[Federal Register Volume 77, Number 57 (Friday, March 23, 2012)]
[Rules and Regulations]
[Pages 17220-17252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6594]



[[Page 17219]]

Vol. 77

Friday,

No. 57

March 23, 2012

Part IV





Department of Health and Human Services





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45 CFR Part 153





Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment; Final Rule

Federal Register / Vol. 77 , No. 57 / Friday, March 23, 2012 / Rules 
and Regulations

[[Page 17220]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 153

[CMS-9975-F]
RIN 0938-AR07


Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment

AGENCY: Department of Health and Human Services.

ACTION: Final rule.

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SUMMARY: This final rule implements standards for States related to 
reinsurance and risk adjustment, and for health insurance issuers 
related to reinsurance, risk corridors, and risk adjustment consistent 
with title I of the Patient Protection and Affordable Care Act as 
amended by the Health Care and Education Reconciliation Act of 2010, 
referred to collectively as the Affordable Care Act. These programs 
will mitigate the impact of potential adverse selection and stabilize 
premiums in the individual and small group markets as insurance reforms 
and the Affordable Insurance Exchanges (``Exchanges'') are implemented, 
starting in 2014. The transitional State-based reinsurance program 
serves to reduce uncertainty by sharing risk in the individual market 
through making payments for high claims costs for enrollees. The 
temporary Federally administered risk corridors program serves to 
protect against uncertainty in rate setting by qualified health plans 
sharing risk in losses and gains with the Federal government. The 
permanent State-based risk adjustment program provides payments to 
health insurance issuers that disproportionately attract high-risk 
populations (such as individuals with chronic conditions).

DATES: Effective Date: These regulations are effective on May 22, 2012.

FOR FURTHER INFORMATION CONTACT:

Sharon Arnold at (301) 492-4415 or Laurie McWright at (301) 492-4372 
for general information.
Wakina Scott at (301) 492-4393 for matters related to reinsurance.
Grace Arnold at (301) 492-4272 for matters related to risk adjustment.
Jeff Wu at (301) 492-4416 for matters related to risk corridors.

SUPPLEMENTARY INFORMATION: 

Abbreviations

CMS Centers for Medicare & Medicaid Services
HHS U.S. Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
MLR Medical Loss Ratio
PCIP Pre-existing Condition Insurance Plan
PHS Act Public Health Service Act (42 U.S.C. 201 et seq.)
QHP Qualified Health Plan

Table of Contents

I. Background
    A. Legislative Overview
    B. Introduction
II. Provisions of the Proposed Regulations and Analysis of and 
Responses to Public Comments
    A. Subpart A--General Provisions
    B. Subpart B--State Notice of Benefit and Payment Parameters
    C. Subpart C--State Standards Related to the Reinsurance Program
    D. Subpart D--State Standards Related to the Risk Adjustment 
Program
    E. Subpart E--Health Insurance Issuer and Group Health Plan 
Standards Related to the Reinsurance Program
    F. Subpart F--Health Insurance Issuer Standards Related to the 
Risk Corridors Program
    G. Subpart G--Health Insurance Issuer Standards Related to the 
Risk Adjustment Program
III. Provisions of the Final Regulations
IV. Collection of Information Requirements
V. Summary of Regulatory Impact Analysis
VI. Regulatory Flexibility Act

I. Background

A. Legislative Overview

    Starting in 2014, individuals and small businesses will be able to 
purchase private health insurance through State-based competitive 
marketplaces called Affordable Insurance Exchanges, or ``Exchanges.'' 
Exchanges will offer Americans competition, choice, and clout. 
Insurance companies will compete for business on a level playing field, 
driving down costs. Consumers will have a choice of health plans to fit 
their needs. In addition, Exchanges will give individuals and small 
businesses the same purchasing power as big businesses. The Departments 
of Health and Human Services, Labor, and the Treasury are working in 
close coordination to release guidance related to Exchanges in several 
phases. A Request for Comment relating to Exchanges was published in 
the Federal Register on August 3, 2010. An Initial Guidance to States 
on Exchanges was issued on November 18, 2010. A proposed rule for the 
application, review, and reporting process for waivers for State 
innovation was published in the Federal Register on March 14, 2011. Two 
proposed rules, including the proposed form of this rule, were 
published in the Federal Register on July 15, 2011 to implement 
components of Exchanges and health insurance premium stabilization 
programs (that is, reinsurance, risk corridors, and risk adjustment) 
from the Affordable Care Act. A proposed rule regarding eligibility for 
Exchanges was published in the Federal Register on August 17, 2011. A 
proposed rule on the Health Insurance Premium Tax Credit was published 
in the Federal Register on August 17, 2011. A proposed rule making 
changes to eligibility for the Medicaid program was published in the 
Federal Register on August 17, 2011. The final versions of the Exchange 
Establishment and Eligibility rules were made available for public 
inspection at the Office of the Federal Register on March 12, 2012. A 
final version of the Medicaid rule is being made available for public 
inspection at the Office of the Federal Register on the same date as 
this rule.
    Section 1341 of the Affordable Care Act provides that each State 
must establish a transitional reinsurance program to help stabilize 
premiums for coverage in the individual market during the first three 
years of Exchange operation (2014 through 2016). Section 1342 provides 
that HHS must establish a temporary risk corridors program that will 
apply to QHPs in the individual and small group markets for the first 
three years of Exchange operation (2014 through 2016). Section 1343 
provides that each State must establish a permanent program of risk 
adjustment for all non-grandfathered plans in the individual and small 
group markets both inside and outside of the Exchanges. These risk-
spreading mechanisms, which will be implemented by HHS and the States, 
are designed to mitigate the potential impact of adverse selection and 
provide stability for health insurance issuers in the individual and 
small group markets. If a State chooses not to establish a transitional 
reinsurance program or a risk adjustment program, this final rule 
provides that HHS will do so on its behalf.
    Section 1321(a) also provides broad authority for HHS to establish 
standards and regulations to implement the statutory requirements 
related to reinsurance, risk adjustment, and the other components of 
title I of the Affordable Care Act. Section 1321(a)(2) requires, in 
issuing such regulations, HHS to engage in stakeholder consultation in 
a way that ensures balanced representation among interested parties. We 
describe the consultation activities HHS has undertaken later in this 
introduction. Section 1321(c)(1) authorizes HHS to establish and 
implement reinsurance,

[[Page 17221]]

risk adjustment, and the other components of title I of the Affordable 
Care Act in States that have not done so.

B. Introduction

    Underpinning the goals of high-quality, affordable health insurance 
coverage is the need to minimize the possible negative effects of 
adverse selection. Adverse selection results when a health insurance 
purchaser understands his or her own potential health risk better than 
the health insurance issuer does, resulting in a health plan having 
higher costs than anticipated.
    To protect themselves from adverse selection, issuers may include a 
margin in their pricing (that is, set premiums higher than necessary) 
in order to offset the potential expense of high-cost enrollees. The 
uncertainty resulting from adverse selection could also lead an issuer 
to be more cautious about offering certain plan designs in the 
Exchange. This risk will likely be greatest in the first years of the 
Exchange; however, the risk should decrease as the new market matures 
and issuers gain actual claims experience with this new population.
    As experience in States has shown, offsetting the adverse selection 
from insurance reforms may be best accomplished by broadening the risk 
pool: Making coverage affordable through lower premiums and targeted 
financial assistance and making coverage a responsibility so that 
people pay premiums regardless of their current need for health care. 
In addition, to further minimize the negative effects of adverse 
selection and foster a stable marketplace from year one of 
implementation, the Affordable Care Act establishes transitional 
reinsurance and temporary risk corridors programs, and a permanent risk 
adjustment program to provide payments to health insurance issuers that 
cover higher-risk populations and to more evenly spread the financial 
risk borne by issuers.
    The transitional reinsurance program and the temporary risk 
corridors program, which begin in 2014, are designed to provide issuers 
with greater payment stability as insurance market reforms are 
implemented. The reinsurance program, which is a State-based program, 
will reduce the uncertainty of insurance risk in the individual market 
by partially offsetting risk for high-cost enrollees. By limiting 
issuers' exposure to high-cost enrollees, this program will attenuate 
individual market rate increases that might otherwise occur because of 
the immediate enrollment of individuals with unknown health status. The 
risk corridors program, which is a Federally administered program, will 
protect against uncertainty in rates for QHPs by limiting the extent of 
issuer losses (and gains). On an ongoing basis, the risk adjustment 
program is intended to provide increased payments to health insurance 
issuers that attract higher-risk populations (such as those with 
chronic conditions) and reduce the incentives for issuers to avoid 
higher-risk enrollees. Under this program, funds are transferred from 
issuers with lower-risk enrollees to issuers with higher-risk 
enrollees. Section 1343 of the Affordable Care Act authorizes HHS to 
utilize criteria and methods similar to those utilized under Parts C or 
D of title XVIII of the Social Security Act to implement risk 
adjustment. Standards for the reinsurance, risk corridors, and risk 
adjustment programs are addressed in this final rule. The following 
chart summarizes these programs:

----------------------------------------------------------------------------------------------------------------
               Program                       Reinsurance             Risk corridors          Risk adjustment
----------------------------------------------------------------------------------------------------------------
What.................................  Provides funding to      Limits issuer losses     Transfers funds from
                                        issuers that incur       (and gains).             lower risk plans to
                                        high claims costs for                             higher risk plans.
                                        enrollees.
Program Operation....................  State option to          HHS....................  State option to operate
                                        operate, regardless of                            if the State
                                        whether the State                                 establishes an
                                        establishes an                                    Exchange.
                                        Exchange.
Who Participates.....................  All issuers and third    Qualified health plans.  Non-grandfathered
                                        party administrators                              individual and small
                                        on behalf of group                                group market plans,
                                        health plans                                      inside and outside the
                                        contribute funding;                               Exchange.
                                        non-grandfathered
                                        individual market
                                        plans (inside and
                                        outside the Exchange)
                                        are eligible for
                                        payments.
Why..................................  Offsets high cost        Protects against         Protects against
                                        outliers.                inaccurate rate-         adverse selection.
                                                                 setting.
When.................................  Throughout the year....  After reinsurance and    Before June 30 of the
                                                                 risk adjustment.         calendar year
                                                                                          following the benefit
                                                                                          year.
Time Frame...........................  3 years (2014-2016)....  3 years (2014-2016)....  Permanent.
----------------------------------------------------------------------------------------------------------------

II. Provisions of the Proposed Regulations and Analysis of and 
Responses to Public Comments

    As indicated in our proposed rule, HHS published a Request for 
Comment (RFC) on August 3, 2010, inviting the public to provide input 
regarding the rules that will govern the Exchanges. The comment period 
closed on October 4, 2010. Comments were submitted by consumer advocacy 
organizations, medical and health care professional trade associations 
and societies, medical and health care professional entities, health 
insurance issuers, insurance trade associations, members of the general 
public, and employer organizations. The RFC comments were considered in 
the development of the proposed rule.
    Leading up to the issuance of the Premium Stabilization proposed 
rule, HHS consulted with stakeholders through weekly meetings with the 
National Association of Insurance Commissioners (NAIC), regular contact 
with States through the Exchange grant process, and meetings with 
tribal representatives, health insurance issuers, trade groups, 
consumer advocates, employers, and other interested parties. We 
continue to consult with these stakeholders on the development of 
guidance related to the reinsurance, risk adjustment, and risk 
corridors programs. In this final rule, we have responded to comments 
submitted in response to the Premium Stabilization proposed rule and 
the RFC, where relevant.
    On July 15, 2011, we published in the Federal Register (76 FR 
41950-41956) the proposed Standards related to Reinsurance, Risk 
Corridors, and Risk Adjustment. We received approximately 700 comments 
on the proposed rule. Of the comments received, approximately 200 were 
submitted as part of letter campaigns related to women's and mental 
health services, or were general comments on the Affordable Care Act 
and the government's role in health

[[Page 17222]]

care, but were not specific to the proposed rule.
    Comments that were specific to the proposed rule represented a wide 
variety of stakeholders, including States and tribal organizations, 
health insurance issuers, consumer groups, healthcare providers, 
industry experts, and members of the public. Many commenters emphasized 
the importance of the premium stabilization programs as Exchanges and 
insurance reforms are implemented and addressed the balance between 
flexibility for States and standardization and predictability for 
consumers nationwide.

A. Subpart A--General Provisions

1. Basis and Scope (Sec.  153.10)
    Section 153.10(a) of subpart A specified that the general statutory 
authority for the standards proposed in part 153 are based on the 
following sections of title I of the Affordable Care Act: sections 1321 
and 1341-1343. Section 153.10(b) specified that this part establishes 
standards for the establishment and operation of a transitional 
reinsurance program, a temporary risk corridors program, and a 
permanent risk adjustment program. We received a number of supportive 
comments on these provisions and we are finalizing them without 
modification.
2. Definitions (Sec.  153.20)
    In Sec.  153.20, Sec.  153.200, Sec.  153.300, and Sec.  153.600 of 
the proposed rule, we set forth definitions for terms that are critical 
to the reinsurance, risk adjustment, and risk corridors programs. Many 
of the definitions presented in Sec.  153.20 were taken directly from 
the Affordable Care Act or from existing regulations. New definitions 
were created to carry out the regulations in part 153. When a term is 
defined in part 153 other than in subpart A, the definition of the term 
is applicable only to the relevant subpart or section. The application 
of the terms defined in Sec.  153.20 is limited to part 153.
    Considering the comments received, we are finalizing this section 
as proposed, with the following modifications:
    We are moving a number of definitions that previously appeared in 
subparts C, D, and G of the proposed rule to subpart A of this final 
rule. We are revising the definition of ``attachment point'' to clarify 
that reinsurance payments will apply to claims costs accumulated on an 
incurred basis in a benefit year, and to specify that reinsurance 
payments are payable on all covered benefits. We are making conforming 
revisions to the definitions of ``coinsurance rate'' and ``reinsurance 
cap.'' We are revising the definition of ``contribution rate'' to be a 
per capita amount payable with respect to reinsurance contribution 
enrollees who reside in a State. We are adding a new defined term, 
``reinsurance contribution enrollee,'' which means an individual 
covered by a plan for which reinsurance contributions must be made 
pursuant to Sec.  153.400(b). We are removing the definition of 
``percent of premium'' because this definition is no longer used.
    We are modifying the definition of ``risk adjustment methodology'' 
to mean all parts of the risk adjustment process--the risk adjustment 
model, the calculation of plan average actuarial risk, the calculation 
of payments and charges, the risk adjustment data collection approach, 
and the schedule for the risk adjustment program. We are doing so to 
clarify the distinct parts of the risk adjustment process. The risk 
adjustment model calculates individual risk scores. The calculation of 
plan average actuarial risk adjusts those individual risk scores for 
rating variation, and calculates average actuarial risk at the plan 
level. The plan average actuarial risk is used for the calculation of 
payments and charges for risk adjustment covered plans. The risk 
adjustment data collection approach specifies how risk adjustment data 
will be stored, collected, accessed, transmitted, and validated, and 
the timeframes, data format, and privacy and security standards 
associated with each. The schedule for the risk adjustment program is 
the schedule for calculating payments and charges, invoicing issuers 
for charges, and disbursing payments. We are modifying the definition 
of ``risk adjustment data'' to mean all data that are used in a risk 
adjustment model, the calculation of plan average actuarial risk, or 
the calculation of payments and charges, or that are used for 
validation or audit of such data. We have added several new 
definitions--``individual risk score,'' ``calculation of plan average 
actuarial risk,'' ``calculation of payments and charges,'' and ``risk 
adjustment data collection approach.''
    Finally, we are making a number of clarifying modifications 
throughout this section.
    Comment: We received one comment suggesting that HHS define the 
benefit year as a calendar year and that the reinsurance program would 
be best operated on a calendar year basis.
    Response: The benefit year was defined as the calendar year in the 
Exchange Establishment rule. We have cross-referenced this definition 
in this final rule.
    Comment: Although a few commenters supported the proposal that 
reinsurance be payable only on essential health benefits, the majority 
of commenters urged that reinsurance be payable on all covered 
benefits, with several citing the administrative complexity of 
distinguishing between claims for essential health benefits and claims 
for other covered benefits.
    Response: Because it would be administratively burdensome for 
issuers to distinguish claims for covered essential health benefits 
from other claims, we are revising the definitions so that reinsurance 
is payable on all covered benefits.
    Comment: We received several comments disagreeing with the 
inconsistency in the proposed definition of percent of premium, which 
would include administrative costs for the fully insured market, but 
not the self-insured market.
    Response: We believe that the statute intended for self-insured 
plans also to pay administrative costs. However, since we have modified 
the policy for the collection of contributions as discussed in the 
preamble to Sec.  153.220, we are no longer proposing a definition for 
percent of premium.
    Comment: We received a number of comments requesting clarification 
of the definition of a contributing entity for the reinsurance program. 
Several commenters suggested that HHS clarify that third-party 
administrators are not financially liable for contributions to be made 
by group health plans for which they administer benefits.
    Response: The Affordable Care Act requires that health insurance 
issuers and third party administrators on behalf of group health plans 
make contributions. We are including text in Sec.  153.400 that 
clarifies which issuers must make reinsurance contributions and which 
are exempt.
    Comment: A few commenters expressed support for the differentiation 
between the defined terms ``risk adjustment model'' and ``risk 
adjustment methodology.'' Another commenter suggested an expanded set 
of definitions to capture more of the steps in the risk adjustment 
process, including a term to define the methodology for transferring 
money between plans, and a term to describe an individual enrollee's 
relative cost compared to that of an average enrollee.
    Response: We are adding a definition of ``individual risk score'' 
to describe a relative measure of predicted health care costs for a 
particular enrollee. We are adding a definition of ``calculation

[[Page 17223]]

of plan average actuarial risk'' to describe the specific calculations 
used to determine plan average actuarial risk from individual risk 
scores for a risk adjustment covered plan, including the specification 
of the risk pool from which average actuarial risk will be calculated. 
We are adding a definition of ``calculation of payments and charges'' 
to describe the specific procedures used to determine plan average 
actuarial risk from individual risk scores for a risk adjustment 
covered plan, including adjustment for variable rating factors and the 
specification of the risk pool from which average actuarial risk is to 
be calculated. We are adding a definition of ``risk adjustment data 
collection approach'' to describe the specific procedures by which risk 
adjustment data is to be stored, collected, accessed, and transmitted, 
and the timeframes, data format, and privacy and security standards 
with respect thereto.
    Comment: We received two comments about the definition of ``risk 
adjustment data.'' One commenter suggested that the definition be 
expanded to encompass all aspects of the risk adjustment process. 
Another commenter requested that HHS not adopt language that would 
curtail the use of a prospective risk adjustment model.
    Response: We are aligning the definition with a number of the other 
new definitions encompassed in ``risk adjustment methodology.'' We do 
not intend to curtail the use of a prospective risk adjustment model.
    Comment: We received a few comments requesting clarification as to 
the types of plans that are subject to risk adjustment. Commenters 
asked specifically about Medicaid managed care plans and multi-State 
plans.
    Response: Section 1343 of the Affordable Care Act requires that 
health plans (except grandfathered plans) in the individual or small 
group markets participate in the risk adjustment program. We are 
modifying the definition of ``risk adjustment covered plan'' in 
response to comments. This modification clarifies that all health 
insurance coverage, including multi-State plans and Consumer Operated 
and Oriented Plans, are risk adjustment covered plans. The risk 
adjustment program does not apply to Medicare Advantage plans or 
Medicare Prescription Drug Plans, under which private health plans 
contract with Medicare to provide Medicare-covered benefits, or to 
contracts with State Medicaid agencies to provide Medicaid benefits, as 
payments for such coverage are regulated under provisions of the Social 
Security Act.
    Insurance coverage solely for excepted benefits under title XXVII 
of the PHS Act will be excluded from risk adjustment. Excepted benefit 
plans cover a specific set of services, such as vision benefits, while 
``major medical'' plans cover a broader set of benefits such as 
physician and hospital visits. These differences make fair enrollee 
risk comparison between excepted benefit plans and major medical plans 
difficult. We are modifying the definition of risk adjustment covered 
plan to exclude plans determined not to be risk adjustment covered 
plans in the annual HHS notice of benefit and payment parameters.

B. Subpart B--State Notice of Benefit and Payment Parameters

    In this subpart, we proposed a process by which the States that are 
operating a risk adjustment program or establishing a reinsurance 
program issue an annual notice of benefit and payment parameters to 
disseminate information to issuers and other stakeholders about 
specific requirements to support payment-related functions. This 
provides a practical way to update certain payment and benefit 
parameters that may change annually, such as reinsurance contribution 
rates that are based on annually changing thresholds. This notice will 
also serve as a mechanism to address other Exchange-related provisions.
1. State Notice of Benefit and Payment Parameters (Sec.  153.100)
    In Sec.  153.100(a), we proposed that a State operating an 
Exchange, as well as a State establishing a reinsurance program, be 
required to issue a notice to describe the specific parameters that the 
State will employ if that State intends to utilize any reinsurance or 
risk adjustment parameters that differ from those specified in the 
annual HHS notice of benefit and payment parameters. In paragraph (b) 
(now paragraph (c)), we proposed specific deadlines for the State 
notice of benefit and payment parameters. We proposed that those 
deadlines be tied to the publication of the annual HHS notice of 
benefit and payment parameters, upon which the public will have an 
opportunity to comment. Below is a chart detailing the schedules for 
the annual HHS notice of benefit and payment parameters for benefit 
year 2014 and subsequent years, with the first two milestones occurring 
in the calendar year two years before the effective date.

           Annual HHS Notice of Benefit and Payment Parameters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
HHS publishes advance notice.......  Mid-October two calendar years
                                      before the benefit year.
Comment period ends................  Mid-November two calendar years
                                      before the benefit year.
HHS publishes final notice.........  Mid-January of the calendar year
                                      before the benefit year.
------------------------------------------------------------------------

    We proposed that a State that plans to modify Federal parameters 
issue its notice by early March in the calendar year before the benefit 
year. We proposed that this requirement set an outer bound for the date 
by which the final notice is to be issued by a State that intends to 
utilize any reinsurance or risk adjustment parameters that differ from 
those specified in the annual HHS notice of benefit and payment 
parameters.
    We also proposed in paragraph (c) (now paragraph (d)), that if a 
State operating an Exchange or establishing a reinsurance program does 
not provide public notice of its intent to have State-specific 
parameters within the period specified, the parameters set forth in the 
annual HHS notice of benefit and payment parameters will serve as the 
State parameters.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing the provisions proposed in Sec.  
153.100 of the proposed rule, with the following modifications: We are 
clarifying that a State must publish a notice of benefit and payment 
parameters if it intends to modify the data requirements for 
reinsurance payments, collect reinsurance contributions, use more than 
one applicable reinsurance entity, or modify any reinsurance 
parameters. We are directing a State that operates a risk adjustment 
program to publish a notice of benefit and payment parameters setting 
forth the risk adjustment methodology and data validation standards it 
will use. We are specifying that State notices be issued by March 1 of 
the calendar year prior to the first benefit year for which the notice 
applies. We are clarifying that a

[[Page 17224]]

State that does not publish a notice of benefit and payment parameters 
forgoes its right to modify the data requirements for reinsurance 
payments, collect reinsurance contributions, use more than one 
applicable reinsurance entity, or use any risk adjustment methodology 
or data validation standards other than those published in the annual 
HHS notice of benefit and payment parameters for use by HHS when 
operating risk adjustment on behalf of a State. We are also making a 
number of clarifying modifications throughout this section.
    Comment: We received a number of comments in support of a 
requirement that States publish a State notice of benefit and payment 
parameters. One commenter suggested that we include a requirement that 
all notices be made public with a period for comment. Another commenter 
proposed that States be required to justify deviation from any 
methodologies or parameters set forth in the annual HHS notice of 
benefit and payment parameters.
    Response: While we recognize the value of requiring a public 
comment period for State notices, we believe that such a requirement 
should be left to State law and practice. HHS will provide an 
opportunity for public comment when HHS administers risk adjustment or 
reinsurance. State law will govern what administrative process is 
necessary when a State adopts a risk adjustment methodology, or 
modifies reinsurance parameters, subject to the limits of this final 
rule and the HHS notice of benefit and payment parameters. We are 
clarifying the content of the justification to be published by a State 
that seeks to use a risk adjustment methodology other than the 
methodology used by HHS when operating risk adjustment on behalf of a 
State. However, we are not requiring that a State must provide 
justification for changes to reinsurance payment parameters. As 
discussed in the preamble in subpart C, we believe a State may have 
many reasons to make adjustments to the HHS reinsurance payment 
parameters. As such, we believe that each State should have the 
flexibility to determine the parameters that best suit the 
administration of its reinsurance program.
    Comment: A number of commenters expressed support for the timing of 
notice releases as proposed. However, we received a number of comments 
stating that the proposed timeframe did not allow sufficient time for 
issuers to prepare their applications for certification for 
participation in the Exchange in time for the October 2013 open 
enrollment period. Commenters proposed alternative timeframes for the 
release of the HHS notice that ranged from January 2012 to June 30, 
2012. A number of commenters also stated that, particularly in the 
initial years, more advanced notice of Federal and State program 
parameters will be necessary in order for issuers to prepare premiums 
for the 2014 benefit year.
    Response: The timeframe for implementation of the Affordable Care 
Act makes it difficult for the Federal and State governments to provide 
more notice than was proposed in the proposed rule. To accommodate 
States' and issuers' desire for further information with respect to 
risk adjustment, HHS is planning a number of working sessions with 
issuers and States. We believe these sessions will provide sufficient 
information to issuers and States, while providing HHS the time 
necessary to more fully develop the Federal parameters for the 
reinsurance and risk adjustment programs. For these reasons, we are 
clarifying and finalizing the proposed requirement that State notices 
of benefit and payment parameters be published by March 1 of the 
calendar year prior to the benefit year.
    Comment: We received a comment supporting the requirement that, if 
a State establishing a reinsurance program does not provide public 
notice of its intent to have State-specific parameters, the parameters 
set forth in the annual HHS notice of benefit and payment parameters 
will serve as the State parameters.
    Response: We are finalizing our policy that a State that elects to 
establish a reinsurance program that does not publish a State notice of 
benefit and payment parameters by March 1 must adhere to the parameters 
set forth in the HHS notice of benefit and payment parameters.
2. Standards for the State Notice of Benefit and Payment Parameters 
(Sec.  153.110)
    We proposed in paragraph (a)(1) (now paragraph (a)), that content 
related to the reinsurance program include the data requirements and 
data collection frequency for health insurance issuers to receive 
reinsurance payments. In paragraph (a)(2) (now paragraph (e)), we 
proposed that a State that establishes a reinsurance program must 
specify the attachment point, reinsurance cap, and coinsurance rate if 
the State plans to use values different from those set forth in the 
annual HHS notice of benefit and payment parameters. In paragraph 
(a)(3) (now paragraph (d)), we proposed that if a State plans to use 
more than one applicable reinsurance entity, the State must include in 
its State notice of benefit and payment parameters information related 
to the geographic boundaries of each applicable reinsurance entity and 
estimates related to the number of enrollees, payments, and premiums 
available for contributions in each region.
    In paragraph (b) (now paragraph (f)), we proposed content related 
to the risk adjustment program if the State intends to modify the risk 
adjustment parameters set forth in the annual HHS notice of benefit and 
payment parameters, including a detailed description of and rationale 
for any modification.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing the provisions proposed in Sec.  
153.110 with the following modifications: We are specifying that a 
State establishing a reinsurance program that elects to collect 
reinsurance contributions from the fully insured market must announce 
its intention to do so, and must set forth the data requirements for 
reinsurance payments in the State notice of benefit and payment 
parameters. We are clarifying that a State must apply any modified 
reinsurance parameters uniformly throughout the State. However, as 
discussed in Subpart C, a State must inform HHS by December 1, 2012, of 
its intent to collect reinsurance contributions for the 2014 benefit 
year, and by September 1 of the calendar year that is two years prior 
to the applicable benefit year if the State elects to collect 
reinsurance contributions for any benefit year after 2014. A State that 
elects to collect additional reinsurance contributions must describe 
the purpose of the additional collection and the additional 
contribution rate. We are making a number of clarifying modifications 
throughout this section.
    Comment: One commenter supported affording States the flexibility 
to provide higher reinsurance payments to plans.
    Response: We believe that States should have the flexibility to 
vary reinsurance payments, so long as the reinsurance parameters are 
uniform throughout the State. However, a State electing to change 
reinsurance parameters must publish those changed parameters in the 
State notice of benefit and payment parameters. A State electing to 
make higher reinsurance payments will be required to collect any 
additional reinsurance contributions required to fund those higher 
payments through a State applicable reinsurance entity.
    Comment: We received a comment asking that States be provided the

[[Page 17225]]

flexibility to use multiple coinsurance rates.
    Response: We believe that States generally should have flexibility 
in setting payment parameters, but we do not believe that the 
Affordable Care Act intended for a State to allow an applicable 
reinsurance entity to set multiple payment parameters in the State, or 
for multiple applicable reinsurance entities in a State to set 
different payment parameters. We believe that payment parameters set by 
the State or HHS on behalf of the State should be uniform throughout 
the State.
    Comment: Several commenters supported the requirement that if there 
are multiple applicable reinsurance entities in a State, these entities 
must be required to operate in distinct geographic areas.
    Response: We are finalizing that requirement in Sec.  
153.210(a)(2).
    Comment: Several commenters asked for clarification or changes in 
the content that a State must provide in its notice of benefit and 
payment parameters. In particular, commenters stated that the proposed 
rule did not define the term ``risk adjustment data validation 
methodology.''
    Response: We believe our proposed rule struck a balance between 
providing minimal baselines for States and providing States with 
flexibility for their State notices. We are clarifying the provisions 
related to risk adjustment data validation by requiring that Sec.  
153.110(f) align with Sec.  153.330(a) and Sec.  153.350.

C. Subpart C--State Standards Related to the Reinsurance Program

    Section 1341 of the Affordable Care Act directs that a transitional 
reinsurance program be established in each State to help stabilize 
premiums for coverage in the individual market during the benefit years 
2014 through 2016. Under this provision, all health insurance issuers, 
and third-party administrators on behalf of self-insured group health 
plans, must make contributions to support reinsurance payments to non-
grandfathered plans of individual market issuers that cover high-cost 
individuals. As a basis for reinsurance payments, the law directs HHS 
to develop a list of 50 to 100 medical conditions to identify high-cost 
individuals, or to identify alternative methods for payment in 
consultation with the American Academy of Actuaries.
    In subpart C of the proposed rule, we proposed to codify in 
regulation section 1341 of the Affordable Care Act as it relates to 
establishing a reinsurance program. Related standards on health 
insurance issuers with respect to reinsurance were proposed in subpart 
E of the proposed rule.
1. Reserved (Sec.  153.200)
    Section 153.200 of the proposed rule defined a number of terms used 
in this subpart. Those definitions have been moved to subpart A. We are 
reserving this section for future use.
2. State Establishment of a Reinsurance Program (Sec.  153.210)
    In Sec.  153.210 of the proposed rule, we described standards for 
States regarding the establishment of a reinsurance program. We 
proposed in paragraph (a) that each State that elects to operate an 
Exchange must also establish a reinsurance program as required by the 
law. In paragraph (a)(1), we proposed to codify in regulation section 
1341(a) of the Affordable Care Act, which requires that States must 
either enter into a contract with an existing applicable reinsurance 
entity or establish an applicable reinsurance entity to carry out the 
provisions for the reinsurance program. We believe the statute allows 
State flexibility in selecting an applicable reinsurance entity and did 
not propose more specific guidelines.
    The Affordable Care Act also allows States to set up more than one 
reinsurance entity, although this option may increase administrative 
costs. We proposed in paragraph (a)(2) that, for any State that chooses 
to have more than one reinsurance entity, the State must publish in a 
State notice of benefit and payment parameters, described in subpart B, 
information regarding the geographic divisions between the applicable 
entities. We further interpret the statute to imply that the geographic 
divisions of the applicable reinsurance entities must be distinct and 
together cover the entire individual market in the State and not just 
certain areas or populations. In paragraph (a)(3), we proposed to allow 
the State to permit a reinsurance entity to subcontract for 
administrative functions, provided that the State reviews and approves 
these subcontracted arrangements as described in paragraph (a)(4). We 
interpreted the statute to allow flexibility in the performance of 
administrative functions, with the understanding that the responsible 
party must be the applicable reinsurance entity.
    We proposed in paragraph (a)(5) that the establishment of, or 
contract with, an applicable reinsurance entity must extend for a 
sufficient period to ensure that the entity can fulfill all reinsurance 
requirements for the benefit years 2014 through 2016, and any 
activities required to be undertaken in subsequent periods. Any State 
in which contributions remain to be disbursed for benefit years beyond 
2016 must ensure that an applicable reinsurance entity is available for 
required payment activities for such additional periods. Section 
1341(b)(4) of the Affordable Care Act requires that these payments be 
completed by December 31, 2018.
    We clarified in paragraph (b) that there may be situations in which 
an applicable reinsurance entity operates a reinsurance program for 
more than one State. In such cases, we consider each contract to be an 
individual reinsurance arrangement between a specific State and the 
applicable reinsurance entity.
    We proposed in paragraph (c) to allow a State that does not elect 
to establish an Exchange to operate its own reinsurance program. Under 
this circumstance, the State will be required to carry out the 
provisions of this subpart. In paragraph (d), we proposed that if a 
State does not elect to establish an Exchange and does not elect to 
establish its own reinsurance program, HHS will establish the 
reinsurance program and will perform all the reinsurance functions for 
that State. These functions would include the collection of all 
contributions described in Sec.  153.220, including funds required to 
operate and administer the applicable reinsurance functions. In 
paragraph (e), we proposed that each State that establishes a 
reinsurance program must ensure that each applicable reinsurance entity 
within the State complies with all provisions of this subpart and with 
subpart E.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions with the 
following modifications:
    In paragraph (a), we are clarifying that because reinsurance is no 
longer a required Exchange function, each State is eligible to 
establish a reinsurance program regardless of whether the State 
establishes an Exchange; we are removing proposed paragraph (c) to 
conform to this change. We are clarifying in paragraph (a)(2) that each 
State is required to notify HHS in the manner and timeframe specified 
by HHS of the percentage of reinsurance contributions received by HHS 
for the State to be allocated to each applicable reinsurance entity, if 
applicable. We are moving the requirement that a State publish the 
geographic boundaries for each applicable reinsurance entity, if it 
elects to have more than one, to subpart B. Finally, we are making a 
number of clarifying modifications to this section.

[[Page 17226]]

    Comment: We received a comment suggesting a number of entities that 
could serve as a not-for-profit reinsurance entity for a State. We 
received a few comments urging that we provide more guidance on 
entities eligible to be State applicable reinsurance entities. One 
commenter suggested that the State reinsurance entity be subject to 
both Federal and State oversight.
    Response: We believe that a State should have the discretion to 
select the entity that will administer its reinsurance program, and do 
not establish specific standards for that selection. We understand the 
commenter's concern about oversight, and note that Sec.  153.210(d) 
requires States to ensure compliance with subpart C when the State is 
operating the reinsurance program. When HHS is operating a reinsurance 
program on behalf of the State, HHS will also ensure such compliance. 
Because we believe that States should have flexibility in selection and 
oversight over the applicable reinsurance entity, we are not proposing 
further guidance on those matters.
    Comment: We received a comment suggesting that HHS provide options 
for States to terminate an entity for cause.
    Response: We believe that nothing in this final rule precludes 
States from terminating a contract with an applicable reinsurance 
entity in a manner consistent with State law (including regulations 
governing contracting). In such an event, the State should ensure a 
seamless transition of reinsurance functions to another applicable 
reinsurance entity to prevent any disruption in the program.
    Comment: We received many comments suggesting that a State 
establishing an Exchange not be required to operate a reinsurance 
program. Commenters stated that it would be difficult for a State to 
identify a not-for-profit entity to operate the transitional 
reinsurance program. One commenter suggested that HHS execute a master 
contract with a single reinsurance entity that satisfies all of the 
requirements in this final rule and permit States to use that entity. 
Another commenter stated that a State's options for establishing a 
reinsurance program should be similar to those it has with respect to 
establishing a risk adjustment program.
    Response: We are no longer requiring that States that establish an 
Exchange also establish a reinsurance program. We believe that this 
flexibility is appropriate because some States have previously 
established reinsurance programs, and may feel they are prepared to 
operate a reinsurance program for their State. If a State chooses not 
to establish a reinsurance program, HHS will establish a reinsurance 
program for that State.
    Comment: We received one comment asking HHS to publish a white 
paper on draft methodologies for reinsurance.
    Response: We are describing the general methodology for collecting 
reinsurance contributions and making reinsurance payments in subpart C 
of this final rule. We plan to provide further details on this 
methodology, including the national rate for contributions and State-
based reinsurance payment parameters, in the HHS notice of benefit and 
payment parameters.
    Comment: We received a comment seeking clarification on the use of 
unexpended contribution funds collected in calendar years 2014 through 
2016, and funds that may remain after 2016.
    Response: We believe that unused reinsurance funds should be used 
by the State until expended or by December 31, 2018, whichever date 
comes first, to make reinsurance payments. States are not prohibited 
from continuing a reinsurance program, but may not use reinsurance 
contribution funds collected under the reinsurance program in calendar 
years 2014 through 2016 to fund the program in years after 2018. If 
contribution funds collected for a calendar year between 2014 and 2016 
remain unspent by December 31 of the year, those funds may be carried 
into the next year to make payments for the next year or to make 
retroactive payments for prior years.
    Comment: We received a comment asking that existing State 
reinsurance programs be permitted to serve as a combined reinsurance 
program. The commenter further suggested permitting the use of 
reinsurance contributions collected under the transitional reinsurance 
program for an existing State reinsurance program.
    Response: We believe that a State with an existing reinsurance 
program in place can modify that program to comply with the standards 
for the transitional reinsurance program. The State would be required 
to contract with a not-for-profit reinsurance entity to administer the 
program, and the applicable reinsurance entity must comply with the 
standards. Contributions collected for the transitional reinsurance 
program must be used to make reinsurance payments pursuant to the 
transitional reinsurance program based on the payment parameters 
established by the State or HHS on behalf of the State, and may not be 
used to fund a separate State reinsurance program.
3. Collection of Reinsurance Contribution Funds (Sec.  153.220)
    In Sec.  153.220 of the proposed rule, we described standards for 
the collection of reinsurance contribution funds. In paragraph (a)(1) 
(now paragraph (c)), we proposed to codify in regulation the aggregate 
contribution amounts required under the Affordable Care Act for 
reinsurance. The Affordable Care Act requires that the reinsurance 
entity collect specified additional contribution funds for deposit into 
the general fund of the U.S. Treasury. In paragraph (a)(2), we proposed 
to codify in regulation these additional contribution amounts.
    Although the transitional reinsurance program is State-based, 
section 1341(b)(3) sets contribution amounts for the program on a 
national basis. We considered two approaches to collecting contribution 
funds: (1) Use of a national uniform contribution rate, and (2) use of 
a State-level allocation, both set by HHS to ensure that the sum of all 
contribution funds equals the national amounts set forth in the 
Affordable Care Act. In paragraph (b), we proposed using a national 
contribution rate. Use of a national contribution rate is a simpler 
approach. Further, since there is significant uncertainty about 
individual market enrollment, the overall health of the enrolled 
population, and the cost of care for new enrollees, we believed that a 
national contribution rate would be the less ambiguous approach of the 
two. All contribution funds collected by a State establishing a 
reinsurance program under the national contribution rate would stay in 
that State and be used to make reinsurance payments on valid claims 
submitted by reinsurance-eligible plans in that State. There are two 
methods we considered for determining contributions using a national 
rate: (1) A percent of premium amount applied to all contributing 
entities, and (2) a flat per capita amount applied to all covered 
enrollees of contributing entities. In paragraph (b)(1) (now paragraph 
(e)), we proposed the percent of premium method as the fairest method 
by which to collect these contributions.
    In paragraph (b)(2) (now paragraph (e)), we also proposed requiring 
that all contribution funds collected for reinsurance payments be used 
for reinsurance, and all contribution funds collected for the U.S. 
Treasury be paid to the U.S. Treasury. In paragraph (b)(3)(i), we 
proposed that a State may collect more than would be collected under 
the national rate, if the State believes that these amounts are not 
sufficient to cover the payments it will

[[Page 17227]]

make under the payment formula. In paragraph (b)(3)(ii) (now paragraph 
(g)), we proposed permitting a State to collect more than the amount 
collected at the national rate to cover the administrative costs of the 
applicable reinsurance entity.
    We also considered the frequency with which applicable reinsurance 
entities should collect contribution funds from contributing entities. 
For example, applicable reinsurance entities could collect contribution 
funds intended for reinsurance payments and payments to the U.S. 
Treasury on a monthly basis beginning in January 2014 so that 
reinsurance payments could begin in February 2014.
    Considering the comments received, we are finalizing these 
provisions with the following modifications:
    In paragraph (a), we are revising the proposed provisions so that 
HHS would collect contribution funds from self-insured plans and third-
party administrators on their behalf, whether or not a state elects to 
establish a reinsurance program. This policy is consistent with 
traditional Federal oversight of self-insured plans. States that 
establish a reinsurance program would have the option, but not the 
obligation, to collect contributions from issuers in the fully insured 
market. If a State does not elect to collect from the fully insured 
market, HHS would collect contributions from both fully insured and 
self-insured plans.
    In paragraph (b), we are clarifying that a State that elects to 
establish a reinsurance program must generally notify HHS by September 
1 of the calendar year that is two years prior to the applicable 
benefit year if the State plans to collect reinsurance contributions 
from fully insured plans. However, due to States' anticipated workload 
in establishing Exchanges in the fall of 2012, we are postponing the 
deadline for notifying HHS of a State's intent to collect reinsurance 
contributions from fully insured plans to December 1, 2012, for the 
2014 benefit year (with the notification being required by September 1 
of the calendar year two years prior to the applicable benefit year for 
any benefit year after 2014). The State's notification will be 
effective for the applicable benefit year and each subsequent benefit 
year during which reinsurance-related activities continue.
    Paragraph (d) describes how contribution funds collected by HHS 
will be distributed: HHS will distribute the reinsurance contributions 
collected to the applicable reinsurance entity for a State, net of the 
State's share of the U.S. Treasury contribution and administrative 
expenses incurred when performing reinsurance functions under this 
subpart.
    In paragraph (e), we are clarifying that HHS will set the national 
contribution rate in the annual HHS notice of benefit and payment 
parameters along with the proportion of the national contribution rate 
that will be allocated to reinsurance payments, payments to the U.S. 
Treasury, and administrative expenses of the applicable reinsurance 
entity for the State or HHS when performing reinsurance functions under 
this subpart.
    In paragraph (g), we are clarifying that a State may elect to 
collect more than the amounts that would be collected based on the 
contribution rate to provide funding for administrative expenses or 
additional reinsurance payments. This policy was proposed in paragraph 
(b)(3) of the proposed rule. In paragraph (h), we describe the 
administration of additional State collections. If a State establishes 
a reinsurance program and elects to collect more than the amounts that 
would be collected based on the national contribution rate for 
administrative expenses, then the State must notify HHS within 30 days 
after publication of the proposed annual HHS notice of benefit and 
payment parameters of the additional contribution rate that it elects 
to collect for administrative expenses. Further, the State must ensure 
that the State's applicable reinsurance entity collects any additional 
amount for administrative expenses, or accepts additional amounts from 
HHS in accordance with the State's election under paragraph (a)(1). For 
reinsurance payments, notwithstanding paragraphs (a)(1) and (a)(2), the 
State must ensure that the State applicable reinsurance entity collects 
all additional reinsurance contributions from contributing entities for 
the purpose of reinsurance payments. In sum, HHS will only collect 
additional amounts for administrative expenses for a State, and will 
not collect additional amounts for reinsurance payments for a State. 
The collection of additional amounts for reinsurance payments must be 
carried out by the State's applicable reinsurance entity. We are also 
making a number of clarifying modifications throughout this section.
    Comment: We received many comments expressing concern that States 
may lack the ability to collect contributions from self-insured plans, 
due to the States' lack of authority and oversight of self-insured 
plans.
    Response: We are revising the proposed collection process so that 
HHS collects from the self-insured market in all States. We believe 
that this change in collection process will create a more efficient, 
centralized collection from self-insured plans that is beneficial to 
both States and third party administrators on behalf of group health 
plans. This collection is authorized under HHS' authority under section 
1321(c)(1) of the Affordable Care Act to ``take such actions as are 
necessary to implement'' the requirements of title I of the Affordable 
Care Act.
    Comment: We received overwhelming support for the proposed use of a 
national uniform contribution rate. However, one commenter expressed 
concern with this approach, and suggested a State-level allocation to 
make the redistribution of contribution funds proportional to the size 
of the State's individual market.
    Response: Consistent with the majority of comments, we believe that 
a national uniform contribution rate is the better approach because it 
is simpler and more easily implemented for a transitional program. The 
statute does not specify the approach for collection of contributions, 
but requires HHS to consult with the NAIC in determining provisions for 
the reinsurance program. NAIC supported the use of a national 
contribution rate because it minimizes the burden on States and issuers 
and is more equitable. NAIC also stated in its official response to the 
proposed rule that a State-level allocation would be more 
administratively burdensome for issuers and States and would not 
guarantee fairness in the collection of contributions. While one 
commenter expressed concern that use of a national contribution rate 
would result in underfunding of reinsurance, we believe that a State's 
right to increase the contribution rate addresses this concern.
    Comment: Many commenters supported the proposed percent of premium 
method, arguing that a percent of premium method better allocates 
contributions to States with higher premium and healthcare costs. A few 
commenters opposed use of a percent of premium method due to its 
complexity and a concern that it could adversely impact the market.
    Response: HHS has considered the advantages and disadvantages of 
both methods, along with the overarching goals for the transitional 
reinsurance program, which are to (1) Stabilize premiums by offering 
protection to health insurance issuers against medical cost overruns 
for high-cost enrollees in the individual market; (2) provide early and 
prompt payment of reinsurance funds during the benefit year; (3) 
minimize administrative burden; and (4)

[[Page 17228]]

allow contributions collected by or on behalf of a State to remain in 
that State. Given these goals and the time-limited nature of the 
program, we believe that the per capita approach will be less complex 
to administer, particularly with regard to the self-insured market. 
Further, the per capita approach will better enable us to maintain the 
goals of the reinsurance program by providing issuers with a more 
straightforward approach in making contributions to the reinsurance 
program with minimal administrative burden. A State would still be 
allowed to collect additional contributions towards reinsurance 
payment.
    While several commenters expressed support for our original 
proposal of a percent of premium method, these same stakeholders also 
support timely collection and payment in the reinsurance program, which 
is an important component of the premium stabilization provided by the 
reinsurance program. We believe that the per capita approach will best 
achieve this goal.
4. Calculation of Reinsurance Payments (Sec.  153.230)
    In Sec.  153.230 of the proposed rule, we set the payment policy 
for the reinsurance program based upon consultation with the American 
Academy of Actuaries. The reinsurance payment policy must address two 
basic issues: (1) How to determine the individuals who are covered by 
reinsurance, and (2) how to determine appropriate payment amounts. 
Given the short-term nature of the program, our primary objective is to 
select an implementation approach that is administratively and 
operationally simple, but satisfies the goals of the program. 
Therefore, we prefer to use reliable and readily accessible data 
sources that will allow health insurance issuers to receive prompt 
payment. We proposed in paragraph (a) that coverage be based on items 
and services within the essential health benefits for an individual 
enrollee that exceeds an attachment point.
    In paragraph (b), we proposed to announce the reinsurance payment 
formula and State-specific values for the attachment point, reinsurance 
cap, and coinsurance rate in the annual HHS notice of benefit and 
payment parameters. We believe that publishing this information in a 
Federal notice is the best approach for announcing the attachment point 
and reinsurance cap, as these values may change in calendar years 2015 
and 2016. The Affordable Care Act does not suggest that the three-year 
reinsurance program should replace commercial reinsurance or internal 
risk mitigation strategies. There will be a continued need for ongoing 
commercial reinsurance. Therefore, we proposed establishing a 
reinsurance cap set at a level approximately equal to the attachment 
point for traditional commercial reinsurance.
    In paragraph (b)(1) (now paragraph (c)), we proposed that the 
reinsurance payment amount be a percentage of those costs above an 
attachment point and below a reinsurance cap. However, we believe 
States may have unique situations, and will permit a State that 
establishes a reinsurance program to establish its own payment formula 
by varying the attachment point, coinsurance rate, and reinsurance cap. 
The preamble to the proposed rule contains a further discussion of the 
reasoning and background behind the policy proposed in paragraph 
(b)(1).
    We proposed using medical cost experience to identify eligible 
enrollees for which health insurance issuers would receive reinsurance. 
This approach for calculating reinsurance payments considers costs only 
for high-risk individuals. However, use of a reinsurance cap, as well 
as the fact that a health insurance issuer pays only a portion of costs 
above the attachment point and below the cap, may incentivize health 
insurance issuers to control costs.
    We proposed in paragraph (b)(2) (now moved to Sec.  
153.220(f)(2)(ii)), that all payments to the general fund of the U.S. 
Treasury be made on a frequency to be determined by HHS. We have also 
considered the frequency with which payments should be made to the U.S. 
Treasury. For example, the applicable reinsurance entities could remit 
payment on a monthly or quarterly basis commencing February 28, 2014 
and continuing through January 31, 2017 or until States have remitted 
the full amount of all payments. We proposed in paragraph (c) (now 
paragraph (d)), to allow some degree of State variation from the 
reinsurance parameters proposed by HHS. We proposed in paragraph (c)(1) 
(now paragraph (d)(1)), that the State may alter the attachment point, 
reinsurance cap, including elimination of the cap, and coinsurance 
rate. We proposed in paragraph (c)(2) (now paragraph (d)(2)), that 
States must publish any modification to the reinsurance payment formula 
and parameters in a State notice of benefit and payment parameters as 
described in subpart B of this part. We proposed in paragraph (c)(3) 
(now paragraph (d)(3)), that the State must ensure that all proposed 
alterations to the reinsurance formulas proposed by HHS, including 
payments and contributions, result in the applicable reinsurance entity 
having sufficient contributions to meet all of its obligations for 
payments. These alterations to reinsurance parameters do not require 
HHS approval.
    We believe that a State may have many reasons to make adjustments 
to the HHS reinsurance payment formula. First, the State may decide to 
increase reinsurance payments above the levels established by HHS. 
Second, the State may have additional unexpended funds from a prior 
contribution period and may seek to adjust the reinsurance formulas to 
disburse the unexpended funds. Finally, the State may elect to pay the 
same amounts recommended by HHS, but may wish to modify the frequency 
of those payments.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions, with the 
following modifications:
    In paragraph (a), we are no longer requiring that payment be linked 
to the coverage of essential health benefits. In paragraph (b), we are 
clarifying that the States must use, subject to any modifications made 
pursuant to paragraph (d), the payment formula and values for the 
attachment point, reinsurance cap, and coinsurance rate for each year 
commencing in 2014 and ending in 2016, established in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year. We are removing paragraph (b)(2) due to the new policy on 
collections and payments to the U.S. Treasury set forth in Sec.  
153.220. We are revising paragraph (c)(3) (now paragraph (d)(3)), to 
clarify that any State modification to the reinsurance payment formula 
pursuant to paragraph (d)(1) must be reasonably calculated to ensure 
that contributions received toward reinsurance are sufficient to cover 
payments that the applicable reinsurance entity is obligated to make 
under that State formula for the given benefit year for the reinsurance 
program. We are making a number of clarifying modifications throughout 
this section.
    Comment: We received a number of comments that emphasized that 
reinsurance programs typically are tied not to underlying conditions 
that lead to high enrollee medical costs, but to claims costs beyond a 
specific dollar threshold within a coverage period, regardless of 
enrollees' health condition. Several commenters stated that coverage of 
specific conditions under a reinsurance program could lead to 
discriminatory practices toward certain individuals, with one commenter 
noting

[[Page 17229]]

that identifying medical conditions as a basis for reinsurance payments 
would require more extensive verification than usually required by 
traditional reinsurance. Another commenter stated that reinsurance that 
makes payments based solely on incurred costs does not encourage 
efficient and effective care.
    Response: We are finalizing the provisions that base reinsurance 
payments on total claims costs, rather than specific diagnoses. We 
believe that because reinsurance payments are likely to only reimburse 
a portion of claims costs above the attachment point and will pay no 
costs above the reinsurance cap, there will still be incentives for an 
issuer to encourage efficient and effective care.
    Comment: We received a few comments suggesting that States be 
permitted to use one of the other approaches proposed by the American 
Academy of Actuaries for determining eligible individuals for 
reinsurance.
    Response: In consultation with HHS, the American Academy of 
Actuaries proposed four approaches for determining eligible individuals 
for the reinsurance program, described in the preamble to the proposed 
rule. From those proposals, we selected the approach based on total 
claims costs. We believe that permitting States the flexibility to 
select one of the other American Academy of Actuaries approaches would 
unnecessarily burden issuers operating in multiple States. Because 
reinsurance is a transitional program, we wish to avoid that additional 
burden on issuers, and are finalizing the proposed policy that uses 
total claims cost.
    Comment: We received many comments supporting our proposed approach 
for calculating reinsurance payments based on the use of an attachment 
point, coinsurance rate, and reinsurance cap. One commenter expressed 
concern that the proposed approach may reduce the incentive to control 
costs.
    Response: We understand the concerns regarding cost control. 
However, since issuers are likely to not be fully reimbursed under the 
reinsurance program for claims costs above the attachment point, we 
believe that they will continue to have an incentive to control costs.
    Comment: We received a comment asking for clarification on whether 
reinsurance payments are made on an incurred basis.
    Response: As indicated in the proposed definitions for ``attachment 
point,'' ``coinsurance rate,'' and ``reinsurance cap,'' we intend for 
claims costs to be measured on an incurred basis for purposes of 
calculating reinsurance payments.
5. Disbursement of Reinsurance Payments (Sec.  153.240)
    In Sec.  153.240, we proposed parameters for the timing of 
reinsurance payments. In paragraph (a) of this section, we proposed 
that States must ensure that the applicable reinsurance entity collects 
from health insurance issuers of reinsurance-eligible plans data 
required to calculate payments described in Sec.  153.230, according to 
the data requirements and data collection frequency specified by the 
State in the State notice of benefit and payment parameters described 
in subpart B, or in the annual HHS notice of benefit and payment 
parameters.
    In paragraph (b), we proposed that a State must ensure that each 
applicable reinsurance entity makes payments that do not exceed 
contributions and makes payments to health insurance issuers of 
reinsurance-eligible plans according to Sec.  153.230. We also proposed 
in paragraph (b)(2) (now paragraph (b)(1)), to allow a State to reduce 
payments on a pro rata basis to match the amount of contributions 
received by the State in a given reinsurance year, and to require that 
pro rata reductions made by the State be made in a fair and equitable 
manner for all health insurance issuers in the individual market.
    In paragraph (b)(3) (now paragraph (b)(2)), we proposed that a 
State be required to ensure that an applicable reinsurance entity make 
payments as specified in Sec.  153.410(b) to the issuer of a 
reinsurance-eligible plan after receiving a valid claim for payment. 
Finally, in paragraph (c), we proposed that for each benefit year, the 
State be required to maintain all records related to the reinsurance 
program for 10 years, consistent with requirements for record retention 
under the False Claims Act.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions with the 
following modifications:
    We are clarifying in paragraph (b) that the State must ensure that 
each applicable reinsurance entity does not make reinsurance payments 
that exceed contributions received to date. We are removing paragraph 
(b)(1) because those requirements are covered in Sec.  153.230 and 
paragraph (b)(2) (formerly paragraph (b)(3)). We are clarifying in 
paragraph (b)(1) (formerly paragraph (b)(2)), that if a State, or HHS 
on behalf of the State, determines that reinsurance payments requested 
for a calendar year will likely exceed the reinsurance contributions 
that will be received for the year, the State, or HHS on behalf of the 
State, may reduce reinsurance payments, so long as the manner in which 
payments are reduced is fair and equitable for all health insurance 
issuers in the individual market. We are making a number of clarifying 
modifications throughout this section.
    Comment: We received many comments related to the timing of 
reinsurance payments. Some commenters asked that States be provided 
flexibility in determining payment timeframes. A few commenters 
suggested that contributions be collected monthly, but that payments be 
made quarterly. One commenter suggested providing early funds to small 
carriers to cover potential cash flow shortfalls.
    Response: We recognize the importance of providing issuers with 
reinsurance payments in a timely manner, but we believe it is prudent 
to maintain flexibility in payment timing to ensure that sufficient 
contributions are available to fund those payments. We are finalizing 
the proposal permitting States to establish the payment timeframe in 
the State notice of benefit and payment parameters described in subpart 
B. For reinsurance programs established by HHS on behalf of the State, 
HHS will publish the payment timeframe in the HHS notice of benefit and 
payment parameters. We anticipate that States will take into account 
the cash flow needs of small issuers in setting the reinsurance payment 
timeframes.
    Comment: We received several comments suggesting that HHS prohibit 
health insurance issuers from passing reinsurance payment shortfalls on 
to providers.
    Response: We understand the concern raised by the commenters, and 
we encourage providers to work with plan issuers concerning this 
matter.
    Comment: We received several comments on the duration of the record 
maintenance requirement. Commenters suggested retention requirements 
ranging from two to fifteen years, with many commenters suggesting a 
five-year period.
    Response: We believe that the record retention requirements for 
reinsurance should be consistent with other Federal record retention 
requirements, and are finalizing the proposed provision that requires 
records to be retained for ten years, as explained above.
6. Coordination With High-Risk Pools (Sec.  153.250)
    In Sec.  153.250(a) of the proposed rule, we proposed to codify in 
regulation section 1341(d) of the Affordable Care

[[Page 17230]]

Act, which requires that States eliminate or modify high-risk pools to 
the extent necessary to carry out the reinsurance program. In paragraph 
(a), we proposed to codify in regulation the above-referenced section. 
In paragraph (b), we proposed to permit a State that continues its 
high-risk pool to coordinate its high-risk pool with its reinsurance 
program to the extent it conforms with the provisions of this subpart.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions with no 
modifications.
    Comment: We received several comments recommending that high-risk 
pools be permitted to be offered as individual market plans eligible 
for reinsurance. One commenter requested that reinsurance contributions 
be used to fund the costs of operating State high-risk pools during the 
three-year period. Several commenters suggested not combining 
reinsurance funds with funds for high-risk pools, and opposed 
permitting high-risk pools to receive reinsurance payments.
    Response: We clarify in Sec.  153.400 that State high-risk pools 
are excluded from contributions and payments. We clarify, as we did in 
the proposed rule, that none of the funds collected for reinsurance can 
be used for any purpose other than for making payments under the 
reinsurance program or for administering that program. We understand 
the concerns of some commenters regarding the transition of high-risk 
pool participants and point out that the Exchanges will work with State 
high-risk pools to ensure a smooth transition and continuity of care 
for these enrollees. We believe that the reinsurance program, along 
with the risk adjustment and risk corridors programs, were designed in 
anticipation of new high-cost enrollees, some of whom may currently be 
receiving coverage through State high-risk pools.
    Comment: We received a comment suggesting coordination between PCIP 
and the transitional reinsurance program.
    Response: Section 1101 of the Affordable Care Act requires 
coordination between PCIP and the Exchanges. To the extent that 
individuals previously enrolled in PCIP enroll in reinsurance-eligible 
plans, issuers will have access to the reinsurance program for these 
enrollees.

D. Subpart D--State Standards Related to the Risk Adjustment Program

    In subpart D, we proposed standards for States with respect to the 
risk adjustment program required under section 1343 of the Affordable 
Care Act. Parallel provisions for health insurance issuers were 
proposed in subpart G of this part. Section 1343 provides for a program 
of risk adjustment for all non-grandfathered plans in the individual 
and small group market both inside and outside of the Exchange. The 
risk adjustment program is intended to reduce or eliminate premium 
differences between plans based solely on expectations of favorable or 
unfavorable risk selection or choices by higher risk enrollees in the 
individual and small group market. The risk adjustment program also 
serves to level the playing field inside and outside of the Exchange, 
reducing the potential for excessive premium growth or instability 
within the Exchange. We interpret section 1343 to mean that risk pools 
must be aggregated at the State level, even if a State decides to 
utilize regional Exchanges. Furthermore, section 1343(c) indicates that 
risk adjustment applies to individual and small group market health 
insurance issuers of non-grandfathered plans within a State, both 
inside and outside of the Exchange. Accordingly, similar to our 
approach in reinsurance, if multiple States contract with a single 
entity to administer risk adjustment, risk may not be combined across 
State lines, but must be pooled within each State.
1. Reserved (Sec.  153.300)
    Section 153.300 of the proposed rule defined a number of terms used 
in this subpart. Those definitions have been moved to subpart A. We are 
reserving this section for future use.
2. Risk Adjustment Administration (Sec.  153.310)
    In this section, in paragraph (a)(1), we specified that any State 
electing to establish an Exchange is eligible to establish a risk 
adjustment program. Pursuant to section 1321(c)(1) of the Affordable 
Care Act, we proposed in paragraph (a)(2) that for States that do not 
operate an Exchange, HHS will establish a risk adjustment program. We 
also clarified in paragraph (a)(3) that HHS will administer all of the 
risk adjustment functions for any State that elects to establish an 
Exchange but does not elect to administer risk adjustment. We are 
finalizing this provision, with a number of clarifying modifications.
    Comment: Many commenters supported permitting States to defer 
operation of a risk adjustment program to HHS. One commenter 
recommended that any State should be eligible to operate a risk 
adjustment program, whether or not the State is establishing an 
Exchange.
    Response: An effective risk adjustment program is critical to 
prevent adverse selection and stabilize premiums inside and outside the 
Exchanges. Developing a risk adjustment program is methodologically and 
operationally complex. We believe that, particularly in the initial 
years, States may wish to defer risk adjustment operation to HHS in 
order to focus resources on establishing Exchanges. We are therefore 
finalizing these provisions to provide States the option to operate 
risk adjustment if they establish Exchanges. Because we believe that 
the Federally Facilitated Exchange should be operated in coordination 
with a risk adjustment program that is closely tied to its 
implementation, States not operating Exchanges and States entering into 
a partnership with or relying entirely on the Federally Facilitated 
Exchange will not be permitted to operate a risk adjustment program. We 
will clarify in future guidance the process through which a State will 
notify HHS of its choice to operate risk adjustment if it establishes 
an Exchange beginning in 2014 or any subsequent year.
    In paragraph (b), we clarified that a State may elect to have an 
entity other than the Exchange perform the risk adjustment functions of 
this subpart, provided that the selected entity meets the requirements 
for eligibility to serve as an Exchange set forth in Sec.  155.110 of 
the proposed Exchange Establishment rule. Considering the comments 
received, we are finalizing this provision, noting that the definition 
of an entity eligible to serve as an Exchange has been modified from 
the proposed definition.
    Comments: Commenters offered varying opinions regarding the 
requirements for entities to be eligible to administer risk adjustment. 
Several commenters urged HHS to include stronger provisions prohibiting 
conflicts of interest. Those commenters stated that all members of the 
board of a risk adjustment entity should be free of financial ties to 
issuers, and that consumer representation on the board should be 
required. One commenter believed that an entity's eligibility to be a 
risk adjustment entity should be based on the entity's experience, and 
not on the requirements governing entities carrying out Exchange 
functions. Other commenters stated that the requirements on entities 
eligible to administer risk adjustment and carry out Exchange functions 
were overly restrictive, noting that the requirements would exclude 
State regulators, such as a State Department of Insurance. This 
commenter asked that the regulator in

[[Page 17231]]

each State be eligible to administer risk adjustment. Two commenters 
suggested that entities be eligible to administer both risk adjustment 
and reinsurance.
    Response: We believe that a State may have a single entity 
administer reinsurance and risk adjustment, provided that the entity 
meets the separate requirements to administer both programs. We note 
that to be eligible to administer reinsurance, an entity must meet the 
definition outlined in Sec.  153.20. We also appreciate concerns that 
risk adjustment entities may have board members with conflicts of 
interest and, further, that because risk adjustment involves the 
transfer of money between plans, these concerns may be especially 
relevant for this program. We encourage States to weigh these concerns 
when establishing a risk adjustment entity. However, we seek, to the 
extent possible, consistency between the requirements to serve as a 
risk adjustment entity and the requirements to serve as an entity 
performing other Exchange functions.
    In paragraph (c), we proposed timeframes for the risk adjustment 
process. We proposed that all payment calculations commence with the 
2014 benefit year. We sought comment on the appropriate deadline by 
which risk adjustment must be completed each year. In response to 
comments, we are finalizing the standard that risk adjustment be 
implemented beginning with the 2014 benefit year, and are including a 
requirement that each issuer be notified of risk adjustment payments 
owed to, or charges owed by, the issuer by June 30 of the year 
following the benefit year. We believe that this deadline best balances 
the need to coordinate risk adjustment payments and charges with other 
programs, and the need to ensure that high quality risk adjustment data 
is available to support the program.
    Comments: We received a number of comments recommending that risk 
adjustment be performed before completion of the MLR calculation 
process. Two commenters specified that risk adjustment should be 
completed by late May of the year following the benefit year in order 
to accommodate the Federal MLR reporting deadline of June 1. Other 
commenters stated that it would be difficult to coordinate risk 
adjustment payments with MLR reporting. Two commenters suggested 
extending the MLR deadline for 2014 through 2016. One commenter 
suggested delaying the implementation of risk adjustment until 2016.
    Response: The risk adjustment process relies in part on high 
quality claims data. Allowing for claims run-out after the benefit year 
increases the amount and quality of claims data because issuers will 
have more time to receive, review and pay claims made during the 
benefit year. Better quality data will lead to more accurate risk 
scores, which ultimately feed into the calculation of plan average 
actuarial risk and the calculation of payments and charges.
    In the preamble to the proposed rule, we discussed requiring that 
States complete the risk adjustment process by June 30 of the year 
following the benefit year, or June 30, 2015 for the benefit year 2014. 
States would be free to set a payment schedule (including interim 
payments throughout the benefit year), but would be required to comply 
with the June 30 deadline. Many commenters agreed that June 30 was a 
reasonable deadline for completion of the risk adjustment process. We 
have included in the final rule a June 30 deadline for the completion 
of the risk adjustment process. We believe that 6 months following the 
benefit year is a reasonable timeframe to complete the risk adjustment 
process.
    The deadline to submit MLR reports to the Federal government is 
June 1 of the year following the calendar year experience being 
reported. MLR calculations must take into account risk adjustment 
payments and charges. We recognize that our proposed deadline is 
inconsistent with the current Federal MLR reporting deadline, but 
believe that allowing sufficient time to collect quality data to 
support risk adjustment is extremely important and would be extremely 
difficult to complete within current MLR timeframes. We will work to 
resolve this issue prior to 2014.
    Comments: A few commenters suggested that risk adjustment payments 
be made quarterly, with the final payment to be made after the first 
quarter of the year following the benefit year.
    Response: We believe that States should have the flexibility to set 
a payment schedule that best suits their program administration. 
Therefore, we did not include a requirement that States adhere to a 
specific payment schedule.
    In the preamble to the proposed rule, we discussed our belief that 
States should provide HHS with a summary report of risk adjustment 
activities for each benefit year in the year following the calendar 
year covered in the report. The final rule directs States to submit an 
annual summary report of their program. We believe that this report 
will permit States to learn from other States' experience and will help 
HHS evaluate the implementation of the risk adjustment program. We will 
specify the contents of the report in future guidance, but expect the 
report would include information such as plan average actuarial risk 
score and the risk adjustment payment or charge for each risk 
adjustment covered plan in the State, trends in risk scores over time, 
evidence of upcoding, and other risk adjustment-related elements. We 
expect that States will make summary reports publicly available. We 
believe this report will facilitate periodic evaluation, oversight, and 
continuous improvement of the risk adjustment program.
    Comment: Several commenters supported the concept of providing 
summary reports. However, one commenter was unwilling to fully support 
the requirement until knowing the content that would be required in the 
report. Two commenters suggested that the report include the average 
actuarial risk for each plan, the risk adjustment charge or payment for 
each plan, and information on risk scores and cost trends, including 
evidence of upcoding and error rates determined under the most recently 
completed risk adjustment data validation audits. We also received 
comments requesting that HHS require that State risk adjustment 
entities report information about their States' risk adjustment program 
to issuers. Finally, we received one comment suggesting that all funds 
collected by the risk adjustment entity be required to be used only in 
connection with the risk adjustment program.
    Response: Annual summary reports can serve as a tool for States and 
HHS to monitor and evaluate State programs across the country. HHS will 
also be able to use the reports to provide technical assistance to 
States administering risk adjustment programs when needed. The 
technical assistance will serve not only to improve a State's risk 
adjustment program, but will reduce the burden on each State to 
evaluate and improve its risk adjustment program. The information in 
the annual reports will also be useful in evaluating the implementation 
of the Federally developed risk adjustment methodology and other 
Federally certified risk adjustment methodologies. For these reasons, 
we have added paragraph (d) to this final rule to ensure that States 
submit annual risk adjustment program reports to HHS.
3. Federally Certified Risk Adjustment Methodology (Sec.  153.320)
    Section 1343(b) of the Affordable Care Act requires HHS to 
establish criteria and methods for risk adjustment in coordination with 
the States. We

[[Page 17232]]

interpret this provision to mean that HHS will establish a baseline 
methodology to be used by a State, or HHS on behalf of the State, in 
determining plan average actuarial risk. In Sec.  153.300 of the 
proposed rule, we defined the risk adjustment methodology as 
encompassing the risk adjustment model, the calculation of plan average 
actuarial risk, and the calculation of payments and charges.
    We proposed in paragraph (a)(1) that a Federally certified risk 
adjustment methodology be developed by HHS. We proposed in paragraph 
(a)(2) that a State-submitted alternate risk adjustment methodology may 
become a Federally certified risk adjustment methodology through HHS 
certification. For the reasons described in the proposed rule and 
considering the comments received, we are finalizing these provisions, 
with certain clarifying modifications.
    Comments: One commenter requested clarification on when State 
alternate methodologies would be required to be submitted and would be 
evaluated. Multiple commenters expressed a preference that State and 
Federal methodologies be announced early enough to give sufficient time 
for issuers to incorporate anticipated risk adjustment payments or 
charges into their rates.
    Response: While the proposed timing necessitates a short window for 
submission and evaluation of the alternate risk adjustment 
methodologies, the timeframe permits a State to evaluate the 
methodology proposed by HHS in the proposed annual HHS notice of 
benefit and payment parameters. This timeframe also permits HHS to 
publish all certified methodologies at one time in the final annual HHS 
notice of benefit and payment parameters. In future years, HHS will 
evaluate whether it should accept and evaluate applications for 
alternate risk adjustment methodologies on an earlier timeframe. 
However, in the initial year, the HHS methodology will likely not have 
been fully developed in time to benchmark alternate risk adjustment 
methodologies on an earlier timeframe.
    We proposed in paragraph (b)(1) of this section that a State that 
is operating a risk adjustment program must use one of the Federally 
certified risk adjustment methodologies that HHS will publish in an 
annual HHS notice of benefit and payment parameters. We proposed that 
State notices of benefit and payment parameters include a full 
description of the risk adjustment model, including, but not limited 
to: (1) Demographic factors, diagnostic factors, and utilization 
factors (if any); (2) the qualifying criteria for establishing that an 
individual is eligible for a specific factor; (3) the weights assigned 
to each factor; and (4) the schedule for the calculation of individual 
risk scores. We sought comments on other information that should be 
included in this notice. In paragraph (b)(2), we proposed that the risk 
adjustment methodology will also describe any adjustments made to the 
risk adjustment model weights when calculating average actuarial risk, 
including premium rating variation.
    Considering the comments received, we are finalizing this 
provision, with the following modifications: We are clarifying that 
notices must also include a description of the calculation of plan 
average actuarial risk, a description of the calculation of payments 
and charges, and a description the risk adjustment data collection 
approach. We are also including a number of other clarifying 
modifications.
    Comments: We received several comments supporting a structure in 
which HHS will develop a risk adjustment methodology but States have 
the option to submit alternate methodologies for approval by HHS. 
Several commenters preferred that HHS establish one national 
methodology. Other commenters suggested that States be required to 
justify deviation from the methodology developed by HHS. Two commenters 
believed that HHS approval of State methodologies was unnecessary, and 
that any State alternate methodology should be deemed certified and 
available to all States. Some commenters suggested that all 
methodologies be subject to notice and comment.
    Response: We recognize that States may wish to employ alternate 
risk adjustment methodologies, and believe that alternate approaches 
could achieve results similar to those that will be achieved by the 
methodology developed by HHS. We agree that States should submit a 
rationale for their proposed alternate methodology for certification. 
We are therefore finalizing the proposed rule, which required 
publication of a rationale, with a number of clarifying modifications. 
HHS will develop a Federal risk adjustment methodology, and States that 
wish to deviate from that methodology may submit an alternate 
methodology to HHS for approval. States must specify in their State 
notice of benefit and payment parameters which of the Federally 
certified methodologies published in the annual HHS notice of benefit 
and payment parameters they will use. We believe that the publication 
of the Federal methodology in a notice of benefit and payment 
parameters addresses certain commenters' desire that interested parties 
be given opportunity to comment on the methodology proposed by HHS. HHS 
will provide an opportunity for public comment when it administers risk 
adjustment on behalf of a State. State law will govern what 
administrative process is necessary when a State adopts a risk 
adjustment methodology, subject to the limits of this final rule and 
the annual HHS notice of benefit and payment parameters.
    In paragraph (c), we proposed that HHS will specify in the annual 
HHS notice of benefit and payment parameters the Federally certified 
risk adjustment methodology that will apply when HHS operates the risk 
adjustment program. We are finalizing this provision, with a number of 
clarifying modifications.
    The statute is not specific with respect to the method by which 
States are expected to determine the precise value of payments and 
charges, so we requested comment on two payments and charges 
methodologies and whether there are alternate methodologies that might 
be used. We received a number of comments requesting consistency in 
methodology from State to State. Therefore, we plan to establish a 
national method for the calculation of payments and charges that States 
may not vary. A national method for the calculation of payments and 
charges ensures a degree of consistency in the risk adjustment program 
from State to State while allowing States to vary certain elements of 
the program.
    Comments: Many commenters recommended that HHS establish one 
national methodology or limit States' ability to deviate from the 
methodology developed by HHS. Other commenters supported giving States 
the flexibility to propose alternate methodologies so long as those 
methodologies are as robust as the one proposed by HHS.
    Response: The calculation of payments and charges requires 
selection of a baseline premium, for example, a plan average or State 
average premium. That premium basis is multiplied by the plan average 
actuarial risk to calculate risk adjustment payments or charges, and 
requires balancing if payments do not equal charges. Thus, the 
calculation of payments and charges affects the amount of funds 
transferred from low-risk to high-risk plans, and can affect premiums 
in low-risk and high-risk plans.
    Although a national standard methodology for calculating payments 
and charges provides a degree of consistency from State to State, we 
recognize it may also limit States' ability

[[Page 17233]]

to implement novel methodologies. We believe that there may be 
potential to introduce State variation in the calculation of payments 
and charges in the future. We also believe that requiring a national 
methodology for calculating payments and charges initially, and leaving 
open the possibility of permitting State variation in later years, 
relieves States from the burden of developing such a methodology in the 
first year, and provides a starting point for States seeking to create 
alternate methodologies in later years.
4. State Alternate Risk Adjustment Methodologies (Sec.  153.330)
    We proposed allowing States to utilize alternate risk adjustment 
methodologies, provided that States taking advantage of this 
flexibility submit their proposed alternate risk adjustment 
methodologies for HHS review and certification. We proposed in 
paragraph (a)(1) the information about the State's proposed risk 
adjustment methodology that the State must include in its request for 
certification. In paragraph (a)(2), we proposed that all requests 
include information relating to certain criteria to be used in the 
evaluation of the request.
    For the reasons described in the proposed rule, and considering the 
comments received, we are finalizing these provisions with the 
following modifications: We are including new language requiring States 
to provide a description of the risk adjustment methodology. This 
change aligns this provision with changes made to Sec.  153.320 
discussed above. We are also making a number of clarifying 
modifications throughout this section.
    Comments: Several commenters requested greater specificity about 
the validation requirements for the proposed alternate risk adjustment 
methodologies. One commenter requested that HHS permit States to vary 
payments based on whether a plan participates in the Exchange or the 
Small Business Health Options Program. Another commenter suggested that 
States be permitted to vary payments based on whether the issuer 
implements programs to improve population health. Other commenters 
suggested other requirements for certification of alternate risk 
adjustment methodologies. For example, one commenter recommended 
requiring that an alternate methodology include either a separate model 
for pediatrics or demonstrate the model's effectiveness in pediatric 
populations. Another commenter recommended requiring States to specify 
how they will move from a retrospective to a prospective risk 
adjustment approach. A number of commenters supported use of a 
prospective approach, while others favored a retrospective approach. 
Some commenters supported a diagnosis-based risk adjustment model, 
while others favored a demographic approach. One commenter suggested 
that a survey-based approach be utilized.
    Response: We anticipate that a number of different approaches could 
receive Federal certification. HHS will provide further details on the 
process for receiving Federal certification for alternate risk 
adjustment methodologies in the draft annual HHS notice of benefit and 
payment parameters. State alternate methodology requests will be 
accepted up to 30 days after publication of the draft annual HHS notice 
of benefit and payment parameters, and alternate methodologies that are 
certified by HHS will be published in the final HHS notice of benefit 
and payment parameters.
    In paragraph (b), we proposed that a State that operates a risk 
adjustment program must renew HHS certification of alternate risk 
adjustment methodologies whenever changes occur, including at the time 
of recalibration, which the State must identify when initially 
requesting certification for the alternate risk adjustment model. 
Considering the comments received, we are finalizing this provision 
with the following modifications: We are including language clarifying 
that the need to obtain recertification of a recalibrated risk 
adjustment model applies to any alteration to the Federally certified 
risk adjustment methodology.
    Comment: We received two comments supporting a requirement that 
States wishing to recalibrate or otherwise change their methodology 
submit that change to HHS for approval.
    Response: We are finalizing this policy.
5. Data Collection Under Risk Adjustment (Sec.  153.340)
    As described above, a robust risk adjustment process requires data 
to support the determination of an individual's risk score and the plan 
and State average actuarial risk. In paragraph (a), we proposed that a 
State, or HHS on behalf of the State, be responsible for collecting 
data for use in the risk adjustment program. HHS considered three 
possibilities for data collection: (1) A centralized approach in which 
issuers submit raw claims data sets to HHS; (2) an intermediate State-
level approach in which issuers submit raw claims data sets to the 
State government or the entity responsible for administering the risk 
adjustment process at the State level; and (3) a distributed approach 
in which each issuer must reformat its own data to map correctly to the 
risk assessment database, and then pass on individual risk scores to 
the entity responsible for assessing risk adjustment charges and 
payments.
    Considering the comments received, we are modifying this paragraph 
as follows: Rather than specify an intermediate risk adjustment data 
collection approach, we are permitting States that elect to operate a 
risk adjustment program to choose the risk adjustment data collection 
approach that best suits their program. HHS will use a distributed 
approach when operating risk adjustment on behalf of a State. Because a 
distributed approach to data collection has not been implemented on 
this scale, we plan to evaluate the implementation and may make changes 
to the approach based on that evaluation. We are including a 
requirement that States operating risk adjustment collect or calculate, 
at a minimum, individual risk scores. This requirement minimizes the 
collection of sensitive data while allowing States to calculate rating 
variation adjustments and payments and charges. We are modifying the 
privacy and security standards applicable when a State is operating 
risk adjustment. Protecting the privacy and confidentiality of an 
individual's personal health information continues to be among HHS' 
highest priorities. Under a distributed approach, issuers will need to 
format risk adjustment data, maintain that data in a manner that 
complies with State or HHS specifications, and in some cases run risk 
adjustment software. In addition, a State, or HHS on behalf of the 
State, will not be required to collect claims data; however, the data 
validation and audit process will be more involved.
    Comments: We received a large number of comments on the collection 
of risk adjustment data, including many comments supporting HHS' 
proposed collection of risk adjustment data at the State level. A 
number of other commenters expressed concern for patient privacy under 
the proposed method of data collection. Some of those concerned about 
patient privacy did not explicitly oppose the proposed risk adjustment 
data collection approach, but encouraged HHS to collect de-identified 
data or carefully consider privacy and security standards, such as 
techniques to mask or encrypt data. We received many comments in favor 
of a distributed approach to risk adjustment data collection. These 
comments focused on the administrative complexity of transmitting 
claims data

[[Page 17234]]

to HHS and the risk of exposing private information and competitively 
sensitive data, such as unit prices for medical services. Another 
commenter suggested that States be given flexibility to choose which 
risk adjustment data collection approach to use when operating risk 
adjustment.
    Response: The transmission by issuers to HHS and the storage by HHS 
of large amounts of sensitive data pose potential risks to consumer 
privacy. A distributed approach would leverage the existing data 
infrastructure of issuers, potentially saving Federal and issuer 
resources. For these reasons, HHS will utilize a distributed approach 
to collecting risk adjustment data when operating risk adjustment on 
behalf of a State.
    We considered requiring that all States utilize a distributed 
approach to risk adjustment data collection, as HHS will do. However, 
we believe that requiring a particular approach runs counter to the 
flexibility generally afforded States by the Affordable Care Act and 
HHS.
    We proposed in paragraph (b) that the State, or HHS on behalf of 
the State, use standard HIPAA transaction standards when collecting 
data. We proposed in paragraphs (b)(1) and (b)(2) to require States to 
utilize two specific HIPAA transaction standards for risk adjustment 
data collection. In paragraph (b)(3), to address consumer privacy 
concerns, we proposed that States must utilize specific privacy 
standards in their data collection risk adjustment procedures.
    Considering the comments received, we are modifying this paragraph 
as follows: We are including a requirement that States require issuers 
to comply with the data privacy and security standards set forth in the 
State's notice of benefit and payment parameters.
    Because we maintain the flexibility for States that operate risk 
adjustment programs to choose their data collection approaches, we are 
including a requirement that States limit their collection to the 
information reasonably necessary to operate the risk adjustment 
program. For example, a State could not collect an enrollee's name, 
because that information would not be reasonably necessary to operate 
the risk adjustment program. We are prohibiting a State from collecting 
or storing any personally identifiable information for use as a unique 
identifier for an enrollee's data, unless that information is masked or 
encrypted by the issuer, with the key to that masking or encryption 
withheld from the State. The term ``personally identifiable 
information'' is a broadly used term across Federal agencies, and has 
been defined in the Office of Management and Budget Memorandum M-07-16. 
In order to reduce duplicative guidance or potentially conflicting 
regulatory language, we are not defining personally identifiable 
information in this final rule, and incorporate the aforementioned 
definition into this final rule.
    The privacy and security standards outlined above reflect the 
changes in the risk adjustment data collection approach in paragraph 
(a) of this section. We note that these standards should be read to 
represent a minimum standard to be used in the risk adjustment program. 
We expect that States will build on these minimum privacy and security 
standards when establishing a risk adjustment data collection program.
    Comment: We received a number of comments about privacy concerns 
associated with the proposed collection of risk adjustment data. Some 
commenters believed that HHS should finalize a requirement that any 
risk adjustment data collected be de-identified. Others preferred that 
data not be collected.
    Response: We are committed to applying strong privacy and security 
standards to risk adjustment data collected by States or HHS on behalf 
of a State. We are amending the proposed privacy and security standards 
so that States that limit their collection of personally identifiable 
information to that which is reasonably necessary to carry out their 
risk adjustment methodology. In paragraph (b)(4), we require States to 
implement security standards that provide administrative, technical, 
and physical safeguards consistent with the standards described in the 
HIPAA Security Rule at 45 CFR 164.308, 164.310, and 164.312. We 
recognize that the specific requirements for data collection may vary 
depending on the amount and type of data States choose to collect, and 
thus we decided to permit States to design security requirements to 
accommodate these requirements. This final rule does not preclude 
States from implementing stricter security standards, particularly if 
they choose to collect additional risk adjustment data. HHS will not be 
collecting the claims data from issuers needed to run the risk 
adjustment methodology when HHS runs risk adjustment on behalf of a 
State. HHS will issue further guidance regarding the privacy and 
security standards applicable when HHS is operating risk adjustment on 
behalf of a State.
    In paragraph (c), we proposed that States with existing all-payer 
claims databases may request an exception from the minimum standards 
for data collection. In paragraph (d), we proposed that the State must 
make certain risk adjustment data available to support other 
activities, including: recalibrating Federally certified risk 
adjustment models; verifying risk corridor submissions; and verifying 
and auditing reinsurance claims. We have removed paragraphs (c) and (d) 
because these requirements are not compatible with flexibility with 
regard to risk adjustment data collection. In the proposed rule and 
preamble, we discussed a number of ways risk adjustment data could be 
used to support other programs such as verifying risk corridor 
submissions, reinsurance payments, cost-sharing reductions, and quality 
improvement efforts. We are continuing to explore how to obtain the 
data needed to support these programs. We anticipate working closely 
with States and issuers to efficiently gather or access the data needed 
to support these programs.
    Comments: We received a few comments requesting that existing data 
collection initiatives such as all-payer claims databases be utilized 
to the fullest extent possible to support risk adjustment.
    Response: A State operating a risk adjustment program may choose to 
utilize all-payer claims databases, provided that the State complies 
with the requirements set forth in this paragraph.
    Comments: We received several comments supporting the use of risk 
adjustment data for other Affordable Care Act purposes. Two commenters 
were wary of permitting access to data for uses beyond risk adjustment 
because they view the data as sensitive and wish to limit Federal 
access to it.
    Response: We believe that HHS' use of a distributed approach for 
risk adjustment addresses many concerns regarding centralized data 
collection of risk adjustment data. We are currently exploring options 
to collect the information needed for other purposes. We believe that 
States administering a risk adjustment program should, to the extent 
possible, seek efficiencies in data collection across programs.
6. Risk Adjustment Data Validation Standards (Sec.  153.350)
    In Sec.  153.350, we proposed that States have a reliable data 
validation process, which is essential to the establishment of a 
credible risk adjustment program. In paragraph (a), we proposed that 
the State, or HHS on behalf of the State, validate a statistically 
valid sample of all issuers that submit data for risk adjustment every 
year. In paragraph (b), we proposed that the State, or HHS on

[[Page 17235]]

behalf of the State, be permitted to adjust the average actuarial risk 
for each plan based on the error rate found in the validation. In 
paragraph (c), we proposed that the State, or HHS on behalf of the 
State, be permitted to adjust payments and charges based on the changes 
to average actuarial risk. Finally, in paragraph (d), we proposed that 
the State, or HHS on behalf of the State, be required to provide an 
appeals process for issuers.
    Considering the comments received, we are finalizing this 
provision, with the following modifications: We are expanding the data 
validation requirements to include requirements applicable to a 
distributed risk adjustment data collection approach, and are making a 
number of clarifying modifications throughout this section.
    Comments: We received several comments on data validation. We 
received a number of comments supporting the proposed data validation 
requirements. For the most part, commenters supported data validation 
requirements for every issuer offering risk adjustment covered plans in 
a State. A few commenters suggested that HHS add requirements on 
States, establish a national validation methodology, or perform the 
validation itself.
    One commenter suggested that States be allowed to establish minimum 
values, under which annual data validation would not be required. For 
example, issuers with fewer than 5,000 members and less than 1 percent 
of the overall market would not be required to validate data annually; 
instead, these issuers would be required to validate data every 2 or 3 
years.
    Response: We believe that the data validation standards we are 
finalizing represent appropriate minimum standards. We believe that 
annual data validation for all issuers is necessary to ensure a robust 
risk adjustment program, and so do not believe that minimum values for 
annual data validation or data validation that occurs less frequently 
are appropriate.
    Comment: We also received a number of comments about the specific 
data validation methodology or process. Several commenters suggested 
that data validation be completed throughout the year and certified at 
the end of the year. One commenter suggested including a requirement 
that data validation be maintained for the duration of risk adjustment 
operation. One commenter suggested that diagnoses identified by health 
care providers apply even if, upon subsequent audit, HHS determines 
that the patient's medical records did not support the provider's 
diagnosis. One commenter urged that States be required to design risk 
adjustment data validation standards using a methodology similar to 
that used under the CMS-Hierarchical Condition Category system.
    Response: We believe that a State should have the discretion to 
design its risk adjustment program, including the method for data 
validation. Given that risk adjustment occurs at the State level, the 
possibility of differences from State to State do not present a 
significant problem. For this reason, we are finalizing the data 
validation requirements with the modifications described above.
    Comment: We received one comment suggesting that we insert the 
phrase ``or HHS on behalf of the State'' in paragraph (c).
    Response: In the preamble to the proposed rule, we proposed ``that 
the State, or HHS on behalf of the State, adjust payments and charges 
based on the changes to average actuarial risk.'' However, the phrase 
``or HHS on behalf of the State'' was omitted from the proposed 
regulation text in paragraph (c). We are amending the final rule text 
to be consistent with Sec.  153.350(a) and (b) of, and the preamble to, 
the proposed rule.

E. Subpart E--Health Insurance Issuer and Group Health Plan Standards 
Related to the Reinsurance Program

    In subpart E of the proposed rule, we proposed standards for health 
insurance issuers that complemented the standards for the transitional 
reinsurance program more fully described in the preamble to subpart C 
of the proposed rule. Subpart C discussed standards of the program 
applicable to States. In subpart E, we discussed the standards 
applicable to health insurance issuers and self-insured group health 
plans.
1. Reinsurance Contribution Funds (Sec.  153.400)
    In Sec.  153.400, we proposed to codify in regulation section 1341 
of the Affordable Care Act, which requires that the reinsurance program 
be funded by contribution funds from contributing entities. In 
paragraph (a), we proposed that all contributing entities make 
contributions, in a frequency and manner to be determined by the State 
or HHS, to the applicable reinsurance entity in the State. In paragraph 
(b), we proposed that if the State establishes multiple applicable 
reinsurance entities, the contributing entity must contribute an 
appropriate payment to each applicable reinsurance entity. We proposed 
in paragraph (c) (now paragraph (d)), that contributing entities be 
required to provide the data necessary for the applicable reinsurance 
entity to calculate the amounts due from each contributing entity.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions, with the 
following modifications:
    We are clarifying in paragraph (a) that a contributing entity must 
make contributions for all reinsurance contribution enrollees who 
reside in a State at the national rate and any additional contribution 
rate if a State elects to collect additional contributions. We are 
adding paragraph (a)(1), which clarifies that all contributing entities 
must make reinsurance contributions on behalf of all group health plans 
and health insurance coverage they represent except those set forth in 
paragraph (a)(2). For example, contributing entities are required to 
make reinsurance contributions on behalf of plans in the Federal 
Employee Health Benefit Program, State and local government employee 
plans, and grandfathered health plans. The Affordable Care Act requires 
these issuers and third-party administrators on behalf of self-insured 
plans to make reinsurance contributions.
    In paragraph (a)(2), we are clarifying that contributing entities 
are not required to make contributions on behalf of plans or health 
insurance coverage that consists solely of excepted benefits within the 
meaning of section 2791(c) of the PHS Act. Section 1341(b)(3)(B)(i) of 
the Affordable Care Act requires the contribution amount for an issuer 
to be based on the issuer's fully insured commercial book of business 
for all major medical products. Issuers of certain plans are excluded 
from making reinsurance contributions because those plans are not 
``commercial books of business'' or ``major medical'' products. Thus, 
private Medicare and Medicaid plans and Federal and certain State high-
risk pools are exempt from making reinsurance contributions because 
they are not a ``commercial book of business.'' Further, stand-alone 
vision and dental plans and other plans defined as excepted benefits 
within the meaning of section 2791(c) of the PHS Act are exempt because 
they are not ``major medical'' products.
    In a new paragraph (c), we are requiring that each contributing 
entity submit contributions due to the Federal applicable reinsurance 
entity on a quarterly basis beginning January 15, 2014. We believe this 
timeframe is consistent with industry practice and will allow for 
timely transfer of

[[Page 17236]]

contribution funds to States and the U.S. Treasury. We believe that 
States should have the flexibility to set the frequency of collections 
by the applicable reinsurance entity.
    In a new paragraph (d), we are clarifying that each contributing 
entity must submit to HHS and each applicable reinsurance entity, if 
the State elects to collect reinsurance contributions, data required to 
substantiate contribution amounts, in the format and with the timing 
specified by the State or HHS. For example, HHS may request this data 
in the form of a report that specifies the number of reinsurance 
contribution enrollees covered by a plan in each State in a month.
    Comment: We received a number of comments requesting clarification 
as to whether certain types of plans, such as multi-State plans and CO-
OP plans, are contributing entities.
    Response: We believe that section 1341(b)(1)(A) of the Affordable 
Care Act directs a broad cross-section of issuers and self-insured 
plans to make reinsurance contributions, given the uncertainty of the 
size and characteristics of the population that will participate in the 
Exchanges. We discuss whether certain plans are required to make 
reinsurance contributions in the preamble above.
    Comment: One commenter suggested that HHS clarify whether the Basic 
Health Plans described in Section 1331 of the Affordable Care Act will 
be subject to reinsurance contributions or eligible for reinsurance 
payments.
    Response: Since guidance and regulations regarding the Basic Health 
Plans have not yet been issued by HHS, we are unable to provide 
direction at present on whether these plans are subject to the 
reinsurance program.
    Comment: We received several comments recommending that reinsurance 
contributions be collected on a quarterly basis. One commenter 
recommended an annual collection.
    Response: We have included a provision that requires that 
contributions to HHS be submitted quarterly in paragraph (c). A State 
that elects to collect contributions may set its own timeframe for 
collection. However, we encourage States to adopt a timeframe similar 
to the one adopted by HHS to minimize the burden on issuers in multiple 
States.
2. Requests for Reinsurance Payment (Sec.  153.410)
    The reinsurance program as proposed in subpart C will make payments 
to reinsurance-eligible plan issuers. In paragraph (a) of the proposed 
rule, we proposed that reinsurance-eligible plan issuers be required to 
submit a request for reinsurance payment to the applicable reinsurance 
entity. We proposed in paragraph (b) that this request be made 
according to the method specified in the annual HHS notice of benefit 
and payment parameters.
    For the reasons described in the proposed rule and considering the 
comments received, we are finalizing these provisions, with certain 
clarifying changes.
    Comment: We received a comment requesting that HHS provide 
standards for issuers to request payment.
    Response: Issuers of reinsurance-eligible plans will make requests 
for payment in accordance with the procedures set forth in the annual 
HHS notice of benefit and payment parameters. If a State establishes a 
reinsurance program, then it will publish guidance regarding data 
requirements for reinsurance payment in its State notice of benefit and 
payment parameters.
    Comment: We received a few comments regarding the frequency of 
reinsurance payments. One commenter suggested a monthly reinsurance 
payment cycle. The commenter suggested that the reinsurance entity pay 
claims at 75 percent of the eligible amounts, with the remaining 25 
percent of eligible claims becoming payable at the end of the year to 
the extent funds are available. One commenter suggested a payment 
process at the end of the benefit year. Another commenter suggested 
that reinsurance payment requests be permitted to be submitted whenever 
an individual claim causes a beneficiary's accumulated claims costs for 
the plan year to exceed the attachment point, and that adjustments be 
permitted to be submitted as the claim fully develops.
    Response: Further guidance on the reinsurance claim and payment 
process will be provided in the HHS notice of benefit and payment 
parameters.
    Comment: We received comments regarding the deadline for 
reinsurance payment requests and late claims. One commenter suggested 
that reinsurance-eligible claims be required to be submitted no more 
than six months after the plan year, and that claims not filed within 
that timeframe become ineligible for reinsurance payment. Another 
commenter suggested that the ability to submit late claims be 
restricted to ensure that late claims do not delay MLR rebates to 
consumers or risk corridors payments to insurers.
    Response: We will provide further guidance on the deadline for 
requests and on late claims in the annual HHS notice of benefit and 
payment parameters.

F. Subpart F--Health Insurance Issuer Standards Related to the 
Temporary Risk Corridors Program (Sec.  153.500-Sec.  153.530)

    In this subpart, we proposed requirements on health insurance 
issuers related to the temporary risk corridors program which section 
1342 of the Affordable Care Act established for the first three years 
of Exchange operation (2014-2016). Risk corridors create a mechanism 
for sharing risk for allowable costs between the Federal government and 
QHP issuers. QHP issuers with allowable costs that are less than 97 
percent of the QHP's target amount will remit charges for a percentage 
of those savings to HHS, while QHP issuers with allowable costs greater 
than 103 percent of the QHP's target amount will receive payments from 
HHS to offset a percentage of those losses.
1. Definitions (Sec.  153.500)
    In Sec.  153.500, we proposed a number of definitions for purposes 
of administering risk corridors. We proposed to define ``allowable 
administrative costs'' as the total non-medical costs as defined in 
Sec.  158.160(b), including costs for the administration and operation 
incurred by the plan as set forth in Sec.  158.160(b)(2). We proposed 
to define ``allowable costs'' as an amount equal to the total medical 
costs, which include clinical costs, excluding allowable administrative 
costs, paid by the QHP issuer in providing benefits covered by the QHP. 
``Charge'' was defined as the flow of funds from QHP issuers to HHS. 
``Direct and indirect remuneration'' was defined by reference to the 
definition used for Medicare Part D purposes. ``Payment'' was defined 
as the flow of funds from HHS to QHP issuers. ``Qualified health plan'' 
was defined by reference to the definition for the term included in the 
proposed Exchange Establishment rule. ``Risk corridors'' was defined as 
any payment adjustment system based on the ratio of allowable costs of 
a plan to the plan's target amount. ``Target amount'' was defined as an 
amount equal to the total premiums incurred by a QHP, including any 
premium tax credit under any governmental program, reduced by the 
allowable administrative costs of the plan.
    Considering the comments received and other considerations 
discussed below, we are finalizing this section with the following 
modifications:

[[Page 17237]]

    We are adding the defined term, ``administrative costs,'' meaning 
total non-claims costs for a QHP as defined in Sec.  158.160(b). We are 
revising the defined term, ``allowable administrative costs,'' to mean 
administrative costs, capped at 20 percent of premiums earned. We are 
revising the definition of ``allowable costs'' to reference the MLR 
term ``incurred claims'' and to include quality improvement and health 
information technology expenditures, as defined in the MLR rule. We are 
also referencing the after-the-fact adjustments described in Sec.  
153.530(b) for reinsurance and risk adjustment amounts paid or received 
by a QHP issuer.
    We are revising the definition of ``direct and indirect 
remuneration'' to mean prescription drug rebates received by the issuer 
within the meaning of Sec.  158.140(b)(1)(i). This definition matches 
the concept from the MLR rule, which takes into account rebates, but 
not other forms of remuneration, such as price concessions and 
discounts.
    We are adding the defined term, ``premiums earned,'' meaning monies 
paid by or for enrollees with respect to a QHP as a condition of 
receiving coverage under that plan, including any fees or other 
contributions paid by or for enrollees. This defined term references 
the equivalent definition in the MLR rule, and is intended to clarify 
that premiums are to be determined in a manner consistent with the MLR 
rule, a consistency we seek with respect to the risk corridors program 
when practicable. We are revising the defined term, ``target amount,'' 
to reference the new defined term ``premiums earned.''
    We are moving the definition of ``qualified health plan'' to 
subpart A. We are not modifying the definitions of ``charge,'' 
``payment,'' or ``risk corridors.'' Finally, we are making a number of 
clarifying modifications throughout this section. Many of the revisions 
we are making to defined terms in this subpart are intended to parallel 
terms used in the MLR rule, to the extent feasible. These revised 
definitions are used in the risk corridors calculation in a manner that 
is mathematically identical to the statutory formulation in section 
1342 of the Affordable Care Act.
    Comment: In the preamble of the proposed rule, we discussed the 
possibility of imposing a 20 percent limitation on allowable 
administrative costs. A number of commenters supported this limitation. 
Some commenters supported the 20 percent limitation because it would 
prevent an issuer with high administrative costs from receiving risk 
corridors payments, and then using those payments to pay the required 
MLR rebates. Other commenters stated that imposing a limitation would 
be consistent with the MLR rule--a consistency that could reduce the 
need for issuers to maintain data for two different formulas.
    Response: We are revising the definition of allowable 
administrative costs accordingly.
    Comment: We received a number of comments that supported including 
quality improvement expenditures in allowable costs. Some commenters 
also suggested including health information technology expenses, which 
the MLR rule also takes into account. The commenters stated that 
including quality improvement expenses and health information 
technology expenditures in allowable costs would ensure consistency 
with MLR requirements, and would incentivize issuers to make these 
investments, which could inure to the benefit of enrollees. Some 
commenters requested that we adopt certain modifications to those MLR 
definitions. For example, two commenters suggested that HHS adopt a 
standard-based ``functional approach'' for determining whether an 
activity or function is a quality improvement activity similar to that 
employed by MLR. Under this approach, the function of the activity 
would dictate whether it was a quality improvement activity that 
issuers could include in allowable costs. Another commenter recommended 
that quality improvement activity expenditures be based on projections.
    Response: We viewed the proposed rule as including these costs in 
allowable costs, because they are not among the administrative costs in 
Sec.  158.160(b). We are revising the definition of allowable costs to 
make clear that it includes both expenditures to improve health care 
quality and expenditures related to health information technology and 
meaningful use requirements. However, we are not modifying those MLR 
definitions for purposes of risk corridors, in order to retain 
consistency with the MLR calculation.
    Comment: A few commenters requested that the risk corridors program 
not utilize the Medicare Part D formulation of direct and indirect 
remuneration. They stated that the Part D formulation is too broad for 
the risk corridors program, and that a narrower construct is 
appropriate here. Commenters contrasted the formulation applicable to 
Medicare, a governmental program, with the formulation that in their 
view should be applicable to commercial plans. Commenters recommended 
including a number of different definitions of rebates, discounts, and 
price concessions. One commenter recommended using the formulation used 
in the retiree drug subsidy program under subpart R of the Medicare 
Modernization Act regulations at 42 CFR 423.880 et seq.
    Response: We acknowledge the breadth of the proposed definition of 
direct and indirect remuneration, and are revising the definition to be 
consistent with the approach adopted by the MLR rule. The MLR rule 
requires deduction of prescription drug rebates received by an issuer 
for both reporting and calculation purposes. We intend that MLR rules 
for defining and determining when prescription drug rebates are 
received by an issuer apply for risk corridors purposes.
    Comment: One commenter recommended that allowable costs be defined 
as the sum of claims incurred during the risk corridors reporting year 
and paid through March 31 of the following year plus unpaid claims 
liabilities associated with claims incurred during the risk corridors 
reporting year.
    Response: We agree that the calculation of allowable costs should 
include a run-out period and unpaid claims liabilities, and are 
clarifying that allowable costs should be calculated in accordance with 
the MLR rule.
    Comment: We received four comments about the definition of ``QHP.'' 
Three commenters stated that a plan offered by an issuer outside of the 
Exchange that is identical to a QHP should be subject to the risk 
corridors program. Those commenters cited administrative simplicity, 
and stated that ``the pricing of QHPs is supposed to be the same 
whether offered on or off an Exchange.'' A fourth commenter requested 
guidance on the issue.
    Response: The Affordable Care Act provides that the risk corridors 
program applies to QHPs. For risk corridors purposes, the QHP 
definition set forth in the Exchange Establishment rule applies. A QHP 
issuer is not precluded from offering a QHP outside an Exchange. If a 
QHP issuer does so, the QHP offered outside an Exchange is subject to 
the risk corridors program. We believe that, in keeping with the 
discussion of the same premium provision in the preamble of the 
Exchange Establishment rule, this generally means that health plans 
that are substantially the same as a QHP will be subject to the risk 
corridors program. HHS may clarify this standard in future rulemaking 
or guidance.
    Comment: A number of commenters requested that the risk corridors

[[Page 17238]]

calculation take into account profits in a manner similar to the MLR 
rule. Some commenters requested that allowable administrative costs 
include profits, margin, or underwriting gain. This inclusion would be 
consistent with the MLR rule, which permits an issuer in certain 
circumstances to have administrative expenses and profits up to 20 
percent of after-tax premium revenues before a rebate is due. 
Commenters also noted that section 1342(a) of the Affordable Care Act 
states that risk corridors calculations are to be based on a similar 
program under Medicare Part D, which includes return on investment, an 
analog to profits, in the definition of target amount.
    Response: The proposed rule did not address profits in the risk 
corridors calculation. In the HHS notice of benefit and payment 
parameters, we intend to propose that profits be included within 
administrative costs for purposes of the risk corridors calculation, 
consistent with MLR.
    Comment: A number of commenters requested that the risk corridors 
calculation take into account taxes in a manner similar to the MLR 
rule. The MLR rule requires reporting of a broad range of taxes, and 
deduction of certain taxes from premiums in the MLR denominator. One 
commenter noted that taxes may either be subtracted from premiums or 
added to allowable administrative costs.
    Response: The proposed rule did not address taxes in the risk 
corridors calculation. In the HHS notice of benefit and payment 
parameters, we intend to propose that taxes and other expenses be 
included within administrative costs for purposes of the risk corridors 
calculation, with those Federal and State taxes and licensing and 
regulatory fees described in Sec.  158.161(a), Sec.  158.162(a)(1), and 
Sec.  158.162(b)(1) exempt from the 20 percent cap on allowable 
administrative expenses.
    Comments: Several commenters sought clarification as to whether any 
of the risk corridors elements were projections. Various commenters 
suggested that premiums or administrative costs should reflect 
projections. One commenter requested a clarification to confirm the 
intent to use projected costs as the targeted amount.
    Response: Section 1342 of the Affordable Care Act does not allow 
the use of projections. Furthermore, because the temporary risk 
corridors program is designed to limit the extent of actual issuer 
losses (and gains) with respect to QHPs, the program will use actual 
data, not projected data.
2. Risk Corridors Establishment and Payment Methodology (Sec.  153.510)
    In Sec.  153.510 of the proposed rule, we proposed to establish 
risk corridors by specifying risk percentages above and below the 
target amount. In Sec.  153.510(a), we proposed to require a QHP issuer 
to adhere to the requirements set by HHS for the establishment and 
administration of a risk corridors program for calendar years 2014 
through 2016. The preamble to the proposed rule stated that we would 
issue guidance in the annual HHS notice of benefit and payment 
parameters for QHPs regarding reporting and the administration of 
payments and charges. The preamble also stated that risk corridors 
guidance will be plan-specific, and not issuer-specific, as is the case 
with respect to the MLR rule, and that we interpreted the risk 
corridors provisions to apply to all QHPs offered in the Exchange.
    In Sec.  153.510, we also established the payment methodology for 
the risk corridors program, using the thresholds and risk-sharing 
levels specified in statute. In Sec.  153.510(b), we described the 
method for determining payment amounts to QHP issuers. For a QHP with 
allowable costs in excess of 103 percent but not more than 108 percent 
of the target amount, HHS will pay the QHP issuer 50 percent of the 
amount in excess of 103 percent of the target amount. For a QHP with 
allowable costs that exceed 108 percent of the target amount, the 
Affordable Care Act directs HHS to pay the QHP issuer an amount equal 
to 2.5 percent of the target amount plus 80 percent of the amount in 
excess of 108 percent of the target amount.
    In Sec.  153.510(c), we described the circumstances under which QHP 
issuers will remit charges to HHS, as well as the means by which HHS 
will determine those charge amounts. We proposed that QHP issuers will 
begin to remit charges to HHS for the first dollar of allowable charges 
less than 97 percent of the target amount. For a QHP with allowable 
costs that are less than 97 percent of the target amount but greater 
than 92 percent of the target amount, HHS will charge the QHP issuer an 
amount equal to 50 percent of the difference between 97 percent of the 
target amount and the actual value of allowable costs. For a QHP with 
allowable costs below 92 percent of the target amount, the QHP issuer 
will remit charges to HHS in an amount equal to 2.5 percent of the 
target amount plus 80 percent of the difference between 92 percent of 
the target amount and the actual value of allowable costs.
    While we did not propose deadlines in the proposed rule, we 
discussed in the preamble timeframes for QHP issuers to remit charges 
to HHS. We suggested, for example, that a QHP issuer required to make a 
risk corridors payment may be required to remit charges within 30 days 
of receiving notice from HHS, and that HHS would make payments to QHP 
issuers that are owed risk corridors amounts within a 30-day period 
after HHS determines that a payment should be made to the QHP issuer. 
QHP issuers who are owed these amounts will want prompt payment, and 
payment deadlines should be the same for HHS and QHP issuers. We sought 
comment on these proposed payment deadlines in the preamble to the 
proposed rule.
    Considering the comments received, we are finalizing this section 
as proposed, with a few clarifying modifications.
    Comments: We received a number of comments suggesting that the risk 
corridors calculation should be performed at a less granular level than 
the plan level. The most common suggestion was aggregation at the 
issuer level, although other alternatives were suggested. One commenter 
suggested aggregation at the carrier, State and business line level, 
while another recommended applying the risk corridors calculation 
separately to an issuer's aggregate non-group QHP business and 
aggregate small group QHP business. One reason advanced for these 
alternatives was consistency with the MLR rules, which apply at the 
issuer level. Commenters also noted that issuers do not currently 
accumulate data at the plan level. Some commenters stated that issuer-
level data would be more credible and reliable.
    Response: We have carefully considered the commenters' suggestions, 
but are not making the requested change. The statutory language 
governing risk corridors does not afford the necessary flexibility. The 
statutory provision that governs risk corridors at section 1342(a) of 
the Affordable Care Act describes the risk corridors program as one in 
which ``a qualified health plan offered in the individual or small 
group market shall participate * * *''. By contrast, section 2718 of 
the PHS Act, which governs the MLR program, requires the calculation of 
a ratio with respect to an issuer.
    Comment: One commenter requested that the risk corridors program 
may be based on targeted medical costs (net premiums) in addition to 
the premium rates.
    Response: We are not making the changes proposed by the commenter 
because section 1342 of the Affordable Care Act does not provide the 
flexibility necessary to do so. That section requires

[[Page 17239]]

that the risk corridors program be based upon the ratio of a plan's 
total costs, other than administrative costs, to its total premiums, 
reduced by the administrative costs. In codifying that section in 
regulation, we have sought to define the relevant terms in a manner 
consistent with those used in the MLR calculation.
    Comments: A number of commenters addressed the risk corridors 
payment deadline. Three commenters agreed that 30 days was a reasonable 
timeframe for both payments and charges, and one commenter recommended 
that payments and charges be paid once per year. One commenter 
suggested requiring issuers of QHPs to submit risk corridors data 
within 30 days after submission of a request for payment to HHS or 
receipt of demand for payment from HHS.
    Response: We plan to address the risk corridors payment deadline in 
the HHS notice of benefit and payment parameters.
3. Attribution and Allocation of Revenue and Expense Items (Sec.  
153.520)
    In Sec.  153.520(a)(3) of the proposed rule (now Sec.  153.530(d)), 
we proposed rules for accounting for reinsurance claims submitted on a 
date to be determined by HHS for a given reinsurance benefit year. 
Specifically, we proposed that a QHP issuer be required to attribute 
reinsurance payments to risk corridors based on the date on which the 
valid reinsurance claim was submitted. For example, if the QHP issuer 
were to submit a reinsurance claim on or before the deadline for a 
benefit year, that QHP issuer would attribute the claim payment to the 
risk corridors calculation for the benefit year in which the costs were 
accrued. Conversely, if the QHP issuer were to submit a claim after the 
deadline for a benefit year, that QHP issuer would attribute the claim 
payment to the risk corridors calculation for the following benefit 
year.
    We are finalizing this provision as proposed, with the following 
modifications:
    We are revising Sec.  153.520(d) to clarify that an issuer must 
attribute not only reinsurance payments, but also reinsurance 
contributions and risk adjustment payments and charges to the benefit 
year for which the contributions, charges, or payments apply, not the 
year in which the claim was submitted.
    In addition, we are including the new paragraphs Sec.  153.520(a), 
Sec.  153.520(b), Sec.  153.520(c), and Sec.  153.520(e) to clarify the 
attribution of items, such as quality improvement and health 
information technology expenditures, that are typically not plan-
specific. Paragraph 153.520(a) requires that each item of revenue and 
expense in allowable costs and target amount for a QHP must be 
reasonably attributable to that QHP's operations. Paragraph 153.520(b) 
states that each item must be reasonably allocated across the issuer's 
plans (that is, QHPs and non-QHPs). Thus, Sec.  153.520(a) and Sec.  
153.520(b) require an issuer to allocate shared revenue and expense 
items between its health plans and its other business lines, and then 
to attribute its shared items within its health plans to each plan. To 
the extent that the issuer is utilizing a method for allocating 
expenses for MLR purposes, the method used for risk corridors purposes 
under Sec.  153.520 must be consistent. Paragraph 153.520(c) requires 
an issuer to disclose to HHS a detailed description of the methods and 
bases for the attribution and allocation. We plan to specify the timing 
and method of disclosure in future guidance. Finally, Sec.  153.520(e) 
requires an issuer to maintain the supporting records for the 
attribution and allocation for 10 years, and to make the records 
available to HHS upon request.
    Comments: We received a few comments to the proposed provision 
attributing reinsurance payments to the applicable benefit year. One 
commenter stated that the rule was inconsistent with issuers' pricing 
practices, the MLR calculation, and financial reporting practices. The 
commenter stated that issuers could manipulate risk corridors payments 
by delaying claims submissions, and that claims not submitted in time 
for the 2016 calculation would not be eligible for risk corridors, 
since the program would have terminated. Another commenter recommended 
that reinsurance amounts be on a ``basis other than a paid basis'' in 
order to be consistent with the MLR calculation. Another commenter 
recommended attribution of reinsurance claims to the year of 
submission, even if the claims were incurred in a prior benefit year.
    Response: We are clarifying in the rule that reinsurance and risk 
adjustment payments, contributions, and charges are attributed to the 
benefit year with respect to which the reinsurance or risk adjustment 
amounts apply. For example, reinsurance payments received in 2015 for 
claims costs incurred in 2014 (even if the reinsurance claim was 
properly submitted in 2015) would be attributed to 2014 for purposes of 
risk corridors calculations.
4. Risk Corridors Data Requirements (Sec.  153.530)
    To support the risk corridors program calculations, we proposed in 
Sec.  153.520 of the proposed rule that all QHP issuers submit data 
needed to determine actual performance relative to their target 
amounts, to be collected in standard formats specified by HHS. We 
proposed in Sec.  153.520(a) to require that QHP issuers submit data 
related to actual premium amounts collected, including premium amounts 
paid by parties other than the enrollee in a QHP, and specifically, 
advance premium tax credits paid by the government. We also proposed 
that risk adjustment and reinsurance be regarded as after-the-fact 
adjustments to premiums for purposes of determining risk corridors 
amounts. Therefore, Sec.  153.520(a)(1) of the proposed rule required 
that the reported premium amounts be increased by the amounts paid to 
the QHP issuer for risk adjustment and reinsurance, and Sec.  
153.520(a)(2) required that reported premium amounts be reduced for any 
risk adjustment charges the QHP issuer pays on behalf of the plan, 
reinsurance contributions that the QHP issuer makes on behalf of the 
plan, and Exchange user fees that the QHP issuer pays on behalf of the 
plan. We sought comment on this issue in the preamble.
    We proposed in Sec.  153.520(b) that QHP issuers be required to 
submit allowable cost data to calculate the risk corridors in a format 
to be specified by HHS, and that allowable costs be reduced for any 
direct and indirect remuneration received. Finally, we proposed that 
allowable costs be reduced by the amount of any cost-sharing reductions 
received from HHS.
    Considering the comments received, we are finalizing this 
provision, with the following modifications:
    In order to more clearly reflect section 1342(c)(1)(B) of the 
Affordable Care Act, we are revising this section so that the 
adjustments for reinsurance and risk adjustment are made to allowable 
costs. We are also making a number of clarifying modifications 
throughout this section.
    Comments: Commenters generally agreed that reinsurance and risk 
adjustment payments and charges should be treated as after-the-fact 
adjustments to risk corridors. One commenter noted the inconsistency 
between the proposed rule's treatment of reinsurance and risk 
adjustment payments and charges as adjustments to premium revenue, and 
section 1342 of the Affordable Care Act, which requires that those 
adjustments be made to allowable costs. Another commenter

[[Page 17240]]

noted that under the MLR rule, these adjustments are made to premium 
revenue, and urged that the risk corridors program handle these 
adjustments in the same manner. One commenter requested clarification 
that the attribution of reinsurance payments ``received'' be determined 
on an accrual rather than cash basis. Another commenter, who requested 
that the risk adjustment program be delayed until at least 2016 because 
of the complexity of implementing the risk adjustment, reinsurance, and 
risk corridors programs simultaneously, requested that, for 
consistency, HHS only take into account reinsurance for purposes of the 
temporary risk corridors program during those initial years.
    Response: In order to more clearly reflect the requirements of the 
Affordable Care Act, we are revising the section so that those payments 
and charges are adjustments to allowable costs, rather than premium 
revenue. We agree with the commenter that reinsurance and risk 
adjustment payments and charges should be reflected in risk corridors 
on an accrual basis, and are reflecting that requirement in Sec.  
153.520(d) of this final rule. Since all three programs will play 
important and different roles in stabilizing premiums beginning in 
2014, we believe that both the risk adjustment and reinsurance programs 
should be taken into account as after-the-fact adjustments for purposes 
of the risk corridors calculation, as required by the statute.
    Comments: Commenters expressed concern about the interaction of 
risk corridors, reinsurance, and risk adjustment with the MLR 
calculation. Commenters discussed the need for the MLR timeline to take 
into account those other calculations, payments, and charges. One 
commenter discussed the challenges faced by publicly held issuers who 
must also comply with Federal securities laws' disclosure requirements. 
Two commenters included detailed timelines encompassing proposed due 
dates for reinsurance, risk adjustment, risk corridors and MLR.
    Commenters also supported our efforts to use, where practicable, 
MLR definitions and concepts in the risk corridors rules, but noted 
difficulties in using data collected for MLR purposes for premium 
stabilization purposes because MLR data is compiled at the issuer 
level, while risk corridors data will be required to be collected at 
the plan level.
    Response: We will provide additional details on timeline-related 
issues in future guidance. We anticipate that the accounting profession 
will take appropriate measures to guide issuers, as it has in past 
analogous circumstances, such as with the retiree drug subsidy program 
under the Medicare Modernization Act, which was first effective in 
2006. We will continue efforts to minimize reporting burden by seeking 
to utilize data already collected for MLR.
    Comments: We received a comment on the issue of how to determine 
the allowable costs for a QHP if the issuer fails to comply with the 
reporting requirements in Sec.  153.530. The commenter recommended that 
HHS use quarterly reports to determine a final payment liability using 
the lowest HHS payment liability minus a certain percentage of withhold 
(penalty) of either the premium payments or risk corridors payment.
    Response: We interpret the comment as suggesting that HHS determine 
a baseline amount of allowable costs or payment liability reflecting 
experience of other issuers. The approach is one of several reasonable 
methods. We will consider it along with other approaches. We are 
evaluating measures we could take to address non-compliance.

G. Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program

    Section 1343 of the Affordable Care Act provides for a program of 
risk adjustment for all non-grandfathered plans in the individual and 
small group markets both inside and outside of the Exchanges. We noted 
in the introduction to subpart D of this part that the risk adjustment 
program described in section 1343 is intended to reduce or eliminate 
premium differences between plans based solely on expectations of 
favorable or unfavorable risk selection or choices by higher risk 
enrollees in the individual and small group markets. The foregoing is 
relevant for this subpart as well, which finalizes the health insurance 
issuer standards that are necessary to carry out risk adjustment as 
described in subpart D.
1. Reserved (Sec.  153.600)
    Section 153.600 of the proposed rule defined a number of terms used 
in this subpart. Those definitions have been moved to subpart A. We are 
reserving this section for future use.
2. Risk Adjustment Issuer Requirements (Sec.  153.610)
    We proposed in paragraph (a) that all issuers of risk adjustment 
covered plans be required to submit risk adjustment data according to 
the timetable and format prescribed by the State, or HHS on behalf of 
the State. Considering the comments received, we are finalizing this 
definition, with the following modifications: We are modifying the 
requirement that issuers submit risk adjustment data to the State, or 
HHS on behalf of the State, to align with the changes to Sec.  
153.340(a) and (b) discussed above. We are adding a requirement that 
issuers that offer risk adjustment covered plans store required risk 
adjustment data in accordance with the risk adjustment data collection 
approach established by HHS or the State. We note that use of a 
distributed model may require issuers to format risk adjustment data 
and maintain that data in a manner that complies with specifications 
promulgated by the State, or HHS on behalf of the State, and to run 
risk adjustment software.
    Comment: We received many comments supporting the requirement that 
issuers submit risk adjustment data to the State, or HHS on behalf of 
the State. A number of commenters requested that HHS expand the 
definition of risk adjustment data to include rate setting data that 
may not be available from State Departments of Insurance. Other 
commenters stated that the amount and type of data envisioned in the 
proposed rule was appropriate.
    Response: We are making only minor changes to this provision, to 
align with changes made to Sec.  153.340(a).
    Comment: One commenter suggested that participation in risk 
adjustment should be voluntary. Two other commenters urged HHS to delay 
risk adjustment until sufficient data is available. We received several 
comments suggesting that the timeframe for data submission be left to 
States.
    Response: The Affordable Care Act requires that issuers of risk 
adjustment covered plans participate in the risk adjustment program. We 
believe that there will be sufficient data to administer the risk 
adjustment program, even in the initial years. Therefore, we are 
finalizing the policy that all issuers offering risk adjustment covered 
plans must participate in the program by providing the specified 
information to the State, or HHS on behalf of the State, on a timeframe 
determined by that State.
    In paragraph (b) of the proposed rule, we proposed to permit 
contractual arrangements between issuers and providers, suppliers, 
physicians, and other practitioners to ensure that issuers receive the 
necessary risk adjustment data. Considering the comments received, we 
are finalizing this paragraph as paragraph (c).

[[Page 17241]]

    Comments: We received a number of comments in response to this 
provision. Two commenters supported a requirement permitting issuers to 
require providers, suppliers, physicians, and other practitioners to 
submit risk adjustment data to those issuers. We received two comments 
expressing reservations about the requirement on the grounds that it 
would place additional burdens on practitioners.
    Response: We believe that the risk adjustment program is highly 
dependent on high quality risk adjustment data. Issuers depend on 
providers, suppliers, physicians, and other practitioners to submit 
this data to them. Because issuers will receive or be required to make 
risk adjustment payments based in part on the amount and quality of 
this risk adjustment data, we believe it is fair to permit issuers to 
require suppliers, physicians, and other practitioners to submit that 
data to them in their contracts. We are therefore finalizing this 
paragraph.
    In paragraph (c) of the proposed rule, we proposed that risk 
adjustment covered plan issuers who owe a net balance of risk 
adjustment charges will be assessed those net charges upon completion 
of the risk adjustment process. Additionally, we requested comment as 
to whether issuers should have a 30-day timeframe in which to pay net 
charges to the State that assessed those charges, or to HHS on behalf 
of the State. Considering the comments received, we are finalizing this 
paragraph, clarifying that charges include any adjustments made 
pursuant to data validation described in Sec.  153.350.
    Comment: We received a few comments supporting the requirement that 
issuers remit charges to the State, or HHS on behalf of the State.
    Response: In response to comments, we are finalizing the 
requirement that issuers pay risk adjustment charges to the State, or 
HHS on behalf of the State. We are clarifying that charges include any 
adjustments made pursuant to data validation described in Sec.  
153.350.
    Comment: We received one comment supporting a requirement that 
issuers be required to pay net charges within 30 days of the assessment 
of those charges by a State, or HHS on behalf of a State.
    Response: In response to the comment, we are adding a provision 
that issuers must pay net charges to the State, or HHS on behalf of the 
State, within 30 days of the assessment of those charges.
3. Compliance With Risk Adjustment Standards (Sec.  153.620)
    The credibility of risk adjustment is important to stabilizing 
health insurance premiums in the Exchanges. Consistent with Sec.  
153.350 of the proposed rule, we proposed in Sec.  153.620 that risk 
adjustment covered plan issuers must make available data to HHS or the 
State to support validation of the risk adjustment data that they have 
submitted. In paragraph (b), we proposed that risk adjustment covered 
plan issuers retain the risk adjustment data that they have reported 
for a period of ten years. For the reasons described in the proposed 
rule and considering the comments received, we are finalizing these 
provisions as proposed with a few modifying clarifications.
    Comment: We received several comments supporting the requirement 
that issuers make data required for validation of risk adjustment data 
available to States or HHS on behalf of the State. Two commenters 
suggested that HHS establish sanctions for issuers that do not comply 
with the data validation and records maintenance requirements. One 
commenter opposed this requirement, suggesting that the requirement 
would force issuers to disclose sensitive data.
    Response: We believe that the data validation and records 
maintenance standards are necessary to support the credibility of the 
risk adjustment program. After consideration of the comments received, 
we are finalizing the proposed provision with a minor drafting change 
to Sec.  153.610(b) to clarify that the provision applies when the 
State, or HHS on behalf of the State, requests the data.
    Comment: We received several comments suggesting that a ten-year 
record retention requirement was too long and would impose a 
significant burden on issuers.
    Response: We believe that the record retention requirements should 
be consistent with other Federal record retention requirements, and are 
finalizing the proposed provision.

III. Provisions of the Final Regulations

    For the most part, this final rule incorporates the provisions of 
the proposed rule. Those provisions of the final rule that differ from 
the proposed rule are as follows:

Subpart A--General Provisions (Sec.  153.10 and Sec.  153.20)

    <bullet> We have moved a number of reinsurance-related definitions 
to subpart A. We have made technical changes to the definition of 
``attachment point,'' ``coinsurance rate,'' ``contribution rate,'' and 
``reinsurance cap'' to reflect comments received.
    <bullet> We have moved a number of risk adjustment-related 
definitions to subpart A. We have added several new definitions--
``individual risk score,'' ``calculation of plan average actuarial 
risk,'' ``calculation of payments and charges,'' ``risk adjustment data 
collection approach,'' and ``risk adjustment data.'' We also modified 
the definition of ``risk adjustment methodology'' to mean all parts of 
risk adjustment--the risk adjustment model, the calculation of plan 
average actuarial risk, the calculation of payments and charges, the 
risk adjustment data collection approach, and the schedule for the risk 
adjustment program. We have modified the definition of ``risk 
adjustment data'' to mean all data that are used in a risk adjustment 
model, or the calculation of plan average actuarial risk, or the 
calculation of payments and charges, or that are used for validation or 
audit of such data.

Subpart B--State Notice of Benefit and Payment Parameters (Sec.  
153.100 and Sec.  153.110)

    <bullet> We have clarified that a State that establishes a 
reinsurance program must publish a notice of benefit and payment 
parameters if it intends to modify the data requirements for 
reinsurance payments, collect reinsurance contributions, use more than 
one applicable reinsurance entity, or modify any reinsurance 
parameters. We have clarified that States have the flexibility to 
establish a reinsurance entity regardless of whether or not they 
establish a State Exchange.
    <bullet> We have clarified that a State operating a risk adjustment 
program must publish a notice of benefit and payment parameters setting 
forth the risk adjustment methodology and data validation that it will 
use.
    <bullet> We have specified that State notices of benefit and 
payment parameters be issued by March 1 of the calendar year prior to 
the first benefit year for which the notice applies.
    <bullet> We have clarified that a State that does not publish a 
notice of benefit and payment parameters forgoes its right to modify 
the data requirements for reinsurance payments, collect reinsurance 
contributions, use more than one applicable reinsurance entity, modify 
any reinsurance parameters, or use any risk adjustment methodology or 
data validation standards other than those published in the HHS notice 
of benefit and payment parameters for use by HHS when operating risk 
adjustment on behalf of the State.

[[Page 17242]]

    <bullet> We have specified that a State that elects to collect 
additional reinsurance contributions must describe the purpose of the 
additional collection and the additional contribution rate.
    <bullet> We have clarified that a State that modifies the 
reinsurance parameters from those published in the annual HHS notice of 
benefit and payment parameters must apply those parameters uniformly 
throughout the State.

Subpart C--State Standards Related to the Reinsurance Program (Sec.  
153.200-Sec.  153.250)

    <bullet> We have clarified that States that establish an Exchange 
are not required to establish a reinsurance program.
    <bullet> We have revised the process for collection of 
contributions so that HHS will collect contributions from self-insured 
plans, while the State has the option to collect from fully insured 
plans. We have required States to notify HHS by December 1, 2012, if 
they elect to collect reinsurance contributions from fully insured 
plans for the 2014 benefit year, and by September 1 of the calendar 
year that is two years prior to the applicable benefit year if they 
elect to collect reinsurance contributions from fully insured plans for 
any benefit year after 2014.
    <bullet> We have directed each State to notify HHS of the 
percentage of reinsurance contributions received by HHS allocated to 
each applicable reinsurance entity, if applicable.
    <bullet> We have added provisions specifying that if a State elects 
to collect additional reinsurance contributions, HHS will only collect 
additional amounts for administrative expenses, and will not collect 
additional amounts for reinsurance payments.
    <bullet> We are no longer requiring that reinsurance payments be 
linked to essential health benefits.

Subpart D--State Standards Related to the Risk Adjustment Program 
(Sec.  153.300-Sec.  153.350)

    <bullet> We have added a deadline for States to notify issuers of 
payments and charges.
    <bullet> We have added a provision that States must submit annual 
risk adjustment program summary reports to HHS.
    <bullet> We have clarified the standards for publication of risk 
adjustment methodology in HHS and State notices of benefit and payment 
parameters.
    <bullet> We have modified the proposed approach to risk adjustment 
data collection, as follows: When HHS operates a risk adjustment 
program, it will use a distributed approach so that individual data 
remains with the issuer. When a State operates a risk adjustment 
program, it may choose the approach that best suits its program.
    <bullet> We have modified the privacy and security standards 
applicable when a State is operating risk adjustment.
    <bullet> We have adjusted the data validation standards to account 
for the new approach to risk adjustment data collection.

Subpart E--Health Insurance Issuer and Group Health Plan Standards 
Related to the Reinsurance Program (Sec.  153.400 and Sec.  153.410)

    <bullet> We have clarified that contributing entities must make 
reinsurance contributions to HHS and the applicable reinsurance entity, 
if the State elects to collect reinsurance contributions.
    <bullet> We have clarified which contributing entities must make 
reinsurance contributions.
    <bullet> We have clarified issuer standards for States that elect 
to collect additional funds.
    <bullet> We have specified a collection timeframe for submission of 
reinsurance contributions to HHS.
    <bullet> We have clarified that reinsurance contributions data must 
be submitted to HHS and each applicable reinsurance entity, if the 
State elects to collect reinsurance contributions.

Subpart F--Health Insurance Issuer Standards Related to the Risk 
Corridors Program (Sec.  153.500-Sec.  153.530)

    <bullet> We added the defined terms ``administrative costs'' and 
``premiums earned'' to be consistent with the MLR regulations.
    <bullet> We revised the defined term ``allowable administrative 
costs'' to include a 20 percent cap on such costs.
    <bullet> We revised the defined term ``allowable costs'' to include 
quality improvement and health information technology expenditures 
under the MLR regulations.
    <bullet> We revised the defined term ``direct and indirect 
remuneration'' to conform with the MLR regulations.
    <bullet> We revised the provision regarding attribution of 
reinsurance payments based on the date on which the reinsurance claim 
was submitted. The final rule specifies that reinsurance payments and 
contributions and risk adjustment payments and charges be allocated to 
the benefit year for which they apply.
    <bullet> We added a number of provisions clarifying how revenue and 
expense items not typically plan-specific are to be allocated and 
attributed to plans.
    <bullet> We revised the provisions concerning after-the-fact 
adjustments to allowable costs to more clearly reflect the relevant 
statutory requirements.

Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program (Sec.  153.610 and Sec.  153.620)

    <bullet> We have modified issuers' data submission standards to 
reflect the flexibility afforded to States in collecting risk 
adjustment data.
    <bullet> We have included a requirement that issuers that offer 
risk adjustment covered plans store all required risk adjustment data 
in accordance with the risk adjustment data collection approach 
established by HHS, or the State.
    <bullet> We have specified that issuers remit risk adjustment 
charges within 30 days.

IV. Collection of Information Requirements

    This final rule includes requirements that differ from those 
included in the proposed rule. The following provisions of provisions 
this final rule involve changes from the information collection 
requirements set forth in the proposed rule:
    <bullet> As described in Sec.  153.210(a), we have added a new 
provision to the final rule under which a State that contracts with 
more than one applicable reinsurance entity must notify HHS of the 
percentage of reinsurance contributions received from HHS for the State 
to be allocated to each applicable reinsurance entity.
    <bullet> As described in Sec.  153.220(b), we have added a new 
standard to the final rule under which a State electing to collect 
reinsurance contributions from issuers in the fully insured market must 
notify HHS of its intention to do so.
    <bullet> As described in Sec.  153.310(d), we have added a new 
standard to the final rule under which a State operating a risk 
adjustment program must submit annual summary reports of risk 
adjustment operations to HHS.
    <bullet> As described in Sec.  153.340(b)(1), we have modified the 
risk adjustment data collection standards from the proposed rule. A 
State operating a risk adjustment program must collect or calculate 
individual risk scores generated by the risk adjustment model in the 
Federally certified risk adjustment methodology.
    <bullet> As described in Sec.  153.400(d), we have modified the 
data standards applicable to contributing entities with respect to 
contribution amounts so that a contributing entity in the individual 
and fully insured market is no longer required to submit enrollment and 
premium data and a contributing entity in the self-insured market is no 
longer required to submit data on covered lives and total expenses. 
Instead, a contributing entity is required to submit

[[Page 17243]]

data necessary to substantiate the contribution amounts for the 
contributing entity.
    <bullet> As described in Sec.  153.520(c), we have added a new 
standard to the final rule under which a QHP issuer must submit to HHS 
a report with detailed description of the methods and specific bases 
used to attribute revenues and expenses in allowable costs and target 
amount to each QHP and across plans.
    <bullet> As described in Sec.  153.520(e), we have added a new 
standard to the final rule under which a QHP issuer must maintain for 
ten years and make available to HHS upon request the data used to make 
certain attributions and allocations of items of revenue or expenses, 
together with all supporting information required to determine that 
these methods and bases were accurately implemented.
    In addition, this final rule describes some information collections 
for which HHS plans to seek approval at a later date. For these 
information collections, HHS will issue future Federal Register notices 
to seek comments on those information collections, as required by the 
Paperwork Reduction Act. Included among such information collections 
for which HHS plans to seek later approval are the following 
requirements:
    <bullet> As described in Sec.  153.310(d), a State operating a risk 
adjustment program must submit annual summary reports of risk 
adjustment operations to HHS.
    <bullet> As described in Sec.  153.400(d), a contributing entity 
must submit data required to substantiate the contribution amounts for 
the contributing entity.
    <bullet> As described in Sec.  153.410(b), issuers of reinsurance-
eligible plans, in order to receive reinsurance payments, must make 
requests for payment in accordance with the standards of the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year or the applicable State notice of benefit and payment parameters.
    <bullet> As described in Sec.  153.520(c), a QHP issuer must submit 
to HHS a report with a detailed description of the methods and specific 
bases used to attribute revenues and expenses in allowable costs and 
target amount to each QHP and across plans.
    <bullet> As described in Sec.  153.530, a QHP issuer must submit to 
HHS data on premiums earned, allowable costs, and allowable 
administrative costs with respect to each QHP that the QHP issuer 
offers.
    <bullet> As described in Sec.  153.610(a)-(b) and Sec.  153.620(b), 
an issuer that offers risk adjustment covered plans must submit or make 
accessible, and must store, all risk adjustment data for those risk 
adjustment covered plans.
    <bullet> As described in Sec.  153.620, an issuer that offers risk 
adjustment covered plans must comply with data validation requests by 
the State or HHS on behalf of the State.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a control 
number assigned by OMB.

V. Summary of Regulatory Impact Analysis

    The following section focuses on the benefits and costs of the 
requirements included in this final rule, summarizing analysis from the 
detailed Regulatory Impact Analysis, available at http://cciio.cms.gov 
under ``Regulations and Guidance.'' That Regulatory Impact Analysis 
evaluates the impacts of this final rule and a second final rule, 
titled ``Patient Protection and Affordable Care Act; Establishment of 
Exchanges and Qualified Health Plans; Exchange Standards for 
Employers.'' The second final rule was made available for public 
inspection at the Office of the Federal Register on March 12, 2012.

A. Introduction

    HHS has examined the impacts of the final rule under Executive 
Orders 12866 and 13563, the Regulatory Flexibility Act (5 U.S.C. 601-
612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). 
Executive Orders 12866 and 13563 direct agencies to assess all costs 
and benefits (both quantitative and qualitative) of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). Executive Order 13563 emphasizes the importance 
of quantifying both costs and benefits, of reducing costs, of 
harmonizing rules, and of promoting flexibility. This rule has been 
designated an ``economically'' significant rule, under section 3(f)(1) 
of Executive Order 12866. Accordingly, the rule has been reviewed by 
the Office of Management and Budget.
    The Regulatory Flexibility Act requires agencies to analyze 
regulatory options that would minimize any significant impact of a rule 
on small entities. Few insurance issuers offering comprehensive health 
insurance policies fall below the size thresholds for ``small'' 
business established by the SBA. HHS concludes that this rule will not 
have a significant impact on a substantial number of small entities.
    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires 
that agencies prepare a written statement, which includes an assessment 
of anticipated costs and benefits, before proposing ``any rule that 
includes any Federal mandate that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100,000,000 or more (adjusted annually for 
inflation) in any one year.'' The current threshold after adjustment 
for inflation is approximately $136 million, using the most current 
(2011) Implicit Price Deflator for the Gross Domestic Product. Because 
States are not required to establish a reinsurance program or operate a 
risk adjustment program, the final rule does not impose a mandate to 
incur costs above the $136 million threshold on State, local, or tribal 
governments. Because operational details on how health insurance 
issuers and entities that must participate in the reinsurance program 
have not been finalized, we are not able to estimate whether the final 
rule imposes a mandate to incur costs above the $136 million threshold 
on the private sector.

B. Need for This Regulation

    This rule implements standards for States related to reinsurance 
and risk adjustment, and for health insurance issuers related to 
reinsurance, risk corridors, and risk adjustment consistent with the 
Affordable Care Act. These programs will mitigate the impacts of 
potential adverse selection and stabilize the individual and small 
group markets as insurance reforms and the Exchanges are implemented, 
starting in 2014. The transitional State-based reinsurance program 
serves to reduce the uncertainty of insurance risk in the individual 
market by making payments for high-cost enrollees. The temporary 
federally administered risk corridors program serves to protect against 
rate-setting uncertainty for QHPs by limiting the extent of issuer 
losses (and gains). On an ongoing basis, the State-based risk 
adjustment program is intended to protect health insurance issuers that 
attract higher-risk populations (such as individuals with chronic 
conditions).

C. Summary of Costs and Benefits

    Two regulations are being published to implement components of the 
Exchange and health insurance premium stabilization policies in the 
Affordable Care Act. The detailed Regulatory Impact Analysis evaluates 
the impacts of both proposed rules, while this summary focuses on the 
benefits and costs of the requirements in this final rule.

[[Page 17244]]

Methods of Analysis
    This regulatory impact analysis references Congressional Budget 
Office (CBO) estimates relating to the Affordable Care Act and CMS 
estimates published in the FY 2013 President's Budget relating to the 
Affordable Care Act and the proposed form of this rule. The CBO 
estimates remain the most comprehensive accounting of all the 
interacting provisions pertaining to the Affordable Care Act, and 
contain cost estimates of certain provisions that have not been 
independently estimated by CMS. We expect that the requirements in this 
final rule will significantly alter neither CBO's estimates nor CMS's 
estimates. Our review and analysis of the requirements of the final 
rule indicate that the impacts are within the margin of error of CBO's 
and CMS's models.
Summary of Costs and Benefits
    CBO estimated program payments and receipts for reinsurance and 
risk adjustment. As those programs do not begin operation until 2014, 
there are no outlays for reinsurance and risk adjustment in 2012 and 
2013. CBO estimates that risk adjustment payments and collections are 
equal in the aggregate, but that risk adjustment payments lag revenues 
by one quarter. CBO did not score the impact of the risk corridors 
program, but assumed collections would equal payments to plans in the 
aggregate. The payments and receipts in risk adjustment and reinsurance 
are financial transfers between issuers and the entities running those 
programs.

 Table 1--Estimated Outlays and Receipts for Reinsurance and Risk Adjustment Programs FY2012-FY2016, in Billions
                                                   of Dollars
----------------------------------------------------------------------------------------------------------------
              Year                     2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
Reinsurance and Risk Adjustment   ..............  ..............              11              18              18
 Program Payments \a\...........
Reinsurance and Risk Adjustment   ..............  ..............              12              16              18
 Program Receipts \a\...........
----------------------------------------------------------------------------------------------------------------
a Risk-adjustment payments lag receipts by one quarter. Note that although the estimates above are based upon
  CBO analyses, CBO did not account for reinsurance collections payable to the U.S. Treasury. Consequently, the
  receipts in the President's Fiscal Year 2013 Budget are higher than those estimated by CBO, though not
  appreciably different.
Source: CBO. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010.

    Benefits. Payments through reinsurance, risk adjustment, and risk 
corridors reduce the increased risk of financial loss that health 
insurance issuers might otherwise expect to incur in 2014. Insurers 
charge premiums for expected costs plus a risk premium, in order to 
build up reserve funds in case medical costs are higher than expected. 
Reinsurance, risk adjustment, and risk corridors payments reduce the 
risk to the issuer, reducing the risk premium.
    Costs. There are administrative costs to States and Exchanges to 
set up and administer these premium stabilization programs. However, 
States may use Exchange Planning and Establishment Grant funding 
awarded pursuant to section 1311 of the Affordable Care Act to develop 
these programs. There are also reporting costs for issuers to submit 
data and financial information.
Regulatory Options Considered
    Options considered for the reinsurance, risk adjustment, and risk 
corridor programs parallel the options considered for Exchanges. These 
programs aim to mitigate the impacts of potential adverse selection and 
stabilize the individual and small group markets as insurance reforms 
and the Affordable Insurance Exchanges are implemented, starting in 
2014. The Affordable Care Act structures reinsurance and risk 
adjustment as State-based programs with Federal guidelines on 
methodology, while it establishes risk corridors as a federally run 
program.
    HHS identified two regulatory options to the approach set forth in 
this final rule, as required by Executive Order 12866.
    Uniform Standards for Reinsurance and Risk Adjustment: Under this 
option, HHS would have set a single standard for State operation of 
reinsurance and risk adjustment. This option would have restricted 
State flexibility.
    State Flexibility for Reinsurance and Risk Adjustment: Under this 
option, States would have had a great deal of flexibility around 
whether and how to implement reinsurance and risk adjustment programs. 
This option would have allowed States to develop these programs to fit 
their State-specific characteristics. The programs would have been 
subject to few Federal standards.
Summary of Estimate Costs for Each Option
    A single standard for State operations of reinsurance and risk 
adjustment could have resulted in reduced Federal oversight cost. 
However, this option could also have reduced innovation and limited the 
diffusion of successful policies. On the other hand, while State 
flexibility could have allowed for State innovation, it would have 
increased the administrative burden on the Federal government and 
multi-State issuers, as policies and procedures could have varied 
significantly between States. HHS has adopted a middle course that aims 
to limit administrative costs, especially for the transitional 
reinsurance program, while also ensuring that the policy aims of the 
premium stabilization programs are met. These costs and benefits are 
discussed more fully in the detailed Regulatory Impact Analysis.

D. Accounting Statement

----------------------------------------------------------------------------------------------------------------
                                                                                   Unit discount
               Category                     Primary estimate        Year dollar        rate           Period
                                                                                     (percent)        covered
----------------------------------------------------------------------------------------------------------------
Benefits:
    Annualized Monetized ($millions/    Not estimated...........            2011               7       2012-2016
     year).
                                        Not estimated...........            2011               3       2012-2016
Costs:
    Annualized Monetized ($millions/    Not estimated...........            2011               7       2012-2016
     year).
                                        Not estimated...........            2011               3       2012-2016
Transfers:

[[Page 17245]]

 
    Federal Annualized Monetized        9925....................            2011               7       2012-2016
     ($millions/year).
                                        9633....................            2011               3       2012-2016
                                       -------------------------------------------------------------------------
        Qualitative...................  Risk Adjustment transfers funds among individual and small group market
                                         health plan issuers.
                                        Reinsurance collects funds from all issuers and distributes it to
                                         individual market issuers.
----------------------------------------------------------------------------------------------------------------
Note: For full documentation and discussion of these estimated costs and benefits see the detailed Regulatory
  Impact Analysis, available at http://cciio.cms.gov under ``Regulations and Guidance.''

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
requires agencies to prepare an initial regulatory flexibility analysis 
to describe the impact of the proposed rule on small entities, unless 
the head of the agency can certify that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The RFA generally defines a ``small entity'' as (1) A proprietary firm 
meeting the size standards of the Small Business Administration (SBA), 
(2) a not-for-profit organization that is not dominant in its field, or 
(3) a small government jurisdiction with a population of less than 
50,000. States and individuals are not included in the definition of 
``small entity.'' HHS uses 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 above, this final rule is necessary to implement 
standards for States related to reinsurance and risk adjustment, and 
for health insurance issuers related to reinsurance, risk corridors, 
and risk adjustment consistent with the Affordable Care Act. For 
purpose of the regulatory flexibility analysis, we expect entities 
offering health insurance plans, including fully insured health plan 
issuers and self-insured health plan issuers, to be affected by this 
proposed rule. We believe that health insurers would be classified 
under the North American Industry Classification System (NAICS) Codes 
524114 (Direct Health and Medical Insurance Carriers) According to SBA 
size standards, entities with average annual receipts of $7 million or 
less would be considered small entities for this NAICS code. Health 
issuers could also be classified in NAICS code 621491 (HMO Medical 
Centers), in which case the SBA size standard for small entities would 
be annual receipts of $10 million or less.
    HHS examined the health insurance industry in depth in the 
Regulatory Impact Analysis we prepared for the proposed rule on 
establishment of the Medicare Advantage program (69 FR 46866, August 3, 
2004). In that analysis, we determined that there were few insurance 
firms underwriting comprehensive health insurance policies (in 
contrast, for example, to travel insurance policies or dental discount 
policies) that fell below the size thresholds for ``small'' entities 
established by the SBA.
    Additionally, as discussed in the Medical Loss Ratio interim final 
rule (75 FR 74918), HHS used 2009 National Association of Insurance 
Commissioners (NAIC) Health and Life Blank annual financial statement 
data to develop an updated estimate of the number of small entities 
that offer comprehensive major medical coverage in the individual and 
group markets. For purposes of that analysis, HHS used total Accident 
and Health (A&H) earned premiums as a proxy for annual receipts. HHS 
estimated that there were 28 small entities with less than $7 million 
in A&H earned premiums offering individual or group comprehensive major 
medical coverage; however, this estimate may overstate the actual 
number of small health insurance issuers offering such coverage, since 
it does not include receipts from these companies' other lines of 
business.
    This final rule contains standards for premium stabilization 
programs required of health plan issuers including the risk adjustment 
program as well as the transitional reinsurance program and temporary 
risk corridors programs. Because we believe that few insurance firms 
offering comprehensive health insurance policies fall below the size 
thresholds for ``small'' entities established by the SBA, we conclude 
that this final rule will not have a significant economic impact on a 
substantial number of small entities.

List of Subjects in 45 CFR Part 153

    Administrative practice and procedure, Adverse selection, Health 
care, Health insurance, Health records, Organization and functions 
(Government agencies), Premium Stabilization, Reporting and 
recordkeeping requirements, Reinsurance, Risk adjustment, Risk 
corridors, Risk mitigation, State and local governments.
    For the reasons set forth in the preamble, the Department of Health 
and Human Services amends 45 CFR subtitle A, subchapter B, by adding 
part 153 to read as set forth below:

Subtitle A--Department of Health and Human Services

Subchapter B--Requirements Relating To Health Care Access

PART 153--STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS, AND 
RISK ADJUSTMENT UNDER THE AFFORDABLE CARE ACT

Subpart A--General Provisions
Sec.
153.10 Basis and scope.
153.20 Definitions.
Subpart B--State Notice of Benefit and Payment Parameters
153.100 State notice of benefit and payment parameters.
153.110 Standards for the State notice of benefit and payment 
parameters.
Subpart C--State Standards Related to the Reinsurance Program
153.200 [Reserved]
153.210 State establishment of a reinsurance program.
153.220 Collection of reinsurance contribution funds.
153.230 Calculation of reinsurance payments.
153.240 Disbursement of reinsurance payments.
153.250 Coordination with high-risk pools.
Subpart D--State Standards Related to the Risk Adjustment Program
153.300 [Reserved]
153.310 Risk adjustment administration.
153.320 Federally certified risk adjustment methodology.
153.330 State alternate risk adjustment methodology.
153.340 Data collection under risk adjustment.
153.350 Risk adjustment data validation standards.

[[Page 17246]]

Subpart E--Health Insurance Issuer and Group Health Plan Standards 
Related to the Reinsurance Program
153.400 Reinsurance contribution funds.
153.410 Requests for reinsurance payment.
Subpart F--Health Insurance Issuer Standards Related to the Risk 
Corridors Program
153.500 Definitions.
153.510 Risk corridors establishment and payment methodology.
153.520 Attribution and allocation of revenue and expense items.
153.530 Risk corridors data requirements.
Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program
153.600 [Reserved]
153.610 Risk adjustment issuer requirements.
153.620 Compliance with risk adjustment standards.

    Authority:  Secs. 1321, 1341-1343, Pub. L. 111-148, 24 Stat. 
119.

Subpart A--General Provisions


Sec.  153.10  Basis and scope.

    (a) Basis. This part is based on the following sections of title I 
of the Affordable Care Act (Pub. L. 111-148, 24 Stat. 119):
    (1) Section 1321. State flexibility in operation and enforcement of 
Exchanges and related requirements.
    (2) Section 1341. Transitional reinsurance program for individual 
market in each State.
    (3) Section 1342. Establishment of risk corridors for plans in 
individual and small group markets.
    (4) Section 1343. Risk adjustment.
    (b) Scope. This part establishes standards for the establishment 
and operation of a transitional reinsurance program, temporary risk 
corridors program, and a permanent risk adjustment program.


Sec.  153.20  Definitions.

    The following definitions apply to this part, unless the context 
indicates otherwise:
    Alternate risk adjustment methodology means a risk adjustment 
methodology proposed by a State for use instead of a Federally 
certified risk adjustment methodology that has not yet been certified 
by HHS.
    Applicable reinsurance entity means a not-for-profit organization 
that is exempt from taxation under Chapter 1 of the Internal Revenue 
Code of 1986 that carries out reinsurance functions under this part on 
behalf of the State. An entity is not an applicable reinsurance entity 
to the extent it is carrying out reinsurance functions under subpart C 
of this part on behalf of HHS.
    Attachment point means the threshold dollar amount for claims costs 
incurred by a health insurance issuer for an enrolled individual's 
covered benefits in a benefit year, after which threshold the claims 
costs for such benefits are eligible for reinsurance payments.
    Benefit year has the meaning given to the term in Sec.  155.20 of 
this subchapter.
    Calculation of payments and charges means the methodology applied 
to plan average actuarial risk to determine risk adjustment payments 
and charges for a risk adjustment covered plan.
    Calculation of plan average actuarial risk means the specific 
procedures used to determine plan average actuarial risk from 
individual risk scores for a risk adjustment covered plan, including 
adjustments for variable rating and the specification of the risk pool 
from which average actuarial risk is to be calculated.
    Coinsurance rate means the rate at which the applicable reinsurance 
entity will reimburse the health insurance issuer for claims costs 
incurred for an enrolled individual's covered benefits in a benefit 
year after the attachment point and before the reinsurance cap.
    Contributing entity means a health insurance issuer or a third 
party administrator on behalf a self-insured group health plan.
    Contribution rate means, with respect to a benefit year, the per 
capita amount each contributing entity must pay for a reinsurance 
program established under this part with respect to each reinsurance 
contribution enrollee who resides in that State.
    Exchange has the meaning given to the term in Sec.  155.20 of this 
subchapter.
    Federally certified risk adjustment methodology means a risk 
adjustment methodology that either has been developed and promulgated 
by HHS, or has been certified by HHS.
    Grandfathered health plan has the meaning given to the term in 
Sec.  147.140(a) of this subchapter.
    Group health plan has the meaning given to the term in Sec.  
144.103 of this subchapter.
    Health insurance coverage has the meaning given to the term in 
Sec.  144.103 of this subchapter.
    Health insurance issuer or issuer has the meaning given to the term 
in Sec.  144.103 of this subchapter.
    Health plan has the meaning given to the term in section 1301(b)(1) 
of the Affordable Care Act.
    Individual market has the meaning given to the term in Sec.  
144.103 of this subchapter.
    Individual risk score means a relative measure of predicted health 
care costs for a particular enrollee that is the result of a risk 
adjustment model.
    Large employer has the meaning given to the term in Sec.  155.20 of 
this subchapter.
    Qualified employer has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Qualified health plan or QHP has the meaning given to the term in 
Sec.  155.20 of this subchapter.
    Qualified individual has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Reinsurance cap means the threshold dollar amount for claims costs 
incurred by a health insurance issuer for an enrolled individual's 
covered benefits, after which threshold, the claims costs for such 
benefits are no longer eligible for reinsurance payments.
    Reinsurance contribution enrollee means an individual covered by a 
plan for which reinsurance contributions must be made pursuant to Sec.  
153.400.
    Reinsurance-eligible plan means, for the purpose of the reinsurance 
program, any health insurance coverage offered in the individual 
market, except for grandfathered plans and health insurance coverage 
not required to submit reinsurance contributions under Sec.  
153.400(a).
    Risk adjustment covered plan means, for the purpose of the risk 
adjustment program, any health insurance coverage offered in the 
individual or small group market with the exception of grandfathered 
health plans, group health insurance coverage described in Sec.  
146.145(c) of this subchapter, individual health insurance coverage 
described in Sec.  148.220 of this subchapter, and any other plan 
determined not to be a risk adjustment covered plan in the annual HHS 
notice of benefit and payment parameters.
    Risk adjustment data means all data that are used in a risk 
adjustment model, the calculation of plan average actuarial risk, or 
the calculation of payments and charges, or that are used for 
validation or audit of such data.
    Risk adjustment data collection approach means the specific 
procedures by which risk adjustment data is to be stored, collected, 
accessed, transmitted, validated and audited and the applicable 
timeframes, data formats, and privacy and security standards.
    Risk adjustment methodology means the risk adjustment model, the 
calculation of plan average actuarial risk, the calculation of payments 
and charges, the risk adjustment data collection approach, and the 
schedule for the risk adjustment program.
    Risk adjustment model means an actuarial tool used to predict 
health care

[[Page 17247]]

costs based on the relative actuarial risk of enrollees in risk 
adjustment covered plans.
    Risk pool means the State-wide population across which risk is 
distributed.
    Small group market has the meaning given to the term in section 
1304(a)(3) of the Affordable Care Act.
    State has the meaning given to the term in Sec.  155.20 of this 
subchapter.

Subpart B--State Notice of Benefit and Payment Parameters


Sec.  153.100  State notice of benefit and payment parameters.

    (a) General requirement for reinsurance. A State establishing a 
reinsurance program must issue an annual notice of benefit and payment 
parameters specific to that State if that State elects to:
    (1) Modify the data requirements or data collection frequency for 
health insurance issuers to receive reinsurance payment from those 
specified in the annual HHS notice of benefit and payment parameters 
for the applicable benefit year;
    (2) Collect reinsurance contributions pursuant to Sec.  
153.220(a)(1);
    (3) Collect additional reinsurance contributions pursuant to Sec.  
153.220(g);
    (4) Use more than one applicable reinsurance entity; or
    (5) Modify any reinsurance payment parameters from those specified 
in the annual HHS notice of benefit and payment parameters for the 
applicable benefit year.
    (b) Risk adjustment requirements. A State operating a risk 
adjustment program must issue an annual notice of benefit and payment 
parameters specific to that State setting forth the risk adjustment 
methodology and data validation standards it will use.
    (c) State notice deadlines. If a State is required to publish an 
annual State notice of benefit and payment parameters, it must do so by 
March 1 of the calendar year prior to the benefit year for which the 
notice applies.
    (d) State failure to publish notice. Any State establishing a 
reinsurance program or operating a risk adjustment program that fails 
to publish a State notice of benefit and payment parameters within the 
period specified in paragraph (c) of this section must--
    (1) Adhere to the data requirements and data collection frequency 
for health insurance issuers to receive reinsurance payments that are 
specified in the annual HHS notice of benefit and payment parameters 
for the applicable benefit year;
    (2) Forgo the collection of reinsurance contributions pursuant to 
Sec.  153.220(a);
    (3) Forgo the collection of additional reinsurance contributions 
pursuant to Sec.  153.220(g);
    (4) Forgo the use of more than one applicable reinsurance entity;
    (5) Adhere to the reinsurance parameters specified in the annual 
HHS notice of benefit and payment parameters for the applicable benefit 
year; and
    (6) Adhere to the risk adjustment methodology and data validation 
standards published in the annual HHS notice of benefit and payment 
parameters for use by HHS when operating risk adjustment on behalf of a 
State.


Sec.  153.110  Standards for the State notice of benefit and payment 
parameters.

    (a) Data requirements. If a State that establishes a reinsurance 
program elects to modify the data requirements or data collection 
frequency for health insurance issuers to receive reinsurance payment 
from those specified in the annual HHS notice of benefit and payment 
parameters for the applicable benefit year, the State notice of benefit 
and payment parameters must specify those modifications.
    (b) Reinsurance collection. If a State that establishes a 
reinsurance program elects to collect reinsurance contributions 
pursuant to Sec.  153.220(a), then the State must announce its 
intention to do so in the State notice of benefit and payment 
parameters.
    (c) Additional collections. If a State that establishes a 
reinsurance program elects to collect additional funds pursuant to 
Sec.  153.220(g), the State must publish the following:
    (1) A description of the purpose of the additional collection, 
including whether it will be used to cover reinsurance payments, 
administrative costs, or both; and
    (2) The additional contribution rate at which the funds will be 
collected.
    (d) Multiple reinsurance entities. If a State plans to use more 
than one applicable reinsurance entity, the State must publish in the 
State notice of benefit and payment parameters, for each applicable 
reinsurance entity--
    (1) The geographic boundaries for that entity;
    (2) An estimate of the number of enrollees in fully insured plans 
within those boundaries;
    (3) An estimate of the number of enrollees in the individual market 
within those boundaries;
    (4) An estimate of the reinsurance contributions that will be 
collected by the applicable reinsurance entity;
    (5) The percentage of reinsurance contributions received from HHS 
for the State to be allocated to the applicable reinsurance entity; and
    (6) An estimate of the amount of reinsurance payments that will be 
made to issuers with respect to enrollees within those boundaries.
    (e) Reinsurance payment. If a State that establishes a reinsurance 
program intends to modify the attachment point, reinsurance cap, or 
coinsurance rate from the corresponding parameters specified in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year, the State must--
    (1) Describe those modified parameters in the State notice of 
benefit and payment parameters; and
    (2) Apply the modified parameters uniformly throughout the State.
    (f) Risk adjustment content. A State operating a risk adjustment 
program must provide the information set forth in Sec.  153.330(a) and 
the data validation standards set forth pursuant to Sec.  153.350 in 
the State notice of benefit and payment parameters.

Subpart C--State Standards Related to the Reinsurance Program


Sec.  153.200  [Reserved]


Sec.  153.210  State establishment of a reinsurance program.

    (a) General requirement. Each State is eligible to establish a 
reinsurance program for the years 2014 through 2016.
    (1) If a State establishes a reinsurance program, the State must 
enter into a contract with one or more applicable reinsurance entities 
to carry out the provisions of this subpart.
    (2) If a State contracts with more than one applicable reinsurance 
entity, the State must:
    (i) Ensure that each applicable reinsurance entity operates in a 
distinct geographic area with no overlap of jurisdiction with any other 
applicable reinsurance entity;
    (ii) Use the same payment parameters with respect to each 
applicable reinsurance entity; and
    (iii) Notify HHS in the manner and timeframe specified by HHS of 
the percentage of reinsurance contributions received from HHS for the 
State to be allocated to each applicable reinsurance entity.
    (3) A State may permit an applicable reinsurance entity to 
subcontract specific administrative functions required under this 
subpart and subpart E of this part.
    (4) A State must review and approve subcontracting arrangements to 
ensure efficient and appropriate expenditures

[[Page 17248]]

of administrative funds collected under this subpart.
    (5) A State must ensure that the applicable reinsurance entity 
completes all reinsurance-related activities for benefit years 2014 
through 2016 and any activities required to be undertaken in subsequent 
periods.
    (b) Multi-State reinsurance arrangements. Multiple States may 
contract with a single entity to serve as an applicable reinsurance 
entity for each State. In such a case, the reinsurance programs for 
those States must be operated as separate programs.
    (c) Non-electing States. HHS will establish a reinsurance program 
for each State that does not elect to establish its own reinsurance 
program.
    (d) Oversight. Each State that establishes a reinsurance program 
must ensure that the applicable reinsurance entity complies with all 
provisions of this subpart and subpart E of this part throughout the 
duration of its contract.


Sec.  153.220  Collection of reinsurance contribution funds.

    (a) Collections. If a State establishes a reinsurance program, 
then--
    (1) The State may elect to--
    (i) Have the applicable reinsurance entity collect contributions 
for reinsurance contribution enrollees who reside in that State 
directly from issuers of health plans; or
    (ii) Ensure that the applicable reinsurance entity accepts 
contributions for reinsurance contribution enrollees who reside in that 
State with respect to issuers of health plans from HHS.
    (2) The State must ensure that the applicable reinsurance entity 
accepts contributions for reinsurance contribution enrollees who reside 
in that State with respect to all contributing entities other than 
issuers of health plans from HHS.
    (b) Notification of election to collect. If a State establishes a 
reinsurance program, then that State must notify HHS by December 1, 
2012, if the State elects to collect reinsurance contributions from 
fully insured plans for the 2014 benefit year, and by September 1 of 
the calendar year that is two years prior to the applicable benefit 
year if the State elects to collect reinsurance contributions from 
fully insured plans for any benefit year after 2014, in each case 
pursuant to paragraph (a)(1)(i) of this section. The State's 
notification will be effective for the applicable benefit year and each 
subsequent benefit year during which activities related to the 
transitional reinsurance program continue.
    (c) Contribution funding. Reinsurance contributions collected must 
fund the following:
    (1) Reinsurance payments that will total, on a national basis, $10 
billion in 2014, $6 billion in 2015, and $4 billion in 2016;
    (2) U.S. Treasury contributions that will total, on a national 
basis, $2 billion in 2014, $2 billion in 2015, and $1 billion in 2016; 
and
    (3) Administrative expenses of the applicable reinsurance entity or 
HHS when performing reinsurance functions under this subpart.
    (d) Distribution of reinsurance contributions. If a State 
establishes a reinsurance program, HHS will distribute funds collected 
for reinsurance contribution enrollees who reside in a State to the 
applicable reinsurance entity for that State (or the applicable 
reinsurance entities, if more than one, in accordance with the 
allocation specified by the State pursuant to Sec.  153.210(a)(2)(ii)), 
less:
    (1) The State's pro rata share of the U.S. Treasury contribution 
described in paragraph (c)(2) of this section; and
    (2) The State's pro rata share of administrative expenses incurred 
by HHS when performing reinsurance functions under this subpart.
    (e) National contribution rate. HHS will set in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year the national contribution rate and the proportion of contributions 
collected under the national contribution rate to be allocated to:
    (1) Reinsurance payments;
    (2) Payments to the U.S. Treasury as described in paragraph (c)(2) 
of this section; and
    (3) Administrative expenses of the applicable reinsurance entity or 
HHS when performing reinsurance functions under this subpart.
    (f) State collections. If a State elects to have the applicable 
reinsurance entity collect contributions pursuant to paragraph 
(a)(1)(i) of this section, the State must ensure that:
    (1) The applicable reinsurance entity for the State collects 
contributions for reinsurance contribution enrollees who reside in that 
State directly from issuers of health plans in the amounts required 
under the national contribution rate.
    (2) Reinsurance contributions are allocated as required in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year, such that:
    (i) Contributions allocated for reinsurance payments are only used 
for reinsurance payments; and
    (ii) Contributions allocated for payments to the U.S. Treasury are 
paid to the U.S. Treasury in a timeframe to be established by HHS.
    (g) Additional State collections. If a State establishes a 
reinsurance program, it may elect to collect more than the amounts that 
would be collected based on the national contribution rate set forth in 
the annual HHS notice of benefit and payment parameters for the 
applicable benefit year to provide:
    (1) Funding for administrative expenses of the applicable 
reinsurance entity; or
    (2) Additional funding for reinsurance payments.
    (h) Administration of additional State collections. If a State 
elects to collect additional amounts pursuant to paragraph (g) of this 
section for administrative expenses or reinsurance payments, then:
    (1) The State must notify HHS within 30 days after publication of 
the draft annual HHS notice of benefit and payment parameters for the 
applicable benefit year of the additional contribution rate that it 
elects to collect for additional administrative expenses. The State 
must ensure that the State's applicable reinsurance entity--
    (i) Collects these additional amounts for additional administrative 
expenses from issuers of health plans when the State elects to collect 
contributions from such issuers under paragraph (a)(1) of this section; 
and
    (ii) Accepts additional amounts for additional administrative 
expenses from HHS from all contributing entities from which HHS 
collects in accordance with the State's election under paragraph (a)(1) 
of this section.
    (2) Notwithstanding paragraphs (a)(1) and (a)(2) of this section, 
the State must ensure that the applicable reinsurance entity collects 
all additional reinsurance contributions for the purpose of reinsurance 
payments from all contributing entities.


Sec.  153.230  Calculation of reinsurance payments.

    (a) General requirement. A health insurance issuer of a non-
grandfathered individual market plan becomes eligible for reinsurance 
payments when its claims costs for an individual enrollee's covered 
benefits in a benefit year exceed the attachment point.
    (b) Reinsurance payment parameters. If a State establishes a 
reinsurance program, the State must use, subject to any modifications 
made pursuant to paragraph (d) of this section, the payment formula and 
values for the attachment point, reinsurance cap, and coinsurance rate 
for each year

[[Page 17249]]

commencing in 2014 and ending in 2016 established in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year.
    (c) Reinsurance payments. If a State establishes a reinsurance 
program, the State must ensure, subject to Sec.  153.240(b)(1), that 
the reinsurance payment represents the product of the coinsurance rate 
multiplied by the health insurance issuer's claims costs for an 
individual enrollee's covered benefits that the health insurance issuer 
incurs between the attachment point and the reinsurance cap.
    (d) State modification of reinsurance payment formula. If a State 
establishes a reinsurance program, the State may modify the reinsurance 
payment formula in accordance with the following:
    (1) The State may only use one or more of the following methods to 
modify the reinsurance payment formula:
    (i) Increasing or decreasing the attachment point;
    (ii) Increasing, decreasing, or eliminating the reinsurance cap; or
    (iii) Increasing or decreasing the coinsurance rate.
    (2) The State must publish any such modification to the reinsurance 
payment formula and parameters in a State notice of benefit and payment 
parameters as described in subpart B of this part.
    (3) Any State modification to the reinsurance payment formula 
pursuant to paragraph (d)(1) of this section must be reasonably 
calculated to ensure that reinsurance contributions received toward 
reinsurance are sufficient to cover payments that the applicable 
reinsurance entity is obligated to make under that State formula for 
the given benefit year for the reinsurance program.
    (4) The State must use a uniform attachment point, coinsurance 
rate, and reinsurance cap throughout the State.


Sec.  153.240  Disbursement of reinsurance payments.

    (a) Data collection. If a State establishes a reinsurance program, 
the State must ensure that the applicable reinsurance entity collects 
from health insurance issuers of reinsurance-eligible plans data 
required to calculate payments described in Sec.  153.230, according to 
the data requirements and data collection frequency specified by the 
State in the notice of benefit and payment parameters described in 
subpart B of this part.
    (b) Reinsurance entity payments. If a State establishes a 
reinsurance program, the State must ensure that each applicable 
reinsurance entity does not make payments to health insurance issuers 
that exceed contributions received to date by the applicable 
reinsurance entity.
    (1) If a State, or HHS on behalf of the State, determines that 
reinsurance payments requested for a benefit year will likely exceed 
the reinsurance contributions that will be received for the year, the 
State may require that the applicable reinsurance entity reduce (or HHS 
on behalf of the State may reduce) reinsurance payments, so long as the 
manner in which payments are reduced is fair and equitable for all 
health insurance issuers in the individual market.
    (2) The State must ensure that an applicable reinsurance entity 
makes payment to the health insurance issuer of a reinsurance-eligible 
plan after receiving a valid claim for payment from that health 
insurance issuer in accordance with the requirements of Sec.  153.410.
    (c) Maintenance of records. If a State establishes a reinsurance 
program, the State must maintain books, records, documents, and other 
evidence of accounting procedures and practices of the reinsurance 
program for each benefit year for at least 10 years.


Sec.  153.250  Coordination with high-risk pools.

    (a) General requirement. The State must eliminate or modify any 
State high-risk pool to the extent necessary to carry out the 
reinsurance program established under this subpart.
    (b) Coordination with high-risk pools. The State may coordinate the 
State high-risk pool with the reinsurance program to the extent that 
the State high-risk pool conforms to the provisions of this subpart.

Subpart D--State Standards Related to the Risk Adjustment Program


Sec.  153.300  [Reserved]


Sec.  153.310  Risk adjustment administration.

    (a) State eligibility to establish a risk adjustment program. (1) A 
State that elects to operate an Exchange is eligible to establish a 
risk adjustment program.
    (2) Any State that does not elect to operate an Exchange, or that 
HHS has not approved to operate an Exchange, will forgo implementation 
of all State functions in this subpart, and HHS will carry out all of 
the provisions of this subpart on behalf of the State.
    (3) Any State that elects to operate an Exchange but does not elect 
to administer risk adjustment will forgo implementation of all State 
functions in this subpart, and HHS will carry out all of the provisions 
of this subpart on behalf of the State.
    (b) Entities eligible to carry out risk adjustment activities. If a 
State is operating a risk adjustment program, the State may elect to 
have an entity other than the Exchange perform the State functions of 
this subpart, provided that the entity meets the standards promulgated 
by HHS to be an entity eligible to carry out Exchange functions.
    (c) Timeframes. A State, or HHS on behalf of the State, must 
implement risk adjustment for the 2014 benefit year and every benefit 
year thereafter. For each benefit year, a State, or HHS on behalf of 
the State, must notify issuers of risk adjustment payments due or 
charges owed annually by June 30 of the year following the benefit 
year.
    (d) State summary reports. Each State operating a risk adjustment 
program must submit to HHS an annual summary of risk adjustment program 
operations in the manner and timeframe specified by HHS.


Sec.  153.320  Federally certified risk adjustment methodology.

    (a) General requirement. Any risk adjustment methodology used by a 
State, or HHS on behalf of the State, must be a Federally certified 
risk adjustment methodology. A risk adjustment methodology may become 
Federally certified by one of the following processes:
    (1) The risk adjustment methodology is developed by HHS and 
published in an annual HHS notice of benefit and payment parameters; or
    (2) An alternate risk adjustment methodology is submitted by a 
State in accordance with Sec.  153.330, reviewed and certified by HHS, 
and published in an annual HHS notice of benefit and payment 
parameters.
    (b) Publication of methodology in notices. The publication of a 
risk adjustment methodology by HHS in an annual HHS notice of benefit 
and payment parameters or by a State in an annual State notice of 
benefit and payment parameters described in subpart B of this part must 
include:
    (1) A complete description of the risk adjustment model, 
including--
    (i) Factors to be employed in the model, including but not limited 
to demographic factors, diagnostic factors, and utilization factors, if 
any;
    (ii) The qualifying criteria for establishing that an individual is 
eligible for a specific factor;
    (iii) Weights assigned to each factor; and
    (iv) The schedule for the calculation of individual risk scores.

[[Page 17250]]

    (2) A complete description of the calculation of plan average 
actuarial risk.
    (3) A complete description of the calculation of payments and 
charges.
    (4) A complete description of the risk adjustment data collection 
approach.
    (5) The schedule for the risk adjustment program.
    (c) Use of methodology for States that do not operate a risk 
adjustment program. HHS will specify in the annual HHS notice of 
benefit and payment parameters for the applicable year the Federally 
certified risk adjustment methodology that will apply in States that do 
not operate a risk adjustment program.


Sec.  153.330  State alternate risk adjustment methodology.

    (a) State request for alternate methodology certification. (1) A 
State request to HHS for the certification of an alternate risk 
adjustment methodology must include:
    (i) The elements specified in Sec.  153.320(b);
    (ii) The calibration methodology and frequency of calibration; and
    (iii) The statistical performance metrics specified by HHS.
    (2) The request must include the extent to which the methodology:
    (i) Accurately explains the variation in health care costs of a 
given population;
    (ii) Links risk factors to daily clinical practice and is 
clinically meaningful to providers;
    (iii) Encourages favorable behavior among providers and health 
plans and discourages unfavorable behavior;
    (iv) Uses data that is complete, high in quality, and available in 
a timely fashion;
    (v) Is easy for stakeholders to understand and implement;
    (vi) Provides stable risk scores over time and across plans; and
    (vii) Minimizes administrative costs.
    (b) State renewal of alternate methodology. If a State is operating 
a risk adjustment program, the State may not implement a recalibrated 
risk adjustment model or otherwise alter its risk adjustment 
methodology without first obtaining HHS certification.
    (1) Recalibration of the risk adjustment model must be performed at 
least as frequently as described in paragraph (a)(1)(ii) of this 
section;
    (2) A State request to implement a recalibrated risk adjustment 
model or otherwise alter its risk adjustment methodology must include 
any changes to the parameters described in paragraph (a)(1) of this 
section.


Sec.  153.340  Data collection under risk adjustment.

    (a) Data collection requirements. If a State is operating a risk 
adjustment program, the State must collect risk adjustment data.
    (b) Minimum standards. (1) If a State is operating a risk 
adjustment program, the State may vary the amount and type of data 
collected, but the State must collect or calculate individual risk 
scores generated by the risk adjustment model in the applicable 
Federally certified risk adjustment methodology;
    (2) If a State is operating a risk adjustment program, the State 
must require that issuers offering risk adjustment covered plans in the 
State comply with data privacy and security standards set forth in the 
applicable risk adjustment data collection approach; and
    (3) If a State is operating a risk adjustment program, the State 
must ensure that any collection of personally identifiable information 
is limited to information reasonably necessary for use in the 
applicable risk adjustment model, calculation of plan average actuarial 
risk, or calculation of payments and charges. Except for purposes of 
data validation, the State may not collect or store any personally 
identifiable information for use as a unique identifier for an 
enrollee's data, unless such information is masked or encrypted by the 
issuer, with the key to that masking or encryption withheld from the 
State.
    (4) If a State is operating a risk adjustment program, the State 
must implement security standards that provide administrative, 
physical, and technical safeguards for the individually identifiable 
information consistent with the security standards described at 45 CFR 
164.308, 164.310, and 164.312.


Sec.  153.350  Risk adjustment data validation standards.

    (a) General requirement. The State, or HHS on behalf of the State, 
must ensure proper implementation of any risk adjustment software and 
ensure proper validation of a statistically valid sample of risk 
adjustment data from each issuer that offers at least one risk 
adjustment covered plan in that State.
    (b) Adjustment to plan average actuarial risk. The State, or HHS on 
behalf of the State, may adjust the plan average actuarial risk for a 
risk adjustment covered plan based on errors discovered with respect to 
implementation of risk adjustment software or as a result of data 
validation conducted pursuant to paragraph (a) of this section.
    (c) Adjustment to charges and payments. The State, or HHS on behalf 
of the State, may adjust charges and payments to all risk adjustment 
covered plan issuers based on the adjustments calculated in paragraph 
(b) of this section.
    (d) Appeals. The State, or HHS on behalf of the State, must provide 
an administrative process to appeal findings with respect to the 
implementation of risk adjustment software or data validation.

Subpart E--Health Insurance Issuer and Group Health Plan Standards 
Related to the Reinsurance Program


Sec.  153.400  Reinsurance contribution funds.

    (a) General requirement. Each contributing entity must make 
reinsurance contributions at the national contribution rate (and any 
additional contribution rate if the State has elected to collect 
additional contributions pursuant to Sec.  153.220(g)) for the 
reinsurance program for all reinsurance contribution enrollees who 
reside in a State, in a frequency and manner determined by HHS or the 
State, to HHS or the applicable reinsurance entity, as applicable.
    (1) A contributing entity must make reinsurance contributions on 
behalf of its group health plans and health insurance coverage, except 
as set forth in paragraph (a)(2) of this section.
    (2) A contributing entity is not required to make contributions on 
behalf of plans or health insurance coverage that consist solely of 
excepted benefits as defined by section 2791(c) of the PHS Act.
    (b) Multiple reinsurance entities. If the State establishes or 
contracts with more than one applicable reinsurance entity, the 
contributing entity must make reinsurance contributions to each 
applicable reinsurance entity for the reinsurance contribution 
enrollees who reside in the applicable geographic area.
    (c) Timeframe for Federal collections. Each contributing entity 
must submit contributions to HHS on a quarterly basis beginning January 
15, 2014.
    (d) Data requirements. Each contributing entity must submit to HHS 
and each applicable reinsurance entity, if the State elects to collect 
reinsurance contributions, data required to substantiate the 
contribution amounts for the contributing entity, in the manner and 
timeframe specified by the State or HHS.


Sec.  153.410  Requests for reinsurance payment.

    (a) General requirement. An issuer of a reinsurance-eligible plan 
may make a

[[Page 17251]]

request for payment when an enrollee of that reinsurance-eligible plan 
has met the criteria for reinsurance payment set forth in the annual 
HHS notice of benefit and payment parameters for the applicable year or 
the State notice of benefit and payment parameters described in subpart 
B of this part, as applicable.
    (b) Manner of request. An issuer of a reinsurance-eligible plan 
must make requests for payment in accordance with the requirements of 
the annual HHS notice of benefit and payment parameters for the 
applicable benefit year or the State notice of benefit and payment 
parameters described in subpart B of this part, as applicable.

Subpart F--Health Insurance Issuer Standards Related to the Risk 
Corridors Program


Sec.  153.500  Definitions.

    The following definitions apply to this subpart:
    Administrative costs mean, with respect to a QHP, total non-claims 
costs incurred by the QHP issuer for the QHP, as described in Sec.  
158.160(b) of this subchapter.
    Allowable administrative costs mean, with respect to a QHP, 
administrative costs of the QHP, up to 20 percent of the premiums 
earned with respect to the QHP (including any premium tax credit under 
any governmental program).
    Allowable costs mean, with respect to a QHP, an amount equal to the 
sum of incurred claims of the QHP issuer for the QHP, within the 
meaning of Sec.  158.140 of this subchapter (including adjustments for 
any direct and indirect remuneration); expenditures by the QHP issuer 
for the QHP for activities that improve health care quality as set 
forth in Sec.  158.150 of this subchapter; expenditures by the QHP 
issuer for the QHP related to health information technology and 
meaningful use requirements as set forth in Sec.  158.151 of this 
subchapter; and the adjustments set forth in Sec.  153.530(b).
    Charge means the flow of funds from QHP issuers to HHS.
    Direct and indirect remuneration means prescription drug rebates 
received by a QHP issuer within the meaning of Sec.  158.140(b)(1)(i) 
of this subchapter.
    Payment means the flow of funds from HHS to QHP issuers.
    Premiums earned mean, with respect to a QHP, all monies paid by or 
for enrollees with respect to that plan as a condition of receiving 
coverage, including any fees or other contributions paid by or for 
enrollees, within the meaning of Sec.  158.130 of this subchapter.
    Risk corridors means any payment adjustment system based on the 
ratio of allowable costs of a plan to the plan's target amount.
    Target amount means, with respect to a QHP, an amount equal to the 
total premiums earned with respect to a QHP, including any premium tax 
credit under any governmental program, reduced by the allowable 
administrative costs of the plan.


Sec.  153.510  Risk corridors establishment and payment methodology.

    (a) General requirement. A QHP issuer must adhere to the 
requirements set by HHS in this subpart and in the annual HHS notice of 
benefit and payment parameters for the establishment and administration 
of a program of risk corridors for calendar years 2014, 2015, and 2016.
    (b) HHS payments to health insurance issuers. QHP issuers will 
receive payment from HHS in the following amounts, under the following 
circumstances:
    (1) When a QHP's allowable costs for any benefit year are more than 
103 percent but not more than 108 percent of the target amount, HHS 
will pay the QHP issuer an amount equal to 50 percent of the allowable 
costs in excess of 103 percent of the target amount; and
    (2) When a QHP's allowable costs for any benefit year are more than 
108 percent of the target amount, HHS will pay to the QHP issuer an 
amount equal to the sum of 2.5 percent of the target amount plus 80 
percent of allowable costs in excess of 108 percent of the target 
amount.
    (c) Health insurance issuers' remittance of charges. QHP issuers 
must remit charges to HHS in the following amounts, under the following 
circumstances:
    (1) If a QHP's allowable costs for any benefit year are less than 
97 percent but not less than 92 percent of the target amount, the QHP 
issuer must remit charges to HHS in an amount equal to 50 percent of 
the difference between 97 percent of the target amount and the 
allowable costs; and
    (2) When a QHP's allowable costs for any benefit year are less than 
92 percent of the target amount, the QHP issuer must remit charges to 
HHS in an amount equal to the sum of 2.5 percent of the target amount 
plus 80 percent of the difference between 92 percent of the target 
amount and the allowable costs.


Sec.  153.520  Attribution and allocation of revenue and expense items.

    (a) Attribution to QHP. Each item of revenue or expense in 
allowable costs or the target amount with respect to a QHP must be 
reasonably attributable to the operation of the QHP, with the 
attribution based on a generally accepted accounting method, 
consistently applied. To the extent that an issuer utilizes a specific 
method for allocating expenses for purposes of Sec.  158.170 of this 
subchapter, the method used for purposes of this paragraph must be 
consistent.
    (b) Allocation across plans. Each item of revenue or expense in 
allowable costs or the target amount must be reasonably allocated 
across a QHP issuer's plans, with the allocation based on a generally 
accepted accounting method, consistently applied. To the extent that an 
issuer utilizes a specific method for allocating expenses for purposes 
of Sec.  158.170 of this subchapter, the method used for purposes of 
this paragraph must be consistent.
    (c) Disclosure of attribution and allocation methods. A QHP issuer 
must submit to HHS a report, in the manner and timeframe specified in 
the annual HHS notice of benefit and payment parameters, with a 
detailed description of the methods and specific bases used to perform 
the attributions and allocations set forth in paragraphs (a) and (b) of 
this section.
    (d) Attribution of reinsurance and risk adjustment to benefit year. 
A QHP issuer must attribute reinsurance payments and contributions and 
risk adjustment payments and charges to allowable costs for the benefit 
year with respect to which the reinsurance payments or contributions or 
risk adjustment calculations apply.
    (e) Maintenance of records. A QHP issuer must maintain for 10 years 
and make available to HHS upon request the data used to make the 
attributions and allocations set forth in paragraphs (a) and (b) of 
this section, together with all supporting information required to 
determine that these methods and bases were accurately implemented.


Sec.  153.530  Risk corridors data requirements.

    (a) Premium data. A QHP issuer must submit to HHS data on the 
premiums earned with respect to each QHP that the issuer offers in the 
manner and timeframe set forth in the annual HHS notice of benefit and 
payment parameters.
    (b) Allowable costs. A QHP issuer must submit to HHS data on the 
allowable costs incurred with respect to each QHP that the QHP issuer 
offers in the manner and timeframe set forth in the annual HHS notice 
of benefit and payment parameters. For purposes of this subpart, 
allowable costs must be--

[[Page 17252]]

    (1) Increased by--
    (i) Any risk adjustment charges paid by the issuer for the QHP 
under the risk adjustment program established pursuant to subpart D of 
this part; and
    (ii) Any reinsurance contributions made by the issuer for the QHP 
under the transitional reinsurance program established pursuant to 
subpart C of this part.
    (2) Reduced by--
    (i) Any risk adjustment payments received by the issuer for the QHP 
under the risk adjustment program established pursuant to subpart D of 
this part;
    (ii) Any reinsurance payments received by the issuer for the QHP 
under the transitional reinsurance program established pursuant to 
subpart C of this part; and
    (iii) Any cost-sharing reduction payments received by the issuer 
for the QHP.
    (c) Allowable administrative costs. A QHP issuer must submit to HHS 
data on the allowable administrative costs incurred with respect to 
each QHP that the QHP issuer offers in the manner and timeframe set 
forth in the annual HHS notice of benefit and payment parameters.

Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program


Sec.  153.600  [Reserved]


Sec.  153.610  Risk adjustment issuer requirements.

    (a) Data requirements. An issuer that offers risk adjustment 
covered plans must submit or make accessible all required risk 
adjustment data for those risk adjustment covered plans in accordance 
with the risk adjustment data collection approach established by the 
State, or by HHS on behalf of the State.
    (b) Risk adjustment data storage. An issuer that offers risk 
adjustment covered plans must store all required risk adjustment data 
in accordance with the risk adjustment data collection approach 
established by the State, or by HHS on behalf of the State.
    (c) Issuer contracts. An issuer that offers risk adjustment covered 
plans may include in its contract with a provider, supplier, physician, 
or other practitioner, provisions that require such contractor's 
submission of complete and accurate risk adjustment data in the manner 
and timeframe established by the State, or HHS on behalf of the State. 
These provisions may include financial penalties for failure to submit 
complete, timely, or accurate data.
    (d) Assessment of charges. An issuer that offers risk adjustment 
covered plans that has a net balance of risk adjustment charges 
payable, including adjustments made pursuant to Sec.  153.350(c), will 
be notified by the State, or by HHS on behalf of the State, of those 
net charges, and must remit those risk adjustment charges to the State, 
or to HHS on behalf of the State, as applicable.
    (e) Charge submission deadline. An issuer must remit net charges to 
the State, or HHS on behalf of the State, within 30 days of 
notification of net charges payable by the State, or HHS on behalf of 
the State.


Sec.  153.620  Compliance with risk adjustment standards.

    (a) Issuer support of data validation. An issuer that offers risk 
adjustment covered plans must comply with any data validation requests 
by the State or HHS on behalf of the State.
    (b) Issuer records maintenance requirements. An issuer that offers 
risk adjustment covered plans must retain any information requested to 
support risk adjustment data validation for a period of at least ten 
years after the date of the report.

    Dated: March 14, 2012.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: March 14, 2012.
Kathleen Sebelius,
Secretary.
[FR Doc. 2012-6594 Filed 3-16-12; 11:15 am]
BILLING CODE 4120-01-P