[Federal Register Volume 77, Number 63 (Monday, April 2, 2012)]
[Rules and Regulations]
[Pages 19522-19525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7835]


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OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 890

48 CFR Parts 1602, 1615, 1632, and 1652

RIN 3206-AM39


Federal Employees Health Benefits Program: New Premium Rating 
Method for Most Community Rated Plans

AGENCY: U.S. Office of Personnel Management.

ACTION: Final rule.

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SUMMARY: The U.S. Office of Personnel Management (OPM) is issuing a 
final regulation amending the Federal Employees Health Benefits (FEHB) 
regulations and also the Federal Employees Health Benefits Acquisition 
Regulation (FEHBAR). This final regulation makes minor changes to an 
interim final regulation on the same subject published June 29, 2011. 
The rule replaces the procedure by which premiums for community rated 
FEHB carriers are compared with the rates charged to a carrier's 
similarly sized subscriber groups (SSSGs). The new procedure utilizes a 
medical loss ratio (MLR) threshold, analogous to that defined in both 
the Affordable Care Act (ACA), and in Department of Health and Human 
Services (HHS) regulations and replaces the outdated SSSG methodology 
with a more modern and transparent calculation while still ensuring 
that the FEHB Program is receiving a fair rate. This will result in a 
more streamlined process for plans and increased competition and plan 
choice for enrollees. The new process will apply to all community rated 
plans, except those required by their state to use traditional 
community rating (TCR). This new process will be phased in over two 
years, with optional participation for non-TCR plans in the first year.

DATES: This final rule is effective May 2, 2012.

FOR FURTHER INFORMATION CONTACT: Louise Dyer, Senior Policy Analyst, 
(202) 606-0770.

SUPPLEMENTARY INFORMATION: The Office of Personnel Management is 
issuing a final regulation to establish a new rate-setting procedure 
for most FEHB plans that are subject to community rating. This final 
rule makes minor changes to an interim final rule published June 29, 
2011 that replaced the current rate negotiation process with a 
requirement that most community rated plans meet an FEHB-specific 
medical loss ratio (MLR) target. Plans that are required to use 
traditional community rating (TCR) per their state regulator will be 
exempt from this new rate-setting procedure. This final rule makes 
several changes to the interim final rule published June 29, 2011. 
First, OPM has removed a clause that said that the previous year's MLR 
would have no effect on the current plan year. The change was added in 
response to public comments and is intended to give OPM appropriate 
flexibility to determine a fair and accurate MLR for each plan in each 
year. Second, OPM has laid out a deadline for publishing the FEHB-
specific MLR threshold. Third, OPM made technical changes to a 
certificate attesting to accurate pricing in order to accommodate a 
change in timing. Fourth, clarifying language explains that OPM will 
substitute its own credibility adjustment for that defined by HHS.

Analysis of and Responses to Public Comments

    We received two comment letters on the interim final rule from FEHB 
carriers and carrier groups. The comments and OPM's responses are 
detailed below.
    Comment: A commenter noted that FEHB carriers will need as much 
advance notice of the MLR threshold for the following year as possible. 
This commenter recommended early notice by OPM, even in advance of the 
annual Call Letter, to allow carriers to plan for rating actions and 
complete filings.
    Response: For the first years of MLR-based rate negotiation, OPM 
will be gathering information about FEHB carrier MLRs which will aid in 
setting future MLR thresholds. OPM will make every effort to provide 
such advance notice as the rate negotiation methodology matures. This 
final regulation text states that OPM will make the MLR threshold 
public no later than twelve calendar months before plan years beginning 
with 2014.
    Comment: A commenter raised the need for clarity and consistency 
regarding the identification and allocation of costs and revenues for 
the MLR calculation. Specifically, the commenter asked for additional 
clarification on what can be included as expenses, such as fees and 
charges related to Affordable Care Act implementation.
    Response: As stated in the interim final regulation, OPM will adopt 
the HHS definition of MLR for purposes of MLR-based rate negotiation in 
FEHB. We anticipate that any clarifications around this calculation 
that are offered by HHS will be adopted by OPM. OPM will only allow 
costs for items that are allowed by the FEHB contract to be included in 
the MLR calculation.
    Comment: Both commenters raised concerns about the subsidization 
penalty reserve account. One commenter stated that using penalty funds 
to subsidize other plans is inconsistent with both the current 
similarly sized subscriber group (SSSG) methodology and the ACA MLR 
rebates. Another commenter stated that OPM needs to be sure that this 
reserve does not act as a disincentive for carriers to operate in the 
most efficient way possible.
    Response: OPM has intentionally structured the subsidization 
penalty differently from either the SSSG adjustments or the ACA MLR 
rebates. The subsidization penalties are to be shared among community 
rated plans in order to avoid a plan paying a penalty into an account 
from which it can solely benefit.
    In response to the concern about the subsidization penalty reserve 
acting as a disincentive to efficiency, OPM feels the penalty will 
encourage plans to offer a fair rate at the time of proposal and 
therefore will not act as a disincentive to efficiency.
    Comment: Both commenters expressed concern about OPM's plan to 
calculate MLR using one year of data, as compared to a three year 
average for the HHS calculation. The commenters were concerned about 
large FEHB plans having to manage between the two methodologies. One 
commenter mentioned that an annual MLR calculation would not allow FEHB 
plans to mitigate variation when carriers engage in activities that 
entail large one-time start up costs.
    Response: Regarding the commenters concern about managing two 
methodologies, OPM feels applying an MLR calculation similar to the ACA 
required calculation, instead of the SSSG methodology, provides more 
consistency than there would have been without this regulatory change.
    OPM must balance its goal of negotiating the best rate for FEHB 
payers every year with the concerns of FEHB carriers about managing 
variation. For example, OPM may consider the MLR for one or more 
previous years when calculating the current year's MLR. This allows OPM 
the flexibility to prevent carriers who have historically offered 
favorable rates from being overly penalized for an unusually low MLR in

[[Page 19523]]

a given year. OPM issues its annual rate instructions to plans well in 
advance of contract negotiations which would contain any variations 
required to address such concerns.
    Comment: A commenter stated the need for advance knowledge and 
understanding of the criteria that will be applied during the annual 
reconciliation audit. Specifically, the commenter asked to better 
understand the factors that will be considered and the potential 
outcomes of the reconciliation process itself once applied. 
Additionally, the commenter would like to understand the roles of OPM 
and the OPM Inspector General in audit oversight.
    Response: OPM does not have plans to change any element of the 
audit process as a result of this regulation. As such, OPM will not add 
any information about the audit process to this regulation.
    Comment: A commenter raised a concern about how the ACA MLR rebates 
will be treated in calculating the FEHB MLR. Specifically, the 
commenter wanted to be sure that disregarding the ACA MLR payments from 
the FEHB MLR calculation will not result in inappropriate duplicative 
payments and suggested that the methodology be revised to include any 
ACA rebate in the numerator along with medical costs.
    Response: The ACA rebate for a carrier reflects a three year 
average MLR for their entire book of business and is not specific to 
the FEHB. OPM wants the FEHB MLR to be representative of only FEHB 
experience. Its purpose is to ensure the FEHB is receiving a fair rate 
each year. Including data that is not specific to FEHB claims 
experience and premiums would diminish OPM's ability to do this. 
Duplicative payments should not result because any amounts paid to the 
subsidization penalty reserve should be captured in the following 
year's ACA MLR calculation.
    Comment: A commenter recommended that OPM permit plans to aggregate 
premiums by parent company when calculating the MLR to mitigate wide 
variation in MLRs among a parent company's plan offerings.
    Response: The regulation allows for this recommendation through the 
rate instructions if OPM deems it to be appropriate. We do not expect 
to allow for aggregation within the first few years of implementing 
MLR, but will consider this option as the MLR experience matures.
    Comment: One commenter expressed concern about OPM's plan to use a 
different form than HHS for submitting MLR information. The commenter 
is concerned about the administrative burden of the two forms and 
recommends that OPM follow the model of the HHS form and make it public 
before the end of 2011.
    Response: Because formula for calculating the MLR required in this 
context is the same as that outlined in 45 CFR part 158, OPM intends to 
model its form closely on the HHS form.
    Comment: One commenter recommended that OPM implement a credibility 
adjustment for small or new plans for the MLR calculation in the 2012 
pilot year.
    Response: OPM agrees that such an adjustment is appropriate once 
the new methodology is fully implemented in 2013 and beyond. OPM does 
not plan to use such an adjustment in the 2012 pilot year since plans 
requiring an adjustment can choose not to use the new methodology. OPM 
intends to adjust the calculation for small or new plans for years 2013 
and beyond.
    Comment: A commenter recommended that OPM issue guidance for those 
plans that choose to participate in the 2012 MLR pilot. Specifically, 
the commenter would like guidance confirming that the FEHB MLR 
calculation will follow the HHS methodology in treatment of Federal 
income taxes, not-for-profit community benefits, and assessments on 
health insurers to support medical centers.
    Response: OPM has been speaking with FEHB carriers participating in 
the 2012 MLR pilot about their specific concerns and has offered some 
guidance in that context. OPM will continue conversations with FEHB 
carriers as needed. OPM intends to be consistent with the HHS 
methodology unless doing so conflicts with the FEHB contract.

Changes Made Since the Interim Final Rule Was Published

    The interim final regulation on this subject published June 29, 
2011 (76 FR 38282). In Sec.  1602.170-14(b), the first sentence of the 
interim final rule read ``The FEHB-specific MLR will be calculated on 
an annual basis with the prior year's ratio having no effect on the 
current plan year.'' In this final rule, OPM removed the clause ``with 
the prior year's ratio having no effect on the current plan year'' 
since OPM may use an adjustment taking previous year's experience into 
account.
    Also in Sec.  1602.170-14(b), this final rule states that OPM will 
put forth the FEHB-specific MLR threshold no later than 12 calendar 
months before the beginning of plan years beginning with 2014. The 
final rule states that OPM will publish the 2013 threshold no later 
than 8 months before the beginning of that plan year. In Sec.  
1602.170-14(c), this final rule explains that OPM will set a 
credibility adjustment in place of the one defined by HHS at 45 CFR 
158.230-158.232.
    In the interim final rule, the supplementary information included a 
sentence stating that ``To complete the FEHB-specific MLR threshold 
calculation after the carrier calculated the ACA-required MLR, FEHB 
carriers will report claims incurred in the plan year and paid through 
March 31 of the following year.'' OPM has determined that a longer 
period of claims data would create a more stable calculation for 
carriers and therefore OPM will request through rate instructions that 
carriers submit claims through June 30 of the following year. To 
accommodate the change in timing, carriers using the MLR methodology 
will have to submit a ``Certificate of Accurate Cost or Pricing Data 
for Community-Rated Carriers'' followed by a ``Certificate of Accurate 
MLR Calculation'' at a later date. In the interim final rule there was 
only one certificate for all carriers. The new certificate language is 
in Sec.  1615.406-2.

Regulatory Impact Analysis

    OPM has examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and 
Executive Order 13563, which directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public, health, and 
safety effects, distributive impacts, and equity). A regulatory impact 
analysis must be prepared for major rules with economically significant 
effects of $100 million or more in any one year. This rule is not 
considered a major rule because OPM estimates that premiums paid by 
Federal employees and agencies will be very similar under the old and 
new payment methodologies. This rule will be cost-neutral. OPM's 
intention is to keep FEHB premiums stable and sustainable using this 
more transparent methodology.

List of Subjects

5 CFR Part 890

    Government employees, Health facilities, Health insurance, Health 
professions, Hostages, Iraq, Kuwait, Lebanon, Military personnel, 
Reporting and recordkeeping requirements, Retirement.

48 CFR Parts 1602, 1615, 1632, and 1652

    Government employees, Government procurement, Health insurance,

[[Page 19524]]

Reporting and recordkeeping requirements.

    U.S. Office of Personnel Management.
John Berry,
Director.
    For the reasons set forth in the preamble, OPM is adopting the 
interim rule published June 29, 2011, at 76 FR 38282 as final with the 
following changes:

TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM

Chapter 16--Office of Personnel Management Federal Employees Health 
Benefits Acquisition Regulation

Subchapter A--General

PART 1602--DEFINITIONS OF WORDS AND TERMS

0
1. The authority citation for part 1602 continues to read as follows:

    Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c); 48 CFR 1.301.

0
2. Revise Sec.  1602.170-14 to read as follows:


Sec.  1602.170-14  FEHB-specific medical loss ratio threshold 
calculation.

    (a) Medical Loss Ratio (MLR) means the ratio of plan incurred 
claims, including the issuer's expenditures for activities that improve 
health care quality, to total premium revenue determined by OPM, as 
defined by the Department of Health and Human Services in 45 CFR part 
158.
    (b) The FEHB-specific MLR will be calculated on an annual basis. 
This FEHB-specific MLR will be measured against an FEHB-specific MLR 
threshold to be put forth by OPM no later than 12 calendar months 
before the beginning of plan years 2014 and beyond. OPM will publish 
the FEHB-specific MLR threshold no later than 8 months before the 
beginning of plan year 2013.
    (c) In place of the credibility adjustment at 45 CFR 158.230-
158.232, OPM will set a separate credibility adjustment to account for 
the special circumstances of small FEHB plans in annual rate 
instructions to carriers.

Subchapter C--Contracting Methods and Contract Types

PART 1615--CONTRACTING BY NEGOTIATION

0
3. The authority citations for part 1615 continue to read as follows:

    Authority:  Audit and records--5 U.S.C. 8913; 40 U.S.C. 486(c); 
48 CFR 1.301. Negotiation--5 U.S.C. 8902.

0
4. In Sec.  1615.402, revise paragraph (c)(3)(ii)(A) to read as 
follows:


Sec.  1615.402  Pricing policy.

* * * * *
    (c) * * *
    (3) * * *
    (ii) * * *
    (A) For contracts with 1,500 or more enrollee contracts for which 
the FEHB Program premiums for the contract term will be at or above the 
threshold at FAR 15.403-4(a)(1), OPM will require the carrier to 
provide the data and methodology used to determine the FEHB Program 
rates. OPM will also require the data and methodology used to determine 
the medical loss ratio (MLR) as defined in the ACA (Pub. L. 111-148) 
and as defined by HHS in 45 CFR part 158 for all FEHB community rated 
plans other than those required by state law to use Traditional 
Community Rating. The carrier will provide cost or pricing data, as 
well as the FEHB-specific MLR threshold data required by OPM in its 
rate instructions for the applicable contract period. OPM will evaluate 
the data to ensure that the rate is reasonable and consistent with the 
requirements in this chapter. If necessary, OPM may require the carrier 
to provide additional documentation.
* * * * *

0
5. Revise Sec.  1615.406-2 to read as follows:


Sec.  1615.406-2  Certificates of accurate cost or pricing data for 
community rated carriers.

    (a) The contracting officer will require a carrier with a contract 
meeting the requirements in 1615.402(c)(2) or (3) to execute one or 
more of the Certificates contained in this section. A carrier with a 
contract meeting the requirements in 1615.402(c)(2) will complete the 
appropriate Certificate(s) and keep such on file at the carrier's place 
of business in accordance with 1652.204-70. A carrier with a contract 
meeting the requirements in 1615.402(c)(3) will complete and submit the 
appropriate certificate(s) to OPM.
    (b) A carrier using the SSSG methodology described in 
1615.402(c)(3)(i) will submit the ``Certificate of Accurate Cost or 
Pricing Data for Community-Rated Carriers (SSSG methodology)'' along 
with its rate reconciliation during the first quarter of the applicable 
contract year. A carrier using the MLR methodology described in 
1615.402(c)(3)(ii) will submit two forms. The ``Certificate of Accurate 
Cost or Pricing Data for Community-Rated Carriers (MLR methodology)'' 
will be submitted along with the rate reconciliation during the first 
quarter of the applicable contract year. The ``Certificate of Accurate 
MLR Calculation'' will be submitted when the carrier submits its FEHB-
specific MLR calculation to OPM.


(Beginning of first certificate)
Certificate of Accurate Cost or Pricing Data for Community-Rated 
Carriers (SSSG methodology)
    This is to certify that, to the best of my knowledge and belief: 
(1) The cost or pricing data submitted (or, if not submitted, 
maintained and identified by the carrier as supporting documentation) 
to the Contracting officer or the Contracting officer's representative 
or designee, in support of the ------*FEHB Program rates were developed 
in accordance with the requirements of 48 CFR Chapter 16 and the FEHB 
Program contract and are accurate, complete, and current as of the date 
this certificate is executed; and (2) the methodology used to determine 
the FEHB Program rates is consistent with the methodology used to 
determine the rates for the carrier's Similarly Sized Subscriber 
Groups.

    *Insert the year for which the rates apply.

Firm:------------------------------------------------------------------

Name:------------------------------------------------------------------

Signature:-------------------------------------------------------------

Date of Execution:-----------------------------------------------------

(End of first certificate)

(Beginning of second certificate)

Certificate of Accurate Cost or Pricing Data for Community-Rated 
Carriers (MLR methodology)
    This is to certify that, to the best of my knowledge and belief: 
(1) The cost or pricing data submitted (or, if not submitted, 
maintained and identified by the carrier as supporting documentation) 
to the Contracting officer or the Contracting officer's representative 
or designee, in support of the ------*FEHB Program rates were developed 
in accordance with the requirements of 48 CFR Chapter 16 and the FEHB 
Program contract and are accurate, complete, and current as of the date 
this certificate is executed;
    *Insert the year for which the rates apply.

Firm:------------------------------------------------------------------

Name:------------------------------------------------------------------

Signature:-------------------------------------------------------------

Date of Execution:-----------------------------------------------------

(End of second certificate)

(Beginning of third certificate)

Certificate of Accurate MLR Calculation
    This is to certify that, to the best of my knowledge and belief: 
the determination of the carrier's FEHB-

[[Page 19525]]

specific medical loss ratio for * is accurate, complete, and consistent 
with the methodology as stated in Sec.  1615.402(c)(3)(ii).

    *Insert the year for which the MLR calculation applies.

Firm:------------------------------------------------------------------

Name:------------------------------------------------------------------

Signature:-------------------------------------------------------------

Date of Execution:-----------------------------------------------------

(End of certificate)

Subchapter H--Clauses and Forms

PART 1652--CONTRACT CLAUSES

0
6. The authority citation for Part 1652 continues to read as follows:

    Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c); 48 CFR 1.301.


0
7. In Sec.  1652.216-70, revise paragraph (b)(4) to read as follows:


Sec.  1652.216-70   Accounting and price adjustment.

* * * * *
    (b) * * *
    (4) If rates are determined by comparison with the FEHB-specific 
MLR threshold, then if the MLR for the carrier's FEHB plan is found to 
be lower than the published FEHB-specific MLR threshold, the carrier 
must pay a subsidization penalty equal to the difference into a 
subsidization penalty account.
* * * * *
[FR Doc. 2012-7835 Filed 3-30-12; 8:45 am]
BILLING CODE 6325-64-P