Vol. 78 Thursday, 

No. 100 May 23, 2013 

Part III 

Department of Health and Human Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 422 and 423 

Medicare Program; Medical Loss Ratio Requirements for the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs; Final 

Rule 


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31284 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 422 and 423 

[CMS–4173–F] 

RIN 0938–AR69 

Medicare Program; Medical Loss Ratio 

Requirements for the Medicare 

Advantage and the Medicare 

Prescription Drug Benefit Programs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule implements 

new medical loss ratio (MLR) 

requirements for the Medicare 

Advantage Program and the Medicare 

Prescription Drug Benefit Program 

established under the Patient Protection 

and Affordable Care Act. 

DATES: These regulations are effective 

on July 22, 2013. 

FOR FURTHER INFORMATION CONTACT: Ilina 

Chaudhuri, 410–786–8628 or 

Ilina.Chaudhuri@cms.hhs.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background 

We are publishing this final rule for 

the Medicare Advantage (Part C) and 

prescription drug (Part D) programs to 

make changes as required by the Patient 

Protection and Affordable Care Act 

(Pub. L. 111–148) as amended by the 

Health Care and Education 

Reconciliation Act (Pub. L. 111–152) 

(‘‘Reconciliation Act’’), which we refer 

to collectively as the Affordable Care 

Act. The Affordable Care Act includes 

significant reforms to both the private 

health insurance industry and the 

Medicare and Medicaid programs. 

Provisions in the Affordable Care Act 

concerning the Part C Medicare 

Advantage (MA) and Part D Prescription 

Drug programs largely focus on 

beneficiary protections, MA payment 

reforms, and simplification of MA and 

Prescription Drug program processes for 

both programs. Regulations 

implementing most Affordable Care Act 

provisions pertaining to the MA and 

Prescription Drug program provisions 

were published on April 12, 2012 (77 

FR 22072) and a correction was 

published June 1, 2012 (77 FR 32407). 

This final rule implements section 

1103 of Title I, Subpart B of the 

Reconciliation Act. This section of the 

Affordable Care Act amends section 

1857(e) of the Social Security Act (the 

Act) to add new medical loss ratio 

(MLR) requirements. An MLR is 

expressed as a percentage, generally 

representing the percentage of revenue 

used for patient care, rather than for 

such other items as administrative 

expenses or profit. Because section 

1860D–12(b)(3)(D) of the Act 

incorporates by reference the 

requirements of section 1857(e) of the 

Act, these new Affordable Care Act 

medical loss ratio requirements also 

apply to the Part D program. Under 

these new requirements, MA 

organizations and Part D sponsors are 

required to report their MLR, and are 

subject to financial and other penalties 

for a failure to meet a new statutory 

requirement that they have an MLR of 

at least 85 percent. The Affordable Care 

Act requires several levels of sanctions 

for failure to meet the 85 percent 

minimum MLR requirement, including 

remittance of funds to the Secretary, a 

prohibition on enrolling new members, 

and ultimately contract termination. In 

the February 22, 2013 Federal Register 

(78 FR 12428), we published a proposed 

rule with revisions to the Medicare 

Advantage (MA) program (Part C) and 

prescription drug benefit program (Part 

D). This final rule sets forth CMS’ 

implementation of these new MLR 

requirements for the MA and Part D 

programs. 

II. Provisions of the Proposed Rule and 

Summary of and Responses to the 

Public Comments 

We received approximately 51 items 

of timely correspondence containing 

comments in response to the February 

22, 2013 proposed rule. These public 

comments addressed issues on multiple 

topics. Commenters included health and 

drug plan organizations, insurance 

industry trade groups, provider 

associations, pharmacist and pharmacy 

associations, beneficiary advocacy 

groups, private citizens, and others. 

Overall, commenters supported our 

decision to model Medicare MLR policy 

after the commercial MLR rules. 

In this final rule, we address 

comments and concerns regarding the 

policies included in the proposed rule. 

We present a summary of public 

comments received, as well as our 

responses to them in the applicable 

section of this final rule. 

A. Introduction 

The new minimum MLR requirement 

in section 1857(e)(4) of the Act is 

intended to create incentives for MA 

organizations and Part D sponsors to 

reduce administrative costs such as 

marketing costs, profits, and other uses 

of the funds earned by MA 

organizations and Part D sponsors and 

to help ensure that taxpayers and 

enrolled beneficiaries receive value 

from Medicare health plans. Under this 

final rule, an MLR will be determined 

based on the percentage of Medicare 

contract revenue spent on clinical 

services, prescription drugs, quality 

improving activities, and direct benefits 

to beneficiaries in the form of reduced 

Part B premiums. The higher the MLR, 

the more the MA organization or Part D 

sponsor is spending on claims and 

quality improving activities and the less 

they are spending on other things. MA 

organizations and Part D sponsors will 

remit payment to CMS when their 

spending on clinical services, 

prescription drugs, quality improving 

activities, and Part B premium rebates, 

in relation to their total revenue, is less 

than the 85 percent MLR requirement 

established under section 1857(e)(4) of 

the Act. We believe the payment 

remittance of section 1857(4)(e)(A) of 

the Act is designed to encourage the 

provision of value to policyholders by 

creating incentives for MA organizations 

and Part D sponsors to become more 

efficient in their operations. If an MA 

organization or Part D sponsor fails to 

meet MLR requirements for more than 3 

consecutive years, they will also be 

subject to enrollment sanctions and, 

after 5 consecutive years, to contract 

termination. 

B. Scope, Applicability, and Definitions 

As noted previously, section 

1857(e)(4) of the Act, which establishes 

requirements for a minimum MLR, 

directly applies to the MA program. The 

requirements at section 1857(e)(4) of the 

Act also apply to the Medicare 

Prescription Drug Benefit Program, 

because section 1860D–12(b)(3)(D) of 

the Act requires that the contractual 

requirements at section 1857(e) of the 

Act apply to the Part D program. 

1. Scope and Applicability 

This section discusses the scope of 

the Medicare MLR requirements and the 

applicability to various plan types. Part 

422 of the Code of Federal Regulations 

(CFR) regulates the MA Program, and 

Part 423 of the CFR regulates the Part D 

program. This final rule implements 

sections 1857(e)(4) and 1860D– 

12(b)(3)(D) of the Act by adding to both 

Parts 422 and 423 a new Subpart X, 

‘‘Requirements for a Minimum Medical 

Loss Ratio.’’ Subpart X for the MA 

program has the same structure as 

Subpart X for the Part D program. Thus, 

discussion in this preamble is organized 

by each Subpart X section, and both MA 

and Part D provisions are discussed 

within each section. Any differences 

between the MA and Part D provisions 


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are described within the relevant 

section. 

Because section 1857(e) of the Act, 

where the MLR requirement appears in 

statute, does not directly apply to Cost 

HMOs/CMPs (Cost Health Maintenance 

Organizations/Competitive Medical 

Plans), HCPPs (Health Care Prepayment 

Plans) or PACE (Program of AllInclusive Care for the Elderly) 

organizations, we are finalizing that 

MLR requirements set forth in this final 

rule only apply to the Part D portion of 

the benefits offered by Cost HMOs/ 

CMPs and employers/unions offering 

HCPPs. We are finalizing our proposal 

that we would treat these contracts like 

PDPs for MLR purposes. If a Cost HMO/ 

CMP or an HCPP does not meet the 

minimum MLR requirement on the Part 

D portion of the benefits it provides to 

Medicare enrollees, for 3 consecutive 

years, it will be forced to stop enrolling 

new individuals in such Part D coverage 

and, after 5 consecutive years, will 

potentially lose the Part D portion of its 

contract. 

As explained in the proposed rule, we 

believe that for PACE organizations 

offering Part D, the situation is different 

such that we should use our authority 

under the PACE statute to waive 

Medicare MLR requirements for PACE 

organizations. We received a comment 

on this proposal, which supported our 

proposed approach, and thus we are 

finalizing this proposal without 

modification, and are not applying the 

Part D MLR requirements to the Part D 

offerings of PACE organizations. 

Comment: Several commenters 

supported the proposed rule and CMS’s 

general approach of using the 

commercial MLR rules as a reference 

point for developing the Medicare MLR 

requirements. 

Response: We appreciate the support. 

Comment: Many commenters believe 

that CMS has the discretion to not apply 

the Medicare MLR requirements to the 

Part D program, citing what they 

contended was a lack of evidence of 

Congressional intent to do so, or noting 

that holding Part D stand-alone 

contracts to the same minimum MLR as 

MA contracts is unfair because of 

relatively low drug claims costs or more 

volatility compared to medical-only 

plans or plans with both medical and 

drug benefits. Several commenters 

pointed to the provision in section 

1857(e)(3) of the Act that applies to 

contracts with federally qualified health 

centers (FQHCs) as a precedent for not 

applying a provision in section 1857(e) 

of the Act to Part D, presumably based 

on the belief that the FQHC provision 

does not apply to Part D. 

Another commenter stated that, if 

Medicare MLR applies to Part D, we 

should consider a multiplier to increase 

Part D MLRs. Another commenter asked 

us to consider lowering the 85 percent 

requirement for Part D contracts. Some 

commenters argued that enforcing an 

MLR for Part D contracts would be 

unnecessary because plans are already 

subject to risk corridors that serve as an 

upper limit on net revenue. A 

commenter suggested that, at a 

minimum, CMS delay the applicability 

of Medicare MLR requirements to Part D 

until 2015. Several commenters 

supported applying Medicare MLR 

requirements to the Part D program. 

Response: In the proposed rule, we 

explained that the statute requires us to 

apply all provisions in section 1857(e) 

of the Act to the Part D program. We 

disagree that the FQHC provision is 

relevant precedent for understanding 

the Medicare MLR statute. While this 

provision is not applicable as a practical 

matter, as Part D sponsors do not 

subcontract with FQHCs to provide 

FQHC services, if a Part D plan ever did 

so, that contract would be subject to this 

provision. In the case of the MLR rule, 

however, it clearly can be applied to 

drug costs, as it is under the commercial 

MLR rule upon which this rule is based. 

With respect to the commenters 

seeking special treatment for Part D 

under the MLR rule, our analysis 

suggests that by including Part D 

reinsurance payments in the MLR 

calculation, meeting the minimum MLR 

requirement will be reasonably 

achievable for Part D stand-alone 

contracts and thus a multiplier to 

increase MLRs for these contracts is not 

necessary. We believe that the MLR 

requirements and risk sharing achieve 

different goals, though they are related. 

The purpose of risk sharing as part of 

the Part D payment reconciliation is for 

sponsors and the government to share in 

the unexpected gains or losses to a 

sponsor that are not already included in 

the reinsurance subsidy or taken into 

account through risk adjustment. The 

MLR requirement places a lower bound 

on the percent of total revenue that must 

be spent on claims and quality 

improving activities, which risk sharing 

does not. Furthermore, one objective 

that the MLR policy will accomplish, 

that risk sharing does not, is to provide 

beneficiaries a measure by which they 

can compare relative value of Medicare 

products. 

Comment: A few commenters believe 

that the Medicare MLR requirements 

should not apply to Part D stand-alone 

contracts because the Medicare MLR 

should mirror the commercial MLR, 

which the commenters believe does not 

require MLR reporting for drug-only 

coverage. 

Response: As discussed in the prior 

response, the statute requires us to 

apply the Medicare MLR requirement to 

the Part D program. Moreover, the 

commercial MLR rule does apply to an 

insurance policy covering only drugs, as 

it applies to all health insurance 

coverage as defined by the Public Health 

Service Act, so the premise of the 

question is incorrect. 

Comment: A commenter believed that 

applying MLR to Part D would make it 

difficult for beneficiaries to compare 

Medicare MLRs within the Medicare 

market and between the Medicare and 

commercial markets. 

Response: By applying the Medicare 

MLRs to the Part D program, we believe 

that beneficiaries can meaningfully 

compare health insurance products 

between the Medicare and commercial 

markets. We recognize that the 

advantage to beneficiaries of applying 

the Medicare MLRs to Part D standalone contracts is to allow for 

comparison among the stand-alone 

contracts more so than comparison with 

the MA–PD contracts. 

Comment: A commenter expressed 

concern about the MLR requirements 

placing Cost Plans at a competitive 

disadvantage. The commenter gave the 

example of a beneficiary comparing an 

MA–PD with a Cost Plan that offers Part 

D and concluding that the MA–PD offers 

better value based on the MLR even if 

Cost Plan is more efficient in providing 

drug coverage. In this situation, the 

commenter was concerned that it would 

reflect poorly on the Cost Plan as a 

whole and not just on the Part D portion 

of the plan. 

Response: Because the MLR rule is 

applied to the Part D portion of the 

benefits offered by Cost Plans, we will 

be treating them like PDPs for MLR 

purposes. Thus, when we make MLR 

information available to the public, we 

plan to make clear which MLRs are 

associated with comprehensive benefits 

and which are associated only with a 

drug benefit. 

Comment: Because beneficiary 

premiums fund 25 percent of the value 

of benefits offered under Part D plans, 

a commenter believes that absence of 

any mechanism to share the remittances 

with beneficiaries is further evidence 

that the Medicare MLR requirement is 

not applicable to Part D. 

Response: That would not be a reason 

to exempt Part D coverage, as 

beneficiaries with Part C coverage may 

also have a premium. 

Comment: A commenter sought 

clarification regarding the applicability 

of the rule for section 1876 Cost HMO/ 


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CMPs and section 1833 Cost HCPPs 

(Health Care Prepayment Plans) that 

offer Part D. 

Response: As the Medicare MLR rule 

will only apply to the Part D portion of 

the benefits offered by Cost HMOs/ 

CMPs and employers/unions offering 

HCPPs, we will treat them like PDPs 

instead of MA–PDs for MLR purposes. 

Comment: A commenter stated that 

application of the MLR to Part D would 

create an uneven playing field due to 

the manner by which LIS beneficiaries 

are auto-enrolled into certain plans 

without sponsors paying agent and 

broker fees to acquire this new 

enrollment. Because agent and broker 

fees are considered administrative costs 

under this rule, the commenter suggests 

that those contracts with high levels of 

auto-enrolled beneficiaries would be 

advantaged in meeting the MLR 

requirements. 

Response: We do not believe this 

introduces a systemic bias that favors 

particular plan sponsors. Every plan 

sponsor has the potential to bid below 

the LIS benchmark and receive autoenrollment for its non-enhanced PDPs. 

Comment: A commenter supported 

applying the Medicare MLR 

requirements to EGWPs, while another 

commenter requested that we waive the 

Medicare MLR requirements for all 

EGWPs. A few commenters requested 

clarification that the MLR applies only 

to the defined standard benefit for Part 

D EGWPs in light of CMS’ policy 

effective as of January 2014 that 

supplemental benefits for Part D EGWPs 

will be considered non-Medicare 

benefits for purposes of adjudicating the 

benefit and populating PDE records. 

Response: The MLR statutory 

provision does not provide for an 

exemption for EGWPs and thus applies 

to contracts offering MA and Part D 

plans. As a significant percentage of MA 

enrollees are members of EGWPs (about 

20 percent), we believe that it is 

important not to exempt EGWPs. We 

expect EGWPs to report costs and 

revenue per § 422.2420 and § 423.2420 

on the Medicare-funded portion of each 

contract. Additional information 

regarding how to determine the 

Medicare-funded portion of each 

contract will be provided in subregulatory guidance or in the Paperwork 

Reduction Act notice and comment 

process. We note that though we 

currently do not collect information on 

EGWP benefit packages, we have the 

authority to request this information if 

needed. For non-CY EGWPs, we expect 

that MLR calculations and remittances 

would occur on a calendar year basis, 

similar to how payments and most 

submissions to CMS are on a calendar 

year basis. 

Comment: A commenter supported 

not applying the Part D MLR 

requirements to the Part D offerings of 

PACE organizations. 

Response: We appreciate the support, 

and as noted previously we are adopting 

this policy in this final rule. 

Comment: A few commenters 

inquired how the Medicare MLR 

requirements will apply to private 

health plans participating in state 

demonstration to integrate care for 

dually eligible Medicare and Medicaid 

beneficiaries. 

Response: Unless waived, all 

applicable statutory and regulatory 

requirements of the Medicare program 

apply to plans participating in these 

demonstrations. During the 

demonstration development process, we 

will determine, in conjunction with 

participating states, whether and to 

what extent to waive the Medicare MLR 

requirement. 

2. Definitions 

In proposed § 422.2401 and 

§ 423.2401, we stated that the acronym 

MLR would be used to refer to the 

medical loss ratio referenced in Part 

422, Subpart X and Part 423, Subpart X. 

We also defined non-claims costs as 

those expenses for administrative 

services that are not: Incurred claims, 

payments toward reducing the Part B 

premium for MA plan enrollees, 

expenditures on quality improving 

activities, licensing and regulatory fees, 

or state and federal taxes and 

assessments that cannot be deducted 

from total revenue. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

C. General Requirements for MA 

Organizations and Part D Sponsors 

Sections 1857(e)(4) and 1860D–12 of 

the Act (which incorporates section 

1857(e)(4) of the Act by reference) set 

forth a requirement that MA 

organizations and Part D sponsors report 

MLRs, and that these MLRs meet the 

statutory standard of 85 percent. Those 

organizations that do not meet this MLR 

requirement will be required to pay 

remittances. If organizations are unable 

to meet the minimum MLR for 3 

consecutive years, they will also be 

subject to enrollment sanctions and, for 

5 consecutive years, contract 

termination. MA organizations and Part 

D sponsors will be required to submit 

data to CMS that will allow enrollees of 

health plans, consumers, regulators, and 

others to take into consideration MLRs 

as a measure of health insurers’ 

efficiency. 

Comment: A few commenters 

requested that we deviate from requiring 

an 85 percent MLR for a contract year 

in favor of a lower MLR requirement, or 

that we calculate MLRs using a rolling 

3-year average as required in the 

commercial markets. 

Response: The 85 percent standard is 

set in statute, as is the fact that an MLR 

is calculated for each ‘‘contract year.’’ 

1. Aggregation of MLR to the Contract 

Level 

We proposed at § 422.2410(a) and 

§ 423.2410(a) that an MA organization 

and a Part D sponsor must report an 

MLR for each contract they have with 

CMS, instead of at the MA plan level or 

at the MA organization level. We also 

proposed requiring MA organizations to 

report one MLR for each contract that 

includes MA–PD plans, instead of one 

for nondrug benefits and another for 

prescription drug benefits. 

Comment: Many commenters 

supported reporting MLRs at a higher 

level than the contract level, such as at 

the parent organization level. The 

commenters noted that this approach 

would be preferable as there would be 

less claims variation, would be 

administratively less burdensome to 

report, would reflect the national 

character of the Medicare program, is 

the closest option to the commercial 

MLR, and would ensure a level playing 

field. A few commenters recommended 

that CMS require aggregation of the 

MLR for MA organizations at the 

contract level within a state and for Part 

D stand-alone contracts at the contract 

level by region. Another commenter 

suggested that the appropriate level of 

aggregation is aggregated to the state 

level by MA or Part D plan, noting that 

beneficiaries enroll in plans and not 

contracts, that a good MLR at the 

contract level may mask low-value 

plans underneath it, and that applying 

sanctions at plan level would cause the 

least beneficiary disruption. These 

commenters recognized the potential 

value of reporting plan-level MLRs and 

urged us to continue considering this 

option after the final rule is published. 

Several commenters suggested that 

sponsors be able to choose a level of 

aggregation when reporting MLRs 

similar to the manner in which they can 

choose the level of aggregation when 

determining gain/loss margins for 

bidding. Many commenters agreed with 

reporting at the contract level as 

proposed. 

Response: We continue to believe that 

reporting MLRs at the contract level 

strikes an appropriate balance of 


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administrative burden, meaningful 

MLRs, and comparability with 

commercial MLR reporting. Although 

Medicare is a national program, 

beneficiaries consider the coverage 

options available to them in a particular 

geographic area, which often correlates 

with the state in which they live. As MA 

and PDP contracts are often executed at 

the state level and no other reporting for 

MA and Part D organizations is done at 

the state level of aggregation, we believe 

that reporting Medicare MLRs at the 

contract level is preferable. This level of 

aggregation parallels the commercial 

MLR approach, which aggregates the 

MLR to the state and market level, and 

avoids imposing administrative burden 

for the minority of contracts that span 

multiple states. Contrary to the claim 

that aggregating at the parent 

organization level is necessary to ensure 

a level playing field, it would in fact 

favor parent organizations that operate 

nationally by allowing claims and 

revenues to be shifted around to meet 

the MLR requirements, which a parent 

organization with more limited scope 

would be unable to do. 

Though we recognize that the value of 

individual plans in a contract may differ 

from one another, we also need to keep 

in mind that calculating MLRs at the 

plan level would necessitate higher 

credibility adjustments due to higher 

random claims variation; and therefore, 

may not result in a better measure of 

value. If we allowed sponsors to choose 

their level of reporting, then the 

foremost concern is that resulting MLRs 

would not be comparable by 

beneficiaries. We presume that most MA 

organizations and Part D sponsors 

would choose to report at the highest 

level of parent organization, which 

would raise the concerns we have 

previously discussed of meaningfulness 

of the MLR and significant beneficiary 

disruption in the event of enrollment 

sanction or contract termination. 

Comment: Many commenters agreed 

with our proposed approach of 

reporting one combined MLR for MA 

only and MA–PD contracts for clarity to 

beneficiaries and the public. 

Response: We appreciate the support. 

After consideration of the public 

comments received, we are finalizing 

the level of aggregation for reporting 

Medicare MLR at the contract level as 

proposed. 

2. Remittance Requirement 

Per section 1857(e)(4)(A) of the Act 

and as set forth in proposed 

§ 422.2410(b) and § 423.2410(b), if we 

determine for a contract year that an MA 

organization or Part D sponsor has an 

MLR for a contract year that is less than 

0.85 (85 percent), the MLR requirement 

will not have been met and the 

sponsoring organization will be required 

to remit a payment to CMS. The amount 

of the remittance will be equal to the 

product of: (1) The total revenue under 

the contract for the contract year; and 

(2) the difference between 0.85 and the 

contract’s MLR. Total revenue is 

discussed later in section II.D. of this 

final rule. 

Comment: Notwithstanding the 

statutory requirement for remittances to 

be paid to the Secretary, a few 

commenters believe that we should 

reimburse Medicare beneficiaries who 

paid premiums to plans that did not 

meet the 85 percent MLR during the 

plan year. 

Response: As the commenters note, 

the statute expressly provides that MA 

organizations and Part D sponsors must 

remit to the Secretary when the 

minimum MLR is not met. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

3. Enrollment Sanction 

As set forth in § 422.2410(c) and 

§ 423.2410(c), if an MA or PDP contract 

fails to have an MLR of at least 0.85 for 

3 or more consecutive contract years, 

enrollment of new enrollees in plans 

under that contract will be prohibited. 

The year for which this enrollment 

sanction will apply will be the second 

succeeding year after the third 

consecutive year in which the MA 

organization or Part D sponsor fails to 

meet the MLR requirement. For 

example, the MLRs for contract years 

2014 through 2016 will be reported in 

2015 through 2017. If a contract did not 

meet the MLR requirement for the 2014, 

2015, and 2016 contract years, new 

enrollment in plans under that contract 

will be prohibited beginning in 2018, 

which is the second succeeding contract 

year after the third consecutive year of 

failure (2016) to meet the MLR 

requirement. 

Comment: A few commenters 

suggested establishing a special 

enrollment period to allow beneficiaries 

under MA or Part D contracts that do 

not meet the minimum MLR to disenroll 

and select a new plan. 

Response: As discussed in section 

II.G. of this final rule, we are requiring 

MA organizations and Part D sponsors 

that fail to meet the minimum MLR 2 

years in a row to report earlier the 

following year, such that any 

beneficiary would have sufficient time 

to select a new plan during the annual 

election period. Thus, we do not believe 

that a special enrollment period would 

be necessary. We note that in the 

circumstance of a contract termination 

for failure to meet the MLR, during the 

special enrollment period, enrollees in 

the plans under that contract being 

terminated would be notified that they 

have to elect another option for the year 

the termination takes effect, or would be 

placed under original Medicare. 

Comment: A commenter requested 

that CMS interpret the enrollment 

sanction required after the ‘‘second 

succeeding contract year’’ as the second 

succeeding contract year following 

submission of the report. The 

commenter noted that such an 

interpretation would avoid imposing 

enrollment suspensions on MA 

organizations and Part D sponsors after 

they have already submitted their bids. 

Response: We believe that one 

purpose of the enrollment sanction is to 

keep beneficiaries from enrolling in low 

value plans. The plain reading of the 

statute supports this goal, whereas 

interpreting the enrollment sanction to 

apply the second succeeding contract 

year following submission of the report 

would allow new enrollment into low 

value plans for another year. 

Comment: A commenter asked for 

new enrollment to be allowed for plans 

that meet MLR requirements in the 

fourth year of reporting but had failed 

to meet the requirements for 3 

consecutive years. 

Response: If a contract fails to meet 

the minimum MLR for contract years 

2014, 2015, and 2016, the enrollment 

sanction for all plans under that 

contract will be for contract year 2018. 

If the contract then meets the minimum 

MLR for 2017, new enrollment for plans 

under that contract will be allowed 

during contract year 2019. 

Comment: A commenter urged that 

the processes that currently apply to 

suspensions of enrollment imposed as 

an intermediate sanction should apply 

to prohibitions on new enrollment 

based on a failure to meet MLR 

requirements. 

Response: We would not expect an 

MA organization or Part D sponsor to 

contest a suspension of enrollment since 

it is required by statute and would be 

based on an MLR that the organization 

itself reported. However, if an MA 

organization or Part D sponsor wished 

to argue that an enrollment sanction 

should not have been imposed because 

they did not report 3 consecutive years 

of below 85 percent MLRs, we would 

make available the processes that 

currently apply to suspensions of 

enrollment imposed as an intermediate 

sanction. We note that under that 

process, the prohibition on new 

enrollment would remain in place 


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31288 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

during any appeal of the enrollment 

sanction. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

4. Termination 

If the contract fails to have an MLR of 

at least 0.85 (85 percent) for 5 

consecutive contract years, we are 

required under section 1857(e)(4)(C) of 

the Act to terminate the contract. This 

requirement is reflected in proposed 

§ 422.2410(d) and § 423.2410(d). We 

proposed to implement section 

1857(e)(4)(C) of the Act by terminating 

the contract for the year following the 

year in which the MA organization or 

Part D sponsor is required to report the 

MLR for the fifth year. For termination, 

we proposed to implement the ‘‘second 

succeeding contract year’’ requirement 

in a manner similar to how we proposed 

to implement the enrollment 

termination after 3 or more consecutive 

years of not meeting the minimum MLR 

requirement. Thus, for a contract that 

failed to meet the MLR requirement in 

2014 through 2018, we will terminate 

the contract in 2020. 

Comment: A commenter concerned 

about beneficiary displacement asked 

how beneficiaries would be notified and 

transitioned in the event of a contract 

termination for failure to meet the MLR 

requirements. 

Response: As discussed in section 

II.G. of this proposed rule, we are 

requiring MA organizations and Part D 

sponsors that fail to meet the minimum 

MLR 2 years in a row and onwards to 

report earlier the following year, such 

that any beneficiary would have 

sufficient time to select a new plan 

during the annual election period 

should the beneficiary wish to do so 

based on the MLR finding. As noted 

previously, in the case of a termination, 

enrollees would be informed that they 

needed to elect another option for the 

year the termination takes effect, or 

would be placed under original 

Medicare. Thus, in the event of a 

contract termination for failure to meet 

the MLR, the plans under that contract 

would not be available as an option for 

beneficiaries during the annual election 

period. 

Comment: A commenter requested for 

appeal rights in the event of a contract 

termination due to failure to meet the 

MLR requirements for 5 consecutive 

years. 

Response: We would not expect an 

MA organization or Part D sponsor to 

contest a contract termination since it is 

required by statute and would be based 

on an MLR that the organization itself 

reported. However, in response to this 

comment we are making notice and 

appeal rights in § 422.510(b)(1) and (d) 

and § 423.509(b)(1) and (d) available in 

the event of a contract termination for 

MLR reasons. Therefore, we are not 

finalizing § 422.510(a)(16) as proposed 

and instead revising § 422.2410(d) and 

§ 423.2410(d) to state that CMS would 

terminate a contract per § 422.510(b)(1) 

and (d) and § 423.509(b)(1) and (d). 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed, with the 

exceptions of not finalizing 

§ 422.510(a)(16) and instead revising 

§ 422.2410(d) to state that ‘‘CMS 

terminates the contract per 

§ 422.510(b)(1) and (d) effective as of the 

second succeeding contract year’’ and 

not finalizing § 423.509(a)(16) and 

instead revising § 423.2410(d) to state 

that CMS terminates the contract per 

§ 423.509(b)(1) and (d) effective as of the 

second succeeding contract year. 

D. Calculation of Medical Loss Ratio 

1. Definition of Medical Loss Ratio 

Proposed § 422.2420(a) and 

423.2420(a) set forth a high-level 

definition of the MLR as a ratio of the 

numerator defined in paragraph (b) to 

the denominator defined in paragraph 

(c). In general, the MA and Part C costs 

are in the numerator and revenues are 

in the denominator. A credibility 

adjustment is discussed in section II.F. 

of this final rule. 

Proposed § 422.2410(a)(2) provides 

that the MLR for an MA contract not 

offering Part D prescription drug 

benefits will only be required to reflect 

the costs and revenues related to the 

benefits defined at § 422.100(c), basic 

benefits, mandatory supplemental 

benefits, and optional supplemental 

benefits. If the MA contract includes 

MA–PD plans, the MLR would, also 

under the proposed rule, be required to 

reflect costs and revenues for benefits 

described at § 423.104(d), (e), and (f) 

(standard coverage, alternative coverage, 

and enhanced alternative coverage). 

Proposed § 423.2410(a)(2) also specified 

that the MLR for a PDP contract would 

be required to reflect costs and revenues 

for standard coverage, alternative 

coverage, and enhanced alternative 

coverage. 

Comment: A number of commenters 

commended CMS for adopting the same 

MLR rules that apply to commercial 

plans (which were based on 

recommendations of the National 

Association of Insurance 

Commissioners), modifying them when 

appropriate for the Medicare program. 

Commenters noted that this reduces 

issuer burden by avoiding needless 

duplication for issuers participating in 

both Medicare and commercial markets, 

facilitating common standards allowing 

comparisons and evaluations, and 

minimizes confusion for the public. 

Response: We appreciate the support 

for aligning commercial and Medicare 

approaches to MLR reporting. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

2. MLR Numerator 

Proposed sections 422.2420(b) and 

§ 423.2420(b) for MA and Part D 

contracts identify the elements to be 

included in the numerator for a 

contract’s MLR. Sections 422.2420(b)(1) 

and 423.2420(b)(1) identify two basic 

elements that would constitute the MLR 

numerator: Incurred claims (as defined 

in paragraphs (b)(2) through (b)(4) for 

both programs) and expenditures under 

the contract for activities that improve 

health care quality, which are 

referenced at paragraph (b)(1)(iii) for 

both programs, and described in detail 

at sections § 422.2430 and § 423.2430. 

a. Incurred Claims 

For the MA program, under the 

proposed rule, incurred claims would 

include direct claims that the MA 

organization pays to providers 

(including under capitation contracts) 

for covered services that are provided to 

all enrollees under the contract, as 

described at § 422.2420(b)(2)(i). In 

addition, as set forth at proposed 

§ 422.2420(b)(2)(ii) and 

§ 423.2420(b)(2)(i), for MA contracts that 

include MA–PD plans and for PDP 

contracts, respectively, incurred claims 

would be required to include only drug 

costs that are ‘‘actually paid’’ by the Part 

D sponsor, which are net of direct or 

indirect remuneration from any source. 

‘‘Actually paid’’ claims refer to those 

costs for which the MA organization or 

Part D sponsor is liable through all 

phases of the benefit, including the 

reinsurance portion of claim costs in the 

catastrophic phase of the benefit. MA 

and Part D contracts would also be 

required to reflect the various items 

under § 422.2420(b)(2)(iii) through (xi) 

and § 423.2420(b)(2)(ii). 

Comment: A commenter inquired 

whether claims costs for members with 

end-stage renal disease (ESRD) or who 

have elected hospice should be 

included in the numerator as incurred 

claims. 

Response: Sections 422.2420(b)(1)(i) 

and 423.2420(b)(1)(i) state that the MLR 

numerator should include incurred 

claims for all enrollees. Thus, claims 

costs for ESRD enrollees should be 

included in the numerator as incurred 


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claims, as well as claims paid by the 

plan (and not fee-for-service Medicare) 

for enrollees who have elected hospice. 

Comment: A commenter argued that 

use of Part C rebate dollars to reduce 

Part D premium and cost sharing should 

be added to the numerator for MA–PD 

contracts, in the same manner that the 

proposed rule allows rebate dollars 

allocated to reduce the Part B premium 

to be added to the numerator, because 

the Part D reductions also benefit 

beneficiaries. The commenter noted that 

this approach would be especially 

important to SNPs, which typically use 

some or all of the bid savings to buy 

down the cost of prescription drugs. 

Response: The MLR is based on actual 

costs and revenues for plan benefit 

packages under a contract. Part C 

rebates are revenue to the MA 

organization, and thus are in the MLR 

denominator. The numerator includes 

expenses for benefits. A reduced Part B 

premium is a plan benefit, and only 

accounting flows make this appear other 

than a benefit expense. Currently, CMS 

makes a monthly payment to the MA 

organization for each enrollee in a plan, 

which includes the plan-specific rebate 

amount minus the amount (if any) for 

Part B premium reduction. This is 

revenue. Then CMS sends the amounts 

allocated to reduce Part B premiums to 

the Social Security Administration 

(SSA). If CMS instead paid the MA 

organization the Part B premium rebate 

amount and then required the MA 

organization to pay the SSA on behalf 

of its enrollees, it would be more 

apparent that such a payment is 

payment for a benefit, that is, a cost in 

the numerator. Given existing 

accounting flows, we find it appropriate 

to add the Part B rebate amount to the 

numerator, as proposed at 

§ 422.2420(b)(ii) and § 422.2420(b)(ii). In 

contrast, rebates used to reduce Part D 

premiums and cost-sharing are 

associated with expenditures on drugs, 

and these costs are included in the 

numerator as incurred claims. Incurred 

claims reflect the benefit design for each 

plan under the contract, including 

design features such as reduced costsharing and supplemental drug coverage 

(which are in the benefit design in part 

because of rebate revenue). In reviewing 

this comment, we realized that making 

an adjustment for Part B premiums is 

not applicable to stand-alone Part D 

contracts and we have therefore deleted 

proposed § 423.2420(b)(1)(ii) and 

renumbered accordingly. 

Comment: A few commenters 

requested that CMS clarify whether MA 

organizations employing capitated 

provider reimbursement arrangements 

may consider the full capitation amount 

as a benefit expense unless the provider 

contract specifies a distinct fee for 

administrative services. A commenter 

noted that an approach including the 

full capitation amount in incurred 

claims would mirror the commercial 

MLR requirements. Another commenter 

noted that capitated services often may 

include care management or disease 

management activities and other 

activities intended to improve quality. 

Response: In § 422.2420(b)(2), we are 

following the commercial MLR 

approach where incurred claims are 

direct claims paid to providers, 

including under capitation contracts. 

Where an MA organization of Part D 

sponsor has arranged with a clinical 

provider for capitation payments rather 

than fee-for-service reimbursement for 

covered services to enrollees, and such 

capitation payments include 

reimbursement for certain provider 

administrative costs, then the entire per 

member per month capitation payment 

paid to the provider may be included in 

incurred claims. The full capitation 

amount paid to a provider for covered 

services described at § 422.2420(a)(2) 

could be reported as a benefit expense, 

unless, as the commenters noted, the 

provider contract specifies a distinct fee 

for administrative services. Note that if 

the capitated payment includes 

payment for quality-improving activities 

that also would meet the requirements 

under § 422.2430 and § 423.2430 

(activities that improve health care 

quality), the MA organization must 

ensure that costs for these activities are 

only counted once in the numerator. 

Comment: A commenter requested 

that CMS exclude from provider 

bonuses and incentive payments, which 

must be included in the numerator, the 

treatment of incentive bonuses to 

providers for the purposes of exclusive 

provider-sponsor contracting. 

Response: One requirement of 

incentives and bonus payments to 

providers under § 422.2420(b)(2) and 

§ 423.2420(b)(2) is that the payments 

must be ‘‘related to clinical services and 

prescription drug costs’’, which would 

not include bonus payments specifically 

as an incentive not to contract with 

another organization. 

Comment: A commenter stated that 

CMS’ proposal to include costs and 

revenues for optional supplemental 

benefits in the MLRs for MA contracts 

is unjustified because revenue for these 

benefits comes solely from beneficiary 

premium, and by law beneficiaries do 

not share in any remittances that must 

be made by MA organizations and Part 

D sponsors for contracts that fail to meet 

the MLR requirement. The commenter 

believed that the MLR should only 

include benefits funded by the Medicare 

program. 

Response: The commenter is correct 

that we intend for the MA MLR to 

include all of the MA benefits defined 

at § 422.100(c): Basic benefits, 

mandatory supplemental benefits, and 

optional supplemental benefits. We 

believe that all Medicare costs and 

revenues under an MA contract should 

be included in the MLR, and the 

optional supplemental benefit package 

is defined by law as a type of Medicare 

benefit under the MA program. The fact 

that the optional supplemental benefit is 

funded completely by beneficiary 

premiums is a reason for including 

these benefits in the MLR. A key goal of 

the MLR provision is to provide 

beneficiaries with information needed 

to better understand how much of 

revenue—including beneficiary 

premiums—is being used to pay for 

their Medicare services and qualityimproving activities. 

Comment: A commenter 

recommended that CMS establish a 

multiplier to apply to the numerator for 

Part D contracts in recognition of 

significant differences between the 

structure of these limited benefit 

policies and comprehensive medical 

coverage, analogous to the multiplier 

developed for mini-med policies under 

the commercial MLR rule. 

Response: We do not believe that the 

Medicare Part D benefit package is 

analogous to the limited benefit 

packages referred to as a mini-med 

policies, which the commercial MLR 

has defined as policies that have a total 

annual limit of $250,000 or less, and 

thus do not believe that application of 

an adjuster analogous to the mini-med 

adjuster is appropriate. Like stand-alone 

Part D contracts, commercial, standalone pharmacy policies are subject to 

the commercial MLR standard and do 

not receive an adjustment. 

Comment: A few commenters 

requested that CMS follow the 

commercial rule and implement a 3-year 

reporting period to allow for smoothing 

of abatement years, thus resulting in a 

more accurate MLR calculation. 

Response: The statutory language for 

the Medicare MLR requirement, unlike 

the commercial statute, requires that 

‘‘the Secretary determines for a contract 

year’’ whether the MLR meets the 

threshold of 85 percent. We believe that 

CMS does not have the authority to 

implement a rolling 3-year average 

MLR. 

Comment: A commenter determined 

that the proposed treatment of 

commercial reinsurance in the proposed 

rule deviated from the commercial MLR 

regulation. The commenter noted that 


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under 45 CFR 158.130(a)(3) of the 

commercial regulation, the only 

instances in which the premiums and 

claims associated with a ‘‘100 percent 

indemnity reinsurance treaty’’ are 

reported as part of the MLR calculation 

by the ‘‘assuming entity’’ instead of by 

the ‘‘ceding entity’’ are—(1) when the 

reinsurance treaty was in force prior to 

the date of enactment of the Affordable 

Care Act; and (2) in situations in which 

the assuming entity is also completely 

responsible for performing 

administrative functions. 

Response: We thank the commenter 

for pointing out this unintended 

inconsistency with the commercial MLR 

regulation in our proposed provisions at 

§ 422.2420(b)(1)(iv), § 422.2420(c)(4), 

§ 423.2420(b)(1)(iv) and 

§ 423.2420(c)(4). 

Our proposed regulation would 

require that claims and revenue be 

reported on a direct basis, at 

§ 422.2420(b)(2)(i), § 422.2420(c)(1), 

§ 423.2420(b)(2)(i), and § 423.2420(c)(1). 

We agree that our proposed regulations 

about the exceptions to direct reporting 

should be corrected to mirror the 

commercial regulation as we intended. 

As we stated in the preamble to the 

proposed rule, we only intended to 

depart from the commercial MLR rule to 

the extent necessary and appropriate 

given the Medicare context. In this case, 

the provisions at issue do not involve 

Medicare. Thus, we are revising the 

proposed regulation text to mirror more 

exactly the commercial regulation at 45 

CFR 158.130(a)(2) and (a)(3). We are 

separating provisions on assumptive 

and 100 percent indemnity reinsurance, 

and incorporating the commercial rule 

language at 45 CFR 158.130(a)(3), which 

provides that the only instance in which 

the premiums (revenue) and claims 

associated with a 100 percent indemnity 

reinsurance treaty are reported by the 

assuming entity, instead of by the 

ceding entity, is when the reinsurance 

treaty was in force prior to the date of 

enactment of the Affordable Care Act. In 

short, with this change our provisions 

now mirror the distinction between 

paragraphs § 158.130(a)(2) and (a)(3) in 

the commercial rule. 

We are including these reinsurance 

provisions under § 422.2420 and 

§ 423.2420 for both the MLR numerator 

(costs) and MLR denominator (revenue.) 

(The commercial MLR rule addresses 

the treatment of reinsurance for the 

MLR numerator at § 158.103 through a 

definition of direct paid claims.) 

Finally, we are moving the numerator 

provision at § 158.103 (b)(1)(iv) to (b)(5) 

and adding paragraph (b)(6). 

Comment: A few commenters 

questioned whether, and how, the MLR 

requirement applies to MA Medical 

Savings Account (MSA) plans. One of 

these commenters requested that MSA 

plans be exempted, and another 

commenter argued that if the 

requirement applies to this unique plan 

type, the beneficiary deposit should be 

included in both the numerator and 

denominator of the calculation. 

Response: Medicare MSA plans are a 

type of MA plan, and they are not 

exempted from the MLR statutory 

provisions. We agree with the 

commenter, however, that the annual 

deposit into the beneficiary’s MSA 

should be included in both the 

numerator and denominator of the MLR 

calculation. In response to this 

comment, we are revising proposed 

§ 422.2420(b)(1), to indicate that the 

annual deposit to the beneficiary’s 

medical savings account should be 

included in the MLR numerator. 

Note that the requirement to include 

optional supplemental benefit costs and 

revenue under the contract applies to all 

MA plan types. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed, with the 

exception of revising the proposed 

§ 422.2420(b)(1) to indicate that the 

annual deposit to the beneficiary’s 

medical savings account should be 

included in the MLR numerator, and 

making changes to the 100 percent 

indemnity and assumptive reinsurance 

provisions under § 422.2420 and 

§ 423.2420. 

b. Adjustments to and Exclusions From 

Incurred Claims 

Under proposed § 422.2420(b)(3) and 

§ 423.2420(b)(3), any amounts paid to 

providers that were recovered because 

they were overpayments would have to 

be deducted from incurred claims. 

There are also several expenditures that 

would not be included in incurred 

claims for MA and PDP contracts, as 

provided in § 422.2420(b)(4) and 

§ 423.2420(b)(4). Under proposed 

§ 422.2420(b)(4)(ii) and 

§ 423.2420(b)(4)(ii), amounts paid to 

CMS by an MA organization or Part D 

sponsor as a remittance under 

§ 422.2410(b) or § 423.2410(b) are not 

permitted to be included in incurred 

claims for any contract year. 

Comment: A few commenters noted 

that direct and indirect remuneration 

was inadvertently being backed out of 

incurred claims twice, as the definition 

of drug costs ‘‘actually paid’’ per 

§ 423.308 is already net of DIR and then 

again in the section listing adjustments 

that must be deducted from incurred 

claims. 

Response: We agree and are correcting 

this error by removing proposed 

§ 422.2420(b)(3)(i) and renumbering 

§ 422.2420(b)(3)(ii) accordingly, as well 

as removing proposed 

§ 423.2420(b)(3)(i) and renumbering 

§ 423.2420(b)(3)(ii) accordingly. For 

clarity in the regulatory text, we added 

a reference to direct and indirect 

remuneration in § 423.2420(b)(2)(i). 

Comment: Several commenters 

recommended that all low income 

premium and cost sharing subsidies 

(LIPS and LICS) and discounts on brand 

drugs advanced to beneficiaries as part 

of the Coverage Gap Discount Program 

be taken into account in the numerator 

(and denominator), similar to the 

treatment of Part D reinsurance. 

Response: We make LIPS payments to 

MA organizations and Part D sponsors 

to make the sponsor whole for reduced 

premiums that eligible beneficiaries are 

paying the plan. Beneficiary premiums 

are revenue, not costs, and thus LIPS 

payments are taken into account in the 

denominator of the MLR. We view LICS 

payments and coverage gap discount 

payments as pass-through payments, 

unlike federal reinsurance, which pays 

for a portion—but not all—of plan 

liability in the catastrophic phase of the 

benefit. Thus, LICS and CGDP amounts 

do not belong in the MLR numerator or 

the MLR calculation. 

We are finalizing this provision with 

the following modifications. We have 

made changes to the regulatory text by 

deleting proposed § 422.2420(b)(3)(i) 

and renumbering § 422.2420(b)(3)(ii) 

accordingly, as well as deleting 

proposed § 423.2420(b)(3)(i) and 

renumbering § 423.2420(b)(3)(ii) 

accordingly. We inserted the reference 

to direct and indirect remuneration in 

§ 423.2420(b)(2)(i). We made these 

changes to make clear that direct and 

indirect remuneration must already be 

netted out of drug costs that are actually 

paid per § 423.308 and therefore should 

not be deducted again. 

3. MLR Denominator 

We proposed at § 422.2420(c) and 

§ 423.2420(c) that the MLR denominator 

would equal the total revenue under the 

contract (as described in 

§ 422.2420(c)(1) and § 423.2420 (c)(1)), 

net of deductions set forth in 

§ 422.2420(c)(2) and § 423.2420(c)(2), 

taking into account the exclusions 

described in § 422.2420(c)(3) and 

§ 423.2420(c)(3), and in accordance with 

§ 422.2420(c)(4) and § 423.2420(c)(4). 

Total revenue for the MA program, as 

defined under proposed § 422.2420(c)(1) 

and § 423.2420(c)(1), must be reported 

on a direct basis and would include our 

risk-adjusted payments to the MA 


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organization for all enrollees under a 

contract, reflecting final risk scores, 

including Part C rebate payments, all 

unpaid premium amounts that an MA 

organization or Part D sponsor could 

have collected from enrollees in the 

plan(s) under the contract; all changes 

in unearned premium reserves, and for 

MA plans under a contract that offer 

Part D, direct subsidy payments and 

reinsurance payments as reconciled per 

§ 423.329(c)(2)(ii); all premiums paid by 

or on behalf of enrollees to the MA 

organization or Part D sponsor as a 

condition of receiving coverage under 

an MA or Part D plan; our payments for 

low income premium subsidies under 

§ 423.780; and risk corridor payments 

under § 423.315(e). 

Total revenue for the Part D program, 

as defined at § 423.2420(c)(1), means 

CMS’ payments to the Part D sponsor for 

all enrollees under a contract, reflecting 

final risk scores, including: direct 

subsidy payments at § 423.329(a)(1), 

reinsurance payments at § 423.329(a)(2), 

and payment adjustments resulting from 

reconciliation per § 423.329(c)(2)(ii); all 

premiums paid by or on behalf of 

enrollees to the Part D sponsor as a 

condition of receiving coverage under a 

plan; CMS’ payments for low income 

premium subsidies under § 423.780; all 

unpaid premium amounts that a Part D 

sponsor could have collected from 

enrollees in the plan(s) under the 

contract; all changes in unearned 

premium reserves; and risk corridor 

payments under § 423.315(e). 

At § 422.2420(c)(2), we proposed 

three categories of taxes and fees that 

must be deducted from total revenue: 

Licensing and regulatory fees, federal 

taxes and assessments, and state taxes 

and assessment. We also proposed that 

a fourth amount be deducted from total 

revenue: community benefit 

expenditures. We proposed to align 

with the commercial MLR regulations to 

allow a federal income tax-exempt 

issuer to deduct community benefit 

expenditures by defining them in 

§ 422.2420(c)(2)(iv) and 

§ 423.2420(c)(2)(iv), up to a cap of 3 

percent of total revenue under this part 

or the highest premium tax rate in the 

state for which the MA organization or 

Part D sponsor is licensed, as 

expenditures for activities or programs 

that seek to achieve the objectives of 

improving access to health services, 

enhancing public health, and relief of 

government burden. 

Next, we proposed that some items 

not be included in total revenue. First 

is the amount of unpaid premiums that 

the MA organization or Part D sponsor 

can demonstrate to us that it made a 

reasonable effort to collect. We 

proposed that HITECH, or EHR, 

incentive payments and payment 

adjustments would not be considered 

for purposes of the MLR calculation. 

Thus, neither EHR incentive payments 

for meaningful use of certified 

electronic health records by qualifying 

MAOs, MA EPs and MA-affiliated 

eligible hospitals (as administered 

under Part 495 subpart C), nor EHR 

payment adjustments for a failure to 

meet meaningful use requirements (as 

administered under Part 495 subpart C) 

will be in the MLR calculation. We 

proposed that Coverage Gap Discount 

Program payments under § 423.2320 

would not be included in total revenue. 

Finally, as explained in the preamble 

to the proposed rule, we did not 

propose an adjustment to total revenue 

for commercial reinsurance. 

Comment: A few commenters 

requested clarification on the proposed 

regulatory requirement that total 

revenue must include all unpaid 

premium amounts that an MA 

organization or Part D sponsor could 

have collected from enrollees under a 

contract, but should exclude from total 

revenue all unpaid premium amounts 

for which they can demonstrate to CMS 

they made a reasonable effort to collect. 

Both commenters wanted to exclude all 

unpaid beneficiary premium revenue 

from the denominator. A commenter 

noted that the citations in the proposed 

rule to § 422.74(d)(1)(i) and 

§ 423.44(d)(1)(i) are references to CMS’ 

disenrollment policy, which includes 

the option that an MA organization or 

Part D sponsor may forgive unpaid 

amounts and not disenroll beneficiaries, 

and they requested clarification. 

Response: We appreciate that the 

commenters brought to our attention 

that these provisions of the proposed 

rule are somewhat confusing because 

our disenrollment policy is cited. 

Specifically, at § 422.2420(c)(1)(v), 

§ 422.2420(c)(3)(i), § 423.2420(c)(1)(iv), 

and § 423.2420(c)(3)(i)), where we 

regulate the treatment of unpaid 

premium amounts, we included 

references to § 422.74(d)(1)(i) and 

§ 423.44(d)(1)(i). These citations are to 

our policy on the conditions under 

which an MA organization or Part D 

sponsor may disenroll a beneficiary for 

non-payment of plan premiums. This 

disenrollment policy is focused on 

beneficiary protection by setting limits 

around disenrollment. We believe that 

these citations are confusing in the 

context of MLR calculation and 

reporting. Thus, we are revising 

proposed § 422.2420(c)(3)(i) and 

§ 423.2420(c)(3)(i) to delete these 

citations. The policy intention remains 

the same: The MA organization or Part 

D sponsor will include all beneficiary 

premium amounts under a contract in 

total revenue (the MLR denominator) 

minus any premium amounts that 

remain unpaid after reasonable 

collection efforts. 

Comment: Several commenters 

requested that CMS allow the MLR for 

dual SNPs and FIDE SNPs to include 

Medicaid and Medicare costs and 

revenues. 

Response: We do not believe that we 

have the authority to include Medicaid 

costs and revenues in the Medicare MLR 

requirement, including the authority to 

require payment of a remittance 

calculated on a combined MLR. 

Comment: A number of commenters 

contended that there are a number of 

administrative costs that are in the 

denominator of the MLR that are 

barriers to contracts meeting the MLR 

requirement. A few commenters argued 

that administrative costs associated with 

the rules of participating in the 

Medicare program should specifically 

be excluded from the calculation of 

their MLRs, similar to the treatment of 

taxes and fees in the MA and Part D 

MLR calculation. Examples of these 

costs include provider credentialing, 

costs associated with meeting the 

annual bidding requirements, member 

communications, compliance activities 

over which MA organizations and Part 

D sponsors have no control, and 

expenses incurred for maintaining 

compliance and quality assurance 

programs in accordance with state and 

federal requirements, maintaining 

effective grievance and appeals 

processes, and audits that require 

additional investments. Other 

commenters argued that it is an 

unbalanced approach to include 

administrative costs associated with 

managing several components of the 

Part D program in total revenue, with no 

costs related to these items allowed in 

the numerator: low-income cost-sharing 

(LICS) payments, low-income subsidy 

payments that cover beneficiary 

premiums (LIPS), and discounts on 

brand drugs advanced to beneficiaries as 

part of the Coverage Gap Discount 

Program (CGDP). These commenters 

argued that LICS, LIPS, and CGDP 

should be treated similarly to how CMS 

proposed to treat Part D reinsurance 

payments, as allowable in both the 

numerator and denominator of the MLR. 

Response: As the commenters noted, 

administrative costs are an element of 

doing business. A goal of the MLR is to 

indicate the share of medical and 

prescription drug costs under a contract, 

relative to total revenue. Total revenue 

includes amounts that cover 

administrative costs and margin. We do 


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not believe that excluding 

administrative costs from revenue (or 

adding such costs to the numerator) 

would provide an accurate 

representation of the MLR for a contract. 

This is reflected in the commercial MLR 

rule, which does not permit 

administrative expenses like provider 

credentialing, annual bidding, member 

communications, compliance, quality 

assurance, grievance and appeals, or 

audit costs to be deducted from the 

premium or added to the numerator. In 

fact, one of the key goals of the MLR is 

to have a measure to compare how costeffectively MA organizations and Part D 

sponsors can meet their administrative 

requirements. 

Regarding administrative costs 

specific to the CGDP, we believe that 

CMS bears most of these administrative 

costs, including executing agreements 

with manufacturers participating in the 

CGDP, paying monthly interim coverage 

gap payments, invoicing manufacturers, 

and conducting coverage gap discount 

reconciliation. We require all MA 

organizations and Part D sponsors to 

engage in certain administrative 

activities as a condition of participation 

in the MA and Part D programs, and 

believe that the burden of meeting these 

requirements is fairly distributed. 

For these reasons, we do not believe 

it necessary or appropriate to adjust the 

MLR calculation for administrative costs 

beyond what we proposed. We will be 

mindful of placing additional 

administrative requirements on MA 

organizations and Part D sponsors that 

could have differential impacts on the 

MLR calculation. 

LICS, LIPS, and CGDP payments are 

not allowable in both the numerator and 

denominator of the MLR, like the way 

Part D reinsurance payments are treated. 

As we make LIPS payments on behalf of 

eligible beneficiaries, this amount is 

treated as revenue just as if the 

beneficiary had paid these amounts 

directly to the plan. We view LICS and 

CGDP payments as pass-through 

payments, unlike federal reinsurance, 

for which MA organizations and Part D 

sponsors retain some plan liability in 

the catastrophic phase of the benefit. 

Comment: One commenter requested 

clarification regarding the exclusion of 

commercial reinsurance from total 

revenue and inquired whether the 

‘‘commercial reinsurance’’ exclusion 

means net reinsurance (that is, 

reinsurance premium less reinsurance 

recoveries) or whether both premiums 

and recoveries are excluded from the 

MLR calculation. 

Response: We followed the 

commercial MLR approach by not 

allowing MA organizations and Part D 

sponsors to adjust the MLR for 

commercial reinsurance (we note that 

this response is addressing commercial 

insurance and not the federal 

reinsurance provision under the Part D 

program). That is, both reinsurance 

premiums and recoveries are excluded 

from the MLR calculation. Both costs 

and revenues must be reported on a 

direct basis, that is, before ceded 

reinsurance as stated at 

§ 422.2420(b)(2)(1) regarding incurred 

claims as direct claims direct drug costs 

that are actually paid, and 

§ 422.2420(c)(1) and § 423.2420(c)(1) 

regarding total revenue reported on a 

direct basis. 

Comment: Some commenters 

supported the alignment of the 

proposed rule with the commercial MLR 

regulations, by allowing federal income 

tax-exempt MA organizations and Part D 

sponsors to deduct community benefit 

expenditures from total revenue, up to 

a cap. In regards to contracts that span 

more than one state, a commenter 

supported the blending of the highest 

premium tax rates for the states in 

which the contract is offered. Another 

commenter recommended applying the 

state premium tax rate to the proportion 

of community benefit expenditures 

furnished by plans under the contract in 

that state, or allocating based on 

proportions of enrollment in each 

applicable state, then deducting the 

amount up to the cap. Several 

commenters noted that community 

benefit expenditures should not be 

considered a category of expenditures to 

be deducted from total revenue. 

Generally, commenters who did not 

support the deduction of community 

benefit expenditures argued that since 

MA and Part D plans do not pay state 

premium taxes on their Medicare 

revenue, the proposed rule provides an 

unfair advantage for federal income taxexempt issuers and does not recognize 

the community benefit expenditures 

made by for-profit issuers. 

Response: We agree that, because an 

MA organization or Part D sponsor that 

is exempt from federal income taxes 

must make community benefit 

expenditures, such an MA organization 

or Part D sponsor should be allowed to 

deduct community benefit 

expenditures. This final rule allows a 

federal income tax-exempt MA 

organization or Part D sponsor to deduct 

its community benefit expenditures in 

the same manner that a for-profit plan 

sponsor is allowed to deduct its federal 

income taxes. This rule explains the 

community benefit expenditure 

deduction available to an MA 

organization or Part D sponsor that is 

exempt from federal income taxes. Such 

MA organizations and Part D sponsors 

will be allowed to deduct actual 

community benefit expenditures up to 

the higher of 3 percent of total revenue 

as defined for MLR purposes, or the 

highest premium tax rate in the state 

where the MA organization or Part D 

sponsor is licensed, multiplied by the 

MA organization or Part D sponsor’s 

earned premium for the contract. We 

note that the amount of community 

benefit expenditures deducted is not 

allowed to exceed the amount of actual 

community benefit expenditures in the 

reporting year. In the instance where a 

contract spans more than one state, we 

will blend the highest premium tax rates 

for the states in which the contract is 

offered in a manner to be determined 

through sub-regulatory guidance or the 

Paperwork Reduction Act notice and 

comment process. 

After consideration of the public 

comments received, we are finalizing 

these provisions with the following 

technical corrections. First, we are 

revising proposed § 422.2420(c)(3)(i) by 

removing the citation to 

§ 422.74(d)(1)(i), and we are revising 

proposed § 423.2420(c)(3)(i) by 

removing the citation to 

§ 423.44(d)(1)(i). These changes to the 

provisions on treatment of unpaid 

premiums remove a confusing reference 

to our disenrollment policy, which is 

not directly relevant to the 

determination of total revenue for MLR 

purposes. The second technical 

correction clarifies what is meant by 

total revenue under the contract, 

specifically, that total revenue for a 

contract is not simply the amount under 

paragraph § 422.2420(c)(1) and 

§ 423.2420(c)(1) but is the amount under 

paragraph (c) that reflects (c)(1) through 

(c)(4). Finally, we are correcting 

proposed § 422.2420(c)(3) and 

§ 423.2420(c)(3), which are provisions 

on amounts to be excluded from total 

revenue; we erroneously proposed 

‘‘incurred claims,’’ which are in the 

MLR numerator. We have corrected this 

to state ‘‘revenue.’’ 

4. Projection of Net Total Revenue 

When calculating Medicare MLRs, we 

proposed that MA organizations and 

Part D sponsors would be required to 

account for all Part C and D revenue that 

would be paid after the final risk 

adjustment reconciliation occurs, and 

all Part D revenue that would be paid 

after all reinsurance and risk corridor 

reconciliations occur. 

Comment: Several commenters stated 

concerns about CMS’ proposal that the 

MLR would be reported once, based on 

the Medicare revenue for the year at the 

time of the report, and that neither 


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reopening(s) of a reconciliation process 

nor any risk adjustment data validation 

(RADV) audits that could change the 

final revenue amount would result in a 

reopening of the MLR reported for a 

contract year. A few commenters agreed 

that the MLR calculation should not be 

reopened on a routine basis, but 

recommended that CMS allow the 

reopening of the MLR for contracts with 

MLRs below the threshold. Finally, 

some commenters requested that, at a 

minimum, if there is a finding from a 

RADV or other audit that requires an 

issuer to remit funds to CMS, CMS 

should allow recalculation of a past 

MLR to reflect this adjustment to 

revenue based on an audit finding, or 

alternatively allow an adjustment to 

revenue in the MLR reported for the 

year of the audit finding. 

Response: We believe that the 

remittances owed based on a failure to 

meet the MLR standard should be based 

on the revenue figure at the time of the 

report, and should not be subject to 

change if this revenue figure is 

decreased or increased in a future year. 

First, that is the revenue that in fact was 

received by the MA organization or Part 

D sponsor at the time it made its 

decisions on how to apportion it 

between patient care and quality 

improvement and other costs. The 

remittance (and other sanctions) can be 

considered a penalty for plans that 

apportioned more than 15 percent of the 

revenue received to costs other than 

patient care or quality improvement. 

Presumably, the MA organization did 

not make those decisions based upon an 

assumption that its revenue would be 

reduced or increased in a future year as 

a result of an audit or reconciliation that 

changes the final Medicare payment 

amount in some future year. 

Moreover, if the payment amount is 

adjusted downward in a future year (for 

example, because it is found that the 

organization or sponsor submitted 

inflated risk scores that were not 

justified), we do not believe it would be 

appropriate for the MA organization or 

Part D sponsor to be provided with an 

adjustment to its MLR that could reduce 

or eliminate its penalty for violating the 

MLR standard for the year in question. 

The fact that the MA organization or 

Part D sponsor had to refund amounts 

to which it should not have been 

entitled does not retroactively affect the 

value it delivered with the funds it had 

during the contract year at issue. Thus, 

if an MLR violates the 85 percent 

standard as reported, that MLR is final. 

We are finalizing these provisions as 

proposed. 

5. Allocation of Expenses 

We proposed that MA organizations 

and Part D sponsors would be required 

to properly allocate all expenses 

stemming from each contract, as 

provided under § 422.2420(d) and 

§ 423.2420(d). Each expense would be 

required to be included under only one 

type of expense, unless a portion of the 

expense fits under the definition of one 

type of expense and the remainder fits 

into a different type of expense, in 

which case the expense will be required 

to be pro-rated between types of 

expenses. Expenditures that benefit 

multiple contracts, or contracts other 

than those being reported, including but 

not limited to those that are for, or 

benefit, commercial plans, would under 

our proposal have to be reported on a 

pro rata share basis. This approach 

aligns with the commercial MLR rules. 

Comment: A commenter requested 

clarification regarding the alignment 

with the commercial MLR in reference 

to the proposal that, MA organizations 

and Part D sponsors must use Statutory 

Accounting Principles for the purposes 

of MLR determination except in cases 

when another regulatory authority such 

as state insurance departments requires 

other reporting for a particular contract 

or product using Generally Accepted 

Accounting Principles (GAAP). 

Response: We agree that use of 

Statutory Accounting Principles for 

Medicare MLR requirements would 

align with current practices in 

determining commercial MLR and 

minimize administrative burden on 

issuers. We thus are adopting this 

approach by requiring MA organizations 

and Part D sponsors to explain how 

revenue is used to pay for non-claims 

expenditures. MA organizations and 

Part D sponsors must allocate their nonclaims and quality improving expenses 

by contract. If an expense is attributable 

to a specific activity, then MA 

organizations and Part D sponsors 

should allocate the expense to that 

particular activity. However, if this is 

not feasible, then the MA organization 

or Part D sponsor must apportion the 

costs using a generally accepted 

accounting method that yields the most 

accurate results. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

E. Activities That Improve Health Care 

Quality 

We proposed to adopt definitions of 

activities that improve health care 

quality for the purposes of this MLR 

rule that will result in a uniform 

accounting of the associated costs for 

MA organizations and Part D sponsors. 

As noted in the proposed rule, this 

definition of quality would apply solely 

for the purposes of MLR reporting and 

calculation, and not for other purposes, 

such as Medicare star ratings that 

determine MA quality bonus payments 

as authorized under the Affordable Care 

Act or any quality activities related to 

the Medicaid program. This final rule 

provides a set of criteria in § 422.2430 

and § 423.2430 which MA organizations 

or Part D sponsors will be required to 

comply with in order for the activity in 

question to be treated as quality 

improving. In the proposed rule, we 

requested comment on the types of drug 

utilization review that should be 

considered a quality improving activity 

for Medicare MLR purposes. 

Comment: A few commenters noted 

that concurrent and retrospective 

utilization reviews are often used for 

cost containment purposes. However, 

commenters generally recommended the 

inclusion of concurrent and 

retrospective reviews and remarked that 

the activities provide an opportunity to 

prevent overutilization, increase the 

likelihood of desired health outcomes, 

and improve education of providers and 

future patients, thereby making them 

quality-improving. Many commenters 

recommended expanding the definition 

under proposed § 423.2430 to allow all 

utilization review as a QIA. A few 

commenters suggested categorizing 

utilization management as an allowable 

QIA. 

Response: As discussed in the 

proposed rule, prospective utilization is 

considered a QIA because it is rendered 

before care or services are delivered and 

can help ensure that the most 

appropriate treatment or services is 

given in the most appropriate setting. 

While concurrent and retrospective 

review in Part D cannot meet the 

‘‘before care or services are delivered’’ 

prong, we understand that these types of 

utilization reviews could promote 

quality in certain circumstances, 

especially in the Part D context. In 

reviewing the comments received on 

QIA in the commercial MLR and the 

experience we have had in collecting 

commercial MLR data, which includes 

expenditures to provide a drug benefit, 

we are not persuaded that deviating 

from the proposed QIA definition is 

necessary. Thus, we believe that the 

interest of maintaining consistency with 

the definition of QIA in the commercial 

rule outweighs changing the treatment 

of utilization review in the QIA 

definition. 

Comment: Many commenters 

supported the definition of QIA and our 

efforts to align the Medicare MLR 


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regulation with the commercial MLR 

policy. A few of these commenters 

particularly supported requiring QIA to 

be grounded in evidence-based practice 

that can be objectively measured. Many 

commenters suggested that CMS expand 

their interpretation of QIA for MA 

organizations and Part D sponsors, as 

well as expand the guidance on QIA. 

Response: We appreciate the 

commenters’ support. We believe it is 

important to maintain definitions of 

QIA that are consistent with the 

commercial MLR regulation for more 

accurate comparability for beneficiaries 

and to minimize the administrative 

burden on MA organizations and Part D 

sponsors that have both commercial and 

Medicare lines of business. 

Comment: A number of commenters 

responded to the solicitation for 

comments regarding Medication 

Therapy Management (MTM) programs 

in a Part D context, with the 

recommendation that programs be 

considered for inclusion in the MLR as 

quality improving activities. Generally, 

commenters remarked that MTM 

programs required by CMS improve 

quality and care coordination and 

therefore, should be included in the 

MLR. In addition, commenters noted the 

importance of MTM programs in 

individualized disease management and 

some commenters believe the inclusion 

of MTM programs would further 

encourage and incentivize providers to 

strengthen their MTM programs. 

Response: We appreciate the 

comments on this topic and will use 

them to inform our MTM requirements. 

We also agree that so long as the MTM 

activities meet the requirements set 

forth in § 422.2430 and § 423.2430, they 

would qualify as a QIA. 

Comment: Many commenters 

requested that CMS consider as QIA all 

activities to prevent and reduce fraud, 

waste, and abuse, noting that CMS 

requires such activities as a condition of 

participation in the Part C and D 

programs. Commenters stated their 

concerns that by not allowing plans to 

count all expenses incurred in reducing 

fraud, waste, and abuse, it will result in 

a disincentive to engage in these 

beneficial activities. 

Response: Fraud reduction efforts 

include both fraud prevention and fraud 

recovery. We are allowing the amount of 

claim payments recovered through fraud 

reduction efforts, not to exceed the 

amount of fraud reduction expenses, to 

be included in incurred claims per 

§ 422.240(b)(2)(ix) and 

§ 423.240(b)(2)(xiii). Thus, even though 

fraud prevention is not a QIA, we 

believe this provides an incentive for 

MA organizations and Part D sponsors 

to engage in fraud reduction activities. 

To the extent that MA organizations and 

Part D sponsors are engaging in other 

activities that meet the requirements in 

§ 422.2430 and § 423.2430, they may be 

considered as quality improving 

activities. 

Comment: A number of commenters 

advised caution in regards to 

categorizing wellness programs as QIA. 

They suggest that CMS only include 

wellness programs that have evidence to 

support their effectiveness, those that do 

not penalize beneficiaries who do not 

participate, and those that are at lowrisk for ‘‘cherry-picking’’ the healthiest 

beneficiaries. In particular, commenters 

were worried about wellness programs 

that disproportionately penalize groups 

of older adults, those with disabilities, 

racial minority groups, and low-income 

individuals. Similarly, one commenter 

urged us to be critical of coaching 

programs that are not evidence-based. 

Response: Our longstanding policy is 

that a plan benefit design cannot offer 

differential benefits to its enrollees, and 

that an MA organization or Part D 

sponsor may not deny, limit, or 

condition enrollment to individuals 

eligible to enroll in an MA plan offered 

by the organization on the basis of any 

factor that is related to health status, 

including medical history, disability, 

race, or age. Moreover, MA 

organizations and Part D sponsors must 

have procedures in place to ensure that 

members are not discriminated against 

in the delivery of health care services, 

consistent with the benefits covered in 

their policy, based on race, ethnicity, 

national origin, religion, gender, age, 

mental or physical disability, genetic 

information, or source of payment. With 

regard to comments that we only 

include wellness programs that have 

evidence to support their effectiveness, 

we developed subregulatory 

recommendations of acceptable 

evidence-based criteria which may be 

found in section 90.5 of Chapter 4 of the 

Managed Care manual. The suggestions 

for evidence-based approaches include: 

‘‘(i) Studies from government agencies 

(for example, the FDA); (ii) Evaluations 

performed by independent technology 

assessment groups (for example, 

BCBSA); and (iii) Well-designed 

controlled clinical studies that have 

appeared in peer review journals. 

Chapter 4 of the managed care manual 

(Section 10.5.3) outlines general criteria, 

additional to the federal antidiscrimination laws, that plans are 

required to follow when designing 

benefits. These criteria are applicable to 

wellness programs. We would note that 

these criteria also include a prohibition 

against steerage: ‘‘An MAO may not 

design a plan with supplemental 

benefits that only appeal to healthier 

beneficiaries.’’ We believe it is 

important to provide plans the 

flexibility needed to design wellness 

programs that maximize the potential 

for improved health outcomes for their 

enrolled populations. We see this as 

both an opportunity to prevent the onset 

of chronic illness and to improve the 

health status of chronically ill enrollees. 

Therefore, for MLR purposes, these 

programs are appropriately considered a 

QIA subject to the requirements in 

§ 422.2430 and § 423.2430. 

Comment: A few commenters agreed 

that marketing expenses should not be 

included in QIA and asked us to clarify 

that fees paid to brokers and agents are 

included within the term ‘‘marketing 

expenses.’’ 

Response: Like the commercial MLR, 

we consider agents and brokers fees as 

non-claims costs and therefore 

impermissible as being considered 

included as incurred claims. We also 

exclude marketing as a quality 

improving activity. Though MA 

organizations and Part D sponsors are 

responsible for applying the QIA criteria 

to determine if a particular activity is 

permissible to be reported as QIA, we 

take this opportunity to note that our 

subregulatory guidance discusses agent 

and broker compensation in Manual 

chapters titled ‘‘Medicare Marketing 

Guidelines.’’ 

Comment: A few commenters 

requested including statutorily required 

quality-related activities that are 

specific to SNPs in the definition of 

QIA. 

Response: To the extent that SNPs’ 

quality activities meet the criteria of 

sections § 422.2430 and § 423.2430, they 

may be considered QIA. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

F. Credibility Adjustment 

As noted in section II.A. of this final 

rule, we are using the commercial MLR 

rules as a reference point for developing 

the Medicare MLR. We proposed that 

the methodology for the Medicare MLR 

calculation take into account the special 

circumstances of contracts with lower 

enrollment by applying credibility 

adjustment factors to smaller enrollment 

contracts that are designed to reduce the 

probability that an issuer with smaller 

enrollment has to pay a remittance in a 

given year to 25 percent of the time or 

less. Unlike the commercial rule, we did 

not propose including a deductible 

factor. 

The Office of the Actuary derived the 

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alone credibility adjustments based on 

the variability of expected claims, 

assuming plans are priced exactly at an 

85 percent MLR. The target failure rate 

is 25 percent for contracts priced at an 

85 percent MLR. We followed the 

commercial MLR rule by proposing that 

an MA organization and a Part D 

sponsor may add a credibility 

adjustment to a contract’s MLR if the 

contract’s experience is partially 

credible, as defined by CMS. Fullycredible contracts are not eligible for a 

credibility adjustment. Finally, we 

proposed that for contract years when a 

contract has non-credible experience, 

the sanctions specified in the statute for 

having an MLR that does not meet the 

minimum requirement of 85 percent 

would not apply. 

We defined partially-credible 

experience for MA contracts as 

enrollment that is greater than or equal 

to 2,400 member months and no greater 

than 180,000 member months of 

enrollment for a contract year. We 

defined partially-credible experience for 

Part D stand-alone contracts as 

enrollment that is greater than or equal 

to 4,800 member months and no greater 

than 360,000 member months of 

enrollment for a contract year. 

Accordingly, non-credible MA contracts 

would have annual enrollment of less 

than 2,400 member months, and noncredible Part D stand-alone contracts 

would have annual enrollment of less 

than 4,800 member months. Further, 

fully-credible MA contracts would have 

an enrollment greater than 180,000 

member months, and fully-credible Part 

D stand-alone contracts would have an 

enrollment greater than 360,000 member 

months. 

Tables 1A and 1B provide the 

proposed credibility adjustments for 

partially-credible MA–PD contracts and 

Part D stand-alone contracts beginning 

in 2014. Credibility adjustments for 

contracts with enrollment sizes that fall 

between the categories of member 

months displayed in the tables would be 

determined using linear interpolation. 

We proposed to use member months 

(instead of life years, which is used in 

the commercial MLR credibility 

adjustment) to describe the enrollment 

thresholds pertinent to application of 

the Medicare credibility adjustments, 

such that member months for a contract 

year equal the sum across the 12 months 

of a year of the total number of enrollees 

for each month. This includes enrollees 

who are in ESRD and hospice status for 

a month. As with the commercial rule, 

we intend to evaluate the credibility 

adjustments and update them, if 

necessary. 

TABLE 1A—MLR CREDIBILITY ADJUSTMENTS FOR MA–PD * CONTRACTS

Member months Credibility adjustment 

(%) 

<2,400 ....................... Non-credible. 

2,400 ......................... 8.4. 

6,000 ......................... 5.3. 

12,000 ....................... 3.7. 

24,000 ....................... 2.6. 

60,000 ....................... 1.7. 

120,000 ..................... 1.2. 

180,000 ..................... 1.0. 

> 180,000 .................. Fully-credible. 

* MA–PD combined with MA-only. 

TABLE 1B—PROPOSED MLR CREDIBILITY ADJUSTMENTS FOR PART D 

STAND-ALONE CONTRACTS

Member months Credibility adjustment 

(%) 

<4,800 ....................... Non-Credible. 

4,800 ......................... 8.4. 

12,000 ....................... 5.3. 

24,000 ....................... 3.7. 

48,000 ....................... 2.6. 

120,000 ..................... 1.7. 

240,000 ..................... 1.2. 

360,000 ..................... 1.0. 

> 360,000 .................. Fully-credible. 

Comment: Several commenters 

supported CMS’ proposal to apply 

credibility adjustments to low 

enrollment contracts, to best balance the 

goals of providing value to beneficiaries 

and ensuring that contracts with 

relatively low enrollment would be able 

to function effectively. 

Response: We appreciate the 

commenters’ support. 

Comment: A commenter expressed 

concern that proposed text at § 423.2440 

on credibility adjustments could be 

interpreted in future years to allow CMS 

the option of eliminating credibility 

adjustments for a year. The commenter 

confirmed the importance of credibility 

adjustments and requested that the 

regulation be amended to state that in 

no case can CMS eliminate a credibility 

adjustment. 

Response: At § 422.2440 and 

§ 423.2440, the regulation text states 

that we will define and publish 

definitions of partial, full, and noncredibility through the annual Advance 

Notice and Rate Announcement process. 

We agree that credibility adjustments 

are important for small enrollment 

contracts, which we described at length 

in the proposed rule. Moreover, we 

would not be able to completely 

eliminate the credibility adjustment for 

MLR purposes without notice and 

comment rulemaking outside of the 

Advance Notice/Rate Announcement 

process. 

Comment: A commenter 

recommended that CMS consider 

broadening further the enrollment 

thresholds for a Part D credibility 

adjustment to provide an additional 

element to improve compatibility of the 

85 percent MLR threshold with Part D. 

Another commenter requested that CMS 

establish full credibility thresholds at 

700,000 member months for MA–PD 

and 1.4 million member months for Part 

D stand-alone contracts. 

Response: We are mirroring the 

commercial MLR rule’s approach, where 

credibility adjustments are designed to 

reduce the probability that an issuer 

with smaller enrollment has to pay a 

rebate in a given year to 25 percent of 

the time or less. Establishing full 

credibility thresholds at greater than 

700,000 member months for MA–PD 

contracts and greater than 1.4 million 

member months for Part D stand-alone 

contracts would be approximately 

equivalent to using a 10 percent target 

failure rate. As we discussed in the 

proposed rule, the National Association 

of Insurance Commissioners (NAIC) did 

consider setting the commercial base 

credibility adjustments so that such an 

issuer would be required to pay a rebate 

less than 10 percent of the time. The 

NAIC concluded that setting credibility 

adjustments based on a 25 percent 

probability of paying a rebate struck a 

more equitable balance of consumer and 

issuer interests. 

Comment: A few commenters 

questioned that the threshold for fullycredible enrollment is set at 1 percent 

and not zero percent. The commercial 

MLR regulation sets the fully-credible 

threshold at 0 percent. One of these 

commenters also requested CMS to 

confirm that there is a lower coefficient 

of variation for MA–PD claims than for 

Part D stand-alone claims; this 

commenter expected the full-credibility 

threshold for MA–PD contracts to be 

higher than that for Part D stand-alone 

contracts. 

Response: We mirrored the 

commercial approach of setting 25 

percent as the target failure rate for 

partially credible contracts. Our policy 

for transitioning from partial to full 

credibility is to maintain the 25 percent 

target failure rate for all partially 

credible contracts, up to (but excluding) 

the full credibility threshold. Thus, we 

are finalizing the credibility adjustment 

factors published in the proposed rule. 

Regarding full credibility thresholds, 

it is correct that MA–PD contracts have 

a lower coefficient of variation (less 

variation around the mean) than Part D 

stand-alone contracts. Thus, the full 

credibility threshold for MA–PD 

contracts is set at fewer member months 


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than the threshold for Part D standalone contracts. 

After consideration of the public 

comments received, we are finalizing 

our proposals for the credibility 

adjustments, and will apply the factors 

listed in Tables 1A and 1B as described. 

G. Reporting Requirements 

Consistent with existing reporting 

requirements at § 422.504(f)(2) and 

§ 423.505(f)(2), we proposed that MA 

organizations and Part D sponsors be 

required to submit an MLR report in a 

timeframe and manner specified by 

CMS, and that the organizations be 

required to calculate MLRs and 

remittance as part of their report 

submission. In addition, we proposed 

that the reports will include, but not be 

limited to, the data needed by the MA 

organization and Part D sponsor to 

calculate and verify the MLR and 

remittance amount, if any, for each 

contract. 

The proposed rule also described 

three options for reporting dates after 

the end of the contract year, and 

requested comment on these options: 

July, September (after the risk score 

reconciliation), and December (after the 

Part D reconciliation and calculation of 

risk corridor payments). We noted that 

we must balance any preference for a 

later reporting date with disruption that 

beneficiaries will experience if we 

halted new enrollment or terminated a 

contract after open enrollment has 

begun. 

Comment: Many commenters were 

concerned about the timeframe for MLR 

reporting. None supported MLR 

reporting before September and almost 

all recommended December reporting to 

reduce the extent to which MLRs are 

based on projections of costs and 

revenues. One commenter 

recommended against December 

reporting because of the disruption it 

could cause beneficiaries who might be 

enrolled in plans about to be 

terminated. Several commenters 

suggested that in the event an MA 

organization or Part D sponsor fails to 

meet the MLR threshold for 2 

consecutive years, in the third year the 

MA organizations or Part D sponsor 

should be required to meet an earlier 

MLR reporting deadline to avoid 

disruptions to beneficiaries enrolled in 

plans that would become subject to 

enrollment sanctions or termination. 

Response: We agree with the 

commenters that the best balance 

between beneficiary protection and 

calculating MLRs based on the most 

complete data is to require that, in 

general, MLR reporting for a contract 

year will occur in the December 

following the contract year, on a date 

and in a manner specified by CMS. The 

exception will be for contracts that fail 

to meet the MLR threshold for 2 

consecutive years. For these contracts, 

MLR reporting will occur in the 

following contract year prior to 

December, in a month that will be 

specified by us. This reporting deadline 

will allow time for us to implement, 

prior to the open enrollment period, an 

enrollment sanction for any contract 

that fails to meet the MLR threshold for 

3 or more consecutive years and 

contract termination for any contract 

that fails to meet the MLR threshold for 

5 consecutive years. We will specify this 

early reporting date for contracts that 

failed to meet the MLR threshold for 2 

consecutive years in forthcoming 

guidance on MLR reporting 

requirements. 

After consideration of the public 

comments received, we are finalizing 

these provisions with the following 

clarification in the preamble: in general, 

MLR reporting for a contract year will 

occur in December following the 

contract year, on a date and in a manner 

specified by us. The exception will be 

for contracts that fail to meet the MLR 

threshold for 2 consecutive years; MLR 

reporting will occur in the following 

contract year prior to December, in a 

month that will be specified by us and 

that will allow time for us to implement, 

prior to the open enrollment period, an 

enrollment sanction for any contract 

that fails to meet the MLR threshold for 

3 or more consecutive years and 

contract termination for any contract 

that fails to meet the MLR threshold for 

5 consecutive years. 

H. Remittances if Applicable MLR 

Requirement Is Not Met 

Sections 422.2470 and 423.2470, 

paragraphs (a), (b), (c), and (d), delineate 

the proposed general requirements 

regarding sanctions, the calculation of 

the amount to be remitted, the 

timeframe for payment of any amount 

that may be due, and the treatment of 

remittances in future years’ numerator 

and denominator. 

In accordance with section 1857(e)(4) 

of the Act, § 422.2470(a) and 

§ 423.2470(a) simply provide that if a 

contract is partially or fully-credible and 

does not meet the applicable MLR 

standard set forth in § 422.2410(b) and 

§ 423.2410(b), then the MA organization 

or Part D sponsor will remit payment to 

CMS as calculated under this final rule. 

Sections 422.2470(b) and 423.2470(b) 

explain the amount of the payment that 

will be due to CMS. Consistent with the 

remittance provisions in the Affordable 

Care Act in this final rule, we propose 

that MA organizations and Part D 

sponsors be required to remit to CMS 

the amount by which the applicable 

MLR requirement in § 422.2410(b) and 

§ 423.2410(b) exceeds the contract’s 

actual MLR, multiplied by the total 

revenue of the contract, as provided 

under proposed § 422.2420(c) and 

§ 423.2420(c). 

Sections 422.2470(c) and 423.2470(c) 

specify that we will subtract remittances 

from plan payment amounts in a timely 

manner after the MLR is reported, on a 

schedule determined by CMS. 

Remittances by MA and Part D 

organizations will occur as part of 

regular monthly payments that CMS 

makes to MA organizations and Part D 

sponsors. Sections 422.2470(d) and 

423.2470(d) specify that remittances 

paid in any 1 year will not be included 

in the numerator or denominator of the 

next year’s or any year’s MLR. 

Comment: Several commenters 

commented on the special 

circumstances of MA organizations and 

Part D sponsors in Puerto Rico with 

respect to the Medicare MLR 

requirement. The commenters requested 

that Medicaid and Medicare benefits be 

combined when calculating the 

contract’s MLR because expenses for 

Platino benefits, relative to revenue, are 

truly medical losses. In addition, 

commenters noted the unique 

circumstances facing plan sponsors 

serving Puerto Rico, where Part D lowincome subsidy funding does not apply. 

Response: The Medicare MLR 

requirement, including calculation of a 

remittance amount, applies to Medicare 

benefits and not to Medicaid benefits. 

However, we have added language to 

§ 422.2420(a) and § 423.2420(a) 

authorizing us to make adjustments to 

the MLR produced by the standard 

formula to address exceptional 

circumstances for areas outside the 50 

states and the District of Columbia that 

we determine would warrant an 

adjustment. We will explore whether or 

how to adjust the MLR calculation 

under this language to take into account 

the unique circumstances of these areas. 

After consideration of the public 

comments received, with the exception 

of the new language in § 422.2420(a) 

and § 423.2420(a) permitting us to make 

adjustments warranted by exceptional 

circumstances for areas outside the 50 

states and the District of Columbia, we 

are finalizing these provisions as 

proposed. 

I. MLR Review and Non-Compliance 

We proposed that we would conduct 

selected reviews of reports submitted 

under § 422.2460 and § 423.2460 to 

determine that remittance amounts 


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under § 422.2410(b) and § 423.2410(b) 

and sanctions under §§ 422.2410(c), 

§ 422.2410(d), § 423.2410(c), and 

§ 423.2410(d) were accurately 

calculated, reported, and applied. 

MA organizations and Part D sponsors 

would under this proposal be required 

to retain documentation relating to the 

data reported, and provide access to that 

data to CMS, HHS, the Comptroller 

General, or their designees, in 

accordance with proposed § 422.504 

and § 423.505. These proposed 

provisions were intended to give CMS 

or its designees access to information 

needed to determine whether the 

reports and amounts submitted with 

respect to the MLR are accurate and 

valid. Sanctions would be imposed for 

non-compliance with the MLR 

requirements. Furthermore, under 

proposed § 422.2480(c) and 

§ 423.2480(c), MA organizations and 

Part D sponsors with third party 

vendors would be required to have or be 

able to obtain and validate, in a timely 

manner, all underlying data associated 

with their services prior to the 

preparation and submission of MLR 

reporting to CMS. This includes all 

claims data paid on behalf of the MA 

organization or Part D sponsor, direct 

and indirect remuneration data and 

supporting materials, and all pricing 

components and utilization data that 

were used or rendered to substantiate 

invoices submitted to sponsors or 

financial data submitted to CMS. 

In addition, we proposed to add a 

failure to provide accurate and timely 

MLR data to the list of items in 

§ 422.510(a) and § 423.509(a) that 

constitute grounds for termination, and 

for intermediate sanctions and civil 

money penalties, by adding a paragraph 

(15) related to MLR reporting. Such an 

addition would provide CMS authority 

to invoke the contract termination 

procedures in § 422.510(b) through (d) 

and § 423.509(b) through (d) for failure 

by an MA organization or Part D 

sponsor to provide timely and accurate 

MLR data. Further, we proposed that 

intermediate sanctions at § 422.752(b) 

and (c) and § 423.752(b) and (c) would 

also be available, as well as civil 

monetary penalties at § 422.760 and 

§ 423.760. 

Comment: A commenter supported 

the requirement for third party vendors 

to disclose claims data to MA 

organizations and Part D sponsors by 

request and suggested that we require 

third party electronic audit for 100 

percent of paid claims, clarify what ‘‘all 

underlying data’’ means, and require a 

PBM to link claims to the underlying 

retail contract. 

Response: By ‘‘all underlying data,’’ 

we mean complete claim detail. This 

would include, at a minimum, 

individual claim transaction file layout 

records, relevant pharmacy contractual 

terms and rate schedules dictating 

payment terms for purposes of claim 

detail comparison, and a similar level of 

detail on rebates and any other price 

concessions received. We decline to 

require third party auditing for 100 

percent of paid claims, as we believe 

this would be an overly onerous 

requirement on MA organizations and 

Part D sponsors. 

After consideration of the public 

comments received, we are finalizing 

these provisions as proposed. 

III. Provisions of the Final Rule 

For the most part, this final rule 

incorporates the provisions of the 

proposed rule. Those provisions of this 

final rule that differ from the proposed 

rule are as follows: 

• Stating in preamble that in general, 

MLR reporting for a contract year will 

occur in December following the 

contract year, on a date and in a manner 

specified by us. The exception will be 

for contracts that fail to meet the MLR 

threshold for 2 consecutive years; MLR 

reporting will occur in the following 

contract year prior to December, in a 

month that will be specified by us and 

that will allow time for us to implement, 

prior to the open enrollment period, an 

enrollment sanction for any contract 

that fails to meet the MLR threshold for 

3 or more consecutive years and 

contract termination for any contract 

that fails to meet the MLR threshold for 

5 consecutive years. 

• Not finalizing proposed 

§ 422.510(a)(16) and instead revising 

§ 422.2410(d) to state that ‘‘CMS 

terminates the contract per 

§ 422.510(b)(1) and (d) effective as of the 

second succeeding contract year’’ 

• Not finalizing proposed 

§ 423.510(a)(16) and instead revising 

§ 423.2410(d) to state that ‘‘CMS 

terminates the contract per 

§ 423.509(b)(1) and (d) effective as of the 

second succeeding contract year.’’ 

• Making changes to the 100 percent 

indemnity and assumptive reinsurance 

provisions under § 422.2420 and 

§ 423.2420 to conform with the 

commercial MLR rule. 

• Adding new language in 

§ 422.2420(a) and § 423.2420(a), 

permitting CMS to make adjustments 

warranted by exceptional circumstances 

for areas outside the 50 states and the 

District of Columbia. 

• Revising the proposed 

§ 422.2420(b)(1) to indicate that the 

annual deposit to the beneficiary’s 

medical savings account should be 

included in the MLR numerator. 

• Deleting proposed 

§ 422.2420(b)(3)(i) and renumbering 

§ 422.2420(b)(3)(ii) accordingly. 

• Deleting proposed 

§ 423.2420(b)(3)(i), renumbering 

§ 423.2420(b)(3)(ii) accordingly, and 

inserting a reference to direct and 

indirect remuneration in 

§ 423.2420(b)(2)(i) 

• Revising proposed 

§ 422.2420(c)(3)(i) by removing the 

citation to § 422.74(d)(1)(i), and we are 

revising proposed § 423.2420(c)(3)(i) by 

removing the citation to 

§ 423.44(d)(1)(i). 

• In proposed § 422.2420(c)(3) and 

§ 423.2420(c)(3), revising the term 

‘‘revenue’’ to read ‘‘incurred claims.’’ 

• Correcting proposed 

§ 422.2420(c)(3) and § 423.2420(c)(3). 

IV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements: 

A. ICRs Regarding MLR and Remittance 

Reporting Requirement (§ 422.2470 and 

§ 423.2470) 

This final rule describes the 

information that will be reported by MA 

organizations and Part D sponsors on an 

annual basis to the Secretary starting in 

2014. We proposed that MA 

organizations and Part D sponsors’ 

submissions will include information 

regarding reimbursement for clinical 

services, expenditures for activities that 

improve health care quality, other nonclaim costs, total revenue, and federal 

and state taxes and regulatory fees, 


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among other data elements. MA 

organizations and Part D sponsors will 

be required to calculate MLRs and 

remittance as part of their submission to 

the Secretary. 

At this time, we have not developed 

the MLR reporting instructions and 

forms that MA organizations and Part D 

sponsors will have to complete on an 

annual basis beginning for contract 

years starting January 1, 2014. We 

expect the first year of MLR reporting 

for MA organizations and Part D 

sponsors to occur in 2015 for the 2014 

contract year, and we proposed to 

continue collecting MLR data for the 

foreseeable future. We plan to publish 

the instructions and forms that issuers 

must file for all plans in future 

guidance. At that time, we will solicit 

public comments on both the forms and 

the estimated burden imposed on health 

insurance issuers for complying with 

the provisions of this final rule. We will 

publish the required 60-day and 30-day 

notices in the Federal Register notifying 

the public of OMB approval as required 

by the PRA. 

Comment: One commenter requested 

the format for the MLR report in draft 

with sufficient time for stakeholder 

comments, including specification of 

which information in the report will be 

made public. 

Response: There will be two 

opportunities for public comment on 

the draft reporting form and instructions 

as is required by the PRA. 

We are finalizing these provisions as 

proposed. 

B. ICRs Regarding Retention of Records 

(§ 422.2480(b) and (c) and § 423.2480(b) 

and (c)) 

Subpart I of the final rule establishes 

our enforcement authority regarding the 

reporting requirements under section 

1857(e) of the Act. MA organizations 

and Part D sponsors must maintain all 

documents and other evidence 

necessary to enable us to verify that the 

data required to be submitted comply 

with the definitions and criteria set 

forth in this final rule, and that the MLR 

is calculated and any remittances owed 

are calculated and provided in 

accordance with this final rule. The 

proposed § 422.2480(c) and 

§ 423.2480(c) will require MA 

organizations and Part D sponsors to 

maintain all of the documents and other 

evidence for 10 years. 

We expect that all MA organizations 

and Part D sponsors will have to retain 

data relating to the calculation of MLRs; 

those who have owed remittances will 

also have to retain information 

regarding the payment of remittances. 

We believe that the burden associated 

with our record retention requirements 

does not exceed standard record 

retention practices because MA 

organizations and Part D sponsors are 

already required to retain the records 

and information required by this final 

rule in order to comply with the legal 

requirements of their states’ 

departments of insurance. For that 

reason, we are assigning a lesser burden 

to these requirements as compared with 

the commercial MLR requirements. We 

estimate that about 616 contracts will be 

subject to the aforementioned 

requirements. (The 616 contracts are 

comprised of 605 contracts subject to 

the remittance requirement plus 11 noncredible contracts that are subject to 

reporting requirements). We further 

estimate that it will take MA 

organizations and Part D sponsors about 

28 hours in total to meet the record 

retention requirements, at a cost of 

about $4.00 per report. The total 

estimated annual burden associated 

with the requirements in § 422.2480(b) 

and (c) and § 423.2480(b) and (c) is 

shown in the regulatory impact analysis. 

While we have developed a 

preliminary burden estimate, we are not 

seeking OMB approval at this time. We 

will seek OMB approval for the 

aforementioned recordkeeping 

requirements at the same time we seek 

OMB approval for the information 

collection requirements associated with 

the proposed MLR remittance reporting 

requirements discussed in § 422.2470 

and § 423.2470. 

V. Regulatory Impact Analysis 

A. Introduction 

This final rule implements section 

1857(e)(4) of the Act, which sets forth 

requirements for a medical loss ratio 

(MLR) for MA organizations and Part D 

sponsors. The MLR is an accounting 

statistic that, stated simply, measures 

the percentage of total revenue that MA 

organizations and Part D sponsors spend 

on health care and quality initiatives 

(and, under this rule, amounts spent to 

reduce Part B premiums), versus what 

they spend on such other items as 

administration, marketing and profit. 

The higher the MLR, the more the MA 

organization or Part D sponsor is 

spending on claims and quality 

improving activities and the less they 

are spending on other items and 

retaining as profit. As stated earlier, MA 

organizations and Part D sponsors must 

submit MLR-related data to the 

Secretary on an annual basis, and in the 

event that a contract’s MLR fails to meet 

the minimum statutory requirement, 

MA organizations and Part D sponsors 

will remit a payment to CMS. If the 

contract continues to fall below the 

minimum MLR standard, the contract 

will be subject to enrollment sanctions 

and possibly termination. This final rule 

sets forth uniform definitions and 

standardized methodologies for 

calculating the MLR and addresses 

enforcement of the reporting 

requirements. These provisions are 

generally effective for contract years 

beginning on or after January 1, 2014. 

We have examined the effects of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation 

and Regulatory Review (January 18, 

2011), the Regulatory Flexibility Act 

(RFA) (September 19, 1980, Pub. L. 96– 

354), section 1102(b) of the Act, section 

202 of the Unfunded Mandates Reform 

Act of 1995 (March 22, 1995, Pub. L. 

104–4), Executive Order 13132 on 

Federalism (August 4, 1999), and the 

Congressional Review Act (5 U.S.C. 

804(2)). 

Executive Orders 12866 (58 FR 51735) 

and 13563 direct agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 is 

supplemental to and reaffirms the 

principles, structures, and definitions 

governing regulatory review as 

established in Executive Order 12866, 

emphasizing the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

Section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule: (1) Having an annual effect on the 

economy of $100 million or more in any 

1 year, or adversely and materially 

affecting a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

state, local or tribal governments or 

communities (also referred to as 

‘‘economically significant’’); (2) creating 

a serious inconsistency or otherwise 

interfering with an action taken or 

planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raising novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive Order. 

A regulatory impact analysis (RIA) 

must be prepared for major rules with 


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economically significant effects ($100 

million or more in any 1 year), and a 

‘‘significant’’ regulatory action is subject 

to review by the Office of Management 

and Budget (OMB). This final rule is 

likely to have economic impacts of $100 

million or more in any 1 year, and 

therefore has been designated an 

‘‘economically significant’’ rule under 

section 3(f)(1) of Executive Order 12866. 

Therefore, we have prepared an RIA that 

details the anticipated effects (costs, 

savings, and expected benefits), and 

alternatives considered in this final rule. 

Accordingly, OMB has reviewed this 

final rule pursuant to the Executive 

Order. 

We did not receive any comments on 

the RIA and are therefore finalizing the 

analysis as proposed. 

B. Statement of Need 

Consistent with the provisions in 

section 1857(e)(4) of the Act, which are 

incorporated by reference in section 

1860D–12(b)(3)(D) of the Act, this final 

rule requires MA organizations and Part 

D sponsors to meet the minimum MLR 

requirement of 85 percent. If this 

requirement is not met at the contract 

level, which is the level of aggregation 

in this final rule, MA organizations and 

Part D sponsors are subject to penalties. 

Section 1857(e)(4) of the Act requires 

MA organizations and Part D sponsors 

to ‘‘remit to the Secretary an amount 

equal to the product of the total revenue 

of the MA plan under this part for the 

contract year and the difference between 

0.85 and the medical loss ratio.’’ Section 

1857(e)(4) of the Act also provides that 

the Secretary shall not permit 

enrollment of new enrollees if the plan 

does not meet the MLR requirement of 

85 percent for 3 or more consecutive 

years and shall terminate the contract if 

the plan (contract) fails to have such a 

medical loss ratio for 5 consecutive 

contract years. 

C. Summary of Impacts 

We limited the period covered by the 

regulatory impact analysis (RIA) to 

calendar year (CY) 2014 (with the 

exception of section V.D.5. of this final 

rule, which presents estimates for 

ongoing annual administrative costs for 

2014 and subsequent years). We 

anticipate that the transparency and 

standardization of MLR reporting in this 

final rule will help ensure that 

taxpayers, the federal government, and 

enrolled beneficiaries receive value 

from Medicare health plans. 

Additionally, including in the MLR 

calculation those costs related to 

quality-improving activities could help 

to increase the level of investment in 

and implementation of effective quality 

improving activities, which could result 

in improved quality outcomes and lead 

to a healthier beneficiary population. 

Executive Order 12866 also requires 

consideration of the ‘‘distributive 

impacts’’ and ‘‘equity’’ of a rule. As 

described in this RIA, this regulatory 

action will help ensure that MA 

organizations and Part D sponsors spend 

at least a specified portion of total 

revenue on reimbursement for clinical 

services, prescription drugs, quality 

improving activities, and direct benefits 

to beneficiaries in the form of reduced 

Part B premiums, and will result in a 

decrease in the proportion of health 

insurance revenue spent on 

administration and profit. It will require 

MA organizations and Part D sponsors 

to remit payment to CMS if this 

standard is not met. MA organizations 

and Part D sponsors may also 

experience sanctions if this standard is 

not met over a period of 3 to 5 

consecutive years. The remittance will 

help incent MA organizations and Part 

D sponsors to price their benefit 

packages such that a specified portion of 

premium income is likely to be spent on 

reimbursement for clinical services and 

quality improving activities, resulting in 

increased value to beneficiaries enrolled 

in MA and Part D. In accordance with 

Executive Order 12866, we believe that 

the benefits of this regulatory action 

justify the costs. 

Although we are unable to quantify 

benefits, Table 2 shows that the 

estimated transfer amounts due to 

failure to meet the minimum MLR 

requirement, which we characterize in 

this RIA as remittances to CMS could be 

substantial. Estimates for CY 2014 

remittances are $717 million for MA–PD 

contracts and $141 million for Part D 

stand-alone contracts. As discussed in 

section V.D.4, these estimates do not 

account for potential plan sponsor 

behavioral changes. (Note that the 

estimates in Tables 2 through 5 are 

based on CY 2013 bid data, which are 

a proxy for actual CY 2014 costs and 

revenues that will be used in actual 

MLR calculations.) Additional details 

relating to these estimates are discussed 

later in this regulatory impact analysis. 

We also estimate that administrative 

costs of the rule will be approximately 

$9.6 million upfront and $2.8 million in 

subsequent years. 

TABLE 2—ESTIMATED REMITTANCE FOR CY 2014 

[With credibility adjustment] 

Contract type 

Remittance estimates (in millions) 

Contracts with MLRs 

< 80% 

Contracts with MLRs 

from 80% to 84.99% 

All contracts below MLR 

requirement 

of 85% 

[total remittance] 

MA–PD ......................................................................................... $293 $424 $717 

Part D Stand-alone ...................................................................... 5 136 141 

Total ...................................................................................... 298 560 858 

Source: 2013 approved bids. 

Notes: Estimates reflect application of the credibility adjustment to MLRs for partially-credible contracts. The remittance for a contract is the 

product of the difference between 0.85 and the contract’s MLR and the total revenue of the contract, as provided in § 422.2420(c) and 

§ 423.2420(c). All MA contracts include at least one MA–PD plan, so are labeled MA–PD. This analysis does not explicitly model the impact of 

potential MA organizations or Part D sponsor behavioral changes. 

D. Detailed Economic Analysis 

1. Benefits 

In developing this final rule, we 

carefully considered its potential effects, 

including both costs and benefits. We 

identify several potential benefits which 

are discussed later in this section. 

A potential benefit of this final rule is 

greater market transparency and 

improved ability of beneficiaries to 

make informed insurance choices. The 

uniform reporting required under this 

final rule, along with other programs 

such as www.Medicare.gov, a Web site 


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with plan-level information, will mean 

that beneficiaries will have better data 

to inform their choices, enabling the 

market to operate more efficiently. 

In addition, contracts that will not 

otherwise meet the MLR minimum 

defined by this final rule may opt to 

increase spending on quality-promoting 

activities. These programs, which 

include case management, care 

coordination, chronic disease 

management and medication 

compliance, have the potential to create 

a societal benefit by improving 

outcomes and beneficiary population 

health. 

MA organizations and Part D sponsors 

that will not otherwise meet the MLR 

minimum may also expand covered 

benefits or reduce cost-sharing for 

beneficiaries. To the extent that these 

changes result in increased 

consumption of effective health 

services, the final rule could result in 

improved beneficiary health outcomes, 

thereby creating a societal benefit. 

2. Costs 

We have identified the direct costs 

associated with this final rule as the 

costs associated with reporting, 

recordkeeping, remittance payments, 

enrollment sanctions and termination, 

and other costs. 

a. Direct Costs 

We estimate that each MA 

organization and Part D sponsor will 

incur approximately $16,000 in onetime administrative costs (per report), 

and about $5,000 in annual ongoing 

administrative costs (per report) related 

to complying with the requirements of 

this final rule. Additional details 

relating to these costs are discussed later 

in this RIA. 

b. Other Costs 

Additionally, there are three other 

potential types of costs associated with 

this final rule: Costs of potential 

increases in medical care use, the cost 

of additional quality-improving 

activities, and costs to beneficiaries if 

MA organizations and Part D sponsors 

decide to limit products offered as a 

result of this final rule. 

As discussed in the benefits section, 

there may be increases in qualityimproving activities, provision of 

medical services, and Part D covered 

items due to this final rule. This is 

likely have some benefit to beneficiaries 

but also potentially represents an 

additional cost to MA organizations, 

Part D sponsors, and the federal 

government. 

It is also possible that some MA 

organizations and Part D sponsors in 

particular areas or markets will not be 

able to operate profitably when required 

to comply with the proposed 

requirements. They may respond by 

changing or reducing the number of 

products they offer. MA organizations 

and Part D sponsors are likely to 

consider whether they expect to be 

successful competitors in a given 

market. Entire contracts or subsets of 

plans under contracts with low MLRs 

may be withdrawn from a given market 

entirely, while MA organizations and 

Part D sponsors with low MLR contracts 

(particularly those that are subsidiaries 

of larger organizations) may find ways 

to achieve higher MLRs through 

increased efficiencies. 

To the extent that MA organizations 

and Part D sponsors decide to limit 

product offerings in response to this 

final rule, individual enrollees in the 

plans under these contracts may bear 

some costs associated with searching for 

and enrolling in a new Medicare health 

plan. For Medicare beneficiaries, this 

may also lead to reduced choice, the 

inability to purchase similar coverage, 

and higher search costs related to 

finding affordable insurance coverage. 

c. Transfers 

To the extent that MA organizations 

and Part D sponsors have contracts with 

MLRs that fall short of the minimum 

requirement, they must remit payment 

to the Secretary. These remittances will 

reflect transfers from the MA 

organizations or Part D sponsors to the 

Secretary. Using 2013 approved bid 

data, we have estimated remittances for 

CY 2014, which are presented in Table 

2. 

d. Additional Sanctions 

To the extent that MA organizations’ 

and Part D sponsors’ MLRs fall short of 

the minimum MLR requirements for a 

period of 3 or 5 consecutive years, they 

will undergo additional sanctions. If an 

MA organization’s or Part D sponsor’s 

MLR falls below 85 percent for 3 

consecutive contract years, the Secretary 

shall not permit the enrollment of new 

enrollees under the contract for 

coverage. If the MLR falls below 85 

percent for 5 consecutive contract years, 

the Secretary shall terminate the 

contract. To the extent that enrollment 

sanctions are issued, this may lead to 

reduced choice for Medicare 

beneficiaries. To the extent that 

contracts are terminated, individual 

enrollees in these contracts may bear 

some costs associated with searching for 

and enrolling in a new Medicare health 

or drug plan. One benefit of enrollment 

sanctions will be the movement of 

beneficiaries into contracts with a more 

efficient operating cost structure. 

3. Overview of Data Sources, Methods, 

and Limitations 

The most recent data on the number 

of licensed entities offering Medicare 

coverage through MA or Part D 

prescription drug plans are the 2013 

approved bids. These bid data contain 

information on MA organizations’ and 

Part D sponsors’ projected revenues, 

expenses, and enrollment. Generally, 

these projections are based on actual 

plan experience from previous years. CY 

2013 bid data are a proxy for actual CY 

2014 costs and revenues that will be 

used in actual MLR calculations. 

We used 2013 approved plan bid data, 

aggregated to the contract level. An MA 

organization or Part D sponsor can have 

one or multiple contracts with CMS 

and, under each contract, the MA 

organization or Part D sponsor can offer 

one or multiple plans (plan benefit 

packages) in which beneficiaries may 

enroll. Although these data represent 

the most recent data source with which 

to estimate impacts of the MLR 

regulations, there are limitations that 

should be noted. For example, plan bids 

are projected estimates of per person per 

month revenue needed to offer a benefit 

package, where required revenue is the 

sum of direct medical costs or 

prescription drug costs, administrative 

costs and margin. Member month 

projections may differ from actual 

enrollment, and revenue projections in 

the bid may differ from the actual 

revenue MA organizations and Part D 

sponsors truly require, given actual 

claims experience in a year. 

Moreover, we proposed to follow the 

commercial MLR regulations by 

including expenditures on quality 

improving activities in the numerator of 

the MLR (and, under this rule, amounts 

spent to reduce Part B premiums), and 

allowing certain amounts to be 

subtracted from the denominator of the 

MLR, such as licensing and regulatory 

fees; federal and state taxes and 

assessments; and community benefit 

expenditures. Some data for this RIA 

was collected in the bid pricing tool for 

the first time in 2013, such as reported 

estimates by MA organizations and Part 

D sponsors of expenditures on quality 

and levels of taxes and fees. Part D 

employer-group waiver plans are not 

required to submit bids, and therefore 

they are not included in the data 

analysis. Therefore, these plans are 

excluded from the analysis of Part D 

stand-alone contracts. Employer group 

waiver plans offered under MA–PD 

contracts are included in the RIA, 

although the bid data available for these 


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plans are only from the MA portions of 

the bids. 

As discussed at greater length in 

section V.D.4 of this final rule, we 

expect that MA organization and Part D 

sponsor behavior will change as a result 

of this final rule, which will impact the 

MLRs and remittances due. Because we 

are limited in our ability to predict 

behavioral changes, we do not explicitly 

model these behavioral changes in our 

estimates. We asked for comment on our 

methods and limitations presented in 

this regulatory impact analysis, 

anticipated impacts of behavioral 

changes, and additional ideas for 

quantifying the costs and benefits of this 

final rule. 

4. Number of Affected Entities Subject 

to the MLR Provisions 

We proposed that the MLR provisions 

will apply to all MA organizations and 

Part D sponsors offering Part C or D 

coverage (except for the proposed 

exclusion of PACE organizations, and 

the proposed inclusion of cost plans’ 

Part D coverage). For purposes of the 

RIA, we have estimated the total 

number of entities that will be affected 

by the requirements of this final rule at 

the contract level because this is the 

level at which we proposed to apply the 

MLR. We believe that this is the best 

read of the statute at 1857(e) of the Act 

and that applying the MLR adjustment 

at the contract level will promote 

program stability and a variety of benefit 

structures. 

Table 3 shows the estimated 

distribution of entities offering Part C 

and D contracts subject to MLR 

remittance requirements. Note that 

section 1876 Cost HMO/CMPs and 

section 1833 Cost HCPPs (Health Care 

Prepayment Plans) are excluded from 

this MLR analysis, as they do not submit 

Part C bids and only a few Part D bids 

for 2013 were submitted for section 

1876 cost plans. 

TABLE 3—ESTIMATED NUMBER OF

CONTRACTS SUBJECT TO MLR REMITTANCE REQUIREMENTS

Contract type Contract 

count 

Estimated 

number of 

beneficiaries 

(in millions) 

MA–PD * ......... 544 14.3 

Part D Standalone ** ........ 61 19.3 

Total ......... 605 33.6 

* All MA contracts include at least one MA– 

PD plan, so are labeled MA–PD. Non-credible 

contracts, of which there are 11, are not displayed or included in this table as they are not 

subject to the remittance requirements. 

** PACE and costs contracts are excluded. 

Source: CMS administrative data on MA 

and Part D contracts, based on 2013 accepted 

bids. Beneficiary counts are bid projections. 

Of the 605 MA–PD and Part D standalone contracts subject to the remittance 

requirement, we estimate that only 14 

percent of these contracts will be 

required to pay an MLR related 

remittance to CMS in 2014 (see Table 5). 

This RIA provides estimates only for CY 

2014, and, as a result, does not estimate 

the number of contracts that could 

undergo MLR-related enrollment 

suspensions or terminations in 

subsequent years. 

We note that the estimates in Table 3 

will be used to estimate potential CY 

2014 remittances and therefore exclude 

non-credible contracts, which are not 

subject to the remittance requirements. 

This RIA does not account for the 

changes to remittance amounts if the 

distributions of credibility status 

changes. If more contracts become 

partially or fully credible, then 

remittance amounts would increase. 

Conversely, if more contracts become 

non-credible, then remittances amounts 

would decrease. 

5. MLR Remittance Payments 

a. Data Limitations and Modeling 

Assumptions 

As described in the commercial MLR 

rule, we expect that as a result of this 

final rule, MA organization and Part D 

sponsor behavior will change. Even if 

the 2013 bid data were a precise 

indication of actual claims costs and 

revenue for 2013, MLRs in 2014 may 

well be different as a result of MA 

organization or Part D sponsor 

behavioral change. However, for 

purposes of this analysis, we do not 

explicitly model these behavioral 

changes in our estimates. Potential 

behavioral changes as a result of this 

final rule are as follows: 

• Pricing Policy—MA organizations 

and Part D sponsors will likely consider 

a number of responses in 2014 to 

minimize or avoid remittance (for 

example, reducing premium increases, 

or paying providers bonuses if incurred 

claims fall short of a certain threshold). 

• Activities That Improve Quality— 

MA organizations and Part D sponsors 

may increase their quality-improving 

activities given the financial incentive 

to do so, or modify existing activities to 

meet the QIA definition, and spending 

on these activities may change and vary 

significantly by MA organization or Part 

D sponsor. 

• Other Changes—MA organizations 

and Part D sponsors are expected to 

carefully scrutinize all of their 

expenditures to determine whether 

some could legitimately be categorized 

as expenditures for clinical services, 

prescription drugs, or quality improving 

activities based on the definitions 

implemented by this regulation. 

Further, it is unclear to what extent 

companies may make other behavioral 

changes that could affect MLR 

remittances (for example, expanding 

coverage to increase medical claims, 

consolidation, requesting permission to 

split contracts into smaller contracts in 

order to receive credibility adjustments, 

etc.). 

b. Methods for Estimating MLR 

Remittances 

The analysis includes estimates that 

are based on both unadjusted and 

adjusted MLRs. An ‘‘adjusted MLR’’ 

refers to the MLR for a contract to which 

a credibility adjustment has been added, 

as described in section II.F. of this final 

rule. Accordingly, an unadjusted MLR is 

calculated without any credibility 

adjustment. Comparisons of unadjusted 

and adjusted MLRs are provided to 

assess the impact of the proposed 

credibility adjustments on partiallycredible contracts. All MLRs reported in 

this analysis have denominators net of 

estimated federal and state taxes and 

licensing and regulatory fees, using data 

reported by MA organizations and Part 

D sponsors in their 2013 bids. Because 

the definitions of these taxes and fees 

are new to this rule, the estimates from 

the 2013 bid data may differ from how 

much they will actually spend on taxes 

and fees in 2014. Similarly, all 

estimated MLRs reported in this 

analysis also incorporate 2013 bid 

estimates of expenses for quality 

improving activities, as reported by MA 

organizations and Part D sponsors. 

Because the definitions of quality 

improving activities are new to this rule, 

the estimates from the 2013 bid data 

may differ from how much they will 

actually spend on these activities in 

2014. 

The adjusted MLRs reflect application 

of the credibility adjustments for 

contracts that have partially credible 

experience. As described in section II.F. 

of this final rule, we proposed that an 

MA–PD contract be defined as partiallycredible when the enrollment is greater 

than or equal to 2,400 member months 

and no greater than 180,000 member 

months for a contract year. We proposed 

that a Part D stand-alone contract be 

defined as partially-credible when the 

enrollment is greater than or equal to 

4,800 member months and no greater 

than 360,000 member months for a 

contract year. We proposed that these 

contracts receive a credibility 

adjustment to their MLRs to account for 


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statistical variability in their claims 

experience that is inherent in contracts 

with smaller enrollment. We proposed 

that MA–PD contracts are defined as 

fully-credible when the enrollment is 

greater than 180,000 member months 

and Part D stand-alone contracts are 

defined as fully-credible when the 

enrollment is greater than 360,000 

member months. Reported MLR values 

for fully-credible contracts will not 

reflect a credibility adjustment. Finally, 

we proposed that contracts are defined 

as having non-credible experience if the 

enrollment for a year is less than 2,400 

member months for MA–PD contracts 

and less than 4,800 member months for 

Part D stand-alone contracts. Noncredible contracts will not be subject to 

the remittance requirements or other 

MLR-related sanctions specified in 

statute (and implemented in the 

regulations at § 422.2410(b), (c), and (d) 

and § 423.2410(b) through (d)). Section 

II.F. of the final rule describes the 

rationale and method for calculating 

credibility adjustments. 

First, the unadjusted MLR for a 

contract is calculated as follows. Each 

component of the MLR numerator 

(incurred claims, expenditures for 

quality activities, Part B premium 

rebates amount, and Part D reinsurance) 

is summed across all plans under the 

contract for all projected enrollees and 

the contract-level components are then 

summed. Next, each component of the 

MLR denominator (revenue net of taxes 

and fees, and Part D reinsurance) is 

summed across all plans under the 

contract for all projected enrollees, and 

the contract-level components are then 

summed. The ratio is then calculated to 

determine the unadjusted MLR. Finally, 

for contracts that are partially-credible 

and thus eligible for a credibility 

adjustment, and have an MLR below 85 

percent prior to application of a 

credibility adjustment, we calculate an 

adjusted MLR for the contract by adding 

the applicable percentage points. 

To estimate a remittance for a contract 

whose MLR falls below the minimum 

MLR requirement of 85 percent, we 

multiply the contract’s difference 

between the minimum MLR 

requirement of 85 percent and the 

contract’s MLR by the contract’s total 

revenue (as provided at § 422.2430(c) 

and § 423.2420(c)). 

We did not receive any comments and 

we are finalizing these analyses as 

proposed. 

c. Numbers and Enrollment of MA 

Organizations and Part D Sponsors 

Affected by the MLR Requirements and 

Associated MLR Remittance Payments 

As shown in Table 4, we estimate that 

336 MA–PD contracts and 26 Part D 

stand-alone contracts will be designated 

as ‘‘partially-credible’’ according to the 

standards of this final rule, and thus 

eligible for a credibility adjustment. 

That is, about 62 percent of MA–PD 

contracts (representing about 13 percent 

of projected total MA–PD enrollment) 

will be partially-credible, and about 43 

percent of Part D stand-alone contracts 

(representing about 1 percent of 

projected total stand-alone enrollment) 

will be eligible for a credibility 

adjustment if the MLR falls below 85 

percent. (Many MLRs for partiallycredible contracts are estimated to meet 

the minimum MLR requirement, as 

shown in Table 5.) 

A total of 208 MA–PD contracts and 

35 Part D stand-alone contracts are 

estimated to be fully-credible, so are not 

eligible for a credibility adjustment. As 

discussed elsewhere in this final rule, 

contracts with non-credible experience 

during a given contract year that do not 

meet the minimum MLR requirement 

will not be required to provide any 

remittance to CMS nor be subject to 

enrollment sanctions or termination 

because the contract will not have a 

sufficiently large number of member 

months to yield a statistically valid 

MLR. 

TABLE 4—ESTIMATED ENROLLMENT, REVENUE, AND AVERAGE MLR BY CREDIBILITY STATUS

Contract type Credibility status Contract count 

Number of 

beneficiaries 

(in millions) 

Total 

revenue 

(in billions) 

Avg MLR * 

(percent) 

MA–PD ............................................. Partial .............................................. 336 1 .8 $20.8 89.6 

Full ................................................... 208 12 .5 135.8 88.9 

Part D Stand-alone .......................... Partial .............................................. 26 0 .2 0.4 86.7 

Full ................................................... 35 19 31.3 88.4 

Notes: The table excludes 9 MA–PD contracts and 2 Part D stand-alone contracts that are non-credible. Employer group waiver plans do not 

submit Part D bids, so are absent from the Part D stand-alone analysis, and only their MA bid data are included in the MA–PD analysis. This 

analysis does not explicitly model the impact of potential MA organization or Part D sponsor behavioral changes. 

* Average MLRs reflect adjusted MLRs for those partially-credible contracts with MLRs below 85% prior to application of a credibility adjustment. Averages are enrollment-weighted. The average MLR for partially-credible contracts uses the MLR with credibility adjustment. Enrollment 

and total revenue are projections from the 2013 approved bids. 

Source: CMS analysis of administrative data on MA and Part D contracts, based on 2013 accepted bids. 

Finally, Table 4 shows average MLRs 

for the subgroups of MA–PD and Part D 

stand-alone partially-credible and fullycredible contracts. (The average MLRs 

for partially-credible contracts reflect 

the MLRs after application of a 

credibility adjustment for those 

partially-credible contracts with an MLR 

below 85 percent prior to application of 

a credibility adjustment.) On average, 

each of these four subgroups of 

contracts is estimated to meet the 

minimum MLR requirement, with 

average MLRs ranging from 86.7 percent 

to 89.6 percent. However, there are 

contracts within both subgroups of 

partially-credible and fully-credible 

contracts that do not meet the minimum 

MLR requirement, as shown in Table 5. 

For the purpose of this RIA (and not 

the actual MLR calculation), total 

revenue for MA–PD contracts is the total 

MA revenue requirement + MA optional 

supplemental benefit premium (if any) + 

Part D basic bid + Part D reinsurance— 

Parts C and D taxes and fees. 

For the purpose of this RIA (and not 

the actual MLR calculation), total 

revenue for Part D stand-alone contracts 

is the sum of the basic bid and Part D 

reinsurance, minus taxes and fees. Lowincome cost sharing (LICS) payments 

are excluded. 

Table 5 shows the number of MA–PD 

and Part D stand-alone contracts 

estimated to owe a remittance payment, 

before and after application of a 

credibility adjustment to eligible 

partially-credible contracts. The figures 

in Table 5 were determined as follows. 

First, we used enrollment projections to 

determine which contracts are fullycredible and which are partiallycredible. Next we calculated the MLRs 

with the credibility adjustment added 

for those partially-credible contracts 

with MLRs below 85 percent. Finally, to 


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show the overall program impact of 

credibility adjustments, we calculated 

the estimated remittances for partiallycredible and fully-credible contracts before and after application of 

credibility adjustments. 

TABLE 5—ESTIMATED IMPACT OF CREDIBILITY ADJUSTMENT ON ESTIMATED MLR REMITTANCE PAYMENTS FOR CY 2014 

Contract type Credibility status Number of 

contracts 

Number of 

contracts 

below 85% 

MLR before 

credibility 

adjustment 

Estimated 

remittance 

without 

credibility 

adjustment 

(in millions) 

Number of 

contracts 

below 85% 

after 

credibility 

adjustment 

Estimated 

remittance 

with 

credibility 

adjustment 

(in millions) 

MA–PD ................................ Partial ................................. 336 68 $109 34 $55 

Full ...................................... 208 37 662 37 662 

Total ............................ 544 105 771 71 717 

Part D stand-alone .............. Partial ................................. 26 12 11 9 8 

Full ...................................... 35 2 133 2 133 

Total ............................ 61 14 144 11 141 

* Partially-credible contracts are those with enrollment levels that make them eligible for a credibility adjustment. 

This analysis does not explicitly model the impact of potential MA organization or Part D sponsor behavioral changes. 

Source: CMS analysis of administrative data on MA and Part D contracts, based on 2013 accepted bids. 

Of the 336 MA–PD contracts that will 

be categorized as partially-credible, 68 

will fail to meet the MLR minimum 

requirement of 85 percent in the 

absence of a credibility adjustment. The 

average MLR for this group of 68 

contracts, prior to adding a credibility 

adjustment, is 82.6 percent. Upon 

application of the credibility 

adjustment, 34 of these 68 will pass the 

MLR requirement, and 34 will still have 

MLRs below 85 percent. The subset of 

34 contracts that passes with 

application of the credibility adjustment 

has an average MLR of 85.7 percent. As 

a result, the credibility adjustment 

decreases the estimated remittance 

amount by about $54 million (from $771 

to $717 million). However, it should be 

noted that the majority of the estimated 

remittance of $717 million, that is, $662 

million, is owed by fully-credible 

contracts. 

For Part D stand-alone contracts, 12 of 

the 26 partially-credible contracts will 

fail to meet the MLR minimum 

requirement in the absence of a 

credibility adjustment. The average 

MLR for this group of 12 contracts, prior 

to adding a credibility adjustment, is 

80.4 percent. Upon application of the 

credibility adjustment, 3 of these 12 

contracts will pass the requirement, and 

9 will still have MLRs below 85 percent. 

The subset of 3 contracts that passes 

with application of the credibility 

adjustment has an average MLR of 86.8 

percent. As a result, the credibility 

adjustment decreases the estimated 

remittance amount by about $3 million 

(from $144 to $141 million). However, 

it should be noted that the majority of 

the estimated remittance of $141 

million, that is $133 million, is owed by 

fully-credible contracts. Non-credible 

contracts were excluded from this 

analysis because no sanctions under 

§ 422.2410(b) through (d) will apply to 

these contracts; as these contracts will 

not have remittances, they do not factor 

into the analysis of the estimated 

impacts. 

6. Administrative Costs Related to MLR 

Provisions 

As stated previously, this final rule 

implements the reporting requirements 

of section 1857(e)(4) of the Act, 

describing the medical loss ratio 

requirements and sanctions for not 

meeting those requirements, including a 

remittance payment of the difference to 

the Secretary and enrollment 

suspensions and contract termination 

for those who do not meet the 

requirements. Implementation of these 

requirements necessitates that a report 

be submitted to the Secretary and that 

MLR information be made available to 

the public in a time and manner that we 

determine, as well as the remittance 

calculation, payment and enforcement 

provisions of section 1857(e)(4) of the 

Act. We have quantified the primary 

sources of start-up costs that MA 

organizations and Part D sponsors will 

incur to bring themselves into 

compliance with this final rule, as well 

as the ongoing annual costs that they 

will incur related to these requirements. 

These costs and the methodology used 

to estimate them are discussed later in 

this section. 

a. Methodology and Assumptions for 

Estimating Administrative Costs 

Many MA organizations and Part D 

sponsors already report to CMS several 

elements needed for the MLR 

calculation, for example, certain fields 

in the Part D prescription drug events 

records, and some information in the 

annual Part C and Part D Technical 

Reporting. This final rule includes 

requirements related to additional data 

elements. As discussed earlier in this 

impact analysis, in order to assess the 

potential administrative burden relating 

to the requirements in this final rule, we 

drew on the regulatory impact analysis 

from the commercial MLR rules to gain 

insight into the tasks and level of effort 

required, and modified these estimated 

impacts for Medicare. Based on this 

review, we estimate that MA 

organizations and Part D sponsors will 

incur one-time start-up costs associated 

with developing teams to review the 

requirements in this final rule, and with 

developing processes for capturing the 

necessary data (for example, automating 

systems, writing new policies for 

tracking expenses in the general ledger, 

and developing methodologies for 

allocating expenses by lines of business 

and by contract). We estimate that MA 

organizations and Part D sponsors will 

also incur ongoing annual costs relating 

to data collection, populating the MLR 

reporting forms, conducting a final 

internal review, submitting the reports 

to the Secretary, conducting internal 

audits, record retention, preparing and 

submitting remittances, suspending 

enrollment (where appropriate), 

modifying marketing, and/or 

terminating contracts (where 

appropriate). 

We anticipate that the level of effort 

relating to these activities will vary 

depending on the scope of an MA 

organization or Part D sponsor’s 

operations. The complexity of each MA 

organization or Part D sponsor’s 

estimated reporting burden is likely to 

be affected by a variety of factors, 

including the number of contracts it 

offers, enrollment size, the degree to 


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which it currently captures relevant 

data, whether it is a subsidiary of a 

larger carrier, and whether it currently 

offers coverage in the commercial 

market (and is therefore subject to the 

commercial MLR requirements). 

b. Costs Related to MLR Reporting 

For each contract year, MA 

organizations or Part D sponsors must 

submit a report to the Secretary that 

complies with the requirements of this 

final rule and in a time and manner that 

the Secretary determines. For purposes 

of these impact estimates, we assume 

that this report will include data 

relating to both the amounts expended 

on reimbursement for clinical services 

and prescription drugs, activities that 

improve quality and other non-clinical 

costs, as well as information relating to 

remittance payments. 

The estimated total number of MLR 

data reports that MA organizations and 

Part D sponsors will be required to 

submit to the Secretary under the 

provisions of this final rule depends on 

the number of contracts held. We 

anticipate one report per contract. Our 

analysis here is based on 553 MA 

contracts and 63 Part D stand-alone 

contracts, for a total of 616 reports. The 

616 contracts are comprised of 605 

contracts subject to the remittance 

requirement plus 11 non-credible 

contracts that are subject to reporting 

requirements. We used the commercial 

MLR RIA as a basis for estimating the 

total hours of administrative work 

related to the Medicare MLR 

requirements. We estimated the average 

cost per hour to be $94.88. This figure 

was derived by using the May 2011 

mean hourly wage of $60.41 for 

computer and information systems 

managers from the Department of 

Labor’s Bureau of Labor Statistics. This 

rate was increased by 48 percent to 

account for fringe benefits and overhead 

(36 percent for fringe benefits and 12 

percent for overhead). This figure was 

then converted to 2014 dollars using an 

average annual growth rated derived 

from the changes to the Consumer Price 

Index. This is an upper-bound estimate 

that assumes all MA organizations and 

Part D sponsors will be submitting a 

separate MLR report for each contract. 

Table 6 shows our estimates that MA 

organizations and Part D sponsors will 

incur one-time costs in 2014 and 

ongoing costs thereafter, relating to the 

MLR reporting requirements in this final 

rule of approximately $16,000 per 

contract, on average, in 2014. 

TABLE 6—ESTIMATED ADMINISTRATIVE COSTS RELATED TO MEDICAL LOSS RATIO (MLR) REPORTING REQUIREMENTS

Type of administrative cost Total number 

of contracts 

Total number 

of reports 

Estimated total 

hours 

Estimated 

average cost 

per hour 

Estimated total 

cost 

Estimated 

average cost 

per report 

One-Time Costs ....................................... 616 616 101,000 $94.88 $9,600,000 $16,000 

Ongoing Costs ......................................... 616 616 29,000 94.88 2,800,000 5,000 

Notes: Total number of reports represents the estimated total number of MLR reports that will be submitted to the Secretary. 

The source data has been modified to reflect estimated costs for MA organizations and Part D sponsors. Values may not be exact due to 

rounding. Estimates reflect 2011 wage data from the U.S. Department of Labor, Bureau of Labor Statistics. 

c. Costs Related to MLR Record 

Retention Requirements 

Consistent with the assumptions 

discussed earlier, MLR record retention 

costs are assumed to be relatively 

negligible, since MA organizations and 

Part D sponsors already retain similar 

data for general MA and Prescription 

Drug audits and per the established 

requirements in § 422.504(f)(2) and 

§ 423.505(f)(2). Therefore, to arrive at an 

estimate for MA organizations and Part 

D sponsors, we adjusted downward the 

3.5 minute-per-report estimate that 

appears in the RIA for the commercial 

MLR rule. Table 7 shows that we 

estimate that MA organizations and Part 

D sponsors will incur annual ongoing 

costs relating to the MLR reporting 

requirements in this final rule of 

approximately $4.00 per report on 

average. We estimated the average cost 

per hour to be $94.88. This figure was 

derived by using the May 2011 mean 

hourly wage of $60.41 for computer and 

information systems managers from the 

Department of Labor’s Bureau of Labor 

Statistics. This rate was increased by 48 

percent to account for fringe benefits 

and overhead (36 percent for fringe 

benefits and 12 percent for overhead). 

This figure was then converted to 2014 

dollars using an average annual growth 

rated derived from the changes to the 

Consumer Price Index. 

TABLE 7—MLR RECORD RETENTION REQUIREMENTS-ESTIMATED ONGOING ADMINISTRATIVE COSTS

Description Total number 

of contracts 

Total number 

of reports 

Estimated total 

hours 

Estimated 

average cost 

per hour 

Estimated total 

cost 

Estimated 

average cost 

per report 

Ongoing Costs ......................................... 616 616 28 $94.88 $2,600 $4 

Notes: Total number of reports represents the estimated total number of MLR reports that will be submitted to the Secretary. 

The source data has been modified to reflect estimated costs for MA organization and Part D sponsors. Values may not be exact due to 

rounding. Estimates reflect 2011 wage data from the U.S. Department of Labor, Bureau of Labor Statistics. 

d. Costs Related to MLR Remittance 

Payments 

Consistent with the assumptions 

discussed earlier, costs around 

submitting remittances to CMS are 

expected to be relatively negligible, in 

particular because we proposed to 

implement payment of remittances 

using a standard payment adjustment 

procedure in our payment system, 

which is a routine systems interface for 

the industry. 

E. Alternatives Considered 

Under the Executive Order, we are 

required to consider alternatives to 

issuing regulations and alternative 

regulatory approaches. We considered a 

variety of regulatory alternatives to the 

policies proposed thus far, and solicited 

comments on these alternatives. 

1. Credibility Adjustment 

One alternative to the credibility 

adjustment in this final rule will be to 

not make any adjustment for credibility, 

and to require smaller plans to make 

remittance payments on the same terms 

as larger plans. If we do not adopt a 


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credibility adjustment, the estimated 

remittance in 2014 will be 

approximately $915 million for MA–PD 

and Part D stand-alone contracts, or 

approximately $57 million larger, as 

shown in Table 5. As described 

elsewhere in this preamble, we believe 

that the credibility adjustment as 

proposed will best balance the goals of 

providing value to beneficiaries and 

assuring that contracts with relatively 

low enrollment will be able to function 

effectively. 

2. Aggregation of MLR to the Contract 

Level 

We considered two alternatives to 

aggregating MLRs to the contract level. 

Determining MLRs at the level of plan 

benefit package will increase the burden 

on MA organizations and Part D 

sponsors and the size of many plan 

benefit packages is too small for an MLR 

to reasonably represent the MA 

organization’s or Part D sponsor’s 

approach to resource allocation. We also 

considered calculating MLRs at the 

parent organization level, but we believe 

that this high level of aggregation will 

obscure local variation in resource 

allocation that will be important to 

enrollees. As described elsewhere in 

this final rule, we believe that the 

contract-level of aggregation is closest to 

the commercial MLR regulations of 

state-level aggregation and best 

promotes program stability. 

3. Quality Improving Activities 

After considering the commercial 

MLR regulations’ approach to defining 

quality improving activities, we decided 

to propose aligning our definition of 

quality improving activities with that in 

the commercial MLR rule. As discussed 

elsewhere in this final rule, potential 

alternatives would be to adopt narrower 

or broader definitions of quality 

improving activities. These distinctions 

could be made based on the criteria for 

selecting quality improving activities or 

the specific types of activities included 

in the definition. 

This final rule defines qualityimproving activities as being those that 

are grounded in evidence-based 

medicine, designed to improve the 

quality of care received by an enrollee, 

and capable of being objectively 

measured and producing verifiable 

results and achievements. A narrower 

definition might include only evidencebased quality improving initiatives, 

while excluding activities that have not 

been demonstrated to improve quality. 

Similarly, a narrower definition would 

not allow for inclusion of future 

innovations before data are available 

that demonstrate their effectiveness. 

Conversely, a broader definition 

might allow additional types of 

administrative expenses to be counted 

as activities that improve quality, such 

as network fees associated with third 

party provider networks or costs 

associated with converting International 

Classification of Disease (ICD) code sets 

from ICD–9 to ICD–10 that are in excess 

of 0.3 percent of a MA organization or 

Part D sponsor’s total revenue. As 

discussed elsewhere in this final rule, 

while we agree that certain 

administrative expenses should not be 

counted as expenditures on quality 

improving activities, some traditional 

administrative activities could qualify 

as expenditures on quality improving 

activities if they meet the criteria set 

forth in this final rule. 

We do not have data available to 

estimate the effects of alternative 

definitions of quality improving 

activities on MLRs, but a broader 

definition of quality improving 

activities would produce smaller 

estimated remittances, and a narrower 

definition would result in larger 

estimated remittances. 

F. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.) (RFA) requires 

agencies that issue a regulation to 

analyze options for regulatory relief for 

small businesses if a rule has a 

significant impact on a substantial 

number of small entities. The Act 

generally defines a ‘‘small entity’’ as (1) 

a proprietary firm meeting the size 

standards of the Small Business 

Administration (SBA), (2) a not-forprofit organization that is not dominant 

in its field, or (3) a small government 

jurisdiction with a population of less 

than 50,000 (states and individuals are 

not included in the definition of ‘‘small 

entity.’’) HHS uses as its measure of 

significant economic impact on a 

substantial number of small entities a 

change in revenues of more than 3 to 5 

percent. 

As discussed earlier, in general, 

health insurance issuers offering Part C 

and D coverage, including MA 

organizations, Part D sponsors, 1876 

Cost HMO/CMPs, and section 1833 

HCPPs (Health Care Prepayment Plans), 

will be affected by the final rule. We 

believe that health insurers will be 

classified under the North American 

Industry Classification System (NAICS) 

Code 524114 (Direct Health and Medical 

Insurance Carriers). According to SBA 

size standards, entities with average 

annual receipts of $7 million or less will 

be considered small entities for this 

NAICS code. Health issuers could 

possibly also be classified in NAICS 

Code 621491 (HMO Medical Centers) 

and, if this is the case, the SBA size 

standard will be $10 million or less. 

As discussed in the Web Portal 

interim final rule (75 FR 24481), HHS 

examined the health insurance industry 

in depth in the RIA we prepared for the 

proposed rule on establishment of the 

Medicare Advantage program (69 FR 

46866, August 3, 2004). In that analysis 

we determined that there were few, if 

any, issuers underwriting health 

insurance coverage (in contrast, for 

example, to travel insurance policies or 

dental discount policies) that fell below 

the relevant size thresholds for ‘‘small’’ 

business established by the SBA. 

Similarly, MA organizations and Part 

D sponsors, the entities that will largely 

be affected by the provisions of this 

final rule, are not generally considered 

small business entities. They must 

follow minimum enrollment 

requirements (5,000 in urban areas and 

1,500 in nonurban areas) and because of 

the revenue from such enrollments, 

these entities are generally above the 

revenue threshold required for analysis 

under the RFA. While a very small rural 

plan could fall below the threshold, we 

do not believe that there are more than 

a handful of such plans. Additionally, a 

fraction of MA organizations and 

sponsors could be considered small 

businesses because of their non-profit 

status and lack of dominance in their 

field. As its measure of significant 

economic impact on a substantial 

number of small entities, HHS uses a 

change in revenue of more than 3 to 5 

percent. We do not believe that this 

threshold will be reached by the 

requirements in this final rule because 

very few small entities are subject to the 

provisions in this final rule, the 

estimated administrative costs 

associated with reporting MLR data to 

the Secretary are very low (see section 

V.D.6. of this final rule), and the 

credibility adjustment addresses the 

special circumstances of contracts with 

lower enrollment. For these reasons, we 

believe this final rule will have minimal 

impact on small entities. As a result, the 

Secretary has determined that this final 

rule will not have a significant impact 

on a substantial number of small 

entities. 


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31306 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

G. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that includes a federal mandate that 

could result in expenditure in any 1 

year by state, local or tribal 

governments, in the aggregate, or by the 

private sector, of $100 million in 1995 

dollars, updated annually for inflation. 

In 2013, that threshold level is 

approximately $141 million. 

UMRA does not address the total cost 

of a rule. Rather, it focuses on certain 

categories of cost, mainly those ‘‘federal 

mandate’’ costs resulting from: (1) 

Imposing enforceable duties on state, 

local, or tribal governments, or on the 

private sector; or (2) increasing the 

stringency of conditions in, or 

decreasing the funding of, state, local, or 

tribal governments under entitlement 

programs. 

Consistent with policy embodied in 

UMRA, this proposed regulation has 

been designed to a low-burden 

alternative for state, local and tribal 

governments, and the private sector 

while achieving the objectives of the 

Affordable Care Act. 

This final rule contains reporting 

requirements and data retention 

requirements for MA organizations and 

Part D sponsors. We estimate that 

administrative costs related to MLR 

reporting requirements will be $9.6 

million in total one-time costs in 2014 

and $2.8 million per year in ongoing 

costs. We estimate that ongoing costs 

per year for record retention 

requirements will be $2,600. This final 

rule also contains requirements related 

to remittance payments paid by MA 

organizations and Part D sponsors that 

do not meet the minimum MLR 

standards. We estimate approximately 

$858 million in remittance payments to 

the Secretary in 2014, contingent upon 

certain changes in bidding and payment 

behavior. It includes no mandates on 

state, local, or tribal governments. 

H. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on state and local 

governments, preempts state law, or 

otherwise has federalism implications. 

States generally regulate health 

insurance coverage. However in 2003, 

section 232(a) of the MMA amended 

section 1856 for MA plans by 

eliminating the general and specific 

preemption distinctions from section 

1856 and expanded federal preemption 

of state standards to broadly apply 

preemption to all state law or regulation 

(other than state licensing laws or state 

laws relating to plan solvency). In our 

view, while this final rule does not 

impose substantial direct requirement 

costs on state and local governments, 

this final rule has minimal Federalism 

implications due to direct effects on the 

distribution of power and 

responsibilities among the state and 

federal governments relating to 

determining and enforcing minimum 

MLR standards, reporting and 

remittance requirements relating to 

coverage that MA organizations and Part 

D sponsors offer. 

We anticipate that the federalism 

implications (if any) are substantially 

mitigated because the Affordable Care 

Act does not provide any role for the 

states in terms of receiving or analyzing 

the data or enforcing the requirements 

of section 1857(e)(4) of the Act. The 

enforcement provisions of this final rule 

state that the Secretary has enforcement 

authority and does not require the states 

to do anything. 

As discussed earlier, in developing 

this final rule for the Medicare 

Advantage and the Medicare 

Prescription Drug Benefit programs, 

HHS used the commercial MLR 

regulation as a reference point for 

developing the Medicare MLR 

requirements. In compliance with the 

requirement of Executive Order 13132 

that agencies examine closely any 

policies that may have federalism 

implications or limit the policymaking 

discretion of the states, HHS made 

efforts to consult with and work 

cooperatively with states during the 

development of the commercial MLR 

regulation, including participating in 

conference calls with and attending 

conferences of the National Association 

of Insurance Commissioners, and 

consulting with state insurance officials 

on an individual basis. Throughout the 

process of developing the commercial 

MLR regulation, to the extent feasible 

within the specific preemption 

provisions of HIPAA as it applies to the 

Affordable Care Act, the Department 

attempted to balance the states’ interests 

in regulating health insurance issuers, 

and Congress’ intent to provide uniform 

minimum protections to consumers in 

every state. 

By doing so, it is the Department’s 

view that we have complied with the 

requirements of Executive Order 13132. 

Pursuant to the requirements set forth in 

section 8(a) of Executive Order 13132, 

and by the signatures affixed to this 

regulation, the Department certifies that 

we have complied with the 

requirements of Executive Order 13132 

for the attached final rule in a 

meaningful and timely manner. 

I. Congressional Review Act 

This final rule is subject to the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.) and has been 

transmitted to the Congress and the 

Comptroller General for review. 

In accordance with the provisions of 

Executive Order 12866, this final rule 

was reviewed by the Office of 

Management and Budget. 

J. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/ 

circulars_a004_a-4), we have prepared 

an accounting statement in Table 8 

showing the classification of the 

transfers and costs associated with the 

provisions of this final rule for CY 2014. 


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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 31307 

TABLE 8—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES FOR THE MA–PD AND PART D 

STAND-ALONE MLR REMITTANCE PAYMENTS FOR CY 2014 

[In millions of 2013 dollars] 

Category 

Transfers 

Discount rate 

Period covered 

7% 3% 

Annualized Monetized Transfers: 

Primary Estimate ......................................................................................................... $802 $833 CY 2014 

From/To ....................................................................................................................... From MA Organizations and Part D Sponsors / To 

Federal Government 

Category Costs 

Discount rate Period covered 

Annualized Costs to MA Organizations and Part D Sponsors: 7% 3% CY 2014 

Primary Estimate ......................................................................................................... $9.0 $9.3 

List of Subjects 

42 CFR Part 422 

Administrative practice and 

procedure, Health facilities, Health 

maintenance, organizations (HMO), 

Medicare, Penalties, Privacy, Reporting 

and recordkeeping requirements. 

42 CFR Part 423 

Administrative practice and 

procedure, Emergency medical services, 

Health facilities, Health maintenance 

organizations (HMO), Health 

professionals, Medicare, Penalties, 

Privacy, Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR parts 

422 and 423 as set forth below: 

PART 422 MEDICARE ADVANTAGE 

PROGRAM 

■ 1. The authority citation for part 422 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

■ 2. Section 422.510 is amended by 

adding paragraph (a)(15) to read as 

follows: 

§ 422.510 Termination of contract by CMS. 

(a) * * * 

(15) Has failed to report MLR data in 

a timely and accurate manner in 

accordance with § 422.2460. 

* * * * * 

Subpart U—[Reserved] 

Subpart W—[Reserved] 

■ 3. Remove and reserve subparts U and 

W. 

■ 4. Add subpart X to read as follows: 

Subpart X—Requirement for a Minimum 

Medical Loss Ratio 

Sec. 

422.2400 Basis and scope. 

422.2401 Definitions. 

422.2410 General requirements. 

422.2420 Calculation of the medical loss 

ratio. 

422.2430 Activities that improve health 

care quality. 

422.2440 Credibility adjustment. 

422.2450 [Reserved] 

422.2460 Reporting requirements. 

422.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

422.2480 MLR review and non-compliance. 

Subpart X—Requirement for a 

Minimum Medical Loss Ratio 

§ 422.2400 Basis and scope. 

This subpart is based on section 

1857(e)(4) of the Act, and sets forth 

medical loss ratio requirements for 

Medicare Advantage organizations, and 

financial penalties and sanctions against 

MA organizations when minimum 

medical loss ratios are not achieved by 

MA organizations. 

§ 422.2401 Definitions. 

Non-claims costs means those 

expenses for administrative services that 

are not— 

(1) Incurred claims (as provided in 

§ 422.2420(b)(2) through (4)); 

(2) Expenditures on quality improving 

activities (as provided in § 422.2430); 

(3) Licensing and regulatory fees (as 

provided in § 422.2420(c)(2)(ii)); 

(4) State and Federal taxes and 

assessments (as provided in 

§ 422.2420(c)(2)(i) and (iii)). 

§ 422.2410 General requirements. 

(a) For contracts beginning in 2014 or 

later, an MA organization (defined at 

§ 422.2) is required to report an MLR for 

each contract under this part for each 

contract year. 

(b) MLR requirement. If CMS 

determines for a contract year that an 

MA organization has an MLR for a 

contract that is less than 0.85, the MA 

organization has not met the MLR 

requirement and must remit to CMS an 

amount equal to the product of the 

following: 

(1) The total revenue of the MA 

contract for the contract year. 

(2) The difference between 0.85 and 

the MLR for the contract year. 

(c) If CMS determines that an MA 

organization has an MLR for a contract 

that is less than 0.85 for 3 or more 

consecutive contract years, CMS does 

not permit the enrollment of new 

enrollees under the contract for 

coverage during the second succeeding 

contract year. 

(d) If CMS determines that an MA 

organization has an MLR for a contract 

that is less than 0.85 for 5 consecutive 

contract years, CMS terminates the 

contract per § 422.510(b)(1) and (d) 

effective as of the second succeeding 

contract year. 

§ 422.2420 Calculation of the medical loss 

ratio. 

(a) Determination of MLR. (1) The 

MLR for each contract under this part is 

the ratio of the numerator (as defined in 

paragraph (b) of this section) to the 

denominator (as defined in paragraph 

(c) of this section). An MLR may be 

increased by a credibility adjustment 

according to the rules at § 422.2440, or 

subject to an adjustment determined by 

CMS to be warranted based on 


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exceptional circumstances for areas 

outside the 50 states and the District of 

Columbia. 

(2) The MLR for an MA contract— 

(i) Not offering Medicare prescription 

drug benefits must only reflect costs and 

revenues related to the benefits defined 

at § 422.100(c); and 

(ii) That includes MA–PD plans 

(defined at § 422.2) must also reflect 

costs and revenues for benefits 

described at § 423.104(d) through (f) of 

this chapter. 

(b) Determining the MLR numerator. 

(1) For a contract year, the numerator of 

the MLR for an MA contract (other than 

an MSA contract) must equal the sum of 

paragraphs (b)(1)(i) through (iii) of this 

section, and the numerator of the MLR 

for an MSA contract must equal the sum 

of paragraphs (b)(1)(i), (iii), and (iv) of 

this section. The numerator must be 

determined in accordance with 

paragraphs (b)(5) and (6) of this section. 

(i) Incurred claims for all enrollees, as 

defined in paragraphs (b)(2) through (4) 

of this section. 

(ii) The amount of the reduction, if 

any, in the Part B premium for all MA 

plan enrollees under the contract for the 

contract year. 

(iii) The expenditures under the 

contract for activities that improve 

health care quality, as defined in 

§ 422.2430. 

(iv) The amount of the annual deposit 

into the medical savings account 

described at § 422.4(a)(2). 

(2) Incurred claims for clinical 

services and prescription drug costs. 

Incurred claims must include the 

following: 

(i) Direct claims that the MA 

organization pays to providers 

(including under capitation contracts 

with physicians) for covered services, 

described at paragraph (a)(2) of this 

section provided to all enrollees under 

the contract. 

(ii) For an MA contract that includes 

MA–PD plans (described in paragraph 

(a)(2) of this section), drug costs 

provided to all enrollees under the 

contract, as defined at 

§ 423.2420(b)(2)(i) of this chapter. 

(iii) Unpaid claims reserves for the 

current contract year, including claims 

reported in the process of adjustment. 

(iv) Percentage withholds from 

payments made to contracted providers. 

(v) Incurred but not reported claims 

based on past experience, and modified 

to reflect current conditions such as 

changes in exposure, claim frequency or 

severity. 

(vi) Changes in other claims-related 

reserves. 

(vii) Claims that are recoverable for 

anticipated coordination of benefits. 

(viii) Claims payments recoveries 

received as a result of subrogation. 

(ix) Claims payments recoveries as a 

result of fraud reduction efforts, not to 

exceed the amount of fraud reduction 

expenses. 

(x) Reserves for contingent benefits 

and the medical claim portion of 

lawsuits. 

(xi) The amount of incentive and 

bonus payments made to providers. 

(3) Adjustments that must be 

deducted from incurred claims include 

the following: 

(i) Overpayment recoveries received 

from providers. 

(4) Exclusions from incurred claims. 

The following amounts must not be 

included in incurred claims: 

(i) Non-claims costs, as defined in 

§ 422.2401, which include the 

following: 

(A) Amounts paid to third party 

vendors for secondary network savings. 

(B) Amounts paid to third party 

vendors for any of the following: 

(1) Network development. 

(2) Administrative fees. 

(3) Claims processing. 

(4) Utilization management. 

(C) Amounts paid, including amounts 

paid to a provider, for professional or 

administrative services that do not 

represent compensation or 

reimbursement for covered services 

provided to an enrollee, such as the 

following: 

(1) Medical record copying costs. 

(2) Attorneys’ fees. 

(3) Subrogation vendor fees. 

(4) Bona fide service fees. 

(5) Compensation to any of the 

following: 

(i) Paraprofessionals. 

(ii) Janitors. 

(iii) Quality assurance analysts. 

(iv) Administrative supervisors. 

(v) Secretaries to medical personnel. 

(vi) Medical record clerks. 

(ii) Amounts paid to CMS as a 

remittance under § 422.2410(b). 

(5) Incurred claims under this part for 

policies issued by one MA organization 

and later assumed by another entity 

must be reported by the assuming 

organizations for the entire MLR 

reporting year during which the policies 

were assumed and no incurred claims 

under this part for that contract year 

must be reported by the ceding MA 

organization. 

(6) Reinsured incurred claims for a 

block of business that was subject to 

indemnity reinsurance and 

administrative agreements effective 

before March 23, 2010, for which the 

assuming entity is responsible for 100 

percent of the ceding entity’s financial 

risk and takes on all of the 

administration of the block, must be 

reported by the assuming issuer and 

must not be reported by the ceding 

issuer. 

(c) Determining the MLR 

denominator. For a contract year, the 

denominator of the MLR for an MA 

contract must equal the total revenue 

under the contract. Total revenue under 

the contract is as described in paragraph 

(c)(1) of this section, net of deductions 

described in paragraph (c)(2) of this 

section, taking into account the 

exclusions described in paragraph (c)(3) 

of this section, and in accordance with 

paragraph (c)(4) of this section. 

(1) CMS’ payments to the MA 

organization for all enrollees under a 

contract, reported on a direct basis, 

including the following: 

(i) Payments under § 422.304(a)(1) 

through (3) and (c). 

(ii) The amount applied to reduce the 

Part B premium, as provided under 

§ 422.266(b)(3). 

(iii) Payments under § 422.304(b)(1), 

as reconciled per § 423.329(c)(2)(ii) of 

this chapter. 

(iv) All premiums paid by or on 

behalf of enrollees to the MA 

organization as a condition of receiving 

coverage under an MA plan, including 

CMS’ payments for low income 

premium subsidies under 

§ 422.304(b)(2). 

(v) All unpaid premium amounts that 

an MA organization could have 

collected from enrollees in the MA 

plan(s) under the contract. 

(vi) All changes in unearned premium 

reserves. 

(vii) Payments under § 423.315(e) of 

this chapter. 

(2) The following amounts must be 

deducted from total revenue in 

calculating the MLR: 

(i) Licensing and regulatory fees. (A) 

Statutory assessments to defray the 

operating expenses of any State or 

Federal department, such as the ‘‘user 

fee’’ described in section 1857(e)(2) of 

the Act. 

(B) Examination fees in lieu of 

premium taxes as specified by State law. 

(ii) Federal taxes and assessments. All 

Federal taxes and assessments allocated 

to health insurance coverage. 

(iii) State taxes and assessments. 

State taxes and assessments such as the 

following: 

(A) Any industry-wide (or subset) 

assessments (other than surcharges on 

specific claims) paid to the State 

directly. 

(B) Guaranty fund assessments. 

(C) Assessments of State industrial 

boards or other boards for operating 

expenses or for benefits to sick 

employed persons in connection with 


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disability benefit laws or similar taxes 

levied by States. 

(D) State income, excise, and business 

taxes other than premium taxes. 

(iv) Community benefit expenditures. 

Community benefit expenditures are 

payments made by a Federal income 

tax-exempt MA organization for 

community benefit expenditures as 

defined in paragraph (c)(2)(iv)(A) of this 

section, limited to the amount defined 

in paragraph (c)(2)(iv)(B) of this section, 

and allocated to a contract as required 

under paragraph (d)(1) of this section. 

(A) Community benefit expenditures 

means expenditures for activities or 

programs that seek to achieve the 

objectives of improving access to health 

services, enhancing public health and 

relief of government burden. 

(B) Such payment may be deducted 

up to the limit of either 3 percent of 

total revenue under this part or the 

highest premium tax rate in the State for 

which the Part D sponsor is licensed, 

multiplied by the Part D sponsor’s 

earned premium for the contract. 

(3) The following amounts must not 

be included in total revenue: 

(i) The amount of unpaid premiums 

for which the MA organization can 

demonstrate to CMS that it made a 

reasonable effort to collect. 

(ii) The following EHR payments and 

adjustments: 

(A) EHR incentive payments for 

meaningful use of certified electronic 

health records by qualifying MAOs, MA 

EPs and MA-affiliated eligible hospitals 

that are administered under 42 CFR part 

495 subpart C. 

(B) EHR payment adjustments for a 

failure to meet meaningful use 

requirements that are administered 

under 42 CFR part 495 subpart C. 

(iii) Coverage Gap Discount Program 

payments under § 423.2320 of this 

chapter. 

(4) Total revenue (as defined at 

§ 422.2420(c)) for policies issued by one 

MA organization and later assumed by 

another entity must be reported by the 

assuming entity for the entire MLR 

reporting year during which the policies 

were assumed and no revenue under 

this part for that contract year must be 

reported by the ceding MA organization. 

(5) Total revenue (as defined at 

§ 422.2420(c)) that is reinsured for a 

block of business that was subject to 

indemnity reinsurance and 

administrative agreements effective 

prior to March 23, 2010, for which the 

assuming entity is responsible for 100 

percent of the ceding entity’s financial 

risk and takes on all of the 

administration of the block, must be 

reported by the assuming issuer and 

must not be reported by the ceding 

issuer. 

(d) Allocation of expense—(1) General 

requirements. (i) Each expense must be 

included under only one type of 

expense, unless a portion of the expense 

fits under the definition of or criteria for 

one type of expense and the remainder 

fits into a different type of expense, in 

which case the expense must be prorated between types of expenses. 

(ii) Expenditures that benefit multiple 

contracts, or contracts other than those 

being reported, including but not 

limited to those that are for or benefit 

self-funded plans, must be reported on 

a pro rata share. 

(2) Description of the methods used to 

allocate expenses. (i) Allocation to each 

category must be based on a generally 

accepted accounting method that is 

expected to yield the most accurate 

results. Specific identification of an 

expense with an activity that is 

represented by one of the categories in 

§ 422.2420(b) or (c) will generally be the 

most accurate method. 

(ii) Shared expenses, including 

expenses under the terms of a 

management contract, must be 

apportioned pro rata to the contracts 

incurring the expense. 

(iii)(A) Any basis adopted to 

apportion expenses must be that which 

is expected to yield the most accurate 

results and may result from special 

studies of employee activities, salary 

ratios, premium ratios or similar 

analyses. 

(B) Expenses that relate solely to the 

operations of a reporting entity, such as 

personnel costs associated with the 

adjusting and paying of claims, must be 

borne solely by the reporting entity and 

are not to be apportioned to other 

entities within a group. 

§ 422.2430 Activities that improve health 

care quality. 

(a) Activity requirements. Activities 

conducted by an MA organization to 

improve quality must fall into one of the 

categories in paragraph (a)(1) of this 

section and meet all of the requirements 

in paragraph (a)(2) of this section. 

(1) Categories of quality improving 

activities. The activity must be designed 

to achieve one or more of the following: 

(i) To improve health outcomes 

through the implementation of activities 

such as quality reporting, effective case 

management, care coordination, chronic 

disease management, and medication 

and care compliance initiatives, 

including through the use of the 

medical homes model as defined for 

purposes of section 3602 of the Patient 

Protection and Affordable Care Act, for 

treatment or services under the plan or 

coverage. 

(ii) To prevent hospital readmissions 

through a comprehensive program for 

hospital discharge that includes patientcentered education and counseling, 

comprehensive discharge planning, and 

post-discharge reinforcement by an 

appropriate health care professional. 

(iii) To improve patient safety and 

reduce medical errors through the 

appropriate use of best clinical 

practices, evidence-based medicine, and 

health information technology under the 

plan or coverage. 

(iv) To promote health and wellness. 

(v) To enhance the use of health care 

data to improve quality, transparency, 

and outcomes and support meaningful 

use of health information technology. 

Such activities, such as Health 

Information Technology (HIT) expenses, 

are required to accomplish the activities 

that improve health care quality and 

that are designed for use by health 

plans, health care providers, or 

enrollees for the electronic creation, 

maintenance, access, or exchange of 

health information, and are consistent 

with meaningful use requirements, and 

which may in whole or in part improve 

quality of care, or provide the 

technological infrastructure to enhance 

current quality improving activities or 

make new quality improvement 

initiatives possible. 

(2) The activity must be designed for 

all of the following: 

(i) To improve health quality. 

(ii) To increase the likelihood of 

desired health outcomes in ways that 

are capable of being objectively 

measured and of producing verifiable 

results and achievements. 

(iii) To be directed toward individual 

enrollees or incurred for the benefit of 

specified segments of enrollees or 

provide health improvements to the 

population beyond those enrolled in 

coverage as long as no additional costs 

are incurred due to the non-enrollees. 

(iv) To be grounded in evidence-based 

medicine, widely accepted best clinical 

practice, or criteria issued by recognized 

professional medical associations, 

accreditation bodies, government 

agencies or other nationally recognized 

health care quality organizations. 

(b) Exclusions. Expenditures and 

activities that must not be included in 

quality improving activities include, but 

are not limited to, the following: 

(1) Those that are designed primarily 

to control or contain costs. 

(2) The pro rata share of expenses that 

are for lines of business or products 

other than those being reported, 

including but not limited to, those that 

are for or benefit self-funded plans. 


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31310 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

(3) Those which otherwise meet the 

definitions for quality improving 

activities but which were paid for with 

grant money or other funding separate 

from premium revenue. 

(4) Those activities that can be billed 

or allocated by a provider for care 

delivery and that are reimbursed as 

clinical services. 

(5) Establishing or maintaining a 

claims adjudication system, including 

costs directly related to upgrades in 

health information technology that are 

designed primarily or solely to improve 

claims payment capabilities or to meet 

regulatory requirements for processing 

claims, including ICD–10 

implementation costs in excess of 0.3 

percent of total revenue under this part, 

and maintenance of ICD–10 code sets 

adopted in accordance with to the 

Health Insurance Portability and 

Accountability Act (HIPAA), 42 U.S.C. 

1320d–2, as amended. 

(6) That portion of the activities of 

health care professional hotlines that 

does not meet the definition of activities 

that improve health quality. 

(7) All retrospective and concurrent 

utilization review. 

(8) Fraud prevention activities. 

(9) The cost of developing and 

executing provider contracts and fees 

associated with establishing or 

managing a provider network, including 

fees paid to a vendor for the same 

reason. 

(10) Provider credentialing. 

(11) Marketing expenses. 

(12) Costs associated with calculating 

and administering individual enrollee 

or employee incentives. 

(13) That portion of prospective 

utilization review that does not meet the 

definition of activities that improve 

health quality. 

(14) Any function or activity not 

expressly permitted by CMS under this 

part. 

§ 422.2440 Credibility adjustment. 

(a) An MA organization may add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is 

partially credible, as determined by 

CMS. 

(b) An MA organization may not add 

a credibility adjustment to a contract’s 

MLR if the contract’s experience is fully 

credible, as determined by CMS. 

(c) For those contract years for which 

a contract has non-credible experience 

for their MLR, sanctions under 

§ 422.2410(b) through (d) will not apply. 

(d) CMS defines and publishes 

definitions of partial credibility, full 

credibility, and non-credibility and the 

credibility factors through the notice 

and comment process of publishing the 

Advance Notice and Final Rate 

Announcement. 

§ 422.2450 [Reserved] 

§ 422.2460 Reporting requirements. 

For each contract year, each MA 

organization must submit a report to 

CMS, in a timeframe and manner 

specified by CMS, which includes but is 

not limited to the data needed by the 

MA organization to calculate and verify 

the MLR and remittance amount, if any, 

for each contract, such as incurred 

claims, total revenue, expenditures on 

quality improving activities, non-claims 

costs, taxes, licensing and regulatory 

fees, and any remittance owed to CMS 

under § 422.2410. 

§ 422.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

(a) General requirement. For each 

contract year, an MA organization must 

provide a remittance to CMS if the 

contract’s MLR does not meet the 

minimum MLR requirement required by 

§ 422.2410(b) of this subpart. 

(b) Amount of remittance. For each 

contract that does not meet the MLR 

requirement for a contract year, the MA 

organization must remit to CMS the 

amount by which the MLR requirement 

exceeds the contract’s actual MLR 

multiplied by the total revenue of the 

contract, as provided in § 422.2420(c), 

for the contract year. 

(c) Timing of remittance. CMS 

deducts the remittance from plan 

payments in a timely manner after the 

MLR is reported, on a schedule 

determined by CMS. 

(d) Treatment of remittance. Payment 

to CMS must not be included in the 

numerator or denominator of any year’s 

MLR. 

§ 422.2480 MLR review and noncompliance. 

To ensure the accuracy of MLR 

reporting, CMS conducts selected 

reviews of reports submitted under 

§ 422.2460 to determine that that the 

MLRs and remittance amounts under 

§ 422.2410(b) and sanctions under 

§ 422.2410(c) and (d), were accurately 

calculated, reported, and applied. 

(a) The reviews include a validation 

of amounts included in both the 

numerator and denominator of the MLR 

calculation reported to CMS. 

(b) MA organizations are required to 

maintain evidence of the amounts 

reported to CMS and to validate all data 

necessary to calculate MLRs. 

(c)(1) Documents and records must be 

maintained for 10 years from the date 

such calculations were reported to CMS 

with respect to a given MLR reporting 

year. 

(2) MA organizations must require 

any third party vendor supplying drug 

or medical cost contracting and claim 

adjudication services to the MA 

organization to provide all underlying 

data associated with MLR reporting to 

that MA organization in a timely 

manner, when requested by the MA 

organization, regardless of current 

contractual limitations, in order to 

validate the accuracy of MLR reporting. 

(d) Reports submitted under 

§ 422.2460, calculations, or any other 

MLR submission required by this 

subpart found to be materially incorrect 

or fraudulent— 

(1) Is noted by CMS; 

(2) Appropriate remittance amounts 

are recouped by CMS; and 

(3) Sanctions may be imposed by CMS 

as provided in § 422.752. 

PART 423—VOLUNTARY MEDICARE 

PRESCRIPTION DRUG BENEFIT 

■ 5. The authority for part 423 

continues to read as follows: 

Authority: Secs. Sections 1102, 1106, 

1860D–1 through 1860D–42, and 1871 of the 

Social Security Act (42 U.S.C. 1302, 1306, 

1395w–101 through 1395w–152, and 

1395hh). 

■ 6. Section 423.509 is amended by 

adding paragraph (a)(14) to read as 

follows: 

§ 423.509 Termination of contract by CMS. 

(a) * * * 

(14) Has failed to report MLR data in 

a timely and accurate manner in 

accordance with § 423.2460. 

* * * * * 

■ 7. Add subpart X to read as follows: 

Subpart X—Requirements for a Minimum 

Medical Loss Ratio 

Sec. 

423.2300 Basis and scope. 

423.2401 Definitions. 

423.2410 General requirements. 

423.2420 Calculation of medical loss ratio. 

423.2430 Activities that improve health 

care quality. 

423.2440 Credibility adjustment. 

423.2450 [Reserved] 

423.2460 Reporting requirements. 

423.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

423.2480 MLR review and non-compliance. 

Subpart X—Requirements for a 

Minimum Medical Loss Ratio 

§ 423.2400 Basis and scope. 

This subpart is based on section 

1857(e)(4) of the Act, and sets forth 

medical loss ratio requirements for Part 

D sponsors, and financial penalties and 

sanctions against Part D sponsors when 

minimum medical loss ratios are not 

achieved by Part D sponsors. 


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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 31311 

§ 423.2401 Definitions. 

Non-claims costs means those 

expenses for administrative services that 

are not— 

(1) Incurred claims (as provided in 

§ 423.2420(b)(2) through (b)(4)); 

(2) Expenditures on quality improving 

activities (as provided in § 423.2430); 

(3) Licensing and regulatory fees (as 

provided in § 423.2420(c)(2)(i)); or 

(4) State and Federal taxes and 

assessments (as provided in 

§ 423.2420(c)(2)(ii) and (iii)). 

§ 423.2410 General requirements. 

(a) For contracts beginning in 2014 or 

subsequent contract years, a Part D 

sponsor (defined at § 423.4) is required 

to report an MLR for each contract 

under this part for each contract year. 

(b) If CMS determines for a contract 

year that a Part D sponsor has an MLR 

for a contract that is less than 0.85, the 

Part D sponsor must remit to CMS an 

amount equal to the product of the 

following: 

(1) The total revenue of the 

prescription drug plan for the contract 

year. 

(2) The difference between 0.85 and 

the MLR for the contract year. 

(c) If CMS determines that a Part D 

sponsor has an MLR for a contract that 

is less than 0.85 for 3 or more 

consecutive contract years, CMS does 

not permit the enrollment of new 

enrollees under the contract for 

coverage during the second succeeding 

contract year. 

(d) If CMS determines that a Part D 

sponsor has an MLR for a contract that 

is less than 0.85 for 5 consecutive 

contract years, CMS does terminate the 

contract under the authority at 

§ 423.509(a)(11) and (14) effective as of 

the second succeeding contract year. 

§ 423.2420 Calculation of medical loss 

ratio. 

(a) Determination of the MLR. (1) The 

MLR for each contract under this part is 

the ratio of the numerator (as defined in 

paragraph (b) of this section) to the 

denominator (as defined in paragraph 

(c) of this section). An MLR may be 

increased by a credibility adjustment 

according to the rules at § 423.2440, or 

subject to an adjustment determined by 

CMS to be warranted based on 

exceptional circumstances for areas 

outside the 50 states and the District of 

Columbia. 

(2) The MLR must reflect costs and 

revenues for benefits described at 

§ 423.104(d) through (f). The MLR for 

MA–PD plans (defined at § 422.2 of this 

chapter) must also reflect costs and 

revenues for benefits described at 

§ 422.100(c) of this chapter. 

(b) Determining the MLR numerator. 

(1) For a contract year, the numerator of 

the MLR for a Part D prescription drug 

contract must equal the sum of 

paragraphs (b)(1)(i) through (iii) of this 

section and must be in accordance with 

paragraph (b)(1)(iv) of this section. 

(i) Incurred claims for all enrollees, as 

defined in paragraphs (b)(2) through (4) 

of this section. 

(ii) The expenditures under the 

contract for activities that improve 

health care quality, as defined in 

§ 423.2430; 

(2) Incurred claims for prescription 

drug costs. Incurred claims must 

include the following: 

(i) Direct drug costs that are actually 

paid (as defined in § 423.308, which are 

net of prescription drug rebates and 

other direct or indirect remuneration as 

defined herein) by the Part D sponsor. 

(ii) Unpaid claims reserves for the 

current contract year, including claims 

reported in the process of adjustment. 

(iii) Percentage withholds from 

payments made to contracted providers. 

(iv) Claims incurred but not reported 

based on past experience, and modified 

to reflect current conditions such as 

changes in exposure, claim frequency or 

severity. 

(v) Changes in other claims-related 

reserves. 

(vi) Claims that are recoverable for 

anticipated coordination of benefits. 

(vii) Claims payments recoveries 

received as a result of subrogation. 

(viii) Claims payments recoveries 

received as a result of fraud reduction 

efforts, not to exceed the amount of 

fraud reduction expenses. 

(ix) Reserves for contingent benefits 

and the Part D claim portion of lawsuits. 

(3) Adjustments that must be 

deducted from incurred claims include 

the following: 

(i) Overpayment recoveries received 

from providers. 

(4) Exclusions from incurred claims. 

The following amounts must not be 

included in incurred claims: 

(i) Non-claims costs, as defined in 

§ 423.2401, which include the 

following: 

(A) Amounts paid to third party 

vendors for secondary network savings. 

(B) Amounts paid to third party 

vendors for any of the following: 

(1) Network development. 

(2) Administrative fees. 

(3) Claims processing. 

(4) Utilization management. 

(C) Amounts paid, including amounts 

paid to a pharmacy, for professional or 

administrative services that do not 

represent compensation or 

reimbursement for covered services 

provided to an enrollee, such as the 

following: 

(1) Medical record copying costs. 

(2) Attorneys’ fees. 

(3) Subrogation vendor fees. 

(4) Bona fide service fees. 

(5) Compensation to any of the 

following: 

(i) Paraprofessionals. 

(ii) Janitors. 

(iii) Quality assurance analysts. 

(iv) Administrative supervisors. 

(v) Secretaries to medical personnel. 

(vi) Medical record clerks. 

(ii) Amounts paid to CMS as a 

remittance under § 423.2410(b). 

(5) Incurred claims under this part for 

policies issued by one Part D sponsor 

and later assumed by another entity 

must be reported by the assuming 

organization for the entire MLR 

reporting year during which the policies 

were assumed and no incurred claims 

under this part for that contract year 

must be reported by the ceding Part D 

sponsor. 

(6) Reinsured incurred claims for a 

block of business that was subject to 

indemnity reinsurance and 

administrative agreements effective 

before March 23, 2010, for which the 

assuming entity is responsible for 100 

percent of the ceding entity’s financial 

risk and takes on all of the 

administration of the block, must be 

reported by the assuming issuer and 

must not be reported by the ceding 

issuer. 

(c) Determining the MLR 

denominator. For a contract year, the 

denominator of the MLR for a Part D 

prescription drug contract must be in 

accordance with paragraph (c)(4) of this 

section and equal the total revenue 

under the contract. Total revenue is as 

described in paragraph (c)(1) of this 

section, net of deductions described in 

paragraph (c)(2) of this section, taking 

into account the exclusions described in 

paragraph and (c)(3) of this section, and 

be in accordance with (c)(4) of this 

section. 

(1) CMS’ payments to the Part D 

sponsor for all enrollees under a 

contract, reported on a direct basis, 

including the following: 

(i) Payments under § 423.329(a)(1) 

and (2). 

(ii) Payment adjustments resulting 

from reconciliation per 

§ 423.329(c)(2)(ii). 

(iii) All premiums paid by or on 

behalf of enrollees to the Part D sponsor 

as a condition of receiving coverage 

under a Part D plan, including CMS’ 

payments for low income premium 

subsidies under § 422.304(b)(2) of this 

chapter. 

(iv) All unpaid premium amounts that 

a Part D sponsor could have collected 

from enrollees in the Part D plan(s) 

under the contract. 


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31312 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

(v) All changes in unearned premium 

reserves. 

(vi) Payments under § 423.315(e). 

(2) The following amounts must be 

deducted from total revenue in 

calculating the MLR: 

(i) Licensing and regulatory fees. 

Statutory assessments to defray 

operating expenses of any State or 

Federal department, such as the ‘‘user 

fee’’ described in section 1857(e)(2) of 

the Act, and examination fees in lieu of 

premium taxes as specified by State law. 

(ii) Federal taxes and assessments. All 

Federal taxes and assessments allocated 

to health insurance coverage. 

(iii) State taxes and assessments. 

State taxes and assessments, such as the 

following: 

(A) Any industry-wide (or subset) 

assessments (other than surcharges on 

specific claims) paid to the State 

directly. 

(B) Guaranty fund assessments. 

(C) Assessments of State industrial 

boards or other boards for operating 

expenses or for benefits to sick 

employed persons in connection with 

disability benefit laws or similar taxes 

levied by States. 

(D) State income, excise, and business 

taxes other than premium taxes. 

(iv) Community benefit expenditures. 

Community benefit expenditures are 

payments made by a Federal income 

tax-exempt Part D sponsor for 

community benefit expenditures as 

defined in paragraph (c)(2)(iii)(A) of this 

section, limited to the amount defined 

in paragraph (c)(2)(iii)(B) of this section, 

and allocated to a contract as required 

under paragraph (d)(1) of this section. 

(A) Community benefit expenditures 

means expenditures for activities or 

programs that seek to achieve the 

objectives of improving access to health 

services, enhancing public health and 

relief of government burden. 

(B) Such payment may be deducted 

up to the limit of either 3 percent of 

total revenue under this part or the 

highest premium tax rate in the State for 

which the Part D sponsor is licensed, 

multiplied by the Part D sponsor’s 

earned premium for the contract. 

(3) The following amounts must not 

be included in total revenue: 

(i) The amount of unpaid premiums 

for which the Part D sponsor can 

demonstrate to CMS that it made a 

reasonable effort to collect. 

(ii) Coverage Gap Discount Program 

payments under § 423.2320. 

(4) Total revenue (as defined at 

§ 422.2420(c)) of this chapter) for 

policies issued by one Part D sponsor 

and later assumed by another entity 

must be reported by the assuming entity 

for the entire MLR reporting year during 

which the policies were assumed and 

revenue under this part for that contract 

year must be reported by the ceding Part 

D sponsor. 

(5) Total revenue (as defined at 

§ 422.2420(c) of this chapter) that is 

reinsured for a block of business that 

was subject to indemnity reinsurance 

and administrative agreements effective 

before March 23, 2010, for which the 

assuming entity is responsible for 100 

percent of the ceding entity’s financial 

risk and takes on all of the 

administration of the block, must be 

reported by the assuming issuer and 

must not be reported by the ceding 

issuer. 

(d) Allocation of expenses—(1) 

General requirements. (i) Each expense 

must be included under only one type 

of expense, unless a portion of the 

expense fits under the definition of or 

criteria for one type of expense and the 

remainder fits into a different type of 

expense, in which case the expense 

must be pro-rated between types of 

expenses. 

(ii) Expenditures that benefit multiple 

contracts, or contracts other than those 

being reported, including but not 

limited to those that are for or benefit 

self-funded plans, must be reported on 

a pro rata share. 

(2) Description of the methods used to 

allocate expenses. (i) Allocation to each 

category must be based on a generally 

accepted accounting method that is 

expected to yield the most accurate 

results. 

(ii) Specific identification of an 

expense with an activity that is 

represented by one of the categories in 

§ 423.2420(b) or (c) will generally be the 

most accurate method. 

(ii) Shared expenses, including 

expenses under the terms of a 

management contract, must be 

apportioned pro rata to the entities 

incurring the expense. 

(iii)(A) Any basis adopted to 

apportion expenses must be that which 

is expected to yield the most accurate 

results and may result from special 

studies of employee activities, salary 

ratios, premium ratios or similar 

analyses. 

(B) Expenses that relate solely to the 

operations of a reporting entity, such as 

personnel costs associated with the 

adjusting and paying of claims, must be 

borne solely by the reporting entity and 

are not to be apportioned to other 

entities within a group. 

§ 423.2430 Activities that improve health 

care quality. 

(a) Activity requirements. Activities 

conducted by a Part D sponsor to 

improve quality fall into one of the 

categories in paragraph (a)(1) of this 

section and meet all of the requirements 

in paragraph (a)(2) of this section. 

(1) Categories of quality improving 

activities. The activity must be designed 

to achieve one or more of the following: 

(i) To improve health outcomes 

through the implementation of activities 

such as quality reporting, effective case 

management, care coordination, chronic 

disease management, and medication 

and care compliance initiatives, 

including through the use of the 

medical homes model as defined for 

purposes of section 3602 of the Patient 

Protection and Affordable Care Act, for 

treatment or services under the plan or 

coverage. 

(ii) To prevent hospital readmissions 

through a comprehensive program for 

hospital discharge that includes patientcentered education and counseling, 

comprehensive discharge planning, and 

post-discharge reinforcement by an 

appropriate health care professional. 

(iii) To improve patient safety and 

reduce medical errors through the 

appropriate use of best clinical 

practices, evidence-based medicine, and 

health information technology under the 

plan or coverage. 

(iv) To promote health and wellness. 

(v) To enhance the use of health care 

data to improve quality, transparency, 

and outcomes and support meaningful 

use of health information technology. 

Activities, such as Health Information 

Technology (HIT) expenses, are required 

to accomplish the activities that 

improve health care quality and that are 

designed for use by health plans, health 

care providers, or enrollees for the 

electronic creation, maintenance, 

access, or exchange of health 

information, and are consistent with 

meaningful use requirements, and 

which may in whole or in part improve 

quality of care, or provide the 

technological infrastructure to enhance 

current quality improving activities or 

make new quality improvement 

initiatives possible. 

(2) The activity must be designed for 

all of the following: 

(i) To improve health quality. 

(ii) To increase the likelihood of 

desired health outcomes in ways that 

are capable of being objectively 

measured and of producing verifiable 

results and achievements. 

(iii) To be directed toward individual 

enrollees or incurred for the benefit of 

specified segments of enrollees or 

provide health improvements to the 

population beyond those enrolled in 

coverage as long as no additional costs 

are incurred due to the non-enrollees. 

(iv) To be grounded in evidence-based 

medicine, widely accepted best clinical 


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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 31313 

practice, or criteria issued by recognized 

professional medical associations, 

accreditation bodies, government 

agencies or other nationally recognized 

health care quality organizations. 

(b) Exclusions. Expenditures and 

activities that must not be included in 

quality improving activities include, but 

are not limited to, the following: 

(1) Those that are designed primarily 

to control or contain costs. 

(2) The pro rata share of expenses that 

are for lines of business or products 

other than those being reported, 

including but not limited to, those that 

are for or benefit self-funded plans. 

(3) Those which otherwise meet the 

definitions for quality improving 

activities but which were paid for with 

grant money or other funding separate 

from premium revenue. 

(4) Those activities that can be billed 

or allocated by a pharmacy for care 

delivery and that are reimbursed as 

clinical services. 

(5) Establishing or maintaining a 

claims adjudication system, including 

costs directly related to upgrades in 

health information technology that are 

designed primarily or solely to improve 

claims payment capabilities or to meet 

regulatory requirements for processing 

claims, including ICD–10 

implementation costs in excess of 0.3 

percent of total revenue under this part, 

and maintenance of ICD–10 code sets 

adopted in accordance with the Health 

Insurance Portability and 

Accountability Act (HIPAA), 42 U.S.C. 

1320d-2, as amended. 

(6) That portion of the activities of 

health care professional hotlines that 

does not meet the definition of activities 

that improve health quality. 

(7) All retrospective and concurrent 

utilization review. 

(8) Fraud prevention activities. 

(9) The cost of developing and 

executing pharmacy contracts and fees 

associated with establishing or 

managing a pharmacy network, 

including fees paid to a vendor for the 

same reason. 

(10) Pharmacy network credentialing. 

(11) Marketing expenses. 

(12) Costs associated with calculating 

and administering individual enrollee 

or employee incentives. 

(13) That portion of prospective 

utilization review that does not meet the 

definition of activities that improve 

health quality. 

(14) Any function or activity not 

expressly permitted by CMS under this 

part. 

§ 423.2440 Credibility adjustment. 

(a) A Part D sponsor may add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is 

partially credible, as determined by 

CMS. 

(b) A Part D sponsor may not add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is fully 

credible, as determined by CMS. 

(c) For those contract years for which 

a contract has non-credible experience 

for their MLR, sanctions under 

§ 423.2410(b) through (d) will not apply. 

(d) CMS defines and publishes 

definitions of partial credibility, full 

credibility, and non-credibility and the 

credibility factors through the notice 

and comment process of publishing the 

Advance Notice and Final Rate 

Announcement. 

§ 423.2450 [Reserved]. 

§ 423.2460 Reporting requirements. 

(a) For each contract year, each Part 

D sponsor must submit a report to CMS, 

in a timeframe and manner specified by 

CMS, which includes but is not limited 

to the data needed by the Part D sponsor 

to calculate and verify the MLR and 

remittance amount, if any, for each 

contract, such as incurred claims, total 

revenue, costs for quality improving 

activities, non-claims costs, taxes, 

licensing and regulatory fees, and any 

remittance owed to CMS under 

§ 423.2410. 

(b) Total revenue reported as part of 

the MLR report must be net of all 

projected reconciliations. 

(c) The MLR will be reported once, 

and will not be reopened as a result of 

any payment reconciliation processes. 

§ 423.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

(a) General requirement. For each 

contract year, a Part D sponsor must 

provide a remittance to CMS if the 

contract’s MLR does not meet the 

minimum percentage required by 

§ 423.2410(b). 

(b) Amount of remittance. For each 

contract that does not meet MLR 

requirement for a contract year, the Part 

D sponsor must remit to CMS the 

amount by which the MLR requirement 

exceeds the contract’s actual MLR 

multiplied by the total revenue of the 

contract, as provided in § 423.2420(c), 

for the contract year. 

(c) Timing of remittance. CMS will 

deduct the remittance from plan 

payments in a timely manner after the 

MLR is reported, on a schedule 

determined by CMS. 

(d) Treatment of remittance. Payment 

to CMS must not be included in the 

numerator or denominator of any year’s 

MLR. 

§ 423.2480 MLR review and noncompliance. 

To ensure the accuracy of MLR 

reporting, CMS conducts selected 

reviews of reports submitted under 

§ 423.2460 to determine that the MLRs 

and remittance amounts under 

§ 423.2410(b) and sanctions under 

§ 423.2410(c) and (d), were accurately 

calculated, reported, and applied. 

(a) The reviews will include a 

validation of amounts included in both 

the numerator and denominator of the 

MLR calculation reported to CMS. 

(b) Part D sponsors are required to 

maintain evidence of the amounts 

reported to CMS and to validate all data 

necessary to calculate MLRs. 

(c)(1) Documents and records must be 

maintained for 10 years from the date 

such calculations were reported to CMS 

with respect to a given contract year. 

(2) Part D sponsors must require any 

third party vendor supplying drug cost 

contracting and claim adjudication 

services to the Part D sponsors to 

provide all underlying data associated 

with MLR reporting to that Part D 

sponsor in a timely manner, when 

requested by the Part D sponsor, 

regardless of current contractual 

limitations, in order to validate the 

accuracy of MLR reporting. 

(d) Reports submitted under 

§ 423.2460, calculations, or any other 

MLR submission required by this 

subpart found to be materially incorrect 

or fraudulent— 

(1) Are noted by CMS; 

(2) Appropriate remittance amounts 

are recouped by CMS; and 

(3) Sanctions may be imposed by CMS 

as provided in § 423.752. 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: May 15, 2013. 

Marilyn Tavenner, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: May 15, 2013. 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2013–12156 Filed 5–17–13; 4:15 pm] 

BILLING CODE 4120–01–P 


sroberts on DSK5SPTVN1PROD with RULES