) of that section, the QHP issuer must not use Federal funds, including advance payments of the 

premium tax credit or cost-sharing reductions, to pay for the services. 
 175 

information, under section 36B(b)(3)(D) of the Code, as added by section 1401 of the 

Affordable Care Act, to allow for the removal of the cost of “additional benefits” from 

the advance payments of the premium tax credit. The rate allocation information would 

allow the Exchange to calculate the percentage of the rate attributable to EHB; this 

percentage could then be multiplied by the adjusted monthly premium, as defined by 26 

CFR 1.36B-3(e), and the monthly premium of the QHP in which the taxpayer enrolls, to 

calculate the premium assistance amount. The allocation of the expected allowed claims 

costs would be used to validate the rate allocation, and to calculate the advance payments 

for cost-sharing reductions as described in proposed §156.430 of this proposed rule. 

 In §156.470(e), we further propose that an issuer of a metal level health plan 

offered, or proposed to be offered, in the individual market on the Exchange also submit 

to the Exchange annually for approval, an actuarial memorandum with a detailed 

description of the methods and specific bases used to perform the allocations. The 

Exchange and HHS would use this memorandum to verify that the allocations meet the 

standard, proposed in §156.470(c). First, the issuer must ensure that the allocation is 

performed by a member of the American Academy of Actuaries in accordance with 

generally accepted actuarial principles and methodologies. Second, the rate allocation 

should reasonably reflect the allocation of the expected allowed claims costs attributable 

to EHB (excluding those services described in §156.280(d)(1)). Third, the allocation 

should be consistent with the allocation of State-required benefits to be submitted by the 

issuer as proposed in §155.170(c) of the proposed EHB/AV Rule, and the allocation 

requirements described in §156.280(e)(4) for certain services. Fourth, the issuer should 

calculate the allocation as if it was a premium under the fair health insurance premium 

standards described at §147.102, the single risk pool standards described at §156.80, and 

the same premium rate standards described at §156.255. We propose this requirement 
 176 

because we believe the allocation of rates should be performed consistent with the 

standards applicable to the setting of rates. Thus, for example, an issuer should calculate 

the allocation of premiums using costs for essential health benefits across all enrollees in 

all plans in the relevant risk pool, under §156.80, and not across a standardized 

population or a plan-specific population. Although the last approach might yield a more 

accurate allocation, it would increase the analytical burden on issuers, and it would not 

align with other reporting requirements, such as for the Effective Rate Review program 

(established under section 2794 of the PHS Act), which requires projections based on the 

single risk pool standards. We welcome comment on this proposed standard and 

alternative approaches. 

 In §156.470(b), we propose somewhat similar standards for the allocation of 

premiums for stand-alone dental plans. Specifically, we propose that an issuer provide to 

the Exchange annually for approval, for each stand-alone dental plan offered, or proposed 

to be offered, in the individual market on the Exchange, a dollar allocation of the 

expected premium for the plan, to: (1) the pediatric dental essential health benefit, and 

(2) any benefits offered by the stand-alone dental plan that are not the pediatric essential 

health benefit. As described in 26 CFR 1.36B-3(k), this allocation will be used to 

determine premium tax credit, and thus the advance payment of the premium tax credit, 

available if an individual enrolls in both a QHP and a stand-alone dental plan. We note 

that unlike issuers of metal level health plans offered or proposed to be offered as QHPs, 

issuers of stand-alone dental plans would be required to submit a dollar allocation of the 

expected premium for the plan (rather than a percentage of the rate, which would be 

multiplied by the premium to determine the allocation of the premium). 

 We propose this approach because issuers of stand-alone dental plans are exempt 

from certain standards in the proposed Market Reform Rule, including §147.102 and 
 177 

156.80 (related to fair health insurance premiums and the single risk pool), and as a 

result, are not required to develop rates under the same limitations that apply to issuers of 

QHPs in the individual and small group markets. Implicit in the allocation methodology 

required for issuers of QHPs proposed in §156.470(a) is a requirement that the premium 

rating methodology be set prior to the allocation. We anticipate that issuers of standalone dental plans may take into account additional rating factors, up to and including 

medical underwriting, which would make the completion and submission of final 

premium rating methodologies to the Exchange problematic. Our proposal at 

§156.470(b) does not require issuers of stand-alone dental plans to finalize the total 

premium prior to the benefit year, but does require issuers to finalize the dollar amount of 

the premium allocable to the pediatric dental essential health benefit to allow for the 

calculation of advance payments of the premium tax credit. This approach will ensure 

that Exchanges have sufficient information to calculate advance payments of the 

premium tax credit at the time an applicant selects coverage. 

In proposed §156.470(e), we also propose that issuers of stand-alone dental plans 

submit to the Exchange annually for approval an actuarial memorandum with a detailed 

description of the methods and specific bases used to perform the allocations, 

demonstrating that the allocations meet the standards proposed in §156.470(d). These 

standards are similar to those proposed for issuers of metal level health plans offered or 

proposed to be offered as QHPs, with some adaptations specific to stand-alone dental 

plans. In §156.470(d)(1) and (2) we propose that the allocation be performed by a 

member of the American Academy of Actuaries in accordance with generally accepted 

actuarial principles and methodologies, and be consistent with the allocation applicable to 

State-required benefits to be submitted by the issuer under §155.170(c). In addition, in 

§156.470(d)(3), we propose that the allocation be calculated under the fair health 
 178 

insurance premium standards described at 45 CFR 147.102, except for the provision 

related to age set forth at §147.102(a)(1)(ii); the single risk pool standards described at 45 

CFR 156.80; and the same premium rate standards described at 45 CFR 156.255 (in each 

case subject to the standard proposed in subparagraph (4) described below). We propose 

these standards because we believe that Congress intended that premium tax credits be 

available based on the market reforms embodied in the Affordable Care Act. However, 

in the place of the fair health insurance premium standards related to age, we propose in 

subparagraph (4) that the allocation be calculated so that the amount of the premium 

allocated to the pediatric dental essential health benefit for an individual under the age of 

19 years does not vary, and the amount of the premium allocated to the pediatric dental 

essential health benefit for an individual aged 19 years or more is equal to zero. Thus, for 

example, an issuer of a stand-alone dental plan should calculate the dollar allocation for 

individuals under 19 years of age across all such enrollees in all plans in the relevant risk 

pool, under §156.80. This will ensure that advance payments of the premium tax credit 

are applied to policies that include individuals who may benefit from the pediatric dental 

essential health benefit as interpreted in the proposed EHB/AV Rule. We seek comment 

on this approach and the proposed allocation standards. We also note that issuers of 

stand-alone dental plans are not required to submit an allocation of their expected 

allowed claims costs because these plans are not eligible for cost-sharing reductions, as 

described in §156.440(b). 

 In §155.1030(b)(1), we propose that the Exchange collect and review annually the 

rate or premium allocation, the expected allowed claims cost allocation, and the actuarial 

memorandum that an issuer submits; and ensure that such allocations meet the standards 

set forth in §156.470(c). To ensure that the allocations are completed appropriately, we 

expect that the Exchange will review the allocation information in conjunction with the 
 179 

rate and benefit information that the issuer submits under §156.210. To facilitate this 

review, we proposed revisions to the reporting requirements for the Effective Rate 

Review program in the proposed Market Reform rule to include the rate allocation and 

expected allowed claims cost allocation information that issuers of metal level health 

plans would submit. Therefore, an Exchange that coordinates its review of QHP rates 

and benefits with the State’s Effective Rate Review program would be able to also 

coordinate the allocation review, avoiding duplication. This approach should streamline 

the submission process for issuers. We note, however, that it is ultimately the 

responsibility of the Exchange to ensure that the issuer performs the allocations 

appropriately for each health plan or stand-alone dental plan that the issuer offers, or 

seeks to offer, on the individual market in the Exchange, including those that are not 

reported as part of the Effective Rate Review program. Therefore, we expect that 

Exchanges will collect the allocation information through the Effective Rate Review 

program or the QHP certification and annual submission process, as appropriate. 

 As discussed above, the rate and premium allocation information would then be 

used by the Exchange to calculate the dollar amounts of the advance payments of the 

premium tax credit, and the expected allowed claims cost allocation would be used by 

HHS to calculate the advance payments of the cost-sharing reductions, as described in 

§156.430. To allow for these calculations, and to ensure that Federal funds are spent 

appropriately, we propose under §155.1030(b)(2) that the Exchange be required to submit 

to HHS the approved allocation(s) and actuarial memorandum for each QHP and standalone dental plan. We propose to provide further detail on the manner and timeframe of 

this submission to HHS in the future; however, we expect that the Exchange would be 

required to submit the information prior to the start of the benefit year. In paragraph 

(b)(4), we propose authority for the use of this data by HHS for the approval of the 
 180 

estimates that issuers submit for advance payments of cost-sharing reductions described 

in §156.430, and for the oversight of the advance payments of cost-sharing reductions 

and premium tax credits programs. 

 In §155.1030(b)(3), we propose that the Exchange collect annually any estimates 

and supporting documentation that a QHP issuer submits to receive advance payments for 

the value of the cost-sharing reductions under §156.430(a). The Exchange must then 

submit the estimates and supporting documentation to HHS for review and approval. 

This collection from issuers should occur as part of the initial QHP certification process 

and any annual submission process. We propose to provide further detail on the manner 

and timeframe of the submission to HHS in the future; however, we expect that the 

Exchange would be required to submit the information prior to the start of the benefit 

year. 

3. QHP Minimum Certification Standards Relating to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

 Under HHS rulemaking authority under sections 1311(c)(1), 1321(a)(1), 1402 and 

1412 of the Affordable Care Act, we propose to add §156.215. This section would 

amend the QHP minimum certification standards and specify that an issuer seeking to 

offer a health plan on the individual market in the Exchange meet the requirements 

described in subpart E of part 156 related to the administration of advance payments of 

the premium tax credit and cost-sharing reductions. We propose to add this section to 

clarify that compliance with part 156 subpart E, including the standards and submission 

requirements proposed at §156.420 and §156.470, is a requirement of QHP certification, 

and therefore, is included in the standard described at §155.1000(b), under which an 

Exchange must offer only health plans that meet the minimum certification requirements. 

Under our proposal, continuing compliance with subpart E requirements by QHPs and 
 181 

QHP issuers is a condition of certification; failure to comply with the requirements could 

result in decertification of the QHP as well as other enforcement actions. This 

corresponds to the proposed addition of §155.1030, which sets forth the Exchange 

responsibilities on certification with respect to advance payments of the premium tax 

credit and cost-sharing reductions (described previously). 

4. Health Insurance Issuer Responsibilities with Respect to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

a. Definitions 

Under §156.400, we propose definitions for terms that are used throughout 

subpart E of part 156. These terms apply only to subpart E. Some of these definitions 

cross-reference definitions elsewhere in parts 155 or 156, including definitions proposed 

in the proposed EHB/AV Rule: the terms “advance payments of the premium tax credit” 

and “Affordable Care Act” are defined by reference to §155.20, and the term “maximum 

annual limitation on cost sharing” is defined as the highest annual dollar amount that 

health plans (other than QHPs with cost-sharing reductions) may require in cost sharing 

for a particular year, as established for that year under §156.130 of the proposed 

EHB/AV Rule. The terms “Federal poverty level or FPL” and “Indian” are defined by 

reference to §155.300(a). The term “de minimis variation” is defined as the allowable 

variation in the AV of a health plan that does not result in a material difference in the true 

dollar value of the health plan as established in §156.140(c)(1) of the proposed EHB/AV 

Rule. We also propose to define “stand-alone dental plan” as a plan offered through an 

Exchange under §155.1065. We seek comment on these definitions. 

We propose to rely on the definitions of “cost sharing” and “cost-sharing 

reductions” from §156.20. We note that the definitions of cost sharing and cost-sharing 

reductions apply only with respect to EHB, though without regard to whether the EHB is 
 182 

provided inside or outside of a QHP’s network. We propose to define “annual limitation 

on cost sharing” to mean the annual dollar limitation on cost sharing required to be paid 

by an enrollee that is established by a particular health plan. However, as proposed in 

§156.130(c) of the proposed EHB/AV Rule, we note again that the annual limitation on 

cost sharing would not include cost sharing for benefits provided outside of a QHP’s 

network. If a State requires a QHP to cover benefits in addition to EHB, the provisions 

of this subpart E (except for §156.420(c) and (d)) relating to cost-sharing reductions do 

not apply to those additional State-required benefits. For clarity, we note these 

provisions apply to State-required benefits included in EHB under §156.110(f) of the 

proposed EHB/AV Rule. Finally, we note that cost-sharing reductions are subject to 

§156.280(e)(1)(ii). 

 Other definitions are proposed here to effectuate the regulations proposed in 

subpart E. This Payment Notice includes five related definitions: standard plan, silver 

plan variation, zero cost sharing plan variation, limited cost sharing plan variation, and 

plan variation, as follows: 

• We propose to define “standard plan” as a QHP offered at one of the four 

levels of coverage, defined at §156.140, with an annual limitation on cost sharing that 

conforms to the requirements of §156.130(a). A standard plan at the bronze, silver, gold, 

or platinum level of coverage is referred to as a standard bronze plan, a standard silver 

plan, a standard gold plan, and a standard platinum plan, respectively. 

• We propose to define “silver plan variation” as, with respect to a standard 

silver plan, any of the variations of that standard silver plan described in §156.420(a). 

• We propose to define “zero cost sharing variation” as, with respect to a QHP 

at any level of coverage, the variation of such QHP described in §156.420(b)(1), which 

provides for the elimination of cost sharing for Indians based on household income level.. 
 183 

• We propose to define “limited cost sharing variation” as, with respect to a 

QHP at any level of coverage, the variation of such QHP described in §156.420(b)(2), 

which provides for the prohibition on cost sharing applicable to the receipt of benefits 

from IHS or certain other providers, irrespective of income level. 

• We propose to define “plan variation” as a zero cost sharing plan variation, 

limited cost sharing plan variation, or silver plan variation. We emphasize that the plan 

variations of a QHP are not separate plans, but variations in how the cost sharing required 

under the QHP is to be shared between the enrollee(s) and the Federal government. 

We propose these definitions to administer and implement the cost-sharing 

reductions established under section 1402 of the Affordable Care Act. As described in 

more detail below, although there will only be one actual QHP (for example, a standard 

silver plan) with one standard cost-sharing structure, we use the concept of plan 

variations to describe how certain eligible individuals will pay only a portion of the total 

cost sharing required under that QHP, with the Federal government bearing the remaining 

cost-sharing obligations under section 1402 of the Affordable Care Act. 

To reflect how the Affordable Care Act creates different eligibility categories 

with different associated cost-sharing reductions, we propose that each plan variation will 

reflect the enrollee’s portion of the cost sharing requirements for the QHP. We refer to 

“assigning” enrollees to the applicable plan variation to describe how the enrollee will 

receive the benefits described in section 1402 of the Affordable Care Act. We reiterate 

that these variations are not different QHPs and that a change in eligibility for costsharing reductions simply changes the enrollee’s responsibility for part of the total cost 

sharing under the same QHP. We seek comment on these definitions. 

We propose to define “de minimis variation for a silver plan variation” as a single 

percentage point. That is, we propose that 1 percentage point variation in the AV of a 
 184 

silver plan variation would not result in a material difference in the true dollar value of 

the silver plan variation. We note that this proposal differs from the 2 percentage point 

de minimis variation standard for health plans, proposed in §156.140(c)(1) of the 

proposed EHB/AV Rule. We believe that because cost-sharing reductions are reimbursed 

by the Federal government, the degree of flexibility afforded to issuers of silver plan 

variations in the cost-sharing design should be somewhat less. With this standard we 

seek to balance the need to ensure that individuals receive the full value of the costsharing reductions for which they are eligible, and issuers’ ability to set reasonable costsharing requirements. 

We propose to define “most generous” or “more generous” as, between a QHP 

(including a standard silver plan) or plan variation and one or more other plan variations 

of the same QHP, the QHP or plan variation designed for the category of individuals last 

listed in §155.305(g)(3). That list, as proposed to be amended under this rule, first lists 

the QHP with no cost-sharing reductions, followed by the limited cost sharing plan 

variation, the 73 percent, 87 percent, and 94 percent silver plans, and finally, the zero cost 

sharing plan variation. We seek comment on this definition. 

We propose to define the “annual limitation on cost sharing” as the annual dollar 

limit on cost sharing required to be paid by an enrollee that is established by a particular 

QHP. We note that this definition refers to the plan-specific cost-sharing parameter, 

while the defined term “maximum annual limitation on cost sharing” refers to the 

uniform maximum that would apply to all QHPs (other than QHPs with cost-sharing 

reductions) for a particular year. 

Finally, we propose to define the “reduced maximum annual limitation on cost 

sharing” as the dollar value of the maximum annual limitation on cost sharing for a silver 

plan variation that remains after applying the reduction in the maximum annual limitation 
 185 

on cost sharing required by section 1402 of the Affordable Care Act, as announced in the 

annual HHS notice of benefit and payment parameters. The reduced maximum annual 

limitation on cost sharing for each silver plan variation for 2014 is proposed in the 

preamble for §156.420 of this Payment Notice. The reduced maximum annual limitation 

applies, as does the maximum annual limitation, only with respect to cost sharing on 

EHB, and does not apply to cost sharing on services provided by out-of-network 

providers. 

b. Cost-sharing reductions for enrollees 

 In §156.410(a), we propose that a QHP issuer must ensure that an individual 

eligible for cost-sharing reductions, as demonstrated by assignment to a particular plan 

variation, pay only the cost sharing required of an eligible individual for the applicable 

covered service under a plan variation. For example, if an individual is assigned to an 87 

percent AV silver plan variation, and the copayment for a hospital emergency room visit 

is reduced from $100 to $50 under that silver plan variation, the individual must be 

charged only the reduced copayment of $50. We also specify in this paragraph that the 

enrollee receive this reduction in cost sharing when the cost sharing is collected, which in 

this instance might occur when the enrollee visits the emergency room for care. This 

means that a QHP issuer may not create a system in which an eligible enrollee is required 

to pay the full cost sharing requirement and apply for a reimbursement or refund. This 

proposal applies to all forms of cost sharing, including copayments, coinsurance, and 

deductibles. Similarly, the QHP issuer must ensure that the enrollee is not charged any 

type of cost sharing after the applicable annual limitation on cost sharing has been met. 

We note, however, that an individual eligible for cost-sharing reductions would not be 

eligible for a reduced copayment or coinsurance rate until any applicable (potentially 

reduced) deductible has been paid. For example, assume that a QHP issuer requires a 
 186 

$750 deductible for individuals eligible for a 73 percent AV silver plan variation, with 

reduced cost sharing occurring after the deductible is met. Further assume that an 

individual eligible for cost-sharing reductions has not previously incurred cost sharing 

during the benefit year under the QHP and has a two day hospital stay that costs $500 per 

day. Under this plan variation, the individual must pay $500 for the first day and $250 

for the second day to meet the plan’s deductible requirements before receiving the 

reduced coinsurance or copayment under the 73 percent AV plan variation. We seek 

comment on these provisions. 

In §156.410(b), we propose that after a qualified individual makes a plan 

selection, a QHP issuer would assign the individual to the applicable plan variation under 

the eligibility determination sent to the QHP issuer by the Exchange. For example, an 

individual determined by the Exchange to be eligible for a 94 percent AV silver plan 

variation would be provided the option to enroll in any silver health plan with the 

appropriate cost-sharing reductions applied (the statute specifies that cost-sharing 

reductions are available to non-Indians only in silver health plans). We note that the 

QHP issuer is entitled to rely upon the eligibility determination sent to the QHP issuer by 

the Exchange. 

In §156.410(b)(1), we propose that a QHP issuer assign a qualified individual 

who chooses to enroll in a silver plan in the individual market in the Exchange to the 

silver plan variation for which the qualified individual is eligible. This proposal is 

consistent with section 1312(a)(1) of the Affordable Care Act, which permits the 

individual to enroll in the silver health plan. However, section 1312(a)(1) does not 

address whether the individual could opt out of the most generous silver plan variation 

(that is, to refuse the most generous cost-sharing reductions for which the individual is 

eligible). We believe that allowing opting out of the most generous silver plan variation 
 187 

could cause significant consumer confusion, with no attendant policy benefit. 

Furthermore, we note that if a qualified individual does not want to take advantage of the 

cost-sharing reductions for which he or she is eligible, the individual may elect to decline 

to apply for cost-sharing reductions when seeking enrollment through the Exchange. In 

addition, we note that section 1402(a) states the requirement on QHP issuers to provide 

cost-sharing reductions to eligible individuals once the QHP issuer has been notified of 

the individual’s eligibility. We invite comment on this approach. 

Section §156.410(b)(2) and (3) are discussed below in the section of this proposed 

rule related to special cost-sharing reduction rules for Indians. 

In §156.410(b)(4), we propose that a QHP issuer must assign an individual 

determined ineligible by the Exchange for cost-sharing reductions to the selected QHP 

with no cost-sharing reductions. 

c. Plan Variations 

In §156.420, we propose that issuers submit to the Exchange for certification and 

approval the variations of the health plans that they seek to offer, or continue to offer, in 

the individual market on the Exchange as QHPs that include required levels of costsharing reductions. We further clarify that under our proposal, multi-State plans, as 

defined in §155.1000(a), and CO–OP QHPs, as defined in §156.505, would be subject to 

the provisions of this subpart. OPM will certify the plan variations of the multi-State 

plans and determine the time and manner for submission. 

 Sections 1402(a) through (c) of the Affordable Care Act direct issuers to reduce 

cost sharing for EHB for eligible insured enrolled in a silver health plan with household 

incomes between 100 and 400 percent of the FPL, such that the plan’s share (before any 

reimbursement from HHS for cost-sharing reductions) of the total allowed costs of the 

benefits are a certain percentage (that is, the health plan meets a certain AV level). To 
 188 

achieve these AV levels, the law directs issuers to first reduce the maximum annual 

limitation on cost sharing. The amount of the reduction in the maximum annual 

limitation on cost sharing is specified in the statute; however, under section 

1402(c)(1)(B)(ii) of the Affordable Care Act, the Secretary may adjust the reduction to 

ensure that the resulting limits do not cause the AVs of the health plans to exceed the 

specified levels. After the issuer reduces the annual limitation on cost sharing to comply 

with the applicable reduced maximum annual limitation, section 1402(c)(2) of the 

Affordable Care Act directs the Secretary to establish procedures under which an issuer is 

to further reduce cost sharing if necessary to achieve the specified AV levels. 

Table 14 sets forth the reductions in the maximum annual limitation on cost 

sharing (subject to revision by the Secretary) and AV levels applicable to silver plans for 

these individuals, under section 1402(c) of the Affordable Care Act: 

TABLE 14: Statutory Reductions in Maximum Annual Limitation on Cost Sharing 

Household Income Reduction in Maximum Annual 

Limitation on Cost Sharing 

(subject to revision by the 

Secretary) 

AV Level 

(calculated before any 

reimbursement from HHS)

100-150% of FPL 2/3 94% 

150-200% of FPL 2/3 87% 

200-250% of FPL 1⁄2 73% 

250-300% of FPL 1⁄2 70% 

300-400% of FPL 1/3 70% 

 

 For individuals with household incomes of 250 to 400 percent of the FPL, we 

note that without any change in other forms of cost sharing, any reduction in the 

maximum annual limitation on cost sharing will cause an increase in AV. Therefore, a 

reduction in the maximum annual limitation on cost sharing for the standard silver plan 

could require corresponding increases in other forms of cost sharing to maintain the 

required 70 percent AV. For example, if a plan were directed to lower its annual 

limitation on cost sharing for individuals with household income between 250 and 400 
 189 

percent of the FPL from $6,000 to $5,000, the issuer might be required to significantly 

increase plan deductibles, coinsurance, and co-payments to maintain the required 70 

percent AV. We anticipate that most individuals would not expect to reach the annual 

limitation on cost sharing, and therefore, would be required to pay more in up-front costs 

under such a cost-sharing structure. Given the effect of the reductions in the maximum 

annual limitation on cost sharing outlined above and the additional administrative burden 

required in designing and operating additional silver plan variations, we propose not to 

reduce the maximum annual limitation on cost sharing for individuals with household 

incomes between 250 and 400 percent of the FPL. We believe that this approach is 

within the Secretary’s authority under section 1402(c)(1)(B)(ii) of the Affordable Care 

Act, and would benefit those individuals who do not expect to reach the annual limitation 

on cost sharing, who are likely to represent the majority of eligible individuals. The 

majority of those who commented on this approach in response to the AV/CSR Bulletin 

were supportive of this proposed implementation of section 1402(c)(1) of the Affordable 

Care Act. 

 For individuals with a household income of 100 to 250 percent of the FPL, we 

propose, as outlined in the AV/CSR Bulletin, an annual three-step process for the design 

of cost-sharing structures in the silver plan variations, as follows: 

Step 1. In the first step, we would identify in the annual HHS notice of benefit and 

payment parameters the maximum annual limitation on cost sharing applicable to all 

plans that will offer the EHB package. This limit would be used to set the reduced 

maximum annual limitation on cost sharing applicable to silver plan variations. 

Section 156.130(a) of the proposed EHB/AV Rule relates to the maximum annual 

limitation on cost sharing for EHB packages. For benefit year 2014, cost sharing (except 

for cost sharing on services provided by out-of-network providers) under self-only 
 190 

coverage and non-self-only coverage may not exceed the annual dollar limit on cost 

sharing for high deductible health plans as described in sections 223(c)(2)(A)(ii)(I) and 

223(c)(2)(A)(ii)(II) of the Code, respectively. For a benefit year beginning after 2014, 

the maximum annual limitation on cost sharing will equal the dollar limit for 2014 benefit 

year adjusted by a premium adjustment percentage determined by HHS, under section 

1302(c)(4) of the Affordable Care Act. We plan to propose the premium adjustment 

percentage applicable to the 2015 benefit year in the next HHS notice of benefit and 

payment parameters. 

Maximum Annual Limitation on Cost Sharing for Benefit Year 2014: As 

discussed above, the maximum annual limitation on cost sharing for 2014 will be the 

dollar limit on cost sharing for high deductible health plans set by the IRS for 2014. The 

IRS will publish this dollar limit in the spring of 2013. However, to allow time for HHS 

to analyze the impact of the reductions in the maximum annual limitation on cost sharing 

on health plan AV levels, and to allow issuers adequate time to develop the cost-sharing 

structures of their silver plan variations for submission during the QHP certification 

process, we propose to estimate the dollar limit for 2014, using the methodology detailed 

in sections 223(c)(2)(A)(ii) and 223(g) of the Code. This methodology calls for a base 

dollar limit to be updated annually by a cost-of-living adjustment, which for 2014 is 

based on the average Consumer Price Index for all urban consumers, published by the 

Department of Labor, for a 12-month period ending March 31, 2013. Because that the 

Consumer Price Index for March 2013 is not yet available, we propose to use a projection 

of this number developed by the Office of Management Budget for the President’s 

Budget for Fiscal Year 2013. Using this projection, and the methodology described in 

the Code, we estimate that the maximum annual limitation on cost sharing for self-only 

coverage for 2014 will be approximately $6,400 (the maximum annual limitation on cost 
 191 

sharing for other than self-only coverage for 2014 would be twice that amount, or 

$12,800). This is slightly more than a 2 percent increase from the limit set by IRS for 

2013 ($6,250). We emphasize that this estimate was developed only for purposes of 

setting the reduced maximum annual limitation on cost sharing for silver plan variations. 

Under section 1302(c)(1)(A) of the Affordable Care Act, cost sharing incurred under 

plans offering EHB packages in 2014 cannot exceed the limit set by IRS under section 

223(c)(2)(A)(ii)(I) and (II) of the Code for 2014 plan years. We welcome comment on 

this approach. 

Step 2. In the second step under our proposal, we would analyze the effect on AV 

of the reductions in the maximum annual limitation on cost sharing described in section 

1402(c)(1)(A) of the Affordable Care Act. Under section 1402(c)(1)(B)(ii), we would 

adjust the reduction in the maximum annual limitation on cost sharing, if necessary, to 

ensure that the actuarial value of the applicable silver plan variations would not exceed 

the actuarial value specified in section 1402(c)(1)(B)(i). A description of our analyses 

and the reduced annual limitations on cost sharing for the three income categories will be 

published in this annual HHS notice of benefit and payment parameters. 

Reduced Maximum Annual Limitation on Cost Sharing for Benefit Year 2014. 

For the 2014 benefit year, we analyzed the impact on actuarial value of the reductions 

described in the Affordable Care Act to the estimated maximum annual limitation on cost 

sharing for self-only coverage for 2014 ($6,400). We began by developing three model 

silver level QHPs. These model plans were meant to represent the broad sets of plan 

designs that we expect issuers to offer at the silver level of coverage through an 

Exchange. To that end, the model plans include a PPO plan with a typical cost-sharing 

structure ($1,675 deductible and 20 percent in-network coinsurance rate), a PPO plan 

with a lower deductible and above-average coinsurance ($575 deductible and 40 percent 
 192 

in-network coinsurance rate), and an HMO-like plan ($2,100 deductible, 20 percent 

coinsurance rate, and the following services with copays that are not subject to the 

deductible or coinsurance: $500 inpatient stay, $350 emergency department visit, $25 

primary care office visit, and $50 specialist office visit).37 All three model plans meet the 

actuarial value requirements for silver health plans, and start with an annual limitation on 

cost sharing equal to the estimated maximum annual limitation on cost sharing ($6,400). 

The plan design features of the model QHPs were entered into the AV calculator 

developed by HHS and proposed at §156.135(a) in the proposed EHB/AV Rule, 

implementing section 1302(d) of the Affordable Care Act. We then observed how the 

reduction in the maximum annual limitation on cost sharing specified in the Affordable 

Care Act (that is, 2/3 or 1/2 of the annual limitation on cost sharing, as applicable) 

affected the AV of the plans. 

We found that the reduction in the maximum annual limitation on cost sharing 

specified in the Affordable Care Act for enrollees with a household income level between 

100 and 150 percent of the FPL (2/3 reduction), and 150 and 200 percent of the FPL (2/3 

reduction), did not cause the AV of any of the model QHPs to exceed the statutorily 

specified AV level (94 and 87, respectively). This suggests that it is unnecessary to 

adjust the reduction under section 1402(c)(1)(B)(ii) of the Affordable Care Act for 

benefit year 2014. In contrast, the reduction in the maximum annual limitation on cost 

sharing specified in the Affordable Care Act for enrollees with a household income level 

 

37 We note that these plan structures are broadly consistent with structures suggested by research from 

“Small Group Health Insurance in 2010: A Comprehensive Survey of Premiums, Product Choices, and 

Benefits.” America’s Health Insurance Plans Center for Policy and Research. July 2011; “Employer 

Health Benefits: 2011 Summary of Findings.” The Kaiser Family Foundation and Health Research & 

Educational Trust. Accessed on June 7, 2012 from http://ehbs.kff.org/pdf/8226.pdf; and “What the 

Actuarial Values in the Affordable Care Act Mean.” The Kaiser Family Foundation: Focus on Health 

Reform. April 2011. Accessed on June 7, 2012 from http://www.kff.org/healthreform/upload/8177.pdf. 
 193 

between 200 and 250 percent of FPL (1/2 reduction), did cause the AVs of the model 

QHPs to exceed the specified AV level of 73 percent. As a result, we propose that QHP 

issuers only be required to reduce their annual limitation on cost sharing for enrollees in 

the 2014 benefit year with a household income between 200 and 250 percent of FPL by 

approximately 1/5, rather than 1/2. We further propose to moderate the reductions in the 

maximum annual limitation on cost sharing for all three income categories, as shown in 

Table 15, to account for any potential inaccuracies in our estimate of the maximum 

annual limitation on cost sharing for 2014, and unique plan designs that may not be 

captured by our three model QHPs. We note that selecting a lesser reduction for the 

maximum annual limitation on cost sharing will not reduce the benefit afforded to 

enrollees in aggregate as QHP issuers are required to further reduce their limit on cost 

sharing, or reduce other types of cost sharing, if the required reduction does not cause the 

actuarial value of the QHP to meet the specified level, as detailed in step 3 of this 

proposal. Based on this analysis, in Table 15, we propose the following reduced 

maximum annual limitations on cost sharing for benefit year 2014: 

TABLE 15: Reductions in Maximum Annual Limitation on Cost Sharing for 2014 

Eligibility Category Reduced Maximum Annual 

Limitation on Cost Sharing 

for Self-Only Coverage for 

2014 

Reduced Maximum 

Annual Limitation on 

Cost Sharing for Other 

Than Self-Only 

Coverage for 2014 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(i) (that is, 100-

150% of FPL) 

$2,250 $4,500 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(ii) (that is, 150-

200% of FPL) 

$2,250 $4,500 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(iii) (that is, 200-

250% of FPL) 

$5,200 $10,400 
 194 

 We do not believe there will be a need to revise our analyses once the IRS dollar 

limit for 2014 is published, and propose that QHP issuers may rely on the reduced 

maximum annual limitations on cost sharing published in the final HHS notice of benefit 

and payment parameters to develop their silver plan variations for the 2014 benefit year. 

We welcome comment on this approach. 

Step 3. In the third step under our proposal, a QHP issuer offering coverage in the 

individual market on the Exchange would develop three variations of its standard silver 

plan – one each for individuals with household incomes between 100 and 150 percent of 

the FPL, 150 and 200 percent of the FPL, and 200 and 250 percent of the FPL – with 

each variation having an annual limitation on cost sharing that does not exceed the 

applicable reduced maximum annual limitation on cost sharing published in the annual 

HHS notice of benefit and payment parameters. If the application of the reduced annual 

limitation on cost sharing results in an AV for a particular silver plan variation that 

differs from the required 73, 87, or 94 percent AV level by more than the permitted 

amount (that is, the 1 percent de minimis amount for silver plan variations, subject to 

proposed §156.420(f), as described below), the QHP issuer would adjust the cost-sharing 

structure in that silver plan variation to achieve the applicable AV level. 

For example, we propose to set the reduced maximum annual limitation on cost 

sharing for self-only coverage for 2014 at $2,250 for individuals with household incomes 

between 150 and 200 percent of the FPL. However, an issuer might find that even when 

the limitation on cost sharing for the proposed plan is reduced to $2,250, the actuarial 

value of the plan may only increase to 82 percent. The issuer would then amend its costsharing structure by decreasing copayments, deductibles or coinsurance (or further 

reducing the annual limitation on cost sharing) so that the silver plan variation achieves 

the required AV of 87 percent (plus or minus the de minimis variation for silver plan 
 195 

variations). The AV of the silver plan variation would be calculated using the AV 

calculator or other permitted methods, as described in §156.135 of the proposed EHB/AV 

Rule. 

We set forth in §156.420(a)(1) through (3) proposed specifications for the three 

silver plan variations, and propose that they may deviate from the required AV levels by 

the de minimis variation for silver plan variations, established as 1 percentage point. We 

further propose that issuers submit these silver plan variations annually to the Exchange 

for certification, prior to the benefit year. Silver plan variations must be approved 

annually even if the standard silver plan does not change, since the reduced maximum 

annual limitation on cost sharing may change annually due to the premium adjustment 

percentage. We welcome comment on this proposed provision. 

Sections 156.420(b) and (d) are discussed below in the section related to special 

cost-sharing reduction rules for Indians. 

In §156.420(c), we propose that silver plan variations cover the same benefits and 

include the same providers as the standard silver plan. We further propose that silver 

plan variations must require the same out-of-pocket spending for benefits other than 

EHB. Lastly, we propose that silver plan variations be subject to all requirements 

applicable to the standard silver plan (except for the requirement that the plan have an 

AV as set forth in §156.140(b)(2) of the proposed EHB/AV Rule). This means, for 

example, that silver plan variations must meet standards relating to marketing and benefit 

design of QHPs, network adequacy standards, and essential community providers. 

Although these requirements are implicit because a plan variation is not a separate plan, 

we seek to make these requirements explicit to ensure that QHP issuers develop 

appropriate plan variations. 
 196 

In §156.420(e), we propose a standard to govern the design of cost sharing 

structures for silver plan variations. Under this approach, the cost sharing for enrollees 

under any silver plan variation for an EHB from a provider may not exceed the 

corresponding cost sharing in the standard silver plan or any other silver plan variation of 

the standard silver plan with a lower AV. For example, if the co-payment on an 

emergency room visit at a particular university hospital is $30 in the silver plan variation 

with a 73 percent AV, the co-payment in the silver plan variation with an 87 percent AV 

for that issuer would be $30 or less. This proposed standard would apply to all types of 

cost-sharing reductions, including reductions to deductibles, coinsurance, and copayments. An issuer would have the flexibility to vary cost sharing on particular benefits 

or providers so long as that cost sharing did not increase for a particular benefit or 

provider for higher AV silver plan variations. This standard, along with the proposed 

requirements in §156.420(c), would help ensure that silver plan variations with higher 

AVs would always provide the most cost savings to enrollees while providing the same 

benefits and provider network. Furthermore, consumers would be best served by 

enrolling in the highest AV variation of the standard silver plan selected for which they 

are eligible. We also believe that this proposed standard is appropriate as the plan 

variations are meant to be the same as the QHP, except as to the payer of the cost sharing 

and the reduction in out-of-pocket costs charged to the eligible individual. 

 We provided an overview of this proposed approach in the AV/CSR Bulletin. 

One commenter expressed concern about the differential effect of deductibles on lowincome populations, and suggested that we also set limits on deductibles in silver plan 

variations. A number of other commenters also urged HHS to adopt more restrictive 

requirements on issuers’ designs of cost-sharing structures in silver plan variations. One 
 197 

commenter urged HHS to systematically monitor a number of aspects of how QHP 

issuers implement cost-sharing reductions. 

We believe that, at this point, this proposal strikes the appropriate balance 

between protecting consumers and preserving QHP issuer flexibility. The standard in 

§156.420(e) that cost sharing for a silver plan variation not exceed the corresponding cost 

sharing for a standard silver plan or silver plan variation with a lower AV, along with 

non-discrimination standards described in §156.130(g) of the proposed EHB/AV Rule, 

protects low-income populations who are assigned to these QHP plan variations through 

the Exchange. We seek comment on this approach. 

In §156.420(f), we propose that, notwithstanding the permitted de minimis 

variation in AV for a health plan or the permitted de minimis variation for a silver plan 

variation, the AV of the standard silver plan (which must be 70 percent plus or minus 2 

percentage points) and the AV of the silver plan variation applicable to individuals with 

household incomes between 200 and 250 percent of the FPL (which must be 73 percent 

plus or minus 1 percentage point) must differ by at least 2 percentage points. For 

example, under the de minimis standard proposed in §156.140(c)(1) of the proposed 

EHB/AV rule, an issuer would be permitted to offer a standard silver plan with an AV of 

72 percent. Under the proposed rule in §156.420(f), that issuer would be permitted to 

offer a silver plan variation with an AV of 74 percent to individuals with household 

incomes between 200 and 250 percent of the FPL, but not a silver plan variation with an 

AV of 73 percent. This proposal helps ensure that eligible enrollees with household 

incomes between 200 and 250 percent of the FPL can purchase a plan with a cost-sharing 

structure that is more generous than that associated with the standard silver plan, 

consistent with Congressional intent for cost-sharing reductions under section 1402(c). 

We chose to propose a 2 percentage point differential to ensure that a difference in cost-
 198 

sharing reductions provided to each income category is maintained, while still allowing 

issuers the flexibility to set the AV within the de minimis variation standards and to 

develop plan designs with easy-to-understand cost sharing arrangements. We welcome 

comments on this approach. 

d. Changes in Eligibility for Cost-Sharing Reductions 

In §156.425(a), we propose that if the Exchange notifies a QHP issuer of a change 

in an enrollee’s eligibility for cost-sharing reductions (including a change following 

which the enrollee will not be eligible for cost-sharing reductions), then the QHP issuer 

must change the individual’s assignment so that the individual is assigned to the 

applicable standard plan or plan variation. We also propose that the QHP issuer 

effectuate the change in eligibility in accordance with the effective date of eligibility 

provided by the Exchange, as described in §155.330(f). We clarify that if an enrollee 

changes QHPs after the effective date of the eligibility change as the result of a special 

enrollment period, once the Exchange notifies the issuer of the new QHP of the 

enrollment, that QHP issuer must assign the enrollee to the applicable standard plan or 

plan variation of the QHP selected by the enrollee, consistent with the proposed 

§156.410(b). 

In paragraph (b) of §156.425, we propose that in the case of a change in 

assignment to a different plan variation (or standard plan without cost-sharing reductions) 

of the same QHP in the course of a benefit year (including in the case of a re-enrollment 

into the QHP following enrollment in a different plan), the QHP issuer must ensure that 

any cost sharing paid by the applicable individuals under the previous plan variations (or 

standard plan without cost-sharing reductions) is accounted for in the calculation of 

deductibles and annual limitations on cost sharing in the individual’s new plan variation 

for the remainder of the benefit year. We note that a change from or to an individual or 
 199 

family policy of a QHP due to the addition or removal of family members does not 

constitute a change in plan for the family members who remain on the individual or 

family policy. Individuals would therefore not be penalized by changes in eligibility for 

cost-sharing reductions during the benefit year or the addition or removal of family 

members, although they would be ineligible for any refund on cost sharing to the extent 

the newly applicable deductible or annual limitation on cost sharing is exceeded by prior 

cost sharing. The QHP issuer would not be prohibited from or required to extend this 

policy to situations in which the individual changes QHPs, including by enrolling in a 

QHP at a different metal level, but would be permitted to so extend this policy, provided 

that this extension of the policy is applied across all enrollees in a uniform manner. We 

seek comment on this provision. 

e. Payment for Cost-Sharing Reductions 

Section 1402(c)(3) of the Affordable Care Act directs a QHP issuer to notify the 

Secretary of HHS of cost-sharing reductions made under the statute for individuals with 

household incomes under 400 percent of the FPL, and directs the Secretary to make 

periodic and timely payments to the QHP issuer equal to the value of those reductions. 

Section 1402(c)(3)(B) also permits the Secretary to establish a capitated payment system 

to carry out these payments. Further, section 1412(c)(3) of the Affordable Care Act 

permits advance payments of cost-sharing reduction amounts to QHP issuers based upon 

amounts specified by the Secretary. Under these authorities, we propose to implement a 

payment approach under which we would make monthly advance payments to issuers to 

cover projected cost-sharing reduction amounts, and then reconcile those advance 
 200 

payments at the end of the benefit year to the actual cost-sharing reduction amounts.38 

This approach fulfills the Secretary’s obligation to make “periodic and timely payments 

equal to the value of the reductions” under section 1402(c)(3) of the Affordable Care Act. 

This proposal would not require issuers to fund the value of any cost-sharing reductions 

prior to reimbursement (to the extent the issuers provide the required actuarial 

information), and ensures that payments are made only for actual cost-sharing reduction 

amounts realized by Exchange enrollees. This approach is similar to the one employed 

for the low-income subsidy under Medicare Part D. We welcome comments on this and 

alternative approaches, and whether this approach should change over time. 

To implement our proposed payment approach, in §156.430(a)(1)(i) through (iv), 

we propose that for each health plan that an issuer offers, or intends to offer, in the 

individual market on the Exchange as a QHP, the issuer must provide to the Exchange 

annually prior to the benefit year, for approval by HHS, an estimate of the dollar value of 

the cost-sharing reductions to be provided over the benefit year. If the QHP is a silver 

health plan, the submission must identify separately the per member per month dollar 

value of the cost-sharing reductions to be provided under each silver plan variation 

identified in §156.420(a)(1), (2), and (3). And for each QHP, regardless of metal level, 

the submission must identify the per member per month dollar value of the cost-sharing 

reductions to be provided under the zero cost sharing plan variation. In addition, the 

estimate should be accompanied by supporting documentation validating the estimate. 

We expect that Exchanges will collect this information from issuers through the QHP 

certification process or an annual submission process, and then send the information to 

 

38 We note that these payments (both advance and reconciled), and the estimated or actual cost-sharing 

reductions underlying them, are subject to 45 CFR 156.280(e)(1)(ii). 
 201 

HHS for review and approval. Sections 156.430(a)(1)(ii) and 156.430(a)(2) are further 

described in section III.E.4.i. of this proposed rule. 

We further propose that issuers develop the estimates using the methodology 

specified by HHS in the applicable annual HHS notice of benefit and payment 

parameters. In §156.430(a)(3), we propose that HHS will approve estimates that follow 

this methodology. For the 2014 benefit year, we propose that issuers use a methodology 

that utilizes the data that issuers submit under §156.420 and §156.470. As a result, 

issuers would not be required to submit any additional data or supporting documentation 

to receive advance payments in benefit year 2014 for the value of the cost-sharing 

reductions that would be provided under silver plan variations. Below, we describe in 

detail how the data that issuers will submit under §156.420 and §156.470 will be used to 

develop the estimate of the value of the cost-sharing reductions for the 2014 benefit year. 

 Methodology for Developing Estimate of Value of Cost-Sharing Reductions for 

Silver Plan Variations for 2014 Benefit Year. We propose that for the 2014 benefit year, 

issuers use a simplified methodology for estimating the value of the cost-sharing 

reductions under silver plan variations and calculating the advance payments. We 

believe that the lack of data regarding the costs that will be associated with the QHPs and 

their plan variations will make it difficult to accurately predict the value of the costsharing reductions, even if a complex methodology is used. We intend to review the 

methodology for estimating the advance payments in future years, once more data is 

available. We also note that the payment reconciliation process described §156.430(c) 

through paragraph (e) would ensure that the QHP issuer is made whole for the value of 

any cost-sharing reductions provided during the year, which may not be equal to the 

value of the advance payments. 
 202 

For the 2014 benefit year, we propose that advance payments be estimated on a 

per enrollee per month basis using the following formula: 

 In this formula, the monthly expected allowed claims cost for a silver plan 

variation would equal one-twelfth of the expected allowed claims costs allocated to EHB, 

other than services described in §156.280(d)(1),39 for the standard silver plan, multiplied 

by a factor to account for the increased utilization that may occur under the specific plan 

variation due to the reduced cost-sharing requirements. As described in §156.470, the 

QHP issuer will submit the expected allowed claims cost information to the Exchange 

annually. The Exchange will then review this estimate, and submit the approved 

information to HHS, as described in proposed §155.1030(b)(2) above, for use in the 

advance payment calculation. HHS will then multiply the monthly expected allowed 

claims cost by one of the following induced utilization factors, to arrive at the monthly 

expected allowed claims cost for the particular plan variation. We propose the following 

induced utilization factors based on our analysis of the expected difference in 

expenditures for enrollees in QHPs of different actuarial values. For this analysis, we 

used the Actuarial Value Calculator, developed by HHS using the Health Intelligence 

Company, LLC (HIC) database from calendar year 2010. This database includes detailed 

enrollment and claims information for individuals who are members of regional insurers 

and covers over 54 million individuals. The database includes current members of small 

 

39 Under §156.20, cost-sharing reductions are only provided on EHB. In addition, §156.280(e)(1)(i) states 

that if a QHP provides coverage of services described in paragraph (d)(1) of that section, the QHP issuer 

must not use federal funds, including cost-sharing reductions, to pay for the service. 
 203 

group health plans, and a population relatively similar to the population of enrollees 

likely to participate in the health exchanges.40 

TABLE 16: Induced Utilization Factors for Purposes of Cost-Sharing Reduction 

Advance Payments 

Household Income Silver Plan AV Induced Utilization Factor 

100-150% of FPL Plan Variation 94% 1.12 

150-200% of FPL Plan Variation 87% 1.12 

200-250% of FPL Plan Variation 73% 1.00 

 In the second half of the formula, we propose the multiplication of the monthly 

expected allowed claims cost for the particular plan variation by the difference in AV 

between the standard silver plan and the plan variation. This will allow us to estimate the 

difference in cost sharing between the standard plan and the plan variation. We propose 

to use the actuarial values of the QHPs and silver plan variations that the Exchange will 

submit to HHS under §155.1030(a)(2). 

 This methodology should limit the burden of estimating cost-sharing reduction 

amounts on QHP issuers, and provide a standardized per enrollee per month estimate of 

the value of cost-sharing reductions. This estimate can then be multiplied by the number 

of enrollees assigned to a particular plan variation in a given month to arrive at the total 

advance payment that will be provided to the issuer for each plan variation of each QHP, 

for a given month. We welcome comment on this methodology and the proposed 

induced utilization factors, as well as the value of increasing the complexity of the 

methodology versus the value of operational efficiency. 

 

40 We note that these induced utilization factors appear to be broadly consistent with results from the 

RAND Health Insurance Experiment, described in Robert H. Brook, John E. Ware, William H. Rogers, 

Emmett B. Keeler, Allyson Ross Davies, Cathy Donald Sherbourne, George A. Goldberg, Kathleen N. 

Lohr, Patti Camp, and Joseph P. Newhouse. The Effect of Coinsurance on the Health of Adults: Results 

from the RAND Health Insurance Experiment. Santa Monica, Calif.: RAND Corporation, R-3055-HHS, 

December 1984. 
 204 

In §156.430(b), we propose making periodic advance payments to issuers based 

on the approved advance estimates provided under §156.430(a) and the confirmed 

enrollment information. We propose to use the methodology described above to 

determine the amount of these advance payments. 

In §156.430(c), we propose that a QHP issuer report to HHS the actual amount of 

cost-sharing reductions provided. In general, for a particular benefit provided by the 

QHP, this amount would equal the difference between the cost sharing required of an 

enrollee in the corresponding standard silver plan with no cost-sharing reductions and the 

cost sharing that was actually required of the enrollee under the plan variation at the point 

where the service was provided. For example, if an individual enrolled in a silver plan 

variation receives a benefit that would be subject to a $20 copayment under the standard 

silver plan but is subject to only a $5 copayment under the silver plan variation in which 

the individual is enrolled, the cost-sharing reduction amount would be $15. Additional 

specifications regarding submission of actual cost-sharing reduction amounts will be 

provided in future guidance; however, we expect that QHP issuers will submit the actual 

amount of cost-sharing reductions provided after the close of the benefit year. 

In §156.430(c)(1) and (c)(2), we propose specific standards for the reporting of 

cost-sharing reduction amounts. In §156.430(c)(1), we propose that in the case of a 

benefit for which the QHP issuer compensates the applicable provider in whole or in part 

on a fee-for-service basis, the QHP issuer submit the total allowed costs for essential 

health benefits charged for an enrollees’ policy for the benefit year, broken down by what 

the issuer paid, what the enrollee paid, and the amount reimbursed to the provider for the 

amount that the enrollee would have paid under the standard QHP without cost-sharing 

reductions. In §156.430(c)(2), we propose that in the case of a benefit for which the QHP 

issuer compensates the applicable provider in any other manner (such as on a capitated 
 205 

basis), the QHP issuer submit the total allowed costs for essential health benefits charged 

for an enrollees’ policy for the benefit year, broken down by what the issuer paid, what 

the enrollee paid, and the amount that the enrollee would have paid under the standard 

QHP without cost-sharing reductions. When we refer to compensation made on a 

capitated basis in this context, we mean a compensation model under which issuers make 

payments to providers based on a contracted rate for each enrollee, commonly referred to 

as a “per-member-per-month” rate, regardless of the number or type of services provided. 

We note that a non-fee-for-service provider is not required to be reimbursed by the issuer. 

However, we expect that issuers and providers in non-fee-for-service arrangements will 

make available to providers compensation for cost-sharing reductions through their 

negotiated capitation payments. We seek comments on this assumption and other 

payment approaches for QHPs that use a capitated system to pay providers. 

In §156.430(d), we propose to periodically reconcile advance payments to issuers 

against the actual cost-sharing reduction amounts reported under §156.430(c). Thus, 

where a QHP issuer compensates a provider in whole or in part on a fee-for-service basis, 

we would reconcile the advance payments provided to the issuer against the actual 

amount of cost-sharing reductions reimbursed to providers and provided to enrollees. 

Where the QHP issuer compensates a provider under another arrangement, such as a 

capitated arrangement, we would reconcile the advance payments made to issuers against 

the actual cost-sharing reduction amounts provided to enrollees. We propose this 

differentiated reimbursement approach because if issuers are paying providers on a basis 

other than a fee-for-service basis, the parties may not be exchanging data or making 

payments on a per-service basis. We do not wish to interfere with contractual payment 

arrangements between issuers and providers by imposing per-service accounting or 

payment streams if an issuer and provider have elected not to structure their relationship 
 206 

in that manner. However, in all cases we would condition reimbursement upon provision 

to the enrollee at the point-of-service of the cost-sharing reduction under the applicable 

plan variation. We welcome comment on this proposal. 

We propose in §156.430(e) that if the actual amounts of cost-sharing reductions 

exceed the advance payment amounts provided to the issuer (including if the QHP issuer 

elected not to submit an advance estimate of the cost-sharing reduction amounts provided 

under the limited cost sharing plan variation, and therefore received no advance 

payments), HHS would reimburse the issuer for the shortfall, assuming that the issuer has 

submitted its actual cost-sharing reduction amount report to HHS in a timely fashion. If 

the actual amounts of cost-sharing reductions are less than the advance payment amounts 

provided to the issuer, we propose that the QHP issuer must repay the difference to HHS. 

Detailed procedural requirements and interpretive guidance on cost-sharing reduction 

reconciliation will be provided in the future. 

In §156.430(f), we propose rules on advance payment and reimbursement of costsharing reductions during special transitional periods of coverage where eligibility and 

enrollment are uncertain, including requirements relating to cost-sharing reductions 

provided during grace periods following non-payment of premium. Under §156.270, a 

QHP issuer must establish a standard policy for termination of coverage for non-payment 

of premiums by enrollees. Under that policy, a three-month grace period applies if an 

enrollee receiving advance payments of the premium tax credit has previously paid at 

least one full month’s premium during the benefit year. In the first month of the grace 

period, the QHP issuer must pay all appropriate claims for services rendered and HHS 

would reimburse the QHP issuer for cost-sharing reductions for such claims (and the 

QHP issuer may retain any advance payments of cost-sharing reductions), but the issuer 

may pend claims for services rendered to the enrollee in the second and third months of 
 207 

the grace period. If an enrollee exhausts the grace period without making full payment of 

the premiums owed, the QHP issuer may terminate coverage and deny payment for the 

pending claims. 

In §156.430(f)(1), we propose standards related to the non-payment of premiums 

and exhausted grace periods. We propose that a QHP issuer will be eligible for 

reimbursement of cost-sharing reductions provided prior to a termination of coverage 

effective date. Furthermore, any advance payments of cost-sharing reductions would be 

paid to a QHP issuer for coverage prior to a determination of termination, including 

during any grace period as described in §155.430(b)(2)(ii)(A) and (B). The 

determination of termination occurs on the date that the Exchange sends termination 

information to the QHP issuer and HHS under §155.430(c)(2). 

The QHP issuer would be required to repay any advance payments of cost-sharing 

reductions made with respect to any month after any termination of coverage effective 

date during a grace period. A QHP issuer generally would not be eligible for 

reimbursement of cost-sharing reductions provided after the termination of coverage 

effective date with respect to a grace period. For example, if an individual receiving 

advance payments of the premium tax credit is eligible for cost-sharing reductions, and 

stops paying his or her premium, HHS would continue to provide advance payments of 

the cost-sharing reductions during the grace period. HHS would reimburse the QHP 

issuer for any reduction in cost sharing provided during the first month of the threemonth grace period, but not after the termination of coverage effective date (that is, there 

will be no reimbursement for cost-sharing reductions provided during the second and 

third month of the grace period if retroactive termination occurs). The issuer may pend 

claims and payments for cost-sharing reductions for services rendered to the individual in 

the second and third month of the grace period, as described in §156.270(d). The QHP 
 208 

issuer must return to HHS any advance payments of the cost-sharing reduction applicable 

to the second and third months. This proposed policy aligns with the approach for 

advance payments of the premium tax credit described in §156.270(e). 

We propose in §156.430(f)(2) and (3) that in the case of any other retroactive 

termination, if the termination (or late determination thereof) is the fault of the QHP 

issuer, as reasonably determined by the Exchange, the QHP issuer would not be eligible 

for advance payments and reimbursement for cost-sharing reductions provided during the 

period following the termination of coverage effective date and prior to the determination 

of the termination; and if the termination (or the late determination thereof) is not the 

fault of the QHP issuer, as reasonably determined by the Exchange, the QHP issuer 

would be eligible for advance payments and reimbursement for cost-sharing reductions 

provided during such period. For example, if a QHP issuer fails to timely notify the 

Exchange that an enrollee requested a termination of coverage, the Exchange could 

reasonably determine that the QHP issuer is at fault and would not be eligible for advance 

payments and reimbursement for cost-sharing reductions provided during the period 

following the termination of coverage effective date and prior to the determination of the 

termination. Alternatively, if an individual was incorrectly enrolled in a QHP due to an 

error by the Exchange, the QHP issuer would not be at fault and would be eligible for 

advance payments and reimbursement for cost-sharing reductions provided during the 

period following the termination of coverage effective date and prior to the determination 

of the termination. We welcome comment on this proposal and other approaches, and 

seek comment on the relative equities of, incentives created by, and consequences of this 

proposal and other approaches, including the potential costs to HHS. 

In §156.430(f)(4), we propose that a QHP issuer would be eligible for advance 

payments and reimbursement of cost-sharing reductions provided during any period for 
 209 

resolution of inconsistencies in information required to determine eligibility for 

enrollment under §155.315(f). Under §155.315(f), if an Exchange cannot verify 

eligibility information for an individual, it must provide the individual at least 90 days to 

present satisfactory evidence of eligibility to resolve the inconsistency. In the interim, 

the Exchange must make an eligibility determination based upon the individual’s 

attestation and other verified information in the application, including with respect to the 

cost-sharing reductions for which the individual is eligible. At the end of the 

inconsistency period, if the Exchange cannot confirm the attestation, the Exchange must 

make the eligibility determination based upon the data available, subject to certain 

exceptions. In the event the Exchange cannot confirm the attestation and determines the 

individual to be ineligible for cost-sharing reductions provided during the inconsistency 

period, we propose to reimburse those cost-sharing reductions because there is no clear 

mechanism under the Affordable Care Act for seeking reimbursement of those amounts 

from the individual. We welcome comment on this proposal and other approaches, and 

seek comment on the relative equities of, incentives created by, and consequences of this 

proposal and other approaches, including the potential costs to HHS. 

f. Plans Eligible for Advance Payments of the Premium Tax Credit and Cost-Sharing 

Reductions 

In §156.440, we clarify the applicability of advance payments of the premium tax 

credit and cost-sharing reductions to certain QHPs. We propose that the provisions of 

part 156 subpart E generally apply to qualified health plans offered in the individual 

market on the Exchange. 

However, we propose in §156.440(a) that the provisions not apply to catastrophic 

plans as described in §156.155 of the proposed Market Reform Rule to be consistent with 

26 CFR 1.36B-1(c). Section 36B(c)(3)(A) of the Code defines a QHP to exclude 
 210 

catastrophic plans – a definition that also applies to section 1402 of the Affordable Care 

Act, by means of section 1402(f)(1) of the Affordable Care Act. Further, eligibility for 

cost-sharing reductions is tied to a “coverage month with respect to which a premium tax 

credit is paid,” which would exclude months during which the individual is enrolled in a 

catastrophic health plan. Therefore, we propose that enrollment in a catastrophic plan 

precludes eligibility for cost-sharing reductions. Effectively, this proposal restricts the 

provision of cost-sharing reductions with respect to Indians only, because non-Indians 

can only receive cost-sharing reductions when enrolled in a silver plan variation. 

We propose in §156.440(b) that the provisions of this subpart E, including 

§156.410, §156.420, §156.425, §156.430, and §156.470, to the extent each relate to costsharing reductions, not apply to stand-alone dental plans. Section 1311(d)(2)(B)(ii) of the 

Affordable Care Act provides that an Exchange must allow a stand-alone dental plan that 

provides pediatric dental benefits that are EHB to be offered separately from or in 

conjunction with a QHP. However, section 1402(c)(5) of the Affordable Care Act states 

if an individual enrolls in both a QHP and a stand-alone dental plan, the provisions on 

cost-sharing reductions under sections 1402(a) and (c) of the Affordable Care Act do not 

apply to that portion of the cost-sharing reductions properly allocable to pediatric dental 

EHB, meaning that if an individual enrolls in both a QHP and a stand-alone dental plan 

offered on an Exchange, cost-sharing reductions are not payable with respect to pediatric 

dental benefits offered by the stand-alone dental plan. However, cost-sharing reductions 

would be payable with respect to pediatric dental benefits provided by a QHP. Requiring 

payment of cost-sharing reductions on pediatric dental benefits within a stand-alone 

dental plan offered on an Exchange would create significant operational complexities. 

For example, stand-alone dental plans would be required to submit plan variations, and 

since the calculation of AV for stand-alone dental plans will not be standardized, the 
 211 

review and approval of the plan variations and advance estimates would be difficult to 

oversee. 

We propose to clarify in §156.440(c) that the provisions of this subpart E apply to 

child-only plans. Section 1302(f) of the Affordable Care Act and §156.200(c)(2) of this 

subchapter provides that an issuer that offers a QHP at any level of coverage in an 

Exchange also must offer the plan at the same level of coverage in the Exchange only to 

individuals that have not attained age 21. Under section 1302(f) of the Affordable Care 

Act, the child-only plan is to be treated as a QHP, and is therefore subject to the 

provisions of this subpart E. 

g. Reduction of Enrollee’s Share of Premium to Account for Advance Payments of the 

Premium Tax Credit 

In §156.460(a), we propose to codify QHP issuer requirements set forth in section 

1412(c)(2)(B) of the Affordable Care Act. The law authorizes the payment of advance 

tax credits to QHP issuers on behalf of certain qualified enrollees. The advance payment 

must be used to reduce the portion of the premium charged to enrollees. In 

§156.460(a)(1), we propose to codify clause (i) of that subparagraph, which requires that 

a QHP issuer reduce the portion of the premium charged to the enrollee by the amount of 

the advance payment of the premium tax credit for the applicable month(s). 

In §156.460(a)(2), we propose to codify section 1412(c)(2)(B)(ii) of the statute, 

which requires that the QHP issuer notify the Exchange of any reduction in the portion of 

the premium charged to the individual. This notification will be sent to the Exchange 

through the standard enrollment acknowledgment in accordance with §156.265(g). That 

information will then be submitted to the Secretary via enrollment information sent from 

the Exchange to HHS under §155.340(a)(1). 
 212 

In §156.460(a)(3), we propose to codify section 1412(c)(2)(B)(iii), which requires 

that a QHP issuer display the amount of the advance payment of the premium tax credit 

for the applicable month(s) on an enrollee’s billing statement. This requirement would 

ensure that the enrollee is aware of the total cost of the premium and would allow the 

enrollee to verify that the correct amount for the advance payment of the premium tax 

credit has been applied to his or her account. 

In §156.460(b), we propose that a QHP issuer may not refuse to commence 

coverage under a policy or terminate a policy on account of any delay in payment from 

the Federal government of an advance payment of the premium tax credit on behalf of an 

enrollee if the QHP issuer has been notified by the Exchange that it would receive an 

advance payment. We expect that monthly advance payments of the premium tax credit 

would be paid in the middle of the month, and propose to require that issuers not decline 

to cover individuals nor terminate policies for which the enrollee’s payments have been 

timely made on account of the timing of the advance payments of the premium tax credit. 

We welcome comment on these proposals. 

h. Allocation of Rates and Claims Costs for Advance Payments of Cost-Sharing 

Reductions and the Premium Tax Credit 

 As described in section III.E.2. of this proposed rule, we propose in §156.470 to 

direct issuers to allocate the rate or expected premium for each metal level health plan 

and stand-alone dental plan offered, or proposed to be offered, in the individual market 

on the Exchange, and the expected allowed claims costs for the metal level health plans, 

among EHB and additional benefits. Issuers must submit these allocations annually to 

the Exchange, along with an actuarial memorandum with a detailed description of the 

methods and specific bases used to perform the allocations. The Exchange and HHS will 
 213 

use this memorandum to verify that these allocations meet the standards set forth in 

paragraphs (c) and (d) of §156.470. 

 We propose that issuers submit the allocation information to the Exchange as part 

of the QHP certification process and an annual submission process for QHPs that are 

already certified, though an Exchange may specify alternative submission channels. For 

example, for issuers interested in participating in a Federally-facilitated Exchange, we 

propose to collect the metal level health plan allocation information through the Effective 

Rate Review program. We proposed revisions to the rate review reporting requirements 

in the proposed Market Reform Rule to include the allocation submission. This approach 

should streamline the submission process for issuers. We note that multi-State plans, as 

defined in §155.1000(a), are subject to these provisions. OPM would determine the time 

and manner for multi-State plans to submit the allocation information. We welcome 

comment on this proposal. 

i. Special Cost-Sharing Reduction Rules for Indians 

 We discuss in greater detail below a number of provisions throughout this 

proposed subpart E implementing section 1402(d) of the Affordable Care Act, which 

governs cost-sharing reductions for Indians. 

 Interpretation of section 1402(d)(2) of the Affordable Care Act: Section 

1402(d)(1) of the Affordable Care Act directs a QHP issuer to treat an Indian with 

household income not more than 300 percent of the FPL as an “eligible insured” – a 

defined term in the statute triggering cost-sharing reductions for non-Indians – and to 

eliminate all cost sharing for those Indians. Conversely, section 1402(d)(2) of the 

Affordable Care Act, which prohibits cost sharing under a plan for items or services to an 

Indian enrolled in a QHP provided directly by the Indian Health Service, an Indian Tribe, 

Tribal Organization, or Urban Indian Organization, or through referral under contract 
 214 

health services, does not direct the issuer to treat the Indian as an “eligible insured.” 

Section 1402(f)(2) of the Affordable Care Act permits cost-sharing reductions only for 

months in which the “insured” – which we interpret to be synonymous with the term 

“eligible insured” – is allowed a premium tax credit. The implications of this 

interpretation are that cost-sharing reductions under sections 1402(a) and 1402(d)(1) of 

the Affordable Care Act are only available to individuals eligible for premium tax credits. 

However, cost-sharing reductions under section 1402(d)(2) of the Affordable Care Act 

would be available to Indians regardless of their eligibility for premium tax credits. This 

approach aligns with the typical practice today, under which cost sharing is not required 

with respect to services provided to an Indian by the IHS, an Indian Tribe, Tribal 

Organization, or Urban Indian Organization. Furthermore, as described in §155.350(b), 

an Exchange may determine an Indian eligible for cost-sharing reductions under section 

1402(d)(2) of the Affordable Care Act without requiring the applicant to request an 

eligibility determination for insurance affordability programs. We welcome comment on 

our interpretation of sections 1402(d)(2) and 1402(f)(2) of the Affordable Care Act. 

We note also that section 1402(d) of the Affordable Care Act specifies that 

reductions in cost sharing must be provided to Indians who purchase coverage on the 

Exchange. Although section 1402(d)(1) of the Affordable Care Act applies only to the 

individual market, section 1402(d)(2) of the Affordable Care Act does not contain this 

explicit restriction. We propose to interpret section 1402(d)(2) of the Affordable Care 

Act to apply only to the individual market because we believe section 1402(d)(2) flows 

from and builds upon the identification of “any qualified health plans” made in section 

1402(d)(1). Further, we believe that Congress did not intend for reductions in cost 

sharing to be available outside the individual market Exchanges. We welcome comment 

on this interpretation and any other interpretation of this language. 
 215 

Finally, we note that section 1402(d)(2)(B) of the Affordable Care Act states that 

QHP issuers are not to reduce payments to the relevant facility or provider for an item or 

service by the amount of any cost sharing that would be due from an Indian but for the 

prohibition on cost sharing set forth in section 1402(d)(2) of the Affordable Care Act. 

We propose not to codify this provision in regulation because we believe it is clear and 

self-enforcing, and because we believe that it would also be impermissible for an issuer 

to reduce payments to a provider for any cost-sharing reductions required under sections 

1402(a) or 1402(d)(1) of the Affordable Care Act – particularly because these costsharing reductions are to be reimbursed by HHS. We also note that nothing in this 

section exempts an issuer from section 206 of the Indian Health Care Improvement Act, 

which provides that the United States, an Indian Tribe, Tribal organization, or urban 

Indian organization has the right to recover from third party payers, including QHPs, up 

to the reasonable charges billed for providing health services, or, if higher, the highest 

amount an insurer would pay to other providers.

 Proposed provisions of part 156 relating to Indians: Similar to cost-sharing 

reductions for non-Indians, we propose to use the concept of plan variations to describe 

how Indians would pay only a portion, or as appropriate, none of the total cost sharing 

required under that plan, with the Federal government bearing the remaining cost-sharing 

obligation. In §156.410(b)(2), we propose that a QHP issuer assign an Indian determined 

by the Exchange to have an expected household income that does not exceed 300 percent 

of the FPL to a zero cost sharing plan variation of the selected QHP (no matter the level 

of coverage) with no cost sharing, based on the enrollment and eligibility information 

submitted to the QHP issuer by the Exchange. In §156.410(b)(3), we propose that a QHP 

issuer assign an Indian determined eligible by the Exchange for cost-sharing reductions 

under section 1402(d)(2) of the Affordable Care Act to a limited cost sharing plan 
 216 

variation of the selected QHP (no matter the level of coverage) with no cost sharing 

required on benefits received from the IHS and certain other providers. The assignments 

to the plan variations would be subject to §155.305(g)(3), which governs plan variation 

placement decisions when a single policy covers two or more individuals who are eligible 

for different levels of cost-sharing reductions. We also considered an alternative 

approach to the provision of cost-sharing reductions for Indians. Rather than requiring 

QHP issuers to assign Indians to zero and limited cost sharing plan variations, QHP 

issuers would simply assign Indians to the standard plan (or as appropriate, silver plan 

variation), and would waive the cost-sharing requirements, as appropriate. We note that 

this latter approach would permit an Indian and non-Indian to enroll in the same plan, and 

for each to receive the cost-sharing reductions to which they would be individually 

entitled. We are proposing the approach described above in part because we believe that 

the use of plan variations will permit issuers to efficiently and effectively provide to all 

enrollees eligible for cost-sharing reductions, especially Indians, their appropriate level of 

cost-sharing reductions. Because of technical constraints, we understand that complying 

with the alternative approach would be nearly impossible for many issuers for the 2014 

benefit year. Due to these considerations, adopting the alternative approach could lead 

many issuers to implement cost-sharing waivers manually, which could lead to fewer 

cost-sharing reductions being available to Indians. In addition, we note that under the 

proposed Market Reform Rule at §147.102(c)(1), the total premium for family coverage 

in a State that has not adopted community rating principles is to be determined by 

summing the premiums for each individual family member (but that premiums for no 

more than the three oldest family members who are under age 21 must be taken into 

account). Thus, in many instances, a family made up of Indians and non-Indians would 

lose no premium savings from enrolling in different policies to obtain the maximum cost-
 217 

sharing reductions for which each family member is eligible. However, we seek 

comment on which approach HHS should adopt beginning January 1, 2016. We propose 

the approach first described above pending the adoption of any change in approach. We 

also seek comment on the burdens that may be imposed on individuals, providers and 

insurers under the proposed and alternative approaches. Finally, we will monitor whether 

providers are receiving less payment for Indians who choose to enroll in a family policy 

without the benefit of cost-sharing. 

In §156.420(b), we propose that QHP issuers submit to the Exchange the zero 

cost sharing plan variation and limited cost sharing plan variations for each of the QHPs 

(at any level of coverage) that it intends to offer on the Exchange. The zero cost sharing 

plan variation – addressing cost-sharing reductions under section 1402(d)(1) of the 

Affordable Care Act and available to Indians with expected household incomes that do 

not exceed 300 percent of the FPL, as determined under §155.350(a) – must have all cost 

sharing eliminated. The limited cost sharing plan variation – addressing cost-sharing 

reductions under section 1402(d)(2) of the Affordable Care Act and available to all 

Indians as determined in §155.350(b) – must have no cost sharing on any item or service 

furnished directly by the IHS, an Indian Tribe, Tribal Organization, Urban Indian 

Organization, or through referral under contract health services, as defined in 25 U.S.C. 

1603. We note that unlike silver plan variations, zero cost sharing plan variation and 

limited cost sharing plan variations must only be submitted for certification when the 

standard plan is submitted for QHP certification. We welcome comment on this 

proposal. 

In §156.420(d), we propose language similar to that proposed in §156.420(c) for 

silver plan variations – that the zero cost sharing plan variation and limited cost sharing 

plan variations cover the same benefits and include the same providers as the standard 
 218 

QHP, and require the same out-of-pocket spending for benefits other than EHB. We also 

propose that a limited cost sharing plan variation, which would have no cost sharing on 

any item or service furnished directly by the IHS, Indian Tribe, Tribal Organization, or 

Urban Indian Organization, or through referral under contract health services, must have 

the same cost sharing on items or services not described in §156.420(b)(2) as the QHP 

with no cost-sharing reductions. Lastly, we propose that zero cost sharing plan variation 

and limited cost sharing plan variations be subject to all standards applicable to the 

standard QHP (except for the requirement that the plan have an AV as set forth in 

156.140(b)). We believe that these standards are appropriate, as a plan variation and a 

standard plan are meant to be the same QHP, except for the reductions in cost sharing. 

We welcome comment on this proposal. 

Section 1402(d)(3) of the Affordable Care Act directs the Secretary to pay a QHP 

issuer the amount necessary to reflect the increase in AV of a QHP required by reason of 

the changes in cost sharing for Indians under section 1402(d) of the Affordable Care Act. 

We propose to use the same payment approach to reimburse cost-sharing reductions for 

Indians under sections 1402(d) as we propose to use for cost-sharing reductions provided 

to eligible individuals with household incomes between 100 and 250 percent of the FPL 

under section 1402(a) of the Affordable Care Act. That is, we propose that QHP issuers 

submit estimates for the dollar value of the cost-sharing reductions to be provided under 

the zero cost sharing plan variation and limited cost sharing plan variations, to receive 

advance payments, and then reconcile the advance payments to the actual cost-sharing 

reduction amounts. This unified approach satisfies both the requirement for “periodic 

and timely payments equal to the value of the reductions” under section 1402(c)(3) of the 

Affordable Care Act, and payment of “the amount necessary to reflect the increase in AV 

of the plan” under section 1402(d)(3) of the Affordable Care Act. Because AV is a 
 219 

mechanism for identifying how much the plan pays for benefits compared to the costs 

paid by an enrollee, we believe reimbursement of the dollar value of the reductions 

satisfies the requirement to pay QHP issuers an amount necessary to reflect the increase 

in actuarial value of the qualified health plan as a result of the reductions. Furthermore, 

at this time, it would be difficult for issuers and HHS to accurately estimate the “increase 

in AV of the plan” resulting from the cost-sharing reduction rules for Indians. Relevant 

data on Indian populations’ cost sharing is not easily available, and issuers would not be 

able to use the AV calculator to estimate Indian-only cost-sharing features of a plan 

because the calculator is based on a standard population. Our proposed combined 

approach to reimbursing both cost-sharing reductions for eligible individuals with 

household incomes between 100 and 250 percent of the FPL and cost-sharing reductions 

for Indians should reduce the operational and financial burden on issuers and HHS, who 

would otherwise be required to operate under and implement two separate reimbursement 

programs. 

In §156.430(a)(1)(ii) we propose that for each metal level QHP that an issuer 

offers or intends to offer in the individual market on the Exchange, the issuer must 

provide to the Exchange annually prior to the benefit year, for approval by HHS, 

estimates, and supporting documentation validating the estimates, of the per member per 

month dollar value of cost-sharing reductions to be provided under the zero cost sharing 

plan variation. These estimates must be developed using the methodology specified by 

HHS in the applicable annual HHS notice of benefit and payment parameters. We 

propose that issuers use the same methodology described above for estimating advance 

payments for the cost-sharing reductions provided under silver plan variations for 

estimating advance payments for the cost-sharing reductions provided under the zero cost 

sharing plan variation. This methodology would utilize data that QHP issuers submit for 
 220 

other requirements, such as §156.420 and §156.470. As a result, QHP issuers would not 

be required to submit separate estimates or supporting documentation to receive advance 

payments in benefit year 2014 for the value of the cost-sharing reductions that would be 

provided under the zero cost sharing plan variation. 

As in the case of silver plan variations, the following formula would be used: 

 In this formula, the monthly expected allowed claims cost for the zero cost 

sharing plan variation would equal one-twelfth of the expected allowed claims costs 

allocated to EHB, other than services described in §156.280(d)(1), for the standard plan, 

multiplied by a factor to account for the increased utilization that may occur under the 

zero cost sharing plan variation due to the elimination of the cost-sharing requirements. 

As described in §156.470, the QHP issuer should submit the expected allowed claims 

cost information to the Exchange annually. The Exchange would then review this 

allocation, and submit the approved allocation to HHS, as described in §155.1030(b)(2), 

for use in the advance payment calculation. HHS would then multiply the monthly 

expected allowed claims cost by the induced utilization factor, to arrive at the monthly 

expected allowed claims cost for the zero cost sharing plan variation. We propose the 

following induced utilization factors for the zero cost sharing plan variation, based on our 

analysis of the HIC database from calendar year 2010. 

TABLE 17: Induced Utilization Factors for Advance Payments for Cost-Sharing 

Reductions for Indians 

Zero Cost Sharing Plan Variation Induced Utilization Factor 

Zero Cost Sharing Plan Variation of Bronze QHP 1.15 

Zero Cost Sharing Plan Variation of Silver QHP 1.12 

Zero Cost Sharing Plan Variation of Gold QHP 1.07 
 221 

Zero Cost Sharing Plan Variation of Platinum QHP 1.00 

 

 In the second half of the formula, we propose to multiply the monthly expected 

allowed claims cost for the zero cost sharing plan variation by the difference in AV 

between the standard plan and the plan variation. The AV of the zero cost sharing plan 

variation would be 100, because all cost sharing is eliminated for this plan variation. 

Lastly, the per enrollee per month estimate will be multiplied by the number of 

individuals assigned to the zero cost sharing plan variation (based on the most recent 

confirmed enrollment data) in a given month to arrive at the total advance payment that 

will be provided to the issuer for each QHP. We welcome comment on this methodology 

and the proposed induced utilization factor, as well as the value of increasing the 

complexity of the methodology versus the value of operational efficiency. 

In §156.430(a)(2), we discuss the process for estimating the value of cost-sharing 

reductions to be provided under the limited cost sharing plan variation open to Indians 

regardless of household income. We propose that QHP issuers have the option to forgo 

submitting an estimate of the value of these cost-sharing reductions if they believe the 

operational cost of developing the estimate is not worth the value of the advance 

payment. If a QHP issuer chooses to not submit an estimate, the issuer would provide the 

cost-sharing reductions as required, and would be reimbursed by HHS after the close of 

the benefit year, as proposed in §156.430(c). If a QHP issuer does seek advance 

payments for the these cost-sharing reductions, the issuer must provide to the Exchange 

annually prior to the benefit year, for approval by HHS, an estimate, and supporting 

documentation validating the estimate, of the per member per month dollar value of the 

cost-sharing reductions to be provided under the limited cost sharing plan variation of the 

QHP. The estimate must be developed using the methodology specified by HHS in the 
 222 

applicable annual HHS notice of benefit and payment parameters. For the 2014 benefit 

year, we simply propose that issuers submit a reasonable estimate of the value of the 

reductions, developed by a member of the American Academy of Actuaries in 

accordance with generally accepted actuarial principles and methodologies, and that the 

estimate should be no higher than the corresponding estimate for the zero cost sharing 

plan variation. We do not propose a standardized methodology because, unlike other 

plan variations, these cost-sharing reductions are to be provided for only a specific subset 

of providers, and the Affordable Care Act does not prescribe an AV for these reductions. 

As noted above, because the actuarial value calculator is based on a standard population, 

it will not have the functionality to generate an accurate AV for these plan variations. 

However, as in the case of the other plan variations, we plan to review the methodology 

for calculating the advance payments once more data is available. We also note that the 

payment reconciliation process described in §156.430(c) through (e) would ensure that 

the QHP issuer is made whole for the value of any cost-sharing reductions provided 

during the benefit year that may not be adequately covered by the advance payments. 

The Exchange will collect the estimate and supporting documentation, as 

described in §155.1030(b)(3), and submit the estimate and supporting documentation to 

HHS for review. Assuming the estimate is reasonable, HHS would make advance 

payments to the QHP issuer following the same procedure as for the other plan 

variations, and as discussed in §156.430(b). 

We welcome comment on this approach. 

F. Provisions on User Fees for a Federally-facilitated Exchange (FFE)

Section 1311(d)(5)(A) of the Affordable Care Act contemplates an Exchange 

charging assessments or user fees to participating health insurance issuers to generate 

funding to support its operations. If a State is not an electing State or does not have an 
 223 

approved Exchange, section 1321(c)(1) directs HHS to operate an Exchange within the 

State. In addition, 31 U.S.C. 9701 permits an agency to establish a charge for a service 

provided by the agency. Circular No. A-25R establishes Federal policy regarding user 

fees, and specifies that a user charge will be assessed against each identifiable recipient 

for special benefits derived from Federal activities beyond those received by the general 

public. Based on section 1311(d)(5)(A) of the Affordable Care Act and Circular No. A25, we are proposing that HHS collect a user fee from participating issuers (as defined in 

§156.50(a)) to support the operation of Federally-facilitated Exchanges. Participating 

issuers will receive two special benefits not available to the general public when they 

offer plans through a Federally-facilitated Exchange: (1) the certification of their plans 

as QHPs, and (2) the ability to sell health insurance coverage through a Federallyfacilitated Exchange to individuals determined eligible for enrollment in a QHP. These 

special benefits are provided to participating issuers based on the following Federal 

operations in connection with the operation of Federally-facilitated Exchanges: 

• Provision of consumer assistance tools; 

• Consumer outreach and education; 

• Management of a Navigator program; 

• Regulation of agents and brokers; 

• Eligibility determinations; 

• Administration of advance payments of the premium tax credit and costsharing reductions; 

• Enrollment processes; 

• Certification processes for QHPs (including ongoing compliance verification, 

recertification and decertification); and 

• Administration of a SHOP Exchange. 
 224 

Activities performed by the Federal government that do not provide issuers 

participating in a Federally-facilitated Exchange with a special benefit will not be 

covered by this user fee. 

 Circular No. A-25R states that user charges should generally be set at a level so 

that they are sufficient to recover the full cost to the Federal government of providing the 

service when the government is acting in its capacity as sovereign (as is the case when 

HHS operates a Federally-facilitated Exchange). However, Circular No. A-25R also 

allows for exceptions to this policy, if approved by OMB. To maintain a competitive 

balance between plans inside and outside the Exchanges, to align with the administrative 

cost structure of State-based Exchanges, and because we believe that growing enrollment 

is likely to increase user fee receipts in future years, we have requested an exception to 

the policy for 2014. As a result, in §156.50(c), we propose that a participating issuer 

offering a plan through a Federally-facilitated Exchange remit a user fee to HHS each 

month, in the time and manner established by HHS, equal to the product of the billable 

members enrolled through the Exchange in the plan offered by the issuer, and the 

monthly user fee rate specified in the annual HHS notice of benefit and payment 

parameters for the applicable benefit year. For purposes of this paragraph, billable 

members are defined under the proposed §147.102(c)(1) as the number of members on a 

policy, with a limitation of three family members under age 21. This approach will 

ensure that the user fee generally aligns with the number of enrollees for each issuer. 

For the 2014 benefit year, we propose a monthly user fee rate equal to 3.5 percent 

of the monthly premium charged by the issuer for a particular policy under the plan. We 

seek to align this rate with rates charged by State-based Exchanges, and may adjust this 

rate to take into account comparable State-based Exchange rates in the final Payment 

Notice. We note that this policy does not affect the ability of a State to use grants 
 225 

described in section 1311 of the Affordable Care Act to develop functions that a State 

elects to operate under a Partnership Exchange, and to support State activities to build 

interfaces with a Federally-facilitated Exchange, as described in the “State Exchange 

Implementation Questions and Answers,” published November 29, 2011. 

Circular No. A-25R provides for a user fee to be collected simultaneously with 

the rendering of services, and thus we further propose to assess user fees throughout the 

benefit year in which coverage is offered. Additional guidance on user fee collection 

processes will be provided in the future; however, we anticipate that user fees will be 

calculated based on the number of billable members enrolled in a plan each month. We 

anticipate collecting user fees by deducting the user fee from Exchange-related program 

payments. If an issuer does not receive any Exchange-related program payments, the 

issuer would be invoiced for the user fee on a monthly basis. We welcome comment on 

these proposals and the operational processes related to user fee assessment and 

collections. 

In addition, we welcome comments on a policy that we are considering that would 

provide for the pooling of Exchange user fees or all administrative costs across a 

particular market (however, the user fee would be collected only from issuers 

participating in the Federally-facilitated Exchange). The Market Reform proposed rule 

proposes an implementation of section 1312(c) of the Affordable Care Act under which 

the claims experience of all enrollees in health plans offered by an issuer in a State in the 

individual, small group, or combined market, as applicable, are to be pooled. We are 

considering further developing this policy, which we would codify in regulation at 

§156.80,41 by requiring that Exchange user fees also be subject to risk pooling. 

 

41 We issued a proposed regulation on risk pooling at §156.80 of the proposed Market Reform Rule. 
 226 

Specifically, we are considering proposing that issuers be allowed an adjustment to the 

index rate for the pooled, expected Exchange user fees for the set of health plans offered 

in a particular market. We are considering this additional specification to provide further 

protection against adverse selection for QHP coverage, and to ensure that the costs of 

Exchange user fees are spread evenly across the market. We seek comment on this 

policy, including whether it should apply to a broader set of administrative costs. For 

example, under this alternative, it could apply to both Exchange user fees and distribution 

costs, or all administrative costs. In addition, we seek comment on an alternative 

approach, under which the proposed risk pooling would apply across all health plans 

within a product (defined as a specific set of benefits), rather than across a market. 

G. Distributed Data Collection for the HHS-operated Risk Adjustment and Reinsurance 

Programs 

1. Background 

The Premium Stabilization Rule specifies at §153.20 that a risk adjustment 

methodology must include a risk adjustment data collection approach. Therefore, the 

Federally certified risk adjustment methodology described in this proposed rule must 

include such a data collection approach. As already discussed, we propose to add new 

§153.420(a) to establish that an issuer of a reinsurance-eligible plan must submit or make 

accessible all required reinsurance data in accordance with the reinsurance data collection 

approach established by the State, or by HHS on behalf of the State. In addition, we 

propose to amend Part 153 by adding Subpart H, entitled “Distributed Data Collection for 

HHS-Operated Programs.” We intend to clarify in Subpart H the data collection process 

that HHS would use when operating a risk adjustment or reinsurance program on behalf 

of a State. 
 227 

In the preamble to the proposed Premium Stabilization Rule, we described a 

distributed approach as one in which each issuer formats its own data in a manner 

consistent with the risk assessment database, and then passes risk scores to the entity 

responsible for assessing risk adjustment charges and payments. In the preamble to the 

Premium Stabilization Rule, we indicated that we intend to use a distributed approach to 

collect data for the HHS-operated risk adjustment program. In the Reinsurance Bulletin, 

we stated that we will also use such an approach when we operate the reinsurance 

program. We believe that this approach minimizes issuer burden while protecting 

enrollees’ privacy. 

2. Issuer Data Collection and Submission Requirements 

Under the HHS-operated risk adjustment and reinsurance programs, HHS will use 

a distributed data collection approach to run software on enrollee-level and claims-level 

data that reside on an issuer’s dedicated data environment. This approach will require 

close technological coordination between issuers and HHS. 

Distributed data environment: In §153.700(a), we propose that an issuer of a risk 

adjustment covered plan or a reinsurance-eligible plan in a State where HHS is operating 

the risk adjustment or reinsurance program on behalf of the State, must establish a 

dedicated data environment and provide data access to HHS, in a manner and timeframe 

specified by HHS, for risk adjustment and reinsurance operations. To accomplish the 

distributed data collection approach for both the reinsurance and risk adjustment 

programs, issuers would be required to establish secure, dedicated, electronic server 

environments to house medical and pharmacy claims, encounter data, and enrollment 

information. Issuers would be directed to make this data accessible to HHS in HHSspecified electronic formats, and to provide HHS with access to the data environment to 

install, update, and operate common software and specific reference tables for the 
 228 

purpose of executing risk adjustment and reinsurance program operations. Issuers would 

also be directed to correct submitted files to resolve problems detected by HHS during 

file processing. We will provide further technical details on these standards in the future. 

We note that HHS will store, in a private and secure HHS computing 

environment, aggregate plan summary data and reports based on activities performed on 

each issuer’s dedicated server environment. Except for purposes of data validation and 

audit, HHS will not store any personally identifiable enrollee information or individual 

claim-level information. 

We propose in §153.700(b) that issuers must establish the dedicated data 

environment (and confirm proper establishment through successfully testing the 

environment to conform with HHS standards for such testing) three months prior to the 

first date of full operation. For example, for benefit year 2014, implementation, 

including testing, will begin in March 2013, and continue through October 2013, in 

preparation for the commencement of risk adjustment and reinsurance program 

operations on January 1, 2014. HHS also plans to schedule technical assistance trainings 

for issuers in 2013. 

Data Requirements: In §153.710(a), we propose that an issuer of a risk adjustment 

covered plan or reinsurance-eligible plan in a State in which HHS is operating the risk 

adjustment or reinsurance program, as applicable, must provide to HHS, through the 

dedicated data environment, access to the enrollee-level plan enrollment data, enrollee 

claims data, and enrollee encounter data specified by HHS. 

We propose in §153.710(b) that all claims data submitted by an issuer of a risk 

adjustment covered plan or reinsurance-eligible plan in a State in which HHS is operating 

the risk adjustment or reinsurance program, as applicable, must have resulted in payment 

by the issuer. The enrollee-level data must include information from claims and 
 229 

encounter data (including data related to cost-sharing reductions, to permit HHS to 

calculate enrollee paid claims net of cost-sharing reductions) as sourced from all medical 

and pharmacy providers, suppliers, physicians, or other practitioners who furnished items 

or services to the issuer’s health plan members for all permitted paid medical and 

pharmacy services during the benefit period. All data must be provided at the level of 

aggregation specified by HHS. 

A listing of required data, proposed data formats, and data definitions for the 

HHS-operated distributed data approaches for the risk adjustment and reinsurance 

programs will be provided in the in the PRA approved under OMB Control Number 

(OCN) 0938-1155 with an October 31, 2015 expiration date. 

In §153.710(c), we propose that an issuer that does not generate claims in the 

normal course of business42 must derive costs on all applicable provider encounters using 

their principal internal methodology for pricing those encounters (for example, a pricing 

methodology used for the Medicare Advantage encounter data collection). If a plan has 

no such methodology, or has an incomplete methodology, it would be permitted to 

implement a methodology or supplement the methodology in a manner that yields 

derived claims that are reasonable in light of the specific market that the plan is serving. 

Establishment and usage of masked enrollee identification numbers: We propose 

in §153.720(a) that an issuer of a risk adjustment covered plan or reinsurance-eligible 

plan in a State in which HHS is operating the risk adjustment or reinsurance program, as 

applicable, must establish an unique masked enrollee identification number for each 

enrollee, in accordance with HHS-defined requirements as described in this section, and 

maintain the same masked enrollee identification number for an enrollee across 

 

42 Examples of such plans include staff-model health maintenance organizations and plans that pay 

providers on a capitated basis.
 230 

enrollments or plans within the issuer, within the State, during a benefit year. In 

§153.720(b), we propose that an issuer of a risk adjustment covered plan or reinsuranceeligible plan in a State in which HHS is operating the risk adjustment or reinsurance 

program, as applicable, may not include an enrollee’s personally identifiable information 

in the masked enrollee identification number or use the same masked enrollee 

identification number for different enrollees enrolled with the issuer. The requirements 

here align the specific requirements for data collection with the requirements in 

§153.340(b) of the Premium Stabilization Rule and the proposed §153.240(d). As 

discussed above, the term “personally identifiable information” is a broadly used term 

across Federal agencies, and has been defined in the Office of Management and Budget 

Memorandum M-07-16 (May 22, 2007).43 To reduce duplicative guidance or potentially 

conflicting regulatory language, we are not defining personally identifiable information 

in this proposed rule, and incorporate the aforementioned definition in to this proposed 

rule. 

Deadline for submission of data: We propose in §153.730 that an issuer of a risk 

adjustment covered plan or reinsurance-eligible plan in a State in which HHS is operating 

the risk adjustment or reinsurance program, as applicable, submit data to be considered 

for risk adjustment payments and charges and reinsurance payments for the applicable 

benefit year by April 30 of the year following the end of the applicable benefit year. This 

timeline will permit sufficient time for HHS to calculate and notify issuers of those 

payments and charges in time to meet the June 30 deadline set forth in §153.310(e), as 

proposed to be renumbered, and proposed in §153.240(b)(1). 

 

43 Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf. 
 231 

Proposed §153.240(b)(2) provides that States administering their own reinsurance 

program must notify issuers of reinsurance-eligible plans of their expected requests for 

reinsurance payments on a quarterly basis. We believe that these interim reports will 

provide issuers in the individual market with information to assist in the development of 

premiums and rates in subsequent benefit years. Acceptable enrollment and 

claims/encounter data not submitted in a timely manner will be considered in the next 

quarter or during the annual processing period. The annual reinsurance payments will not 

be determined until after April 30 of the year following the applicable benefit year, once 

all requests for reinsurance payments have been submitted, and any adjustments have 

been made under proposed §153.230(d). Therefore, for claims to be eligible for 

reinsurance payments, acceptable enrollment and paid claims or encounter data must be 

available on the issuer’s environment prior to the April 30 deadline, as specified in future 

guidance. 

3. Risk Adjustment Data Requirements

HHS’s data collection approach is aligned with the HHS risk adjustment model 

and its calculation of payments and charges. This section describes the types of data that 

will be acceptable for risk adjustment. 

a. Data collection period: The data collection period will encompass enrollment 

and services for the applicable benefit year. 

(1) Claim-level service dates. Institutional and medical claims and encounter data 

where the discharge date or through date of service occurs in the applicable benefit year 

will be allowed for risk adjustment, provided that all other criteria defined under this 

section are met. 
 232 

(2) Enrollment periods. Issuers must provide data for all individuals enrolled in 

risk adjustment covered plans in the applicable benefit year with enrollment effective 

dates beginning on or after January 1 of that benefit year. 

b. Acceptable Risk Adjustment Data. Acceptable risk adjustment data for 

enrollee risk score calculation will be determined using the criteria listed below. 

(1) Acceptable claim types. Data to calculate enrollee risk scores will include 

diagnoses reported on institutional and medical claims that result in final payment action 

or encounters that result in final accepted status. The specific criteria for capturing a 

complete inpatient stay (across multiple bills) for single hospital admission will be 

provided in future guidance. 

(2) Acceptable provider types. Diagnoses reported on certain hospital inpatient 

facility, hospital outpatient and physician provider claims will be acceptable for risk 

adjustment. The risk adjustment model discussion provides HHS’ description for 

identifying and excluding claims from providers based on these criteria. 

(3) Acceptable diagnoses. Diagnoses will be acceptable for enrollee risk score 

calculation if they are present on medical claims and encounters that meet criteria that are 

acceptable for HHS-operated risk adjustment data collection. 

c. Risk Adjustment Processing and Reporting. Issuers are responsible for 

correcting errors and problems identified by HHS in the distributed data environment. 

4. Reinsurance Data Requirements 

This section describes the types of data that would be necessary for the evaluation 

of claims eligible for reinsurance payments to reinsurance-eligible plans as defined under 

§153.20. HHS would use the same distributed data collection approach used for risk 

adjustment; however, only data elements necessary for reinsurance claim selection will 
 233 

be considered for the purpose of determining a reinsurance payment. Data considered 

acceptable for reinsurance payment calculations are described below. 

a. Data collection period. Medical and pharmacy claims, where a claim was 

incurred in the benefit year beginning on or after January 1 of the applicable benefit year 

and paid before the applicable data submission deadline (provided all other criteria are 

met) would be accepted for consideration. 

b. Acceptable Reinsurance Data. Acceptable reinsurance data leading to eligible 

claim selection for the reinsurance program will be determined using the criteria listed 

below. 

(1) Claim types. Data to identify eligible reinsurance paid claims would include 

medical and pharmacy claims. Claims that resulted in payment by the issuer as the final 

action and encounters priced in accordance with issuer pricing methodologies would be 

considered for payment. Replacement claims for the purposes of adjusting data elements 

submitted on prior claim submissions, including, but not limited to changes in payment 

amounts, services rendered, diagnosis, would be accepted, but interim bills and late 

charges would not be accepted. The specific criteria for submitting complete data for 

inpatient stays will be provided in future guidance. 

(2) Capitated plans: Encounter data submitted by issuers that do not generate 

claims in the normal course of business would be accepted for consideration when 

services were performed in the benefit year beginning on or after January 1, 2014 and 

submitted prior to the applicable data-submission deadline. Specific information related 

to the assessment and application of encounter claims for reinsurance calculations will be 

provided in future guidance. 

c. Reinsurance Processing and Reporting. HHS plans to provide each issuer with 

a periodic report on data functions performed in each issuer’s distributed data 
 234 

environment, including the identification of reinsurance eligible claims by State. The 

reports would indicate whether HHS accepted or rejected submitted files and data, and 

errors detected by HHS. Issuers would need to provide corrected files and data to address 

errors identified in HHS-provided reports for those files and data to be eligible for 

identification during reinsurance processing. Timeframes for the processing and 

reporting of these reports, including receipt of corrected files or discrepancy resolution, 

will be provided in future guidance. 

H. Small Business Health Options Program 

1. Employee Choice in the Federally-Facilitated SHOP (FF-SHOP) 

 Employee choice is a central SHOP concept, and facilitating employee choice at a 

single level of coverage selected by the employer – bronze, silver, gold, or platinum – is a 

required SHOP function.44 In addition, the SHOP may also allow a qualified employer to 

make QHPs available to employees by other methods.45 For the FF-SHOP, we continue 

to consider whether to allow a qualified employer to offer its employees only a single 

QHP. We note that, once an employer has selected a single QHP and decided on a 

contribution toward that QHP, the employer can then offer employees a choice of all the 

other plans at the same metal level at no additional cost to the employer. Since adding 

employee choice would have no adverse financial impact on the employer, we propose 

that Federally-facilitated SHOPs will not offer a single QHP option to employers but will 

focus instead on the innovative features of a SHOP: a simpler employer experience and 

enhanced employee choice. In FF-SHOPs, we propose that employers will choose a level 

of coverage (bronze, silver, gold, or platinum) and a contribution, and employees can 

then choose any QHP at that level. 

 

44 §155.705(b)(2). 

45 §155.705(b)(3). 
 235 

 In addition to this choice within single level of coverage, many employers 

expressed support for employer and employee choice across metal levels both in 

comments to the Exchange Establishment NPRM and in stakeholder discussions. Issuers, 

however, have expressed concern about the potential risk segmentation that may result. In 

comments submitted to HHS in connection with the Exchange Final Rule,46 issuers urged 

that employee choice be limited to a single level of coverage selected by the employer 

based on the potential for risk segmentation with a greater degree of employee choice. 

There was general agreement among these commenters that the degree of risk 

segmentation is small if employee choice is limited to a single metal level of coverage, 

particularly given the presence of risk adjustment, and increases as employee choice is 

extended across metal levels of coverage. Many commenters suggested that the risk 

segmentation associated with broad choice across all metal levels may adversely affect 

premiums. 

 Some issuers expressed openness to allowing the employee to “buy up” to certain 

plans at the next higher level of coverage, thereby offering employees a broader range of 

health plans. Therefore, we seek comment on adding an additional employer option in 

the FF-SHOP that would allow a qualified employer to make available to employees all 

QHPs at the level of coverage selected by the employer plus any QHPs at the next higher 

level of coverage that a QHP issuer agrees to make available under this option. QHP 

issuers could decide whether or not to make available QHPs at the next higher level of 

coverage above the level of coverage selected by the employer. 

We note that concerns about risk selection will be mitigated both by the risk 

adjustment program which addresses risk selection directly and by consumer tools 

 

46 Patient Protection and Affordable Care Act; Establishment of Exchanges and Qualified Health Plans; Exchange 

Standards for Employers (CMS-9989), 77 FR 18310 (Mar. 27, 2012). 
 236 

showing expected “total costs” of coverage (premium, deductibles, copayments and 

coinsurance) that help consumers compare the cost of a high premium/low cost sharing 

plan with a low premium/high cost sharing plan. Nonetheless, particularly in the early 

years of implementation, the FF-SHOP in each State will need to balance the 

fundamental goal of enhancing employer and employee choice against concerns about 

potential risk selection to achieve the broadest issuer participation, the best range of plan 

design choices, and the most effective competition in the small group market. Therefore, 

we seek comment on a transitional policy in which a Federally-facilitated SHOP would 

allow or direct employers to choose a single QHP from those offered through the SHOP. 

2. Methods for Employer Contributions in the FF-SHOP 

 Employers may elect a variety of ways to contribute toward health coverage that 

are consistent with Federal law. Because employees in the FF-SHOP will be choosing 

their own coverage and will need to know the net cost to them after the employer’s 

contribution, the employer will need to choose a contribution method before employees 

select their qualified health plans. To facilitate this, each SHOP would offer “safe 

harbor” methods of contributing toward the employee coverage – methods that reflect a 

meaningful employer choice and that conform to existing Federal law. The safe harbor 

methods described below are not the only allowable methods of contribution, but are 

those that will be available initially to qualified employers participating in FF-SHOPs. 

Under this proposed rule at § 155.705(b)(11), FF-SHOPs would base the 

employer contribution methods on the cost of a reference plan chosen by the qualified 

employer. This reference plan approach is one of the methods described in section III.G. 

of IRS Notice 2010-82 regarding allowable ways an employer may contribute to the 

employees’ premiums and qualify for the small business premium tax credit prior to 
 237 

2014. 47 We note that the IRS plans to issue additional guidance applicable to plan years 

beginning after 2013. 

The IRS Notice describes two types of reference plan premiums – one in which 

the premium for the reference plan is a composite premium that is the same for each 

member and a second in which the premium for the reference plan varies with the age of 

the covered individual (or other permissible rating factor). In both cases, the small 

business can define its contribution toward a member’s coverage as a percentage of the 

premium for the reference plan. 

Except in States that prohibit employee contributions that vary by age or require 

issuers to quote only composite premiums, the qualified employer would be asked the 

following question: “Do you want each employee to contribute the same amount toward 

the reference plan premium, or do you want the employee’s contribution to vary with age 

within the allowed limits?”48,

49 This option to charge younger employees lower 

premiums for a given coverage may help attract younger individuals into the risk pool 

and may help employer groups meet any minimum participation rates. On the other 

hand, this option also results in higher premium contributions by older employees who 

are also more likely to incur higher out-of-pocket costs.50

 

47 IRS Notice 2010-82, section III.G. describes employer contribution methods using a reference plan with a variety of 

different rating methods: per member rating (referred to in the Notice as “list billing”), composite rating (referred to as 

“composite billing”), and the hybrid method (referred to as an “employer-computed composite rate”). Although 

prepared as guidance regarding employer contributions eligible for the small business premium tax credit and 

applicable only through 2013, it provides a clear description of “safe harbor” methods that will be used in the FFSHOP. 

48 Thus, the ratio of the employee contribution made by the oldest adult and the youngest adult toward the reference 

plan cannot exceed 3:1 before any tobacco use factor is applied. 49 Because tobacco use information from employees will not be available when estimating total premiums for the group 

and average premiums per employee, tobacco use will always be a surcharge applied to an employee’s or dependent’s 

premium. See the proposed Health Insurance Market Rules (77 Fed. Reg. at 70595-70597) and the Incentives for 

Nondiscriminatory Wellness Programs in Group Health Plans Proposed Rule (77 Fed. Reg. 70620) for further 

discussion of the tobacco use surcharge and wellness programs. 50 See 29 CFR 1625.10 for a description of the ways in which employee contributions toward premiums may vary 

according to employee age without constituting impermissible age discrimination. 
 238 

If the qualified employer decides that the employee’s contribution should vary by 

age, then the employer contribution would be based on the reference plan, and the 

remaining employee contribution for the employee’s plan would not be affected by other 

employees’ decisions about participation. Once the employees have chosen their plans, 

the qualified employer would approve the final application and the FF-SHOP would 

enroll the employees in their chosen health plans. 

If the qualified employer decides that each employee pays the same amount for 

the reference plan coverage, regardless of age, the composite premium for the reference 

plan, and the employer contribution based on that plan, may change based on which 

employees choose to participate, just as composite premiums may need to be re-quoted 

by the issuer today. Operationally, once the employee choices have been made, the 

composite premium for the reference plan would be recalculated, and the employer and 

employees notified of any changes. 

We welcome comments on this approach. 

3. Linking Issuer Participation in an FFE to Participation in an FF-SHOP 

 Consistent with the goal of ensuring choice of affordable insurance plans, in this 

proposed rule, we propose standards that we believe will help ensure that qualified 

employers and qualified employees enrolling through a FF-SHOP are offered a robust set 

of QHP choices in a competitive small group marketplace. We believe that a competitive 

marketplace offering qualified individuals, qualified employers, and qualified employees 

a choice of issuers and QHPs is a central goal of the Affordable Care Act, and that the 

SHOP can provide an effective way for small employers to offer their employees a choice 

of issuers and QHPs. We propose in §156.200(g) to leverage issuers’ participation in an 

FFE to ensure participation in the FF-SHOP, provided that no issuer would be required to 

begin offering small group market products as a result of this provision. 
 239 

While a State-operated SHOP has a variety of options available to ensure a robust 

choice of QHPs and issuers, an FFE is limited to the QHP certification process. We 

propose in §156.200(g) that an FFE may certify a QHP in the individual market of an 

FFE only if the QHP issuer meets one of the following conditions: (1) the issuer offers 

through the FF-SHOP serving that State at least one small group market QHP at the silver 

level of coverage and one at the gold level of coverage; (2) the QHP issuer does not offer 

small group market plans in that State, but another issuer in the same issuer group (as 

defined below) offers through the FF-SHOP serving that State at least one small group 

market QHP at the silver level of coverage and one at the gold level of coverage; or (3) 

neither the issuer nor any issuer in the same issuer group offers a small group market 

product in the State. Thus, no issuer would be required to begin offering small group 

market plans to meet this requirement. 

We note that §156.515(c)(2) has already implemented similar provisions for the 

Consumer Operated and Oriented Plans (CO-OPs). A CO-OP is not required to offer 

plans in the small group market, but if the CO-OP does offer a small group market plan, 

it must offer a silver and a gold QHP in each SHOP that serves the geographic regions in 

which the CO-OP offers coverage in the small group market. 

We propose to add to §156.20 a definition of “issuer group” that will be specific 

to this section of the regulations. The proposed definition includes both issuers affiliated 

by common ownership and control and issuers affiliated by the common use of a 

nationally licensed service mark. We believe that either of these elements–common 

control or common use of a licensed mark–would appropriately identify an issuer group. 

We define “issuer group” to help assure that the certification standard linking Exchange 

participation with SHOP participation has similar effects on small issuers and large issuer 

groups. We seek comment on this issue and whether or not the policy meets its three 
 240 

intended goals: enhancing employer and employee choice, assuring similar effects on 

single issuers and issuer groups, and not requiring any issuer not already offering 

coverage, to begin offering coverage in the small group market. 

4. Broker Compensation for Coverage Sold Through an FFE or FF-SHOP 

While a State also has a variety of policies it might adopt with regard to broker 

compensation that would help create a level playing field for enrollment inside and 

outside the SHOP due to the State’s broad authority to regulate insurance markets, FFE 

and FF-SHOP options for creating a level playing field are again limited to QHP 

certification standards. In a new paragraph §156.200(f), we propose that QHP 

certification by an FFE and an FF-SHOP be conditioned on the QHP issuer paying 

similar broker compensation for QHPs offered through a FFE or FF-SHOP that it would 

pay for similar health plans offered outside an FFE and an FF-SHOP. We request 

comment on whether “similar health plans” is a sufficient standard and if not, which 

factors should be considered in identifying “similar health plans.” We also request 

comment on how this standard might apply when small group market product 

commissions are calculated on a basis other than an amount per employee or covered life 

or a percentage of premium. 

5. Minimum Participation Rate in the FF-SHOP 

Section 155.705(b)(10) specifies that a SHOP may establish a uniform minimum 

participation rate for its QHPs. Further rulemaking is needed to establish a minimum 

participation rate in the FF-SHOP. We recognized in the proposed Exchange 

Establishment Rule, 76 FR at 41886, that minimum participation rates calculated at the 

level of the issuer are currently in wide use by issuers as one method to reduce the 

potential for adverse selection. We note here that the ability of a SHOP, including an FFSHOP, to adopt a minimum participation rate as an exception to the guaranteed issue 
 241 

requirements of the Affordable Care Act is dependent on the final adoption of §147.104 

(b)(1) of the proposed Health Insurance Market Rule, (77 FR 70612), which conditions 

employer eligibility for the year-around open enrollment period in the SHOP (or FFSHOP) on meeting any minimum participation rate that the SHOP (or FF-SHOP) might 

establish. 

Because we believe risk selection based on employee decisions to participate is 

likely without a minimum participation rate, we propose a minimum participation rate for 

the FF-SHOP of 70 percent, calculated at the level of the FF-SHOP. This rate is based on 

consultations with issuer organizations and regulators about customary minimum 

participation rates and would apply to all qualified employers in the FF-SHOP serving a 

given State. Because State law, regulation, and market practices vary from State to State, 

we also propose an option for the FF-SHOP to adopt a different uniform minimum 

participation rate in a State with a FF-SHOP if there is evidence that: 

(1) A State law sets the rate; or 

(2) A higher or lower rate is customarily used by the majority of QHP issuers in 

that State for products in the State’s small group market outside the SHOP. 

In addition, in accordance with State laws, we propose that certain types of alternative 

coverage will exclude an employee entirely from the calculation of the minimum 

participation rate: 

(1) A group health plan offered by another employer; or 

(2) A governmental program such as Medicare, Medicaid, or TRICARE. 

We seek comment on the default minimum participation rate and the exceptions 

that will help ensure alignment with current State practice and standards inside and 

outside the SHOP. 

6. Determining Employer Size for Purposes of SHOP Participation 
 242 

While the Exchange Establishment Rule did not finalize a method for determining 

employer size, we note that part-time employees must be taken into account in some 

reasonable way to be consistent with the Affordable Care Act standards for determining 

employer size. We propose to amend the definitions of “small employer” and “large 

employer” in §155.20 to specify the method for determining employer size and to add the 

definition of large employer to §157.20. In determining whether an employer is a small 

employer for purposes related to the SHOP, we propose that the full-time equivalent 

method used in section 4980H(c)(2)(e) of the Code, as added by section 1513 of the 

Affordable Care Act, be used. We seek comment on the proposed definition. We believe 

that having a single method will provide greater clarity and simplicity both for employers 

and for States seeking to reconcile State methods of determining group size with Federal 

methods in the operation of Exchanges and for determining employer eligibility to 

participate in the SHOP. We discuss the timing of this action in the “Transitional 

Policies” section below. 

7. Definition of a Full-Time Employee for Purposes of Exchanges and SHOPs 

Section 1312(f)(2)(A) of the Affordable Care Act defines a qualified employer as 

one “that elects to make all full-time employees of such employer eligible for one or 

more qualified health plans offered in the small group market through an Exchange that 

offers qualified health plans.” The Affordable Care Act does not define a full-time 

employee for purposes of this provision. We propose to add to §155.20 a definition of 

full-time employee that cross-references section 4980H(c)(4) of the Code, which 

provides that a full-time employee with respect to any month is generally an employee 

who is employed an average at least 30 hours of service per week, subject to the 

transitional policies discussed in the next paragraph. Under our proposal, this definition 
 243 

would control for purposes of the section 1312(f)(2)(A) requirement that qualified 

employers offer coverage to all full-time employees. 

8. Transitional Policies 

Most States currently use definitions of a full-time employee and methods of 

counting employees to determine employer size that differ from Federal definitions and 

methods. We believe that certain provisions of the Affordable Care Act that distinguish 

between the small group market and large group market and between large employers 

and small employers require that a Federal definition be used. We also note that section 

1304(b)(3) of the Affordable Care Act provides States with some discretion in how they 

define their small group market in 2014 and 2015. Because States will generally take 

legislative action before January 1, 2016, to redefine the upper limit of the small group 

market as 100 employees, we believe that States can also act at that time to adopt a 

counting method that is consistent with Federal law. 

Therefore, we propose that the definitions of small employer and full-time 

employee proposed above be effective January 1, 2016, for purposes of Exchange and 

SHOP administration. With respect to State-operated SHOPs for 2014 and 2015 only, 

HHS will not take any enforcement actions against a State-operated SHOP for including 

a group in the small group market based on a State definition that does not include parttime employees when the group should have been classified as part of the large group 

market based on the Federal definition. Similarly, during 2014 and 2015, an employer 

and a State-operated SHOP may adopt a reasonable basis for their determination of 

whether they have met the SHOP requirement to offer coverage to all full-time 

employees, such as the definition of full-time employee from the State’s small group 

market definition or the Federal definition from section 4980H of Chapter 43 of the 

Code. 
 244 

The FF-SHOP, however, must use a counting method that takes part-time 

employees into account. We propose that these definitions will be effective October 1, 

2013 for the FF-SHOP. To make an employer eligibility determination, the FF-SHOP 

will ask employers about the number of employees based on the full-time equivalent 

method used in section 4980H of Chapter 43 of the Code, as added by section 1513 of the 

Affordable Care Act. Thus, in FF-SHOP States, there may be a few employers who can 

purchase a small group market plan outside of the FF-SHOP (because they have fewer 

than 50 full time employees) but will not be eligible to purchase through the FF-SHOP 

(because they have more than 50 full time equivalent employees). 

We request comment on the proposed definitions and on the proposed transition 

policies. 

9. Web Site Disclosures Relating to Agents and Brokers 

We propose modifications to the website disclosure standards relating to brokers 

in §155.220(b). Specifically, we propose a new paragraph (b)(1) that would allow an 

Exchange or SHOP to limit the display of agent and broker information to include only 

those licensed agents and brokers who are registered with the Exchange or SHOP and a 

new paragraph (b)(2) that would specifically adopt this provision for an FFE and an FFSHOP. We believe that listing only brokers who have registered with the Exchange is in 

the best interest of the consumer, both because the registration and training helps assure 

that the agent or broker is familiar with the Exchange policies and application process 

and because the proposed listing will not contain large numbers of licensed brokers who 

are not active in the market. We welcome comments on these proposals. 

10. QHP issuer standards specific to SHOP. 

 We propose modifications to the QHP issuer standards specific to SHOP for 

enrollment in §156.285. Specifically, we propose a technical correction in paragraph 
 245 

(c)(7) such QHP issuers participating in the SHOP must enroll qualified employees if 

they are eligible for coverage. This correction aligns SHOP enrollment standards to 

Exchange enrollment standards. 

I. Medical Loss Ratio Requirements under the Patient Protection and Affordable Care 

Act

1. Treatment of Premium Stabilization Payments, and Timing of Annual MLR Reports 

and Distribution of Rebates 

 Our previous rulemakings concerning PHS Act section 2718 did not address how 

issuers are to account for the premium stabilization programs in their MLR reports and in 

calculating their MLR and any rebates owing, given that the premium stabilization 

programs are effective beginning in 2014. This proposed rule would modify the 

definition of premium revenue in §158.130, the formula in §158.221(c) for calculating an 

issuer’s MLR, and the formula in §158.240(c) for calculating an issuer’s rebate if the 

MLR standard is not met, in the current MLR regulation to account for payments and 

receipts related to the premium stabilization programs. When the MLR annual reporting 

form is updated for the reporting year 2014 and later, premium stabilization amounts 

would be considered a part of total premium revenue reported to the Secretary, similar to 

other elements involved in the derivation of earned premium. The MLR annual reporting 

form would then account for premium stabilization amounts by removing them from 

adjusted earned premium, so that these amounts do not have a net impact on the adjusted 

earned premium used in calculating the MLR denominator and rebates. Additionally, this 

proposed rule would amend §158.140(b) to include premium stabilization amounts as an 

adjustment to incurred claims in calculating the MLR numerator as provided in §158.221. 

This approach would address stakeholder concerns that netting premium stabilization 

amounts directly against adjusted earned premium in MLR and rebate calculations would 
 246 

result in an issuer paying either a higher total amount or a lower total amount for rebates 

and the premium stabilization programs combined, depending on whether the issuer’s net 

premium stabilization obligations resulted in payment or receipt of funds by the issuer. 

The approach in this proposed rule would also preserve consistency between the MLR 

and risk corridors programs by treating premium stabilization amounts in MLR and 

rebate calculations the same way section 1342(c) of the Affordable Care Act treats 

reinsurance and risk adjustment amounts in risk corridors calculations, by applying them 

as adjustments to cost, not revenue. Although PHS Act section 2718 provides that 

premium revenue should “account for” collections or receipts for the premium 

stabilization programs, we believe the statutory language provides flexibility as to 

whether to account for the effects of such collections or receipts in determining revenue 

(the denominator) or costs (the numerator) of the MLR formula. We considered netting 

premium stabilization payments or receipts against revenue, but for the reasons discussed 

above, have not proposed that approach. We invite comment on this decision. 

In sum, the formula for calculating the MLR would be amended as follows to take 

into account payments for and receipts related to the premium stabilization programs: 

Adjusted MLR = [(i + q + n – r) / {(p + n – r) – t – f – n + r}] + c 

Where, 

 i = incurred claims 

 q = expenditures on quality improving activities 

 p = earned premiums 

 t = Federal and State taxes 

 f = licensing and regulatory fees 

 n = reinsurance, risk corridors, and risk adjustment payments made by 

issuer 
 247 

 r = issuer’s reinsurance, risk corridors, and risk adjustment related 

receipts 

 c = credibility adjustment, if any. 

 Issuers must provide rebates to enrollees if their MLRs fall short of the applicable 

MLR standard for the reporting year. Rebates for a company whose adjusted MLR value 

in a State falls below the minimum MLR standard in a given market would be calculated 

using the following amended formula: 

Rebates = (m – a) * [(p + n – r) – t – f – n + r] 

Where, 

 m = the applicable minimum MLR standard for a particular State and 

market 

 a = issuer’s adjusted MLR for a particular State and market. 

 The amendments made by this proposed rule would be effective for MLR 

reporting years beginning in 2014. 

In addition, this proposed rule would change the MLR reporting and rebate 

deadlines, beginning with the 2014 MLR reporting year, to coordinate them with the 

reporting cycles of the premium stabilization programs. Currently, an issuer must file its 

annual MLR report by June 1 and pay any rebates it owes to consumers by August 1 of 

the year that follows the MLR reporting year. However, looking ahead, the amounts 

associated with the premium stabilization programs that issuers must take into account in 

their MLR calculations will not be known until after June 1 each year. For example, a 

state, or HHS on behalf of a state, has until June 30 of the year following a benefit year to 

notify issuers of the risk adjustment and reinsurance payments due or charges owed for 

that benefit year (§153.310(e); §153.240(b)(1) as proposed in this proposed rule). As 

further specified above in section III.C. of this proposed rule issuers must submit risk 
 248 

corridors data and calculations by July 31 of the year following a benefit year 

(§153.530(d) as proposed in this proposed rule). Accordingly, we propose to amend 

§158.110(b) to change the date of MLR reporting to the Secretary from June 1 to July 31 

beginning with the 2014 MLR reporting year, and we propose to amend §158.240(d) to 

change the rebate due date from August 1 to September 30 to accommodate the schedule 

for the premium stabilization programs beginning with the 2014 MLR reporting year. 

Similarly, we propose to amend §158.241(a)(2) to change the due date for rebates 

provided by premium credit from August 1 to September 30, to apply to the first month’s 

premium that is due on or after September 30 following the MLR reporting year, 

beginning with the 2014 MLR reporting year. In choosing these dates, we tried to 

balance consumers’ and policyholders’ interests in maintaining the dates for MLR 

reporting and rebates as close to the June 1 and August 1 dates as possible with issuers’ 

interests in having the necessary data to submit their annual MLR report and sufficient 

time to disburse any rebates. Although we must provide issuers any reconciliation of 

their risk corridors calculations by August 31, as described above in Section C of this 

proposed rule, we believe that there will be few changes to the risk corridors calculations 

submitted by issuers to the Secretary by July 31. This would give issuers one additional 

month from any reconciliation to disburse any rebates owed, which we believe is 

sufficient time. Comments on the proposed timeline are welcome. 

2. Deduction of Community Benefit Expenditures 

While we did not specifically solicit comments on the deduction from premium 

for community benefit expenditures in the MLR December 7, 2011 final rule with 

comment period, we received a few comments that recommend that a tax exempt not-forprofit issuer should be able to deduct both community benefit expenditures and State 

premium tax. These commenters suggest that prior to publication of the final rule, the 
 249 

MLR interim final rule published on December 1, 2010 gave a tax exempt not-for-profit 

issuer this flexibility. Two commenters assert that a Federal income tax exempt issuer is 

required to make community benefit expenditures to maintain its Federal income tax 

exempt status, and that allowing a deduction for community benefit expenditures takes 

the place of a Federal income tax deduction in the MLR calculation. Commenters have 

made clear that deducting both State premium taxes and community benefit expenditures 

would help level the playing field because it would allow a Federal income tax exempt 

issuer to deduct its community benefit expenditures in the same manner that a for-profit 

issuer is allowed to deduct its Federal income taxes. We agree, and this proposed rule 

would amend §158.162(b)(1)(vii) to allow a Federal income tax exempt issuer to deduct 

both State premium taxes and community benefit expenditures from earned premium in 

the MLR calculation. This proposed rule would not change the treatment of State 

premium taxes and community benefit expenditures for those issuers that are not exempt 

from paying Federal income tax. Comments are welcome on the merits of allowing a tax 

exempt issuer to deduct both State premium taxes and community benefit expenditures 

from earned premium. 

In its model MLR recommendation51, the NAIC determined that the deduction 

from premium for community benefit expenditures should be limited to a reasonable 

amount to discourage fraud and abuse and that this limit should be the State premium tax 

rate. We applied this principle in allowing issuers exempt from State premium tax to 

deduct community benefit expenditure, up to the State premium tax rate, in their MLR 

calculation. However, the MLR final rule published on December 7, 2011 allowed 

issuers exempt from Federal income tax to deduct community benefit expenditures in lieu 

 

51 Regulation for Uniform Definitions and Standardized Methodologies for Calculation of the Medical Loss 

Ratio for Plan Years 2011, 2012 and 2013 per Section 2718(b) of the Public Health Service Act, available 

at http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf.
 250 

of State premium taxes, not Federal income taxes. 

Commenters have suggested that a 3 percent limit on the deduction from premium 

for community benefit expenditures would be sufficient to allow a tax exempt issuer to 

maintain its current community benefit expenditure. The 2011 MLR data indicate that, of 

the not-for-profit issuers that reported non-zero community benefit expenditures, the 

average spent on community benefit expenditures (deductible and non-deductible) was 

about 1.6 percent of premium. This suggests that a 3 percent community benefit 

expenditure deduction limit would not discourage a tax exempt issuer from making 

community benefit expenditures. In light of the NAIC model rule and the comments 

received, we propose to limit the deduction from premium for community benefit 

expenditures for issuers that are exempt from Federal income tax to the higher of either 3 

percent of premium or the highest premium tax rate charged in a State. Comments are 

solicited on the proposed community benefit expenditures deduction limit. 

3. Summary of Errors in the MLR Regulation 

a. Errors in the December 1, 2010 interim final rule 

We are making two changes to the December 1, 2010 interim final rule (75 FR 

74864) to make the language of the rule consistent with the NAIC’s recommendations, 

which in the preamble we stated that we were adopting. 

On page 74924, in §158.140 (b)(5)(i), we mistakenly specified the date by which 

issuers must define the formula they use for the blended rate adjustment as ‘‘January 1, 

2011’’ instead of ‘‘January 1 of the MLR reporting year.’’ We are updating this date to 

ensure that all issuers are able to choose to make the blended rate adjustment going 

forward. We mistakenly omitted the words “by the issuer” following the words ‘‘will be 

defined’’ and mistakenly used the word “will” instead of “must” in describing the 

objective formula to be used in reporting group coverage at a blended rate. 
 251 

On page 74928, in §158.232(d), we inadvertently used the word ‘‘For’’ instead of 

‘‘Beginning with’’ when describing the date after which partially-credible issuers that 

consistently fail to meet the MLR standard will not be allowed to use a credibility 

adjustment. 

b. Error in the May 16, 2012 Correcting Amendment 

Section 158.232(c)(1)(i) of the MLR regulation was amended by the May 16, 

2012 correcting amendment (77 FR 28788), which currently reads: ‘‘[t]he per person 

deductible for a policy that covers a subscriber and the subscriber’s dependents shall be 

the lesser of: The sum of the deductible applicable to each of the individual family 

members; or the overall family deductible for the subscriber and subscriber’s family, 

divided by two (regardless of the total number of individuals covered through the 

subscriber).’’ In this correcting amendment, we further amend §158.232(c)(1)(i) by 

deleting the words ‘‘The sum of’’ after the words ‘‘the lesser of:’’ and the comma after 

the words ‘‘subscriber’s family,’’ which we inadvertently did not delete in the May 16, 

2012 correcting amendment.

IV. Collection of Information Requirements 

 Under the Paperwork Reduction Act of 1995, we are required to provide 60-day 

notice in the Federal Register and solicit public comment before a collection of 

information requirement is submitted to the Office of Management and Budget (OMB) 

for review and approval. To fairly evaluate whether an information collection should be 

approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 

requires that we solicit comment on the following issues: 

● The need for the information collection and its usefulness in carrying out the 

proper functions of our agency. 

● The accuracy of our estimate of the information collection burden. 
 252 

● The quality, utility, and clarity of the information to be collected. 

● Recommendations to minimize the information collection burden on the 

affected public, including automated collection techniques. 

The following sections of this document contain paperwork burden but not all of 

them are subject to the information collection requirements (ICRs) under the PRA for 

reasons noted. 

A. Collections Related to State Operation of Reinsurance & Risk Adjustment Programs 

(§153.210 through §153.240, §153.310)

Although the number of States that will elect to operate their own reinsurance or 

risk adjustment programs is unknown, we anticipate that fewer than nine States will 

choose to do so. Collections from fewer than 10 persons are exempt from the PRA under 

44 U.S.C. 3502(3)(A)(i). Therefore, we do not plan to seek OMB approval for the 

following collections. However, in the event that, by the time of the final Payment 

Notice, we believe that the number of States will be greater than 9, we will seek PRA 

approval based on the burden estimates outlined below. 

1. Reporting to HHS (§153.210) 

We are proposing under §153.210(e) that a State operating its own reinsurance 

program must ensure that its applicable reinsurance entity provide information regarding 

the requests for reinsurance payments under the national contribution rate made under 

§153.410 of this part for all reinsurance-eligible plans for each quarter during the 

applicable benefit year. We estimate that it will take an operations analyst 2 hours (at 

$55 an hour) to gather information from applicable reinsurance entities and to submit this 

information to HHS, for a total burden of $110 per State selecting to run reinsurance. 

2. Collection of Reinsurance Contribution Funds (§153.220) 
 253 

Under proposed §153.220(d), a State that operates its own reinsurance program 

and elects to collect additional reinsurance contributions for additional administrative 

expenses or supplemental reinsurance payments or use additional State funds for 

supplemental reinsurance payments must notify HHS of its intent to do so within 30 days 

after publication of the draft annual HHS notice of benefit and payment parameters for 

the applicable benefit year. We believe that the burden associated with this requirement 

is the time and effort necessary for the State to provide this notification, and estimate it 

will take each State approximately 1 hour by an operations analyst (at $55 an hour) to 

submit this notification requirement. Consequently, we estimate a total burden of $55 for 

each State as a result of this requirement. 

3. Collections Related to Reinsurance Payments Made under a State Additional 

Contribution Rate (§153.232) 

Under §153.232(a), we propose to require a State running its own 

reinsurance program that chooses to collect additional contributions under §153.220(d) to 

set supplemental State reinsurance payment parameters and to ensure that reinsurance 

contributions collected and funds used are reasonably calculated to cover additional 

reinsurance payments that are projected to be made only under the supplemental 

reinsurance payment parameters. We estimate that it will take an operations analyst 8 

hours (at $55 an hour) and a senior manager 2 hours (at $77 an hour) to determine 

appropriate supplemental payment parameters. Therefore, we estimate that it will cost 

each State choosing to collect additional contributions approximately $594 to comply 

with this requirement. 

Under §153.232(d), we propose that States that run their own reinsurance 

program and that choose to collect additional contributions under §153.220(d) calculate 

the supplemental reinsurance payments from their additional funds collected under the 
 254 

State additional contribution rate using supplemental payment parameters in conjunction 

with the national payment parameters to reimburse a particular portion of claims. 

Additionally, under §153.232(e), we propose that, if all requested reinsurance payments 

under the State supplemental reinsurance parameters calculated will exceed all 

reinsurance contributions collected under the additional State contribution rate for the 

benefit year, the State must determine a uniform pro rata adjustment to be applied to all 

requests for reinsurance payments. The State or the applicable reinsurance entity must 

reduce all such requests for reinsurance payments for the applicable benefit year by that 

adjustment. We estimate it will take an operations analyst 40 hours (at $55 an hour) and 

a senior manager 12 hours (at $77 an hour) to determine appropriate payment 

calculations and, if necessary, a pro rata adjustment. Therefore, we estimate that it will 

cost each State choosing to collect additional contributions approximately $3,124 to 

comply with this requirement. 

4. Collections Related to Disbursement of Reinsurance Payments (§153.240) 

 We propose to amend §153.240(a) to direct a State operating its own reinsurance 

program to ensure that the applicable reinsurance entity either collects data or is provided 

access to the data required to determine reinsurance payments as described in §§153.230 

and 153.232. In §153.240(b) we propose that a State or HHS on behalf of the State notify 

issuers of the total amount of reinsurance payments that will be made no later than June 

30 of the year following the benefit year, as well as an estimate to each reinsuranceeligible plan of expected requests for reinsurance payments from the plan on a quarterly 

basis during the applicable benefit year. We estimate it will take an operations analyst 40 

hours (at $55 an hour), 10 hours per quarter, and a senior manager 12 hours (at $77 an 

hour), 3 hours per quarter, to determine appropriate quarterly estimates of expected 

reinsurance payments and to notify plans. Additionally, we expect it will take an 
 255 

operations analyst 40 hours (at $55 an hour) and a senior manager 12 hours (at $77 an 

hour) to determine the total amount of reinsurance payments for each reinsurance-eligible 

plan. Therefore, we estimate that it will cost each State choosing to run reinsurance 

approximately $6,248 to comply with this requirement. We will also revise the 

supporting statement of 0938-1155 to reflect the additional burden for States choosing to 

run reinsurance of providing quarterly estimates of expected reinsurance payments and 

notice of total reinsurance payments to reinsurance-eligible plans. At the final Payment 

Notice stage, we will revise the supporting statement of 0938-1155 to clarify that a State 

has the option to ensure that the applicable reinsurance entity provides access to data 

required to determine reinsurance payments, and that the State is not required to verify 

that the reinsurance entity is collecting this data directly. 

In §153.240(a)(3), we propose that a State must provide a process through which 

an issuer of a reinsurance-eligible plan that does not generate individual enrollee claims 

in the normal course of business, such as a capitated plan, may use estimated claims costs 

to make a request for payment (or to submit data to be considered for reinsurance 

payments) for such plan in accordance with the requirements of §153.410. In addition, 

the State must ensure that such requests for reinsurance payment are subject to validation. 

We estimate that our proposal will result in a small administrative cost to States 

associated with determining a format for submission of reinsurance payment data and 

notifying capitated plans of the acceptable method and format of data collection. We 

anticipate that a State will only need to establish this process once. On average, we 

estimate that it will take each State approximately 50 hours to comply with this 

requirement. We estimate it will take an operations analyst 40 hours (at $55 an hour) and 

a senior manager 10 hours (at $77 an hour) to determine an appropriate format for 

submission of reinsurance payment data for capitated plans and to notify plans of the 
 256 

acceptable method and format for data collection. Therefore, we estimate that it will cost 

each State choosing to run reinsurance approximately $2,970 to comply with this 

proposal. 

In §153.240(d)(1), we propose that, if a State establishes a reinsurance program, 

the State must ensure that the applicable reinsurance entity’s collection of personally 

identifiable information is limited to information reasonably necessary for use in the 

calculation of reinsurance contributions or payments. Furthermore, in §153.240(d)(2), 

we propose that, if a State establishes a reinsurance program, it must ensure that the 

applicable reinsurance entity implements security standards that provide administrative, 

physical, and technical safeguards for the individually identifiable information consistent 

with the security standards. To comply with this requirement, we believe that most States 

will require the applicable reinsurance entity to comply with privacy and security 

standards that are similar to the Federal standards already established under the HIPAA 

and The Health Information Technology for Economic and Clinical Health Act 

(HITECH) (Pub.L. 104-191, 110 Stat. 1936, enacted August 21, 1996) or with privacy 

and security standards that are already established under State law, rather than developing 

entirely new standards to apply to reinsurance entities. We further anticipate that most 

States will incorporate this requirement into their contracting process with reinsurance 

entities. We estimate it will take a contract administrator 2 hours (at $40 an hour) and a 

lawyer 2 hours (at $77 an hour) to establish privacy and security standards for 

reinsurance entities and to notify reinsurance entities of these standards. Therefore, we 

estimate a total burden of 4 hours and $234 for each State choosing to operate 

reinsurance to comply with this proposal. 

5. HHS Approval of Risk Adjustment States (§153.310) 
 257 

Under §153.310(a)(4), we are proposing that a State that operates risk adjustment 

must be approved by HHS to do so. The burden associated with this process is the time 

and effort required by a State to submit evidence that it meets the approval standards set 

forth in §153.310(c). Note that these processes will start in benefit year 2015 – prior to 

that, HHS will engage in informal consultations with States. In any given benefit year 

after 2015, different States may apply for approval. 

We estimate it will take each State approximately 180 hours to complete the 

initial risk adjustment entity approval process. We estimate it will take an operations 

analyst 72 hours (at $55 an hour), a contract administrator 72 hours (at $40 per hour), a 

senior manager 24 hours (at $77 an hour), and an attorney 12 hours (at $77 an hour) to 

meet the initial approval requirements. Therefore, we estimate a total burden of $9,612 

for each entity, as a result of these approval requirements. 

B. ICRs Regarding Calculation of Reinsurance Contributions (§153.405) 

 In §153.405, we propose an annual enrollment count of covered lives by 

contributing entities using counting methods derived from the PCORTF Rule. We 

propose requiring contributing entities to provide annual counts of their enrollment and 

reinsurance contributions to HHS based on their last reported PCORTF number as 

modified for reinsurance purposes. The burden associated with this requirement is the 

time and effort required by an issuer to derive an annual, enrollment count. Because 

issuers will already be under an obligation to determine a count of covered lives using a 

PCORTF method, the burden associated with this requirement is the additional burden of 

conducting these counts using the slightly modified counting methods specified in this 

proposed rule. On average, we estimate it will take each issuer 1 hour to reconcile and 

submit final enrollment counts to HHS. Assuming an hourly wage rate of $55 for an 

operations analyst, we estimate an aggregate burden of $110,000 for 2,000 reinsurance 
 258 

contributing entities subject to this requirement. We are revising supporting statement of 

OMB Control Number 0938-1155 to include the required data elements that issuers will 

need to submit their enrollment counts and to specify that issuers must follow the 

methodology when they derive enrollee counts for reinsurance contributions. 

C. Requests for Reinsurance Payment (§153.410)

 As described in §153.410, we propose that issuers of reinsurance-eligible plans 

seeking reinsurance payment must request payment in accordance with the requirements 

of this proposed rule or the State notice of benefit and payment parameters, as applicable. 

To be eligible for reinsurance payments, issuers of reinsurance-eligible plans must submit 

or make accessible all necessary data to be considered for reinsurance payments for the 

applicable benefit year. 

 Issuers operating reinsurance-eligible plans in the individual market that are 

subject to the reinsurance data collection requirements are eligible to make reinsurance 

payment requests. To minimize burden on issuers, HHS intends to collect data in an 

identical manner for the HHS-operated reinsurance program and HHS-operated risk 

adjustment programs. In addition, when HHS operates reinsurance on behalf of a State, 

the maximum out-of-pocket differential between a cost-sharing reduction plan variation 

and the national maximum out-of-pocket limit established by the Federal government 

would be factored into an issuer’s reinsurance payment. Although we are clarifying the 

data elements issuers would be required to submit as part of the reinsurance payment 

request process, the burden associated with this requirement is already accounted for 

under OMB Control Number 0938-1155 with an October 31, 2015 expiration date. We 

are updating the supporting statement approved under 0938-1155 with an October 31, 

2015 expiration date to reflect these clarified data elements. 

D. Upload of Risk Adjustment and Reinsurance Data (§153.420) 
 259 

Under the HHS-operated risk adjustment and reinsurance programs, HHS 

proposes to use a distributed data collection approach to run software on enrollee-level 

plan enrollment, claims and encounter data that reside on an issuer’s dedicated data 

environment. We propose in §153.700(a) to require that an issuer of a risk adjustment 

covered plan or a reinsurance-eligible plan in a State where HHS is operating the risk 

adjustment or reinsurance program on behalf of the State, as applicable, must provide 

HHS, through the dedicated data environment, access to enrollee-level plan enrollment 

data, enrollee claims data, and enrollee encounter data as specified by HHS. Under 

§153.710(b), all claims data submitted by an issuer of a risk adjustment covered plan or a 

reinsurance-eligible plan in a State in which HHS is operating risk adjustment or 

reinsurance, as applicable, must have resulted in payment by the issuer. Under 

§153.710(c), an issuer of a risk adjustment covered plan or a reinsurance-eligible plan in 

a State in which HHS is operating risk adjustment or reinsurance, as applicable, that does 

not generate individual enrollee claims in the normal course of business must derive costs 

on all applicable provider encounters using its principal internal methodology for pricing 

those encounters. Issuers will be directed to make risk adjustment and reinsurance data 

accessible to HHS in a way that conforms to HHS-established guidelines and applicable 

standards for electronic data collection and submission, storage, privacy and security, and 

processing. In addition, in §153.720(a), we propose requiring these issuers to establish a 

unique masked enrollee identification number for each enrollee, in accordance with HHSdefined requirements and maintain the same masked enrollee identification number for 

enrollees that enroll in different plans within the issuer, within the State, during a benefit 

year. Issuers must provide all data to HHS in the specified formats, and must correct 

submitted files to resolve problems detected by HHS during file processing. The burden 
 260 

associated with this requirement is the time and effort to ensure that information in the 

dedicated data environment complies with HHS requirements. 

We estimate that this data submission requirement will affect 1,800 issuers, and 

will cost each issuer approximately $327,600 in total labor and capital costs (including 

the average cost of $15,000 for a data processing server) during the start-up year. This 

cost will be lower in future years when fixed costs decrease. This cost reflects an estimate 

of 3 full-time equivalent employees (5,460 hours per year) at an average hourly rate of 

$59.39 per hour. We anticipate that approximately 400 data processing servers will be 

established across the market in 2014, and these servers will process approximately 9 

billion claims and enrollment files. Therefore, we estimate an aggregate burden, 

including labor and capital costs, of $589,680,000 for all issuers as a result of these 

requirements. We are revising the supporting statements associated with the submission 

of risk adjustment data and reinsurance enrollment data approved under OMB Control 

Number 0938-1155 with an October 31, 2015 expiration date to account for this burden. 

E. ICRs Regarding Data Validation Requirements When HHS Operates Risk Adjustment 

(§153.630)

Under §153.630, an issuer that offers at least one risk adjustment covered plan in 

a State where HHS is operating risk adjustment on behalf of the State for the applicable 

benefit year must have an initial validation audit performed on its risk adjustment data. 

The burden associated with this requirement is the issuer’s time and effort to provide 

HHS with source claims, records, and enrollment information to validate enrollee 

demographic information for initial and second validation audits, and the issuer’s cost to 

employ an independent auditor to perform the initial validation audit on a statistically 

valid sample of enrollees. 
 261 

The statistically valid sample of enrollees provided to each issuer will consist of 

enrollees both with and without HCCs. We estimate that each issuer sample will consist 

of approximately 300 enrollees, with a disproportionate share of approximately twothirds of the sample consisting of enrollees with HCCs. We also anticipate that this audit 

burden will affect about 1,800 issuers. 

Based on Truven Health Analytics 2010 MarketScan® data, we have determined 

that for enrollees with HCCs, the average number of HCCs to be reviewed by an auditor 

per enrollee is approximately two. Additionally, based on HHS audit experience, we 

estimate that it may cost approximately $180 ($90 per hour for 2 hours) for an auditor to 

review the medical record documentation for one enrollee with roughly two HCCs. We 

expect that it may cost approximately $30 per enrollee ($90 per hour for 20 minutes) to 

validate demographic information for all enrollees in the audit sample, totaling 

approximately $210 per enrollee with HCCs and $30 per enrollee with no HCCs. We 

assume that an initial validation audit will be performed on 180,000 enrollees without 

HCCs, and 360,000 enrollees with HCCs. We have developed this estimate assuming 

that medical records will not be reviewed for enrollees without HCCs, and that validation 

for these enrollees will be conducted using demographic data only. Based on the 

information above, we estimate that the total burden per issuer to retain initial validation 

auditors to perform the initial validation would cost approximately $45,000. Therefore, 

for 1,800 issuers, we anticipate that the total burden of conducting initial validation audits 

will be $81 million. We are revising the PRA currently approved OMB Control Number 

0938-1155 with an October 31, 2015 expiration date to account for this additional 

burden. 

Under §153.630(d), issuers will have the opportunity to appeal errors identified 

through the second validation audit process. Because we intend to provide further detail 
 262 

on this process in later guidance and rulemaking, we currently cannot estimate the 

number of issuers that will appeal HCC findings, or the cost per issuer for doing so. 

Therefore, we will seek OMB approval and solicit public comment on the appeal 

information collection requirements established under §153.630(d) at a future date. 

F. ICRs Regarding QHP Certification Standards Related to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions (§155.1030)

 In §155.1030(a)(1), we propose that the Exchange ensure that each issuer that 

offers or seeks to offer a QHP in the individual market on the Exchange submit the 

required plan variations, as proposed in §156.420, for each of its health plans proposed to 

be offered as a QHP in the individual market on the Exchange. Further we propose that 

the Exchange must certify that the plan variations meet the requirements detailed in 

§156.420. We expect that an Exchange would collect prior to each benefit year the 

information necessary to validate that the issuer meets the requirements for silver plan 

variations, as detailed in §156.420(a), and collect for certification the information 

necessary to validate that the issuer meets the requirements for zero and limited cost 

sharing plan variations, as detailed in §156.420(b) . We expect that this data collection 

would include the cost-sharing requirements for the plan variations, such as the annual 

limitation on cost sharing, and any reductions in deductibles, copayments or coinsurance. 

In addition, the Exchange would collect or calculate the actuarial values of each QHP and 

silver plan variation, calculated under §156.135 of the proposed EHB/AV Rule. We 

propose in §155.1030(a)(2) that the Exchange provide the actuarial values of the QHPs 

and silver plan variations to HHS. As proposed in § 155.1030(b)(4), HHS may use this 

information in connection with approving estimates for advance payment of cost-sharing 

reductions submitted by issuers under proposed §156.430. Because HHS will already 

have this information for Federally-facilitated Exchanges, the burden associated with this 
 263 

requirement is the time and effort for each Partnership or State-based Exchange to submit 

this information. We estimate that it will take each Partnership or State-based Exchange 

approximately 3.5 hours to collect, validate, and submit the data to HHS (3 hours by a 

database administrator at $47.70 per hour, and 0.5 hours by a manager at $75.15 per 

hour). We estimate that this will cost each Exchange approximately $181 per year. We 

plan to revise the supporting statement published under CMS form number 10433, which 

is pending OMB approval, to account for this additional burden. 

In paragraph (b)(1) and (2), we propose that the Exchange collect, review, and 

submit the rate or expected premium allocation, the expected allowed claims cost 

allocation, and the actuarial memorandum that a metal level health plan or stand-alone 

dental plan issuer submits under §156.470. This collection will allow for the calculation 

of the advance payments of cost-sharing reductions and the premium tax credit. The 

Exchange must ensure that such allocations meet the standards set forth in §156.470(c) 

and (d). This allocation information must be collected and approved before a health plan 

or stand-alone dental plan can be certified for participation in the Exchange. We expect 

that the Exchange will collect the allocation information in conjunction with the rate and 

benefit information that the issuer submits under §156.210 and/or the rate information 

that the QHP issuers submits through the Effective Rate Review program. Therefore, we 

believe that the burden for Partnership Exchanges or State-based Exchanges to submit to 

HHS this information collected from QHPs is generally part of the burden that is 

accounted for in the PRA approved under OMB Control Number 0938-1141. We 

estimate that Partnership and State-based Exchanges will incur additional burden to 

submit allocation information to HHS for stand-alone dental plans. We estimate that it 

will take each Exchange 30 minutes to submit this information for each stand-alone 

dental plan, and assume that this submission will be performed at the hourly wage rate of 
 264 

$38.49 for an insurance analyst. Assuming 20 stand-alone dental plans across the market, 

we estimate an aggregate burden of approximately $385 for all Partnership or State-based 

Exchanges to submit this information to HHS. We plan to revise the supporting 

statement published under CMS form number 10433, which is pending OMB approval, to 

account for this additional burden. 

In subparagraph (b)(3), we propose that the Exchange must collect any estimates 

and supporting documentation that a QHP issuer submits to receive advance payments of 

certain cost-sharing reductions, as described in §156.430(a), and submit, in the manner 

and timeframe established by HHS, the estimates and supporting documentation to HHS 

for review. Because HHS will already have this information for Federally-facilitated 

Exchanges, the burden associated with this requirement is the time and effort for each 

Partnership or State-based Exchange to submit this information. We believe that this 

requirement will impose minimal burden, and that it will take an insurance analyst 5 

minutes (at an hourly wage rate of $38.49), to collect and submit this information to HHS 

for each Partnership or State-based Exchange. Therefore, we estimate a burden of $3.08 

for each Partnership or State-based Exchange as a result of this requirement. 

G. ICRs Regarding QHP Participation Standards in SHOP (§156.200)

In §156.200(g)(1), we propose that if the issuer of a QHP in an FFE also 

participates in the State’s small group market, the QHP certification standard would be 

met if the issuer offers at least one small group market QHP at the silver level of 

coverage and one QHP at the gold level of coverage in a FF-SHOP serving that State. 

We also propose that, if neither the issuer nor any issuer in the same issuer group 

participates in the small group market of the State, the standard would be met. Therefore, 

no issuer would be required to begin offering small group market plans to meet this 

requirement. The burden associated with this requirement is the time and effort for an 
 265 

issuer to prepare a QHP certification application for a SHOP for at least one silver level 

and one gold level plan design. This burden would be incurred by issuers who, absent 

this requirement, would otherwise not have participated in a SHOP. We describe the 

burden associated with this requirement in the 30-day Federal Register Notice for the 

Initial Plan Data Collection published on November 21, 2012 (77 FR 69846). 

H. ICRs Regarding Plan Variations (§156.420)

In §156.420, we propose that issuers submit to the Exchange for certification the 

variations of the health plans that they offer or propose to offer in the individual market 

on the Exchange that include required levels of cost-sharing reductions. We provide an 

overview of the submission process associated with this requirement in this proposed 

rule. In paragraph (a), we propose that, for each silver health plan that an issuer offers or 

proposes to offer in the individual market on the Exchange, the QHP issuer must submit 

to the Exchange for certification the standard silver plan and three variations of the 

standard silver plan. In paragraph (b), we further propose that a QHP issuer must, for 

each of its health plans at any metal level of coverage, submit a zero cost sharing plan 

variation and a limited cost sharing plan variation of each health plan offered or proposed 

to be offered in the individual market on the Exchange. 

We estimate that 1,200 issuers will participate in an Exchange nationally, and that 

each issuer will offer one QHP per metal level with four zero cost sharing plan variations 

and four limited cost sharing plan variations (one per metal level QHP) and three plan 

variations for low-income populations, for a total of four standard plans and eleven plan 

variations. Our burden estimate assumes that each issuer will submit these plan variations 

as part of their electronic QHP application, which is described in further detail in the 

“Supporting Statement for Initial Plan Data Collection to Support QHP Certification and 

other Financial Management and Exchange Operations,” which was provided for public 
 266 

comment on November 21, 2012 (77 FR 69846). We estimate that it will take 

approximately 1.5 hours to submit the requisite information for a plan variation (0.75 

hours by an actuary at a wage rate of $56.89, 0.5 hours by an insurance analyst at a wage 

rate of $38.49, and 0.25 hours by an insurance manager at a wage rate of $67.44). We 

estimate that each submission for a plan variation will cost an issuer $78.77, for a total 

estimated annual cost of $866.47 per issuer for the 11 plan variations. We estimate an 

aggregate burden of $1,039,764 for all issuers participating in the Exchange. We plan to 

revise the supporting statement published under CMS form number 10433, which is 

pending final OMB approval, to account for this additional burden. 

I. ICRs Regarding Payment of Cost-Sharing Reductions (§156.430)

 In §156.430(a)(1), we propose that for each silver plan variation and zero cost 

sharing plan variation that an issuer offers or proposes to offer in the individual market 

on the Exchange, the QHP issuer must provide to the Exchange, for approval by HHS, 

estimates, and supporting documentation validating the estimates, of the dollar value of 

cost-sharing reductions to be provided. However, we propose a simplified methodology 

for calculating the advance payments for the initial years of the cost-sharing reduction 

program. This methodology will utilize data that QHP issuers submit for other 

requirements, such as §156.420 and §156.470. As a result, there will be no additional 

burden associated with this requirement. 

In §156.430(a)(2), we discuss the process for estimating the value of cost-sharing 

reductions to be provided under the plan variation open to Indians with a household 

income above 300 percent of the FPL, described in §156.420(b)(2). If a QHP issuer 

seeks advance payments for the these cost-sharing reductions, the issuer must provide to 

the Exchange, for approval by HHS, an estimate, and supporting documentation 

validating the estimate, of the dollar value of the cost-sharing reductions to be provided 
 267 

under the limited cost sharing plan variation of the QHP. We estimate that 1,200 issuers 

will participate in Exchanges nationally, and that each issuer will offer one QHP per 

metal level, with one limited cost sharing plan variation for each metal level. For each 

plan variation, the issuer may submit an estimate and supporting documentation of the 

dollar value of the cost-sharing reductions. We expect estimates and supporting 

documentation will be submitted as part of the electronic QHP application, which is 

described in further detail in the “Supporting Statement for Initial Plan Data Collection to 

Support QHP Certification and other Financial Management and Exchange Operations,” 

which was provided for public comment on November 21, 2012 (77 FR 69846). We 

estimate that it will take approximately 1.0 hours to submit each response for a plan 

variation (0.5 hours by an actuary at a wage rate of $56.89 and 0.5 hours by an insurance 

analyst at a wage rate of $38.49. We estimate that each response for a plan variation will 

cost an issuer $47.69, for an estimated total issuer burden to submit responses for 4 plan 

variations of $228,912 for the year. We plan to revise the supporting statement published 

under CMS form number 10433, which is pending final OMB approval, to account for 

this additional burden. 

In §156.430(c), we propose that a QHP issuer submit to HHS, in the manner and 

timeframes established by HHS the actual amount of cost-sharing reductions provided to 

each enrollee. This information is necessary so that HHS can reconcile advance 

payments made throughout the year to actual cost-sharing amounts. While these 

information collection requirements are subject to the Paperwork Reduction Act, the 

information collection process and instruments associated with this requirement are 

currently under development. We will seek OMB approval and solicit public comments 

upon their completion. 
 268 

J. ICRs Regarding Reduction of an Enrollee’s Share of Premium to Account for 

Advance Payment of the Premium Tax Credit (§156.460)

In §156.460(a)(2), we propose that if a QHP issuer receives an advance payment 

of the premium tax credit on behalf of an individual, the QHP issuer must notify the 

Exchange of any reduction in premium through the standard enrollment acknowledgment 

in accordance with §156.265(g). Because this notification will occur through the 

enrollment acknowledgement process that already exists under the final Exchange 

Establishment rule (77 FR 18310), we believe that this requirement will impose minimal 

burden on QHP issuers, and that it will take an insurance analyst 5 minutes (at an hourly 

wage of $38.49), to collect and submit this information to each Exchange Therefore, we 

estimate a burden of $3.20 for each QHP issuer, and an aggregate burden of $3,849 for 

all 1,200 QHP issuers, as a result of this requirement. 

K. ICRs Regarding Allocation of Rates and Claims Costs for Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions (§156.470) 

 In §156.470(a), we propose that an issuer provide to the Exchange annually for 

approval, for each metal level health plan offered or proposed to be offered in the 

individual market on the Exchange, an allocation of the rate and the expected allowed 

claims costs for the plan, for EHB, other than services described in §156.280(d)(1), and 

any other services or benefits offered by a health plan that do not meet the definition of 

EHB. In §156.470(b) we propose that an issuer of a stand-alone dental plan provide to 

the Exchange for approval a dollar allocation of the expected premium for the plan to the 

pediatric dental essential health benefit. In §156.470(c) and (d), we propose that issuers 

ensure that the allocation described in paragraphs (a) and (b), respectively, are calculated 

following specific standards. Lastly, in §156.470(e), we propose that an issuer of a metal 

level health plan or stand-alone dental plan offered, or proposed to be offered, in the 
 269 

individual market on the Exchange, submit an actuarial memorandum with a detailed 

description of the methods and specific bases used to perform the allocations that would 

be required under paragraphs (a) and (b) of that section, demonstrating that the 

allocations meet the standards set forth in paragraphs (c) and (d). 

 QHP issuers will submit these allocations and justifications through the Effective 

Rate Review program (Rate Increase Disclosure and Review Rule, 76 FR 29964). The 

Rate Increase Disclosure and Review Rule develops a process to ensure the public 

disclosure of all information and justifications relating to unreasonable rate increases. To 

that end, the regulation establishes various reporting requirements for health insurance 

issuers, including a Preliminary Justification for a proposed rate increase, a Final 

Justification for any rate increase determined by a State or HHS to be unreasonable, and a 

notification requirement for unreasonable rate increases that will not be implemented. 

The Preliminary Justification includes data supporting the potential rate increase as well 

as a written explanation of the rate increase. For those rates HHS will be reviewing, 

issuers’ submissions also will include data and information that HHS will need to make a 

valid actuarial determination regarding whether a rate increase is unreasonable. 

Therefore, there will be no additional burden on QHP issuers that submit their rates 

through the Effective Rate Review program. The burden for the Effective Rate Review 

submission is already accounted for in OMB Control Number 0938-1141. We are 

additionally revising the supporting statement of the PRA approved under OMB Control 

Number 0938-1141 to clarify that we will be collecting this allocation information from 

metal plans to be offered on an Exchange, whether they are new or existing. 

 This requirement will result in additional burden for stand-alone dental plans. We 

estimate that it will take each stand-alone dental plan 5 hours to prepare and submit this 

information to the Exchange. We assume that this requirement will require 3 hours of 
 270 

labor by an insurance analyst (at an hourly wage rate of $38.49) and 2 hours of labor by 

an actuary (at an hourly wage rate of $56.89). Assuming 20 stand-alone dental plans 

across the market, we estimate an aggregate burden of approximately $4,585 for all 

stand-alone dental plans to submit these allocations and justifications to the Exchange. 

We plan to revise the supporting statement published under HHS form number 10433, 

which is pending final OMB approval, to account for this additional burden. 

L. ICRs Regarding Medical Loss Ratio Reporting (§158.130, §158.140, §158.162, 

§158.221, §158.240)

This proposed rule would direct issuers to include all payments and receipt 

amounts related to the reinsurance, risk corridors and risk adjustment programs in the 

annual MLR report. 

The existing information collection requirement is approved under OMB Control 

Number 0938-1164. This includes the annual reporting form that is currently used by 

issuers to submit MLR information to HHS. Prior to the deadline for the submission of 

the annual MLR report for the 2014 MLR reporting year, and in accordance with the 

PRA, HHS plans to solicit public comment and seek OMB approval for an updated 

annual form that will include reporting of the premium stabilization payments and will 

reflect the changes in deduction for community benefit expenditures for federal income 

tax exempt not-for-profit issuers. 
TABLE 18: Estimated Fiscal Year Reporting Recordkeeping and Cost Burdens 

Regulation Sections 

OMB Control No./CMS Form No. Respondents Responses 

Burden per Response  (hours) 

Total Annual Burden (hours) 

Hourly Labor Cost of Reporting52

($) 

Total Labor ($) 

§153.405 0938-NEW 2,000 2,000 1.00 2,000 55.00 110,000 §153.420 0938-1155 1,800 9,000,000,000 0.001 9,828,000 59.39 583,680,000 §153.630(b) 0938-1155 1,800 540,000 1.67 900,000 90.00 81,000,000 §155.1030(a) 0938-

NEW/CMS10433 

51 51 3.50 179 51.62 9,240 

§155.1030(b)(2) 0938-

NEW/CMS10433 

20 20 0.50 10 38.49 385 

§155.1030(b)(3) 0938-

NEW/CMS10433 

51 51 0.08 4.1 38.49 158 

§156.420 0938-

NEW/CMS10433 

1,200 13,200 1.50 19,800 52.51 1,039,698 

§156.430(a)(2) 0938-

NEW/CMS10433 

1,200 4,800 1.00 4,800 47.69 228,912 

52 Bureau of Labor Statistics, U.S. Department of Labor, National Compensation Survey: Occupational Earnings in the United States, 

Government Printing Office. May 2011. Retrieved from http://www.bls.gov/ncs/ncswage2010.htm 
Regulation 

Sections 

OMB Control No./CMS Form No. Respondents Responses 

Burden per Response  (hours) 

Total Annual Burden (hours) 

Hourly Labor Cost of Reporting52

($) 

Total Labor ($) 

§156.460(a)(2) 0938-NEW 1,200 1,200 0.08 96 38.49 3,695 §156.470 0938-

NEW/CMS10433 

20 20 5 100 45.85 4,585 

Total 3,271 666,076,673 
 273 

V. Response to Comments 

 Because of the large number of public comments we normally receive on Federal 

Register documents, we are not able to acknowledge or respond to them individually. 

We will consider all comments we receive by the date and time specified in the "DATES" 

section of this preamble, and, when we proceed with a subsequent document, we will 

respond to the comments in the preamble to that document. 

VI. Regulatory Impact Analysis 

A. Statement of Need 

This proposed rule implements standards related to premium stabilization 

programs (reinsurance, risk adjustment, and risk corridors), consistent with the 

Affordable Care Act. The purpose of these three programs is to protect issuers from the 

negative effects of adverse selection and to protect consumers from increases in 

premiums due to issuer uncertainty. The Premium Stabilization Rule provided that 

further details on the implementation of these programs, including the specific parameters 

applicable to these programs, would be forthcoming in this proposed rule. This proposed 

rule also includes provisions governing the cost-sharing reductions program, the advance 

payment of the premium tax credit program, the medical loss ratio program, the SHOP 

Exchange, and user fees for Federally-facilitated Exchanges. 

B. Overall Impact

We have examined the impacts of this rule as required by Executive Order 12866 

on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on 

Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory 

Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 202 of the 

Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104-4), Executive 
 274 

Order 13132 on Federalism (August 4, 1999), and the Congressional Review Act (5 

U.S.C. 804(2)). 

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits 

of available regulatory alternatives and, if regulation is necessary, to select regulatory 

approaches that maximize net benefits (including potential economic, environmental, 

public health and safety effects, distributive impacts, and equity). Executive Order 13563 

emphasizes the importance of quantifying both costs and benefits, of reducing costs, of 

harmonizing rules, and of promoting flexibility. A regulatory impact analysis (RIA) must 

be prepared for rules with economically significant effects ($100 million or more in any 1 

year). 

OMB has determined that this Payment Notice is “economically significant” 

within the meaning of section 3(f)(1) of Executive Order 12866, because it is likely to 

have an annual effect of $100 million in any one year. Accordingly, we have prepared an 

RIA that presents the costs and benefits of this proposed rule. 

It is difficult to discuss the wide-ranging effects of these provisions in isolation, 

though the overarching goal of the premium stabilization and Exchange-related 

provisions and policies in the Affordable Care Act is to make affordable health insurance 

available to individuals who do not have access to affordable employer-sponsored 

coverage. The provisions within this proposed rule are integral to the goal of expanding 

coverage. For example, the premium stabilization programs (risk adjustment, 

reinsurance, and risk corridors) decrease the risk of financial loss that health insurance 

issuers might otherwise expect in 2014 and the cost-sharing reductions program and 

advanced payments of the premium tax credit assist low- and moderate-income 

consumers in purchasing health insurance. The combined impacts of these provisions 
 275 

affect the private sector, issuers, and customers, through increased access to health care 

services including preventive services, decreased uncompensated care, lower premiums, 

and increased plan (and thereby cost) transparency. Through the reduction of financial 

uncertainty for issuers and increased affordability for consumers, the provisions are 

expected to increase access to health coverage. 

 Recent research53 analyzed the effects of increased insurance coverage. The 

analysis studied the health effects of expanded Medicaid eligibility in three States (New 

York, Maine, and Arizona) with comparable States that did not expand Medicaid over a 

multiyear time period. The study found that increased coverage resulted in: 

• Significant reduction in mortality (19.6 deaths per 100,000); 

• Increased rate of self-reported health status (by three percent); and 

• Reduction in cost-related delays in care (by 21 percent).

While these results may not be entirely generalizable given the population and 

coverage type, they do replicate other research findings54 of the importance of health 

coverage in improving health and reducing mortality. 

There are administrative costs to States to set up and administer these programs. 

For issuers not receiving payments, any contribution is an additional cost, which an issuer 

could pass on to beneficiaries through premium increases. There are also reporting costs 

for issuers to submit data and financial information. This RIA discusses in detail the 

benefits and costs of the provisions in this proposed rule.

 

53 Sommers, Ben et al “Mortality and Access to Care among Adults after State Medicaid Expansions” New 

England Journal of Medicine .No: 367 20121025-1034

54 Finkelstein, A et al. “The Oregon Health Insurance Experiment: Evidence from the First Year.” NBER 

Working Paper No. 17190, July 2011
 276 

In this RIA, we discuss programs and requirements newly implemented by the 

proposed rule, such as certain provisions related to the cost-sharing reductions program, 

the advance payment of the premium tax credit program, the medical loss ratio program, 

the SHOP Exchange, and user fees for a Federally-facilitated Exchange, as well as new 

regulatory provisions for the three premium stabilization programs (reinsurance, risk 

adjustment, and risk corridors) which had been introduced as part of the Premium 

Stabilization Rule (77 FR 17220). In addition to building on the RIA for that earlier rule, 

we are able, for the analysis of much of the proposed rule, to use the Congressional 

Budget Office’s estimates of the Affordable Care Act’s impact on federal spending, 

revenue collection, and insurance enrollment. 

C. Impact Estimates of the Payment Notice Provisions and Accounting Table

In accordance with OMB Circular A-4, Table 19 below depicts an accounting 

statement summarizing HHS’ assessment of the benefits, costs, and transfers associated 

with this regulatory action. 

This proposed rule implements standards for programs that will have numerous 

effects, including providing consumers with affordable health insurance coverage, 

reducing the impact of adverse selection, and stabilizing premiums in the individual and 

small group health insurance markets and in an Exchange. We are unable to quantify 

benefits of the proposed rule—such as improved health and longevity due to increased 

insurance enrollment—and some costs—such as the cost to society of providing 

additional medical services to newly-enrolled individuals. Direct costs in the table below 

reflect administrative costs to States, health insurance issuers, and Exchanges. The 

effects in Table 19 reflect estimated cost-sharing reduction payments, which are transfers 

from the General Fund of the U.S. Treasury to consumers who qualify for cost-sharing 
 277 

reductions. These transfer estimates are based on the Congressional Budget Office’s 

March 2012 baseline estimates, and have been annualized over the 5 year period from 

FYs 2013-2017. Estimated transfers do not yet reflect any user fees paid by insurance 

issuers for the Federally-facilitated Exchange because we cannot estimate those fee totals 

until the number of States operating an Exchange is determined. 

TABLE 19: Accounting Table 

Category Estimates Units 

 Year 

Dollar 

Discount Rate Period 

Covered 

Benefits

Annualized Monetized Not Estimated 

($millions/year) Not Estimated 

Costs

Annualized 

Monetized 

($millions/year) 

$518.85 2013 7% 2013-2017 

 $529.56 2013 3% 2013-2017 

Transfers

Federal Annualized 

Monetized 

($millions/year) 

$6,513.85 2013 7% 2013-2017 

 $6,787.26 2013 3% 2013-2017 

This impact analysis for the premium stabilization programs references estimates 

from CBO and CMS. CBO’s estimates remain the most comprehensive accounting of all 

the interacting provisions pertaining to the Affordable Care Act, and contain Federal 

budget impact estimates of some provisions that have not been independently estimated 

by CMS. Based on our review, we expect that the provisions of this proposed rule will 

not significantly alter CBO’s estimates of the budget impact of the reinsurance, risk 

corridors, and risk adjustment programs. The requirements of these programs are well 

within the parameters used in the modeling of the Affordable Care Act. Our review and 
 278 

analysis of the requirements indicate that the impacts are likely within the model’s 

margin of error. 

For this RIA, we are updating the estimates for the reinsurance and risk 

adjustment programs to reflect the five-year period from fiscal years (FYs) 2013 through 

2017. Table 20 includes the CBO estimates for outlays and receipts for the reinsurance 

and risk adjustment programs from FYs 2013 through 2017. These estimates for 

reinsurance and risk adjustment reflect CBO’s scoring of these provisions. Unlike the 

current policy, CBO assumed risk adjustment payments and charges would begin to be 

made in 2014, when in fact these payments and charges will begin in 2015 as discussed 

above. Additionally, the CBO estimates do not reflect the $5 billion in reinsurance 

contributions that are submitted to the U.S. Treasury. There are no outlays and receipts 

for reinsurance and risk adjustment in 2013 because the provisions do not take effect until 

2014. 

CBO did not separately estimate the program costs of risk corridors, but assumed 

aggregate collections from some issuers would offset payments made to other issuers. 

Table 20 summarizes the effects of the risk adjustment and reinsurance programs on the 

Federal budget, with the additional, societal effects of this proposed rule discussed in this 

Regulatory Impact Analysis.

TABLE 20: Estimated Federal Government Outlays and Receipts for the 

Reinsurance and Risk Adjustment Programs from FYs 2013-2017, in billions of 

dollars 

Year 2013 2014 2015 2016 2017 2013-

2017 

Reinsurance and 

Risk Adjustment 

Program Payments*

-- 11 18 18 18 65 

Reinsurance and -- 12 16 18 18 64 
 279 

Year 2013 2014 2015 2016 2017 2013-

2017 

Risk Adjustment 

Program Receipts*

*

Risk adjustment program payments and receipts lag by one quarter. Receipt will fully offset payments 

over time. 

Source: Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010.

Risk Adjustment 

Risk adjustment is a permanent program administrable by States that operate an 

HHS-approved Exchange, with risk adjustment criteria and methods established by HHS, 

with States having the option of proposing alternative methodologies. Risk adjustment is 

generally applied to non-grandfathered health plans offered in the individual and small 

group markets, both inside and outside of the Exchange. A State that does not operate an 

Exchange cannot operate risk adjustment, although a State operating an Exchange can 

elect not to run risk adjustment. For States that do not operate an Exchange, do not elect 

to operate risk adjustment, or do not obtain HHS approval to operate risk adjustment, 

HHS will administer the risk adjustment functions on the State’s behalf. 

The Exchange may operate risk adjustment, although a State may also elect to 

have an entity other than the Exchange perform the risk adjustment functions, provided 

that the State is approved by HHS to operate risk adjustment. Similar to the approach for 

reinsurance, multiple States may contract with a single entity to administer risk 

adjustment, provided that risk is pooled at the State level and that each State is approved 

to operate their risk adjustment program. Having a single entity administer risk 

adjustment in multiple States may provide administrative efficiencies. In this proposed 

rule, we propose to establish a risk adjustment State approval process. We describe these 
 280 

administrative costs in the Collection of Information Requirements section of this 

proposed rule. 

The details of the HHS-developed risk adjustment methodology are specified in 

this proposed rule. The HHS-developed risk adjustment methodology is based on a 

model that is concurrent and uses demographic and diagnosis information in a benefit 

year to predict total plan liability in the benefit year. The national payment transfer 

methodology is based on the State average premium to ensure that payments and charges 

net to zero. 

States may use this methodology or develop and propose alternate risk adjustment 

methodologies that meet Federal standards. Once HHS approves an alternate risk 

adjustment methodology, it will be considered a Federally certified risk adjustment 

methodology that any State may elect to use. In this proposed rule, we lay out the criteria 

that HHS will use to evaluate alternate risk adjustment methodologies. Approved 

Federally certified risk adjustment methodologies will be published in the final HHS 

notice of benefit and payment parameters. 

States that elect to develop their own risk adjustment methodologies are likely to 

have increased administrative costs. Developing a risk adjustment methodology requires 

complex data analysis, including population simulation, predictive modeling, and model 

calibration. States that elect to use the HHS developed methodology would likely reduce 

administrative costs. We describe these administrative costs in the Collection of 

Information Requirements section of this proposed rule. 

In the Premium Stabilization Rule, we defined a risk adjustment covered plan as 

any health insurance coverage offered in the individual or small group market with the 

exception of grandfathered health plans, group health insurance coverage described in 
 281 

§146.145(c) of this subchapter, individual health insurance coverage described in 

§148.220 of this subchapter, and any other plan determined not to be a risk adjustment 

covered plan in the annual HHS notice of benefit and payment parameters. In this 

proposed rule, we clarify that plans not subject to certain market reforms and student 

health plans will not be subject to the issuer requirements in subparts G and H of 45 CFR 

Part 153. 

States have the flexibility to merge the individual and small group markets into 

one risk pool, or keep them separate for the purposes of risk adjustment. Risk adjustment 

must be conducted separately in unmerged markets. Developing the technology 

infrastructure required for data submission will likely require an administrative 

investment. The risk adjustment process will require significant amounts of demographic 

and diagnostic data to run through a risk assessment model to determine individual risk 

scores that form the basis for plan and State averages. The Premium Stabilization Rule 

requires States to collect or calculate individual risk scores at a minimum. States may 

vary the amount and type of data collected, provided that States meet specified data 

collection standards. 

Administrative costs will vary across States and health insurance issuers 

depending on the type of data collection approach used in the State. In States opting to 

operate risk adjustment using a distributed model of data collection, the costs associated 

with mapping and storing the required data and, in some cases, the costs associated with 

running the risk adjustment software will likely be borne by the issuer. 

States and issuers that already have systems in place for data collection and 

reporting will have reduced administrative costs. For example, issuers that already report 

data for Medicare Advantage (MA) or Medicaid Managed Care may see minimal 
 282 

additional administrative burden for risk adjustment. Additionally, some States riskadjust their Medicaid Managed Care programs. States with all-payer or multi-payer 

claims databases may need to modify their systems to meet the requirements of risk 

adjustment. However, these costs of modification will be less than the costs of 

establishing these systems. States and issuers that do not have existing technical 

capabilities will have larger administrative costs related to developing necessary 

infrastructure. 

Issuer characteristics, such as size and payment methodology, will also affect 

administrative costs. In general, national issuers will likely be better prepared for the 

requirements of risk adjustment than small issuers. Additionally, administrative costs 

may be greater for issuers whose providers are paid by capitation and who do not receive 

claims or encounter data, as they will have to modify their systems to account for the 

information required for risk adjustment methodology. 

In this proposed rule, we provide more details on the data collection approach 

when we operate risk adjustment on behalf of a State. The Premium Stabilization Rule 

established that when HHS operates risk adjustment on behalf of a State, it will use a 

distributed approach. We believe that this approach minimizes issuer burden while 

protecting enrollee privacy. Under a distributed approach, issuers will need to format 

risk adjustment data, and maintain that data in compliance with HHS-established 

guidelines and applicable standards. We describe these administrative costs in the 

Collection of Information Requirements section of this proposed rule. 

The Premium Stabilization Rule directs States to audit a sample of data from each 

issuer and to ensure proper implementation of risk adjustment software by all issuers that 

participate in risk adjustment. States may extrapolate results from the sample to adjust 
 283 

the average actuarial risk for the plan. This approach is consistent with the approach now 

used in Medicare Advantage, where audit sample error rates will be extrapolated to 

contract-level payments to recoup overpayment amounts. 

In this proposed rule, we propose data validation standards for when HHS 

operates risk adjustment on behalf of a State. We are proposing that HHS conduct a data 

validation program consisting of six stages: (1) sample selection; (2) initial validation 

audit; (3) second validation audit; (4) error estimation; (5) appeals; and (6) payment 

adjustments. Issuers would engage independent initial auditors to conduct an initial audit 

of an HHS-selected sample of risk adjustment data. HHS would retain a second 

validation auditor to verify the findings of the initial validation audit and provide error 

estimates. However, in this proposed rule we propose that there be no adjustments to 

payments and charges based on the error estimates for benefit years 2014 and 2015. We 

describe these administrative costs in the Collection of Information Requirements section 

of this proposed rule. We are also proposing a process to appeal data validation findings. 

Issuers will have an opportunity to appeal findings from both the initial validation audit 

and second validation audit. 

Risk adjustment transfers dollars from health plans with lower-risk enrollees to 

health plans with higher-risk enrollees. From 2014 through 2016, it is estimated that $27 

billion will be transferred between issuers. We are updating the cost estimates for this 

RIA to include 2017, using CBO estimates.55 From 2014 through 2017, we estimate that 

there will be $45 billion transferred between issuers. 

Risk adjustment protects against adverse selection by allowing insurers to set 

premiums according to the average actuarial risk in the individual and small group 

 

55 Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010. 
 284 

market without respect to the type of risk selection the insurer would otherwise expect to 

experience with a specific product offering in the market. This should lower the risk 

premium and allow issuers to price their products closer to the average actuarial risk in 

the market. In addition, it mitigates the incentive for health plans to avoid unhealthy 

members. 

The risk adjustment program also serves to level the playing field inside and 

outside of the Exchange, as payments and charges are applied to all non-grandfathered 

individual and small group plans. This mitigates the potential for excessive premium 

growth within the Exchange due to anticipated adverse selection. 

Reinsurance 

The Affordable Care Act creates a transitional reinsurance program for the years 

2014, 2015, and 2016. Each State is eligible to establish a reinsurance program. If a State 

establishes a reinsurance program, the State must enter into a contract with an applicable 

reinsurance entity to carry out the program. If a State does not elect to establish its own 

reinsurance program, HHS will carry out the reinsurance program for that State. 

The Affordable Care Act requires a reinsurance pool of $10 billion in 2014, $6 

billion in 2015, and $4 billion in 2016. It also requires annual contributions to the U.S. 

Treasury of $2 billion, $2 billion, and $1 billion for those years, respectively. These 

contributions are funded by health insurance issuers and third party administrators on 

behalf of self-insured group health plans. Section 1341(b)(3) of the Affordable Care Act 

directs the Secretary of HHS to establish the method for determining contribution levels 

for the program. HHS proposes to establish a national per capita contribution rate 

designed to collect the $12.02 billion in 2014 to cover the required $10 billion in 

reinsurance payments, the $2 billion contribution to the U.S. Treasury, and the additional 
 285 

$20.3 million to cover the Federal administrative expenses of operating the reinsurance 

program in 2014. We continue to estimate that we will collect these amounts authorized 

from 2014 through 2016 for the reinsurance pool, including the annual contributions to 

the U.S. Treasury. 

HHS proposes to collect the required contributions under the national contribution 

rate from health insurance issuers and self-insured group health plans.56 States 

establishing their own reinsurance program may collect additional contributions for 

administrative costs and/or reinsurance payments. Section 1341(a)(3)(B) of the 

Affordable Care Act requires that the reinsurance contribution amount for each issuer 

reflect each issuers’ fully insured commercial book of business for all major medical 

products. In this proposed rule, we clarify which types of health insurance coverage and 

self-insured group health plans are to make reinsurance contributions, and which are not. 

This clarification does not affect the amounts authorized to be collected for reinsurance. 

A State that establishes a reinsurance program may elect to collect additional 

contributions to provide funding for administrative expenses or supplemental reinsurance 

payments. Additional contributions for administrative expenses may be collected by the 

State’s applicable reinsurance entity, at the State’s election. Any additional contributions 

for reinsurance payments must be collected by the State’s applicable reinsurance entity. 

In this proposed rule, we propose to collect administrative expenses for HHS-operated 

reinsurance programs. A State that operates the reinsurance program bears the 

administrative costs of the applicable reinsurance entity, and must ensure that the 

 

56 The Department of Labor has reviewed this proposed rule and advised that paying required reinsurance 

contributions would constitute a permissible expense of the plan for purposes of Title I of the Employee 

Retirement Income Security Act (ERISA) because the payment is required by the plan under the Affordable 

Care Act as interpreted in this proposed rule. (See generally, Advisory Opinion 2001-01A to Mr. Carl 

Stoney, Jr., available at www.dol.gov/ebsa discussing settlor versus plan expenses.) 
 286 

reinsurance entity complies with program requirements. HHS will share some of its 

collections for administrative costs with States that run the program. If a State operates 

its own reinsurance program, HHS would transfer $0.055 of the per capita administrative 

fee to the State for purposes of administrative expenses incurred in making reinsurance 

payments, and retain the remaining $0.055 to offset the costs of contribution collection. 

A State may have more than one reinsurance entity, and two or more States may jointly 

enter into an agreement with the same applicable reinsurance entity to carry out 

reinsurance in their State. Administrative costs will likely increase if multiple 

reinsurance entities are established within a State, whereas administrative efficiencies 

may be found if multiple States contract with one applicable reinsurance entity. 

We propose in this proposed rule an annual collections and payment cycle. We 

also considered a quarterly collections and payment cycle, as envisioned by the Premium 

Stabilization Rule. However, a quarterly cycle would impose significant costs on 

contributing entities. Because HHS and States operating reinsurance would likely need to 

hold back a significant portion of reinsurance funds until the end of the year to ensure 

equitable payment of requests for reinsurance payments. We believe that issuers would 

receive only limited benefits from a quarterly payment cycle. 

In §153.100(a), a State is required to issue an annual notice of benefit and 

payment parameters specific to that State if it elects to: (i) modify the data requirements 

from the HHS-operated reinsurance program; (ii) collect additional reinsurance 

contributions, under §153.220(d); or (iii) use more than one applicable reinsurance entity. 

States that establish a reinsurance program will also maintain any records 

associated with the reinsurance program, as set forth in §153.240(c). In addition, a State 

will notify HHS if it intends to collect additional administrative expenses and provide 
 287 

justification for the additional collection. The Premium Stabilization Rule established 

that reinsurance contributions will be based on a per capita amount. The per capita 

approach would be less complex to administer in comparison to the percent of premium 

approach that HHS considered but ultimately decided not to pursue. Further, the per 

capita approach will better enable HHS to maintain the goals of the reinsurance program 

by providing issuers with a more straightforward approach to reinsurance contributions. 

States would be permitted to collect additional contributions towards supplemental 

reinsurance payments. We describe the administrative costs in the Collection of 

Information Requirements section of this proposed rule. 

In this proposed rule, we establish the methodology to be used for counting 

covered lives for purposes of calculating reinsurance contributions. This methodology is 

based upon counting methods permitted under the PCORTF Rule. We believe that 

relying on a previously established process set forth in the PCORTF Rule for counting 

enrollees will minimize issuer burden for conducting these counts. In the Collection of 

Information Requirements section of this proposed rule, we describe the administrative 

costs for issuers associated with the data requirements in §153.400(b) for all contributing 

entities both inside and outside the Exchange. The contributing entities would be 

required to provide enrollment data to HHS to substantiate contribution amounts. 

Reinsurance payments will be made to issuers of individual insurance coverage 

for high claims costs for enrollees. In this proposed rule, we propose a national 

attachment point, national reinsurance cap, and national coinsurance rate. In the 

Premium Stabilization Rule, we established that payments will be made on a portion of 

claims costs for enrollees in reinsurance eligible plans incurred above an attachment 

point, subject to a reinsurance cap. 
 288 

Use of a reinsurance cap, as well as the requirement for health insurance issuer 

costsharing above the attachment point and below the cap, may incentivize health 

insurance issuers to control costs. This approach based on claims costs is simpler to 

implement and more familiar to health insurance issuers, and therefore will likely result 

in savings in administrative costs as compared to a condition-based reinsurance approach. 

The program costs of reinsurance are expected to be reflected in changes to health 

insurance premiums. 

A State operating its own reinsurance program may opt to supplement the 

reinsurance parameters proposed by HHS only if the State elects to collect additional 

contributions for supplemental reinsurance payments or use additional State funds for 

supplemental reinsurance payments, and must specify these supplemental payment 

parameters in its State notice of benefit and payment parameters. 

In this proposed rule, we propose that States provide a process through which a 

reinsurance-eligible plan that does not generate individual enrollee claims may derive 

costs to request reinsurance payments. In addition, we clarify that when HHS operates a 

reinsurance program on behalf of a State that these plans may price encounters in 

accordance with its existing principal, internal encounter pricing methodology. 

Additionally, we propose in §153.240(b) of this proposed rule that States operating their 

own reinsurance program must notify issuers of reinsurance payments to be made, as well 

as provide reinsurance-eligible plans an estimate of expected requests for reinsurance 

payments. Moreover, we propose for both State- and HHS-operated reinsurance 

programs, that only plans subject to the 2014 market reform rules would be eligible for 

reinsurance payment. 
 289 

In this proposed rule, we also provide more details on the data collection approach 

for HHS-operated reinsurance programs. HHS plans to use the same distributed data 

collection approach used for risk adjustment; however, only data elements necessary for 

reinsurance claim selection will be considered for the purpose of determining 

reinsurance payments. In the Collection of Information Requirements section, we 

describe the administrative costs required in §153.410 for issuers of reinsurance-eligible 

plans in States where HHS is operating reinsurance to receive reinsurance payments. We 

believe details on the reinsurance data collection approach proposed in the HHS notice of 

benefit and payment parameters are reflected in these cost estimates. 

All health insurance issuers contribute to the reinsurance pool, because successful 

implementation of the range of reforms in 2014 benefit all of their enrollees (for example, 

those reforms should lead to fewer unreimbursed health costs, lowering the costs for all 

issuers and group health plans) while only health insurance issuers with plans in the 

individual market are eligible to receive payments. This serves to stabilize premiums in 

the individual market while having a minimal impact on large group issuers and plans. 

Reinsurance will attenuate individual market rate increases that might otherwise occur 

because of the immediate enrollment of higher risk individuals, potentially including 

those currently in State high-risk pools. It will also help prevent insurers from building in 

risk premiums to their rates given the unknown health of their new enrollees. It is 

expected that the cost of reinsurance contributions will be roughly equal to one percent of 

premiums in the total market in 2014, less in 2015 and 2016, and will end in 2017. In 

contrast, it is anticipated that reinsurance payments will result in premium decreases in 

the individual market of between 10 and 15 percent. 
 290 

Evidence from the Healthy New York (Healthy NY) program57 supports the 

magnitude of these estimates. In 2001, the State of New York began operating Healthy 

NY and required all HMOs in the State to offer policies for which small businesses and 

low-income individuals would be eligible. The program contained a “stop-loss” 

reinsurance provision designed to lower premiums for enrollees. Under the program, if 

any enrollee incurred $30,000 in annual claims, his or her insurer was reimbursed for 90 

percent of the next $70,000 in claims. Premiums for Healthy NY policies were about 15 

percent to 30 percent less than those for comparable HMO policies in the small group 

market. 

Medical Loss Ratio

This proposed rule proposes to amend the MLR and rebate calculation 

methodologies to include payments and receipts related to the premium stabilization 

programs. The definition of premium revenue would be modified to account for these 

payments and receipts. When the MLR annual reporting form is updated for the 

reporting year 2014 and later, premium stabilization payment and receipt amounts would 

be considered a part of gross earned premium reported to the Secretary, similar to other 

elements involved in the derivation of earned premium. The MLR annual reporting form 

would then account for premium stabilization payment and receipt amounts by removing 

them from adjusted earned premium, so that these amounts do not have a net impact on 

the adjusted earned premium used in calculating the MLR denominator and rebates. 

Additionally, this proposed rule proposes to amend the MLR calculation methodology to 

add or subtract premium stabilization payment(s) and receipt amounts in the MLR 

 

57 Swartz, K. “Health New York: Making Insurance More Affordable for Low-Income Workers.” The 

Commonwealth Fund. November 2001. 
 291 

numerator, consistent with the way the statute prescribes the calculation methodology for 

risk corridors. These adjustments will reduce or increase issuers’ MLRs, and may 

increase or reduce issuers’ rebates, respectively. The amended methodology will result in 

a more accurate calculation of MLR and rebate amounts, since it will reflect issuers’ 

actual claims-related expenditures. This approach will also support the effectiveness of 

both the MLR and the premium stabilization programs by correctly offsetting the 

premium stabilization payment and receipt amounts against rebates, consistently with the 

risk corridors calculation methodology adopted in §153.530. 

 Based on HHS’s experience with the 2011 MLR reporting year, there are 466 

health insurance issuers58 offering coverage in the individual and group markets to almost 

80 million enrollees that will be affected by the proposed amendment to account for 

premium stabilization payments in MLR and rebate calculations. In 2012, an estimated 

54 issuers paid $396 million in rebates for the 2011 MLR reporting year to approximately 

4 million enrollees in the individual markets, while 59 issuers in the small group market 

provided approximately $289 million in rebates to policyholders and subscribers on 

behalf of over 3 million enrollees, and 47 issuers in the large group market provided 

approximately $403 million in rebates to policyholders and subscribers on behalf of 

almost 6 million enrollees. Lack of data makes it difficult to predict how high-risk 

enrollees will be distributed among issuers and, therefore, how MLRs and total rebates 

would be affected. Issuers with relatively low-risk enrollees are likely to have positive 

net premium stabilization payments (that is, payments would be greater than receipts) 

and, if so, their MLRs will increase as a result of the amended MLR calculation 

 

58 Issuers represent companies (for example, NAIC company code). These estimates do not include 

issuers of plans with total annual limits of $250,000 or less (sometimes referred to as “mini-med” plans) or 

expatriate plans. 
 292 

methodology. If any of these issuers fail to meet the MLR standard, taking the premium 

stabilization payments and receipts into account in the MLR calculations will result in 

lower rebate payments. Issuers with relatively high-risk enrollees are likely to have 

positive net receipts (that is, receipts would be greater than payments) and, if so, their 

MLRs would decrease as a result. If any such issuer fails to meet the MLR standard, its 

rebate amount will increase. Since such issuers are likely to have high claims 

expenditures and therefore, high MLRs, they would be less likely to owe rebates. So we 

do not anticipate that rebates will go up for such issuers. 

 The Payment Notice proposes to also change the deadlines for MLR report 

submission and rebate payments so that the deadlines occur after all the premium 

stabilization payment and receipt amounts are determined. The change in the deadlines 

will allow issuers to calculate the MLR and rebate amounts based on actual calculated 

payments and receipts rather than estimated amounts and will improve the accuracy of 

the rebate payments and reports. This will also reinforce the effectiveness of the 

premium stabilization programs, since issuers are less likely to pay higher or lower 

rebates based on inaccurate payment and receipt estimations. Accordingly, we propose to 

change the date of MLR reporting to the Secretary from June 1 to July 31, and the rebate 

due date from August 1 to September 30. 

Issuers will also have to report their payments and receipts related to the premium 

stabilization programs in the annual MLR report beginning in the 2014 MLR reporting 

year. Once issuers calculate these amounts, which they will be required to do regardless 

of the MLR reporting requirements, the administrative cost of including these amounts in 

the report will be minimal. 
 293 

The current MLR calculation methodology allows an issuer to deduct from 

premiums in the calculation of an issuer’s MLR and rebates either the amount it paid in 

State premium taxes, or the amount of its community benefit expenditures up to a 

maximum of the highest premium tax rate in the State, whichever is greater, as provided 

in the final rule with comment period (76 FR 76574) published on December 7, 2011. 

This proposed rule proposes to amend the MLR methodology and allow a federal income 

tax exempt not-for-profit issuer to deduct from premium both community benefit 

expenditures and State premium taxes, limited to the higher of the State’s highest 

premium tax rate or 3 percent of premium. Other issuers would continue to use the 

current methodology. This would create a level playing field for Federal income tax 

exempt not-for-profit issuers, who are required to make community benefit expenditures 

to maintain their federal income tax exempt status and would not discourage community 

benefit expenditures. This is likely to increase the MLRs for tax exempt not-for-profit 

issuers. If any of these issuers fail to meet the MLR standard, then this will result in 

lower rebate payments. 

Based on MLR annual reports submitted by issuers for the 2011 MLR reporting 

year, we estimate that there are 132 not-for-profit issuers that will be affected by this 

proposed amendment. In the absence of data on tax exempt not-for-profit issuers, we use 

the estimates for not-for-profit issuers in our analysis. Therefore, the actual impact is 

likely to be lower. For the 20 not-for-profit issuers that submitted data on community 

benefit expenditures, such expenditures as a percentage of earned premiums ranged from 

0.04 percent to 4.11 percent with an average of 1.57 percent, which is likely to be less 

than the current limit for most of the issuers and is less than the proposed limit as well. 

We assume that issuers will maintain the level of community benefit expenditures as 
 294 

reported in their MLR annual reports for the 2011 MLR reporting year. We estimate that 

under the current policy, in the 2012 MLR reporting year, 17 not-for-profit issuers will 

owe approximately $182 million in rebates to approximately 1.5 million enrollees. The 

proposed change in treatment of community benefit expenditures for such issuers will 

have minimal effect on their MLRs and rebates under this assumption, since their current 

expenditures are below the current deduction limits. 

 Issuers with lower rebate payments as a result of these adjustments would need to 

send fewer rebate notices, and therefore, would have lower administrative costs related to 

rebates and rebate notices. 

Risk Corridors 

The Affordable Care Act creates a temporary risk corridors program for the years 

2014, 2015, and 2016 that applies to QHPs. The risk corridors program creates a 

mechanism for sharing risk for allowable costs between the Federal government and QHP 

issuers. The Affordable Care Act establishes the risk corridors program as a Federal 

program; consequently, HHS will operate the risk corridors program under Federal rules 

with no State variation. The risk corridors program will help protect against inaccurate 

rate setting in the early years of the Exchanges by limiting the extent of issuer losses and 

gains. 

QHP issuers must submit to HHS data on premiums earned, allowable claims and 

quality costs, and allowable administrative costs, reflecting data categories required under 

the Medical Loss Ratio Interim Final Rule (75 FR 74918). In designing the program, 

HHS has sought to leverage existing data reporting for Medical Loss Ratio purposes as 

much as possible. 
 295 

As noted above, the risk corridors program is intended to protect QHP issuers in 

the individual and small group market against inaccurate rate setting. Due to uncertainty 

about the population during the first years of Exchange operation, issuers may not be able 

to predict their risk accurately, and their premiums may reflect costs that are ultimately 

lower or higher than predicted. To determine whether an issuer pays into, or receives 

payments from, the risk corridors program, HHS will compare allowable costs 

(essentially, claims costs) and the target amount – the difference between a plan’s earned 

premiums and allowable administrative costs. In this proposed rule, we have provided 

for adjustments to the risk corridors calculation to account for taxes and profits within its 

allowable administrative costs. The threshold for risk corridor payments and charges is 

reached when a QHP issuer’s allowable costs exceed, or fall short of, the target amount 

by at least three percent. A QHP with allowable costs that are at least three percent less 

than its target amount will pay into the risk corridors program. Conversely, HHS will 

pay a QHP with allowable costs that exceed its target amount by at least 3 percent. Risk 

corridor payments and charges are a percentage of the difference between allowable costs 

and target amount and therefore are not on a “first dollar” basis. 

In this proposed rule, HHS also specified the annual schedule for the risk 

corridors program, including dates for claims run-out, data submission, and notification 

of risk corridors payments and charges. 

We believe the proposals on the risk corridors program in this proposed rule have 

a negligible effect on the impact of the program established by and described in the 

Premium Stabilization Rule. 

Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
 296 

The impact analysis for Payment Notice provisions relating to advance payments 

of the premium tax credit and cost-sharing reductions references estimates from the 

CBO’s March 2012 baseline projections. Based on our review, we expect that those 

proposed provisions will not alter CBO’s March 2012 baseline estimates of the budget 

impact of those two programs. The requirements are well within the parameters used in 

the modeling of the Affordable Care Act. Our review and analysis of the requirements 

indicate that the impacts are likely within the model’s margin of error. The Affordable 

Care Act provides for premium tax credits and the reduction or elimination of cost 

sharing for certain individuals enrolled in QHPs offered through the Exchanges. This 

assistance will help many low- and moderate-income individuals and families obtain 

health insurance – for many people, cost sharing is a barrier to obtaining needed health 

care.59 

Section 1402(a)-(c) of the Affordable Care Act directs issuers to reduce cost 

sharing for essential health benefits for individuals with household incomes between 100 

and 400 percent of the FPL who are enrolled in a QHP offered at the silver level of 

coverage in the individual market on the Exchange and are eligible for a premium tax 

credit or advance payment of premium tax credits. The Affordable Care Act, at section 

1402(d), also directs issuers to eliminate cost sharing for Indians (as defined in §155.300) 

with a household income at or below 300 percent of the FPL who are enrolled in a QHP 

of any metal level in the individual market on the Exchange, and prohibits issuers from 

requiring cost sharing for Indians, regardless of household income, for items or services 

furnished directly by the IHS, an Indian Tribe, a Tribal Organization, or an Urban Indian 

Organization or through referral under contracted health services. Finally, the Affordable 

 

59 Brook, et. al., at footnote 5 above. 
 297 

Care Act, at section 1412, provides for the advance payments of the premium tax credit 

and cost-sharing reductions. 

A subset of the persons who enroll in QHPs in the individual market through the 

Exchanges beginning in 2014 will be affected by the provisions relating to advance 

payments of premium tax credit and cost-sharing reductions (those with household 

incomes below 400 percent of the FPL and Indians enrolled in QHPs). In March 2012, 

CBO estimated that there will be approximately 20 million enrollees in Exchange 

coverage by 2016, including approximately 16 million Exchange enrollees who will be 

receiving subsidies.60 Participation rates among potential enrollees are expected to be 

lower in the first few years of Exchange availability as employers and individuals adjust 

to the features of the Exchanges.3

 

 In this proposed rule, we provide additional details for Exchanges and issuers on 

the administration of advance payments of premium tax credit and cost-sharing 

reductions for individuals and families. We clarify the approach to providing for costsharing reductions to individuals who purchase a family policy. We also propose 

standards applicable to Exchanges when setting effective dates for changes in eligibility, 

collecting premiums from enrollees, and administering advance payments of cost-sharing 

reductions and the premium tax credit. We describe these administrative costs in the 

Collection of Information Requirements section of this proposed rule. 

Finally, we direct QHP issuers to enroll individuals in the plan variation with the 

correct cost-sharing structure, and to provide those individuals with the cost-sharing 

 

60 “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” Congressional 

Budget Office, March 2012.

3

Congressional Budget Office, "Letter to the Honorable Evan Bayh: An Analysis of Health Insurance 

Premiums under the Patient Protection and Affordable Care Act," Washington, DC, 2009. 
 298 

reductions for which they are eligible. QHP issuers are responsible for submitting plan 

variations containing the cost-sharing structures proposed by HHS as required by the 

Affordable Care Act. We also clarify which plans are eligible for cost-sharing 

reductions, and we propose standards relating to advance payments of cost-sharing 

reductions and reconciliation of those advance payments against actual cost-sharing 

reduction provided. In addition, we propose that QHP issuers reduce an enrollee’s share 

of premium to account for advance payments of the premium tax credit, and submit 

allocations of rates and claims costs to allow for the calculation of advance payments of 

cost-sharing reductions and the premium tax credit. We describe these administrative 

costs in the Collection of Information Requirements section of this proposed rule. 

 The cost-sharing reduction and advance payment of the premium tax credit 

policies will apply to all issuers that choose to seek certification to offer QHPs through 

the Exchanges for the individual market. QHP issuers will experience costs related to 

preparing and submitting to HHS data to support the administration of cost-sharing 

reductions. We anticipate that the provisions for advance payments of the premium tax 

credit and cost-sharing reductions will result in transfers from the General Fund of the 

Treasury to people receiving cost-sharing reductions and advance payments of the 

premium tax credit. 

User Fees

 To support certain Federal operations of Federally-facilitated Exchanges, we 

propose in this proposed rule, under section 1311(d)(5)(A) of the Affordable Care and 31 

U.S.C. 9701, that a participating issuer offering a plan through a Federally-facilitated 

Exchange remit a user fee to HHS each month equal to the product of the billable 

members (that is, members that count towards the premium) enrolled in the QHP offered 
 299 

by the issuer in the Exchange, and the monthly user fee rate specified in the annual HHS 

notice of benefit and payment parameters for the applicable benefit year. In this 

proposed rule we set forth our intention to have the Federally-facilitated Exchange user 

fee generally reflect the user fee in place by State-based Exchanges in 2014. For the 

2014 benefit year, we propose a monthly user fee rate equal to 3.5 percent of the monthly 

premium charged by the issuer for a particular policy under the QHP. Because we seek 

to align this rate with rates charged by State-based Exchanges, we may adjust this rate to 

conform with State-based Exchange rates in the final Payment Notice. We do not have 

an aggregate estimate of the collections from the user fee at this time because we do not 

yet have a count of the number of States in which HHS will run a Federally-facilitated 

Exchange. We anticipate that this user fee collection will be sufficient to cover the 

majority of costs related to the operation of Federally-facilitated Exchanges and maintain 

balance within the market. 

SHOP 

The Small Business Health Options Program (SHOP) facilitates the enrollment of 

small businesses into small group health insurance plans. A qualitative analysis of the 

costs and benefits of establishing a SHOP was included in the RIA published in 

conjunction with the Exchange Establishment Rule.61 This Impact Analysis addresses the 

additional costs and benefits of the proposed modifications in this proposed rule to the 

SHOP sections of the Exchange Final Rule. 

In this proposed rule, we propose to implement policies for FF-SHOPs designed 

to prevent significant adverse selection while promoting robust plan choice for 

 

61 Available at: http://cciio.cms.gov/resources/files/Files2/03162012/hie3r-ria-032012.pdf
 300 

employees. These policies include methods a qualified employer may use to make QHPs 

available to its employees, rules to ensure parity with a market’s group participation 

requirements, rules to permit the display of agent and broker information on FF-SHOP 

websites, alignment of market definitions with other applicable rules, and incentives for 

issuers to participate in FF-SHOPs. Many of these proposed policies are expected to 

create no significant new costs. 

The Affordable Care Act permits a qualified employer participating in a SHOP to 

select a metal level of coverage and make all plans in that level of coverage available to 

its employees. This represents an increase in plan choice over what many employees of 

small employers have today. Limiting this choice to a single level of coverage reduces 

potential adverse selection within the group and therefore any additional cost due to 

expanded choice. In the Exchange Establishment Rule, we did not quantify either the 

small risk premium or the modest additional consumer benefit resulting from employee 

choice at a single level of coverage. We seek comment on both limiting employee choice 

to prevent adverse selection and allowing for choice across two rather than one metal 

level. 

 The Exchange Final Rule permits a SHOP to set a minimum participation rate; 

such authority is limited to the extent the minimum participation rate is permissible under 

the PHS Act and applicable State law. Minimum participation rates require participation 

in the health plan by a substantial portion of the employer’s group, thereby assuring a 

more representative risk pool and reducing adverse selection. Setting a minimum 

participation rate that is too low would make it ineffective, while setting it too high would 

reduce the number of employers offering coverage. This proposed rule proposes, subject 

to permissibility under the PHS Act, that FF-SHOPs use a default participation rate of 70 
 301 

percent that may be modified if there is evidence that a higher or lower rate is either 

customary in the State or required by State statute. Because this policy results in no 

change in market dynamics, it places no additional costs on employers or issuers. 

 This proposed rule proposes new incentives for some health insurance issuers to 

participate in the FF-SHOP. Health insurance issuers that offer coverage in both the 

individual and small group markets and wish to sell QHPs in an FFE must also offer 

QHPs in an FF-SHOP. This policy promotes robust issuer participation in the FF-SHOP 

which will help small employers offer their employees a broad choice of health plan. 

The benefits of broad plan choice are quite significant. One study suggests 

expanding plan choice while holding premiums constant for employees results in a 

median increase in consumer surplus by 20 percent of the premium cost of coverage.62 

Some of this benefit is due to expanded choice in plan type and health insurance issuer. 

There are two costs associated with this policy. The first is the cost for the QHP issuer of 

submitting plans for certification in the FF-SHOP, which is described in the 30-day 

Federal Register Notice for the Initial Plan Data Collection published on November 21, 

2012 (77 FR 69846). The second is the cost of additional user fees QHP issuers must pay 

for participating in the FF-SHOP. 

D. Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) requires agencies to 

prepare an initial regulatory flexibility analysis to describe the impact of the final rule on 

small entities, unless the head of the agency can certify that the rule will not have a 

significant economic impact on a substantial number of small entities. The RFA 

 

62 Dafny, L., Ho, K., & Varela, M. (2010). Let them have choice: Gains from shifting away from employer-sponsored 

health insurance and toward an individual exchange (No. w15687). National Bureau of Economic Research. 
 302 

generally defines a “small entity” as (1) a proprietary firm meeting the size standards of 

the Small Business Administration (SBA), (2) a not-for-profit organization that is not 

dominant in its field, or (3) a small government jurisdiction with a population of less than 

50,000. States and individuals are not included in the definition of “small entity.” HHS 

uses a change in revenues of more than three to five percent as its measure of significant 

economic impact on a substantial number of small entities. 

This proposed rule contains proposed rules for premium stabilization programs 

required of health plan issuers including the risk adjustment program as well as the 

transitional reinsurance program and temporary risk corridors programs. Because we 

believe that few insurance firms offering comprehensive health insurance policies fall 

below the size thresholds for “small entities” established by the SBA, we do not believe 

that an initial regulatory flexibility analysis is required with respect to such firms. 

For purposes of the RFA, we expect the following types of entities to be affected 

by this proposed rule: (1) health insurance issuers; (2) health insurance plan sponsors; (3) 

reinsurance entities; (4) risk adjustment entities; and (5) third-party administrators. We 

believe that health insurance issuers and plan sponsors would be classified under the 

North American Industry Classification System (NAICS) code 524114 (Direct Health 

and Medical Insurance Carriers); reinsurance entities, risk adjustment entities and third 

party administrators would be classified under NAICS codes 524130 (Reinsurance 

Carriers), 524298 (Actuarial Services) and 524292 (Third Party Administration of 

Insurance). According to SBA size standards, entities with average annual receipts of $7 

million or less would be considered small entities for these NAICS codes. Issuers could 

possibly be classified in 621491 (HMO Medical Centers) and, if this is the case, the SBA 

size standard would be $10 million or less. 
 303 

Based on data from Medical Loss Ratio annual report submissions for the 2011 

MLR reporting year, there are 22 small entities (companies), each with less than $7 

million in earned premiums, that offer individual or group health insurance coverage and 

would therefore be subject to the provisions related to MLR. These small entities 

account for less than 5 percent of the estimated 466 issuers that would be affected by the 

provisions of this rule. Thirty six percent of these small issuers belong to holding groups, 

and many if not all of these small issuers are likely to have other lines of business that 

would result in their revenues exceeding $7 million. 

In this proposed rule, we propose requirements on employers that choose to 

participate in a SHOP Exchange. As discussed above, the SHOP is limited by statute to 

employers with at least one but not more than 100 employees. For this reason, we expect 

that many employers would meet the SBA standard for small entities. We do not believe 

that the regulation imposes requirements on employers offering health insurance through 

SHOP that are more restrictive than the current requirements on small employers offering 

ESI. For example, we propose to generally match existing minimum participation rates 

in the outside market. Additionally, as discussed in the Regulatory Impact Analysis, we 

believe the proposed policy will provide greater choice for the employee among plans 

and issuers, benefitting both employer and employee and simplify the process for the 

employer of administering multiple health benefit plans. We believe the processes that 

we have established constitute the minimum amount of requirements necessary to 

implement statutory mandates and accomplish our policy goals, and that no appropriate 

regulatory alternatives could be developed to further lessen the compliance burden. 
 304 

We believe that a substantial number of sponsors of self-insured group health 

plans could qualify as “small entities.” This proposed rule specifies the reinsurance 

contributions that would be required from third-party administrators on behalf of such 

entities. However, we do not believe that these contributions are likely to result in a 

change in revenues of more than 3 to 5 percent. We request comment on whether the 

small entities affected by this proposed rule have been fully identified. We also request 

comment and information on potential costs for these entities and on any alternatives that 

we should consider. 

E. Unfunded Mandates 

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires 

that agencies assess anticipated costs and benefits and take certain other actions before 

issuing a final rule that includes any Federal mandate that may result in expenditures in 

any one year by a State, local, or Tribal governments, in the aggregate, or by the private 

sector, of $100 million in 1995 dollars, updated annually for inflation. In 2012, that 

threshold is approximately $139 million. Since the impact on State, local, or Tribal 

governments and the private sector is below the threshold, no analysis under UMRA is 

required. 

F. Federalism 

Executive Order 13132 establishes certain requirements that an agency must meet 

when it promulgates a final rule that imposes substantial direct costs on State and local 

governments, pre-empts State law, or otherwise has Federalism implications. Because 

States have flexibility in designing their Exchange and Exchange-related programs, State 

decisions will ultimately influence both administrative expenses and overall premiums. 

States are not required to establish an Exchange. For States electing to operate an 
 305 

Exchange, risk adjustment and reinsurance, much of the initial cost of creating Exchanges 

and Exchange-related programs will be funded by Exchange Planning and Establishment 

Grants. After establishment, Exchanges will be financially self-sustaining, with revenue 

sources at the discretion of the State. Current State Exchanges charge user fees to 

issuers. 

In HHS’s view, while this proposed rule does not impose substantial direct 

requirement costs on State and local governments, this regulation has Federalism 

implications due to direct effects on the distribution of power and responsibilities among 

the State and Federal governments relating to determining standards relating to health 

insurance that is offered in the individual and small group markets. Each State electing to 

establish an Exchange must adopt the Federal standards contained in the Affordable Care 

Act and in this Payment Notice, or have in effect a State law or regulation that 

implements these Federal standards. However, HHS anticipates that the Federalism 

implications (if any) are substantially mitigated because under the statute, States have 

choices regarding the structure and governance of their Exchanges. Additionally, the 

Affordable Care Act does not require States to establish an Exchange; if a State elects not 

to establish an Exchange or the State’s Exchange is not approved, HHS, either directly, or 

through agreement with a non-profit entity, must establish and operate an Exchange in 

that State. 

In compliance with the requirement of Executive Order 13132 that agencies 

examine closely any policies that may have Federalism implications or limit the policy 

making discretion of the States, HHS has engaged in efforts to consult with and work 

cooperatively with affected States, including participating in conference calls with and 
 306 

attending conferences of the National Association of Insurance Commissioners, and 

consulting with State insurance officials on an individual basis. 

Throughout the process of developing this proposed rule, HHS has attempted to 

balance the States’ interests in regulating health insurance issuers, and Congress’ intent to 

provide access to Affordable Insurance Exchanges for consumers in every State. By 

doing so, it is HHS’s view that we have complied with the requirements of Executive 

Order 13132. 

G. Congressional Review Act 

This proposed rule is subject to the Congressional Review Act provisions of the 

Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), 

which specifies that before a rule can take effect, the Federal agency promulgating the 

rule shall submit to each House of the Congress and to the Comptroller General a report 

containing a copy of the rule along with other specified information, and has been 

transmitted to Congress and the Comptroller General for review. 
 307 

List of Subjects 

45 CFR Part 153

Administrative practice and procedure, Adverse selection, Health care, Health 

insurance, Health records, Organization and functions (Government agencies), Premium 

stabilization, Reporting and recordkeeping requirements, Reinsurance, Risk adjustment, 

Risk corridors, Risk mitigation, State and local governments. 

45 CFR Part 155

 Administrative practice and procedure, Health care access, Health insurance, 

Reporting and recordkeeping requirements, State and local governments, Cost-sharing 

reductions, Advance payments of premium tax credit, Administration and calculation of 

advance payments of the premium tax credit, Plan variations, Actuarial value. 

45 CFR Part 156

Administrative practice and procedure, Advertising, Advisory Committees, 

Brokers, Conflict of interest, Consumer protection, Grant programs-health, Grants 

administration, Health care, Health insurance, Health maintenance organization (HMO), 

Health records, Hospitals, American Indian/Alaska Natives, Individuals with disabilities, 

Loan programs-health, Organization and functions (Government agencies), Medicaid, 

Public assistance programs, Reporting and recordkeeping requirements, State and local 

governments, Sunshine Act, Technical assistance, Women, and Youth. 

45 CFR Part 157

Employee benefit plans, Health insurance, Health maintenance organization 

(HMO), Health records, Hospitals, Indians, Individuals with disabilities, Organization 

and functions (Government agencies), Medicaid, Public assistance programs, Reporting 
 308 

and recordkeeping requirements, Safety, State and local governments, Sunshine Act, 

Technical Assistance, Women, and Youth. 

45 CFR Part 158

Administrative practice and procedure, Claims, Health care, Health insurance, 

Health plans, penalties, Reporting and recordkeeping requirements, Premium revenues, 

Medical loss ratio, Rebating. 
 309 

For the reasons set forth in the preamble, the Department of Health and Human 

Services proposes to amend 45 CFR parts 153, 155, 156, 157, and 158 as set forth below: 

PART 153 – STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS, 

AND RISK ADJUSTMENT UNDER THE AFFORDABLE CARE ACT 

1. The authority citation for part 153 continues to read as follows: 

Authority: Secs. 1321, 1341–1343, Pub. L. 111–148, 24 Stat. 119. 

2. Section 153.20 is amended by revising the definitions of “Risk adjustment 

covered plan” and “Risk adjustment data collection approach” as follows: 

§153.20 Definitions. 

* * * * * 

Risk adjustment covered plan means, for the purpose of the risk adjustment 

program, any health insurance coverage offered in the individual or small group market 

with the exception of grandfathered health plans, group health insurance coverage 

described in §146.145(c) of this subchapter, individual health insurance coverage 

described in §148.220 of this subchapter, and any plan determined not to be a risk 

adjustment covered plan in the applicable Federally certified risk adjustment 

methodology. 

* * * * * 

Risk adjustment data collection approach means the specific procedures by which 

risk adjustment data is to be stored, collected, accessed, transmitted, and validated and 

the applicable timeframes, data formats, and privacy and security standards. 

* * * * * 

3. Section 153.100 is amended by – 
 310 

A. Revising paragraph (a)(1). 

B. Removing paragraph (a)(2). 

C. Redesignating paragraphs (a)(3) and (4) as paragraphs (a)(2) and (3). 

D. Revising newly designated paragraph (a)(2). 

E. Removing paragraph (a)(5). 

F. Revising paragraph (c). 

G. Revising paragraph (d)(1). 

H. Removing paragraph (d)(2). 

I. Redesignating paragraphs (d)(3) and (4) as paragraphs (d)(2) and (3). 

J. Revising newly designated paragraph (d)(2). 

K. Removing paragraph (d)(5). 

L. Redesignating paragraph (d)(6) as paragraph (d)(4). 

The revisions read as follows: 

§153.100 State notice of benefit and payment parameters. 

 (a) * * * 

(1) Modify the data requirements for health insurance issuers to receive 

reinsurance payments from those specified in the annual HHS notice of benefit and 

payment parameters for the applicable benefit year; 

 (2) Collect additional reinsurance contributions under §153.220(d) or use 

additional funds for reinsurance payments under §153.220(d)(3); or 

* * * * * 

 (c) State notice deadlines. If a State is required to publish an annual State notice 

of benefit and payment parameters for a particular benefit year, then with respect to 

benefit year 2014, it must do so by March 1, 2013, or by the 30th day following the 
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publication of the final HHS notice of benefit and payment parameters, whichever is 

later. With respect to subsequent benefit years, a State must do so by March 1 of the 

calendar year prior to the benefit year for which the notice applies. 

(d) * * * 

(1) Adhere to the data requirements for health insurance issuers to receive 

reinsurance payments that are specified in the annual HHS notice of benefit and payment 

parameters for the applicable benefit year; 

 (2) Forgo the collection of additional reinsurance contributions under 

§153.220(d) and the use of additional funds for reinsurance payments under 

§153.220(d)(3); 

 * * * * * 

4. Section 153.110 is amended by: 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as paragraph (b) and revising newly designated 

paragraph (b). 

D. Redesignating paragraph (d) as paragraph (c). 

E. Removing newly designated paragraph (c)(2). 

F. Removing newly designated paragraph (c)(4). 

G. Removing newly designated paragraph (c)(5). 

H. Redesignating paragraph (c)(6) as paragraph (c)(3). 

I. Removing paragraph (e). 

J. Redesignating paragraph (f) as paragraph (d). 

The revisions read as follows: 
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§153.110 Standards for the State notice of benefit and payment parameters. 

(a) Data requirements. If a State that establishes a reinsurance program elects to 

modify the data requirements for health insurance issuers to receive reinsurance 

payments from those specified in the annual HHS notice of benefit and payment 

parameters for the applicable benefit year, the State notice of benefit and payment 

parameters must specify those modifications. 

 (b) Additional collections. If a State that establishes a reinsurance program elects 

to collect additional funds under §153.220(d) or use additional funds for reinsurance 

payments under §153.220(d)(3), the State must publish in the State notice of benefit and 

payment parameters the following: 

(1) A description of the purpose of the additional collection, including whether it 

will be used to cover reinsurance payments made under §153.232, administrative costs, 

or both; 

(2) The additional contribution rate at which the funds will be collected; and 

(3) If the purpose of the additional collection includes reinsurance payments (or if 

the State is using additional funds for reinsurance payments under §153.220(d)(3)), the 

State supplemental reinsurance payment parameters required under §153.232. 

* * * * * 

5. Section 153.210 is amended by revising paragraph (a)(2) and adding paragraph 

(e) to read as follows: 

§153.210 State establishment of a reinsurance program. 

(a) * * * 
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(2) If a State contracts with more than one applicable reinsurance entity, the State 

must ensure that each applicable reinsurance entity operates in a distinct geographic area 

with no overlap of jurisdiction with any other applicable reinsurance entity. 

* * * * * 

(e) Reporting to HHS. Each State that establishes a reinsurance program must 

ensure that each applicable reinsurance entity provides information regarding requests for 

reinsurance payments under the national contribution rate made under §153.410 for all 

reinsurance-eligible plans for each quarter during the applicable benefit year in a manner 

and timeframe established by HHS. 

6. Section 153.220 is amended by – 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as paragraph (b). 

D. Removing paragraph (d). 

E. Redesignating paragraph (e) as paragraph (c). 

F. Revising newly designated paragraph (c)(2). 

G. Removing paragraph (f). 

H. Redesignating paragraph (g) as paragraph (d). 

I. Revising newly designated paragraph (d). 

J. Removing paragraph (h). 

The revisions read as follows: 
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§ 153.220 Collection of reinsurance contribution funds. 

(a) Collections. If a State establishes a reinsurance program, HHS will collect all 

reinsurance contributions from all contributing entities for that State under the national 

contribution rate. 

* * * * * 

(c) * * * 

(2) Payments to the U.S. Treasury as described in paragraph (b)(2) if this section; 

and 

* * * * * 

(d) Additional State collections. If a State establishes a reinsurance program: 

(1) The State may elect to collect more than the amounts that would be collected 

based on the national contribution rate set forth in the annual HHS notice of benefit and 

payment parameters for the applicable benefit year to provide: 

(i) Funding for administrative expenses of the applicable reinsurance entity; or 

(ii) Additional funds for reinsurance payments. 

(2) The State must notify HHS within 30 days after publication of the draft annual 

HHS notice of benefit and payment parameters for the applicable benefit year of the 

additional contribution rate that it elects to collect for any additional contributions under 

paragraph (d)(1) of this section. 

(3) A State may use additional funds which were not collected as additional 

reinsurance contributions under this part for reinsurance payments under the State 

supplemental payment parameters under §153.232. 

 * * * * * 

7. Section 153.230 is revised to read as follows: 
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§ 153.230 Calculation of reinsurance payments made under the national 

contribution rate. 

(a) Eligibility for reinsurance payments under the national reinsurance parameters. 

A health insurance issuer of a non-grandfathered individual market plan becomes eligible 

for reinsurance payments from contributions under the national contribution rate when its 

claims costs for an individual enrollee’s covered benefits in a benefit year exceed the 

national attachment point. 

(b) National reinsurance payment parameters. The national reinsurance payment 

parameters for each year commencing in 2014 and ending in 2016 set forth in the annual 

HHS notice of benefit and payment parameters for an applicable benefit year will apply 

with respect to reinsurance payments made from contributions received under the 

national contribution rate. 

(c) National reinsurance payments. Each reinsurance payment made from 

contributions received under the national contribution rate will be calculated as the 

product of the national coinsurance rate multiplied by the health insurance issuer’s claims 

costs for an individual enrollee’s covered benefits that the health insurance issuer incurs 

between the national attachment point and the national reinsurance cap. 

(d) Uniform adjustment to national reinsurance payments. If HHS determines that 

all reinsurance payments requested under the national payment parameters from all 

reinsurance-eligible plans in all States for a benefit year will exceed all reinsurance 

contributions collected under the national contribution rate in all States for an applicable 

benefit year, HHS will determine a uniform pro rata adjustment to be applied to all such 

requests for reinsurance payments for all States. Each applicable reinsurance entity, or 
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HHS on behalf of a State, must reduce all requests for reinsurance payments for the 

applicable benefit year by any adjustment required under this paragraph (d). 

8. Section 153.232 is added to read as follows: 

§153.232 Calculation of reinsurance payments made under a State additional 

contribution rate. 

(a) State supplemental reinsurance payment parameters. (1) If a State establishes a 

reinsurance program and elects to collect additional contributions under 

§153.220(d)(1)(ii) or use additional funds for reinsurance payments under 

§153.220(d)(3), the State must set supplemental reinsurance payment parameters using 

one or more of the following methods: 

(i) Decreasing the national attachment point; 

(ii) Increasing the national reinsurance cap; or 

(iii) Increasing the national coinsurance rate. 

(2) The State must ensure that additional reinsurance contributions and funds 

projected to be received under §153.220(d)(1)(ii) and §153.220(d)(3), as applicable, for 

any applicable benefit year are reasonably calculated to cover additional reinsurance 

payments that are projected to be made only under the supplemental reinsurance payment 

parameters (that will not be paid under the national payment parameters) for the given 

benefit year. 

(3) All applicable reinsurance entities in a State collecting additional reinsurance 

contributions must apply the State supplemental reinsurance payment parameters 

established under paragraph (a)(1) of this section when calculating reinsurance payments. 

(b) General requirement for payments under State supplemental reinsurance 

parameters. Contributions collected under §153.220(d)(1)(ii) or funds under 
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§153.220(d)(3), as applicable, must be applied towards requests for reinsurance payments 

made under the State supplemental reinsurance payments parameters for each benefit 

year commencing in 2014 and ending in 2016. 

(c) Eligibility for reinsurance payments under State supplemental reinsurance 

parameters. If a State establishes supplemental State reinsurance payment parameters 

under §153.232(a)(1), a health insurance issuer of a non-grandfathered individual market 

plan becomes eligible for reinsurance payments from contributions under 

§153.220(d)(1)(ii) or funds under §153.220(d)(3), as applicable, if its incurred claims 

costs for an individual enrollee’s covered benefits in a benefit year: 

(1) Exceed the supplemental State attachment point set forth in the State notice of 

benefit and payment parameters for the applicable benefit year if a State has established 

such a supplemental attachment point under §153.232(a)(1)(i); 

(2) Exceed the national reinsurance cap set forth in the annual HHS notice of 

benefit and payment parameters for the applicable benefit year if a State has established a 

supplemental State reinsurance cap under §153.232(a)(1)(ii); or 

(3) Exceed the national attachment point set forth in the annual HHS notice of 

benefit and payment parameters for the applicable benefit year if a State has established a 

supplemental coinsurance rate under §153.232(a)(1)(iii). 

(d) Payments under State supplemental reinsurance parameters. Each reinsurance 

payment made from contributions received under §153.220(d)(1)(ii) or funds under 

§153.220(d)(3), as applicable, will be calculated with respect to a health insurance 

issuer’s claims costs for an individual enrollee’s covered benefits as the sum of the 

following: 
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(1) If the State has established a supplemental State attachment point, to the extent 

the issuer’s incurred claims costs for such benefits exceed the supplemental State 

attachment point but do not exceed the national attachment point, the product of such 

claims costs between the supplemental State attachment point and the national attachment 

point multiplied by the national coinsurance rate (or, if the State has established a 

supplemental State coinsurance rate, the supplemental State coinsurance rate); 

(2) If the State has established a supplemental State reinsurance cap, to the extent 

the issuer’s incurred claims costs for such benefits exceed the national reinsurance cap 

but do not exceed the supplemental State reinsurance cap, the product of such claims 

costs between the national reinsurance cap and the supplemental State reinsurance cap 

multiplied by the national coinsurance rate (or, if the State has established a supplemental 

State coinsurance rate, the supplemental State coinsurance rate); and 

(3) If the State has established a supplemental coinsurance rate, the product of the 

issuer’s incurred claims costs for such benefits between the national attachment point and 

the national reinsurance cap multiplied by the difference between the supplemental 

coinsurance rate and the national coinsurance rate. 

(e) Uniform adjustment to payments under State supplemental reinsurance 

payment parameters. If all requested reinsurance payments under the State supplemental 

reinsurance parameters calculated in accordance with paragraph (a)(1) of this section 

from all reinsurance-eligible plans in a State for a benefit year will exceed all reinsurance 

contributions collected under §153.220(d)(1)(ii) or funds under §153.220(d)(3) for the 

applicable benefit year, the State must determine a uniform pro rata adjustment to be 

applied to all such requests for reinsurance payments. Each applicable reinsurance entity 
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in the State must reduce all such requests for reinsurance payments for the applicable 

benefit year by that adjustment. 

(f) Limitations on payments under State supplemental reinsurance parameters. A 

State must ensure that: 

(1) The payments made to issuers must not exceed the issuer’s total paid amount 

for the reinsurance-eligible claim(s); and 

(2) Any remaining additional funds for reinsurance payments collected under 

§153.220(d)(1)(ii) must be used for reinsurance payments under the State supplemental 

reinsurance payment parameters in subsequent benefit years. 

9. Section 153.234 is added to read as follows: 

§153.234 Eligibility under health insurance market rules. 

A reinsurance-eligible plan’s covered claims costs for an enrollee incurred prior 

to the application of the following provisions do not count towards either the national 

reinsurance parameters or the State supplemental reinsurance parameters: 45 CFR 

147.102, 147.104 (subject to 147.145), 147.106 (subject to 147.145), 156.80, and subpart 

B of part 156. 

10. Section 153.235 is added to read as follows: 

§153.235 Allocation and distribution of reinsurance contributions 

 (a) Allocation of reinsurance contributions. HHS will allocate and distribute 

reinsurance contributions collected from contributing entities under the national 

contribution rate for reinsurance payments to each State based on total requests for 

reinsurance payments made under the national reinsurance payment parameters in all 

States and submitted under §153.410, net of any adjustment under §153.230(d). 
 320 

(b) Excess reinsurance contributions. Any reinsurance contributions collected 

from contributing entities under the national contribution rate for reinsurance payments 

for any benefit year but unused for the applicable benefit year will be used for 

reinsurance payments under the national reinsurance payment parameters for subsequent 

benefit years. 

11. Section 153.240 is amended by revising paragraphs (a) and (b) and by adding 

a new paragraph (d) to read as follows: 

§153.240 Disbursement of reinsurance payments. 

(a) Data collection. If a State establishes a reinsurance program, the State must 

ensure that the applicable reinsurance entity: 

(1) Collects data required to determine reinsurance payments as described in 

§153.230 and §153.232, as applicable, from an issuer of reinsurance-eligible plans or is 

provided access to such data, according to the data requirements specified by the State in 

the State notice of benefit and payment parameters described in subpart B of this part. 

 (2) Makes reinsurance payments to the issuer of a reinsurance-eligible plan after 

receiving a valid claim for payment from that health insurance issuer in accordance with 

the requirements of §153.410. 

(3) Provides a process through which an issuer of a reinsurance-eligible plan that 

does not generate individual enrollee claims in the normal course of business may use 

estimated claims costs to make a request for payment (or to submit data to be considered 

for reinsurance payments) in accordance with the requirements of §153.410. The State 

must ensure that such requests for reinsurance payment (or a subset of such requests) are 

subject to validation. 

(b) Notification of reinsurance payments. For each applicable benefit year, 
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(1) A State, or HHS on behalf of the State, must notify issuers annually of: 

(i) Reinsurance payments under the national payment parameters, and 

(ii) Reinsurance payments under the State supplemental payment parameters if 

applicable, to be made for the applicable benefit year no later than June 30 of the year 

following the applicable benefit year. 

(2) A State must provide to each reinsurance-eligible plan the expected requests 

for reinsurance payments made under: 

(i) The national payment parameters, and 

(ii) State supplemental payments parameters if applicable, from such plan on a 

quarterly basis during the applicable benefit year in a timeframe and manner determined 

by HHS. 

* * * * * 

(d) Privacy and security. (1) If a State establishes a reinsurance program, the 

State must ensure that the applicable reinsurance entity’s collection of personally 

identifiable information is limited to information reasonably necessary for use in the 

calculation of reinsurance payments, and that use and disclosure of personally identifiable 

information is limited to those purposes for which the personally identifiable information 

was collected (including for purposes of data validation). 

(2) If a State establishes a reinsurance program, the State must ensure that the 

applicable reinsurance entity implements security standards that provide administrative, 

physical, and technical safeguards for the personally identifiable information consistent 

with the security standards described at 45 CFR 164.308, 164.310, and 164.312. 

12. Section 153.310 is amended by: 

A. Redesignating paragraphs (c) and (d) as paragraphs (e) and (f), respectively. 

B. Adding new paragraphs (a)(4), (c) and (d). 

The additions read as follows: 
 322 

§153.310 Risk adjustment administration. 

(a) * * * 

(4) Beginning in 2015, any State that is approved to operate an Exchange and 

elects to operate risk adjustment but has not been approved by HHS to operate risk 

adjustment prior to publication of its State notice of benefit and payment parameters for 

the applicable benefit year, will forgo implementation of all State functions in this 

subpart, and HHS will carry out all of the provisions of this subpart on behalf of the 

State. 

* * * * * 

(c) State responsibility for risk adjustment. (1) A State operating a risk adjustment 

program for a benefit year must administer the applicable Federally certified risk 

adjustment methodology through an entity that – 

(i) Is operationally ready to implement the applicable Federally certified risk 

adjustment methodology and process the resulting payments and charges; and 

(ii) Has experience relevant to operating the risk adjustment program. 

 (2) The State must ensure that the risk adjustment entity complies with all 

applicable provisions of subpart D of this part in the administration of the applicable 

Federally certified risk adjustment methodology. 

(3) The State must conduct oversight and monitoring of its risk adjustment 

program. 

(d) Certification for a State to operate risk adjustment. (1) To be approved by 

HHS to operate risk adjustment under a particular Federally certified risk adjustment 

methodology for a benefit year, a State must establish that it and its risk adjustment entity 

meet the standards set forth in paragraph (c) of this section. 
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(2) To obtain such approval, the State must submit to HHS, in a form and manner 

specified by HHS, evidence that its risk adjustment entity meets these standards. 

13. Section 153.320 is amended by revising paragraphs (a)(1) and (a)(2) to read as 

follows: 

§153.320 Federally certified risk adjustment methodology. 

* * * * * 

(a) * * * 

(1) The risk adjustment methodology is developed by HHS and published in the 

applicable annual HHS notice of benefit and payment parameters; or 

(2) An alternate risk adjustment methodology is submitted by a State in 

accordance with §153.330, reviewed and certified by HHS, and published in the 

applicable annual HHS notice of benefit and payment parameters. 

* * * * * 

14. Section 153.330 is amended by— 

A. Redesignating paragraph (b) as paragraph (c). 

B. Adding new paragraph (b). 

The additions read as follows: 

§153.330 State alternate risk adjustment methodology. 

* * * * * 

 (b) Evaluation criteria for alternate risk adjustment methodology. An alternate 

risk adjustment methodology will be certified by HHS as a Federally certified risk 

adjustment methodology based on the following criteria: 

(1) The criteria listed in paragraph (a)(2) of this section; 

(2) Whether the methodology complies with the requirements of this subpart D; 
 324 

(3) Whether the methodology accounts for risk selection across metal levels; and 

(4) Whether each of the elements of the methodology are aligned. 

* * * * * 

15. Section 153.340 is amended by revising paragraph (b)(3) to read as follows: 

§153.340 Data collection under risk adjustment. 

* * * * * 

(b) * * * 

(3) If a State is operating a risk adjustment program, the State must ensure that 

any collection of personally identifiable information is limited to information reasonably 

necessary for use in the applicable risk adjustment model, calculation of plan average 

actuarial risk, or calculation of payments and charges. Except for purposes of data 

validation, the State may not collect or store any personally identifiable information for 

use as a unique identifier for an enrollee’s data, unless such information is masked or 

encrypted by the issuer, with the key to that masking or encryption withheld from the 

State. Use and disclosure of personally identifiable information is limited to those 

purposes for which the personally identifiable information was collected (including for 

purposes of data validation). 

 * * * * * 

16. Section 153.360 is added to subpart D to read as follows: 

§153.360 Application of risk adjustment to the small group market. 

Enrollees in a risk adjustment covered plan must be assigned to the applicable risk 

pool in the State in which the enrollee’s policy was filed and approved. 

17. Section 153.400 is revised to read as follows: 

§153.400 Reinsurance contribution funds. 
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(a) General requirement. Each contributing entity must make reinsurance 

contributions annually: at the national contribution for all reinsurance contribution 

enrollees, in a manner specified by HHS; and at the additional State supplemental 

contribution rate if the State has elected to collect additional contributions under 

§153.220(d), in a manner specified by the State. 

(1) A contributing entity must make reinsurance contributions for its self-insured 

group health plans and health insurance coverage except to the extent that: 

 (i) Such plan or coverage is not major medical coverage; 

 (ii) In the case of health insurance coverage, such coverage is not considered to be 

part of an issuer’s commercial book of business; 

(iii) In the case of health insurance coverage, such coverage is not issued on a 

form filed and approved by a State. 

(2) Accordingly, as specified in paragraph (a)(1) of this section, a contributing 

entity is not required to make contributions on behalf of the following: 

(i) A self-insured group health plan or health insurance coverage that consists 

solely of excepted benefits as defined by section 2791(c) of the PHS Act; 

(ii) Coverage offered by an issuer under contract to provide benefits under any of 

the following titles of the Social Security Act: 

(A) Title XVIII (Medicare); 

(B) Title XIX (Medicaid); or 

(C)Title XXI (Children’s Health insurance Program); 

(iii) A Federal or State high-risk pool, including the Pre-Existing Condition 

Insurance Plan Program; 
 326 

(iv) Basic health plan coverage offered by issuers under contract with a State as 

described in section 1331 of the Affordable Care Act; 

(v) A health reimbursement arrangement within the meaning of IRS Notice 2002-

45 (2002-2 CB 93) or any subsequent applicable guidance, that is integrated with a selfinsured group health plan or health insurance coverage; 

 (vi) A health savings account within the meaning of section 223(d) of the Code; 

(vii) A health flexible spending arrangement within the meaning of section 125 of 

the Code; 

(viii) An employee assistance plan, disease management program, or wellness 

program that does not provide major medical coverage; 

(ix) A stop-loss policy or an indemnity reinsurance policy; 

(x) TRICARE and other military health benefits for active and retired uniformed 

services personnel and their dependents; 

(xi) A plan or coverage provided by an Indian Tribe to Tribal members and their 

spouses and dependents (and other persons of Indian descent closely affiliated with the 

Tribe), in the capacity of the Tribal members as Tribal members (and not in their capacity 

as current or former employees of the Tribe or their dependents); or 

(xii) Health programs operated under the authority of the Indian Health Service. 

(b) Data requirements. Each contributing entity must submit to HHS data required 

to substantiate the contribution amounts for the contributing entity, in the manner and 

timeframe specified by HHS. 

18. Section 153.405 is added to read as follows: 

§153.405 Calculation of reinsurance contributions. 
 327 

(a) In general. The reinsurance contribution required from a contributing entity 

for its reinsurance contribution enrollees during a benefit year is calculated by 

multiplying: 

(1) The average number of covered lives of reinsurance contribution enrollees 

during the applicable benefit year for all plans and coverage described in §153.400(a)(1) 

of the contributing entity; by 

(2) The contribution rate for the applicable benefit year. 

(b) Annual enrollment count. No later than November 15 of benefit year 2014, 

2015, or 2016, as applicable, a contributing entity must submit an annual enrollment 

count of the average number of covered lives of reinsurance contribution enrollees for the 

applicable benefit year to HHS. The count must be determined as specified in paragraphs 

(d) or (e) of this section, as applicable. 

(c) Notification and payment. (1) Within 15 days of the submission of the annual 

enrollment count described in paragraph (b) of this section or by December 15 of the 

applicable benefit year, whichever is later HHS will notify the contributing entity of the 

reinsurance contribution amount to be paid for the applicable benefit year. 

(2) A contributing entity must remit reinsurance contributions to HHS within 30 

days after the date of the notification. 

(d) Procedures for counting covered lives for health insurance issuers. To 

determine the average number of covered lives of reinsurance contribution enrollees 

under a health insurance plan for a benefit year, a health insurance issuer must use one of 

the following methods: 

(1) Adding the total number of lives covered for each day of the first nine months 

of the benefit year and dividing that total by the number of days in the first nine months; 
 328 

(2) Adding the total number of lives covered on any date (or more dates, if an 

equal number of dates are used for each quarter) during the same corresponding month in 

each of the first three quarters of the benefit year, and dividing that total by the number of 

dates on which a count was made. For this purpose, the same months must be used for 

each quarter (for example January, April and July) and the date used for the second and 

third quarter must fall within the same week of the quarter as the corresponding date used 

for the first quarter; or 

(3) Multiplying the average number of policies in effect for the first nine months 

of the benefit year by the ratio of covered lives per policy in effect, calculated using the 

prior National Association of Insurance Commissioners (NAIC) Supplemental Health 

Care Exhibit (or a form filed with the issuer’s State of domicile for the most recent time 

period). 

(e) Procedures for counting covered lives for self-insured group health plans. To 

determine the number of covered lives of reinsurance contribution enrollees under a selfinsured group health plan for a benefit year, a plan must use one of the following 

methods: 

(1) One of the methods specified in either paragraph (d)(1) or paragraph (d)(2) of 

this section; 

(2) Adding the total number of lives covered on any date (or more dates, if an 

equal number of dates are used for each quarter) during the same corresponding month in 

each of the first three quarters of the benefit year (provided that the date used for the 

second and third quarters must fall within the same week of the quarter as the 

corresponding date used for the first quarter), and dividing that total by the number of 

dates on which a count was made, except that the number of lives covered on a date is 
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calculated by adding the number of participants with self-only coverage on the date to the 

product of the number of participants with coverage other than self-only coverage on the 

date and a factor of 2.35. For this purpose, the same months must be used for each 

quarter (for example, January, April, and July); 

 (3) Using the number of lives covered for the benefit year calculated based upon 

the “Annual Return/Report of Employee Benefit Plan” filed with the Department of 

Labor (Form 5500) for the last applicable time period. For purposes of this paragraph 

(e)(3), the number of lives covered for the benefit year for a plan offering only self-only 

coverage equals the sum of the total participants covered at the beginning and end of the 

benefit year, as reported on the Form 5500, divided by 2, and the number of lives covered 

for the benefit year for a plan offering self-only coverage and coverage other than selfonly coverage equals the sum of the total participants covered at the beginning and the 

end of the benefit year, as reported on the Form 5500; and 

(f) Procedures for counting covered lives for group health plans with a selfinsured coverage option and an insured coverage option. To determine the number of 

covered lives of reinsurance contribution enrollees under a group health plan with a selfinsured coverage option and an insured coverage option for a benefit year, a plan must 

use one of the methods specified in either paragraph (d)(1) or paragraph (d)(2) of this 

section. 

(g) Multiple group health plans maintained by the same plan sponsor -- (1) 

General rule. If a plan sponsor maintains two or more self-insured group health plans 

(including one or more group health plans that provide health insurance coverage) that 

collectively provide major medical coverage for the same covered lives, then those 
 330 

multiple plans shall be treated as a single self-insured group health plan for purposes of 

calculating any reinsurance contribution amount due under paragraph (d) of this section. 

(2) Plan Sponsor. For purposes of this paragraph (g), the term “plan sponsor” 

means: 

(i) The employer, in the case of a plan established or maintained by a single 

employer; 

(ii) The employee organization, in the case of a plan established or maintained by 

an employee organization; 

(iii) The joint board of trustees, in the case of a multiemployer plan (as defined in 

section 414(f) of the Code); 

(iv) The committee, in the case of a multiple employer welfare arrangement; 

(v) The cooperative or association that establishes or maintains a plan established 

or maintained by a rural electric cooperative or rural cooperative association (as such 

terms are defined in section 3(40)(B) of ERISA); 

(vi) The trustee, in the case of a plan established or maintained by a voluntary 

employees’ beneficiary association (meaning that the association is not merely serving as 

a funding vehicle for a plan that is established or maintained by an employer or other 

person); 

(vii) In the case of a plan, the sponsor of which is not described in paragraph 

(g)(2)(i) through (g)(2)(vi) of this section, the person identified by the terms of the 

document under which the plan is operated as the plan sponsor, or the person designated 

by the terms of the document under which the plan is operated as the plan sponsor, 

provided that designation is made, and that person has consented to the designation, by 

no later than the date by which the count of covered lives for that benefit year is required 
 331 

to be provided, after which date that designation for that benefit year may not be changed 

or revoked, and provided further that a person may be designated as the plan sponsor only 

if the person is one of the persons maintaining the plan (for example, one of the 

employers that is maintaining the plan with one or more other employers or employee 

organizations); or 

(viii) In the case of a plan, the sponsor of which is not described in paragraph 

(g)(2)(i) through (g)(2)(vi) of this section, and for which no identification or designation 

of a plan sponsor has been made under paragraph (g)(2)(i)(vii) of this section, each 

employer that maintains the plan (with respect to employees of that employer), each 

employee organization that maintains the plan (with respect to members of that employee 

organization), and each board of trustees, cooperative or association that maintains the 

plan. 

(3) Exception. A plan sponsor is not required to include as part of a single selfinsured group health plan as determined under paragraph (g)(1) of this section any selfinsured group health plan (including a group health plan that provides health insurance 

coverage) that consists solely of excepted benefits as defined by section 2791(c) of the 

PHS Act, or that only provides benefits related to prescription drugs. 

 (4) Procedures for counting covered lives for multiple group health plans treated 

as a single group health plan. The rules in this paragraph (g)(4) govern the determination 

of the average number of covered lives in a benefit year for any set of multiple selfinsured group health plans or health insurance plans (or a combination of one or more 

self-insured group health plans and one or more health insurance plans) that are treated as 

a single group health plan under paragraph (g)(1) of this section. 
 332 

(i) Multiple group health plans including an insured plan. If at least one of the 

multiple plans is an insured plan, the average number of covered lives of reinsurance 

contribution enrollees must be calculated using one of the methods specified in either 

paragraph (d)(1) or paragraph (d)(2) of this section, applied across the multiple plans as a 

whole. The following information must be determined by the plan sponsor and reported 

to HHS, in a manner and timeframe specified by HHS: 

(A) The average number of covered lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans being treated as a single group health plan as 

determined by the plan sponsor and reported to HHS. 

(ii) Multiple group health plans not including an insured plan. If each of the 

multiple plans is a self-insured group health plan, the average number of covered lives of 

reinsurance contribution enrollees must be calculated using one of the methods specified 

either in paragraph (e)(1) or paragraph (e)(2) of this section, applied across the multiple 

plans as a whole. The following information must be determined by the plan sponsor and 

reported to HHS, in a manner and timeframe specified by HHS: 

(A) The average number of covered lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans being treated as a single group health plan as 

determined by the plan sponsor. 

19. Section 153.410 is amended by revising paragraph (a) as follows: 

§153.410 Requests for reinsurance payments. 

(a) General requirement. An issuer of a reinsurance-eligible plan may make a 

request for payment when an enrollee of that reinsurance-eligible plan has met the criteria 
 333 

for reinsurance payment set forth in subpart B of this part and the HHS notice of benefit 

and payment parameters and State notice of benefit and payment parameters for the 

applicable benefit year, if applicable. 

* * * * * 

20. Section 153.420 is added to subpart E to read as follows: 

§153.420 Data collection. 

(a) Data requirement. To be eligible for reinsurance payments, an issuer of a 

reinsurance-eligible plan must submit or make accessible all required reinsurance data in 

accordance with the reinsurance data collection approach established by the State, or by 

HHS on behalf of the State.

(b) Deadline for submission of data. An issuer of a reinsurance-eligible plan must 

submit or make accessible data to be considered for reinsurance payments for the 

applicable benefit year by April 30 of the year following the end of the applicable benefit 

year. 

21. Section 153.500 is amended by-- 

A. Revising the definitions of “Administrative costs” and “Allowable 

administrative costs.” 

B. Adding the definitions of “After-tax premiums earned,” “Profits,” and “Taxes” 

in alphabetical order. 

The revisions and additions read as follows: 

§153.500 Definitions. 

* * * * * 

Administrative costs mean, with respect to a QHP, total non-claims costs incurred 

by the QHP issuer for the QHP, including taxes. 
 334 

After-tax premiums earned mean, with respect to a QHP, premiums earned with 

respect to the QHP minus taxes. 

Allowable administrative costs mean, with respect to a QHP, the sum of 

administrative costs of the QHP, other than taxes plus profits earned by the QHP, which 

sum is limited to 20 percent of after-tax premiums earned with respect to the QHP 

(including any premium tax credit under any governmental program), plus taxes. 

* * * * * 

Profits mean, with respect to a QHP, the greater of: 

(1) Three percent of after tax premiums earned, and 

(2) Premiums earned of the QHP minus the sum of allowable costs and 

administrative costs of the QHP. 

* * * * * 

Taxes mean, with respect to a QHP, Federal and State licensing and regulatory 

fees paid with respect to the QHP as described in §158.161(a) of this subchapter, and 

Federal and State taxes and assessments paid with respect to the QHP as described in 

§158.162(a)(1) and (b)(1) of this subchapter. 

* * * * * 

22. Section 153.510 is amended by adding new paragraph (d) to read as follows:. 

§153.510 Risk corridors establishment and payment methodology. 

* * * * * 

(d) Charge submission deadline. A QHP issuer must remit charges to HHS within 

30 days after notification of such charges. 

23. Section 153.530 is amended by – 

A. Revising paragraphs (a), (b) introductory text, (b)(2)(iii), and (c). 
 335 

B. Adding new paragraph (d). 

The revisions and additions read as follows: 

§153.530 Risk corridors data requirements. 

(a) Premium data. A QHP issuer must submit to HHS data on the premiums 

earned with respect to each QHP that the issuer offers in a manner specified by HHS. 

(b) Allowable costs. A QHP issuer must submit to HHS data on the allowable 

costs incurred with respect to each QHP that the QHP issuer offers in a manner specified 

by HHS. For purposes of this subpart, allowable costs must be– 

* * * * * 

(2) * * * 

(iii) Any cost-sharing reduction payments received by the issuer for the QHP to 

the extent not reimbursed to the provider furnishing the item or service. 

(c) Allowable administrative costs. A QHP issuer must submit to HHS data on 

the allowable administrative costs incurred with respect to each QHP that the QHP issuer 

offers in a manner specified by HHS. 

(d) Timeframes. For each benefit year, a QHP issuer must submit all information 

required under this section by July 31 of the year following the benefit year. 

24. Section 153.630 is added to subpart G to read as follows: 

§153.630 Data validation requirements when HHS operates risk adjustment. 

(a) General requirement. An issuer of a risk adjustment covered plan in a State 

where HHS is operating risk adjustment on behalf of the State for the applicable benefit 

year must have an initial and second validation audit performed on its risk adjustment 

data as described in this section. 

(b) Initial validation audit. 
 336 

(1) An issuer of a risk adjustment covered plan must engage one or more 

independent auditors to perform an initial validation audit of a sample of its risk 

adjustment data selected by HHS. 

(2) The issuer must ensure that the initial validation auditors are reasonably 

capable of performing an initial data validation audit according to the standards 

established by HHS for such audit, and must ensure that the audit is so performed. 

(3) The issuer must ensure that each initial validation auditor is reasonably free of 

conflicts of interest, such that it is able to conduct the initial validation audit in an 

impartial manner and its impartiality is not reasonably open to question. 

(4) The issuer must ensure validation of the accuracy of risk adjustment data for a 

sample of enrollees selected by HHS. The issuer must ensure that the initial validation 

audit findings are submitted to HHS in a manner and timeframe specified by HHS. 

(c) Second validation audit. HHS will select a subsample of the risk adjustment 

data validated by the initial validation audit for a second validation audit. The issuer 

must comply with, and must ensure the initial validation auditor complies with, standards 

for such audit established by HHS, and must cooperate with, and must ensure that the 

initial validation auditor cooperates with, HHS and the second validation auditor in 

connection with such audit. 

(d) Data validation appeals. An issuer may appeal the findings of a second 

validation audit or the application of a risk score error rate to its risk adjustment 

payments and charges. 

(e) Adjustment of payments and charges. HHS may adjust payments and charges 

for issuers that do not comply with audit requirements and standards, as specified in part 

(b) and (c) of this section. 
 337 

(f) Data security and transmission.

(1) An issuer must submit the risk adjustment data and source documentation for 

the initial and second validation audits specified by HHS to HHS or its designee in the 

manner and timeframe specified by HHS. 

(2) An issuer must ensure that it and its initial validation auditor comply with the 

security standards described at 45 CFR 164.308, 164.310, and 164.312 in connection 

with the initial validation audit, the second validation audit, and any appeal. 

25. Subpart H is added to read as follows: 

Subpart H—Distributed Data Collection for HHS-Operated Programs 

Sec. 

153.700 Distributed data environment. 

153.710 Data requirements. 

153.720 Establishment and usage of masked enrollee identification numbers. 

153.730 Deadline for submission of data. 

Subpart H—Distributed Data Collection for HHS-Operated Programs 

§153.700 Distributed data environment. 

(a) Dedicated distributed data environments. For each benefit year in which HHS 

operates the risk adjustment or reinsurance program on behalf of a State, an issuer of a 

risk adjustment covered plan or a reinsurance-eligible plan in the State, as applicable, 

must establish a dedicated data environment and provide data access to HHS, in a manner 

and timeframe specified by HHS, for any HHS-operated risk adjustment and reinsurance 

program. 

(b) Timeline. An issuer must establish the dedicated data environment (and 

confirm proper establishment through successfully testing the environment to conform 
 338 

with applicable HHS standards for such testing) three months prior to the first date of full 

operation. 

§153.710 Data requirements. 

(a) Enrollment, claims, and encounter data. An issuer of a risk adjustment 

covered plan or a reinsurance-eligible plan in a State in which HHS is operating the risk 

adjustment or reinsurance program, as applicable, must provide to HHS, through the 

dedicated data environment, access to enrollee-level plan enrollment data, enrollee claims 

data, and enrollee encounter data as specified by HHS. 

(b) Claims data. All claims data submitted by an issuer of a risk adjustment 

covered plan or a reinsurance-eligible plan in a State in which HHS is operating the risk 

adjustment or reinsurance program, as applicable, must have resulted in payment by the 

issuer. 

(c) Claims data from capitated plans. An issuer of a risk adjustment covered plan 

or a reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or 

reinsurance program, as applicable, that does not generate individual enrollee claims in 

the normal course of business must derive the costs of all applicable provider encounters 

using its principal internal methodology for pricing those encounters. If the issuer does 

not have such a methodology, or has an incomplete methodology, it must supplement the 

methodology in a manner that yields derived claims that are reasonable in light of the 

specific service and insurance market that the plan is serving. 

§153.720 Establishment and usage of masked enrollee identification numbers. 

(a) Enrollee identification numbers. An issuer of a risk adjustment covered plan 

or a reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or 

reinsurance program, as applicable, must – 
 339 

(1) Establish a unique masked enrollee identification number for each enrollee; 

and 

(2) Maintain the same masked enrollee identification number for an enrollee 

across enrollments or plans within the issuer, within the State, during a benefit year. 

(b) Prohibition on personally identifiable information. An issuer of a risk 

adjustment covered plan or a reinsurance-eligible plan in a State in which HHS is 

operating the risk adjustment or reinsurance program on behalf of the State, as applicable, 

may not – 

(1) Include enrollee’s personally identifiable information in the masked enrollee 

identification number; or 

 (2) Use the same masked enrollee identification number for different enrollees 

enrolled with the issuer. 

§153.730 Deadline for submission of data. 

A risk adjustment covered plan or a reinsurance-eligible plan in a State in which HHS is 

operating the risk adjustment or reinsurance program, as applicable, must submit data to 

be considered for risk adjustment payments and charges and reinsurance payments for the 

applicable benefit year by April 30 of the year following the applicable benefit year. 

PART 155—EXCHANGE ESTABLISHMENT STANDARDS AND OTHER 

RELATED STANDARDS UNDER THE AFFORDABLE CARE ACT 

26. The authority citation for part 155 continues to read as follows: 

Authority: Secs. 1301, 1302, 1303, 1304, 1311, 1312, 1313, 1321, 1322, 1331, 

1334, 1401, 1402, 1411, 1412, 1413. 

27. Section 155.20 is amended by— 

A. Revising the definitions of “Large employer” and “Small employer”. 
 340 

B. Adding definitions of “Federally-facilitated Exchange,” “Federally-facilitated 

SHOP,” and “Full-time employee” in alphabetical order. 

The revisions and additions read as follows: 

§155.20 Definitions. 

* * * * * 

Federally-facilitated Exchange means an Exchange established and operated 

within a State by the Secretary under section 1321(c)(1) of the Affordable Care Act.

Federally-facilitated SHOP means a Small Business Health Options Program 

established and operated within a State by the Secretary under section 1321(c)(1) of the 

Affordable Care Act.

Full-time employee has the meaning given in section 4980H (c)(4) of the Code 

effective for plan years beginning on or after January 1, 2016, except for operations of a 

Federally-facilitated SHOP for which it is effective for plan years beginning on or after 

October 1, 2013. 

* * * * * 

Large employer means, in connection with a group health plan with respect to a 

calendar year and a plan year, an employer who employed an average of at least 101 

employees on business days during the preceding calendar year and who employs at least 

1 employee on the first day of the plan year. In the case of plan years beginning before 

January 1, 2016, a State may elect to define larger employer by substituting “51 

employees” for “101 employees.” The number of employees shall be determined using 

the method set forth in section 4980H (c)(2)(E) of the Code, effective for plan years 

beginning on or after January 1, 2016, except for operations of a Federally-facilitated 
 341 

SHOP for which the method shall be used for plan years beginning on or after October 1, 

2013. 

* * * * * 

Small employer means, in connection with a group health plan with respect to a 

calendar year and a plan year, an employer who employed an average of at least 1 but not 

more than 100 employees on business days during the preceding calendar year and who 

employs at least 1 employee on the first day of the plan year. In the case of plan years 

beginning before January 1, 2016, a State may elect to define small employer by 

substituting “50 employees” for “100 employees.” The number of employees shall be 

determined using the method set forth in section 4980H (c)(2)(E) of the Code, effective 

for plan years beginning on or after January 1, 2016, except for operations of a Federallyfacilitated SHOP for which the method shall be used for plan years beginning on or after 

October 1, 2013. 

* * * * * 

28. Section 155.220 is amended by revising paragraph (b) to read as follows— 

§155.220 Ability to States to permit agents and brokers to assist qualified 

individuals, qualified employers, or qualified employees enrolling in QHPs. 

* * * * * 

(b)(1) Web site disclosure. The Exchange or SHOP may elect to provide 

information regarding licensed agents and brokers on its Web site for the convenience of 

consumers seeking insurance through that Exchange and may elect to limit the 

information to information regarding licensed agents and brokers who have completed 

any required Exchange or SHOP registration and training process. 
 342 

(2) A Federally-facilitated Exchange or SHOP will limit the information provided 

on its Web site regarding licensed agents and brokers to information regarding licensed 

agents and brokers who have completed registration and training. 

* * * * * 

 29. Section 155.305 is amended by revising paragraph (g)(3) to read as follows: 

§155.305 Eligibility standards. 

* * * * * 

(g) * * * 

 (3) Special rule for family policies. To the extent that an enrollment in a QHP in 

the individual market offered through an Exchange under a single policy covers two or 

more individuals who, if they were to enroll in separate individual policies would be 

eligible for different cost sharing, the Exchange must deem the individuals under such 

policy to be collectively eligible only for the category of eligibility last listed below for 

which all the individuals covered by the policy would be eligible: 

(i) Individuals not eligible for changes to cost sharing; 

(ii) Individuals described in §155.350(b) (the special cost-sharing rule for Indians 

regardless of income); 

(iii) Individuals described in paragraph (g)(2)(iii) of this section; 

(iv) Individuals described in paragraph (g)(2)(ii) of this section; 

(v) Individuals described in paragraph (g)(2)(i) of this section; and 

 (vi) Individuals described in §155.350(a) (the cost-sharing rule for Indians with 

household incomes under 300 percent of the FPL). 

* * * * * 

 30. Section 155.330 is amended by adding paragraph (g) to read as follows: 
 343 

§155.330 Eligibility redetermination during a benefit year. 

* * * * * 

 (g) Recalculation of advance payments of the premium tax credit and cost-sharing 

reductions. (1) When recalculating the amount of advance payments of the premium tax 

credit for which a tax filer is determined eligible as a result of an eligibility 

redetermination in accordance with this section, the Exchange must — 

(i) Account for any advance payments already made on behalf of the tax filer for 

the benefit year for which information is available to the Exchange, such that the 

recalculated advance payment amount is projected to result in total advance payments for 

the benefit year that correspond to the tax filer’s total projected premium tax credit for 

the benefit year, calculated in accordance with 26 CFR 1.36B-3; and 

(ii) Ensure that that the advance payment provided on the tax filer’s behalf is 

greater than or equal to zero and is calculated in accordance with 26 CFR 1.36B-3(d)(1). 

(2) When redetermining eligibility for cost-sharing reductions in accordance with 

this section, the Exchange must determine an individual eligible for the category of costsharing reductions that corresponds to his or her expected annual household income for 

the benefit year (subject to the special rule for family policies set forth in §155.305(g)(3). 

 31. Section 155.340 is amended by adding paragraphs (e) and (f) to read as 

follows: 

§155.340 Administration of advance payments of the premium tax credit and costsharing reductions. 

* * * * * 

 (e) Allocation of advance payments of the premium tax credit between policies. 

If advance payments of the premium tax credit are to be made on behalf of a tax filer (or 
 344 

two tax filers who are a married couple), and individuals in the tax filer’s tax household 

are enrolled in more than one QHP or stand-alone dental plan, then the advance payments 

must be allocated as follows: 

 (1) That portion of the advance payment of the premium tax credit that is less 

than or equal to the aggregate adjusted monthly premiums, as defined in 26 CFR §1.36B3(e), for the QHP policies properly allocated to EHB must be allocated among the QHP 

policies in proportion to the respective portions of the premiums for the policies properly 

allocated to EHB; and 

 (2) Any remaining advance payment of the premium tax credit must be allocated 

among the stand-alone dental policies (if any) in proportion to the respective portions of 

the adjusted monthly premiums for the stand-alone dental policies properly allocated to 

the pediatric dental essential health benefit. 

 (f) Reduction of enrollee’s portion of premium to account for advance payments 

of the premium tax credit. If an Exchange is facilitating the collection and payment of 

premiums to QHP issuers and stand-alone dental plans on behalf of enrollees under 

§155.240, and if a QHP issuer or stand-alone dental plan has been notified that it will 

receive an advance payment of the premium tax credit on behalf of an enrollee for whom 

the Exchange is facilitating such functions, the Exchange must – 

 (1) Reduce the portion of the premium for the policy collected from the 

individual for the applicable month(s) by the amount of the advance payment of the 

premium tax credit; and 

 (2) Include with each billing statement, as applicable, to or for the individual the 

amount of the advance payment of the premium tax credit for the applicable month(s) and 

the remaining premium owed for the policy. 
 345 

32. Section 155.705 is amended by revising paragraph (b)(3) and by adding new 

paragraphs (b)(10)(i), (b)(10)(ii), (b)(11)(i) and (b)(11)(ii) to read as follows: 

§155.705 Functions of a SHOP. 

* * * * * 

(b) * * * 

(3) (i) SHOP options with respect to employer choice requirements. With regard 

to QHPs offered through the SHOP, the SHOP may allow a qualified employer to make 

one or more QHPs available to qualified employees by a method other than the method 

described in paragraph (b)(2) of this section. 

(ii) A Federally-facilitated SHOP will only permit a qualified employer to make 

available to qualified employees all QHPs at the level of coverage selected by the 

employer as described in paragraph (b)(2) of this section. 

* * * * * 

(10) * * * 

(i) Subject to sections 2702 and 2703 of the Public Health Service Act, a 

Federally-facilitated SHOP must use a minimum participation rate of 70 percent, 

calculated as the number of qualified employees accepting coverage under the 

employer’s group health plan, divided by the number of qualified employees offered 

coverage, excluding from the calculation any employee who, at the time the employer 

submits the SHOP application, is enrolled in coverage through another employer’s group 

health plan or through a governmental plan such as Medicare, Medicaid, or TRICARE. 

(ii) Notwithstanding paragraph (b)(10)(i) of this section, a Federally-facilitated 

SHOP may utilize a different minimum participation rate in a State if there is evidence 

that a State law sets a minimum participation rate or that a higher or lower minimum 
 346 

participation rate is customarily used by the majority of QHP issuers in that State for 

products in the State’s small group market outside the SHOP. 

(11) * * * 

(i) To determine the employer and employee contributions, a SHOP may establish 

one or more standard methods that employers may use to define their contributions 

toward employee and dependent coverage. 

(ii) A Federally-facilitated SHOP must use the following method for employer 

contributions: 

(A) The employer will select a level of coverage as described in paragraph (b)(2) 

and (b)(3) of this section. 

(B) The employer will select a QHP within that level of coverage to serves as a 

reference plan on which contributions will be based. 

(C) The employer will define a percentage contribution toward premiums for 

employee-only coverage under the reference plan and, if dependent coverage is offered, a 

percentage contribution toward premiums for dependent coverage under the reference 

plan. 

(D) An employer may establish, to the extent allowed by Federal and State law, 

different percentages for different employee categories. 

(E) Either State law or the employer may require that a Federally-facilitated 

SHOP base contributions on a calculated composite premium for the reference plan for 

employees, for adult dependents, and for dependents below age 21. 

(F) The resulting contribution amounts for each employee’s coverage may then be 

applied toward the QHP selected by the employee. 

 33. Section 155.1030 is added to read as follows: 
 347 

§155.1030 QHP certification standards related to advance payments of the 

premium tax credit and cost-sharing reductions. 

 (a) Review of plan variations for cost-sharing reductions. (1) The Exchange must 

ensure that each issuer that offers or seeks to offer a health plan at any level of coverage 

in the individual market on the Exchange submits the required plan variations for the 

health plan as described in §156.420 of this subchapter. The Exchange must certify that 

the plan variations meet the requirements of §156.420. 

 (2) The Exchange must provide to HHS the actuarial values of each QHP and 

silver plan variation, calculated under §156.135 of this subchapter, in the manner and 

timeframe established by HHS. 

 (b) Information for administering advance payments of the premium tax credit 

and advance payments of cost-sharing reductions. (1) The Exchange must collect and 

review annually the rate allocation, the expected allowed claims cost allocation, and the 

actuarial memorandum that an issuer submits to the Exchange under §156.470 of this 

subchapter, to ensure that such allocations meet the standards set forth in §156.470(c) and 

(d). 

 (2) The Exchange must submit, in the manner and timeframe established by 

HHS, to HHS the approved allocations and actuarial memorandum underlying the 

approved allocations for each health plan at any level of coverage or stand-alone dental 

plan offered, or proposed to be offered in the individual market on the Exchange. 

 (3) The Exchange must collect annually any estimates and supporting 

documentation that a QHP issuer submits to receive advance payments of certain costsharing reductions, under §156.430(a) of this subchapter, and submit, in the manner and 
 348 

timeframe established by HHS, the estimates and supporting documentation to HHS for 

review. 

 (4) HHS may use the information provided to HHS by the Exchange under this 

section for the approval of the estimates that an issuer submits for advance payments of 

cost-sharing reductions, as described in §156.430 of this subchapter, and the oversight of 

the advance payments of cost-sharing reductions and premium tax credits programs. 

PART 156 – HEALTH INSURANCE ISSUER STANDARDS UNDER THE 

AFFORDABLE CARE ACT, INCLUDING STANDARDS RELATED TO 

EXCHANGES 

 34. The authority citation for part 156 is revised to read as follows: 

Authority: Title I of the Affordable Care Act, sections 1301–1304, 1311–1312, 

1321–1322, 1324, 1334, 1342–1343, 1401–1402, and 1412, Pub. L. 111-148, 124 Stat. 

119 (42 U.S.C. 18021–18024, 18031–18032, 18041–18042, 18044, 18054, 18061, 

18063, 18071, 18082, 26 U.S.C. 36B, and 31 U.S.C. 9701). 

35. Section 156.20 is amended by adding definitions for “Federally-facilitated 

SHOP” and “Issuer group” in alphabetical order to read as follows: 

§156.20 Definitions. 

* * * * * 

Federally-facilitated SHOP has the meaning given to the term in § 155.20 of this 

subchapter. 

* * * * * 

Issuer group means all entities treated under subsection (a) or (b) of section 52 of 

the Internal Revenue Code of 1986 as a member of the same controlled group of 
 349 

corporations as (or under common control with) a health insurance issuer, or issuers 

affiliated by the common use of a nationally licensed service mark. 

 * * * * * 

36. Section 156.50 is amended by revising paragraph (b) and by adding 

paragraph (c) to read as follows: 

§156.50 Financial support. 

 * * * * * 

(b) Requirement for State-based Exchange user fees. A participating issuer must 

remit user fee payments, or any other payments, charges, or fees, if assessed by a Statebased Exchange under §155.160 of this subchapter. 

(c) Requirement for Federally-facilitated Exchange user fee. To support the 

functions of Federally-facilitated Exchanges, a participating issuer offering a plan 

through a Federally-facilitated Exchange must remit a user fee to HHS each month, in the 

timeframe and manner established by HHS, equal to the product of the billable members 

enrolled through the Exchange in the plan offered by the issuer, and the monthly user fee 

rate specified in the annual HHS notice of benefit and payment parameters for the 

applicable benefit year. For purposes of this paragraph, billable members are defined 

under 45 CFR 147.102(c)(1) as each family member in a policy, with a limitation of three 

family members under age 21. 

 37. Section 156.200 is amended by adding paragraphs (f) and (g) to read as 

follows: 

§156.200 QHP issuer participation standards. 

* * * * * 
 350 

(f) Broker compensation in a Federally-facilitated Exchange. A QHP issuer must 

pay the same broker compensation for QHPs offered through a Federally-facilitated 

Exchange that the QHP issuer pays for similar health plans offered in the State outside a 

Federally-facilitated Exchange. 

(g) Certification standard specific to a Federally-facilitated Exchange. A 

Federally-facilitated Exchange may certify a QHP in the individual market of a 

Federally-facilitated Exchange only if the QHP issuer meets one of the conditions below: 

(1) The QHP issuer also offers through a Federally-facilitated SHOP serving that 

State at least one small group market QHP at the silver level of coverage and one at the 

gold level of coverage as described in section 1302(d) of the Affordable Care Act; 

(2) The QHP issuer does not offer small group market products in that State, but 

another issuer in the same issuer group offers through a Federally-facilitated SHOP 

serving that State at least one small group market QHP at the silver level of coverage and 

one at the gold level of coverage; or 

(3) Neither the issuer nor any other issuer in the same issuer group offers a small 

group market product in that State. 

 

38. Section 156.215 is added to read as follows: 

§156.215 Advance payments of the premium tax credit and cost-sharing reduction 

standards. 

 (a) Standards relative to advance payments of the premium tax credit and costsharing reductions. In order for a health plan to be certified as a QHP initially and to 

maintain certification to be offered in the individual market on the Exchange, the issuer 
 351 

must meet the requirements related to the administration of cost-sharing reductions and 

advance payments of the premium tax credit set forth in subpart E of this part. 

 (b) [Reserved] 

 

39. Section 156.285 is amended by adding paragraph (c)(7) to read as follows: 

§156.285 Additional standards specific to SHOP. 

* * * * * 

(c) * * * 

 (7) A QHP issuer must enroll a qualified employee only if the Exchange – 

(i) Notifies the QHP issuer that the employee is a qualified employee; and 

(ii) Transmits information to the QHP issuer as provided in § 155.400(a) of this 

subchapter. 

 * * * * * 

 40. Subpart E is added to read as follows: 

Subpart E – Health Insurance Issuer Responsibilities with Respect to Advance 

Payments of the Premium Tax Credit and Cost-Sharing Reductions 

Sec. 

156.400 Definitions. 

156.410 Cost-sharing reductions for enrollees. 

156.420 Plan variations. 

156.425 Changes in eligibility for cost-sharing reductions. 

156.430 Payment for cost-sharing reductions. 

156.440 Plans eligible for advance payments of the premium tax credit and cost-sharing 

reductions. 
 352 

156.460 Reduction of enrollee’s share of premium to account for advance payments of 

the premium tax credit. 

156.470 Allocation of rates and claims costs for advance payments of cost-sharing 

reductions and the premium tax credit. 

Subpart E – Health Insurance Issuer Responsibilities with Respect to Advance 

Payments of the Premium Tax Credit and Cost-Sharing Reductions 

§156.400 Definitions. 

 The following definitions apply to this subpart: 

Advance payments of the premium tax credit has the meaning given to the term in 

§155.20 of this subchapter. 

Affordable Care Act has the meaning given to the term in §155.20 of this 

subchapter. 

Annual limitation on cost sharing means the annual dollar limit on cost sharing 

required to be paid by an enrollee that is established by a particular qualified health plan. 

De minimis variation means the allowable variation in the AV of a health plan 

that does not result in a material difference in the true dollar value of the health plan as 

established in §156.140(c)(1). 

De minimis variation for a silver plan variation means a single percentage point. 

Federal poverty level or FPL has the meaning given to the term in §155.300(a) of 

this subchapter. 

Indian has the meaning given to the term in §155.300(a) of this subchapter. 

Limited cost sharing plan variation means, with respect to a QHP at any level of 

coverage, the variation of such QHP described in §156.420(b)(2). 
 353 

Maximum annual limitation on cost sharing means the highest annual dollar 

amount that qualified health plans (other than QHPs with cost-sharing reductions) may 

require in cost sharing for a particular year, as established for that year under §156.130. 

Most generous or more generous means, between a QHP (including a standard 

silver plan) or plan variation, and one or more other plan variations of the same QHP, the 

QHP or plan variation designed for the category of individuals last listed in 

§155.305(g)(3) of this subchapter. 

Plan variation means a zero cost sharing plan variation, a limited cost sharing plan 

variation, or a silver plan variation. 

Reduced maximum annual limitation on cost sharing means the dollar value of the 

maximum annual limitation on cost sharing for a silver plan variation that remains after 

applying the reduction, if any, in the maximum annual limitation on cost sharing required 

by section 1402 of the Affordable Care Act as announced in the annual HHS notice of 

benefit and payment parameters. 

Silver plan variation means, with respect to a standard silver plan, any of the 

variations of that standard silver plan described in §156.420(a). 

Stand-alone dental plan means a plan offered through an Exchange under 

§155.1065 of this subchapter.

Standard plan means a QHP offered at one of the four levels of coverage, defined 

at §156.140, with an annual limitation on cost sharing that conforms to the requirements 

of §156.130(a). A standard plan at the bronze, silver, gold, or platinum level of coverage 

is referred to as a standard bronze plan, a standard silver plan, a standard gold plan, and a 

standard platinum plan, respectively. 
 354 

Zero cost sharing plan variation means, with respect to a QHP at any level of 

coverage, the variation of such QHP described in §156.420(b)(1). 

§156.410 Cost-sharing reductions for enrollees. 

(a) General requirement. A QHP issuer must ensure that an individual eligible 

for cost-sharing reductions, as demonstrated by assignment to a particular plan variation, 

pay only the cost sharing required of an eligible individual for the applicable covered 

service under the plan variation. The cost-sharing reduction for which an individual is 

eligible must be applied when the cost sharing is collected. 

(b) Assignment to applicable plan variation. If an individual is determined to be 

eligible to enroll in a QHP in the individual market offered through an Exchange and 

elects to do so, the QHP issuer must assign the individual under enrollment and eligibility 

information submitted by the Exchange as follows – 

(1) If the individual is determined eligible by the Exchange for cost-sharing 

reductions under §155.305(g)(2)(i), (ii), or (iii) of this subchapter (subject to the special 

rule for family policies set forth in §155.305(g)(3) of this subchapter) and chooses to 

enroll in a silver health plan, the QHP issuer must assign the individual to the silver plan 

variation of the selected silver health plan described in §156.420(a)(1), (2), or (3), 

respectively. 

(2) If the individual is determined eligible by the Exchange for cost-sharing 

reductions for Indians with lower household income under §155.350(a) of this subchapter 

(subject to the special rule for family policies set forth in §155.305(g)(3) of this 

subchapter), and chooses to enroll in a QHP, the QHP issuer must assign the individual to 

the zero cost sharing plan variation of the selected QHP with all cost sharing eliminated 

described in §156.420(b)(1). 
 355 

(3) If the individual is determined by the Exchange to be eligible for cost-sharing 

reductions for Indians regardless of household income under §155.350(b) of this 

subchapter (subject to the special rule for family policies set forth in §155.305(g)(3) of 

this subchapter), and chooses to enroll in a QHP, the QHP issuer must assign the 

individual to the limited cost sharing plan variation of the selected QHP with the 

prohibition on cost sharing for benefits received from the Indian Health Service and 

certain other providers described in §156.420(b)(2). 

(4) If the individual is determined by the Exchange not to be eligible for costsharing reductions (including eligibility under the special rule for family policies set forth 

in §155.305(g)(3) of this subchapter), and chooses to enroll in a QHP, the QHP issuer 

must assign the individual to the selected QHP with no cost-sharing reductions. 

§156.420 Plan variations. 

(a) Submission of silver plan variations. For each of its silver health plans that an 

issuer seeks to offer or to continue to offer in the individual market on an Exchange, the 

issuer must submit annually to the Exchange for certification prior to each benefit year 

the standard silver plan and three variations of the standard silver plan, as follows – 

(1) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(i) of 

this subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum 

annual limitation on cost sharing specified in the annual HHS notice of benefit and 

payment parameters for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 

94 percent plus or minus the de minimis variation for a silver plan variation; 
 356 

(2) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(ii) 

of this subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum 

annual limitation on cost sharing specified in the annual HHS notice of benefit and 

payment parameters for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 

87 percent plus or minus the de minimis variation for a silver plan variation; and 

(3) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(iii) 

of this subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum 

annual limitation on cost sharing specified in the annual HHS notice of benefit and 

payment parameters for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 

73 percent plus or minus the de minimis variation for a silver plan variation (subject to 

§156.420(h)). 

(b) Submission of zero and limited cost sharing plan variations. For each of its 

health plans at any level of coverage that an issuer seeks QHP certification for the 

individual market on an Exchange, the issuer must submit to the Exchange for 

certification the health plan and two variations of the health plan, as follows – 

(1) For individuals eligible for cost-sharing reductions under §155.350(a) of this 

subchapter, a variation of the health plan with all cost sharing eliminated; and 

(2) For individuals eligible for cost-sharing reductions under §155.350(b) of this 

subchapter, a variation of the health plan with no cost sharing on any item or service that 

is an EHB furnished directly by the Indian Health Service, an Indian Tribe, Tribal 
 357 

Organization, or Urban Indian Organization (each as defined in 25 U.S.C. 1603), or 

through referral under contract health services. 

(c) Benefit and network equivalence in silver plan variations. A standard silver 

plan and each silver plan variation thereof must cover the same benefits and providers, 

and require the same out-of-pocket spending for benefits other than essential health 

benefits. Each silver plan variation is subject to all requirements applicable to the 

standard silver plan (except for the requirement that the plan have an AV as set forth in 

§156.140(b)(2)). 

(d) Benefit and network equivalence in zero and limited cost sharing plan 

variations. A QHP and each zero cost sharing plan variation or limited cost sharing plan 

variation thereof must cover the same benefits and providers, and require the same outof-pocket spending for benefits other than essential health benefits. A limited cost 

sharing plan variation must have the same cost sharing on items or services not described 

in paragraph (b)(2) of this section as the QHP with no cost-sharing reductions. Each zero 

cost sharing plan variation or limited cost sharing plan variation is subject to all 

requirements applicable to the QHP (except for the requirement that the plan have an AV 

as set forth in §156.140(b)). 

(e) Decreasing cost sharing in higher AV silver plan variations. The cost sharing 

required of enrollees under any silver plan variation of a standard silver plan for an 

essential health benefit from a provider (including a provider outside the plan’s network) 

may not exceed the corresponding cost sharing required in the standard silver plan or any 

other silver plan variation thereof with a lower AV. 

(f) Minimum AV differential between 70 percent and 73 percent silver plan 

variations. Notwithstanding any permitted de minimis variation in AV for a health plan 
 358 

or permitted de minimis variation for a silver plan variation, the AVs of a standard silver 

plan and the silver plan variation thereof described in paragraph (a)(3) of this section 

must differ by at least 2 percentage points. 

§156.425 Changes in eligibility for cost-sharing reductions. 

(a) Effective date of change in assignment. If the Exchange notifies a QHP issuer 

of a change in an enrollee’s eligibility for cost-sharing reductions (including a change in 

the individual’s eligibility under the special rule for family policies set forth in 

§155.305(g)(3) of this subchapter due to a change in eligibility of another individual on 

the same policy), then the QHP issuer must change the individual’s assignment such that 

the individual is assigned to the applicable standard plan or plan variation of the QHP as 

required under §156.410(b) as of the effective date of eligibility required by the 

Exchange. 

(b) Continuity of deductible and out-of-pocket amounts. In the case of a change 

in assignment to a different plan variation (or standard plan without cost-sharing 

reductions ) of the same QHP in the course of a benefit year under this section, the QHP 

issuer must ensure that any cost sharing paid by the applicable individual under previous 

plan variations (or standard plan without cost-sharing reductions) for that benefit year is 

taken into account in the new plan variation (or standard plan without cost-sharing 

reductions) for purposes of calculating cost sharing based on aggregate spending by the 

individual, such as for deductibles or for the annual limitations on cost sharing. 

§156.430 Payment for cost-sharing reductions. 

(a) Estimates of value of cost-sharing reductions for purposes of advance 

payments. (1) For each health plan that an issuer offers, or intends to offer, in the 

individual market on an Exchange as a QHP, the issuer must provide to the Exchange 
 359 

annually prior to the benefit year, for approval by HHS, an estimate of the dollar value of 

the cost-sharing reductions to be provided over the benefit year. The estimate must: 

(i) If the QHP is a silver health plan, identify separately the per member per 

month dollar value of the cost-sharing reductions to be provided under each silver plan 

variation identified in §156.420(a)(1), (2), and (3); 

(ii) Regardless of the level of coverage of the QHP, identify the per member per 

month dollar value of the cost-sharing reductions to be provided under the zero cost 

sharing plan variation; 

(iii) Be accompanied by supporting documentation validating the estimate; and 

(iv) Be developed using the methodology specified by HHS in the applicable 

annual HHS notice of benefit and payment parameters. 

(2) If an issuer seeks advance payments for the cost-sharing reductions to be 

provided under the limited cost sharing plan variation of a health plan it offers, or seeks 

to offer, in the individual market on the Exchange as a QHP at any level of coverage, the 

issuer must provide to the Exchange annually prior to the benefit year, for approval by 

HHS, an estimate of the per member per month dollar value of the cost-sharing 

reductions to be provided over the benefit year under such limited cost sharing plan 

variation. The estimate must: 

(i) Be accompanied by supporting documentation validating the estimate; and 

(ii) Be developed using the methodology specified by HHS in the annual HHS 

notice of benefit and payment parameters. 

(3) HHS’s approval of the estimate will be based on whether the estimate is made 

consistent with the methodology specified by HHS in the annual HHS notice of benefit 

and payment parameters. 
 360 

(b) Advance payments. A QHP issuer will receive periodic advance payments 

based on the approved advance estimates provided under paragraph (a) of this section and 

the actual enrollment in the applicable plan variation. 

(c) Submission of actual amounts. A QHP issuer must submit to HHS, in the 

manner and timeframe established by HHS, the following – 

(1) In the case of a benefit for which the QHP issuer compensates the applicable 

provider in whole or in part on a fee-for-service basis, the total allowed costs for essential 

health benefits charged for an enrollees’ policy for the benefit year, broken down by what 

the issuer paid, what the enrollee paid, and the amount reimbursed to the provider by the 

QHP issuer for the amount that the enrollee would have paid under the standard QHP 

without cost-sharing reductions; and 

(2) In the case of a benefit for which the QHP issuer compensates the applicable 

provider in any other manner, the total allowed costs for essential health benefits charged 

for an enrollees’ policy for the benefit year, broken down by what the issuer paid, what 

the enrollee paid, and what the enrollee would have paid under the standard QHP without 

cost-sharing reductions. 

(d) Reconciliation of amounts. HHS will perform periodic reconciliations of any 

advance payments of cost-sharing reductions provided to a QHP issuer under paragraph 

(b) of this section against – 

(1) The actual amount of cost-sharing reductions provided to enrollees and 

reimbursed to providers by the QHP issuer for benefits for which the QHP issuer 

compensates the applicable providers in whole or in part on a fee-for-service basis; and 
 361 

(2) The actual amount of cost-sharing reductions provided to enrollees for 

benefits for which the QHP issuer compensates the applicable providers in any other 

manner. 

(e) Payment of discrepancies. If the actual amounts of cost-sharing reductions 

described in paragraphs (d)(1) and (2) of this section are – 

(1) More than the amount of advance payments provided and the QHP issuer has 

timely provided the actual amounts of cost-sharing reductions as required under 

paragraph (c) of this section, HHS will reimburse the QHP issuer for the difference; and 

(2) Less than the amount of advance payments provided, the QHP issuer must 

repay the difference to HHS in the manner and timeframe specified by HHS. 

(f) Cost-sharing reductions during special periods. (1) Notwithstanding the 

reconciliation process described in paragraphs (c) through (e) of this section, a QHP 

issuer will not be eligible for reimbursement of any cost-sharing reductions provided 

following a termination of coverage effective date with respect to a grace period as 

described in §155.430(b)(2)(ii)(A) or (B) of this subchapter. However, the QHP issuer 

will be eligible for reimbursement of cost-sharing reductions provided prior to the 

termination of coverage effective date. Advance payments of cost-sharing reductions 

will be paid to a QHP issuer prior to a determination of termination (including during any 

grace period, but the QHP issuer will be required to repay any advance payments made 

with respect to any month after any termination of coverage effective date during a grace 

period). 

(2) Notwithstanding the reconciliation process described in paragraphs (c) 

through (e) of this section, if the termination of coverage effective date is prior to the 

determination of termination other than in the circumstances described in paragraph (f)(1) 
 362 

of this section, and if the termination (or the late determination thereof) is the fault of the 

QHP issuer, as reasonably determined by the Exchange, the QHP issuer will not be 

eligible for advance payments and reimbursement for cost-sharing reductions provided 

during the period following the termination of coverage effective date and prior to the 

determination of the termination. 

(3) Subject to the requirements of the reconciliation process described in 

paragraphs (c) through (e) of this section, if the termination of coverage effective date is 

prior to the determination of termination other than in the circumstances described in 

paragraph (f)(1) of this section, and if the reason for the termination (or late 

determination thereof) is not the fault of the QHP issuer, as reasonably determined by the 

Exchange, the QHP issuer will be eligible for advance payments and reimbursement for 

cost-sharing reductions provided during such period. 

(4) Subject to the requirements of the reconciliation process described in 

paragraphs (c) through (e) of this section, a QHP issuer will be eligible for advance 

payments and reimbursement for cost-sharing reductions provided during any period of 

coverage pending resolution of inconsistencies in information required to determine 

eligibility for enrollment under §155.315(f) of this subchapter. 

§156.440 Plans eligible for advance payments of the premium tax credit and costsharing reductions. 

 Except as noted in paragraph (a) through (c) of this section, the provisions of this 

subpart apply to qualified health plans offered in the individual market on the Exchange. 

(a) Catastrophic plans. The provisions of this subpart do not apply to catastrophic 

plans as described in §156.155. 
 363 

(b) Stand-alone dental plans. The provisions of this subpart, to the extent relating 

to cost-sharing reductions, do not apply to stand-alone dental plans. The provisions of 

this subpart, to the extent relating to advance payments of the premium tax credit, apply 

to stand-alone dental plans. 

 (c) Child-only plans. The provisions of this subpart apply to child-only QHPs, as 

described in §156.200(c)(2). 

§156.460 Reduction of enrollee’s share of premium to account for advance payments 

of the premium tax credit. 

 (a) Reduction of enrollee’s share of premium to account for advance payments of 

the premium tax credit. A QHP issuer that receives notice from the Exchange that an 

individual enrolled in the issuer’s QHP is eligible for an advance payment of the 

premium tax credit must – 

 (1) Reduce the portion of the premium charged to or for the individual for the 

applicable month(s) by the amount of the advance payment of the premium tax credit; 

 (2) Notify the Exchange of the reduction in the portion of the premium charged to 

the individual in accordance with §156.265(g); and 

 (3) Include with each billing statement, as applicable, to or for the individual the 

amount of the advance payment of the premium tax credit for the applicable month(s), 

and the remaining premium owed. 

 (b) Delays in payment. A QHP issuer may not refuse to commence coverage 

under a policy or terminate coverage on account of any delay in payment of an advance 

payment of the premium tax credit on behalf of an enrollee if the QHP issuer has been 

notified by the Exchange under §155.340(a) of this subchapter that the QHP issuer will 

receive such advance payment. 
 364 

§156.470 Allocation of rates and claims costs for advance payments of cost-sharing 

reductions and the premium tax credit. 

(a) Allocation to additional health benefits for QHPs. An issuer must provide to 

the Exchange annually for approval, in the manner and timeframe established by HHS, 

for each health plan at any level of coverage offered, or proposed to be offered in the 

individual market on an Exchange, an allocation of the rate and the expected allowed 

claims costs for the plan, in each case, to: 

(1) EHB, other than services described in §156.280(d)(1), and 

(2) Any other services or benefits offered by the health plan not described 

paragraph (a)(1) of this section. 

(b) Allocation to additional health benefits for stand-alone dental plans. An issuer 

must provide to the Exchange annually for approval, in the manner and timeframe 

established by HHS, for each stand-alone dental plan offered, or proposed to be offered, 

in the individual market on the Exchange, a dollar allocation of the expected premium for 

the plan, to: 

(1) The pediatric dental essential health benefit, and 

(2) Any benefits offered by the stand-alone dental plan that are not the pediatric 

dental essential health benefit. 

(c) Allocation standards for QHPs. The issuer must ensure that the allocation 

described in paragraph (a) of this section— 

(1) Is performed by a member of the American Academy of Actuaries in 

accordance with generally accepted actuarial principles and methodologies; 

(2) Reasonably reflects the allocation of the expected allowed claims costs 

attributable to EHB (excluding those services described in §156.280(d)(1)); 
 365 

(3) Is consistent with the allocation applicable to State-required benefits to be 

submitted by the issuer under §155.170(c) of this subchapter, and the allocation 

requirements described in §156.280(e)(4) for certain services; and 

(4) Is calculated under the fair health insurance premium standards described at 

45 CFR 147.102, the single risk pool standards described at 45 CFR 156.80, and the same 

premium rate standards described at 45 CFR 156.255. 

(d) Allocation standards for stand-alone dental plans. The issuer must ensure that 

the dollar allocation described in paragraph (b) of this section— 

(1) Is performed by a member of the American Academy of Actuaries in 

accordance with generally accepted actuarial principles and methodologies; 

(2) Is consistent with the allocation applicable to State-required benefits to be 

submitted by the issuer under §155.170(c) of this subchapter; 

(3) Is calculated under the fair health insurance premium standards described at 

45 CFR 147.102, except for the provision related to age set forth at §147.102(a)(1)(ii); 

the single risk pool standards described at 45 CFR 156.80; and the same premium rate 

standards described at 45 CFR 156.255 (in each case subject to paragraph (d)(4) of this 

section); and 

(4) Is calculated so that the dollar amount of the premium allocable to the 

pediatric dental essential health benefit for an individual under the age of 19 years does 

not vary, and the dollar amount of the premium allocable to the pediatric dental essential 

health benefit for an individual aged 19 years or more is equal to zero. 

(e) Disclosure of attribution and allocation methods. An issuer of a health plan at 

any level of coverage or a stand-alone dental plan offered, or proposed to be offered in 

the individual market on the Exchange must submit to the Exchange annually for 
 366 

approval, an actuarial memorandum, in the manner and timeframe specified by HHS, 

with a detailed description of the methods and specific bases used to perform the 

allocations set forth in paragraphs (a) and (b), and demonstrating that the allocations meet 

the standards set forth in paragraphs (c) and (d) of this section, respectively. 

PART 157—EMPLOYER INTERACTIONS WITH EXCHANGES AND SHOP 

PARTICIPATION 

 41. The authority citation for part 157 continues to read as follows: 

Authority: Title I of the Affordable Care Act, sections 1311, 1312, 1321, 1411, 

1412, Pub. L. 111-148, 124 Stat. 199. 

42. Section 157.20 is amended by adding the definitions for “Federally-facilitated 

SHOP,” “Full-time employee,” and “Large employer” in alphabetical order to read as 

follows: 

§157.20 Definitions.

* * * * * 

Federally-facilitated SHOP has the meaning given to the term in §155.20 of this 

subchapter. 

Full-time employee has the meaning given to the term in §155.20 of this 

subchapter. 

Large employer has the meaning given to the term in §155.20 of this subchapter. 

* * * * * 

PART 158—ISSUER USE OF PREMIUM REVENUE: REPORTING AND 

REBATE REQUIREMENTS 

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

Authority: Section 2718 of the Public Health Service Act (42 U.S.C. 300gg-18), 
 367 

as amended. 

44. Section 158.110 is amended by revising paragraph (b) to read as follows: 

§158.110 Reporting requirements related to premiums and expenditures. 

* * * * * 

(b) Timing and form of report. The report for each of the 2011, 2012, and 2013 

MLR reporting years must be submitted to the Secretary by June 1 of the year following 

the end of an MLR reporting year, on a form and in the manner prescribed by the 

Secretary. Beginning with the 2014 MLR reporting year, the report for each MLR 

reporting year must be submitted to the Secretary by July 31 of the year following the end 

of an MLR reporting year, on a form and in the manner prescribed by the Secretary. 

* * * * * 

45. Section 158.130 is amended by adding paragraph (b)(5) to read as follows: 

§158.130 Premium revenue. 

* * * * * 

(b) * * * 

(5) Account for the net payments or receipts related to risk adjustment, risk 

corridors, and reinsurance programs under sections 1341, 1342, and 1343 of the Patient 

Protection and Affordable Care Act, 42 U.S.C. 18061, 18062, 18063. 

46. Section 158.140 is amended by adding paragraph (b)(4)(ii) and revising 

paragraph (b)(5)(i) to read as follows: 

§158.140 Requirements for clinical services provided to enrollees. 

* * * * * 

(b) * * * 
 368 

(4) * * * 

(ii) Net payments or receipts related to risk adjustment, risk corridors, and 

reinsurance programs under sections 1341, 1342, and 1343 of the Patient Protection and 

Affordable Care Act, 42 U.S.C. 18061, 18062, 18063. 

(5) * * * 

(i) Affiliated issuers that offer group coverage at a blended rate may choose 

whether to make an adjustment to each affiliate’s incurred claims and activities to 

improve health care quality, to reflect the experience of the issuer with respect to the 

employer as a whole, according to an objective formula that must be defined by the issuer 

prior to January 1 of the MLR reporting year, so as to result in each affiliate having the 

same ratio of incurred claims to earned premium for that employer group for the MLR 

reporting year as the ratio of incurred claims to earned premium calculated for the 

employer group in the aggregate. 

* * * * * 

47. Section 158.162 is amended by revising paragraph (b)(1)(vii) and adding 

paragraph (b)(1)(viii) to read as follows: 

§158.162 Reporting of Federal and State taxes. 

* * * * * 

(b) * * * 

(1) * * * 

(vii) Payments made by a Federal income tax exempt issuer for community 

benefit expenditures as defined in paragraph (c) of this section, limited to the highest of 

either: 

(A) Three percent of earned premium; or 
 369 

(B) The highest premium tax rate in the State for which the report is being 

submitted, multiplied by the issuer’s earned premium in the applicable State market. 

(viii) In lieu of reporting amounts described in paragraph (b)(1)(vi) of this section, 

an issuer that is not exempt from Federal income tax may choose to report payment for 

community benefit expenditures as described in paragraph (c) of this section, limited to 

the highest premium tax rate in the State for which the report is being submitted 

multiplied by the issuer’s earned premium in the applicable State market. 

* * * * * 

 48. Section 158.221 is amended by revising paragraph (c) to read as follows: 

§158.221 Formula for calculating an issuer’s medical loss ratio. 

* * * * * 

(c) Denominator. The denominator of an issuer’s MLR must equal the issuer’s 

premium revenue, as defined in § 158.130, excluding the issuer’s Federal and State taxes 

and licensing and regulatory fees, described in §§ 158.161(a) and 158.162(a)(1) and 

(b)(1), and after accounting for payments or receipts for risk adjustment, risk corridors, 

and reinsurance, described in § 158.130(b)(5). 

49. Section 158.232 is amended by revising paragraph (c)(1)(i) and paragraph (d) 

introductory text to read as follows: 

§158.232 Calculating the credibility adjustment. 

* * * * * 

(c) * * * 

(1) * * * 

(i) The per person deductible for a policy that covers a subscriber and the 

subscriber’s dependents shall be the lesser of: the deductible applicable to each of the 
 370 

individual family members; or the overall family deductible for the subscriber and 

subscriber’s family divided by two (regardless of the total number of individuals covered 

through the subscriber). 

* * * * * 

(d) No credibility adjustment. Beginning with the 2013 MLR reporting year, the 

credibility adjustment for and MLR based on partially credible experience is zero if both 

of the following conditions are met: 

* * * * * 

50. Section 158.240 is amended by revising paragraphs (c) and (d) to read as 

follows: 

§158.240 Rebating premium if the applicable medical loss ratio standard is not met. 

* * * * * 

(c) Amount of rebate to each enrollee. (1) For each MLR reporting year, an issuer 

must rebate to the enrollee the total amount of premium revenue, as defined in §158.130 

of this part, received by the issuer from the enrollee, after subtracting Federal and State 

taxes and licensing and regulatory fees as provided in §§158.161(a) and 158.162(a)(1) 

and (b)(1), and after accounting for payments or receipts for risk adjustment, risk 

corridors, and reinsurance as provided in § 158.130(b)(5), multiplied by the difference 

between the MLR required by §158.210 or §158.211, and the issuer’s MLR as calculated 

under §158.221.

(2) For example, an issuer must rebate a pro rata portion of premium revenue if it 

does not meet an 80 percent MLR for the individual market in a State that has not set a 

higher MLR. If an issuer has a 75 percent MLR for the coverage it offers in the 

individual market in a State that has not set a higher MLR, the issuer must rebate 5 
 371 

percent of the premium paid by or on behalf of the enrollee for the MLR reporting year 

after subtracting taxes and fees and accounting for payments or receipts related to 

reinsurance, risk adjustment and risk corridors. In this example, an enrollee may have 

paid $2,000 in premiums for the MLR reporting year. If the issuer received net payments 

related to reinsurance, risk adjustment and risk corridors of $200, the gross earned 

premium would be $2,200. If the Federal and State taxes and licensing and regulatory 

fees that may be excluded from premium revenue as described in §§158.161(a), 

158.161(a)(1), and 158.162(b)(1) are $150 and the net payments related to reinsurance, 

risk adjustment and risk corridors that must be accounted for in premium revenue as 

described in §§ 158.130(b)(5), 158.221 and 158.240 are $200, then the issuer would 

subtract $150 and $200 from gross premium revenue of $2,200, for a base of $1,850 in 

premium. The enrollee would be entitled to a rebate of 5 percent of $1,850, or $92.50. 

(d) Timing of rebate. For each of the 2011, 2012, and 2013 MLR reporting years, 

an issuer must provide any rebate owing to an enrollee no later than August 1 following 

the end of the MLR reporting year. Beginning with the 2014 MLR reporting year, an 

issuer must provide any rebate owing to an enrollee no later than September 30 following 

the end of the MLR reporting year. 

* * * * * 

 51. Section 158.241 is amended by revising paragraph (a)(2) to read as follows: 

§158.241 Form of rebate. 

(a) * * * 

 (2) For each of the 2011, 2012, and 2013 MLR reporting years, any rebate 

provided in the form of a premium credit must be provided by applying the full amount 

due to the first month’s premium that is due on or after August 1 following the MLR 
 372 

reporting year. If the amount of the rebate exceeds the premium due for August, then any 

overage shall be applied to succeeding premium payments until the full amount of the 

rebate has been credited. Beginning with the 2014 MLR reporting year, any rebate 

provided in the form of a premium credit must be provided by applying the full amount 

due to the first month’s premium that is due on or after September 30 following the MLR 

reporting year. If the amount of the rebate exceeds the premium due for October, then 

any overage shall be applied to succeeding premium payments until the full amount of 

the rebate has been credited. 

* * * * * 
CMS-9964-P 

Dated: November 28, 2012.

 _____________________________ 

Marilyn Tavenner, 

 Acting Administrator, 

 Centers for Medicare & Medicaid Services. 

Approved: November 28, 2012.

 ___________________________________ 

Kathleen Sebelius, 

 Secretary, 

 Department of Health and Human Services. 

BILLING CODE 4120-01-P 

[FR Doc. 2012-29184 Filed 11/30/2012 at 11:15 am; Publication Date: 12/07/2012]