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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 f our 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 th e "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 comme nts 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 deli ver (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 Hube rt 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 fo r persons wishing to re tain 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 schedul e your arrival with one of our staff members. Comments erroneously mailed to the addr esses indicated as appropriate for hand or courier delivery may be delayed an d received after the comment period.4 For information on viewing public co mments, 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 viewi ng by the public, including any personally identifiable or confidential business informa tion 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 av ailable for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Cent ers 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 appointm ent 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 Entitie s and Excluded Entities 3. National Contribution Rate 4. Calculation and Collecti on of Reinsurance Contributions 5. Eligibility for Reinsurance Paymen ts Under Health Insurance Market Rules6 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 Standard s Relating to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
4. Health Insurance Issuer Responsib ilities with Respect to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions F. Provisions on User Fees for a Fe derally-facilitated Exchange (FFE) G. Distributed Data Collection for th e HHS-Operated Risk Adjustment and Reinsurance Programs 1. Background 2. Issuer Data Collection and Submission Requirements 3. Risk Adjustment Data Requirements7 4. Reinsurance Data Requirements H. Small Business Hea lth Options Program I. Medical Loss Ratio Requiremen ts 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 Ac t of 2010 (which is th e collective term for the Patient Protection and Affordable Care Act (Pub. L. 111–148) and the Health Care and Educa tion Reconciliation Act (Pub. L. 111–152)) APTC Advance payment of the premium tax credit8

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 Portabilityand 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 19869 I. Executive Summary A. Purpose Beginning in 2014, individuals and small bus inesses will be able to purchase private health insurance through competitive marketplaces, called A ffordable Insurance Exchanges, or “Exchanges.” Individuals who enroll in h ealth plans through Exchanges may receive premium tax credits to make health insurance more affordable, and financial assistance to cover cost sharing for healthcare services. The premium tax credits, combined with the new insurance reforms, will significantly increase the number of individuals with health insu rance coverage, particularly in the individual market. Premium stabilization programs – risk adjust ment, reinsurance, and risk corridors – protect against adverse selection in the ne wly enrolled population. These programs, in combination with the medical loss rati o program and market reforms extending guaranteed availability (also known as guarant eed issue) protections, prohibiting the use of factors such as health status, medical hi story, 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 pr ograms, and a permanent risk adjustment program to provide payments to health insurance issuers that cover higher-risk populations and to more evenly spread th e 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 gr eater payment stability as insurance market reforms are implemented. The reinsurance program will reduce the uncertainty of insurance risk in the individua l market by partially offsetting risk of highcost enrollees. The risk co rridors program, which is a Fede rally 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 pr ogram is intended to provide increased payments to health in surance issuers that attract higher-risk populations, such as those with chronic condi tions, and reduce the incentives for issuers to avoid higher-risk enrollees. Under this program, funds are tran sferred from issuers with lower-risk enrollees to issuers with higher-risk enrollees. In the Premium Stabilization Rule (7 7 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 pr emium tax credit and for cost-sharing reductions. These programs a ssist 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 he lp 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 Pr otection 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 C ontinuing 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 ta xpayer’s out-of-pocket premium cost.11

Under section 1411 of the Affordable Care Act, an Exchange makes an advance determination of tax credit e ligibility for individuals enro lling in coverage through the Exchange and seeking financial assistance. Using information available at the time of enrollment, the Exchange determines: (1) wh ether 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 se ction 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-poc ket spending associated with health care services provided through QHP coverage. Th e law directs issuers to reduce cost sharing for essential health benefits for individua ls with household incomes between 100 and 400 percent of the Federal Pove rty Level (FPL) who are enro lled in a silver level QHP through an individual market Ex change 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 per cent of the FPL who ar e enrolled in a QHP of any “metal” level (that is, bronze, silv er, gold, or platinum ) through the individual market in the Exchange, and prohibits issu ers of QHPs from requi ring cost sharing for Indians, regardless of household income, for items or services furnished directly by the Indian Health Service, an Indian Tribe, a Tribal Orga nization, or an Urban Indian Organization, or through referral under contracted health services.12 HHS published a bulletin 1 outlining an intended regulatory approach to calculations of actuarial valu e and implementation of cost-s haring reductions on February 24, 2012 (the “AV/CSR Bulletin”). Specifical ly, HHS outlined an intended regulatory approach for the calculation of AV, de minimis variation standards, silver plan variations for individuals eligible for co st-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 re ductions. In this proposed rule, we establish standards governing the admi nistration 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 Excha nge 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 auth ority, under this secti on of the statute, to collect and spend such user fees. In addi tion, 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 Fede ral 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 establ ish a user fee for issu ers 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 c hooses to operate an Exchange to establish a Small Business Health Options Program (SHOP ) that provides healthinsurance options

1 Available at: http://cciio.cms.gov/resources /files/Files2/02242012/A v-csr-bulletin.pdf.13 for small businesses. The Exchange Establ ishment Rule sets forth standards for the administration of SHOP Exchanges. In th is 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, entitl ed “Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements unde r 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, re insurance, and risk co rridors, and to change the timing of the annual MLR report and distri bution of rebates requi red of issuers to allow for accounting of the premium stabiliz ation programs. This proposed rule also proposes to amend the regulations to revi se the treatment of community benefit expenditures in the MLR calculation for i ssuers exempt from Federal income tax. B. Summary of the Major Provisions This proposed rule fills in the fr amework 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-faci litated Exchanges. Finally, it proposes a number of amendments rela ting to the SHOP and the me dical loss ratio program.14 Risk Adjustment : The goal of the Affordable Care Act risk adjustment program is to mitigate the impacts of possible advers e selection and stabilize the premiums in the individual and small group markets as a nd after insurance market reforms are implemented. In this proposed rule, we pr opose a number of standards and parameters for implementing the risk adjustment program, including:

• Provisions governing a State opera ting a risk adjustment program;

• The risk adjustment methodology HHS will use when operating risk adjustment on behalf of a State, incl uding the risk adjustment model, the payments and charges methodology, and th e 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 direct s 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 implem enting the reinsurance program, including:

• Provisions excluding certai n types of health coverage from reinsurance contributions;

• The national per capita contri bution rate to be paid by health insurance issuers and self-insured group health plans along withthe 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 collec tion 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 lo sses resulting from in accurate rate setting from 2014 to 2016. In this proposed rule, we propose to permit a QHP to include profits and taxes within its risk corrido rs calculations. We also pr opose an annual schedule for the program and standard s for data submissions. Advance Payments of the Premium Tax Credit : Sections 1401 and 1411 of the Affordable Care Act provide for advance paym ents 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 pr emiums 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 bene fits for low- and moderateincome enrollees in qualified silver level hea lth plans in individual market Exchanges. It also provides for reductions in cost shari ng for Indians enrolled in QHPs at any metal level. In this proposed rule, we propos e a number of standards governing the costsharing reduction program, including:

• Provisions governing the design of va riations of QHPs with cost-sharing structures for enrollees of various income levels and for Indians;

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

• Provisions governing the assignment and reassignment of enrollees to plan variations;

• Provisions governing issuer submissi ons of estimates of cost-sharing reductions, which are paid in advance to issuers by the Federal government; and16

• Provisions governing reconciliation of th ese advance estimates against actual cost-sharing reductions provided.
User Fees : This proposed rule proposes a per bi llable member user fee applicable to issuers participating in a Federally-faci litated 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 propos ed rule, we propose several standards and processes for implementing S HOP Exchanges, including:

• Standards governing the definitions a nd counting methods used to determine whether an employer is a small or large employer;

• A safe harbor method of employer c ontribution in a Fe derally-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 sa me as those in the outside market; and

• Allowing Exchanges and SHOPs to sele ctively 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 re bate a portion of premiums if their MLRs fall short of the applicable MLR st andard for the reporting year. MLR is calculated as a ratio of claims plus qualityimprovement 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, co mbined with other provisions in the Affordable Care Act, will improve the indi vidual insurance market by making insurance more affordable and accessible to millions of Americans who currently do not have affordable options available to them. The s hortcomings of the indi vidual market today have been widely documented. 2
These limitations of the i ndividual market are made evident by how few people actually purchase coverage in the individua l 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 va lue, and how difficult it is for many people to access coverage. The provisions of this proposed rule, co mbined with other provisions in the Affordable Care Act, will improve the func tioning of both the individual and the small group markets while stabilizing premiums. The transitional rein surance program will serve to stabilize premiums in the indivi dual market. Reinsurance will attenuate individual market rate increases that mightotherwise 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 Commonwea lth 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, potenti ally including those curr ently in State highrisk pools. In 2014, it is anticipated that re insurance payments will result in premium decreases in the individual market of betw een 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 w ill permit issuers to lower rates by not adding a risk premium to account for perc eived uncertainties in the 2014 through 2016 markets. The risk adjustment program protects against adverse selection by allowing issuers to set premiums according to the aver age 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 pr ice 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 i ndividual and small group plans. Provisions addressing the advance payments of the premium tax credit and costsharing reductions will help provide for premium tax credits a nd the reduction or elimination of cost sharing for certain indi viduals 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 obtaining19

needed health care. 5 The availability of premium ta x 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 Exchange s 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 busi nesses 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, si nce it will reflect issuers’ claims-related expenditures, after adjusting for th e 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: Result s from the RAND Health Insurance Experiment. Santa Monica, CA: RAND Corporation, 1984. Available a t: 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 Af fordable Care Act: How They Will Help Millions Of Uninsured And Underinsured Americans Gain Affordable, Comprehensive Health Insurance, The Commonwealth Fund, October 27, 2011; Fredric Blav in 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 cost s to comply with the provisions of the final rule, including administrative and hardwa re costs. However, issuer revenues and expenditures are also expected to increase substantially as a result of the expected increase in the number of people purchas ing 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 thes e costs and benefits to issuers, and the potential effect of the provisions of th is rule on premium rates and financial performance. In addition, States may incur administrativ e 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 bus inesses will be able to purchase private health insurance through State-based competitive marketplaces called Affordable Insurance Exchanges (Exchanges). The Depa rtment of Health and Human Services (HHS), the Department of Labor, and the De partment of the Treasury are working in close coordination to release guidance related to Exchange s in several phases. The Patient Protection and Affordable Care Ac t (Pub. L. 111-148) was enacted on March 23, 2010. The Health Care and Education Rec onciliation 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 insuranc e premium stabilization policies in the Affordable Care Act. A final rule imp lementing 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 pub lished a bulletin on May 1, 2012, outlining our intended approach to implementing risk ad justment when we are operating risk adjustment on behalf of a State (Risk Ad justment Bulletin). On May 7-8, 2012, we hosted a public meeting in which we discusse d that approach (Ris k 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 (Reins urance Bulletin). The Depa rtment 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 intende d regulatory approach to calculating actuarial value and implementing cost-sha ring reductions on Febr uary 24, 2012 (AV/CSR Bulletin). In that bulletin, we outlined an intended regulatory approach for the design of plan variations for individuals eligible fo r 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 Credit22 A proposed regulation relati ng 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 Init ial 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 implem ent components of the Exchange. A proposed regulation regarding Exchange functio ns 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 bene fits and actuarial value was published in the Federal Register on November 26, 2012 (77 FR 70644) (proposed EHB/AV Rule). G. Medical Loss Ratio23 HHS published a request for comment on PHS Act section 2718 in the Federal Register on April 14, 2010 (75 FR 19297), and publis hed 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 da y 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 w ith 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 St ates 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 se t forth in the applicable HHS notice of benefit and payment parameters. We recogni ze that, for this initial benefit year (that is, for benefit year 2014), it may be difficu lt 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 publis h 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 wi thin 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 payment24 parameters for the applicable benefit y ear; (2) forgo the coll ection 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 pub lished 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 ri sk, non-grandfathered plans to higher risk, non-grandfathered plans in the individual and small group market s, inside and outside the Exchanges. In subparts D and G of the Pr emium Stabilization Rule, we established standards for the administrati on of the risk adjustment program. A State approved or conditionally approved by the Secretary to ope rate 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 met hodology. States operating their own risk adjustment program may use a risk adju stment 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 standard s for States and issuer s with respect to the collection and valid ation 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 to25 support HHS operation of the risk adjustment program. This fee is a per-capita fee applied to issuers of risk ad justment covered plans in Stat es 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 ri sk adjustment program on be half 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 a pply 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 adjust ment 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 de scribe the data validation process we propose to use when operating a risk adjustment program on behalf of a State. We propose that issuers cont ract with independent audi tors to conduct an initial validation audit of risk adjustment data, a nd that we conduct a sec ond 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 adjustme nt. In §153.310(a), we specified th at a State that elects to operate an Exchange is eligible to estab lish 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. Unde r our authority in section 1321(a) of the Affordable Care Act on standards for operati on 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 beha lf 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), en titled “State responsibilities for risk adjustment,” set forth a State’s responsibiliti es with regard to risk adjustment program operations. With this change, we also propos e to redesignate paragr aphs (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 th at if a State is operating a risk adjustment program for a benefit year, the St ate administer the program through an entity that meets certain standards. These standard s would ensure the entity has the capacity to operate the risk adjustment program throughout th e benefit year, and is able to administer the risk adjustment methodology. We will work with States to ensu re 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 enti ty must be operationally ready to administer the applicable Fe derally certified risk adjust ment methodology and process the resulting payments and charges. We believe th at it is important for a State to demonstrate that its risk adjustment entity has the capaci ty to implement the applicable Federally certified risk adjustment methodology so th at issuers may have confidence in the program, and so that the program can effectiv ely 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 calcu late issuers’ payments and ch arges in accordance with the applicable Federally certified risk adjustment methodol ogy; 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 pr ogram operations, and has the resources to administer the applicable risk adjustment methodology in its entirety, including the ability to make risk adjustme nt 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 progr am. To meet this standard, a State would demonstrate that the entity has on staff, or ha s contracted with, individuals or firms with experience relevant to the implementation of a risk adjustment methodology. This standard is intended to ensure that the enti ty has the resources and staffing necessary to successfully operate the ri sk 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 the28 applicable Federally ce rtified risk adjustment methodology. In particular, the State would ensure that the entity complies with the pr ivacy 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 propos e 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 St ate’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 ope rate risk adjustment in the State, under the HHS-developed methodology, if the Stat e does not receive ap proval prior to the March deadline for publication of the State notice of benefit and payment parameters. Thus, if a State wishes to operate risk adju stment for benefit year 2015, it would have to be approved prior to publication of the State notice of benef it and payment parameters for benefit year 2015 (publication of which mu st 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 pr ogram until they are approved or conditionally approved to operate an Exchange for the 2014 benefit year. In addition, the set of29 Federally certified risk adju stment methodologies and the St ate-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 th ey 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 benef it year 2015 and subsequent years. For benefit year 2015 and subsequent be nefit years, the proposed approval process would continue to involve ongoing cons ultations with States and their selected risk adjustment entities. In the course of these consultations, we would provide States and proposed entities with our ongoing vi ews on whether they are adequately demonstrating the capacity of th e entity to operate all risk adjustment functions. If the State does not produce the requested evidence or make the request ed changes in the specified timeframe, HHS may determine that th e relevant criteria were not met, and may decline to approve that State’s risk adjust ment 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 risk30 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 po licy regarding user fees, and specifies that a user charge will be assessed against each identifiable recipien t 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 ad justment 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 cost s for administering risk adjustment programs on behalf of States by examining HH S’s contract costs of operating the risk adjustment program. These contracts cove r development of the model and methodology, collections, payments, account management, da ta collection, program integrity and audit functions, operational and fraud analytics, stakeholder trai ning, 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 na tional 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 projec ted total costs for administering the risk adjustment programs on behalf of States by th e expected number of enrollees in risk adjustment covered plans in HHS-ope rated risk adjustment programs. An issuer of a risk adjustment covered pl an in a State where HHS is operating risk adjustment would pay a risk adjustment us er fee equal to the product of its annual enrollment in the risk adjustment covered pl an multiplied by the annual per capita risk31 adjustment user fee rate speci fied in the annual notice of be nefit and payment parameters for the applicable benefit year. We would cal culate 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 exis ting data collection and submi ssion 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 th an $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 a pplicable benefit year to align with payments and charges processing, to pr ovide issuers the time to fu lly comply with the data collection and submission standards, and to permit HHS to perform the user fee calculations based on actual monthly enro llment 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 me thodology 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 a nd after insurance market reforms are implemented. The risk adjustment met hodology 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 pl an 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 variab les 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 tr ansferred between plans. In this proposed rule, these two elements of the methodology are presented together as the payment transfer formula.

• The data collection approachdescribes HHS’ approach to obtaining data, using the distributed model described in sec tion 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 adjust ment may utilize this risk adjustment methodology, or they may submit an altern ate 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 a nd 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 form ula described in secti on III.B.3.c. of this proposed rule. The key feature of the HHS ri sk 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 it s plan-specific cost factors relative to the average of these f actors 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 da ta for a population similar to the expected population to be risk adjusted;

• Uses the hierarchical condition categorie s (“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, catastrophi c) 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 meta l level, geographic rating area, induced demand, and age rating, so that transfers reflect health risk and not ot her cost differences; and

• Transfers funds between plans with in 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 Ac t stipulates that risk adjustment is to apply to non-grandfathered health insurance co verage 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 in dividual or small group markets, excluding plans offering excepted benefits and certai n other plans, including “any other plan determined not to be a risk adjustment cove red plan in the annual HHS notice of benefit and payment parameters.” We propose to amend this definition by replacing “and any34 plan determined not to be a risk adjustme nt 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 inthe applicable Federally certified risk adjustment methodology.” We note that, under this revise d definition, we would describe any plans not determined to be risk adjustment c overed plans under the HHS risk adjustment methodology in the annual notice of benefit a nd 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 catas trophic 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 insuran ce coverage in the individual and small group markets would not be subject to the insurance market refo rms proposed in the Market Reform Rule and the EHB/AV proposed rule. In addition, plan s providing benefits through policies that begin in 2013, with renewal dates in 2014, w ould 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 insuran ce coverage in these market s with higher than average actuarial risk. We interpret actuarial risk to mean predictable risk th at the issuer has not been able to compensate for through exclusi on or pricing. In the current market, plans35 are generally not subject to the insurance mark et reforms that begin in 2014 described at §147.102 (fair health insurance premiums), §147.104 (guaranteed availability of coverage, subject to the student he alth 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 Su bpart B 156 (essential health benefits package), and so are generally able to minimize actuarial risk by excluding certain conditions (for example, maternity covera ge for women of child-bearing age), denying coverage to those with cert ain 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 secti on 1343(b) of the Afford able Care Act to “establish criteria and methods to be used in carrying out ... ri sk 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 (gua ranteed renewability of coverage, subject to the student health insuran ce provisions at §147.145), §156.80 (single risk pool), and Subpart B 156 (essential health be nefits 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 pl ans would have uniform and virtually zero actuarial risk. We therefore propose to treat these plans sepa rately, such that these plans would not be subject to risk adjustment ch arges and would not receive risk adjustment payments. Also, these plans would not be subj ect 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 establishe d 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 descri bed in §147.145) offered by that college or university. We believe that stud ent 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 Affo rdable Care Act to “establish criteria and methods to be used in carrying out ... risk ad justment 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, thes e 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, ar e eligible to enroll incatastrophic plans. Because of the unique characte ristics of this population, we propose to use our authority to establish “criteria and methods” to risk adju st 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 catastr ophic plans would be assessed charges, while catastrophic plans with higher than averag e actuarial risk compared with other catastrophic plans woul d 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 re quirements in subparts G and H of part 153. Merger of markets : Section 1312(c) of the Affordab le Care Act directs issuers to use a single risk pool for a market – th e individual or small group market – when developing rates and premiums. Section 1312(c)(3) gives Stat es 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 risk37 adjustment on behalf of a State if the Stat e elects to do the same for single risk pool purposes. In such a case, rather than transf erring funds between individual market plans only and between small group market plans on ly, we would transfer funds between all individual and small group market plans, consid ered as one market. When the individual and small group markets are merged, the Stat e average premium, described in section III.B.3.c. below, would be the average premiu m of all applicable individual and small group market plans in the applicable risk pool, and normalization de scribed 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 Stat e 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 pol icies filed and approved by the department of insurance in a State. 8 However, a plan licensed in a St ate (and therefore subject to that State’s rate and benefit requirements) may enro ll 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 be nefit requirements applicable to that policy, we propose in §153.360 that a risk adjustment covered plan be s ubject 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- av ailable from NAIC Research Library or in NAIC Proceedings I , 2009) NAIC,3/17/09.38 the choices in preamble to the proposed Prem ium 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 inuser 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 f actors), producing a risk score. We propose separate models for adults, children, and infant s 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 ag e, sex, and diagnoses are adde d 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 se verity 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 ra ting 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 ri sk scores, but is designed to predict average group cost s 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 calib rated 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 Assessm ent 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 liv ing in all States, ag ed 0-64, enrolled in commercial health insurance plans. The data base contains enroll ee-specific clinical utilization, expenditure s, and enrollment across inpatie nt, outpatient, and prescription drug services from a selecti on of large employers and heal th 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 en rollment data files contain information for any person enrolled in one of the employer or individual health plan s at any point during a year. Enrollees were classified as en rolled in fee-for-service (“FFS”) plans or encounter-type plans, with most FFS plan s being preferred pr ovider organization (“PPO”) plans, and the majority of enc ounter-type plans being health maintenance organization (“HMO”) plans. An individual c ould have been enrolled for as few as one and as many as 365 days in a year, and could ha ve been enrolled in one or more years. In operation, the same rules will be applied with respect to enrollment. Diagnoses for model calibration were ex tracted from facilityand professional claims. Facility claims were extracted only fr om bill types that were hospital inpatient, hospital outpatient, rural healthclinic, federally qualified he alth center, or community mental health center. For professional a nd outpatient facility cl aims, diagnoses were generally extracted from claims where the pr ocedure (CPT code) indicated a face-to-face visit with a qualified clinician. Diagnoses from procedures thatdid not meet these criteria (for example, durable medical e quipment, pathology/laboratory, and diagnostic radiology) were not include d. The concurrent modeli ng sample (approximately 20 million individuals) was generated using the following criteria: (1) the enrollee had to be40 enrolled in a FFS plan 12 ; (2) the enrollee must not have incurred any claims paid on a capitated basis 13 ; and (3) the enrollee must have b een enrolled in a plan with drug benefits and mental health and substance abus e coverage. The final database reflects our best approximation of the esse ntial 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 char ges, 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 e xpenditures. Plan liability expenditures for a given plan type (platinum, gold, silver, bronz e, 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 expenditure s for the enrollment period divided by the number of enrollment months. Annualized e xpenditures (total or plan liability) were defined as average monthly expenditures multip lied 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 pr edict 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 antic ipate 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 incl ude prescription drug use as a predictor in each HHS risk adjustment model. While us e of particular prescription drugs may be useful for predicting expenditures, we be lieve that inclusion of prescription drug information could create adverse incentives to modify discretionary prescribing. We seek comments on possible approaches for future vers ions 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 determ ines which diagnosis codes should be included, how the diagnosis codes should be grouped, and how the diagnostic groupings should interact for risk adjustment purposes. Th e ten principles that were used to develop the hierarchical condition category (HCC) classification system for the Medicare risk adjustment model guided the cr eation of the HHS risk adju stment model we propose to use when HHS operates risk adjustment on beha lf of a State. Those principles are:42 Principle 1—Diagnostic categories should be clinically meaningful

. Each diagnostic category is a set of International Clas sification of Diseases, Ninth Revision, Clinical Modification (“ICD-9-CM”) codes. 15 These codes should all relate to a reasonably well-specified disease or medi cal condition that defines the category. Principle 2—Diagnostic categories shoul d predict medical (including drug) expenditures

. Diagnoses in the same HCC shoul d be reasonably homogeneous with respect to their effect on both current (this year’s) costs (conc urrent 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 accurat e and stable estimates of expenditures

. Diagnostic categories used in establishing pa yments 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 le vel within each disease process, while the effects of unrelated disease processes accumulate

. Related conditions should be treated hierarchically, with more severe manifest ations of a condition dominating (and zeroing out the effect of) less serious ones. Principle 5—The diagnostic classifi cation should encourage specific coding

. Vague diagnostic codes should be grouped w ith less severe and lower-paying diagnostic categories to provide incentives fo r more specific diagnostic coding. Principle 6—The diagnostic classificati on should not reward coding proliferation

. The classification should not measure greaterdisease 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 consequen ces for modeling: (1) no HCC should carry a negative payment weight; and (2) a c ondition 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 represen ts a radical change of treatment of a disease process.) Principle 8—The classification system shoul d be internally consistent (transitive)

. If diagnostic category A is higher-ranked th an 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 in ternal consistency of the classification system and ensures that the assignment of di agnostic categories is independent of the order in which hierarchical exclusion rules are applied. Principle 9—The diagnostic classifica tion 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—Discretiona ry diagnostic categorie s should be excluded from payment models

. Diagnoses that are particularly s ubject to intentiona l 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 mode l are referred to as HHS HCCs. The CMS44 HCC diagnostic classi fication 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 a nd 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 clinica lly and with respect to cost. Hierarchies are imposed among related CCs, so that a pe rson is coded for only the most severe manifestation among related diseases. After imposing hierarchies, CCs become Hierarchical Condition Categories, or HCCs. Although HCCs reflect hier archies among related diseas e categories, for unrelated diseases, HCCs accumulate. For example, a female with rheumatoid arthritis and breast cancer has (at least) two separate HCCs c oded, and her predicted cost would reflect increments for both conditions. The model’s structur e thus provides, and predicts from, a detailed comprehensive clinical profile for each individual. Three major characteristics of the CM S HCC classification system required modification for use with the HHS risk adju stment model: (1) population; (2) type of spending; and (3) prediction y ear. The CMS HCCs were developed using data from the aged and/or disabled Medicare population. Al though every ICD-9-CM diagnosis code is mapped and categorized into a diagnostic grouping, for some conditions (such as45 pregnancy) the sample size in the Medicare popul ation 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 medi cal and drug spending. Finally, the CMS HCC classification is primarily designed fo r use with a prospective risk adjustment model, using base year diagnoses and demogra phic 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 yea r’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 th e same between the Medicare and HHS risk adjustment models. For example, the newborn hierarchy was reconfigured in the HHS risk adjustment model to include ne w 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 classificati on for the HHS risk adjustment model, principles 7 (monotonicity), 8 (transitivity) , and 9 (exhaustive cl assification) 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 othe r principles. For example, clinical meaningfulness is often best se rved by creating a very large nu mber of detailed clinical groupings. However, a large number of groupi ngs may not allow for adequate sample sizes for each category. (6) Principles for HCC Selection46

We selected 127 of the full classificati on of 264 HHS HCCs for inclusion in the HHS risk adjustment model. In determini ng which HCCs to include in the HHS risk adjustment model, HCCs that were more a ppropriate 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 consid ered 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 th e 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 segmen tation, rather than ra ndom 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 princi ples described previously, each HHS risk adjustment model excludes HHS HCCs c ontaining diagnoses th at are vague or nonspecific (for example, symptoms), discreti onary in medical treatment or coding (for example, osteoarthritis), or not medically signi ficant (for example, muscle strain). Each HHS risk adjustment model also exclude s 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 HC Cs were grouped (1)47 to reduce model complexity; (2) to avoid in cluding HHS HCCs with small sample size; (3) to limit upcoding by severity within an H CC hierarchy; and (4) to reduce additivity within disease groups (but not across disease groups) to decrease the sensitivity of the model to coding proliferati on. After grouping, the number of HHS HCCs included in the proposed HHS risk adjustment model wa s 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 de mographic 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 categorie s 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 yearincrements 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 applic able benefit year. For individuals who do not have any of the HHS HCCs included in th e proposed HHS risk adjustment model, predicted expenditures are base d solely on their demographic risk factors. In the calibration data set, 19 percent of adults, ni ne 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 de veloped separate risk adjustment models

16 In addition, we imposed several additional constrai nts –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 expensiv e conditions thatdo not apply to adults or children, while having relati vely low frequencies for most HHS HCCs included in the model compared to adults a nd children. Therefore, HHS proposes to use a separate infant model. The infant model utilizes a mutually ex clusive groups approach in which infants are assigned a maturity category (by gestation and birth weig ht) and a severity category. There are 5 maturity categories: Extremel y Immature; Immature; Premature/Multiples; Term; and Age 1

. For the maturity category, age 0 infa nts would be assigned to one of the first four categories and age 1 infants w ould 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 sever ity 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 th an one severity category would be assigned to the highest of those severity categorie s. 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 infa nts 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.pdf49 male-age indicator variables: Age 0 Male a nd 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 ex ample, at an operational level mother and infant claims may be bundled such that infant diagnoses ap pear on the mother’s record. Where newborn diagnoses appear on the mother’s claims, HHS is exploring the feasibility of associating those codes with th e appropriate infant. This assumes that the mother and infant enrollment records exis t and can be matched, which may also pose operational problems in some cases. Alterna tively, we are consider ing requiring issuers to provide separate mother and infant claims when they have received a combined claim. We seek comment on the operational feas ibility 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 mode ls 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 enrolle e, whether those costs are incurred by the enrollee or the issu er. In a total expenditure model, two individuals of the same age w ith 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 liabili ty for plans at different me tal 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, a nd catastrophic) were defined by applying standardized benefit desi gn 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 interac tions 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 fi rst creating a single severity illness indicator. We elected to use the silver mode l to create interaction terms because we expect enrollment to be highest in silver plans due to the availability of premium tax credits and cost-s haring reductions in those plans. The severity illness indicator variable was interact ed with individual HCCs or HCC groups, and the predicted costs of the interaction variables were thengrouped into three cost categories: low, medium and high. Interaction groups in th e 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 leas t 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 a ssigned a single interaction fact or. A hierarchy is imposed on these interaction groups su ch that an individual with a high cost interaction is excluded from having a medium cost interac tion. The high or the medium interaction factor would be added to dem ographic 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 a nd the HHS HCCs included in the HHS risk adjustment model. Dollar coefficients we re estimated for these categories and HCCs using weighted least squares regression, wher e the weight was the fraction of the year enrolled. For each model, the factors were the stat istical regression dollar values for each category or HCC in the model divided by a weig hted 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 fact ors for the enrollee’s category and HCCs are the total relative predic ted expenditures for that enrollee. Table 1 contains factors for each adult model, includ ing the interactions. Table 3 contains the factors for each child model. Table 5 cont ains the factors for each infant model.
TABLE 1: Adult Risk Ad justment 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 0.42752
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 0.95753

Diabetes without Complication 1.331 1.199 1.120 1.000 0.957 Protein-Calorie Malnutrition 14.790 14.790 14.786 14.862 14.883Mucopolysaccharidosis 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 2.98254
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 2.63155
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 6.85056
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 4.85957
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 0.82858
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 12.55559

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 2.84160

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 Seve rity 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 Shoc k, 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 0.07761
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 Tumors 18 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 45.53563
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 7.203Sickle 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 18.22864
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/MyoneuralDisorders 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 14.69665
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 13.60466
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 30.53867
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 4.86668
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, In cluding Birthweight 750-999 Grams
Immature Premature Newborns, Includi ng Birthweight 1000-1499 Grams Immature Premature Newborns, Includi ng Birthweight 1500-1999 Grams Premature/Multiples Premature Newborns, Includi ng Birthweight 2000-2499 Grams Premature/Multiples Other Premature, Low Birthweight, Malnourished, or Multiple Birth Newborns Term Term or Post-Term Singleton New born, Normal or High Birthweight Age 1 All age 1 infants

TABLE 6: HHS HCCS Included in In fant Model Severity Categories Severity Category HCC Severity Level 5 (Highest) Metastatic Cancer Severity Level 5 Pancreas Transplant Status/Complications Severity Level 5 Liver Transp lant Status/Complications Severity Level 5 End-Stage Liver Disease Severity Level 5 Intestine Tran splant Status/Complications Severity Level 5 Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis69
Severity Category HCC Severity Level 5 Respirator De pendence/Tracheostomy Status Severity Level 5 Heart Assistive Device/Artificial Heart Severity Level 5 Heart Transplant Severity Level 5 Conge stive Heart Failure Severity Level 5 Hypoplastic Left Heart Syndrome and Other Severe Congenital Heart Disorders Severity Level 5 Lung Transpla nt 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 Congen ital 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 Ot her Severe Immunodeficiencies Severity Level 4 Traumatic Complete Lesion Cervical Spinal Cord Severity Level 4 Quadriplegia Severity Level 4 Amyotrophic Lateral Sclerosi s and Other Anterior Horn Cell Disease Severity Level 4 Quadriplegic Cerebral Palsy Severity Level 4 Myasthenia Gravis/Myo neural 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 Failur e and Shock, Including Respiratory Distress Syndromes Severity Level 4 Acute Myocardial Infarction Severity Level 4 Heart Infection/Inflammation, Except Rheumatic Severity Level 4 Major Congenita l 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 B acterial 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 Lympho mas and Other Cancers and Tumors Severity Level 3 Colorectal, Breast (A ge < 50), Kidney and Other Cancers70
Severity Category HCC Severity Level 3 Benign/Uncertain Brai n Tumors, and Other Cancers and Tumors 19 Severity Level 3 Lipidoses and Glycogenosis Severity Level 3 Adrenal, Pituitary, a nd Other Significant Endocrine Disorders Severity Level 3 Acute Liver Failure/D isease, Including Neonatal Hepatitis Severity Level 3 Intestinal Obstruction Severity Level 3 Necrotizing Fasciitis Severity Level 3 Bone/Joint/M uscle Infections/Necrosis Severity Level 3 Osteogenesis Impe rfecta 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 Spinocer ebellar 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/Circu latory 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, Neurofib romatosis, 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 Protei n-Calorie Malnutrition Severity Level 2 Congenita l Metabolic Disorders, Not Elsewhere Classified Severity Level 2 Amyloidosis, Porphyr ia, 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 Erythe matosus and Other Autoimmune Disorders Severity Level 2 Congenital/Developmental Sk eletal 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 Brai n/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 Pulm onary Disease, Including Bronchiectasis Severity Level 2 Chronic Ulce r of Skin, Except Pressure Severity Level 1 (Lowest) Chronic Hepatitis Severity Level 1 Acute Pancreati tis/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, Lo wer 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 th e 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 Affo rdable 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 utilize72 health care services at a higher rate than woul d be the case in the absence of cost-sharing reductions. This higher utiliz ation (to the extent not cove red by required cost sharing by the enrollees or cost-shari ng 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 base d on the adjustment for induced demand for advanced payment of cost-shari ng reductions described in sec tion III.E. of this proposed rule. The proposed adjustment factors are se t forth in Table 7. These adjustments would be multiplicative, and applied after demogra phic, 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 availabl e. 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 Ac t 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 risk73 adjustment models. However, plans that r eceive 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 woul d be difficult to determine what portion of reinsurance payments were made for conditi ons 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-ye ar 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 ex amined their R-squared and predictive ratios. The R-squared statistic , which calculates the percenta ge of individual variation explained by a model, measures the predictive accuracy of the model overall. The predictive ratios measure the predictive accur acy of a model for different validation groups or subpopulations. The predictive rati o for each of the HHS risk adjustment models is the ratio of the weighted mean pr edicted plan liability for the model sample population to the weighted mean actual plan liability for the mode l sample population. The predictive ratio represents how well th e model does on average at predicting plan liability for that subpopulation. A subpopulation that is predicted pe rfectly would have a predictive ratio of 1.0. For each of the HHS risk adjustment models, the R-squared74 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 fo r 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 actuari al risk and the calcula tion of payments and charges in the Premium Stabilization Rule. He re, we combine these concepts into a risk adjustment payment transfer formula. In th is 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 Win k leman, Ross and Syed Mehmud. “A Comparative Anal ysis of Claims-Based Tools for Health Risk Assessment.” Society of Actuaries. April 2007.75 We propose to calculate risk adjustment tr ansfers after the clos e of the applicable benefit year, following the completion of issu er 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 rati ng 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 woul d be aggregated at th e issuer level (that is, at the level of the entity licensed by the St ate) 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 woul d 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 pl an’s total member months for the benefit year to determine the total payment due or ch arge owed by the issuer for that plan in a rating area. (1) Rationales for a Transfer Methodolo gy Based on State Average Premiums Risk adjustment transfers are intended to reduce the impact of risk selection on premiums while preserving premiu m 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 establis hed by the Affordable Care Act, the age of the enrollee. Risk adjustment payments w ould 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’ own76 premiums. The approaches that used plan s’ own premiums resulted in unbalanced payment transfers, requiring a ba lancing adjustment to yield tr ansfers 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 acr oss rating areas). A balancing adjustment would likel y vary from year to year, and could add uncertainty to the rate development process (that is, plan ac tuaries 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 show n 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 averag e 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 bette r reflect plan liability. These adjustments to the State average premium result in tran sfers that compensate plans for liability differences associated with risk selection, while preserving premium differences related to the other cost f actors described above. (2) Conceptual overview of the payment transfer formula In this section, we provide a broad overvi ew of the payment transfer formula that we propose to use when operating risk adjustme nt on behalf of a Stat e. We discuss at a77 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 usi ng 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 w ithout 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 be yond the premiums the plans would charge reflecting allowable rating and th eir 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 popul ation. The proposed payment transfer formula developsplan premium estimates by adjusting the State average premium to account for planspecific characteristics such as benefit differenc es. 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. Fi nally, the derivation of the payment transfers also assumes that plans “price to cost,” th at is, that competition among plans for enrollees drives plans' premiums to their premium re quirements. Therefore, we may consider78 “premiums” to be “costs” or “premium requirements.” The payment transfer formula includes the following premiu m adjustment terms:

• Plan average risk score: multiplying th e plan average risk score by the State average premium shows how a plan’s prem ium would differ from the State average premium based on the risk sele ction experienced by the plan.

• Actuarial value: a particular plan’s pr emium 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 averag e premium to account for relative differences between a plan’s AV and the market average AV.

• Permissible rating variation: plan ra tes 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) consta nt. 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 tran sfer formula. The factors are relative measures that compare how plans differ from th e market average with respect to the cost factors (that is to say, the product of the adju stments 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 othe r than risk selection. For ex ample, in the absence of the AV adjustment, a low AV plan with lower-risk en rollees 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 opera ting in the market in the State. The figure below shows how the State aver age 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 Pr emium 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 th e plan induced demand factor. The formula below shows how the plan pr emium estimate reflecting risk selection would be calculated:

Where, = State average premium, = plan i 's plan liability risk score, IDF i = plan i 's induced demand factor, GCF i = plan i ’s geographic cost factor, s i = plan i ’s share of State enrollment, and the denominator is summed across all plans inthe risk pool in the market in the State.80 The key factor in the premium reflecting ri sk selection is the plan average risk score, which would be calculated from th e HHS risk adjustment models. The plan average risk score is a relative measure of pl an 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 co st 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 pr oduct 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 co st 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. A dditionally, the premium estimate reflecting risk selection does not include th e allowable rating fa ctor 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 Prem ium 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 produ ct of the plan AV, plan allowable rating factor, the induced demand f actor, and a geographic cost factor. The formula below shows how this term would be calculated:81

Where, = State average premium, AV i = plan i 's metal level AV, ARF i= allowable rating factor IDF i = plan i 's induced demand factor, GCF i = plan i ’s geographic cost factor, s i = plan i ’s share of State enrollment, and the denominator is summed across all plans inthe 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 unr elated to risk selection. (iv) Risk Adjustment Payment Transfer Formula Transfers would be calculated as th e difference between the plan premium estimate reflecting risk selection and the plan premium estimate not reflecting risk selection – the two premium estimates desc ribed above. Therefore, the proposed 2014 HHS risk adjustment payment transfer formula is:82
Where, = State average premium, = plan i 's plan liability risk score, AV i = plan i 's metal level AV, ARF i= allowable rating factor IDF i = plan i 's allowable rating factor, GCF i = plan i ’s geographic cost factor, s i = plan i ’s share of State enrollment, and the denominator is summed across all plans in the risk pool in the ma rket 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 woul d be assessed a charge if the premium compensation that the plan may receive through its rating practices (as measured through the allowable rating facto r) 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 ri sk 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 gol d plan with an average risk score of 1.1 (because the bronze plan risk adjustment mode l 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 pl ans. Catastrophic plans will be treated as a separate risk pool for purposes of risk adjustment. Indi vidual and small group market83 plans will either be pooled t ogether 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 pr emium terms in the payment transfer formula would be divided by its average. Th is means that each “normalized” term would average to 1.0. Thus, the aver age of the difference between these terms would be zero. This is the fundamental property of the pa yment transfer formula that ensures that transfers across a risk po ol would net to zero. Note that the individual f actors in the proposed payment transfer formula do not need to independently average to 1.0. For example, the average ri sk score for a State may not equal 1.0 due to the underlying differen ces in the health st atus of the State’s population and the national sample used to calib rate the model. It is not necessary to separately renormalize plan average risk scor es 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 f actor. 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 com ponent 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 MarketReform Rule, which caps the number of children that can count toward the build-up of fa mily rates at three. If risk scores were84 calculated as the member month-weighted av erage 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 adjustme nt 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 pl an average risk score calculation including the risk of all members on the policy, including those children not included in the premium.

where PLRS i is plan i 's average plan liability risk score, the subscript e denotes each enrollee within the plan, PLRS e is each enrollee’s individual plan liability risk score, M e is the number of months during the risk adjustment period the enrollee e is enrolled in the plan, and M b is the number of months during the risk adjust period the billable member b is enrolled in the plan (billable members excl ude children who do not count towards family rates).
The proposed payment transfer formula us es the plan average risk score to calculate transfers. The plan average risk sc ores would be calculated using the applicable risk adjustment model described in secti on III.B.3.b. of this pr oposed rule. The plan liability models would produce risk scores that reflect the health st atus of the plan’s enrollees and the AV of the plan. The AV ad justment 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 ri sk score calculation discussed above, all of the other calculations used in the proposed payment transfer formula are based on billable members (that is, ch ildren who do not count toward family policy premiums are excluded). Member months, the State averag e 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 St ate average premium as the basis of calculating payment transfers. The averag e premium calculation w ould be based on the total premiums assessed to enrollees, incl uding the portion of premiums that are attributable to administrative costs. The St ate average premium would be calculated as the enrollment-weighted mean of all plan av erage 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 memb er 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:

and86 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 calculate d. This is the weighted mean over all subscribers s of subscriber premiums P s , with M s 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 co mpensating plans for risk selection while allowing other determinants of premiums – incl uding the generosity of plan benefits – to be reflected in premiums. If the payment tran sfer formula were to ignore actuarial value, it would effectively force low-AV plans to subs idize high-AV plans. This is because the State average premium is calculated from all pl ans 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 incr eased based on a State average premium that includes plans w ith 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 leve l actuarial value as the basis for this adjustment provides a simple and straightforward approach for estimating the impact of benefit design on pl an liability. The standard metal level actuarial values approximate plan liability for the standard popul ation (that is, plan liability in the absence of ri sk selection). Additionally, the adjustment should not be87 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 exampl e, 0.6 a bronze plan), so the actuarial value adjustment in the payment tr ansfer formula must also correspond to the standard metal level actuarial values. Table 9 shows the AV adjustment that w ould be used for each category of metal level plans. TABLE 9: Actuarial Value Adjustment Us ed 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 Afford able Care Act, establishes standards for plan premium rating. Rates can vary ba sed 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 ma y vary by age; the most expensive age group’s rating cannot be more than three times as high as the lowest (f or adults age 21 or above), and rating based on tobacco use cannotexceed a 50 percent increment. Plans cannot base premiums on enroll ee health status. In the pr oposed 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. Tob acco use, wellness discounts, and family rating requirements would not be included in the payment transfer formula for the reasons specified below. Geogra phic cost variation is treated as a separate adjustment in the payment transfer formula. Age rating is permitted within limits to en able 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 i ssuers 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 restri ction, but their corres ponding rating factors would still be specified in the standard age curves. Each plan’s allowable rating factor would be calculated as the enrollment-weight ed average of the age factor, based on the applicable standard age curve, across all of a plan’s enroll ees. 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 w ould be based on each person’s age, tobacco use, and geographic rating area. For familie s 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 incl ude an explicit adjustment related to the family rating requirements, as rate setting would not include a family rating factor. Tobacco rating and wellness discounts ar e also not included in the proposed allowable rating factor adjustment. These ra ting factors are discretio nary. HHS proposes89 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 howthe ARF values would be calculated for three plans. TABLE 10: Example Allowable Rating Factor CalculationAge Band State AgeRating Curve Plan A Plan B Plan C State Enrollment percentages (Share of member-months) 21 1.000 33.30% 40.00% 10.00% 31.70% ( Age bands from 22-39 omitted ) 40 1.278 33.30% 40.00% 20.00% 33.30% ( Age bands from 41-63 omitted ) 64 and older 3.000 33.30% 20.00% 70.00% 35.00% Total member-months 300,000 200,000 100,000 600,000 ARF 1.758 1.511 2.456 1.793

In Table 10, three plans constitute the entire ri sk pool in the market in the State. In practice, each State age rating curve would ha ve 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 s econd 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 thr ee columns, followed by statewide totals. We assume Plan A’s enrollment of 300,000 me mber-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 pe rcent in 40 and older age band, and 35.0 percent in 64 and older age band.90 Plan-specific ARF values are calculated si milarly. 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 w ould 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 St ate average, which is also reflected in its 1.758 ARF, and Plan B’s en rollment is younger than Plan A. (F) Induced Demand Induced demand reflects differences in enro llee spending patterns attributable to differences in the generosity of plan benef its (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 liab ility that are not attr ibuted to the underlying health and demographic characteristics of th e 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 ot her 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 otherw ise identical plan with out 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 1.0891
Metal Level Induced Demand Adjustment Platinum 1.15

(G) Geographic Area Cost Variation The proposed geographic cost factor (G CF) 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 tran sfers to subsidize high-risk plans in high-cost areas at the expense of low-risk plan s 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 appropria te 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 compensa te for the plan’s excess risk. This would disadvantage low-risk plans relative to high-ri sk plans in the low-cost area. The opposite would be true in high-cost areas. GCFs would be calculated for each rating ar ea. These factors would be calculated based on the observed average silver plan prem iums in a geographic area relative to the Statewide average silver plan premium. Us ing only silver plans as the basis of the adjustment would help control for differen ces in premiums across rating areas due to differential enrollment patterns in the availabl e plan types. Additionally, the silver plan premiums used to calculate the adjust ment must be standardized for age to isolate geographic cost differences in premiums. Calculation of the GCF woul d involve three steps. Fi rst, the average premium would be computed for each silver plan in each rating area (using the same formula that92 is used to compute plan premiums in th e 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 M s is the number of billable member months for billable members under the policy of subscriber s P

s 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. Pl an premiums are standardized for age by dividing the average plan prem ium by the plan rating fact or, the enrollment-weighted rating factor applied to all billable member s (discussed above). This formula would be:

Where, is plan i 's age standardized average premium,

, is the average premium for plan i , and ARF i 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 ac complished with the following calculation:

This equation divides the enrollment-wei ghted average of standardized silverlevel plan premiums in a geographic area by th e average of those premiums Statewide. The numerator’s summation is over a ll silver-level plans within plan i 's geographic area,93

so . Similarly, the summation in the denom inator is over all silver-level plans in the State, so

. Using these formulas, the enrollment-wei ghted 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 opera tes 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 numbe r of plan member months for billable members to calculate the total plan level payment. As di scussed 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 calcu lating transfers). We welcome comment on this propos ed 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 dele te “and audited” so that the definition of risk adjustment data collection approach m eans “the specific procedures by which risk adjustment data is to be stored, collec ted, accessed, transmitted, validated and the applicable timeframes, data formats, and priv acy and security standards.” This technical correction clarifies that auditing of risk adjustme nt 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 identifiabl e information was collected (including for purposes of data validation).” This addition will further ensure the privacy and security of potentially sensitive data by limiting th e 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 secti ons of section III.G. of this proposed rule and in th e new proposed §153.700 through §153.730. We welcome comment on this prop osed 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 January1, 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 ampl e claims runout to ensure that diagnoses for the benefit year are captured, while providing HHS sufficient time to run enrollee risk95 score, plan average risk, and payments a nd charges calculations and meet the June 30 deadline described at th e 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 adjustme nt 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 adjustme nt 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 elem ents required to be included with the request to HHS for certification of an alte rnate risk adjustment methodology. Section 153.330(a)(1)(i) states that a request for certi fication 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 calcula tion of plan average act uarial risk; (3) the96 calculation of payments and ch arges; (4) the risk adjustme nt 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 al so include the calibration methodology and frequency of calibration, and §153.330(a)(1)(iii) provides that the request must include statistical performance metric s specified by HHS. Section 153.330(a)(2) requires that the request also include certain descriptive a nd explanatory information relating to the alternate methodology. Under our existing regulations, States wishing to submit an alternate risk adjustment methodology should do so by submitti ng 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, requ ests 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 an d has indicated on that applicati on its intent to operate a risk adjustment program in the State (or, in later ye ars, 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 cer tification of alternat e risk adjustment methodologies in this proposed rule. We propose the following evaluation criteria to certify alternate risk adjust ment methodologies. We propose to redesignate paragraph (b) of §153.330 to paragraph (c), a nd 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 wh ether the alternate risk adjustment97 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 alte rnate risk adjustment methodology: (i) Explains the variation in health care costs of a given population; (ii) Links risk factors to da ily 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 th at an alternate methodology explains the variation in health care costs of a given populations, we woul d consider whether the risk adjustment model was calibrated from data re flecting 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 th is 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 ri sk. States must provide a rationale for the methodology’s approach to the plans subject to risk adjustment. Under this proposed criteria, we would also evalua te 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 consid er whether the alternate methodology discriminates against vulnerable populations or creates inappropriate incentives. Alternate methodologies must not discrimina te against individuals because of age, disability, or expected length of life, and should take into acc ount the health care needs of diverse segments of the risk adjustmentpopulation, including women, children, persons with disabilities, and other vulnerable groups. In the proposed §153.330(b)(2), we woul d 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 schedul e that provides annual notific ation to issuers of risk adjustment covered plans of payments and ch arges by June 30 of the year following the benefit year. Section 153.340(b)(1) sets fo rth a number of minimum requirements for data collection under risk adjustment, includi ng 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 th at will not include personally identifiable information, the Premium Stabilization Rule ga ve States the flexibility to design their own data collection approach, provided privac y 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 a lternate methodology must protec t personally identifiable information, if any, that is stored, tran smitted, or analyzed, to be certified. The application for certification of the altern ate methodology should identify which data elements contain personally identifiable in formation, and should specify how the State would meet these data and pr ivacy security requirements. In §153.330(b)(3), we propose to consider wh ether the alternate risk adjustment methodology accounts for payment transfers across metal levels. We believe that sharing99

risk across metal levels is a critical part of a risk adju stment 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 le vels, and under this proposal, State alternate methodologies must do so as well. For reasons described previously, unde r the proposed HHS risk adjustment methodology, we propose to apply risk adjustmentto catastrophic plans in their own risk pool – that is, we would transfer funds be tween catastrophic plan s, but not between catastrophic plans and metal leve l plans. For a number of plans, such as student health plans and plans not subject to the market refo rm rules, we have proposed not to transfer payments under the HHS risk adjustment me thodology. However, as discussed above, we believe that States should have the flex ibility 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 exampl e, the data collected through the data collection approach should align with the da ta required by the risk adjustment model to calculate individual risk scores. Alternate methodologies submitted by Stat es 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 wo rking closely with States during the development of their alternate me thodologies to ensure that they meet the criteria described abov e. We expect to have a numb er of meetings with any State proposing an alternate methodology during th e certification proce ss. During these meetings, we intend to provi de input to States on whet her their proposed alternate100 methodologies meet the given criteria. States will then have the opportunity to modify their alternate methodologies and request furt her 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 Stabiliza tion 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 reduc e 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 en sure a degree of consistency in the risk adjustment program from State to State, whil e allowing States to vary other elements of the program. However, we recognize that a uniform national method could limit States’ flexibility in developing their alternat e risk adjustment methodologies. The proposed payment transfer formula (reg ardless of whether for a plan liability or total expenditure approach, as described in section III.B.3.10. util izes 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 liabil ity 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 flexibi lity to select the adju stments used for the calculation of payments and charges in thei r 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 in cluding or excluding any of these adjustments. States may also include other adjustment s in the calculation of payments and charges under their alternate methodologies. Adjustments can be added to or removed from the basic payment transf er formula as long as these factors are101
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 adjust ment for geographic cost differences by comparing the area premium to the State averag e premium. A State may elect to develop a different factor to adjust for geographic co st differences. As de scribed above, we ask States to provide the adjustments, the associ ated factors or curves , and the rationale for the adjustments they plan to us e 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 applicab le 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 valida tion findings. The credibility of risk adjustment data, which results from a reliable data validation pro cess, is important to establishing issuer confidence in the risk ad justment program. More over, as error rates derived from the results of data validation ma y be used to make adjustments to the plan average actuarial risk calculated for a risk adjustment covered pla n, the data validation process will ensure that such tr ansfers accurately reflect each pl an’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 c onduct a six-stage data validation program when operating risk adjustment on behalf of a State: (1) sample selection; (2) initial validation audit; (3) s econd 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 applic able 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 va lidation audit of risk adjustment data. These are the second and thir d stages of the six-st age 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 fo r risk adjustment ever y year. As described above, sample selection is the first stage of HHS’ six-stage risk adjustment data validation process. HHS would select the sa mple 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 si ze 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 th e sample. In determining the appropriate sample size for data validation, we recogni ze the need to strike a balance between103 ensuring statistical soundness of the sample and minimizing the operational burden on issuers, providers, and HHS. We expect that each issuer’s initial va lidation 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 pr ogram may be updated as we gain experience performing data validation for risk adjustment. Additionally, we will continue to evaluate population distribu tions to determine the sample subpopulations. We seek comment on this approach to sample selec tion, 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 pro pose 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 conflic ts 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 th e initial validation audit is conducted according to minimum audit standards, an d 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 enroll ment 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 issuer s would have considerable autonomy in selecting their initial validati on auditors. However, initial validation auditors must conduct data validation audits in accordance with audit standards established by HHS. We have id entified three methods for es tablishing these standards:

● HHS or an HHS-designated entity could prospectively certify auditors for these audits;

● HHS could develop standards that issu ers and initial validat ion auditors would follow, without any requirement of prior HHS certification or approva l of auditors; or

● HHS could issue non-binding, “best practice” guidelines for issuers and auditors. We request comment on these approaches a nd 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 s econd 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 pertaini ng to its approach fo r selecting the second validation audit sub-sample in future guida nce. The second va lidation 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 originallypresented during the initial validation audit. In §153.630(c), we establish standards for issuers of risk adjustment covered plans related to HHS’ second validation a udit 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 connecti on with the second validation a udit. Specifically, issuers would submit (or ensure thei r initial validation auditor submits) data validation information, as specified by HHS, from their initial valida tion 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 inthe second validation audit subsample. (4) Error Estimation We would estimate risk score error rate s 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 he alth status components of an enrollee’s risk score. This may include errors due to incorrect dia gnosis coding, invalid documentation, missing or insufficient medical record documentation, or incorrect determination of enrollee demographic information. We are consider ing 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 conduc t 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 pr ovide each issuer with enrollee-level audit results and error estimates at the issuer leve l, 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 va lidation audit or the applicati on 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 recalc ulation of plan aver age actuarial risk following the data validation pr ocess. 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 valida tion 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 bene fit year. We would us e 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 ri sk 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 standa rds and to promote c onfidence in the risk adjustment program. As such, we propos e in paragraph §153.630( e) that HHS may adjust payments and charges for issuers thatdo 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 adjustme nt 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 ma rket that will exist in2014. In particular, we are concerned that adjusting payments a nd charges without first gathering information on the prevalence of error could lead to a cos tly and potentially ineffective audit program. Therefore, we are proposing that issuers c onduct an initial valida tion audit and that we conduct a second validation audit for benef it year 2014 and 2015, but that we would not adjust payments and charges based on valida tion findings during thes e 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 validati on program other than adjusti ng payments and charges (though we would make adjustments under the pr oposed §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 conducted108 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 discovere d, 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 thatall risk adjustment data is adequate and that calculations are appropriate with the desire to limit bur den and uncertainty in the initial years of program operation. This approach was taken withthe Medicare Part C risk adjustment program – the data validation audit process was observed fo r several years before payment adjustments were made. We plan to work with issuers dur ing 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, particul arly with respect to improvements to the data validation process generall y, whether there are alternatives to forgoing changes to payments and charges that we should adopt, a nd what methods we should adopt to ensure data integrity in the firs t two years of the program. As part of our effort to refine the da ta validation program during the first two years, we are considering publishing a repor t on the error rates di scovered during these first two years, and propose to use these resu lts 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 ini tial validation auditors and second validation audits. For example, the second validation au dits may be used to assess the extent to which auditor error contributed to the initial validation audit risk sc ore error rate findings, and to determine whether discrepancies betwee n the results of the two audits may result109 in adjustments to the estimated error rate s 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 fu ture years would allow us to examine the accuracy of the initial valida tion audit without having to dr aw large ini tial validation audit record samples from each issuer that par ticipates in risk adju stment. We anticipate that a small number of audit firms will perfor m the majority of initial audits. We seek comment on the approaches outlined here, as well as additional a pproaches to data validation for risk adjustment. f. Data Security and Transmission In §153.630(f), we establish data secur ity and transmission requirements for issuers related to the HHS data validation process. These requirements establish the manner in which issuers and a uditors must transmit audit in formation, and ensure that any enrollee information that is transmitted is protected. In §153.630(f)(1), we propose that issuers submit any risk adjustment da ta and source documentation specified by HHS for the initial and second validation audits to HHS in the manner and timeframe established by HHS. We propos e in §153.630(f)(2) that, in c onnection with the initial validation audit, the second valid ation audit, and any appeals, an issuer must ensure that it and its initial validation auditor complies with the security st andards 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 pr emiums for coverage in the individual market from 2014 through 2016. The reinsurance program is designed to alleviate the need to110 build into premiums the risk of enrolling individuals with significant unmet medical needs. By stabilizing premiums in the i ndividual market equitabl y throughout the United States, the reinsurance program is intended to help millions of Americans purchase affordable health insurance, reduce unreim bursed 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 progr am to provide reinsurance payments in an efficient, fair, and accurate manner, wh ere they are needed most, to effectively stabilize premiums nationall y. In addition, we intend to implement the reinsurance program in a manner that minimizes the admini strative burden of co llecting contributions and making reinsurance payments. For exampl e, HHS intends to collect contributions from health insurance issuers a nd self-insured group health plans 22 in all States, including States that elect to operate th eir reinsurance programs. This would allow for a centralized and streamlined process for the collec tion of contributions, and would avoid inefficiencies related to usi ng different processes in differe nt 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 leve rage 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 cap ita 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 sa me 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 usi ng the same systems established for the risk adjustment program, resulting in less admi nistrative burden and lower costs, while maintaining the security of iden tifiable health information. In this proposed rule, we propose mo difications and refinements to the reinsurance program standards for States and i ssuers. 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 unifo rm reinsurance paymen t parameters to be used across all States. These payment paramete rs 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 operat e 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 marketplans. 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 ch anges 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 parame ters to be used by all States;

• A uniform reinsurance contribution collection and payment calendar;

• A one-time annual reinsurance contribu tion collection, instead of quarterly collections in a benefit year;

• Collection of reinsurance contri butions by HHS unde r the national contribution rate from both health insurance i ssuers 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 rein surance payment parameters if the State elects to collect additional funds for reinsu rance payments or use additional State funds for reinsurance payments; and

• A limitation on States that seek additiona l reinsurance funds for administrative expenses, such that the State must have its applicable reinsurance entity collect those additional funds. These modifications are proposed in addi tion 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 reinsuran ce contribution and payment process and reinsurance payment parameters that will be applicable in all States, and proposes to113 amend the requirements set forth in the Premiu m 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 paymen ts from those specified in this proposed rule, we propose that all States be required to use the annual payment schedul e 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. U nder 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 estab lishing a reinsurance program to modify the data requirements for health insurance issuers to receive reinsurance payments, provided that the Stat e publishes a State not ice of benefit and payment parameters and specifies thes e modifications in that notice. We propose to also amend §153.100 by deleti ng subparagraph (a)(5), and to add §153.232 to direct a State that elects to coll ect additional reinsurance contributions for purposes of making additional reinsurance pa yments 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 paym ents 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 create114

the most effective reinsura nce program, we are proposing to collect reinsurance contributions on behalf of all States from bot h 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 paym ents, 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 onl y 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)(ii i), 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. Accordi ngly, we also propose to delete §153.110(d)(2), which requires that a State notic e 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 i ssuers in all States. We therefore propose to delete all requirements regarding the State co llection of reinsurance contributions from health insurance issuers under the nationa l 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 inten tion to collect reinsu rance contributions from health insurance issuers. We also propose to delete §15 3.110(d)(4) which requires States to publish in their State notices an es timate of the reinsura nce contributions that will be collected by each applicable reinsurance entity.115 b. Reporting to HHS We propose to amend §153.210 by adding para graph (e), which directs a State that establishes a reinsurance program to pr ovide information regarding all requests for reinsurance payments received from all reinsu rance-eligible plans for each quarter during the benefit year. We propose to use this in formation to monitor requests for reinsurance payments and reinsurance contribution amount s 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 year s, 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 reinsu rance payments for the reinsurance-eligible plan under both the national payment parame ters and any State supplemental payments parameters set forth under §153.232, as determin ed by HHS or the State’s reinsurance entity, as applicable. These quarterly estim ates would provide i ssuers with the timely information that is needed to support the calc ulation of expected claims assumptions that are key to rate development and ultimately, premium stabili zation. 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 y ears, and will use its best estimates of future payments to reduce premiums. It is our e xpectation 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 para meters are calculated to expend all reinsurance contributions collected under th e national contribution rate. Similarly, the additional funds collected by the State for rein surance payments or additional State funds are to be reasonably calculated, under pr oposed §153.232(a)(2), to cover all additional116 reinsurance payments project ed to be made under the State supplemental payment parameters. Because the national payment pa rameters and State supplemental payment parameters apply to two separate funds, we believe that it is impor tant for a State to distinguish between reinsura nce 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, en sure that each applicable reinsurance entity provides to issuers the exp ected requests for reinsuran ce 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 ye ar sent to issuers no later than June 30 of the year following the app licable benefit year. For efficient administration of the rein surance program, HHS must ensure that reinsurance contributions are appropriately sp ent on reinsurance payments. To this end, we intend to obtain reports re garding reinsurance payments and administrative expenses from States that establish a reinsurance progr am. We intend to provide details of these reports in future regulation and guidance, al ong 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 Premiu m 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 entityor additional reinsura nce payments. Under §153.220(h)(1) of the Premium Stabilization Rule (now proposed to be designated as117 §153.220(d)(2)), a State must notif y HHS within 30 days afte r 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 expe nses or reinsurance payments, nothing in section 1341 of the Affordab le Care Act or this proposed rule gives a State the authority to collect from self-i nsured group health pl ans covered by ERISA, and that Federal law generally preempts State law that relate s to an ERISA-covered plan. d. State Collections We propose that HHS collect reinsuran ce 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 co llected and total requests for reinsurance payments nationally, we believe that a centralized collecti on process for all contributing entities will facilitate the allocation and disburse ment of funds. This will also streamline the contribution submissions process for healthinsurance issuers who operate in multiple
States. We propose to amend §153.220(a) to set fo rth that if a State establishes a reinsurance program, HHS will collect all rein surance contributions from all contributing entities for that State under the national c ontribution 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 re insurance contribution enrollees who reside in that State with respect to health insurance issuers from HH S. In accordance with the proposed change regarding Stat e collections, we also propose to delete §153.220(b) of the Premium Stabilization Rule, wh ich directs a State operating its own reinsurance program118 to notify HHS of its intention to collect fr om its health insurance issuers for the 2014 benefit year by December 1, 2012. If finali zed 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 Pr emium 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 contribu tions 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 c ontributions collected under §153.220(d)(1)(ii) and a llocated 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 rein surance contributions, to make reinsurance payments under the State supplemental reinsu rance payment parameters. This would allow States to use other revenue sources, in cluding funds collected for State high-risk pools as discussed below, for supplemental reinsurance payments, as determined by a State. This proposal ensures that additiona l 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 th e extent necessary to carry out the transitional reinsurance119 program. However, any changes made to a St ate 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 contri butions and cannot re ceive reinsurance payments. Because State high-risk pools a nd the transitional reinsurance program both target high-cost enrolle es, 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 c ontinue its program to complement Exchange coverage. We clarify that nothing in the Prem ium Stabilization Rule prevents a State that establishes its own reinsuran ce program from using State money designated for its own high-risk pool towards the re insurance 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 reinsuran ce 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 Entitie s and Excluded Entities Section 1341 of the Affordable Care Act provides that health insurance issuers and third party administrators on behalf of gr oup health plans must make payments to an applicable reinsurance entity. Thus, with resp ect to insured coverage, issuers are liable for making reinsurance contributi ons. With respect to self-insured group health plans, the plan is liable, although a th ird-party administrator or administrative-services-only contractor may be utilized to transfer reinsu rance contributions on behalf of a self-insured group health plan, at that plan’s discreti on. A self-insured, self-administered group health plan without a third-pa rty administrator or administra tive-services-only contractor would make its reinsuran ce contributions directly. 25 Under section 1341(b)(3)(B)(i ) of the Affordable Care Act, contribution amounts for reinsurance are to reflect, in part, anissuer’s “fully in sured 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 re insurance contributions for coverage that is non-commercial, or that is not“major medical coverage.” 26 We believe it is implicit in the statute that contri butions are not required for health insurance coverage that is not regulated by a State department of insuran ce and written on a policy form filed with and approved by a State department of insurance ( but contributions are ge nerally required for self-insured plans even though th ey are not regulated by a State department of insurance). We discuss below our intent to ex clude certain types of plans.

25 In the Certain Preventive Services under the Affordable Care Act Advanced Notice of Proposed Rulemaking (77 FR 16501) published March 21, 2012, potential changes to the reinsurance contributions were contemplated with regard to a potential religious accommodation for contraception coverage for certain self-funded plans. If the rules regarding the religious accommodation include changes to the reinsurance contribution, this policy may be changed accordingly. 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 rein surance contributions cannot receive reinsurance payments).121 Major medical coverage : Section 1341(b)(3 )(B)(i) of the Affordable Care Act refers to “major medical produc ts,” but does not define the term. For the purpose of the reinsurance program, our view is that cove rage provided under a major medical product (which we refer to in Part 153 as “major me dical 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 reinsuran ce program, we believe that coverage that is limited in scope (for example, dread disease coverage, hospital indemnity coverage, stand-alone vision c overage, 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 empl oyer-provided group health cove rage, Medicare Secondary Payer (MSP) rules under section 1862(b) of the Social Security Act would be applicable, and the group health coverage would be cons idered 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 w ho, under the MSP rules, is a beneficiary for whom Medicare is the seconda ry payer would be counted for purposes of reinsurance contributions. However, a 68-year-old reti ree enrolled in a group health plan who, under the MSP rules, is a beneficiary for whom Me dicare 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_i ndex_model_description_a _c.htm#accident_health.122 counted for purposes of reinsurance contribu tions. Similarly, an individual covered under a group health plan with only Medicare Part A (hospitalization) benefits (where Medicare is the primary payer), would notbe counted for purposes of reinsurance contributions because the group health covera ge would not be considered major medical coverage. We also intend that individuals entitled to Medica re because of disability or end-stage renal disease that have other prim ary 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 a nd 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 othe r persons of Indian descent closely affiliated with the Tribe in th e 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 busine ss, 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 gr oup or individual policy for health insurance coverage not filed a nd 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 exclude123

it from reinsurance contributions because that coverage is not within the jurisdiction of a State department of insurance and the Afford able Care Act generally does not apply. On the other hand, insured group “e xpatriate” coverage written on a form filed with and approved by a State department of insurance w ould 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-i nsured 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 in surance 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 covera ge is not issued on a form filed and approved by a Stat e 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 followi ng 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 consis t solely of excepted benefits as defined by section 2791(c) of the PHS Act, as currentlydescribed in §153.400(a)(2) of the Premium Stabilization Rule.

28 We 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 typica lly regulated by these entities.124 (b) Private Medicare, Medi caid, 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 insu rance issuers, under contract with HHS, deliver the requisite benef its. As discussed in the preamble to the Premium Stabilization Rule, these private Me dicare or Medicaid plans are excluded from reinsurance contributions because they are no t part of a commercial book of business. We also clarify that for purposes of rein surance contributions, programs under the CHIP, Federal and State high-risk pools (including the Pre-Existing Condition Insurance Plan Program under section 1101 of the Affordab le Care Act), and basic health plans described in section 1331 of the Affordable Care Act are similarly excluded from reinsurance contributions because they are no t part of a commercial book of business. (c) Health Reimbursement Arrangements (H RAs) 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 employe r credits an amount to each eligible employee’s HRA which the employees may us e for allowable medical expenses. An HRA that is integrated with a group hea lth 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 HS A. 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 accumula te 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 s ection 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 rein surance 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-medi cal purposes, and would be excluded from reinsurance contributions. We note that re insurance 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 re duction contributions under section 125 of the Code. Because section 9005 of the Affordab le Care Act limits the annual amount that may be contributed by an employee to a hea lth 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, dis ease management programs, and wellness
programs : Employee assistance plans, disease management programs, and wellness programs typically provide anci llary benefits to employees that in many cases do not constitute major medical coverage. Employe rs, plan sponsors, a nd 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 ma jor medical coverage, we propose to exclude it from reinsurance contributions. We also no te that employers that provide one or more of these ancillary benefits often sponsor ma jor 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 ap plicable covered lives. Generally, a stop-loss126 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 re tains its liability t o, and its contractual relationship with, the applicable lives covered. We believe these types of policies were not intended to be subject to the reinsuran ce program. No inference is intended as to whether stop-loss or reinsurance policies cons titute health insurance policies for purposes other than reinsura nce contributions. (h) Military Health Benefits : TRICARE is the component of the Military Health System that furnishes health care insuran ce to active duty and retired personnel of the uniformed services (and covered dependents) through private issuers under contract. Although TRICARE coverage is provided by pr ivate issuers, it is not part of a commercial book of business because the relationship between the uniformed services and service members differs from the trad itional 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 H ealth System also includes health care services that doctors, dentists, and nurses provide to uniformed services members on127 military bases and ships. The Veterans Health Administration within the U.S. Department of Veterans Affairs provides he alth care to qualifying veterans of the uniformed services at its outpatient clin ics, 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 insure d or self-insured) offered by a Tribe to Tribal members and their spouses and dependents (and other persons of Indian descent cl osely 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 th e Tribe or their depende nts) 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, cove rage provided to I ndians 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 retir ees or dependents) on acc ount of a current or former employment relationshi p would not be excluded. 3. National Contribution Rate
a. 2014 Rate As described in §153.220(c) (previously de signated as §153.220(e)), we intend to publish in the annual HHS notice of benefit and payment parameters the national per128 capita reinsurance contribution rate for the upcoming benefit year. We read section 1341 of the Affordable Care Act to specify the to tal 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 sect ions 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 Retir ee 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 th at the total amount sp ecified 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 en tities. Finally, sect ion 1341(b)(3)(B)(ii) of the Affordable Care Act allows for the collection of additional amounts for administrative expenses. Taken together, these three com ponents 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 ca lculated by dividing the sum of the three amounts (the nationa l reinsurance pool, the U.S. Treasury contribution, and administrative costs) by the es timated number of enrollees in plans that must make reinsuran ce 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), discu ssed in greater detail below. The HHS estimate of the number of enrollees in plans that must make rein surance contributions that total the $12.02 billion desc ribed above yields a per capi ta 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 contributi ons 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 million130 million/$12.02 billion)

As shown in Table 12, if the total amount of contributions collect ed is less than equal to $12.02 billion, we propose to allo cate 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 pr ovides details on the methodology we used to develop enrollment estimates for the national per capita co ntribution rate. b. Federal Administrative Fees As described in the Premium Stabilizat ion 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 issuer s, 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 re flects the Federal government’s significant economies of scale in operating the progr am, 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 pe r 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 tota l amount collected per131 capita for administra tive 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 reinsuranc e 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 nationa l payment parameters. We seek comment on this approach, and other reasonable, admini stratively simple approaches that may be used to calculate administ rative costs. 4. Calculation and Collection of Reinsurance Contributions a. Calculation of Reinsurance Contributi on Amount and Timeframe for Collections We intend to administer the reinsurance program in a manner that minimizes the administrative burden on health insurance i ssuers and self-insured group health plans, while ensuring that contributions are calcu lated accurately. Thus, we propose in §153.400(a) and §153.240(b)(1), respec tively, to collect and pa y out reinsurance funds annually to minimize the costs of admi nistering the program and the burden on contributing entities. If we were to colle ct and make reinsurance payments throughout132 the benefit year, we would likel y be required to hold the di sbursement of a large portion of the reinsurance payments unt il the end of the benefit ye ar to ensure an equitable allocation of payments. This would deprive c ontributing entities of th e 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 th at 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, a nd 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 a dd §153.405, which provides that the reinsurance contribution of a contributing entity be calculated by multiplying the average number of covered lives of reinsurance c ontribution 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 th e applicable benefit year.

We also propose to amend §153.405(b) to re quire 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 averag e 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 re insurance contributions at the national contribution rate annually and in a manner sp ecified by HHS. We also propose to amend133 §153.400(a) so that each contributing entity makes reinsurance contributions under any additional applicable State supp lemental 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 accura te count of a contributing entity’s average covered lives, and would avoid the need fo r any initial estimates and subsequent reconciliation to account for fluc tuations 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 pa id 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 cont ributing 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 insuran ce issuer may use to determine the average number of covered lives of reinsurance c ontribution enrollees under a health insurance plan for a benefit year for purposes of th e annual enrollment count. These methods promote administrative efficiencies by build ing 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 determin e an annual enrollment count134 during the fourth quarter of the benefit year. 30 Thus, under each of these methods, the number of covered lives will be determined ba sed 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 woul d 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” gene rally by adding the to tal 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 th e number of dates on which a count was made. For reinsurance co ntributions purposes, an issuer would add the totals of lives covered on a date (or more dates if an e qual number of dates are used for each quarter) during the same corresponding m onth in each of the first three quarters of the benefit year, (provided that the dates us ed for the second and third quarters must be within the same week of the quarter as the date used for the first quart er), 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 “Membe r 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 Hea lth 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 th at it is important that health insurance issuers achieve an accurate count of covered lives, particularly for individual market plans. We expect that the individual mark et would be subject to large increases in enrollment between 2014 and 2016. Therefor e, we propose a modified counting method based upon the ratio of covered lives per polic y in the NAIC or State form. Specifically, we propose that health insurance issuers us ing this method multiply the average number of policies for the first nine months of the a pplicable benefit year by the ratio of covered lives per policy calculated from the NAIC S upplemental Health Care Exhibit (or from a form filed with the issuer’s State of domic ile for the most recent time period). Issuers would count the number of policies in the first nine months of the a pplicable 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 issu er 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 2.2 5 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 a pplicable benefit year, it would report 2.25 multiplied by 2,300 as the number of covere d 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-insur ed group health plan may use to determine the average number of covered lives for pur poses of the annual enrollment count. These136 methods mirror the methods permitted to spons ors of self-insured group health plans under the PCORTF Rule, modified slightly fo r 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 addi ng 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 dividi ng 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 othe r 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 select ed for the first quarter. (3) Form 5500 Method : Under the PCORTF Rule, a plan sponsor may use the “Annual Return/Report of Employee Benefit Pl an” filed with the De partment of Labor (Form 5500) by using data from the Form 5500 fo r 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 develo ped 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 contri butions, 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 hea lth 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 enro llment in the individual market. Thus, we propose that a self-insured group plan may cal culate the number of lives covered for a plan that offers only self-only coverage by a dding 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 th at offers self-only c overage and coverage other than self-only coverage may calculate the number of lives covered by adding the total participants covered at the beginning a nd 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 op tions that are insured. In §153.405(f), we propose that to determine the number of c overed lives of rein surance contribution enrollees under a group health plan with bot h self-insured and in sured options for a benefit year must use one of the met hods specified in either §153.405(d)(1) or §153.405(d)(2) – the “actual coun t” method or “snapshot count” for health insurance issuers. Aggregation of self-insured group hea lth plans and health insurance plans : We propose in §153.405(g)(1) that if a plan spons or maintains two or more group health plans or health insurance plans (or a group heal th plan with both in sured 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, then138 these multiple plans must be treated as a single self-insured group health plan for purposes of calculating any re insurance contribution amount due under paragraph (c) of this section. This approach would prevent the double countin g of a covered life for major medical coverage offered across multiple plan s, and prohibit plan sponsors that provide such major medical coverage from splitting th e 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 s ponsor 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 cas e of a multi-employer plan (as defined in section 414(f) of the Code); (D) The committee, in the case of a mu ltiple employer welfare arrangement; (E) The cooperative or associ ation that establis hes or maintains a plan established or maintained by a rural electric cooperativ e 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 thatthe 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 establis hed or maintained by an employer or other person); (G) In the case of a pla n, the plan sponsor of whic h 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 c overed 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 pers on may be designated as the plan sponsor only if the person is one of the persons main taining 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 describe d in (A) through (F) above, and for which no identification or desi gnation of a plan sponsor has been made pursuant (G), each employer or employee orga nization that maintains the plan (with respect to employees of that employer or employee organization), and each board of trustees, cooperative or associa tion that maintains the plan. Exceptions : We propose two exceptions to this aggregation rule, in §153.405(g)(3). First, if the be nefits provided by any health insurance or self-insured group health plans are limited to excepted bene fits within the mean ing of section 2791(c) of the PHS Act (such as sta nd-alone dental or vision benefits), the excepted benefits coverage need not be aggregated with other plans for purposes of th is section. Second, if benefits provided by any health insurance or self-insured group hea lth 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 chos en to structure their coverage in that manner. As discussed in sect ion III.C.2. of this proposed ru le, coverage that consists solely of prescription drug or excepted bene fits is not major medical coverage. If140 enrollees have major medical coverage and se parate coverage cons isting of prescription drug or excepted benefits, reinsurance contribut ions only would be required with respect to the major medical coverage. Reinsuran ce contributions would not be required with respect to the same enrollees’ prescripti on 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 (cover ed 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 anti cipate that a plan sponsor wi ll generate or obtain a list of the participants in each plan and then an alyze the lists to identify those participants that have major medical coverage across a ll 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 us e one of the methods applicable to health insurance plans or self-insured grou p 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 reinsu rance entity concerning multiple plans, as discussed in §153.405(g)(4). Addi tionally, it is important to note that the reinsurance program operates on a benefit year basis as di scussed in section III.C.5. of this proposed rule, which is defined at §153.20 of this pa rt (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 snapsh ot count method for health insurance issuers in §153.405(d)(2 ) must be used. We propose to prohibit the use of the141

“Member Months Method” or “State Form Method” to count covered lives across multiple insured plans because those met hods 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 mu st determine and report, in a timeframe and manner established by HHS, to HHS (or, the a pplicable reinsurance entity if the multiple plans all consist solely of health insurance pl ans and the applicable re insurance 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 met hod 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 ava ilable 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 ar e 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 c overed lives are not available on that form. Thus, we propose three possibl e 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 covered142 lives calculated; (2) the counting method used ; and (3) the names of the multiple plans being treated as a single group health pl an 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 c ontributions from that used for purposes of the return required in connection with the PCORTF Ru le. Because time periods and counting methods may differ, we would not require th at 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 fo r 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), th e 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 appro ach to counting covered lives for reinsurance contributions. b. State Use of Contributions Attri buted to Administrative Expenses To achieve the purposes of the reinsura nce program, reinsurance contributions collected must be appropriately spent on re insurance payments, payments to the U.S. Treasury, and on reasonable expens es 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 expe nses, to permit States that participate in the reinsurance program to accu rately 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 ri sk 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 progr am so that reinsurance funds intended for administrative expenses cannot be used fo r staff retreats, promotional giveaways, excessive executive compensation, or promoti on of Federal or State legislative or regulatory modifications. Second, we intend to propose that reinsurance funds intended for administrative expenses may not be us ed for any expense not necessary to the operation and administration of the reinsura nce program. Third, we intend to propose that an applicable reinsurance entity must allocate any shar ed, indirect, or overhead costs between reinsurance-related and other St ate expenses based on generally accepted accounting principles, consistently applied. An applicable reinsurance entity would be required to provide HHS, in a timeframe a nd manner specified by HHS, a report setting forth and justifying its allocation of admi nistrative 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 clarif y that, under either the reinsurance national payment parameters or the State s upplemental reinsurance payment parameters, if applicable, a reinsurance-eligible plan’s covered claims costs for an enrollee incurred prior to the application of 2014 market re form rules – §147.102 (fai r health insurance premiums), §147.104 (guaranteed availability of coverage, subject to the student health insurance provisions at §147.145), §147.106 (gua ranteed renewability of coverage, subject to the student health insuran ce provisions at §147.145), §156.80 (single risk pool), and Subpart B 156 (essential health bene fits 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 to144 avoid claims costs for newly insured, hi gh-cost individuals by excluding certain conditions (for example, maternity coverage for women of child-bearing age), by denying coverage to those with cert ain high-risk conditions, and by pricing individual premiums to cover the costs of providing coverage to su ch individuals. (We not e that student health plan eligibility would be subj ect to the modified guaranteed availability and guaranteed issue requirements only, to the extent that they apply, as set forth in §147.145, and we would require that the student health plans only meet those modified requirements to be eligible for reinsurance payments.) The market reform rules will be effective for the individual market for policy years 33 beginning on or after January 1, 2014, and as a result, policies that are issued in 2013 will be subject to these rules at the time of renewal in 2014, and therefore, become eligible for reinsu rance payments at the time of renewal in
2014. We believe that providing re insurance payments only to those reinsurance-eligible plans that are subject to the 2014 market re form rules better refl ects the reinsurance program’s purpose of mitigating premium adju stments to account for risk from newly insured, high-cost individuals. We also propos e that State-operated reinsurance programs similarly limit eligibility for reinsurance payments. We recognize that this policy contrasts with the approach proposed for Stat e-operated risk adjustment programs, under which HHS is proposing to permit States to choo se to risk adjust plans not subject to the 2014 market reform rules. Because some St ates may have enacted State-specific rating and market reforms that they believe would ju stify 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 de ductible or limit year used under the coverage. If deductibles or other limits are not imposed on a year ly basis, the policy year is the calendar year.”145 applicability of risk adjustme nt to plans not subject to the 2014 market reform rules furthers the goals of the ri sk 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 reinsura nce 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 Afford able 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 con cerning contributions from and payments to issuers use the term “plan year.” Howeve r, 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 w ith the calendar year. Second, a calendar year based program would ensure adequate co llections in the early part of the program and to preserve fairness in making reinsu rance payments. Third, implementing the reinsurance program on a calendar year basi s permits the reinsurance program schedule to coincide with the MLR and the temporar y risk corridors program schedules, both of which operate on a calendar year basis. Fi nally, we believe thatthe purpose of the reinsurance program is to stabilize prem iums 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 th at 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 enroll ee’s claims costs paid by the issuer that exceeds an attachment point, subject to a reinsurance cap. The coinsurance rate, attachment point, and reinsuranc e cap are the reinsurance “payment parameters.” Section 1341(b)(2)(B) of the Affordable Care Act dir ects the Secretary, in establishing standards for the transitional reinsurance program to in clude a formula for determining the amount of reinsurance payments to be made to issuer s for high-risk individua ls that provides for the equitable allocati on 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 para meters 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 furthe ring 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 reinsu rance market. In contrast to commercial reinsurance, which is used to protect agains t risk, the primary purpos e of the reinsurance program is to stabilize premiums in th e individual market from 2014 through 2016. The reinsurance program is designed to protect ag ainst 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 from147 many newly insured individuals who enter th e individual market as a result of the availability of premium tax credits, more affordable c overage, the minimum coverage provision, and greater transparency and co mpetition 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 nati onal payment paramete rs be established at an attachment point of $60,000, when rein surance payments would begin, a national reinsurance cap of $250,000, when the reinsurance program st ops paying claims for a high-cost individual, and a unifo rm coinsurance rate of 80 pe rcent, meant to reimburse a proportion of claims between the attachment point and reinsurance cap while giving issuers an incentive to contain costs. Th ese three proposed paym ent 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 im pact on premiums across all States. We believe that these proposed national payment parameters best address the reinsurance program’s goals to promote national premiu m stabilization and market stability while providing plans incentives to co ntinue effective managementof enrollee costs. We intend to continue to monitor individual market enrollment and claims patterns to appropriately disburse reinsu rance payments throughout each of the benefit years. To assist with the development of th e payment parameters, HHS developed a model that estimates market enrollment inco rporating the effects of State and Federal policy choices and accounting for the behavi or of individuals and employers, the148

Affordable Care Act Health Insurance M odel (ACAHIM). The outputs of the ACAHIM, especially the estimated enrollment and expendi ture distributions, were used to analyze a number of policy choices re lating to benefit and paymen t parameters, including the national reinsurance c ontribution rate and na tional reinsurance payment parameters. The ACAHIM generates a range of nati onal and State-level outputs for 2014, including the level and com position of enrollment across ma rkets given the eligible population in a State. The ACAHIM is describe d below in two sections: (1) the approach for estimating 2014 enrollment and (2) the ap proach for estimating 2014 expenditures. Because enrollment projections are key to es timating 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, excl usion of undocumented immigrants, and population growth to 2014, to as sign individuals to th e various coverage markets. More specifically, the ACAHIM assigns each individual to a single health insurance market as their baseline (pre-Affo rdable 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 th e CPS distribution of coverage offers for firms of a similar size and industry. Genera lly, to determine the predicted insurance enrollment status for an indi vidual 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 reduc tions under the Exchange. Whenever a transition to another coverage market is possible, the ACAHIM ta kes into account the149 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 individu al market coverage as informed by current take-up rates of insurance across States, varying by demogr aphics and incomes and adjusting for post Affordable Care Act provisions, such as adva nce 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 paramete rs so that estimated contributions align with estimated payments for eligible enrollees. The ACAHIM uses the Health Intelligence Company, LLC (HIC) database fr om 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 distri butions are further adjusted to take into account plan benefit design, or, “m etal” 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 ra ta adjustment rate in the event that HHS determines that the amount of total request s for reinsurance payments under the national reinsurance payment parameters will exceed the amount of reinsurance contributions collected under the national c ontribution rate during a give n benefit year. The total amount of contributions considered for this purpose would include any contributions150

collected but unused under the national contri bution rate during a ny previous benefit
year. For example, in 2014, if total request s 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 to tal 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 calculate d 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 woul d ensure that claims are paid at the same rate out of the national reinsurance fund, and promote equi table 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 propos ing 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 supplemental151 payments parameters may only be made with additional funds the State collects for reinsurance payments under §153.22 0(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 rein surance payments, as provided for under section 1341(b)(3)(B) of the A ffordable Care Act, while allowing nationwide access to the reinsurance payments from the contributi ons 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 th e national attachment point; (2) increasing the national reinsurance cap; or (3) increasi ng the national coinsura nce rate. In other words, a State may not alter the national re insurance payment parameters in a manner that could result in reduced reinsurance pa yments. 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 certaint y for premium rate setting purposes, we propose that a State ensure that any additiona l funds for reinsurance payments it collects under §153.220(d)(1)(ii) or State funds under §153.220(d)(3) as a pplicable are reasonably calculated to cover additional re insurance 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)(i i) or additional funds collected under §153.220(d)(3), as applicable, must be applied toward requests for reinsurance payments152 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 heal th insurance issuer of a non-grandfathered individual market plan b ecomes eligible for reinsurance payments under a State’s supplemental reinsurance parame ters, 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 nationa l 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 re insurance payment parameters so that the State could apply any additional contribut ions it collects under proposed §153.220(d) towards reinsurance payments beyond the nation al 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 el ect to run their own program the flexibility to supplement nationally calculated reinsura nce payments. As mentioned previously, States would be required to separate in its reporting to issuers th e reinsurance payments paid under the national reinsurance paymen t parameters and State supplemental reinsurance payment parameters. To ensure that reinsurance paymen ts under State supplemental payment parameters do not overlap with the national reinsurance payment parameters, we propose the method for calculating Stat e supplemental reinsurance payments. Specifically, we propose in §153.232(d) that supplem ental reinsurance payments with respect to a health insurance issuer’s claims costs for an indi vidual enrollee’s covere d benefits must be calculated by taking the sum of: (1) the pr oduct of such claims costs between the supplemental State attachment point and the national attachment point multiplied by the153 national coinsurance rate (or applicable State supplemental coinsurance rate); (2) the product of such claims costs between the na tional reinsurance cap and the supplemental State reinsurance cap multiplied by the nationa l 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 modi fy all three national reinsurance payment parameters, by establishing a State supplem ental attachment point of $50,000, a State supplemental coinsurance rate of 100 percent, and a State suppleme ntal reinsurance cap of $300,000. Under these supplem ental State reinsurance paym ent 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 issu er’s costs between the 2014 national reinsurance cap of $250,000 and the 2014 Stat e 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 supplemen tal coinsurance rate (100 percent) and the national coinsurance rate (80 percent). Contributions collect ed under the national contribution rate would be applied to an i ssuer’s claims costs above the 2014 national attachment point, subject to the national co insurance rate and na tional 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. Th at State would then use any additional contributions it collects to cover up to $16,000 or 80 percent (the 2014 national154 coinsurance rate) of an is suer’s claims costs between $40,000 (the 2014 supplemental State attachment point) and $60,000 (the 2014 nati onal attachment point). As in the first example, contributions collected under the na tional contribution rate would be applied to an issuer’s claims costs above the 2014 nationa l attachment point, subject to the national coinsurance rate and na tional reinsurance cap. Similar to payment calculations under the national reinsurance payments parameters, we propose in §153.232(e) that if all requested reinsu rance 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 re insurance entity in the State must reduce all such requests for reinsurance payments under the State supplem ental 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 s upplemental reinsurance payment parameters do not exceed the issuer’s total paid amount fo r the reinsurance-eligib le 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, in cluding other areas of flexibility that could be provided to State-operate d reinsurance programs. 9. Allocation and Distribution of Reinsurance Contributions Section 153.220(d) of the Pr emium Stabilization Rule currently provides that HHS would distribute reinsuran ce contributions collected for reinsurance payments from a State to the applicable rein surance entity for that State. We propose to replace this155 section with proposed §153.235(a), which provides that HHS will allocate and distribute the reinsurance contributions collected under the na tional 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 St ates for the applicable benefit year, based on all available contributions and the aggregate requests for reinsurance paym ents, net of the pro rata adjustment, if any. We believe that this method of disbursing reinsurance contributions will allow the transitional re insurance 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 es tablishes a reinsuran ce program, HHS would directly collect from health in surance issuers, as well as self -insured group health plans, the reinsurance contributions for enrolle es 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 applicab le reinsurance entity to collect data needed to determine reinsurance payments as described in §153.230. We propose to amend §153.240(a) by adding subpara graph (1) to direct a St ate 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-elig ible 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 re insurance entity, ther efore, must reduce a plan’s paid claims amount considered for reinsurance payments attributable to costsharing reductions. When HHS operates a re insurance program on behalf of a State,156

HHS would utilize the same di stributed data collection appr oach that we propose to use for risk adjustment, as described in section II I.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 determ ine an issuer’s reinsurance payments. The distributed data collection a pproach 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 i ssuer of a reinsurance- eligible plan that does not generate individual en rollee claims in the normal c ourse of business (such as a capitated plan) may request reinsurance paymen ts (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 subj ect 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 an d State-specific circumstances. This proposed amendment would enable certain reinsu rance-eligible plans, such as staff-model health maintenance organizations, that do not ge nerate 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 en counters, and derive costs for those claims when submitting requests for reinsurance paymen ts (or submitting data to be considered for reinsurance payments). It is our unders tanding 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-ser vice equivalent pr ice or the usual,157 customary, and reasonable equivalent that woul d have been paid for the service in the applicable market. A capitated plan shoul d 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 th e methodology in a manner that yields derived claims that are reasonabl e in light of the specific market that the plan is serving. Capitated plans, like all plans that submit re insurance payment requests (or data to be considered for reinsurance payments) in the HHS-operated program, will be subject to validation and audit. Becau se capitated plans already us e pricing methodologies, we believe this proposed policy would permit capitat ed plans to participat e in the reinsurance program with a minimal increase in admini strative burden. We welcome comments on this approach. b. Notification of Reinsurance Payments We propose to add §153.240(b)(1) which dir ects 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 ad justment payments and charges, allowing issuers to account for their to tal 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 informa tion 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 the158 expected requests for reinsurance payments fo r each quarter. HHS intends to collaborate with issuers and States to develop these ear ly 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 reinsu rance payments and thatuse and disclosure of personally identifiable information is limited to those purposes for which the personally identifiable information was co llected (including for purposes of data validation). This proposal aligns with co rresponding 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 de fining personally identifiable information in this proposed rule, and incorporate the af orementioned definition in to this proposed rule. We also propose to amend §153.240 by adding pa ragraph (d)(2) to require that an applicable reinsurance entity implement specifi c privacy and security standards to ensure enrollee privacy, and to protect sensitive info rmation. 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/de fault/files/omb/memorand a/fy2007/m07-16.pdf.159 complies with the same privacy and security standards that ap ply to issuers and providers, specifically the security standard s described at §164.308, §164.310, and §164.312. d. Data Collection We propose to add new §153.420(a) to addr ess data collectio n issues, including the distributed data collection approach th at 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 calculati on of enrollees’ claims costs incurred by the issuer), in accordance with the reinsurance data collection appro ach 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 paymen ts for the applicable benefit year by April 30 of the year following the end of the applicable benefit year. The Ap ril 30 deadline would apply to all issuers of reinsurance-eligible plans, regardless of whether HHS or the State is operating reinsurance. We welc ome comments on this proposal. D. Provisions for the Tem porary Risk Corridors Program
1. Definitions In the Premium Stabilization Rule, we st ated 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 th e MLR program. We, therefore, propose the following amendments and additions to the definitions in this section. We propose to amend §153.500 by defining “t axes” with respect to a QHP as Federal and State licensing and re gulatory fees paid with resp ect 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). Th is definition aligns with the fees and160 taxes deductible from premiums in the MLR cal culation. We use this definition to define “after tax premiums earned” which we pr opose 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 th is broader definition, administrative costs may also include fees and assessments othe r than “taxes,” as defined above. Using the definitions above, we pr opose 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 corridor s equation; however, we provide for a minimum 3 percent profit margin so that the risk corridors pr ogram will protect a reasonable profit margin (subject to the 20 percent cap on allowable administrative cost s as described below). We believe that permitting issuers of QHPs to reta in 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, a nd 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 bus iness 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 sugge st 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 us e in the risk corri dor calculation. Finally, using the definition of profits di scussed 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, ot her 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 taxe s. This definition reflects the inclusion of profits and taxes discussed above, and cl arifies that the 20 pe rcent 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 t echnology, and other applic able adjustments. Risk adjustment and reinsurance payments are after-the-fact adjustments to allowable costs for purposes of determining risk corri dors amounts, and allowable costs must be reduced by the amount of any cost-shari ng reductions received from HHS.

• Non-Claims Costs : Assume that the QHP has non-claims costs of $50, of which $15 are properly allocab le to licensing and regulat ory 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. Administra tive 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 premiu ms earned by the QHP minus the sum of allowable costs and administrative cost s, 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, pl us profits earned by the QHP, which sum is limited to 20 percent of af ter-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 co sts to target amount, or the ratio of $140 to $148, or approximately 94.6 per cent (rounded to the nearest one-tenth of one percent), meaning that th e QHP issuer would be required to remit to HHS 50 percent of approximately (97 percent - 94.6 per cent) = 50 percent of 2.4 percent, or163 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 a nd 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 charge s to HHS. Under this provision, an issuer would be required to remit char ges within 30 days after notif ication 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 reinsura nce 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 re vised 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 pa id by parties other than the enrollee in a QHP, specifically advance premium tax cred its. We further specified that risk adjustment and reinsurance payments be re garded 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-shari ng reductions received from HHS. For example, if a QHP incurred $200 in allowable co sts for a benefit year, but received a risk adjustment payment of $25, made reinsuran ce 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 re insurance payments received – $15 costsharing reduction payments). As noted in section III.E. of this propos ed rule, we are proposing an approach to reimbursement of cost-sharing reductions th at would add an additional reimbursement requirement for cost-sharing reductions by provi ders with whom the issuer has a fee-forservice compensation arrangement. As desc ribed 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 be nefit 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 enro llee 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 rais ed 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 paymen ts 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), a nd (c) to specify that we will address the manner of submitting required risk corridors da ta in future guidance rather than in this HHS notice of benefit and payment parameters. E. Provisions for the Advance Payments of the Premium Tax Cr edit 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), curren tly entitled “special rule for multiple tax households.” Currently, this provision se ts forth a rule for determining the costsharing reductions applicable to individuals who are, or who are expected to be, in different tax households but w ho enroll in the same QHP pol icy. This provision includes a hierarchy of cost-sharing eligibility categories. Ou r proposed amendment would166 rename this paragraph “special rule for fa mily 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 w ould 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 variati on for which all members of the family are eligible. We note that nothing in this pr ovision precludes qualif ied individuals with different levels of eligibility for cost-shari ng reductions from purchasing separate policies to secure the highest cost-sharing reductions for which they are respectively eligible. We expect that Exchanges will assist consum ers in understanding the relative costs and benefits of enrolling in a family policy versus several indivi dual policies. The following example demonstrates th e applicability of this provision:

• Example: A and B are parent and child who live together, but are each in separate tax households. A a nd B purchase a silver leve l QHP family policy in the individual market on an Exch ange. A has a household income of 245 percent of the FPL, while B has a household income of 180 per cent 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 pl an variation (that is, with lower cost-sharing requirements). Unde r 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 lim it the cost-sharing reductions that members of a family could receive if the fa mily chooses to enroll in a family policy; however, section 1402 of the Affordable Ca re Act does not permit an individual to receive benefits unde r the Federal cost-s haring reductions program for which the167 individual is ineligible. In addition, becau se deductibles and out-of-pocket limits are calculated at the policy level, as opposed to the individual le vel, it would be operationally difficult to establish separate cost-sharing requ irements for different enrollees within the same policy. We discuss this policy further wi th 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 cl arify 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 prem ium 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-re ported change by an in dividual under §155.330(b) or as a result of periodic data ma tching 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 adva nce payments may receive the excess as an income tax refund, and a tax filer whose adva nce payments for the taxable year exceed the tax filer’s premium tax credit would owe th e 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 th e 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 made168 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 in formation is available to the Exchange, such that the recalculated advan ce 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, cal culated 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 gr eater 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 th e premium tax credit during open enrollment prior to 2014 based on an expected hous ehold 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 th e 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 expect ed decrease in annual household income such that tax filer A’s projected household income for the y ear 2014 will now be $27,925 (250 percent of the FPL). Thus, the maximum amount of a dvance payments of the premium tax credit per month would be calculated as fo llows: 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 al ready made on behalf of tax filer A. The Exchange must first multiply $113 by 12 months to calculate the e xpected tax credit for the entire year ($1,356), subtra ct the amount already paid fo r 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 adva nce payment for the remaining months of $191. In this example, we assume that th e taxpayer has elected to have the maximum advance payment for which he or she is eligib le 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 pr eviously receive advance payments of the premium tax credit, the Exchange would calcu late 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 a nd 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 th at 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 ta x year. Without retroactive payments, in the case of a redetermination late in the year, we would ha ve a limited ability to pay out an increase because of the limitation that the premium ta x 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 he lp address any outsta nding premium amounts170 owed by an enrollee to a QHP issuer. We so licit comments regarding whether we should adopt this approach, and how QHP issuers shou ld be required to pr ovide the retroactive payments to enrollees. In §155.330(g)(2), we propose that, when redetermining elig ibility 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 benef it year, as determined at redetermination. Section 1402(f)(3) of the Afford able Care Act provides that eligibility determinations for cost-sharing reductions are made on the basi s 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 in come figure for purposes of determining eligibility for advance payments of the premium tax credit, eligibility for cost-sharing reductions must also be redetermined us ing 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 e ligibility for cost-sharing reductions should not take into account the amount of cost-sha ring reductions alr eady provided on an individual’s behalf. The following example demonstrates th e 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 se lf-reports an increase in e xpected household income such that tax filer B’s expected annual househol d income will now be at 200 percent of the171 FPL. The Exchange must redetermine the tax filer’s eligibility for cost-sharing reductions for the remainder of the benef it 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 reductio ns for individuals with thatexpected 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 th at 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 th rough the Exchange (whe ther 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 de ntal 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 allocati on 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 the172 stand-alone dental policies inproportion 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 ex ample, if a family collectively eligible for advance payments of the premium tax cred it 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 benef it, respectively, the Exchange must allocate five-ninths of the advance payment of the pr emium 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 ensu ring that the advance payment of premium tax credits are only for (and based on) the por tion 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 propos ed provision in §156.460(a), §155.340(f)(1) would direct the Exchange to reduce the por tion of the premium for the policy collected from the enrollee by the amount of the advan ce 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 prem ium collections in these circumstances, the173 Exchange must also take responsibility for lowering the premium costs charged to enrollees by the amount of the credit. Pr oposed §155.340(f)(2) woul d direct Exchanges to display the amount of the advance pa yment of the premium tax credit for the applicable month(s) on an enroll ee’s billing statement. This is the Exchange equivalent of the requirement for QHP issuers proposed in §156.460(b). Both ru les 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: Certifica tion of Qualified Health Plans We propose to add §155.1030. This section would set forth standards for Exchanges to ensure that QHPs in the i ndividual 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 describe d 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 believ e that it is appropriate to incorporate these standards into the QHP certif ication criteria because Exchanges are the primary entities that interact with and oversee QHPs. In §155.1030(a)(1), we propose that the Exch ange ensure that each issuer that offers or seeks to offer a QHP in the i ndividual 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 th e Exchange. Further we propose that the Exchange must certify that the plan varia tions meet the requirements detailed in174 §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 cer tification the information necessary to validate that the issuer meet s the requirements for zero and limited cost sharing plan variations, as de tailed in §156.420(b) . We expect that this da ta 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 cal culate 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 pr ovide 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 su bmit under §156.470 that would allow for the calculation of the advance pa yments of cost-sharing reductions and the premium tax credit. Specifically, in § 156.470(a), we propose that an issu er 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 Exch ange, an allocation of the ra te 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 bene fits 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 pr ovides 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 re ductions, to pay for the services.175 information, under section 36B(b)(3)(D) of th e 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 cred it. The rate alloca tion 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 monthl y 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 allo cation, 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 in dividual market on the Exchange also submit to the Exchange annually for approval, an actuarial memorandum with a detailed description of the methods and specific base s 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 en sure that the allocation is performed by a member of the American A cademy 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 describe d 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 th e proposed EHB/AV Rule, and the allocation requirements described in §156.280(e)(4) for cert ain services. Fourt h, the issuer should calculate the allocation as if it was a premiu m under the fair health insurance premium standards described at §147.102, the single risk pool stan dards described at §156.80, and the same premium rate standards describe d at §156.255. We propose this requirement176

because we believe the alloca tion of rates should be perf ormed consistent with the standards applicable to the set ting of rates. Thus, for example, an issuer should calculate the allocation of premiums using costs for essen tial health benefits across all enrollees in all plans in the relevant risk pool, un der §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 analyt ical burden on issuers, and it would not align with other reporting requirements, suchas for the Effective Rate Review program (established under sec tion 2794 of the PHS Act), which requires projections based on the single risk pool standards. We welcom e comment on this proposed standard and alternative approaches. In §156.470(b), we propose somewhat sim ilar standards for the allocation of premiums for stand-alone dental plans. Specifically, we propos e that an issuer provide to the Exchange annually for approval, for each st and-alone dental plan offered, or proposed to be offered, in the individual market on the Exchange, a dolla r allocation of the expected premium for the plan, to: (1) the pe diatric dental essentia l health benefit, and (2) any benefits offered by the stand-alone dent al 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 plan s offered or proposed to be offered as QHPs, issuers of stand-alone dental plans would be required to su bmit 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 and177 156.80 (related to fair health insurance premiu ms and the single risk pool), and as a result, are not required to deve lop rates under the same limitati ons that apply to issuers of QHPs in the individual and small group market s. 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 allocati on. We anticipate that issuers of standalone dental plans may take into account a dditional rating factors, up to and including medical underwriting, which would make th e completion and submission of final premium rating methodologies to the Exch ange problematic. Our proposal at §156.470(b) does not require issuer s of stand-alone dental pl ans to finalize the total premium prior to the benefit year, but does re quire 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 informati on 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 le vel 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 propos e that the allocation be performed by a member of the American Academy of Actu aries in accordance with generally accepted actuarial principles and methodol ogies, 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 allocati on be calculated under the fair health178 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 po ol standards described at 45 CFR 156.80; and the same premium rate sta ndards described at 45 CFR 156.255 (in each case subject to the standard proposed in s ubparagraph (4) described below). We propose these standards because we believe that Congr ess 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 prem ium standards related to age, we propose in subparagraph (4) that the allo cation be calculated so that the amount of the premium allocated to the pediatric dental essential heal th benefit for an indivi dual 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 enroll ees in all plans in the relevant risk pool, under §156.80. This will ensure that adva nce payments of the premium tax credit are applied to policies that in clude individuals who may benef it 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 st andards. We also note that issuers of stand-alone dental plans are not required to submit an al location 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 allo wed 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 a llocation information in conjunction with the179

rate and benefit information that the issu er submits under §156.210. To facilitate this review, we proposed revisions to the repor ting requirements for the Effective Rate Review program in the proposed Market Reformrule to include th e rate allocation and expected allowed claims cost allocation info rmation 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 revi ew, 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-al one 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 Revi ew program. Therefore, we expect that Exchanges will collect the allocation inform ation through the Effective Rate Review program or the QHP certification and annual submission process, as appropriate. As discussed above, the rate and premiu m allocation information would then be used by the Exchange to calculate the dolla r 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 reducti ons, as described in §156.430. To allow for these calculations, and to ensure that Fede ral 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 fu rther 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 th e start of the benefit year. In paragraph (b)(4), we propose authority for the use of this data by HHS for the approval of the180 estimates that issuers submit for advance pa yments of cost-sharing reductions described in §156.430, and for the oversight of the advanc e payments of cost-sharing reductions and premium tax credits programs. In §155.1030(b)(3), we propose that the Ex change collect annually any estimates and supporting documentation that a QHP issuer submits to receive advance payments for the value of the cost-shari ng reductions under §156.430(a). The Exchange must then submit the estimates and supporting documenta tion 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 pr opose 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 reductio ns. We propose to add this section to clarify that compliance with part 156 subpart E, includi ng 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 and181
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 cert ification with respect to advan ce payments of the premium tax credit and cost-sharing reductions (described previously). 4. Health Insurance Issuer Re sponsibilities 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 pa rts 155 or 156, including definitions proposed in the proposed EHB/AV Rule: the terms “adva nce 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 shari ng” is defined as the highe st annual dollar amount that health plans (other than QHPs with cost-sharing reductions) may require in cost sharing for a particular year, as established fo r that year under §156.130 of the proposed EHB/AV Rule. The terms “Federal poverty le vel or FPL” and “Indian” are defined by reference to §155.300(a). The term “de minimis variation” is define d as the allowable variation in the AV of a health plan that does no t result in a material difference in the true dollar value of the health pl an 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 defi nitions of cost sharing and cost-sharing reductions apply only with respect to EHB, t hough without regard to whether the EHB is182 provided inside or outside of a QHP’s netw ork. We propose to define “annual limitation on cost sharing” to mean the annual dollar lim itation on cost sharing re quired to be paid by an enrollee that is established by a particul ar 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 fo r §156.420(c) and (d)) relating to cost-sharing reductions do not apply to those additiona l State-required benefits. For clarity, we note these provisions apply to State-re quired benefits included inEHB under §156.110(f) of the proposed EHB/AV Rule. Finall y, we note that cost-sharing reductions are subject to §156.280(e)(1)(ii). Other definitions are pro posed here to effectuate the regulations proposed in subpart E. This Payment Notice includes five related definitions: st andard plan, silver plan variation, zero cost shari ng 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 st andard platinum plan, respectively.

• We propose to define “silver plan variat ion” as, with respect to a standard silver plan, any of the variations of that st andard silver plan de scribed 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 shar ing variation” as, with respect to a QHP at any level of coverage, the variati on of such QHP descri bed in §156.420(b)(2), which provides for the prohibition on cost shar ing 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 admini ster 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 standa rd cost-sharing structure, we use the concept of plan variations to describe how cer tain 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 reducti ons, we propose that each plan variation will reflect the enrollee’s portion of the cost sh aring requirements for the QHP. We refer to “assigning” enrollees to the applicable planvariation 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 pa rt 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 va riation” as a single percentage point. That is, we propose that 1 percentage point vari ation in the AV of a184 silver plan variation would not result in a material differen ce in the true dollar value of the silver plan variation. We note that this proposal diffe rs from the 2 percentage point de minimis variation standard for healthplans, proposed in §156.140(c)(1) of the proposed EHB/AV Rule. We believe that beca use 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 li st, as proposed to be amende d under this rule, first lists the QHP with no cost-sharing reductions, followed by the limited cost sharing plan variation, the 73 percent, 87 per cent, and 94 percent silver plan s, and finally, the zero cost sharing plan variation. We s eek 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 li mitation 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 “re duced maximum annual limitation on cost sharing” as the dollar value of the maximum annual li mitation on cost sharing for a silver plan variation that remains after applying the reduction in the maximum annual limitation185 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 limita tion, only with respect to cost sharing on EHB, and does not apply to cost shar ing on services provided by out-of-network providers. b. Cost-sharing reductions for enrollees In §156.410(a), we propose that a QHP issu er must ensure that an individual eligible for cost-sharing reductions, as demons trated by assignment to a particular plan variation, pay only the cost sharing required of an eligible individua l for the applicable covered service under a plan vari ation. For example, if an in dividual is assigned to an 87 percent AV silver plan variation, and the c opayment 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 copaym ent 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 shar ing, 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 a nnual 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 coinsura nce rate until any applicable (potentially reduced) deductible has been pa id. For example, assume that a QHP issuer requires a186 $750 deductible for individuals eligible for a 73 percent AV silver plan variation, with reduced cost sharing occurring after the deduc tible is met. Further assume that an individual eligible for cost -sharing reductions has not prev iously incurred cost sharing during the benefit year under the QHP and ha s a two day hospital stay that costs $500 per day. Under this plan variation, the indi vidual must pay $500 for the first day and $250 for the second day to meet the plan’s de ductible 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 indivi dual 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 en roll in any silver health plan with the appropriate cost-sharing reduc tions 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 determinatio n 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 silv er plan in the individual market in the Exchange to the silver plan variation for which the qualifie d 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 variation187 could cause significant cons umer confusion, with no attendant policy benefit. Furthermore, we note that if a qualified indi vidual 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 s eeking 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 individua ls once the QHP issuer has been notified of the individual’s eligibil ity. 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 fo r certification and approval the variations of the hea lth plans that they seek to offe r, or continue to offer, in the individual market on the Exchange as QHPs that include requi red levels of costsharing reductions. We further clarify th at 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 ce rtify 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 Ac t direct issuers to reduce cost sharing for EHB for eligib le 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 reduc tions) of the total allowed costs of the benefits are a certain percentage (that is, the health plan meets a certain AV level). To188
achieve these AV levels, the law directs is suers 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 Afford able 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 th e annual limitation on cost sharing to comply with the applicable reduced maximum a nnual limitation, section 1402(c)(2) of the Affordable Care Act directs th e Secretary to estab lish procedures under which an issuer is to further reduce cost shar ing 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 Maxi mum 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 hou sehold incomes of 250 to 400 percent of the FPL, we note that without any change in other fo rms 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 co st sharing for the standard silver plan could require corresponding increases in othe r 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 inco me between 250 and 400189 percent of the FPL from $6,000 to $5,000, the issu er might be required to significantly increase plan deductibles, coinsurance, a nd co-payments to maintain the required 70 percent AV. We anticipate th at most individuals would notexpect to reach the annual limitation on cost sharing, and therefore, woul d be required to pay more in up-front costs under such a cost-sharing struct ure. Given the effect of the reductions in the maximum annual limitation on cost sharing outlined a bove and the additional administrative burden required in designing and operating additional si lver 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 secti on 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 th e 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 implementati on of section 1402(c)(1 ) of the Affordable
Care Act. For individuals with a ho usehold income of 100 to 250 percent of the FPL, we propose, as outlined in the AV/CSR Bulletin, anannual three-step process for the design of cost-sharing structures in the s ilver plan variations, as follows: Step 1 . In the first step, we would identify in the annual HHS no tice of benefit and payment parameters the maximum annual lim itation on cost sharing applicable to all plans that will offer the EHB package. Th is limit would be used to set the reduced maximum annual limitation on cost sharing appl icable to silver pl an 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-only190 coverage and non-self-only coverage may not exceed the annual dollar limit on cost sharing for high deductible health plans as de scribed in sections 223(c)(2)(A)(ii)(I) and 223(c)(2)(A)(ii)(II) of the Code , respectively. For a benef it year beginning after 2014, the maximum annual limitation on cost shari ng will equal the dollar limit for 2014 benefit year adjusted by a premium adjustment pe rcentage determined by HHS, under section 1302(c)(4) of the Affordable Care Act. We plan to propose the premium adjustment percentage applicable to th e 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 limita tion on cost sharing for 2014 will be the dollar limit on cost sharing fo r high deductible health plans set by the IRS for 2014. The IRS will publish this dollar limit in the spri ng of 2013. However, to allow time for HHS to analyze the impact of th e reductions in the maximum annual limitation on cost sharing on health plan AV levels, and to allow issuer s adequate time to develop the cost-sharing structures of their silver plan variatio ns 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 co st-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 peri od ending March 31, 2013. Because that the Consumer Price Index for March 2013 is not ye t 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 a nnual limitation on cost sharing for self-only coverage for 2014 will be approximately $6,400 (the maximum annual limitation on cost191 sharing for other than self-only coverage for 2014 would be twice that amount, or $12,800). This is slightly more than a 2 pe rcent increase from the limit set by IRS for 2013 ($6,250). We emphasize that this esti mate 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 lim itation 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 li mitation on cost sharing, if necessary, to ensure that the actuarial valu e of the applicable silver pl an 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 sh aring 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 th e 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 atthe silver level of coverage through an Exchange. To that end, the model plans incl ude 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 deduc tible and 40 percent192 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 st ay, $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 Affordab le Care Act. We then observed how the reduction in the maximum annual limitation on co st sharing specified in the Affordable Care Act (that is, 2/3 or 1/2 of the annua l limitation on cost sharing, as applicable) affected the AV of the plans. We found that the reduction in the maxi mum annual limitation on cost sharing specified in the Affordable Care Act for en rollees 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 se ction 1402(c)(1)(B)(ii) of the Affordable Care Act for benefit year 2014. In contrast, the reducti on in the maximum annual limitation on cost sharing specified in th e Affordable Care Act for enroll ees with a household income level

37 We note that these plan structures are broadly cons istent 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 fr om http://www.kff.org/hea lthreform/upload/8177.pdf.193 between 200 and 250 percent of FPL (1/2 re duction), did cause the AVs of the model QHPs to exceed the specified AV level of 73 perc ent. 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 inco me between 200 and 250 percent of FPL by approximately 1/5, rather than 1/2. We furt her 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, a nd unique plan designs that may not be captured by our three model QHPs. We note that selecting a le sser reduction for the maximum annual limitation on cost sharing will not reduce the benefit afforded to enrollees in aggregate as QHP issuers are re quired to further reduce their limit on cost sharing, or reduce other types of cost shari ng, if the required reduction does not cause the actuarial value of the QHP to meet the specifi ed 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 2014Individuals 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 $10,400194

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 pub lished 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 Excha nge would develop three variati ons of its standard silver plan – one each for individuals with hous ehold incomes between 100 and 150 percent of the FPL, 150 and 200 percent of the FPL, a nd 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 fo r 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 variati on 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 w ith household incomes between 150 and 200 percent of the FPL. Howe ver, an issuer might find that even when the limitation on cost sharing for the propos ed plan is reduced to $2,250, the actuarial value of the plan may only increase to 82 per cent. 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 pl an variation achieves the required AV of 87 percent (plus or minus the de minimis variation for silver plan195 variations). The AV of the silver plan variation woul d 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 specificati ons for the three silver plan variations, and pr opose that they may deviate fromthe required AV levels by the de minimis variation for silver plan variat ions, established as 1 pe rcentage 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 commen t on this proposed provision. Sections 156.420(b) and (d) are discussed be low 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 si lver plan. We furthe r 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 (excep t for the requirement that the plan have an AV as set forth in §156.140(b)(2) of the pr oposed EHB/AV Rule). This means, for example, that silver plan variations must m eet standards relating to marketing and benefit design of QHPs, network adequacy standard s, and essential community providers. Although these requirements are implicit because a plan variati on is not a separate plan, we seek to make these requirements exp licit 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 vari ations. 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 silv er 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, co insurance, 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 pa rticular 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 savi ngs to enrollees while providing the same benefits and provider network. Furthermor e, consumers would be best served by enrolling in the highest AV vari ation of the standard silver plan selected for which they are eligible. We also believ e 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 propos ed approach in the AV/CSR Bulletin. One commenter expressed concern about the di fferential effect ofdeductibles on lowincome populations, and suggested that we al so set limits on deductibles in silver plan variations. A number of ot her commenters also urged HHS to adopt more restrictive requirements on issuers’ designs of cost-sharing structures in silver plan variations. One197 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 planvariation not exceed the corresponding cost sharing for a standard silver plan or silver plan variati on 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 assi gned 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 pl an 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 pl an 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 di ffer 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 ensu re that eligible en rollees 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 st andard silver plan, consistent with Congressional intent for cost-sharing reductions under section 1402(c). We chose to propose a 2 percentage point differe ntial to ensure that a difference in cost-198 sharing reductions provided to each income cat egory 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-understa nd 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 Excha nge notifies a QHP issuer of a change in an enrollee’s eligibility for cost-sha ring 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 varia tion. We also propose that the QHP issuer effectuate the change in eligibility in accord ance with the effective date of eligibility provided by the Exchange, as described in §155.3 30(f). We clarify that if an enrollee changes QHPs after the effective date of the e ligibility change as the result of a special enrollment period, once the Exchange notif ies the issuer of the new QHP of the enrollment, that QHP issuer must assign the en rollee to the applicable standard plan or plan variation of the QHP selected by th e 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 indivi duals under the previous plan variations (or standard plan without cost-sharing reducti ons) is accounted for in the calculation of deductibles and annual limitations on cost shar ing in the individual’ s new plan variation for the remainder of the benefit year. We note that a change from or to an individual or199 family policy of a QHP due to the additi on or removal of family members does not constitute a change in plan for the fam ily 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 fo r 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 re quired to extend this policy to situations in which the individua l changes QHPs, includi ng 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 A ffordable 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 issu er equal to the value of those reductions. Section 1402(c)(3)(B) also perm its the Secretary to establish a capitated payment system to carry out these payments. Further, sect ion 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 th ese authorities, we propose to implement a payment approach under which we would make monthly advance payments to issuers to cover projected cost-sharing reduction amount s, and then reconcile those advance200 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 sec tion 1402(c)(3) of the Affordable Care Act. This proposal would not require issuers to f und the value of any cost-sharing reductions prior to reimbursement (to the extent th e issuers provide the required actuarial information), and ensures that payments ar e 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 a pproach, 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 approva l 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 se parately 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 variati on. 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 a nnual submission process, and th en send the information to

38 We note that these payments (both advance and reco nciled), 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 deve lop the estimates using the methodology specified by HHS in the applicable a nnual HHS notice of benefit and payment parameters. In §156.430(a)(3), we propose thatHHS will approve estimates that follow this methodology. For the 2014 benefit year, we propose that issuers use a methodology that utilizes the data that issuer s submit under §156.420 and §156.470. As a result, issuers would not be required to submit a ny 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 w ill 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 es timating 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 co sts that will be associated with the QHPs and their plan variations will ma ke it difficult to accurately predict the value of the costsharing reductions, even if a complex met hodology 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 paym ent 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-twelft h of the expected allowed clai ms costs allocated to EHB, other than services de scribed in §156.280(d)(1), 39 for the standard silver plan, multiplied by a factor to account for the increased utiliz ation 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 util ization factors, to arrive at the monthly expected allowed claims cost for the particul ar plan variation. We propose the following induced utilization factors based on our an alysis 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 indivi duals 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 relative ly similar to the population of enrollees likely to participate in the health exchanges. 40

TABLE 16: Induced Utilization Factors fo r 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 partic ular 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 standardplan and the plan variation. We propose to use the actuarial values of the QHPs and s ilver 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 standard ized 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 partic ular plan variation in a given month to arrive at the total advance payment that will be provided to the i ssuer for each plan variation of each QHP, for a given month. We welcome comme nt 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 Ro bert 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 ofAdults: 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 pr ovided under §156.430(a) and the confirmed enrollment information. We propose to use the methodology described above to determine the amount of th ese advance payments. In §156.430(c), we propose that a QHP issuer report to HHS the actual amount of cost-sharing reductions provide d. 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 th at would be subject to a $20 copayment under the standard silver plan but is subject to only a $5 copaym ent under the silver plan variation in which the individual is enrolled, the cost-sha ring reduction amount would be $15. Additional specifications regarding submission of actual cost-sharing reduction amounts will be provided in future guidance; how ever, we expect that QHP issuers will submit the actual amount of cost-sharing reductions provided af ter the close of the benefit year. In §156.430(c)(1) and (c)(2), we propose sp ecific 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 th e 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’ pol icy for the benefit year , broken down by what the issuer paid, what the en rollee paid, and the amount reim bursed to the provider for the amount that the enrollee would have paid unde r the standard QHP without cost-sharing reductions. In §156.430(c)(2), we propose that inthe case of a benefit for which the QHP issuer compensates the applicable provider in any other manner (s uch as on a capitated205 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 ha ve paid under the standard QHP without cost-sharing reductions. Wh en we refer to compensation made on a capitated basis in this cont ext, 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 provi ders in non-fee-for-se rvice 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 pa yments to issuers against the actual cost-sharing reducti on amounts reported under §156.430(c). Thus, where a QHP issuer compensates a provider in w hole or in part on a fee-for-service basis, we would reconcile the advance payments pr ovided to the issuer against the actual amount of cost-sharing reductions reimbursed to providers and provided to enrollees. Where the QHP issuer compensates a provide r under another arrangement, such as a capitated arrangement, we would reconcile the advance payments made to issuers against the actual cost-sharing re duction amounts provided to enrollees. We propose this differentiated reimbursement approach because if issuers are payi ng providers on a basis other than a fee-for-service basis, the part ies 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 provide rs by imposing per-service accounting or payment streams if an issuer and provider ha ve elected not to stru cture their relationship206
in that manner. However, in all cases we would condition reimbursement upon provision to the enrollee at the point-o f-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 actua l 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 vari ation, 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 amountreport 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 requirem ents and interpretive guidan ce on cost-sharing reduction reconciliation will be pr ovided 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 require ments 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 polic y, 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 bene fit year. In the first month of the grace period, the QHP issuer must pa y all appropriate claims fo r services rendered and HHS would reimburse the QHP issuer for cost-sha ring 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 of207 the grace period. If an enrollee exhausts th e grace period without making full payment of the premiums owed, the QHP issuer may te rminate coverage and deny payment for the pending claims. In §156.430(f)(1), we propose standards rela ted 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 prov ided prior to a term ination 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 te rmination, 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 repa y any advance payments of cost-sharing reductions made with respect to any month after any termin ation of coverage effective date during a grace period. A QHP issuer generally would not be eligible for reimbursement of cost-sharing reductions prov ided 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 prem ium, HHS would continue to provide advance payments of the cost-sharing reductions during the gr ace period. HHS would reimburse the QHP issuer for any reduction in cost sharing pr ovided 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 o ccurs). 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 pe riod, as described in §156.270(d). The QHP208 issuer must return to HHS any advance paymen ts of the cost-sharing reduction applicable to the second and third months. This pr oposed policy aligns with the approach for advance payments of the premium ta x 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 Exchan ge, 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 ef fective date and prior to the determination of the termination; and if the termination (o r 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 a nd 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 te rmination 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-shari ng 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 ef fective 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, incen tives created by, and consequences of this proposal and other approaches, incl uding 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 for209

resolution of inconsistencies in informa tion 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 mu st provide the individua l 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 indivi dual 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-shari ng reductions provided dur ing the inconsistency period, we propose to reimburse those cost-sha ring reductions because there is no clear mechanism under the Affordable Care Act fo r 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, incen tives created by, and consequences of this proposal and other approaches, incl uding 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 certainQHPs. We propose that the provisions of part 156 subpart E generally apply to qualifie d 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 Ru le to be consistent with 26 CFR 1.36B-1(c). Section 36B(c)(3)(A) of the Code defines a QHP to exclude210 catastrophic plans – a definition that also applies to section 1402 of the Affordable Care Act, by means of section 1402(f)(1) of the Afford able 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 individua l is enrolled in a catastrophic health plan. Th erefore, 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 re spect 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 provisi ons 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-al one dental plan that provides pediatric dental bene fits that are EHB to be o ffered 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 pl an, 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 reduc tions 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 de ntal 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 pediat ric dental benefits within a stand-alone dental plan offered on an Exchange would cr eate significant operational complexities. For example, stand-alone dental plans would be required to submit plan variations, and since the calculation of AV fo r stand-alone dental plans w ill not be standardized, the211 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 A ffordable Care Act and §156.200(c)(2) of this subchapter provides that an i ssuer 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 Shar e of Premium to Account fo r Advance Payments of the Premium Tax Credit In §156.460(a), we propose to codify QHP i ssuer 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 certa in qualified enrollees. The advance payment must be used to reduce the portion of th e 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 sec tion 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 se nt to the Exchange through the standard enrollment acknowledgmen t in accordance with§156.265(g). That information will then be submitted to the Secr etary via enrollment information sent from the Exchange to HHS under §155.340(a)(1).212 In §156.460(a)(3), we propose to codify s ection 1412(c)(2)(B)(ii i), which requires that a QHP issuer display the amount of th e advance payment of the premium tax credit for the applicable month(s) on an enrollee’s billing statement. Th is requirement would ensure that the enrollee is aware of the to tal 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 polic y 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 notifie d 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, a nd propose to require that issuers not decline to cover individuals nor term inate policies for which the enrollee’s payments have been timely made on account of the timing of the a dvance 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 Pr emium Tax Credit As described in section III.E.2. of this proposed rule, we propose in §156.470 to direct issuers to allocate th e rate or expected premium fo r each metal level health plan and stand-alone dental plan offered, or propos ed to be offered, in the individual market on the Exchange, and the expected allowed clai ms 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 will213 use this memorandum to verify that these a llocations meet the standards set forth in paragraphs (c) and (d) of §156.470. We propose that issuers submit the allocati on information to the Exchange as part of the QHP certification process and an a nnual submission process for QHPs that are already certified, though an Exchange may speci fy alternative submission channels. For example, for issuers interested in particip ating in a Federally-fac ilitated 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 incl ude the allocation submi ssion. This approach should streamline the submission process for issuer s. We note that multi-State plans, as defined in §155.1000(a), are subject to these pr ovisions. 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 provisi ons 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 direct s 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 Indi ans. Conversely, section 1402(d)(2) of the Affordable Care Act, which prohibits cost shar ing under a plan for items or services to an Indian enrolled in a QHP provided directly by th e Indian Health Service, an Indian Tribe, Tribal Organization, or Urban Indian Organization, or thro ugh referral under contract214
health services, does not direct the issuer to treat the Indianas an “eligible insured.” Section 1402(f)(2) of the Affo rdable Care Act permits cost-sharing reductions only for months in which the “insured” – which we in terpret 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 sec tions 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 t oday, under which cost sh aring is not required with respect to services provided to an I ndian by the IHS, an I ndian Tribe, Tribal Organization, or Urban IndianOrganization. Furthermore, as described in §155.350(b), an Exchange may determine an Indian elig ible for cost-sharing reductions under section 1402(d)(2) of the Affordable Care Act wit hout requiring the appli cant to request an eligibility determination for insurance affo rdability 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 th e Affordable Care Act specifies that reductions in cost sharing must be provide d 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 interpre t 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 identifi cation of “any qualified healthplans” made in section 1402(d)(1). Further, we belie ve that Congress did not in tend for reductions in cost sharing to be available outside the individua l 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 re levant facility or provider for an item or service by the amount of any co st sharing that would be due from an Indian but for the prohibition on cost sharing set forth in secti on 1402(d)(2) of the Affo rdable Care Act. We propose not to codify this provision in re gulation 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 co st-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 th at nothing in this section exempts an issuer from section 206 of the Indian Health Care Improvement Act, which provides that the United States, an I ndian 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 pa rt 156 relating to Indians: Similar to cost-sharing reductions for non-Indians, we propose to use th e concept of plan variations to describe how Indians would pay only a portion, or as a ppropriate, 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 house hold income that does not exceed 300 percent of the FPL to a zero cost sharing plan varia tion of the selected QHP (no matter the level of coverage) with no cost sharing, based on the enrollment and elig ibility information submitted to the QHP issuer by the Exchange. In §156.410(b)(3), we propose that a QHP issuer assign an Indian determined eligib le by the Exchange for cost-sharing reductions under section 1402(d)(2) of the Affordable Ca re Act to a limited cost sharing plan216
variation of the selected QHP (no matter the level of cove rage) with no cost sharing required on benefits received from the IHS a nd 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 reducti ons. We also considered an alternative approach to the provision of cost-sharing reductions for Indi ans. Rather than requiring QHP issuers to assign Indian s to zero and limited cost sh aring plan variations, QHP issuers would simply assign Indians to the sta ndard plan (or as appropriate, silver plan variation), and would waive the cost-sharing re quirements, as appropriate. We note that this latter approach would permit an Indian a nd non-Indian to enroll in the same plan, and for each to receive the cost-sharing reductio ns to which they would be individually entitled. We are proposing the approach descri bed above in part becau se we believe that the use of plan variations will permit issuers to efficiently and effectively provide to all enrollees eligible for cost-sharing reductions, es pecially Indians, their appropriate level of cost-sharing reductions. Because of technical constraints, we understand that complying with the alternative approachwould 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 waiv ers 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 fam ily member (but that premiums for no more than the three oldest family member s 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 di fferent policies to obtain the maximum cost-217 sharing reductions for which each family me mber is eligible. However, we seek comment on which approach HHS should a dopt 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 ma y be imposed on individuals, providers and insurers under the proposed and alternative a pproaches. Finally, we will monitor whether providers are receiving less payment for Indi ans who choose to enroll in a family policy without the benef it of cost-sharing. In §156.420(b), we propose that QHP issuer s submit to the Ex change the zero cost sharing plan variation and limited cost sh aring plan variations for each of the QHPs (at any level of coverage) thatit intends to offer on the Exch ange. The zero cost sharing plan variation – addressing cost-sharing reductions under section 1402(d)(1) of the Affordable Care Act and available to Indi ans 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 shari ng plan variation – a ddressing 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 ha ve no cost sharing on any item or service furnished directly by the IHS, an Indian Tribe, Tribal Organi zation, Urban Indian Organization, or through referral under contract health servic es, as defined in 25 U.S.C. 1603. We note that unlike silver plan varia tions, zero cost shari ng plan variation and limited cost sharing plan variations must only be submitted for certification when the standard plan is submitted for QHP cert ification. We welc ome comment on this proposal. In §156.420(d), we propose language simila r to that proposed in §156.420(c) for silver plan variations – that the zero cost sharing plan va riation and limited cost sharing plan variations cover the same benefits and include the same providers as the standard218 QHP, and require the same out-of-pocket spendi ng for benefits other than EHB. We also propose that a limited cost sharing plan varia tion, which would have no cost sharing on any item or service furnished directly by the IHS, Indian Tribe, Tr ibal 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 pr opose that zero cost sh aring plan variation and limited cost sharing plan variations be subject to all standards applicable to the standard QHP (except for the requirement th at the plan have an AV as set forth in 156.140(b)). We believe that these standards ar e 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 fo r 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 in comes between 100 and 250 percent of the FPL under section 1402(a) of the Affordable Care Ac t. That is, we propose that QHP issuers submit estimates for the dollar value of the co st-sharing reductions to be provided under the zero cost sharing plan variation and limite d cost sharing plan variations, to receive advance payments, and then reconcile the adva nce payments to the actual cost-sharing reduction amounts. This unified approach sa tisfies both the requirement for “periodic and timely payments equal to the value of th e reductions” under sec tion 1402(c)(3) of the Affordable Care Act, and payment of “the am ount necessary to reflect the increase in AV of the plan” under section 1402(d)(3) of the Affordable Care Act. Because AV is a219 mechanism for identifying how mu ch the plan pays for benefits compared to the costs paid by an enrollee, we believe reimburseme nt of the dollar valu e of the reductions satisfies the requirement to pay QHP issuers an amount necessary to reflect the increase in actuarial value of the qualifie d health plan as a result of the reductions. Furthermore, at this time, it would be diffi cult for issuers and HHS to accurately estimate the “increase in AV of the plan” resulting from the cost-sha ring 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 I ndian-only cost-sharing features of a plan because the calculator is based on a sta ndard population. Our proposed combined approach to reimbursing both cost-sharing re ductions 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 unde r and implement two separate reimbursement
programs. In §156.430(a)(1)(ii) we propose that for eachmetal level QHP that an issuer offers or intends to offer in the individua l 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 validati ng 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 paymen t parameters. We propose that issuers use the same methodol ogy described above for estimating advance payments for the cost-sharing reductions pr ovided under silver plan variations for estimating advance payments for the cost-sharing reductions provide d under the zero cost sharing plan variation. This methodology would utilize data that QHP issuers submit for220 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-twel fth of the expected allowed claims costs allocated to EHB, other than services desc ribed in §156.280(d)(1), for the standard plan, multiplied by a factor to account for the in creased utilization that may occur under the zero cost sharing plan variati on due to the elimination of th e cost-sharing requirements. As described in §156.470, the QHP issuer shou ld submit the expected allowed claims cost information to the Exchange annuall y. The Exchange would then review this allocation, and submit the approved allocati on 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 ut ilization factor, to ar rive at the monthly expected allowed claims cost for the zero co st sharing plan variation. We propose the following induced utilization factors for the zer o cost sharing plan variation, based on our analysis of the HIC databa se 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 1.07221
Zero Cost Sharing Plan Va riation 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 shar ing plan variation by the difference in AV between the standard plan and the plan varia tion. The AV of the zero cost sharing plan variation would be 100, because all cost shari ng 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 shari ng 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 util ization 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 fo r 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 th at 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 s ubmit an estimate, the issuer would provide the cost-sharing reductions as required, and woul d 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 pl an variation of the QHP. The estimate must be developed usi ng the methodology specified by HHS in the222 applicable annual HHS notice of benefit and payment para meters. 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 th e American Academy of Actuaries in accordance with generally accepted actuarial pr inciples and methodologies, and that the estimate should be no higher than the corres ponding estimate for the zero cost sharing plan variation. We do not propose a sta ndardized 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 doe s 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 va lue of any cost-sharing reductions provided during the benefit year that may not be ade quately covered by the advance payments. The Exchange will collect the estimate and supporting documentation, as described in §155.1030(b)(3), and submit the es timate 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 di scussed in §156.430(b). We welcome comment on this approach. F. Provisions on User Fees for a Fe derally-facilitated Exchange (FFE) Section 1311(d)(5)(A) of the Affordable Care Act contemplates an Exchange charging assessments or user fees to particip ating health insurance issuers to generate funding to support its operations. If a State is not an electing State or does not have an223 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. Circul ar No. A-25R establishes Fe deral 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 f ee from participating issuers (as defined in §156.50(a)) to support the operation of Federally-facil itated Exchanges. Participating issuers will receive two special benefits not available to the general public when they offer plans through a Federally-facilitated Exch ange: (1) the certifi cation of their plans as QHPs, and (2) the abilityto sell health insurance coverage through a Federallyfacilitated Exchange to individuals determin ed eligible for enrollment in a QHP. These special benefits are provided to participat ing issuers based on the following Federal operations in connection with the operati on 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 (inc luding ongoing compliance verification, recertification and decertification); and

• Administration of a SHOP Exchange.224 Activities performed by the Federal gove rnment that do not provide issuers participating in a Federally-facilitated Ex change with a special benefit will not be covered by this user fee. Circular No. A-25R states that user char ges should generally be set at a level so that they are sufficient to recover the full co st 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, a nd 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-facilitate d Exchange remit a user fee to HHS each month, in the time and manner established by HH S, equal to the produc t of the billable members enrolled through the Exchange inthe 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 me mbers under age 21. This approach will ensure that the user fee generally aligns w ith 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 a ffect the ability of a State to use grants225

described in section 1311 of the Affordable Care Act to develop functions that a State elects to operate under a Pa rtnership Exchange, and to s upport State activi ties to build interfaces with a Federally-f acilitated Exchange, as described in the “State Exchange Implementation Questions and Answers,” published November 29, 2011. Circular No. A-25R provides for a user f ee to be collected simultaneously with the rendering of services, and thus we furt her propose to assess user fees throughout the benefit year in which coverage is offere d. Additional guidance on user fee collection processes will be provided in the future; howev er, we anticipate that user fees will be calculated based on the number of billable me mbers 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 basi s. We welcome comment on these proposals and the operational proce sses related to user fee assessment and collections. In addition, we welcome comments on a polic y that we are cons idering that would provide for the pooling of Exchange user fees or all administrative costs across a particular market (however, the user f ee 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 healthplans 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 §1 56.80 of the proposed Market Reform Rule.226 Specifically, we are considering proposing thatissuers be allowed anadjustment to the index rate for the pooled, expected Exchange us er fees for the set of health plans offered in a particular market. We are considering th is additional specificati on to provide further protection against adverse sele ction for QHP coverage, and to ensure that the costs of Exchange user fees are spread evenly acr oss the market. We seek comment on this policy, including whether it shou ld 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 pool ing 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 specifie s at §153.20 that a risk adjustment methodology must include a risk adjustment da ta collection approac h. Therefore, the Federally certified risk adju stment methodology described inthis proposed rule must include such a data collecti on approach. As already disc ussed, we propose to add new §153.420(a) to establish that an issuer of a rein surance-eligible plan must submit or make accessible all required reinsuranc e 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 clarif y in Subpart H the data collection process that HHS would use when operating a risk ad justment or reinsurance program on behalf of a State.227 In the preamble to the proposed Premiu m 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 ch arges 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 adjust ment 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 approachminimizes 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 en rollee-level and claims-level data that reside on an issuer’s dedicated data environment. This approach will require close technological coordina tion 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 dataaccess 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 esta blish secure, dedicate d, electronic server environments to house medical and pharmacyclaims, 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 softwa re and specific reference tables for the228 purpose of executing risk adjustment and rein surance 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 mu st establish the dedicated data environment (and confirm proper establishment through successfully testing the environment to conform with HHS standards fo r such testing) three months prior to the first date of full operation. For exampl e, for benefit year 2014, implementation, including testing, will begin in Marc h 2013, and continue through October 2013, in preparation for the commencement of ri sk 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-e ligible plan in a State in which HHS is operating the risk adjustment or reinsurance program, as a pplicable, must provide to HHS, through the dedicated data environment, access to the enrollee-level plan enrollment data, enrollee claims data, and enrollee en counter data specified by HHS. We propose in §153.710(b) that all claims da ta submitted by an issuer of a risk adjustment covered plan or re insurance-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 in formation from claims and229 encounter data (including data related to cost-sharing reductions, to permit HHS to calculate enrollee paid claims net of cost-s haring 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 th e 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 th at does not generate claims in the normal course of business 42 must derive costs on all app licable provider encounters using their principal internal methodology for prici ng those encounters (for example, a pricing methodology used for the Medicare Advantage en counter data collection). If a plan has no such methodology, or has an incomplete methodology, it would be permitted to implement a methodology or supplement th e methodology in a manner that yields derived claims that are reasonabl e in light of the specific mark et 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 adjust ment 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 mask ed enrollee identification number for each enrollee, in accordance with HHS-defined requi rements 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, with in the State, during a benefit year. In §153.720(b), we propose that an issuer of a riskadjustment 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 en rollee’s personally identifiable information in the masked enrollee identification nu mber or use the same masked enrollee identification number for different enrollees enrolled with the issuer. The requirements here align the specific requirements for da ta collection with the requirements in §153.340(b) of the Premium Stabilization Rule and the proposed §153.240(d). As discussed above, the term “per sonally identifiable information” is a broadly used term across Federal agencies, and has been define d 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 de fining personally identifiable information in this proposed rule, and incorporate the af orementioned 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 re insurance-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 a nd reinsurance payments for the applicable benefit year by April 30 of the year following th e 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/de fault/files/omb/memorand a/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 individua l market with information to assist in the development of premiums and rates in subsequent bene fit 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 applicab le 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 aligne d with the HHS risk adjustment model and its calculation of payments and charges. Th is 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 se rvice occurs in the applicable benefit year will be allowed for risk adjustment, provide d that all other crite ria defined under this section are met.232 (2) Enrollment periods. Issuers must provi de 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 dete rmined using the criteria listed below. (1) Acceptable claim types

. Data to calculate enroll ee risk scores will include diagnoses reported on institutional and medical claims that result in final payment action or encounters that result in fi nal accepted status. The sp ecific 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 pr ovider claims will be acceptable for risk adjustment. The risk adjustment mode l discussion provides HHS’ description for identifying and excluding claims from providers based on these criteria. (3) Acceptable diagnoses. Diagnoses w ill 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 ad justment 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 da ta collection appro ach used for risk adjustment; however, only data elements nece ssary for reinsurance claim selection will233 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 af ter January 1 of the applicable benefit year and paid before the applicable data submi ssion 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 w ill 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 w ith 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 y ear 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 f unctions performed in each i ssuer’s distributed data234 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 file s and data to address errors identified in HHS-provided reports fo r those files and data to be eligible for identification during reinsurance processi ng. 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 Federall y-Facilitated SHOP (FF-SHOP) Employee choice is a central SHOP concep t, and facilitating employee choice at a single level of coverage select ed by the employer – bronze, silver, gold, or platinum – is a required SHOP function. 44 In addition, the SHOP may al so allow a qualified employer to make QHPs available to em ployees by other methods. 45 For the FF-SHOP, we continue to consider whether to allow a qualified em ployer 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 canthen offer employees a choice of all the other plans at the same metal level at no a dditional cost to the employer. Since adding employee choice would have no adverse fina ncial impact on the employer, we propose that Federally-facilitated SHOPs will not offe r 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 c ontribution, 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 employ ee 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 segm entation 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 thes e commenters that the degree of risk segmentation is small if employee choice is lim ited to a single metal level of coverage, particularly given the presence of risk adju stment, and increases as employee choice is extended across metal levels of coverage. Many commenters suggest ed that the risk segmentation associated with broad choice across all metal levels may adversely affect premiums. Some issuers expressed openness to allo wing 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 empl oyer to make available to employees all QHPs at the level of coverage selected by th e 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 cove rage selected by the employer. We note that concerns about risk selec tion 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 covera ge (premium, deductible s, copayments and coinsurance) that help consumers compare th e cost of a high premium/low cost sharing plan with a low premium/high co st sharing plan. N onetheless, particularly in the early years of implementation, the FF-SHOP ineach State will need to balance the fundamental goal of enhancing employer and employee choice against concerns about potential risk selection to achie ve the broadest issuer particip ation, the best range of plan design choices, and the most effective compe tition 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 singl e 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 n eed to know the net cost to them after the employer’s contribution, the employer will need to c hoose 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 al lowable methods of contribution, but are those that will be available initially to qua lified employers participating in FF-SHOPs. Under this proposed rule at § 155.70 5(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 wa ys an employer may contribute to the employees’ premiums and qualify for the sm all business premium tax credit prior to237

2014. 47 We note that the IRS plans to issue ad ditional guidance applic able to plan years beginning after 2013. The IRS Notice describes two types of re ference 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 contribu tion toward a member’s coverage as a percentage of the premium for the reference plan. Except in States that prohibit employee c ontributions 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 th e employee’s contributi on to vary with age within the allowed limits?” 48 , 49 This option to charge younger employees lower premiums for a given coverage may help at tract 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 pr emium contributions by older employees who are also more likely to incu r higher out-of-pocket costs. 50

47 IRS Notice 2010-82, section III.G. descri bes employer contribution methods using a reference plan with a variety of different rating methods: per member rating (referred to in th e Notice as “list billing”), co mposite 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” me thods 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 t obacco use factor is applied. 49 Because tobacco use information from em ployees 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 Ru les (77 Fed. Reg. at 70595-70597) and the Incentives for Nondiscriminatory Wellness Programs in Group Health Pl ans Proposed Rule (77 Fed. Reg. 70620) for further discussion of the tobacco use su rcharge and wellness programs. 50 See 29 CFR 1625.10 for a description of the ways in wh ich employee contributions toward premiums may vary according to employee age without constituting impermissible age discrimination.238 If the qualified employer decides that th e 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. On ce 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 ag e, 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 co mposite premiums may need to be re-quoted by the issuer today. Operationally, once th e employee choices have been made, the composite premium for the reference plan w ould be recalculated, and the employer and employees notified of any changes. We welcome comments on this approach.
3. Linking Issuer Participation in an FF E 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 ma rketplace. We believe that a competitive marketplace offering qualified individuals, qual ified 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, pr ovided 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 limite d 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 leas t 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 se rving that State at least one small group market QHP at the silver level of coverage a nd one at the gold level of coverage; or (3) neither the issuer nor any issuer in the sa me issuer group offers a small group market product in the State. Thus, no issuer woul d be required to begin offering small group market plans to meet this requirement. We note that §156.515(c)(2) has already im plemented 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 propos ed definition includes bot h 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 li censed mark–would appropriately identify an issuer group. We define “issuer group” to help assure that the certification standard linking Exchange participation with SHOP partic ipation has similar effects on small issuers and large issuer groups. We seek comment on this issue and whether or not the po licy meets its three240 intended goals: enhancing employer and em ployee choice, assuring similar effects on single issuers and issuer gr oups, and not requiring any i ssuer not already offering coverage, to begin offering cove rage in the small group market.
4. Broker Compensation for Coverage Sold Through an FFE or FF-SHOP While a State also has a vari ety 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 St ate’s broad authority to regu late insurance markets, FFE and FF-SHOP options for creating a level playing field are again limited to QHP certification standards. In a new pa ragraph §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 offere d through a FFE or FF-SHOP that it would pay for similar health plans offered outsi de 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 ru lemaking 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 mini mum participation rate s 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 issue241 requirements of the Affordable Care Act is dependent on the final adoption of §147.104 (b)(1) of the proposed Health Insurance Ma rket 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 se lection 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 entirel y from the calculation of the minimum participation rate: (1) A group health plan offe red by another employer; or (2) A governmental program such as Me dicare, Medicaid, or TRICARE. We seek comment on the default minimum participation rate and the exceptions that will help ensure alignment with curre nt State practice and standards inside and outside the SHOP.
6. Determining Employer Size for Purp oses of SHOP Participation242 While the Exchange Establishment Rule did not finalize a method for determining employer size, we note that part-time employ ees must be taken into account in some reasonable way to be consistent with the A ffordable 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 th e Code, as added by section 1513 of the Affordable Care Act, be used. We seek co mment on the proposed definition. We believe that having a single method will provide greate r clarity and simplicity both for employers and for States seeking to reconcile State me thods 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 empl oyees 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 Afford able 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 respec t to any month is generally an employee who is employed an average at least 30 hour s of service per week, subject to the transitional policies discussed in the next paragraph. Under our proposal, this definition243 would control for purposes of the secti on 1312(f)(2)(A) requir ement 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 defi nition 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 Stat es can also act at that time to adopt a counting method that is consis tent with Federal law. Therefore, we propose that the defin itions 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 ag ainst a State-operated SHOP for including a group in the small group market based on a St ate definition that does not include parttime employees when the group should have beenclassified 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 reas onable basis for their determination of whether they have met the SHOP requireme nt 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 definiti on 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 th ese definitions will be effective October 1, 2013 for the FF-SHOP. To make an employe r 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 St ates, 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 defi nitions and on the proposed transition policies.
9. Web Site Disclosures Relating to Agents and Brokers We propose modifications to the website di sclosure standards relating to brokers in §155.220(b). Specifically, we propose a ne w paragraph (b)(1) that would allow an Exchange or SHOP to limit the display of ag ent and broker information to include only those licensed agents and brokers who are regi stered with the Exchange or SHOP and a new paragraph (b)(2) that woul d specifically adopt this pr ovision for an FFE and an FFSHOP. We believe that listing only brokers who have registeredwith the Exchange is in the best interest of the consumer, both becau se the registration and training helps assure that the agent or broker is familiar with th e Exchange policies and application process and because the proposed listing will not cont ain 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 propos e a technical correction in paragraph245 (c)(7) such QHP issuers participating in th e SHOP must enroll qua lified employees if they are eligible for coverage. This corre ction 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 Paym ents, 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 owi ng, 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) fo r calculating an issue r’s rebate if the MLR standard is not met, in the current MLR regulation to account for payments and receipts related to the premium stabilizati on 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 stab ilization amounts by removing them from adjusted earned premium, so that these amount s 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 incl ude premium stabilization amounts as an adjustment to incurred claims in calcula ting the MLR numerator as provided in §158.221. This approach would address stakeholder co ncerns that netting premium stabilization amounts directly against adjusted earned prem ium in MLR and rebate calculations would246 result in an issuer paying either a higher total amount or a lower total amount for rebates and the premium stabilization programs combin ed, depending on whether the issuer’s net premium stabilization obligations resulted in payment or rece ipt 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 ri sk corridors calculations, by applying them as adjustments to cost, not revenue. Although PHS Act section 2718 provides that premium revenue should “account for” coll ections or receipts for the premium stabilization programs, we believe the stat utory language provides flexibility as to whether to account for the eff ects 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 a nd 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, a nd risk adjustment payments made by issuer247 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. Rebate s for a company whose adjusted MLR value in a State falls below the minimum MLR standa rd 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 st andard for a particular State and market a = issuer’s adjusted MLR for a particular State and market. The amendments made by this propos ed 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 reporti ng year, to coordina te them with the reporting cycles of the premium stabilization prog rams. Currently, an issuer must file its annual MLR report by June 1 and pay any reba tes it owes to cons umers 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 J une 30 of the year following a benefit year to notify issuers of the risk adjustment and re insurance 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 risk248 corridors data and calculations by July 31 of the year following a benefit year (§153.530(d) as proposed in this proposed ru le). 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 Se ptember 30, to apply to the first month’s premium that is due on or after Sept ember 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 pos sible 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 fe w changes to the risk corridors calculations submitted by issuers to the Secretary by July 31. This would give issuers one additional month from any reconciliati on to disburse any rebates owed, which we believe is sufficient time. Comments on th e proposed timeline are welcome.
2. Deduction of Community Benefit Expenditures While we did not specifically solic it comments on the deduction from premium for community benefit expenditures in th e MLR December 7, 2011 final rule with comment period, we received a few comments th at recommend that a tax exempt not-forprofit issuer should be able to deduct both community be nefit expenditures and State premium tax. These commenters suggest that prior to publication of the final rule, the249 MLR interim final rule published on Decembe r 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 expenditu res to maintain its Federal income tax exempt status, and that allowing a deducti on for community benefit expenditures takes the place of a Federal income tax deducti on in the MLR calculation. Commenters have made clear that deducting both State premiu m 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 expe nditures 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 Federa l income tax exempt issuer to deduct both State premium taxes and community bene fit expenditures from earned premium in the MLR calculation. This proposed rule w ould not change the treatment of State premium taxes and community benefit expenditu res for those issuers that are not exempt from paying Federal income tax. Comments ar e welcome on the merits of allowing a tax exempt issuer to deduct both State premiu m taxes and community benefit expenditures from earned premium. In its model MLR recommendation 51 , the NAIC determined that the deduction from premium for community benefit expend itures 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 allowi ng 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 ru le published on December 7, 2011 allowed issuers exempt from Federal income tax to de duct 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 per cent limit on the deduction from premium for community benefit expenditu res would be sufficient to allow a tax exempt issuer to maintain its current community benefit expendi ture. The 2011 MLR dataindicate that, of the not-for-profit issu ers that reported non-zero commun ity benefit expenditures, the average spent on community benefit expend itures (deductible and non-deductible) was about 1.6 percent of premium. This sugge sts that a 3 percent community benefit expenditure deduction limit would not discou rage 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 deduc tion 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 hi ghest premium tax rate charge d in a State. Comments are solicited on the proposed community be nefit 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 c onsistent with the NAI C’s recommendations, which in the preamble we stat ed that we were adopting. On page 74924, in §158.140 (b)(5)(i), we mistak enly 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 repor ting 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 “w ill” instead of “must” in describing the objective formula to be used in report ing 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 af ter 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), whic h currently reads: ‘‘[t]he per person deductible for a policy that covers a subscrib er and the subscriber’s dependents shall be the lesser of: The sum of the deductible applicable to eachof the individual family members; or the overall family deductible fo r the subscriber and subscriber’s family, divided by two (regardless of the total number of indi viduals covered through the subscriber).’’ In this correcting amen dment, we further amend §158.232(c)(1)(i) by deleting the words ‘‘The sum of’’ after the wo rds ‘‘the lesser of:’’ and the comma after the words ‘‘subscriber’s family,’’ which we in advertently did not de lete 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 collecti on 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 automa ted collection techniques. The following sections of this document contain paperwork bur den but not all of them are subject to the information colle ction 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 elec t to operate their own reinsurance or risk adjustment programs is unknown, we anticip ate that fewer than nine States will choose to do so. Collections from fewer th an 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 even t 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 rein surance entity provide information regarding the requests for reinsurance payments unde r the national contribution rate made under §153.410 of this part for all reinsurance-e ligible 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 applicab le reinsurance entities and to submit this information to HHS, for a total burden of $110 pe r State selecting to r un reinsurance. 2. Collection of Reinsuran ce Contribution Funds (§153.220)253 Under proposed §153.220(d), a State that ope rates its own reinsurance program and elects to collect additional reinsurance contributions for additional administrative expenses or supplemental reinsurance paym ents 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 notific ation, and estimate it will take each State approximately 1 hour by an operations analyst (at $55 an hour) to submit this notification requirement. Consequent ly, 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 re quire a State running its own reinsurance program that chooses to colle ct 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 mana ger 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 additio nal contributions under §153.220(d) calculate the supplemental reinsurance payments from their additional funds collected under the254 State additional contribution rate using s upplemental payment parameters in conjunction with the national payment parameters to re imburse 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 th e 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 paymen ts for the applicable benefit year by that adjustment. We estimate it will take an ope rations analyst 40 hour s (at $55 an hour) and a senior manager 12 hours (at $77 an hou r) to determine appropriate payment calculations and, if necessary, a pro rata adjust ment. Therefore, we estimate that it will cost each State choosing to collect add itional contributions approximately $3,124 to comply with this requirement. 4. Collections Related to Disburseme nt 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 appl icable 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 Stat e or HHS on behalf of the State notify issuers of the total amount of reinsurance paym ents 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 re quests 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 appr opriate quarterly estim ates of expected reinsurance payments and to notify plans. Additionally, we expect it will take an255 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 estima tes 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 st atement of 0938-1155 to clarify that a State has the option to ensure that the applicable reinsurance entity pr ovides 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 indi vidual 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 subm it data to be consid ered 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 me thod and format of data collection. We anticipate that a State will only need to esta blish 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 ope rations analyst 40 hour s (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 the256 acceptable method and format for data collectio n. 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 St ate establishes a re insurance program, the State must ensure that the applicable reinsurance entity’s collection of personally identifiable information is limited to info rmation reasonably necessary for use in the calculation of reinsurance c ontributions or payments. Furthermore, in §153.240(d)(2), we propose that, if a State establishes a re insurance program, it must ensure that the applicable reinsurance entity implements security standards that provide administrative, physical, and technical safeguards for the indivi dually identifiable information consistent with the security standards. To comply with this requirement, we believe that most States will require the applicable reinsurance ent ity to comply with privacy and security standards that are similar to the Federal st andards already established under the HIPAA and The Health Information Technology for Economic and Clinical Health Act (HITECH) (Pub.L. 104-191, 110 Stat. 1936, enacte d August 21, 1996) or with privacy and security standards that ar e 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 pro cess 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 establ ish privacy and security standards for reinsurance entities and to notify reinsurance en tities 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 eviden ce that it meets the approval standards set forth in §153.310(c). Note that these processe s will start in benef it 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 a pproximately 180 hours to complete the initial risk adjustment entity approval proc ess. We estimate it will take an operations analyst 72 hours (at $55 an hour), a contract administrato r 72 hours (at $40 per hour), a senior manager 24 hours (at $77 an hour), a nd an attorney 12 hours (at $77 an hour) to meet the initial approval requirements. Th erefore, we estimate a total burden of $9,612 for each entity, as a result of these approval requirements. B. ICRs Regarding Calculation of Reinsurance Co ntributions (§153.405) In §153.405, we propose an annual enro llment count of covered lives by contributing entities using counting methods derived from the PCORTF Rule. We propose requiring contributing entities to prov ide 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 de rive 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 th is requirement is the additional burden of conducting these counts using the slightly modi fied counting methods specified in this proposed rule. On average, we estimate it wi ll take each issuer 1 hour to reconcile and submit final enrollment counts to HHS. A ssuming an hourly wage rate of $55 for an operations analyst, we estimate an a ggregate burden of $110,000 for 2,000 reinsurance258 contributing entities subject to this requireme nt. We are revising supporting statement of OMB Control Number 0938-1155 to include the required data el ements that issuers will need to submit their enrollment counts and to specify that issuers must follow the methodology when they derive enrollee c ounts for reinsura nce contributions. C. Requests for Reinsurance Payment (§153.410) As described in §153.410, we propose that i ssuers of reinsuran ce-eligible plans seeking reinsurance payment must request pa yment in accordance with the requirements of this proposed rule or the State notice of be nefit 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 reinsuran ce-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 issu ers, HHS intends to collect data in an identical manner for the HHS-operated rein surance 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 reduc tion plan variation and the national maximum out-of-pocket limit established by the Federal government would be factored into an issuer’s reinsu rance 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 withthis requirement is already accounted for under OMB Control Number 0938-1155 with an October 31, 2015 expiration date. We are updating the supporting statement appr oved under 0938-1155 with an October 31, 2015 expiration date to reflect thes e 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 requ ire 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 progr am 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 en counter data as spec ified 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 re sulted in payment by the issuer. Under §153.710(c), an issuer of a risk adjustment covere d plan or a reinsurance-eligible plan in a State in which HHS is operating risk adjustme nt or reinsurance, as applicable, that does not generate individual enrollee claims in th e normal course of busin ess 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, storag e, privacy and security, and processing. In addition, in §153.720(a), we propo se 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 burden260 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 processi ng 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 aver age hourly rate of $59.39 per hour. We anticipate that approxima tely 400 data processing servers will be established across the market in 2014, and these servers will process approximately 9 billion claims and enrollment files. Th erefore, we estimate an aggregate burden, including labor and capital costs, of $589,680,000 for all issu ers as a result of these requirements. We are revising the supporting st atements associated with the submission of risk adjustment data and reinsuran ce enrollment data approved under OMB Control Number 0938-1155 with an October 31, 2015 expirati on date to account for this burden. E. ICRs Regarding Data Validation Require ments When HHS Operates Risk Adjustment (§153.630) Under §153.630, an issuer that offers at leas t 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 au dit performed on its ri sk adjustment data. The burden associated with this requirement is the issuer’s time a nd effort to provide HHS with source claims, records, and enro llment information to validate enrollee demographic information for initial and second validation audits, and th e issuer’s cost to employ an independent auditor to perform th e 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 es timate 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 al so anticipate that this audit burden will affect about 1,800 issuers. Based on Truven Health Analytics 2010 Ma rketScan® data, we have determined that for enrollees with HCCs, the average num ber of HCCs to be reviewed by an auditor per enrollee is approximatel y 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 fo r one enrollee with roughly two HCCs. We expect that it may cost a pproximately $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 fo r 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 re tain initial validation auditors to perform the initi al validation would cost a pproximately $45,000. Therefore, for 1,800 issuers, we anticipate that the total burden of conducting init ial 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 oppor tunity to appeal errors identified through the second validation audit process. Because we intend to provide further detail262 on this process in later guidance and rule making, we currently cannot estimate the number of issuers that will appeal HCC findi ngs, or the cost per issuer for doing so. Therefore, we will seek OMB approval and solicit public comment on the appeal information collection require ments established under §153.630(d) at a future date. F. ICRs Regarding QHP Certification Sta ndards Related to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions (§155.1030) In §155.1030(a)(1), we propose that the Exch ange ensure that each issuer that offers or seeks to offer a QHP in the i ndividual 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 vari ations 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 cer tification the information necessary to validate that the issuer meet s the requirements for zero and limited cost sharing plan variations, as de tailed in §156.420(b) . We expect that this da ta 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 cal culate the actuarial va lues 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 pr ovide 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 es timates for advance payment of cost-sharing reductions submitted by issuers under propos ed §156.430. Because HHS will already have this information for Federally-facilitate d Exchanges, the burden associated with this263 requirement is the time and effort for each Pa rtnership or State-based Exchange to submit this information. We estimate that it will ta ke 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 eachExchange 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 allo cation, 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 re ductions and the premium tax credit. The Exchange must ensure that such allocati ons 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 fo r 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 subm its under §156.210 and/or the rate information that the QHP issuers submits through the Eff ective Rate Review program. Therefore, we believe that the burden for Partnership Excha nges 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 th is submission will be performe d at the hourly wage rate of264 $38.49 for an insurance analyst. Assuming 20 st and-alone dental plans across the market, we estimate an aggregate burden of approxima tely $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 th e Exchange must collect any estimates and supporting documentation th at a QHP issuer submits to receive advance payments of certain cost-sharing reductions, as descri bed 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 subm it this information. We believe that this requirement will impose minimal burden, and th at 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 Partic ipation 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 mark et, the QHP certification standard would be met if the issuer offers at least one sma ll group market QHP at the silver level of coverage and one QHP at the gold level of c overage 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 St ate, the standard would be met. Therefore, no issuer would be required to begin offe ring small group market plans to meet this requirement. The burden associated with this requirement is the time and effort for an265 issuer to prepare a QHP certifi cation application for a SHOP fo r 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 pa rticipated in a SHOP. We describe the burden associated with this requirement in the 30-day Federal Register Notice for the Initial Plan Data Collection publishe d 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 fo r certification the variations of the health plans that they offe r or propose to offer in the individual market on the Exchange that include required levels of cost-sharing reductio ns. 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 thatan 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 thr ee variations of the standard silver plan. In pa ragraph (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 variat ion of each health plan offered or proposed to be offered in the individual market on the Exchange. We estimate that 1,200 issuers will participat e in an Exchange nationally, and that each issuer will offer one QHP per metal level w ith 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 tota l 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, wh ich 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 public266 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 vari ation will cost an issuer $78.77, for a total estimated annual cost of $866.47 per issuer for th e 11 plan variations. We estimate an aggregate burden of $1,039,764 for all issuers partic ipating 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 validati ng 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 fo r estimating the value of cost-sharing reductions to be provided under the plan va riation open to Indi ans 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-sha ring reductions, the issu er 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 provided267 under the limited cost sharing plan variati on 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-sha ring reductions. We expect estimates and supporting documentation will be submitted as part of the electronic QHP application, which is described in further detail inthe “Supporting Statement for Initial Plan Data Collection to Support QHP Certification and other Financia l 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 wa ge 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 i ssuer 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 pend ing 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 amou nt 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 subj ect to the Paperwork Reduction Act, the information collection process and instrument s 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 thr ough the standard enrollment acknowledgment in accordance with §156.265(g). Because th is notification will occur through the enrollment acknowledgement process that al ready 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 aninsurance analyst 5 minutes (at an hourly wage of $38.49), to collect and submit this info rmation to each Exchange Therefore, we estimate a burden of $3.20 for each QHP issu er, 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 a nd 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 Exch ange, an allocation of the ra te and the expected allowed claims costs for the plan, for EHB, other th an services described in §156.280(d)(1), and any other services or benefits offered by a hea lth plan that do not meet the definition of EHB. In §156.470(b) we propose that an issuer of a stand-alone dent al plan provide to the Exchange for approval a dollar allocation of the expected premium for the plan to the pediatric dental essential heal th benefit. In §156.470(c) and (d), we propose that issuers ensure that the allocation descri bed 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-al one dental plan offered, or pr oposed to be offered, in the269 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, dem onstrating 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 Disclo sure 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 Justifica tion 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 thos e rates HHS will be reviewing, issuers’ submissions also will include data and information that HHS will need to make a valid actuarial determination regarding whet her a rate increase is unreasonable. Therefore, there will be no additional burden on QHP issu ers that submit their rates through the Effective Rate Review program. The burden for the Effective Rate Review submission is already accounted for inOMB Control Number 0938-1141. We are additionally revising the supporting statemen t of the PRA approved under OMB Control Number 0938-1141 to clarify that we will be co llecting 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 de ntal plan 5 hours to prepare and submit this information to the Exchange. We assume th at this requirement will require 3 hours of270 labor by an insurance analyst (at an hourly wa ge rate of $38.49) a nd 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 aggr egate burden of approximately $4,585 for all stand-alone dental plans to submit these alloca tions and justifications to the Exchange. We plan to revise the supporting stat ement published under HHS form number 10433, which is pending final OMB approval, to account for this additional burden. L. ICRs Regarding Medica l Loss Ratio Reporting (§158.130, §158.140, §158.162, §158.221, §158.240) This proposed rule would direct issuer s to include all payments and receipt amounts related to the reinsurance, risk corr idors and risk adjustment programs in the annual MLR report. The existing information collection requi rement is approved under OMB Control Number 0938-1164. This includes the annual re porting form that is currently used by issuers to submit MLR information to HHS. Prior to the deadline for the submission of the annual MLR report for the 2014 MLR reporting year, and in accordance with the PRA, HHS plans to solic it public comment and seek OMB approval for an updated annual form that will include reporting of the premium stab ilization payments and will reflect the changes in deduction for community benefit expenditures for federal income tax exempt not-for-profit issuers.TABLE 18: Estimated Fiscal Year Reporting Recordkeeping and Cost BurdensRegulationSectionsOMB ControlNo./CMSForm No. Respondents ResponsesBurden perResponse(hours)TotalAnnualBurden(hours)HourlyLaborCost ofReporting52($)Total Labor Cost($)TotalCapital/MaintenanceCosts($)Total Cost($)§153.405 0938-NEW 2,000 2,000 1.00 2,000 55.00 110,000 0 110,000§153.420 0938-1155 1,800 9,000,000,000 0.001 9,828,000 59.39 583,680,000 6,000,000 589,680,000§153.630(b) 0938-1155 1,800 540,000 1.67 900,000 90.00 81,000,000 0 81,000,000§155.1030(a) 0938-NEW/CMS1043351 51 3.50 179 51.62 9,240 0 9,240§155.1030(b)(2) 0938-NEW/CMS1043320 20 0.50 10 38.49 385 0 385§155.1030(b)(3) 0938-NEW/CMS1043351 51 0.08 4.1 38.49 158 0 158§156.420 0938-NEW/CMS104331,200 13,200 1.50 19,800 52.51 1,039,698 0 1,039,698§156.430(a)(2) 0938-NEW/CMS104331,200 4,800 1.00 4,800 47.69 228,912 0 228,91252Bureau of Labor Statistics, U.S. Department of Labor,National Compensation Survey: Occupational Earnings in the United States, 2011. United StatesGovernment Printing Office. May 2011. Retrieved from http://www.bls.gov/ncs/ncswage2010.htmRegulationSectionsOMB ControlNo./CMSForm No. Respondents ResponsesBurden perResponse(hours)TotalAnnualBurden(hours)HourlyLaborCost ofReporting52($)Total Labor Cost($)TotalCapital/MaintenanceCosts($)Total Cost($)§156.460(a)(2) 0938-NEW 1,200 1,200 0.08 96 38.49 3,695 0 3,695§156.470 0938-NEW/CMS1043320 20 5 100 45.85 4,585 0 4,585Total 3,271 666,076,673 6,000,000 672,076,673273
V. Response to Comments Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowle dge or respond to them individually. We will consider all comments we receive by th e date and time specified in the "DATES" section of this preamble, and, when we pr oceed 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 standa rds related to premium stabilization programs (reinsurance, risk adjustment, a nd risk corridors), consistent with the Affordable Care Act. The purpose of these th ree 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 implemen tation of these programs, incl uding the specific parameters applicable to these programs, would be forthc oming in this proposed rule. This proposed rule also includes provisions governing the cost-sharing reduc tions program, the advance payment of the premium tax credit program, the medical loss ratio program, the SHOP Exchange, and user fees for Fe derally-facilitated Exchanges. B. Overall Impact We have examined the impacts of this rule as required by Executive Order 12866 on Regulatory Planning and Review (Sep tember 30, 1993), Executive Order 13563 on Improving Regulation and Re gulatory 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 (M arch 22, 1995, Pub. L. 104-4), Executive274 Order 13132 on Federalism (August 4, 1999), an d the Congressional Review Act (5 U.S.C. 804(2)). Executive Orders 12866 and 13563 direct agenci es to assess all costs and benefits of available regulatory alterna tives and, if regulation is n ecessary, to select regulatory approaches that maximize net benefits (inc luding potential economi c, environmental, public health and safety effects, distributiv e impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both co sts and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. A regulatory impact analysis (RIA) must be prepared for rules with economically sign ificant effects ($100 million or more in any 1 year). OMB has determined that this Paymen t 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 be nefits of this proposed rule. It is difficult to discuss the wide-ranging effects of these provisions in isolation, though the overarching goal of the prem ium 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 withinthis proposed rule are integr al to the goal of expanding coverage. For example, the premium st abilization programs (risk adjustment, reinsurance, and risk corridors) decrease the risk of financial loss that health insurance issuers might otherwise exp ect in 2014 and the cost-sha ring 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 provisions275 affect the private sector, issu ers, and customers, through incr eased access to health care services including preventive services, decr eased uncompensated care, lower premiums, and increased plan (and thereby cost) transpar ency. Through the reduction of financial uncertainty for issuers and increased affordability for consumers, the provisions are expected to increase access to health coverage. Recent research 53 analyzed the effects of incr eased insurance coverage. The analysis studied the health effects of expande d 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 th at increased coverage resulted in:

• Significant reduction in mort ality (19.6 deaths per 100,000);

• Increased rate of self-reported hea lth status (by th ree percent); and

• Reduction in cost-related dela ys in care (by 21 percent). While these results may not be entirelygeneralizable given the population and coverage type, they do rep licate other research findings 54 of the importance of health coverage in improving health and reducing mortality. There are administrative costs to States to set up and administer these programs. For issuers not receiving payments, any contribut ion is an additional cost, which an issuer could pass on to beneficiaries through premiu m increases. There are also reporting costs for issuers to submit data and financial info rmation. This RIA discusses in detail the benefits and costs of the provi sions 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 2011276 In this RIA, we discuss programs a nd requirements newly implemented by the proposed rule, such as certain provisions re lated to the cost-sharing reductions program, the advance payment of the premium tax cred it program, the medical loss ratio program, the SHOP Exchange, and user fees for a Fede rally-facilitated Exch ange, 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 be nefits, 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, a nd 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 impr oved 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, hea lth insurance issuers, and Exchanges. The effects in Table 19 reflect estimated cost-s haring reduction payments, which are transfers from the General Fund of the U.S. Treasury to consumers who qualify for cost-sharing277

reductions. These transfer estimates are ba sed on the Congressional Budget Office’s March 2012 baseline estimates, and have b een annualized over the 5 year period from FYs 2013-2017. Estimated transfers do not yet re flect any user fees paid by insurance issuers for the Federally-facil itated Exchange because we ca nnot 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 Not Estimated Annualized Monetized ($millions/year) Not Estimated Costs Annualized Monetized ($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 pert aining to the Affordable Care Act, and contain Federal budget impact estimates of some provisions th at 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 adjustmentprograms. The requirements of these programs are well within the parameters used in the modeling of the Affordable Care Act. Our review and278 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-yea r 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 no t 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 b ecause 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 additiona l, societal effects of this pr oposed rule discussed in this Regulatory Impact Analysis. TABLE 20: Estimated Federal Government Outlays and Receipts for the Reinsurance and Risk Adjustment Progr ams 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 64279

Year 2013 2014 2015 2016 2017 2013-
2017 Risk Adjustment Program Receipts *

* Risk adjustment program payments and receipts lag by one quarter. R eceipt 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 al ternative methodologies. Risk adjustment is generally applied to non-grandf athered health plans offered in the individual and small group markets, both inside and outside of the Ex change. 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 obtai n HHS approval to operate risk adjustment, HHS will administer the risk adjustment functions on the State’s behalf. The Exchange may operate risk adjustme nt, although a State may also elect to have an entity other than the Exchange pe rform 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 a nd that each State is approved to operate their risk adju stment program. Having a si ngle entity administer risk adjustment in multiple States may provide admi nistrative efficiencies. In this proposed rule, we propose to establish a risk adjustment State approval process. We describe these280

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 ri sk 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 nati onal 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 devel op 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 methodol ogies will be published in the final HHS notice of benefit and payment parameters. States that elect to develo p their own risk adjustment methodologies are likely to have increased administrative costs. Devel oping 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 secti on of this proposed rule. In the Premium Stabilization Rule, we defi ned a risk adjustment covered plan as any health insurance coverage offered in th e individual or small group market with the exception of grandfathered health plans, gr oup health insurance coverage described in281 §146.145(c) of this subchapter, individual health insuran ce coverage described in §148.220 of this subchapter, and a ny 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 subj ect to certain market reforms and student health plans will not be subject to the issu er 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 unmer ged markets. Developing the technology infrastructure required for data submissi on will likely require an administrative investment. The risk adjustment process wi ll require significant amounts of demographic and diagnostic data to run through a risk as sessment model to determine individual risk scores that form the basis for plan and St ate averages. The Premium Stabilization Rule requires States to collect or cal culate 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 co llection, the costs associated with mapping and storing the required data a nd, 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 Me dicaid Managed Care may see minimal282 additional administrative burden for risk adju stment. Additionally, some States riskadjust their Medicaid Managed Care program s. 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 i ssuers that do not have existing technical capabilities will have larger administrati ve costs related to developing necessary infrastructure. Issuer characteristics, such as size and payment methodology, will also affect administrative costs. In general, national i ssuers will likely be better prepared for the requirements of risk adjustment than small i ssuers. 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 opera tes risk adjustment on behalf of a State, it will use a distributed approach. We believe that th is 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 de scribe these administrative costs in the Collection of Information Requirement s section of this proposed rule. The Premium Stabilization Rule directs Stat es to audit a sample of data from each issuer and to ensure proper im plementation of risk adjustmentsoftware by all issuers that participate in risk adjustment. States may ex trapolate results from the sample to adjust283 the average actuarial risk for the plan. This a pproach is consistent with the approach now used in Medicare Advantage, where audit sa mple 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 Stat e. 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 independentinitial auditors to conduct an initial audit of an HHS-selected sample of risk adju stment 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 es timates for benefit years 2014 and 2015. We describe these administrative costs in the Co llection 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 thr ough 2016, it is estimated that $27 billion will be transferred be tween 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 transf erred between issuers. Risk adjustment protects against advers e selection by allowing insurers to set premiums according to the average actuar ial 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 se lection the insurer woul d otherwise expect to experience with a specific pr oduct offering in the market. This should lower the risk premium and allow issuers to price their product s closer to the averag e actuarial risk in the market. In addition, it mitigates the in centive for health plans to avoid unhealthy members. The risk adjustment program also serves to level the playi ng 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 es tablish a reinsurance program. If a State establishes a reinsurance program, the State mustenter into a contract with an applicable reinsurance entity to carry out the program. If a State do es not elect to establish its own reinsurance program, HHS will carry out the reinsurance program for that State. The Affordable Care Act requires a rein surance pool of $10 billion in 2014, $6 billion in 2015, and $4 billion in 2016. It also requires annual contri butions to the U.S. Treasury of $2 billion, $2 billion, and $1 bill ion 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 th e method for determining contribution levels for the program. HHS proposes to establis h 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 contribu tion to the U.S. Treasury, and the additional285
$20.3 million to cover the Federal administrativ e expenses of operating the reinsurance program in 2014. We continue to estimate th at we will collect these amounts authorized from 2014 through 2016 for the reinsurance pool, including the annua l contributions to the U.S. Treasury. HHS proposes to collect the required c ontributions 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 rein surance contribution am ount for each issuer reflect each issuers’ fully insured commerc ial book of business for all major medical products. In this proposed rule , we clarify which types of h ealth insurance coverage and self-insured group health plans are to make reinsurance contributions, and which are not. This clarification does not aff ect 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 administ rative expenses or supplemental reinsurance payments. Additional contribu tions for administrative expe nses 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 ope rates the reinsurance program bears the administrative costs of the applicable rein surance entity, and mu st 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 unde r the Affordable Care Act as interpreted in this proposed rule. (S ee 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 re quirements. HHS will share some of its collections for administrative co sts with States that run the program. If a State operates its own reinsurance program, HHS would transfer $0.055 of th e per capita administrative fee to the State for purposes of administrati ve expenses incurred in making reinsurance payments, and retain the remaining $0.055 to o ffset the costs of c ontribution collection. A State may have more than one reinsurance entity, and two or more States may jointly enter into an agreement with the same a pplicable reinsurance entity to carry out reinsurance in their State. Administra tive 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 a nnual collections and payment cycle. We also considered a quarterly collections and pa yment 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 reinsuran ce payments. We believe that issuers would receive only limited benefits from a quarterly payment cycle. In §153.100(a), a State is required to i ssue an annual noti ce 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 th an one applicable reinsurance entity. States that establish a reinsurance pr ogram 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 addi tional administrative expenses and provide287 justification for the additiona l collection. The Premium St abilization Rule established that reinsurance cont ributions will be based on a pe r 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 ma intain the goals of the reinsurance program by providing issuers with a more straightforw ard approach to reinsu rance contributions. States would be permitted to collect addi tional contributions towards supplemental reinsurance payments. We describe the administrative costs in the Collection of Information Requirements sec tion of this proposed rule. In this proposed rule, we establish th e methodology to be used for counting covered lives for purposes of calculating rein surance contributions. This methodology is based upon counting methods permitted under the PCORTF Rule. We believe that relying on a previously establ ished process set forth in the PCORTF Rule for counting enrollees will minimize issuer burden for conduc ting these counts. In the Collection of Information Requirements section of this pr oposed rule, we descri be the administrative costs for issuers associated with the data requirements in §153.400(b) for all contributing entities both inside and outside the Exch ange. 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 in curred 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 theref ore 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 mu st 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 th at does not generate individua l enrollee claims may derive costs to request reinsurance pa yments. In addition, we clarify that when HHS operates a reinsurance program on behalf of a State that these plan s may price encounters in accordance with its existing principal, internal encounter pricing methodology. Additionally, we propose in §153.240(b) of this pr oposed rule that States operating their own reinsurance program must no tify issuers of reinsurance pa yments to be made, as well as provide reinsurance-eligible plans an estimate of expected requests for reinsurance payments. Moreover, we propose for bot h State- and HHS-operated reinsurance programs, that only plans subject to the 2014 ma rket reform rules would be eligible for reinsurance payment.289 In this proposed rule, we also provide mo re details on the data collection approach for HHS-operated reinsurance programs. HHS plans to use the same distributed data collection approach used for risk adjustmen t; 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 reinsu rance to receive reinsurance payments. We believe details on the reinsurance data collect ion approach proposed in the HHS notice of benefit and payment parameters are re flected in these cost estimates. All health insurance issuers contribute to the reinsurance pool, because successful implementation of the range of reforms in 2014 be nefit all of their enro llees (for example, those reforms should lead to fewer unreimburse d health costs, lowering the costs for all issuers and group health plans) while only he alth insurance issuers with plans in the individual market are eligible to receive payments. This serv es to stabilize premiums in the individual market while having a minima l impact on large group issuers and plans. Reinsurance will attenuate individual market rate increases that might otherwise occur because of the immediate enrollment of hi gher risk individuals, potentially including those currently in State high-risk pools. It wi ll also help prevent insurers from building in risk premiums to their rates given the unknow n 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 anticipate d that reinsurance payments will result in premium decreases in the individual market of between 10 and 15 percent.290 Evidence from the Healthy Ne w York (Healthy NY) program 57 supports the magnitude of these estimates. In 2001, th e State of New York began operating Healthy NY and required all HMOs in the State to o ffer policies for which small businesses and low-income individuals would be eligib le. The program contained a “stop-loss” reinsurance provision designed to lower premiums for enroll ees. Under the program, if any enrollee incurred $30,000 in annual clai ms, his or her insurer was reimbursed for 90 percent of the next $70,000 in claims. Prem iums for Healthy NY po licies were about 15 percent to 30 percent less than those fo r 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 receip ts 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 stabil ization payment and receipt amounts would be considered a part of gross earned premiu m reported to the Secretary, similar to other elements involved in the derivation of earned premium. The ML R annual reporting form would then account for premium stabilizati on payment and receipt amounts by removing them from adjusted earned premium, so th at these amounts do not have a net impact on the adjusted earned premium used in calcu lating the MLR denominator and rebates. Additionally, this proposed ru le proposes to amend the MLR calculation methodology to add or subtract premium st abilization 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’ re bates, respectively. The ame nded methodology will result in a more accurate calculation of MLR and reba te amounts, since it will reflect issuers’ actual claims-related expenditures. This appr oach will also support the effectiveness of both the MLR and the premium stabilization programs by correctly offsetting the premium stabilization payment and receipt amount s against rebates, consistently with the risk corridors calcu lation methodology adopted in §153.530. Based on HHS’s experience with th e 2011 MLR reporting year, there are 466 health insurance issuers 58 offering coverage in the indivi dual 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 re bate calculations. In 2012, an estimated 54 issuers paid $396 million in rebates for th e 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 reba tes to policyholders and subscribers on behalf of over 3 million enrollees, and 47 i ssuers in the large group market provided approximately $403 million in rebates to polic yholders 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 a nd, 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 acc ount in the MLR calculations will result in lower rebate payments. Issuers with relativ ely 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 w ould 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 af ter 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 estimate d amounts and will improve the accuracy of the rebate payments and reports. This w ill also reinforce the effectiveness of the premium stabilization programs, since issuer s are less likely to pay higher or lower rebates based on inaccurate payment and receip t estimations. Accordingly, we propose to change the date of MLR reporting to the Secret ary from June 1 to July 31, and the rebate due date from August 1 to September 30. Issuers will also have to report their paym ents and receipts related to the premium stabilization programs in the annual ML R report beginning in the 2014 MLR reporting year. Once issuers calculate these amounts, wh ich they will be requi red to do regardless of the MLR reporting requirements, the admini strative 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 th e 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 allo w a federal income tax exempt not-for-profit issuer to de duct from premium both community benefit expenditures and State premium taxes, limite d 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 leve l playing field for Federal income tax exempt not-for-profit issuers, who are requi red to make community benefit expenditures to maintain their federal income tax exempt status and would not discourage community benefit expenditures. This is likely to incr ease 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-p rofit 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-pro fit 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 as294 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 fo r such issuers will have minimal effect on their MLRs and rebate s under this assumpti on, since their current expenditures are below the current deduction limits. Issuers with lower rebate payments as a result of these adjust ments would need to send fewer rebate notices, and therefore, woul d have lower administrative costs related to rebates and rebate notices. Risk Corridors The Affordable Care Act creates a tempor ary risk corridors program for the years 2014, 2015, and 2016 that applies to QHPs. Th e risk corridors program creates a mechanism for sharing risk for allowable co sts between the Federal government and QHP issuers. The Affordable Care Act establis hes 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 protec t against inaccurate rate setting in the early years of the Exchange s 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 co sts, reflecting data ca tegories required under the Medical Loss Ratio Interim Final Rule (75 FR 74918). In designing the program, HHS has sought to leverage existing data re porting 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 in accurate rate setting. Due to uncertainty about the population during the first years of Exchange operation, issuers may not be able to predict their risk accurate ly, and their premiums may refl ect costs that are ultimately lower or higher than predicted. To determin e whether an issuer pays into, or receives payments from, the risk corridors pr ogram, HHS will compare allowable costs (essentially, claims costs) and the target am ount – the difference between a plan’s earned premiums and allowable administrative costs. In this proposed ru le, we have provided for adjustments to the risk corridors calcula tion to account for taxes and profits within its allowable administrative costs. The threshol d 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 ri sk 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 ar e not on a “first dollar” basis. In this proposed rule, HHS also specif ied 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 corrido rs program in this proposed rule have a negligible effect on the impact of the pr ogram established by and described in the Premium Stabilization Rule. Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions296 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. Base d 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 requirement s 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 th e model’s margin of error. The Affordable Care Act provides for premium tax credits and the reduction or el imination 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 shar ing is a barrier to obt aining needed health

care. 59 Section 1402(a)-(c) of the Affordable Ca re 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 Ex change and are eligible for a premium tax credit or advance payment of premium tax cred its. 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 per cent of the FPL who ar e enrolled in a QHP of any metal level in the indi vidual 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 Trib e, a Tribal Organizati on, or an Urban Indian Organization or through referral under contracted health servi ces. Finally, the Affordable

59 Brook, et. al., at footnote 5 above.297 Care Act, at section 1412, provides for the ad vance 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 approxi mately 20 million enrollees in Exchange coverage by 2016, including approximately 16 million Exchange enrollees who will be receiving subsidies. 60 Participation rates among potentia l enrollees are expected to be lower in the first few years of Exchange avai lability as employers and individuals adjust to the features of the Exchanges. 3 In this proposed rule, we provide addi tional details for Exchanges and issuers on the administration of advance payments of premium tax credit and cost-sharingreductions for individuals and families. We clarify the approach to providing for costsharing reductions to individuals who pur chase a family policy. We also propose standards applicable to Exchanges when setti ng effective dates for changes in eligibility, collecting premiums from enrollees, and admi nistering advance payments of cost-sharing reductions and the premium tax credit. We describe these administrative costs in the Collection of Information Requirement s section of this proposed rule. Finally, we direct QHP issuers to enroll in dividuals in the planvariation with the correct cost-sharing structure, and to provide th ose individuals with the cost-sharing

60 “Updated Estimates for the Insurance Coverage Provis ions of the Affordable Care Act,” Congressional Budget Office, March 2012. 3 Congressional Budget Office, "Letter to the Honorabl e 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 proposedby HHS as required by the Affordable Care Act. We also clarify which plans are eligible for cost-sharing reductions, and we propose standards relati ng to advance payments of cost-sharing reductions and reconciliation of those adva nce payments against actual cost-sharing reduction provided. In addition, we propose th at 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 allo w 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 Requi rements section of this proposed rule. The cost-sharing reduction and advan ce payment of the premium tax credit policies will apply to all issuers that choos e 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 reductio ns will result in transfers from the General Fund of the Treasury to people receiving cost-sharing re ductions 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 offe ring a plan through a Federally-facilitated Exchange remit a user fee to HHS each m onth equal to the produc t of the billable members (that is, members that count towards the premium) enrolled in the QHP offered299 by the issuer in the Exchange, and the monthl y 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-facil itated 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 fe e 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 f ee 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 esta blishing a SHOP was include d 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 wh ile promoting robust plan choice for

61 Available at: http://cciio.cms.gov/resources/files/Files2/03162012/hie3r-ria-032012.pdf300 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 rule s, 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 ch oice to a single level of coverage reduces potential adverse selection w ithin the group and therefore any additional cost due to expanded choice. In the Exchange Establis hment 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 c overage. 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 mi nimum participation rate is permissible under the PHS Act and applicable State law. Minimu m participation rates require participation in the health plan by a subs tantial portion of the empl oyer’s group, thereby assuring a more representative risk pool and reduc ing 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 covera ge. This proposed rule proposes, subject to permissibility under the PHS Act, that FF- SHOPs use a default participation rate of 70301 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 a dditional costs on employe rs or issuers. This proposed rule proposes new incentiv es for some health insurance issuers to participate in the FF-SHOP. Health insuranc e 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 ar e quite significant. One study suggests expanding plan choice while holding premiums constant for employees results in a median increase in consumer surplus by 20 pe rcent of the premium cost of coverage. 62 Some of this benefit is due to expanded choi ce 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 th at the rule will not have a significant economic impact on a substantia l number of small entities. The RFA

62 Dafny, L., Ho, K., & Varela, M. (2010). Let them have choice: Gains from sh ifting away from employer-sponsored health insurance and toward an individual exchange (No. w15687). National Bur eau of Economic Research.302 generally defines a “small entity” as (1) a prop rietary firm meeting the size standards of the Small Business Administration (SBA), (2) a not-for-profit organi zation that is not dominant in its field, or (3) a small governmentjurisdiction 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 substantia l number of small entities. This proposed rule contains proposed ru les for premium stabilization programs required of health plan issuers including th e risk adjustment program as well as the transitional reinsurance program and temporar y risk corridors programs. Because we believe that few insurance firms offering co mprehensive health insurance policies fall below the size thresholds for “small entities” established by the SBA, we do not believe that an initial regulatory flex ibility analysis is required wi th respect to such firms. For purposes of the RFA, we expect the fo llowing types of entities to be affected by this proposed rule: (1) healthinsurance issuers; (2) health insurance plan sponsors; (3) reinsurance entities; (4) risk adjustment enti ties; and (5) third-party administrators. We believe that health insurance issuers and pl an sponsors would be classified under the North American Industry Classification Sy stem (NAICS) code 524114 (Direct Health and Medical Insurance Carriers); reinsurance en tities, risk adjustment entities and third party administrators would be classi fied 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 entitie s (companies), each with less than $7 million in earned premiums, that offer indivi dual or group health insurance coverage and would therefore be subject to the provisi ons related to MLR. These small entities account for less than 5 percent of the estimated 466 issuers that woul d 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 sm all issuers are likely to have other lines of business that would result in their revenues exceeding $7 million. In this proposed rule, we propose requir ements on employers that choose to participate in a SHOP Exchange. As discus sed 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 em ployers offering health insurance through SHOP that are more restrictive than the cu rrent requirements on small employers offering ESI. For example, we propose to generall y match existing minimum participation rates in the outside market. Additionally, as discussed in the Regulatory Impact Analysis, we believe the proposed policy will provide gr eater choice for the employee among plans and issuers, benefitting both employer a nd 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 th ird-party administrators on behalf of such entities. However, we do not believe that th ese 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 th ese 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 bene fits and take certain other actions before issuing a final rule that includes any Federal mandate that may resultin expenditures in any one year by a State, local, or Tribal govern ments, in the aggregate, or by the private sector, of $100 million in 1995 dollars, update d 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 anal ysis under UMRA is required. F. Federalism Executive Order 13132 establishes certain requ irements 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 otherw ise has Federalism implications. Because States have flexibility in designing their Exchange and Ex change-related programs, State decisions will ultimately influence both admi nistrative expenses and overall premiums. States are not required to establish an Ex change. For States electing to operate an305 Exchange, risk adjustment and reinsurance, mu ch of the initial cost of creating Exchanges and Exchange-related programs will be funde d by Exchange Planning and Establishment Grants. After establishment, Exchanges will be financially self-sustaining, with revenue sources at the discretion of th e State. Current State Exch anges charge user fees to issuers. In HHS’s view, while this proposed ru le does not impose substantial direct requirement costs on State and local gove rnments, this regulation has Federalism implications due to direct effects on the di stribution of power a nd responsibilities among the State and Federal governments relating to determining standards relating to health insurance that is offered in the individual and small group mark ets. 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 la w or regulation that implements these Federal standards. However, HHS anticipates that the Federalism implications (if any) are substantially mitig ated because under the statute, States have choices regarding the structur e and governance of their Ex changes. 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 Exch ange is not approved, HHS , either directly, or through agreement with a non-prof it entity, must establish an d 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 enga ged in efforts to consult with and work cooperatively with affected States, including participating in conf erence calls with and306 attending conferences of the National A ssociation of Insurance Commissioners, and consulting with State insurance o fficials on an individual basis. Throughout the process of developing this proposed rule, HHS has attempted to balance the States’ interests in regulating health insu rance 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 Revi ew Act provisions of the Small Business Regulatory Enforcement Fair ness 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 Hous e of the Congress and to the Comptroller General a report containing a copy of the rule along with ot her specified information, and has been transmitted to Congress and the Co mptroller 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 r ecordkeeping requirements, Reinsurance, Risk adjustment, Risk corridors, Risk mitigation, State and local governments.
45 CFR Part 155 Administrative practice a nd procedure, Health care access, Health insurance, Reporting and recordkeeping requirements, St ate and local governments, Cost-sharing reductions, Advance payments of premium ta x credit, Administrati on and calculation of advance payments of the premium tax cred it, Plan variations, Actuarial value.
45 CFR Part 156 Administrative practice and procedur e, Advertising, Advisory Committees, Brokers, Conflict of interest, Consumer protection, Grant programs-health, Grants administration, Health care, Health insuran ce, Health maintenance organization (HMO), Health records, Hospitals, American Indian/Ala ska Natives, Individuals with disabilities, Loan programs-health, Organization and func tions (Government agencies), Medicaid, Public assistance programs, Reporting and r ecordkeeping requirement s, State and local governments, Sunshine Act, Techni cal assistance, Women, and Youth.
45 CFR Part 157 Employee benefit plans, H ealth insurance, Health maintenance organization (HMO), Health records, Hospitals, Indians, Individuals with disa bilities, Organization and functions (Government agencies), Medi caid, Public assistan ce programs, Reporting308 and recordkeeping requirements, Safety, St ate 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, Re porting and recordkeeping requi rements, 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 part s 153, 155, 156, 157, and 158 as set forth below:
PART 153 – STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS,
AND RISK ADJUSTMENT UNDER THE AFFORDAB LE CARE ACT 1. The authority citation for part 15 3 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 da ta collection approach” as follows: §153.20 Definitions. * * * * * Risk adjustment covered planmeans, for the purpose of the risk adjustment program, any health insurance coverage offere d in the individual or small group market with the exception of grandf athered health plans, group health insurance coverage described in §146.145(c) of this subchapter, individual he alth 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 approachmeans the specific procedures by which risk adjustment data is to be stored, co llected, accessed, transmitted, and validated and the applicable timeframes, data formats, and privacy and secu rity 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 paragr aphs (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 unde r §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 par ticular benefit year, then with respect to benefit year 2014, it must do so by March 1, 2013, or by the 30th day following the311 publication of the final HHS notice of benefit and payment parameters, whichever is later. With respect to subs equent 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 fo r health insurance issuers to receive reinsurance payments that ar e specified in the annual HHS notice of benefit and payment parameters for the applicable benefit year; (2) Forgo the collecti on of additional reinsurance contributions under §153.220(d) and the use of additional f unds 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 paragr aph (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:312
§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 establishe s 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 paymen ts 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 collec tion includes reinsuran ce payments (or if the State is using additional funds for re insurance payments under §153.220(d)(3)), the State supplemental reinsurance paymen t 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) * * *313 (2) If a State contracts with more than one applicable reinsurance entity, the State must ensure that each applicable reinsurance entity operates in a di stinct geographic area with no overlap of jurisdiction with a ny other applicable reinsurance entity.
* * * * * (e) Reporting to HHS . Each State that establishe s a reinsurance program must ensure that each applicable reinsurance ent ity provides information regarding requests for reinsurance payments under the national c ontribution rate made under §153.410 for all reinsurance-eligible plans for each quarter durin g 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 paragra ph (e) as paragraph (c). F. Revising newly designat ed 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:314
§ 153.220 Collection of reinsur ance 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 descri bed 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 contributi on rate set forth in the annua l 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 da ys 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 wh ich 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 revise d to read as follows:315
§ 153.230 Calculation of reinsurance payments made under the national
contribution rate. (a) Eligibility for reinsurance payments under the national re insurance parameters

. A health insurance issuer of a non-grandfathere d individual market plan becomes eligible for reinsurance payments from contributions under the national contribution rate when its claims costs for an individual enrollee’s cove red benefits in a bene fit 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 c ontribution rate will be calculated as the product of the national coinsurance rate multipli ed 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 reinsu rance payments . If HHS determines that all reinsurance payments re quested under the national payment parameters from all reinsurance-eligible plans in all States fo r a benefit year will exceed all reinsurance contributions collected under the national contri bution 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, or316
HHS on behalf of a State, must reduce all requests for reinsurance payments for the applicable benefit year by any adjust ment required under th is paragraph (d). 8. Section 153.232 is added to read as follows: §153.232 Calculation of reinsurance paymen ts made under a State additional
contribution rate. (a) State supplemental reinsurance payment parameters . (1) If a State establishes a reinsurance program and elects to co llect additional contributions under §153.220(d)(1)(ii) or use additional funds for reinsurance payments under §153.220(d)(3), the State must set supplementa l 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 additi onal 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 onl y under the supplemental reinsurance payment parameters (that will not be paid under the national payment parameters) for the given benefit year. (3) All applicable reinsura nce 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 calculati ng reinsurance payments. (b) General requirement for payments under State supplemental reinsurance parameters . Contributions collected unde r §153.220(d)(1)(ii) or funds under317 §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 in surance issuer of a non-gra ndfathered individual market plan becomes eligible for reinsuran ce 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 co vered 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 applicab le benefit year if a State has established such a supplemental attachme nt 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 applicab le 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 applicab le benefit year if a State has established a supplemental coinsurance rate under §153.232(a)(1)(iii). (d) Payments under State supplem ental reinsurance parameters . Each reinsurance payment made from contributions rece ived under §153.220(d)(1)(ii) or funds under §153.220(d)(3), as applicable, will be calculate d with respect to a health insurance issuer’s claims costs for an individual enro llee’s covered benefits as the sum of the following:318 (1) If the State has established a supplement al State attachment point, to the extent the issuer’s incurred claims costs for su ch benefits exceed the supplemental State attachment point but do not exceed the nationa l attachment point, the product of such claims costs between the supplemental State attachment point and th e 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 suppleme ntal 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 rein surance cap, the product of such claims costs between the national re insurance cap and the supplem ental State reinsurance cap multiplied by the national coinsurance rate (or, if the State has established a supplemental State coinsurance rate, the supplemen tal State coinsurance rate); and (3) If the State has established a suppleme ntal coinsurance rate, the product of the issuer’s incurred claims costs for such benef its 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 re insurance payments under the State supplemental reinsurance parameters calculated in accord ance 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 dete rmine a uniform pro rata adjustment to be applied to all such requests for reinsurance pa yments. Each applicab le reinsurance entity319 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 reinsura nce 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 clai ms costs for an enrollee incurred prior to the application of the fo llowing provisions do not count towards either the national reinsurance parameters or the State s upplemental 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 re insurance contributions . HHS will allocate and distribute reinsurance contributions collected from contributing entitie s under the national contribution rate for reinsurance payments to each State based on total requests for reinsurance payments made under the nationa l 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 a pplicable 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 pa ragraphs (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 rein surance program, the State must ensure that the applicab le 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, ac cording to the data requirements specified by the State in the State notice of benefit and payment paramete rs 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 h ealth insurance issuer in accordance with the requirements of §153.410. (3) Provides a process through which an issuerof a reinsurance-el igible 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 da ta to be considered for reinsurance payments) in accordance with the requirements of §153.410. The State must ensure that such requests for reinsuran ce payment (or a subset of such requests) are subject to validation. (b) Notification of reinsurance payments . For each applicable benefit year,321 (1) A State, or HHS on behalf of the St ate, must notify issuers annually of: (i) Reinsurance payments under the national payment parameters, and (ii) Reinsurance payments under the Stat e supplemental payment parameters if applicable, to be made for the applicable benefit year no late r than June 30 of the year following the applicable benefit year. (2) A State must provide to each reinsura nce-eligible plan the expected requests for reinsurance payments made under: (i) The national payment parameters, and (ii) State supplemental payments parame ters if applicable, from such plan on a quarterly basis during the appli cable 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 re insurance entity’s co llection of personally identifiable information is limited to info rmation reasonably necessary for use in the calculation of reinsurance paymen ts, and that use and disclosu re of personally identifiable information is limited to those purposes for which the personally identifiable information was collected (including for purpos es 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 person ally 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 St ate 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 benef it and payment parameters for the applicable benefit year, will forgo impl ementation 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 re sulting payments and charges; and (ii) Has experience relevant to operati ng the risk adjustment program. (2) The State must ensure that the ri sk adjustment entity complies with all applicable provisions of subpart D of this pa rt 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 partic ular Federally certified risk adjustment methodology for a benefit year, a State must esta blish that it and its risk adjustment entity meet the standards set forth in paragraph (c) of this section.323 (2) To obtain such approval, the State must submit to HHS, in a form and manner specified by HHS, evidence that its risk ad justment entity meets these standards. 13. Section 153.320 is amended by revising para graphs (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 be nefit and payment parameters; or (2) An alternate risk adjustment methodology is submitted by a State in accordance with §153.330, reviewed and cer tified by HHS, and published in the applicable annual HHS notice of be nefit and payment parameters.
* * * * * 14. Section 153.330 is amended by— A. Redesignating paragra ph (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 paragr aph (a)(2) of this section; (2) Whether the methodology complies with th e 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 para graph (b)(3) to read as follows: §153.340 Data collection under risk adjustment. * * * * * (b) * * * (3) If a State is operating a risk adjustme nt program, the State must ensure that any collection of personally identifiable info rmation is limited to information reasonably necessary for use in the applicable risk ad justment 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 stor e 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 th at masking or encryption withheld from the State. Use and disclosure of personally id entifiable information is limited to those purposes for which the personally identifiabl e information was collected (including for purposes of data validation).
* * * * * 16. Section 153.360 is added to subp art 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 enro llee’s policy was filed and approved. 17. Section 153.400 is revised to read as follows: §153.400 Reinsurance contribution funds.325 (a) General requirement . Each contributing entity must make reinsurance contributions annually: at the national c ontribution for all rein surance contribution enrollees, in a manner specified by HHS; and at the additional State supplemental contribution rate if the State has electe d 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 hea lth 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 covera ge is not considered to be part of an issuer’s commercial book of business; (iii) In the case of health insurance c overage, such coverage is not issued on a form filed and approved by a State. (2) Accordingly, as specified in paragra ph (a)(1) of this section, a contributing entity is not required to make contri butions on behalf of the following: (i) A self-insured group health plan or h ealth insurance coverage that consists solely of excepted benefits as defi ned 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 H ealth 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 arrangementwithin the meaning of IRS Notice 2002- 45 (2002-2 CB 93) or any subsequentapplicable guidance, that is integrated with a selfinsured group health plan or health insurance coverage; (vi) A health savings account within th e meaning of section 223(d) of the Code; (vii) A health flexible spending arrangem ent 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 i ndemnity reinsurance policy; (x) TRICARE and other military health benefits for active and retired uniformed services personnel and their dependents; (xi) A plan or coverage pr ovided by an Indian Tribe to Tribal members and their spouses and dependents (and other persons of Indian descent closel y 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 auth ority 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 entit y, 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 requ ired 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 Novemb er 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 se ction, 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 pa id 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 li ves 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 covere d on any date (or mo re dates, if an equal number of dates are used for each qua rter) 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 num ber of policies in effect for the first nine months of the benefit year by the ratio of covered li ves 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 live s for self-insured group health plans . To determine the number of covered lives of re insurance contribution enrollees under a selfinsured group health plan for a benefit ye ar, a plan must use one of the following methods: (1) One of the methods specified in eitherparagraph (d)(1) or paragraph (d)(2) of this section; (2) Adding the total number of lives covere d on any date (or mo re dates, if an equal number of dates are used for each qua rter) during the same corresponding month in each of the first three quarters of the benefit year (provide d 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 th e 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 is329 calculated by adding the number of participants with self-only coverage on the date to the product of the number of participants with c overage 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, Ja nuary, April, and July); (3) Using the number of lives covered for the benefit year calculated based upon the “Annual Return/Report of Employee Benef it Plan” filed with the Department of Labor (Form 5500) for the last applicable tim e period. For purposes of this paragraph (e)(3), the number of lives covered for the be nefit year for a plan offering only self-only coverage equals the sum of the total particip ants covered at the beginning and end of the benefit year, as reported on the Form 5500, di vided 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 c overed at the beginning and the end of the benefit year, as re ported on the Form 5500; and (f) Procedures for counting covered live s for group health plans with a selfinsured coverage option and an insured coverage option . To determine the number of covered lives of reinsurance contribution enrollee s under a group health plan with a selfinsured coverage option and an insured covera ge 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 healthplans 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 thatprovide health insu rance coverage) that collectively provide major medical coverage for the same covered lives, then those330 multiple plans shall be treated as a single self-insured group health plan for purposes of calculating any reinsurance cont ribution amount due under paragra ph (d) of this section. (2) Plan Sponsor . For purposes of this paragr aph (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 associ ation that establis hes or maintains a plan established or maintained by a rural electric cooperativ e or rural cooperative association (as such terms are defined in section 3(40)(B) of ERISA); (vi) The trustee, in the case of a planestablished or maintained by a voluntary employees’ beneficiary association (meaning thatthe association is not merely serving as a funding vehicle for a plan that is establis hed 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 pers on 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 th e count of covered lives for th at benefit year is required331 to be provided, after which da te that designation for that be nefit year may not be changed or revoked, and provided further that a person ma y be designated as the plan sponsor only if the person is one of the persons mainta ining 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 pla n, the sponsor of which is not described in paragraph (g)(2)(i) through (g)(2 )(vi) of this section, and for wh ich no identification or designation of a plan sponsor has been made under pa ragraph (g)(2)(i)(vii) of this section, each employer that maintains the plan (with resp ect 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, c ooperative 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 he alth plan that provi des health insurance coverage) that consists solely of excepted benefits as defined by section 2791(c) of the PHS Act, or that only provides bene fits 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 determinationof the average number of covered lives in a benefit year for any set of multiple selfinsured group health plans or health insura nce plans (or a combina tion 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 para graph (g)(1) of this section.332 (i) Multiple group health plan s 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 us ing 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 de termined 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 tr eated as a single group health plan as determined by the plan sponsor and reported to HHS. (ii) Multiple group health plan s 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 ca lculated using one of the methods specified either in paragraph (e)(1) or paragraph (e)(2 ) of this section, app lied 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 tr eated as a single group health plan as determined by the plan sponsor. 19. Section 153.410 is amended by revi sing paragraph (a) as follows: §153.410 Requests for reinsurance payments. (a) General requirement . An issuer of a reinsuranc e-eligible plan may make a request for payment when an enrollee of that reinsurance-eligible plan has met the criteria333 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 s ubpart E to read as follows: §153.420 Data collection. (a) Data requirement

. To be eligible for reinsura nce payments, an issuer of a reinsurance-eligible plan must submit or ma ke accessible all required reinsurance data in accordance with the reinsurance data collection approach esta blished by the State, or by HHS on behalf of the State. (b) Deadline for submission of data . An issuer of a reinsura nce-eligible plan must submit or make accessible data to be considered for reinsurance payments for the applicable benefit year by April 30 of the y ear following the end of the applicable benefit
year. 21. Section 153.500 is amended by-- A. Revising the definitions of “Adm inistrative 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, Federa l and State licensing and regulatory fees paid with respect to the QHP as de scribed 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 notificatio n of such charges. 23. Section 153.530 is amended by – A. Revising paragraphs (a), (b) intr oductory 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 issu er 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 provid er furnishing the item or service. (c) Allowable administrative costs . A QHP issuer must submit to HHS data on the allowable administrative co sts 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 s ubpart G to read as follows: §153.630 Data validation requirements when HHS operates risk adjustment. (a) General requirement

. An issuer of a risk adjustme nt covered plan in a State where HHS is operating risk adjustment on beha lf of the State for the applicable benefit year must have an initial and second valida tion audit performed on its risk adjustment data as described in this section. (b) Initial validation audit

.336 (1) An issuer of a risk adjustment cove red 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 ini tial validation auditors are reasonably capable of performing an initial data va lidation audit according to the standards established by HHS for such a udit, and must ensure that the audit is so performed. (3) The issuer must ensure that each initia l validation auditor is reasonably free of conflicts of interest, such that it is able to conduct the initial va lidation 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 aud it for a second validation audit. The issuer must comply with, and must ensure the initi al validation auditor complies with, standards for such audit established by HHS, and must cooperate with, and must ensure that the initial validation auditor c ooperates with, HHS and the s econd validation auditor in connection with such audit. (d) Data validation appeals

. An issuer may appeal the findings of a second validation audit or the applica tion of a risk score error ra te 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 requi rements 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 specifi ed 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 Coll ection 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 Coll ection 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 pr ogram 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 environmen t 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 successf ully testing the environment to conform338 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 a pplicable, must provide to HHS, through the dedicated data environment, access to enrollee- level plan enrollment data, enrollee claims data, and enrollee encounter da ta 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 progr am, 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 inte rnal methodology for pricing those en counters. If the issuer does not have such a methodology, or has an in complete methodology, it must supplement the methodology in a manner that yi elds derived claims that ar e 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 id entification number for each enrollee; and (2) Maintain the same masked enroll ee 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-e ligible plan in a State in which HHS is operating the risk adjustment or reinsurance pr ogram on behalf of the State, as applicable, may not – (1) Include enrollee’s personally identifiabl e information in the masked enrollee identification number; or (2) Use the same masked enrollee identif ication number for different enrollees enrolled with the issuer. §153.730 Deadline for submission of data. A risk adjustment covered plan or a reinsuran ce-eligible plan in a State in which HHS is operating the risk adjustment or reinsurance pr ogram, 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-faci litated Exchange,” “Federally-facilitated SHOP,” and “Full-time employ ee” 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 secti on 1321(c)(1) of the Affordable Care Act. Federally-facilitated SHOP means a Small Business Health Options Program established and operate d within a State by the Secretary under section 13 21(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 afte r January 1, 2016, except for operations of a Federally-facilitated SHOP for which it is e ffective for plan years beginning on or after October 1, 2013.
* * * * * Large employer means, in connection with a gro up health plan with respect to a calendar year and a plan year, an employe r 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 defi ne 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-facilitated341

SHOP for which the method shall be used fo r plan years beginning on or after October 1,
2013. * * * * * Small employer means, in connection with a gro up health plan with respect to a calendar year and a plan year, an employer w ho 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 ma y elect to define small employer by substituting “50 employees” for “100 employ ees.” The number of employees shall be determined using the method set forth in se ction 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 pa ragraph (b) to read as follows— §155.220 Ability to States to permit agent s and brokers to assist qualified individuals, qualified employers, or qua lified employees enrolling in QHPs. * * * * * (b)(1) Web site disclosure . The Exchange or SHOP may elect to provide information regarding licensed agents and br okers on its Web site fo r the convenience of consumers seeking insurance through that Exchange and may elect to limit the information to information regarding license d agents and brokers who have completed any required Exchange or SHOP re gistration and training process.342 (2) A Federally-facilitated Exchange or SHOP will limit the information provided on its Web site regarding licensed agents a nd brokers to information regarding licensed agents and brokers who have co mpleted registration and training.
* * * * * 29. Section 155.305 is amended by revising pa ragraph (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 enro ll in separate individual policies would be eligible for different cost sharing, the Exch ange 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) (t he special cost-shari ng rule for Indians regardless of income); (iii) Individuals descri bed in paragraph (g)(2)(ii i) of this section; (iv) Individuals descri bed in paragraph (g)(2)(ii) of this section; (v) Individuals described in paragr aph (g)(2)(i) of th is section; and (vi) Individuals describe d 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 pa ragraph (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 alre ady 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 am ount is projected to result in total advance payments for the benefit year that correspond to the tax f iler’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 paym ent provided on the tax filer’s behalf is greater than or equal to zero and is calculated in accord ance with 26 CFR 1.36B-3(d)(1). (2) When redetermining eligibility for co st-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 annua l household income for the benefit year (subject to the special rule for family po licies set forth in §155.305(g)(3). 31. Section 155.340 is amended by adding pa ragraphs (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 (or344 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 paymen t of the premium tax credit that is less than or equal to the aggregate adjusted m onthly premiums, as de fined in 26 CFR §1.36B3(e), for the QHP policies pr operly allocated to EHB must be allocated among the QHP policies in proportion to the re spective portions of the premiu ms 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 pr operly allocated to the pediatric dental esse ntial health benefit. (f) Reduction of enrollee’s portion of premium to account for advance payments of the premium tax credit . If an Exchange is facilita ting 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 dent al 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 premiu m 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 em ployees 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 para graph (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 mi nimum participation rate of 70 percent, calculated as the number of qualified employees accepting coverage under the employer’s group health plan, divided by th e number of qualified employees offered coverage, excluding from the calculation a ny 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, Me dicaid, or TRICARE. (ii) Notwithstanding paragra ph (b)(10)(i) of th is section, a Federally-facilitated SHOP may utilize a different mi nimum participation rate in a State if there is evidence that a State law sets a minimum participati on rate or that a higher or lower minimum346 participation rate is customarily used by the majority of QHP issuers in that State for products in the State’s small gr oup market outside the SHOP. (11) * * * (i) To determine the employer and employ ee contributions, a S HOP may establish one or more standard methods that employe rs may use to define their contributions toward employee and dependent coverage. (ii) A Federally-facilitate d SHOP must use the following method for employer contributions: (A) The employer will select a level of c overage 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 percenta ge 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 ex tent 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 com posite 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 rel ated 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 subm its the required plan variations for the health plan as described in §156.420 of this s ubchapter. 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 adva nce 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 exp ected allowed claims cost allocation, and the actuarial memorandum that an issuer subm its 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 a ny 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 and348 timeframe established by HHS, the estimates and supporting documentation to HHS for review. (4) HHS may use the information provi ded to HHS by the Exchange under this section for the approval of the estimates that an issuer subm its for advance payments of cost-sharing reductions, as de scribed in §156.430 of this subcha pter, and the oversight of the advance payments of cost-sharing re ductions 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 defi nitions 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 subs ection (a) or (b) of section 52 of the Internal Revenue Code of 1986 as a member of the same controlled group of349 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 revi sing 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, equa l to the product of the billable members enrolled through the Exchange in the plan offered by the issu er, 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 pa ragraphs (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 Fe derally-facilitated Exchange that the QHP issuer pays for simila r 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 certif y 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 th e silver level of cove rage and one at the gold level of coverage as de scribed in section 1302(d) of the Affordable Care Act; (2) The QHP issuer does not offer small gr oup market products in that State, but another issuer in the same issuer group o ffers through a Federally-facilitated SHOP serving that State at least one small group mark et QHP at the silver level of coverage and one at the gold level of coverage; or (3) Neither the issuer nor a ny 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 t ax credit and cost-sharing reduction
standards. (a) Standards relative to advance paym ents 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 issuer351 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 para graph (c)(7) to read as follows: §156.285 Additional standards specific to SHOP. * * * * * (c) * * * (7) A QHP issuer must enroll a qualif ied employee only if the Exchange – (i) Notifies the QHP issuer that th e employee is a qualified employee; and (ii) Transmits information to the QHP i ssuer as provided in § 155.400(a) of this subchapter.
* * * * * 40. Subpart E is added to read as follows: Subpart E – Health Insurance Issuer Respon sibilities 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 cr edit 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 cost s for advance payments of cost-sharing reductions and the premium tax credit. Subpart E – Health Insurance Issuer Respon sibilities 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 Acthas 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 esta blished 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 variationmeans a single percentage point. Federal poverty level or FPL has the meaning given to the term in §155.300(a) of this subchapter. Indianhas the meaning given to the term in §155.300(a) of this subchapter. Limited cost sharing plan variationmeans, 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-s haring reductions) may require in cost sharing for a particular y ear, 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 individua ls last listed in §155.305(g)(3) of this subchapter. Plan variationmeans a zero cost sharing plan va riation, 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 maximu m annual limitation on cost sharing required by section 1402 of the Affordable Care Ac t as announced in the annual HHS notice of benefit and payment parameters. Silver plan variation means, with respect to a stan dard silver plan, any of the variations of that standard s ilver 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 sta ndard silver plan, a sta ndard 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 partic ular plan variation, pay only the cost sharing required of an elig ible individual for th e applicable covered service under the plan variation. The cost-sha ring reduction for whic h 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 el igible by the Exchange for cost-sharing reductions under §155.305(g)(2)(i), ( ii), or (iii) of this subcha pter (subject to the special rule for family policies set forth in §155.305( g)(3) of this subcha pter) and chooses to enroll in a silver health plan, the QHP issuer must assign the individua l to the silver plan variation of the selected silv er health plan described in §156.420(a)(1), (2), or (3), respectively. (2) If the individual is determined el igible 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 en roll in a QHP, the QHP issuer mu st assign the individual to the zero cost sharing plan variation of the se lected QHP with all cost sharing eliminated described in §156.420(b)(1).355 (3) If the individual is de termined 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 fo rth 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 planvariation of the se lected QHP with the prohibition on cost sharing for benefits rece ived from the Indian Health Service and certain other providers de scribed in §156.420(b)(2). (4) If the individual is de termined by the Exchange not to be eligible for costsharing reductions (including el igibility under the special rule for family policies set forth in §155.305(g)(3) of this subchapter), and c hooses to enroll in a QHP, the QHP issuer must assign the individual to the sele cted 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 c ontinue to offer in the indivi dual 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 silverplan, as follows – (1) For individuals eligible for cost-s haring reductions und er §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 no tice of benefit and payment parameters for such individuals, and (ii) Other cost-sharing reducti ons 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 no tice of benefit and payment parameters for such individuals, and (ii) Other cost-sharing reducti ons such that the AV of the silver plan variation is 87 percent plus or minus the de minimis va riation 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 no tice of benefit and payment parameters for such individuals, and (ii) Other cost-sharing reducti ons such that the AV of the silver plan variation is 73 percent plus or minus the de minimis varia tion 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 thatan 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 varia tions of the health plan, as follows – (1) For individuals eligible for cost-s haring reductions und er §155.350(a) of this subchapter, a variation of the health planwith all cost sharing eliminated; and (2) For individuals eligible for cost-s haring reductions und er §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 I ndian Tribe, Tribal357 Organization, or Urban IndianOrganization (each as defined in 25 U.S.C. 1603), or through referral under contract health services. (c) Benefit and network equivale nce in silver plan variations . A standard silver plan and each silver plan va riation thereof must cover the same benefits and providers, and require the same out-of-pocket spending fo r benefits other than essential health benefits. Each silver plan variation is subject to all requirements applicable to the standard silver plan (except fo r the requirement that the planhave 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 ha ve the same cost sharing on ite ms 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 fo r 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 va riation of a standard silver plan for an essential health benefit from a provider (inclu ding a provider outside the plan’s network) may not exceed the corresponding cost sharing requi red in the standard silver plan or any other silver plan variatio n 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 plan358 or permitted de minimis variation for a silver plan variation, the AVs of a standard silver plan and the silver plan vari ation thereof described in para graph (a)(3) of this section must differ by at least 2 percentage points. §156.425 Changes in eligibility fo r 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 reduc tions (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 a nother individual on the same policy), then the QHP issuer must ch ange the individual’s assignment such that the individual is assigned to the applicable st andard 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 deducti ble and out-of-pocket amounts . In the case of a change in assignment to a different plan variati on (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 pa id by the applicable individual under previous plan variations (or standard pl an without cost-sharing reducti ons) for that benefit year is taken into account in the ne w 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 fo r the annual limitations on cost sharing. §156.430 Payment for cost-sharing reductions. (a) Estimates of value of cost-shari ng 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 Exch ange as a QHP, the issuer must provide to the Exchange359 annually prior to the benefit year, for approva l 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 reducti ons to be provided under each silver plan variation identified in §1 56.420(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 reduc tions to be provided under the zero cost sharing plan variation; (iii) Be accompanied by supporting docume ntation validating the estimate; and (iv) Be developed using the methodology specified by HHS in the applicable annual HHS notice of benef it and payment parameters. (2) If an issuer seeks advance payments for the cost-sharing reductions to be provided under the limited cost sharing plan vari ation of a health plan it offers, or seeks to offer, in the individual market on the Exch ange 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 ye ar under such limited cost sharing plan variation. The estimate must: (i) Be accompanied by supporting docume ntation validating the estimate; and (ii) Be developed using the methodol ogy 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 provide d under paragraph (a) of this section and the actual enrollment in the a pplicable 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 benef it 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’ pol icy for the benefit year , broken down by what the issuer paid, what the en rollee paid, and the amount reim bursed to the provider by the QHP issuer for the amount that the enroll ee would have paid under the standard QHP without cost-sharing reductions; and (2) In the case of a benef it 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 th e enrollee would have paid unde r 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-fo r-service basis; and361 (2) The actual amount of cost-sharing reductions provided to enrollees for benefits for which the QHP issuer compensa tes the applicable providers in any other

manner. (e) Payment of discrepancies . If the actual amounts of cost-sharing reductions described in paragraphs (d)(1) a nd (2) of this section are – (1) More than the amount of advance pa yments provided and the QHP issuer has timely provided the actual amounts of co st-sharing reductions as required under paragraph (c) of this section, HHS will reimbur se the QHP issuer for the difference; and (2) Less than the amount of advance pa yments 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 describe d in paragraphs (c) through (e) of this section, a QHP issuer will not be eligible for reimburseme nt of any cost-sharing reductions provided following a termination of coverage effectiv e 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. A dvance payments of cost-sharing reductions will be paid to a QHP issuer prior to a dete rmination of termination (including during any grace period, but the QHP issuer will be re quired to repay any advance payments made with respect to any month after any terminati on of coverage effectiv e date during a grace period). (2) Notwithstanding the reconciliation pr ocess described in paragraphs (c) through (e) of this sec tion, if the termination of coverage effective date is prior to the determination of termination other than in th e circumstances described in paragraph (f)(1)362 of this section, and if the termination (or the la te 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 reimbur sement 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 th e reconciliation process described in paragraphs (c) through (e) of this section, if th e termination of covera ge effective date is prior to the determination of termination ot her than in the circumstances described in paragraph (f)(1) of this s ection, and if the reason for the termination (or late determination thereof) is not the fault of th e QHP issuer, as reasonably determined by the Exchange, the QHP issuer will be eligible for advance payments and reimbursement for cost-sharing reductions pr ovided during such period. (4) Subject to the requirements of th e 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 inconsistenc ies 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 paragra ph (a) through (c) of this sec tion, the provisions of this subpart apply to qualified health plans offere d in the individual market on the Exchange. (a) Catastrophic plans . The provisions of this subpa rt do not apply to catastrophic plans as described in §156.155.363 (b) Stand-alone dental plans . The provisions of this s ubpart, to the extent relating to cost-sharing reductions, do not apply to st and-alone dental plans. The provisions of this subpart, to the extent relating to advan ce payments of the premium tax credit, apply to stand-alone dental plans. (c) Child-only plans . The provisions of this subpartapply to child-only QHPs, as described in §156.200(c)(2). §156.460 Reduction of enrollee’s share of pr emium 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 not ice 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 a dvance payment of the premium tax credit; (2) Notify the Exchange of the reduction inthe portion of the premium charged to the individual in acco rdance 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 premiu m 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 cred it 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 cost s 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 th e 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 Exch ange, an allocation of the ra te 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 o ffered by the health plan not described paragraph (a)(1) of this section. (b) Allocation to additional health be nefits for stand-alone dental plans . An issuer must provide to the Exchange annually fo r 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 dol lar allocation of the expected premium for the plan, to: (1) The pediatric dental esse ntial health benefit, and (2) Any benefits offered by the stand-alone dental plan that ar e 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 th e 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 appli cable to State-requir ed 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 in surance 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 appli cable to State-requir ed benefits to be submitted by the issuer under §155.170(c) of this subchapter; (3) Is calculated under the fair health in surance 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 CF R 156.255 (in each case subject to paragraph (d)(4) of this section); and (4) Is calculated so that the dollar am ount of the premium allocable to the pediatric dental essential h ealth benefit for an individua l under the age of 19 years does not vary, and the dollar amount of the premium allocable to the pediat ric dental essential health benefit for an individual aged 19 y ears or more is equal to zero. (e) Disclosure of attri bution and allocation methods . An issuer of a health plan at any level of coverage or a st and-alone dental plan offered, or proposed to be offered in the individual market on the Exchange mu st submit to the Exchange annually for366 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 INTERACTION S WITH EXCHANGES AND SHOP
PARTICIPATION 41. The authority citation for part 15 7 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 “Fed erally-facilitated SHOP,” “Full-time employee,” and “Large empl oyer” 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 te rm in §155.20 of this subchapter.
* * * * *
PART 158—ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE REQUIREMENTS 43. The authority citation for part 15 8 continues to read as follows: Authority : Section 2718 of the Public He alth Service Act (42 U.S.C. 300gg-18 ),367

as amended. 44. Section 158.110 is amended by revising pa ragraph (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 th e 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 Secret ary 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 Ca re Act, 42 U.S.C. 18061, 18062, 18063.

46. Section 158.140 is amended by adding pa ragraph (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 c overage at a blended rate may choose whether to make an adjustment to each aff iliate’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 revisi ng 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 inco me 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; or369 (B) The highest premium tax rate in th e 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 describe d in paragraph (b)(1)(v i) 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 th is 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, exclud ing the issuer’s Fede ral and State taxes and licensing and regulatory fees, desc ribed in §§ 158.161(a) and 158.162(a)(1) and (b)(1), and after accounting for pa yments or receipts for risk adjustment, risk corridors, and reinsurance, descri bed in § 158.130(b)(5). 49. Section 158.232 is amended by revising pa ragraph (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 polic y that covers a subscriber and the subscriber’s dependents shall be the lesser of : the deductible applicable to each of the370 individual family members; or the overall family deductib le 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 pa rtially credible experi ence is zero if both of the following conditions are met:
* * * * * 50. Section 158.240 is amended by revising pa ragraphs (c) and (d) to read as follows: §158.240 Rebating premium if the applicable me dical 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 indivi dual 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 5371 percent of the premium paid by or on behalf of the enrollee for the MLR reporting year after subtracting taxes and f ees and accounting for payments or receipts related to reinsurance, risk adjustment and risk corrido rs. 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 a nd 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 ne t payments related to reinsurance, risk adjustment and risk corridors that mu st 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. Begi nning 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 mu st be provided by applying the full amount due to the first month’s premium that is due on or after August 1 following the MLR372 reporting year. If the amount of the rebate exceeds the premium due for August, then any overage shall be applied to succeeding pr emium 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 mu st 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 succeedi ng 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]