DEPARTMENT OF HEALTH AND HUMAN SERVICES 

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

[CMS-9964-F] 

RIN 0938-AR51 

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

Parameters for 2014 

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of Health 

and Human Services (HHS).

ACTION: Final rule. 

SUMMARY: This final rule provides detail and parameters related to: the risk 

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

for Federally-facilitated Exchanges; advance payments of the premium tax credit; the 

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

program. Cost-sharing reductions and advance payments of the premium tax credit, 

combined with new insurance market reforms, are expected to significantly increase the 

number of individuals with health insurance coverage, particularly in the individual 

market. In addition, we expect the premium stabilization programs – risk adjustment, 

reinsurance, and risk corridors – to protect against the effects of adverse selection. These 

programs, in combination with the medical loss ratio program and market reforms 

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

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

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

affordable health insurance. 

DATES: This final rule is effective on [OFR-insert date 60 days after the date of filing 

for public inspection at OFR]. 
CMS-9964-F 2 

FOR FURTHER INFORMATION CONTACT: 

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

492-4305, for general information. 

Kelly Horney, (410) 786-0558, for matters related to the risk adjustment program 

generally. 

Michael Cohen, (301) 492-4277, for matters related to the risk adjustment methodology 

and the methodology for determining the reinsurance contribution rate and payment 

parameters. 

Adrianne Glasgow, (410) 786-0686, for matters related to the reinsurance program. 

Jaya Ghildiyal, (301) 492-5149, for matters related to the risk corridors program and user 

fees for Federally-facilitated Exchanges. 

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

advance payments of the premium tax credit. 

Bobbie Knickman, (410) 786-4161, for matters related to the distributed data collection 

approach for the HHS-operated risk adjustment and reinsurance programs. 

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

Program. 

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

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Executive Summary 

A. Purpose 

B. Summary of Major Provisions 

C. Costs and Benefits 

II. Background 
CMS-9964-F 3 

A. Premium Stabilization 

B. Cost-Sharing Reductions 

C. Advance Payments of the Premium Tax Credit 

D. Exchanges 

E. Market Reform Rules 

F. Essential Health Benefits and Actuarial Value 

G. Medical Loss Ratio 

H. Tribal Consultation 

III. Provisions of the Proposed Rule and Responses to Public Comments 

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

B. Provisions and Parameters for the Permanent Risk Adjustment Program 

1. Approval of State-Operated Risk Adjustment 

2. Risk Adjustment User Fees 

3. Overview of the Risk Adjustment Methodology HHS Will Implement 

when Operating Risk Adjustment on Behalf of a State 

4. State Alternate Methodology 

5. Risk Adjustment Data Validation 

6. State-Submitted Alternate Risk Adjustment Methodology 

C. Provisions and Parameters for the Transitional Reinsurance Program 

1. State Standards Related to the Reinsurance Program 

2. Contributing Entities and Excluded Entities 

3. National Contribution Rate 

4. Calculation and Collection of Reinsurance Contributions 

5. Eligibility for Reinsurance Payments under the Health Insurance Market 

Reform Rules 
CMS-9964-F 4 

6. Reinsurance Payment Parameters 

7. Uniform Adjustment to Reinsurance Payments 

8. Supplemental State Reinsurance Payment Parameters 

9. Allocation and Distribution of Reinsurance Contributions 

10. Reinsurance Data Collection Standards 

D. Provisions for the Temporary Risk Corridors Program 

1. Definitions 

2. Risk Corridors Establishment and Payment Methodology 

3. Risk Corridors Data Requirements 

4. Manner of Risk Corridor Data Collection 

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

1. Exchange Responsibilities with Respect to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

2. Exchange Functions: Certification of Qualified Health Plans 

3. QHP Minimum Certification Standards Relating to Advance Payments of 

the Premium Tax Credit and Cost-Sharing Reductions 

4. Health Insurance Issuer Responsibilities with Respect to Advance 

Payments of the Premium Tax Credit and Cost-Sharing Reductions 

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

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

Reinsurance Programs 

1. Background 

2. Issuer Data Collection and Submission Requirements 

H. Small Business Health Options Program 
CMS-9964-F 5 

I. Medical Loss Ratio Requirements under the Patient Protection and Affordable 

Care Act 

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

MLR Reports and Distribution of Rebates 

2. Deduction of Community Benefit Expenditures 

3. Summary of Errors in the MLR Regulation 

IV. Provisions of the Final Regulations 

V. Collection of Information Requirements 

VI. Regulatory Impact Analysis 

A. Statement of Need 

B. Overall Impact 

C. Impact Estimates of the Payment Notice Provisions 

D. Alternatives Considered 

E. Regulatory Flexibility Act 

F. Unfunded Mandates 

G. Federalism 

Regulations Text 

Acronyms 

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

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

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

111–152)) 

APTC Advance payments of the premium tax credit 

ASO Administrative services only contractor 

AV Actuarial Value 
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CFR Code of Federal Regulations 

CHIP Children’s Health Insurance Program 

CMS Centers for Medicare & Medicaid Services 

COBRA Consolidated Omnibus Budget Reconciliation Act 

EHB Essential health benefits 

ERISA Employee Retirement Income Security Act 

FFE Federally-facilitated Exchange 

FF-SHOP Federally-facilitated Small Business Health Options Program 

Exchange 

FPL Federal poverty level 

HCC Hierarchical condition category 

HHS United States Department of Health and Human Services 

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

L. 104–191) 

IHS Indian Health Service 

IRS Internal Revenue Service 

MLR Medical loss ratio 

NAIC National Association of Insurance Commissioners 

OMB United States Office of Management and Budget 

OPM United States Office of Personnel Management 

PHS Act Public Health Service Act 

PRA Paperwork Reduction Act of 1985 

QHP Qualified health plan 

SHOP Small Business Health Options Program 

The Code Internal Revenue Code of 1986 
CMS-9964-F 7 

TPA Third party administrator 

I. Executive Summary 

A. Purpose 

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

private health insurance through competitive marketplaces called Affordable Insurance 

Exchanges, “Exchanges,” or “Marketplaces.” Individuals who enroll in qualified health 

plans through Exchanges may receive premium tax credits that make health insurance 

more affordable and financial assistance to cover some or all cost sharing for essential 

health benefits. We expect that the premium tax credits, combined with the new 

insurance reforms, will significantly increase the number of individuals with health 

insurance coverage, particularly in the individual market. Premium stabilization 

programs – risk adjustment, reinsurance, and risk corridors – are expected to protect 

against the effects of adverse selection. These programs, in combination with the 

medical loss ratio program and market reforms extending guaranteed availability (also 

known as guaranteed issue), and prohibiting the use of factors such as health status, 

medical history, gender, and industry of employment to set premium rates, will help to 

ensure that every American has access to high-quality, affordable health care. 

 Premium stabilization programs: The Affordable Care Act establishes a 

permanent risk adjustment program, a transitional reinsurance program, and a temporary 

risk corridors program to provide payments to health insurance issuers that cover higherrisk 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 and Exchanges facilitate increased 

enrollment. The reinsurance program will reduce the uncertainty of insurance risk in the 
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individual market by partially offsetting issuers’ risk associated with high-cost enrollees. 

The risk corridors program will protect against uncertainty in rate setting for qualified 

health plans by limiting the extent of issuers’ financial losses and gains. On an ongoing 

basis, the risk adjustment program is intended to provide increased payments to health 

insurance issuers that attract higher-risk populations, such as those with chronic 

conditions, and reduce the incentives for issuers to avoid higher-risk enrollees. Under 

this program, funds are transferred from issuers with lower-risk enrollees to issuers with 

higher-risk enrollees. 

 In the Premium Stabilization Rule1 we laid out a regulatory framework for these 

three programs. In that rule, we stated that the specific payment parameters for those 

programs would be published in this final rule. In this final rule, we describe these 

standards, and include payment parameters for these programs. 

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

final rule establishes standards for advance payments of the premium tax credit and for 

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

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

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

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

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

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

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

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

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

 

1

 77 FR 17220 (March 23, 2012). 
CMS-9964-F 9 

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

health plan (QHP) purchased on an Exchange affordable by reducing an eligible 

taxpayer’s out-of-pocket premium cost. 

 Under sections 1401, 1411, and 1412 of the Affordable Care Act and 45 CFR part 

155 subpart D, an Exchange makes an advance determination of tax credit eligibility for 

individuals who enroll in QHP coverage through the Exchange and seek financial 

assistance. Using information available at the time of enrollment, the Exchange 

determines whether the individual meets the income and other requirements for advance 

payments and the amount of the advance payments that can be used to pay premiums. 

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

to the issuer of the QHP in which the individual enrolls. 

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

sharing for certain individuals enrolled in a QHP through an Exchange, and section 1412 

of the Affordable Care Act provides for the advance payment of these reductions to 

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

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

services provided through Exchange-based QHP coverage. The statute directs issuers to 

reduce cost sharing for essential health benefits for individuals with household incomes 

between 100 and 400 percent of the Federal poverty level (FPL) who are enrolled in a 

silver level QHP through an individual market Exchange and are eligible for advance 

payments of the premium tax credit. The statute also directs issuers to eliminate cost 

sharing for Indians (as defined in section 4(d) of the Indian Self-Determination and 

Education Assistance Act) with a household income at or below 300 percent of the FPL 

who are enrolled in a QHP of any “metal” level (that is, bronze, silver, gold, or platinum) 

through the individual market in the Exchange, and prohibits issuers of QHPs from 
CMS-9964-F 10 

requiring cost sharing for Indians, regardless of household income, for items or services 

furnished directly by the Indian Health Service, an Indian Tribe, a Tribal Organization, or 

an Urban Indian Organization, or through referral under contract health services. 

 HHS published a bulletin2

 outlining an intended regulatory approach to 

calculating actuarial value and implementing cost-sharing reductions on February 24, 

2012 (AV/CSR Bulletin). The AV/CSR Bulletin outlined an intended regulatory 

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

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

cost-sharing reductions to issuers, among other topics. In the Exchange Establishment 

Rule,3 we set forth eligibility standards for these cost-sharing reductions. In this final 

rule, we make minor revisions to the eligibility standards for families and establish 

standards governing the administration of cost-sharing reductions and provide specific 

payment parameters for the program. 

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

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

participating issuers to generate funding to support its operations. When operating a 

Federally-facilitated Exchange under section 1321(c)(1) of the Affordable Care Act, HHS 

has the authority under sections 1321(c)(1) and 1311(d)(5)(A) of the statute to collect and 

spend such user fees. In addition, 31 U.S.C. 9701 permits a Federal agency to establish a 

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

A-25 Revised (Circular A-25R) establishes Federal policy regarding user fees and 

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

benefits derived from Federal activities beyond those received by the general public. In 

 

2 Available at: http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf. 3 77 FR 18310 (March 27, 2012). 
CMS-9964-F 11 

this final rule, we establish a user fee for issuers participating in a Federally-facilitated 

Exchange. 

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

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

SHOP that provides QHP options for small businesses. The Exchange Establishment 

Rule sets forth standards for the administration of SHOP Exchanges. In this final rule, 

we clarify and expand upon the standards established in the Exchange Establishment 

Rule. 

 Medical loss ratio (MLR) program: Section 2718 of the Public Health Service 

Act (PHS Act) generally requires health insurance issuers to submit an annual MLR 

report to HHS and provide rebates of premium if they do not achieve specified MLRs. 

On December 1, 2010, we published an interim final rule entitled “Health Insurance 

Issuers Implementing Medical Loss Ratio (MLR) Requirements under the Patient 

Protection and Affordable Care Act” (75 FR 74864) which established standards for the 

MLR program. Since then, we have made several revisions and technical corrections to 

those rules. This final rule amends the regulations to specify how issuers are to account 

for payments or receipts from the risk adjustment, reinsurance, and risk corridors 

programs, and to change the timing of the annual MLR report and distribution of rebates 

required of issuers to account for the premium stabilization programs. This final rule also 

amends the regulations to revise the treatment of community benefit expenditures in the 

MLR calculation for issuers exempt from Federal income tax to promote a level playing 

field. 

B. Summary of the Major Provisions

 This final rule fills in the framework established by the Premium Stabilization 

Rule with provisions and parameters for the three premium stabilization programs — the 
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permanent risk adjustment program, the transitional reinsurance program, and the 

temporary risk corridors program. It also establishes key provisions governing advance 

payments of the premium tax credit, cost-sharing reductions, and user fees for Federallyfacilitated Exchanges. Finally, the final rule includes a number of amendments relating 

to the SHOP and the MLR program. 

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

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

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

implemented. We are finalizing a number of standards and parameters for implementing 

the risk adjustment program, including: 

• Provisions governing a State operating a risk adjustment program; 

• The risk adjustment methodology HHS will use when operating risk 

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

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

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

risk adjustment on behalf of a State. 

 Reinsurance: The Affordable Care Act directs that a transitional reinsurance 

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

individual market from 2014 through 2016. In this final rule, we establish a number of 

standards and parameters for implementing the reinsurance program, including: 

• Provisions excluding certain types of health insurance coverage and plans 

from reinsurance contributions; 

• The national per capita contribution rate and the methodology for 

calculating the contributions to be paid by health insurance issuers and selfinsured group health plans; 
CMS-9964-F 13 

• Provisions establishing eligibility for reinsurance payments; 

• The uniform reinsurance payment parameters and the approach that HHS 

will use to calculate and administer the reinsurance program on behalf of a State; 

and 

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

reinsurance program. 

 Risk Corridors: The temporary risk corridors program permits the Federal 

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

from 2014 through 2016. We are finalizing a change to the risk corridors calculation in 

which reinsurance contributions will be treated as a regulatory fee instead of an 

adjustment to allowable costs, and are replacing the term “taxes” in our proposed 

definition of taxes with the term “taxes and regulatory fees.” We are also finalizing 

provisions governing the treatment of profits and taxes and regulatory fees within the risk 

corridors calculation. This provision aligns the risk corridors calculation with the MLR 

calculation. We are also finalizing an annual schedule for the program and standards for 

data submissions. 

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

Affordable Care Act provide for advance payments of the premium tax credit for lowand moderate-income enrollees in a QHP through an Exchange. In this final rule, we are 

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

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

advance payments of the premium tax credit; and 

• Provisions governing the allocation of premiums to essential health 

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

provide for reductions in cost sharing on essential health benefits for low- and moderateincome enrollees in silver level health plans offered in the individual market on 

Exchanges. It also provides for reductions in cost sharing for Indians enrolled in QHPs at 

any metal level. In this final rule, we establish a number of standards governing the costsharing reduction program, including: 

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

structures for enrollees of various income levels and for Indians to implement costsharing reductions; 

• The maximum annual limitations on cost sharing applicable to the plan 

variations; 

• Provisions governing the assignment and reassignment of enrollees to plan 

variations based on eligibility for cost-sharing reductions; 

• Provisions governing issuer submissions of estimates of cost-sharing 

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

• Provisions governing reconciliation of these advance estimates against 

actual cost-sharing reductions provided. 

 User Fees: This final rule establishes a user fee, calculated as a percentage of the 

premium for a QHP, applicable to issuers participating in a Federally-facilitated 

Exchange. This final rule also outlines HHS’s approach to calculating the fee. 

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

employees a variety of QHPs. In this final rule, we establish a number of standards and 

processes for implementing SHOP Exchanges, including: 
CMS-9964-F 15 

• Standards governing the definitions and counting methods used to determine 

whether an employer is a small or large employer and whether an employee is a 

full-time employee; 

• A method for employers to make a QHP available to employees in the Federallyfacilitated SHOP (FF-SHOP); 

• The default minimum participation rate in the FF-SHOP; 

• QHP standards linking FFE and FF-SHOP participation and ensuring broker 

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

• Allowing Exchanges and SHOPs to selectively list only brokers registered with 

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

MLR: The MLR program requires an issuer to rebate a portion of premiums if its 

medical loss ratio falls short of the applicable standard for the reporting year. This ratio 

is calculated as the sum of health care claims costs and amounts spent on quality 

improvement activities divided by premium revenue, excluding taxes and regulatory fees, 

and after accounting for the premium stabilization programs. In this final rule, we 

establish a number of standards governing the MLR program, including: 

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

payments and charges in the MLR calculation; 

• A revised timeline for MLR reporting and rebates; and 

• Provisions modifying the treatment of community benefit expenditures. 

C. Costs and Benefits

 The provisions of this final rule, combined with other provisions in the Affordable 

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

affordable and accessible to millions of Americans who currently do not have affordable 
CMS-9964-F 16 

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

widely documented.4

 

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

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

people were uninsured in the United States,5

 while only around 10.8 million were 

enrolled in the individual market.6

 The relatively small fraction of the target market that 

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

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

to access coverage. 

 The provisions of this final rule, combined with other provisions in the Affordable 

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

markets while stabilizing premiums. The transitional reinsurance program will help to 

stabilize premiums in the individual market. Reinsurance will attenuate individual 

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

higher risk individuals, potentially including those currently in State high-risk pools. In 

2014, it is anticipated that reinsurance payments will result in premium decreases in the 

individual market of between 10 and 15 percent relative to the expected cost of premiums 

without reinsurance. 

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

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

 

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

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

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

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

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

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

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

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

year, available at http://cciio.cms.gov/resources/data/mlr.html.
CMS-9964-F 17 

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

markets. 

 The risk adjustment program protects against the potential of adverse selection by 

allowing issuers to set premiums according to the average actuarial risk in the individual 

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

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

should lower the risk issuers would otherwise price into premiums in the expectation of 

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

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

level the playing field inside and outside of the Exchange. 

Provisions addressing advance payments of the premium tax credit and costsharing reductions will help provide financial assistance for certain eligible individuals 

enrolled in QHPs through the Exchanges. This assistance will help many low-and 

moderate-income individuals and families obtain health insurance. For many people, 

cost sharing is a significant barrier to obtaining needed health care.7

 The availability of 

premium tax credits and cost-sharing reductions through Exchanges starting in 2014 will 

result in lower net premium rates for many people currently purchasing coverage in the 

individual market, and will encourage younger and healthier enrollees to enter the 

market, leading to a healthier risk pool and to reductions in premium rates for current 

policyholders.8

 

 

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

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

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

CA: RAND Corporation, 1984. Available at: http://www.rand.org/pubs/reports/R3055. 8 Congressional Budget Office, Letter to Honorable Evan Bayh, providing an Analysis of Health Insurance 

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

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

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

Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The Coverage and Cost Effects of 
CMS-9964-F 18 

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

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

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

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

while saving employers money by spreading issuers’ administrative costs across more 

employers. 

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

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

expenditures, after adjusting for the premium stabilization programs. 

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

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

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

increase in the number of people purchasing individual market coverage. In addition, 

States may incur administrative and operating costs if they choose to establish their own 

programs. In accordance with Executive Orders 12866 and 13563, we believe that the 

benefits of this regulatory action would justify the costs. 

II. Background 

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

qualified health plans – private health insurance that has been certified as meeting certain 

standards – through competitive marketplaces, called Exchanges. The Department of 

Health and Human Services, the Department of Labor, and the Department of the 

Treasury have been working in close coordination to release guidance related to qualified 

health plans and Exchanges in several phases. The Patient Protection and Affordable 

 

Implementation of the Affordable Care Act in New York State, Urban Institute, March 2012. 
CMS-9964-F 19 

Care Act (Pub. L. 111-148) was enacted on March 23, 2010. The Health Care and 

Education Reconciliation Act (Pub. L. 111-152) was enacted on March 30, 2010. We 

refer to the two statutes collectively as the Affordable Care Act in this final rule. HHS 

published detail and parameters related to the risk adjustment, reinsurance, and risk 

corridors programs; cost-sharing reductions; user fees for Federally-facilitated 

Exchanges; advance payments of the premium tax credit; the Federally-facilitated Small 

Business Health Option Program; and the medical loss ratio program, in a December 7, 

2012 Federal Register proposed rule entitled “Patient Protection and Affordable Care 

Act; HHS Notice of Benefit and Payment Parameters for 2014” (77 FR 73118). 

A. Premium Stabilization 

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

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

Affordable Care Act. The Premium Stabilization Rule implementing the health insurance 

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

(Premium Stabilization Rule) (77 FR 17220) was published in the Federal Register on 

March 23, 2012. A white paper on risk adjustment concepts was published on September 

12, 2011 (Risk Adjustment White Paper). A bulletin was published on May 1, 2012, 

outlining our intended approach to implementing risk adjustment when we are operating 

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

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

Spring Meeting). 

 A bulletin was published on May 31, 2012, outlining our intended approach to 

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

on behalf of a State (Reinsurance Bulletin). HHS solicited comment on proposed 
CMS-9964-F 20 

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

on behalf of a State. 

B. Cost-Sharing Reductions

 The AV/CSR Bulletin was published on February 24, 2012 outlining an intended 

regulatory approach to calculating actuarial value and implementing cost-sharing 

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

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

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

reviewed and considered comments to the AV/CSR Bulletin in developing the provisions 

relating to cost-sharing reductions in this final rule. 

C. Advance Payments of the Premium Tax Credit 

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

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

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

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

(77 FR 30377, to be codified at 26 CFR parts 1 and 602). 

D. Exchanges 

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

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

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

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

proposed regulation regarding Exchange functions in the individual market, eligibility 

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

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

the Exchanges and setting forth standards for eligibility for Exchanges (Exchange 
CMS-9964-F 21 

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

18310). 

 A proposed rule which, among other things, reflects new statutory eligibility 

provisions, titled “Medicaid, Children’s Health Insurance Programs, and Exchanges: 

Essential Health Benefits in Alternative Benefit Plans, Eligibility Notices, Fair Hearing 

and Appeal Processes for Medicaid and Exchange Eligibility Appeals and Other 

Provisions Related to Eligibility and Enrollment for Exchanges, Medicaid and CHIP, and 

Medicaid Premiums and Cost Sharing” was published in the January 22, 2013 Federal 

Register (78 FR 4594) (Medicaid and Exchange Eligibility Appeals and Notices). 

E. Market Reform Rules

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

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

The final rule was made available for public inspection at the Office of the Federal 

Register on February 22, 2013 (Market Reform Rule). 

F. Essential Health Benefits and Actuarial Value

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

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

final rule was published in the Federal Register on February 25, 2013 (78 FR 12834) 

(EHB/AV Rule). 

G. Medical Loss Ratio 

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

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

60-day comment period relating to MLR program on December 1, 2010 (75 FR 74864). 

An interim final rule with 30-day comment period and a final rule with 30-day comment 

period were published in the Federal Register on December 7, 2011 (76 FR 76596 and 
CMS-9964-F 22 

76574). A final rule was published in the Federal Register on May 16, 2012 (77 FR 

28790). 

H. Tribal Consultations 

 Following publication of the proposed rule, we issued a letter to Tribal leaders 

seeking input on the provisions of the proposed rule. We also discussed the provisions of 

the proposed rule in an all-Tribes webinar and conference call and in two meetings with 

the Tribal Technical Advisory Group. We considered the comments offered during these 

discussions in developing the provisions in this final rule. 

III. Provisions of the Proposed Rule and Responses to Public Comments

 We received approximately 420 comments from consumer advocacy groups, 

health care providers, employers, health insurers, health care associations, and 

individuals. The comments ranged from general support or opposition to the proposed 

provisions to very specific questions or comments regarding proposed changes. In this 

section, we summarize the provisions of the proposed rule and discuss and provide 

responses to the comments (with the exception of comments on the paperwork burden or 

the economic impact analysis, which we discuss in those sections of this final rule). We 

have carefully considered these comments in finalizing this rule. 

Comment: We received a number of comments requesting that the comment 

period be extended to 60 days. 

Response: HHS provided a 30-day comment period, which is consistent with the 

Administrative Procedure Act. We note that HHS previously sought and received 

significant comment on the Risk Adjustment White Paper, the Risk Adjustment Bulletin, 

presentations made during the Risk Adjustment Spring Meeting, the Reinsurance 

Bulletin, the AV/CSR Bulletin, and the Premium Stabilization Rule, which outlined the 
CMS-9964-F 23 

policy proposed in the proposed rule. HHS believes that interested stakeholders had 

adequate opportunity to provide comment on the policies established in this final rule. 

Comment: One commenter requested that HHS issue a separate final rule 

containing provisions for each part of the Code of Federal Regulations. 

Response: As noted in the Premium Stabilization Rule, the proposed rule, and 

this final rule, many of the programs covered by this rule are closely linked. To simplify 

the regulatory process, facilitate public comment, and provide the information needed to 

meet statutory deadlines, we elected to propose and finalize these regulatory provisions in 

one rule. 

Comment: We received several comments pertaining to the proposed EHB/AV 

Rule and the proposed Market Reform Rule. 

Response: Those comments are addressed in the final EHB/AV Rule and the 

final Market Reform Rule. 

 Comment: One commenter suggested that the standards set forth by HHS 

pertaining to the HHS-operated risk adjustment or reinsurance programs be the minimum 

requirements for State-operated risk adjustment or reinsurance programs. 

 Response: HHS aims to provide States with flexibility in implementing these 

programs while ensuring that the goals of the premium stabilizations programs are being 

met. Many of the provisions applicable to the risk adjustment and reinsurance programs 

when operated by a State are also applicable to these programs when operated by HHS on 

behalf of a State. 

Comment: Several commenters asked that HHS monitor and oversee the 

implementation of the premium stabilization programs. 

Response: HHS takes seriously its responsibility to monitor the implementation 

of these programs to protect consumers, prevent fraud and abuse, and ensure the 
CMS-9964-F 24 

programs achieve their goals. We will provide further detail on the oversight of these 

programs in future rulemaking and guidance. 

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

In §153.100(c), we proposed to require that, for benefit year 2014 only, a 

State must publish a State notice by March 1, 2013, or by the 30th day following 

publication of the final HHS notice of benefit and payment parameters for 2014, 

whichever is later. Because the effective date of this rule will be 60 days after its 

publication, we will not finalize the proposed change to §153.100(c). Nevertheless, 

consistent with our proposal, we are finalizing our policy that, for 2014 only, a State 

must publish a State notice of benefit and payment parameters by the 30th day 

following publication of this final rule by deeming the March 1 deadline specified in 

the existing regulation to be extended until the date that is 30 days after publication 

of this final rule. 

Comment: A number of commenters supported the proposed deadline extension 

for benefit year 2014, while others opposed such an extension. Some suggested that HHS 

not allow States to operate risk adjustment or reinsurance. 

 Response: We believe that States should have the flexibility to operate risk 

adjustment and reinsurance. Because of the publication date of this final rule, it is clear 

that a State will not have the notice necessary to publish a State notice of benefit and 

payment parameters by the deadline specified in the regulation – that is, March 1, 2013 

for the 2014 benefit year. Thus, as described above, although we are not finalizing our 

proposal to amend the regulation, we are setting the deadline for 2014 only as the 30th 

day after publication of this final rule. 

B. Provisions and Parameters for the Permanent Risk Adjustment Program 

The risk adjustment program is a permanent program created by Section 1343 of 
CMS-9964-F 25 

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

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

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

established standards for the administration of the risk adjustment program. A State 

approved or conditionally approved by the Secretary to operate an Exchange may 

establish a risk adjustment program, or have HHS do so on its behalf. Section 1343 of 

the Affordable Care Act requires each State to operate a risk adjustment program. In 

States that have elected not to operate their own risk adjustment program, HHS will 

operate a program on their behalf. Our authority to operate risk adjustment on the State’s 

behalf arises from sections 1321(c)(1) and 1343 of the Affordable Care Act. Based on 

HHS’s communications with States, as of February 25, 2013, Massachusetts is the only 

State electing to operate a risk adjustment program for the 2014 benefit year. 

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

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

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

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

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

collection and validation of risk adjustment data. 

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

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

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

methodology). In section III.B.2. of the proposed rule, we proposed a small fee to 

support HHS operation of the risk adjustment program. In section III.B.3. of the 

proposed rule, we described the methodology that HHS would use when operating a risk 

adjustment program on behalf of a State. States operating a risk adjustment program can 
CMS-9964-F 26 

use this methodology, or submit an alternate methodology, in a process we described in 

section III.B.4. of the proposed rule. Finally, in section III.B.5. of the proposed rule, we 

described the data validation process we proposed to use when operating a risk 

adjustment program on behalf of a State. (These provisions are discussed fully in the 

proposed rule at 77 FR at 73123-73149). 

1. Approval of State-Operated Risk Adjustment 

a. Risk Adjustment Approval Process 

In the proposed rule, we proposed an approval process for States seeking to 

operate their own risk adjustment program. Specifically, we proposed a new paragraph 

(c) in §153.310, entitled “State responsibility for risk adjustment,” which sets forth a 

State’s responsibilities with regard to risk adjustment program operations. With this 

change, we also proposed to redesignate paragraphs (c) and (d) to paragraphs (e) and (f) 

of §153.310. 

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

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

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

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

the Federally certified risk adjustment methodology the State has chosen to use. 

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

implement the applicable Federally certified risk adjustment methodology and process 

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

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

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

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

adverse selection. To meet this standard, we proposed that a State demonstrate that the 
CMS-9964-F 27 

risk adjustment entity: (1) have systems in place to implement the data collection 

approach, to calculate individual risk scores, and calculate issuers’ payments and charges 

in accordance with the applicable Federally certified risk adjustment methodology; and 

(2) have tested, or have plans to test, the functionality of the system that would be used 

for risk adjustment operations prior to the start of the applicable benefit year. We 

proposed that States also demonstrate that the entity has legal authority to carry out risk 

adjustment program operations, and has the resources to administer the applicable risk 

adjustment methodology in its entirety, including the ability to make risk adjustment 

payments and collect risk adjustment charges. 

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

experience to operate a risk adjustment program. To meet this standard, we proposed that 

a State demonstrate that the entity have on staff, or have contracted with, individuals or 

firms with experience relevant to the implementation of a risk adjustment methodology. 

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

to successfully operate the risk adjustment program. 

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

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

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

applicable Federally certified risk adjustment methodology. In particular, we proposed 

that the State ensure that the entity complies with the privacy and security standards set 

forth in §153.340. 

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

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

program. Because the integrity of the risk adjustment program has important 
CMS-9964-F 28 

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

the conduct of the entity. 

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

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

Comment: Commenters generally agreed with our approach to approving State 

risk adjustment programs beginning in benefit year 2015. 

 Response: We are finalizing these provisions as proposed. 

b. Risk Adjustment Approval Process for Benefit Year 2014 

Because of the unique timing issues for approving a State-operated risk 

adjustment program, we proposed a transitional policy for benefit year 2014. We 

proposed not to require that a State-operated risk adjustment program receive approval 

for benefit year 2014. Instead, we proposed a transitional, consultative process that 

would commence shortly after the provisions of this final rule are effective. We are 

finalizing these provisions as proposed. 

Comment: One commenter supported the transitional process but urged that the 

transitional process not be applied to future years. Another commenter requested that 

HHS require approval in 2014, but make the approval determination on the basis of the 

proposed consultative process. Other commenters suggested that HHS not allow States 

to conduct risk adjustment until the agency could formally approve States, beginning in 

2015. 

 Response: We proposed the transitional policy based on the unique 

circumstances of 2014, and we do not anticipate extending it to future years. Although 

we are mindful of concerns that States may not be fully ready to operate a complex risk 

adjustment program for benefit year 2014, we note that each aspect of a State’s 

operations (including data collection) must be performed in line with one of the Federally 
CMS-9964-F 29 

certified risk adjustment methodologies published in this final rule. Finally, we note that 

any State that begins operation of risk adjustment under this transitional process must 

obtain formal certification for benefit year 2015. We believe this process is sufficiently 

robust to ensure any State operating risk adjustment in 2014 will be prepared to do so. 

2. Risk Adjustment User Fees 

In the proposed rule, we noted that, if a State is not approved to operate or 

chooses to forgo operating its own risk adjustment program, HHS would operate risk 

adjustment on the State’s behalf. Our authority to operate risk adjustment on the State’s 

behalf arises from sections 1321(c)(1) and 1343 of the Affordable Care Act. In States 

where HHS is operating risk adjustment, we proposed that issuers of risk adjustment 

covered plans remit a user fee to fund HHS’s operation of a Federally operated risk 

adjustment program. The authority to charge this user fee can be found under sections 

1343, 1311(d)(5), and 1321(c)(1) of the statute, and under 31 U.S.C. 9701, which permits 

a Federal agency to establish a charge for a service provided by the agency. OMB 

Circular No. A-25R, which establishes Federal policy regarding user fees, specifies that a 

user charge will be assessed against each identifiable recipient of special benefits derived 

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

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

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

financial instability associated with adverse selection as other market reforms go into 

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

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

health insurance markets. 

We further proposed to determine the total amount needed to fund HHS risk 

adjustment operations by examining the contract costs of operating the program, 
CMS-9964-F 30 

including development of the model and methodology, collections, payments, account 

management, data collection, program integrity and audit functions, operational and fraud 

analytics, stakeholder training, and operational support (not including Federal personnel 

costs). We proposed to develop a per capita user fee rate by dividing the amount we 

intend to collect over the course of the benefit year by the expected annual enrollment in 

risk adjustment covered plans (other than plans not subject to market reforms and student 

health plans) for that benefit year. We also proposed a standardized schedule for 

assessment and collection of risk adjustment user fees. Although the user fees would be 

assessed on a per-enrollee-per-month basis to account for fluctuations in monthly 

enrollment, we proposed to collect them only once, in June of the year following the 

benefit year, in order to synchronize user fee collection with risk adjustment payments 

and charges. 

Based on comments received, we are adding §153.610(f), finalizing our risk 

adjustment user fee assessment and collection approach as proposed. We clarify that 

enrollment data for each month will be captured by the servers used in the distributed 

data collection approach. We are also finalizing our intention to set a per capita user fee 

rate in the annual HHS notice of benefit and payment parameters using the proposed 

methodology. The user fee will be determined by dividing HHS’s total contract costs for 

risk adjustment operations in the applicable benefit year by the expected annual 

enrollment in risk adjustment covered plans for that benefit year. Based on this 

methodology, for benefit year 2014, we are establishing a per capita annual user fee rate 

of $0.96, which we will apply as a per-enrollee-per-month risk adjusted user fee of $0.08. 

Comment: One commenter expressed support for the proposal to collect user fees 

to fund HHS risk adjustment operations. Other commenters, though not commenting on 

risk adjustment user fees specifically, urged HHS to minimize or eliminate the fees it 
CMS-9964-F 31 

collects from issuers in order to maintain affordable coverage in the post-2014 health 

insurance market. 

Response: We believe that a reliable funding source is necessary to ensure a 

robust Federal risk adjustment program. We clarify that we are establishing the risk 

adjustment user fee for the sole purpose of funding HHS’s costs for operating the Federal 

risk adjustment program, and we intend to keep the user fee amount as low as possible. 

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

risk adjustment on behalf of a State 

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

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

implemented. The risk adjustment methodology proposed in the proposed rule, which 

HHS would use when operating risk adjustment on behalf of a State, is based on the 

premise that premiums should reflect the differences in plan benefits and plan efficiency, 

not the health status of the enrolled population. 

Under §153.20 of the Premium Stabilization Rule, a risk adjustment methodology 

is made up of five elements: 

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

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

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

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

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

certain adjustments, and calculate the funds to be transferred between plans. In the 

proposed rule, these two elements of the methodology were presented together as the 

payment transfer formula. 
CMS-9964-F 32 

• The data collection approach describes the program’s approach to obtaining 

data. HHS will do so using the distributed model described in section III.G. of this final 

rule. 

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

adjustment operations. 

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

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

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

calculated from the payment transfer formula. The key feature of the HHS risk 

adjustment methodology is that the risk score alone does not determine whether a plan is 

assessed charges or receives payments. Transfers depend not only on a plan’s average 

risk score, but also on its plan-specific cost factors relative to the average of these factors 

within a risk pool within a State. 

As discussed in the proposed rule, the risk adjustment methodology developed by 

HHS: 

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

expected population to be risk adjusted; 

• Uses the HCC grouping logic used in the Medicare population, with HCCs 

refined and selected to reflect the expected risk adjustment population; 

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

current year costs); 

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

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

infants); 
CMS-9964-F 33 

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

within a State; 

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

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

differences; and 

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

We are finalizing the methodology HHS will use when operating the risk 

adjustment program as proposed, with the following modifications: we have included 

individuals over 64 in the demographic factors; we have updated the cost-sharing 

reduction (CSR) adjustment factors for zero cost-sharing plan variations to align with the 

induced demand factors used in the CSR program; we have made technical corrections to 

the payment transfer formula; we have clarified that geographic cost factors will be 

calculated for each risk pool in each market in a State; and we have clarified how 

transfers will be calculated at the plan level. 

Comment: We received many comments supporting HHS’s general approach to 

the risk adjustment methodology we will use when operating risk adjustment on behalf of 

a State. 

Response: We are finalizing the methodology as proposed with minor 

modifications. 

Comment: We received one comment suggesting that current risk adjustment 

methodologies are inadequate because they do not fully account for the sickest patients 

with the most complex medical conditions. Another commenter suggested that HHS take 

an expanded view of risk mitigation by working to ensure a stable risk pool. 

Response: The Affordable Care Act establishes a risk adjustment program, and 

permits the Secretary to base this program on the criteria and methods used in Medicare 
CMS-9964-F 34 

Parts C and D. While we used criteria and methods from Medicare when appropriate, we 

also customized this methodology to best mitigate adverse selection based on our 

projections of the 2014 marketplace. Though we anticipate making future adjustments to 

the model, we seek to balance stakeholders’ desire for a stable model in the initial years 

with introducing model improvements as additional data becomes available. We look 

forward to engaging with stakeholders throughout this process. We believe that this 

program, along with the other 2014 market reforms, will help ensure a stable risk pool. 

Comment: We received one comment that HHS should provide issuers 

information to assess their risk scores and State average risk scores as part of the 

premium development process for 2014. 

Response: As noted in the proposed rule, risk adjustment transfers depend not 

only on a plan’s average risk score, but also on its cost factors compared to the average of 

these factors within a risk pool within a market within a State. HHS does not currently 

have the data necessary to calculate the State average risk score to provide to issuers in 

time for the development of 2014 premiums. HHS contemplates providing technical 

assistance to States and issuers who are interested in this information. 

Comment: We received several comments that HHS should monitor the risk 

adjustment methodology’s performance, with a particular focus on the newly insured 

population. 

Response: We intend to monitor the methodology’s performance to determine 

future adjustments to the model, as data become available. 

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

 In the Premium Stabilization Rule, we defined a “risk adjustment covered plan” in 

§153.20 as health insurance coverage offered in the individual or small group markets, 

excluding plans offering excepted benefits and certain other plans, including “any other 
CMS-9964-F 35 

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

benefit and payment parameters.” We proposed to amend this definition by replacing 

“and any plan determined not to be a risk adjustment covered plan in the annual HHS 

notice of benefit and payment parameters” with “and any other plan determined not to be 

a risk adjustment covered plan in the applicable Federally certified risk adjustment 

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

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

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

subject to notice and comment. 

We described our proposed treatment of certain types of plans (specifically, plans 

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

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

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

the Affordable Care Act. 

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

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

EHB/AV Rule. In addition, plans providing benefits through health insurance policies 

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

requirements until renewal in 2014. The statute specifies that the risk adjustment 

program is to assess charges on non-grandfathered health insurance coverage in the 

individual and small group markets with less than average actuarial risk and to make 

payments to non-grandfathered health insurance coverage in these markets with higher 

than average actuarial risk. We stated that we interpret actuarial risk to mean predictable 

risk that the issuer has not been able to compensate for through exclusion or pricing. In 
CMS-9964-F 36 

the current market, plans are generally not subject to the insurance market reforms that 

begin in 2014 described at §147.102 (fair health insurance premiums), §147.104 

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

§147.145), §147.106 (guaranteed renewability of coverage, subject to the student health 

insurance provisions at §147.145), §156.80 (single risk pool), and subpart B of part 156 

(essential health benefits), and so are generally able to minimize actuarial risk by 

excluding certain conditions (for example, maternity coverage for women of childbearing age) and denying coverage to those with certain high-risk conditions. 

In the proposed rule, we proposed to use the authority in section 1343(b) of the 

Affordable Care Act to “establish criteria and methods to be used in carrying out ... risk 

adjustment activities” for plans not subject to insurance market reforms at §147.102 (fair 

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

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

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

risk pool), and subpart B of part 156 (essential health benefits package). We stated that 

because plans not subject to these market reform rules are able to effectively minimize 

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

risk. We proposed to treat these plans separately, such that these plans would not be 

subject to risk adjustment charges and would not receive risk adjustment payments. 

Also, these plans would not be subject to the issuer requirements described in subparts G 

and H of part 153. We noted that plans offering coverage through policies issued in 2013 

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

upon renewal, and would comply with the requirements established in subparts G and H 

of part 153 at that time. 
CMS-9964-F 37 

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

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

college or university. In the proposed rule, we stated our belief that student health plans, 

because of their unique characteristics, will have relatively uniform actuarial risk. We 

proposed to use the authority in section 1343(b) of the Affordable Care Act to “establish 

criteria and methods to be used in carrying out ... risk adjustment activities” to treat these 

plans as a separate group that would not be subject to risk adjustment charges and would 

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

requirements described in subparts G and H of part 153. 

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

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

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

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

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

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

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

catastrophic plans with higher than average actuarial risk compared with other 

catastrophic plans would receive payments. We did not propose to exempt these plans 

from the requirements in subparts G and H of part 153. 

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

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

developing rates and premiums. Section 1312(c)(3) of the Affordable Care Act gives 

States the option to merge the individual and small group market into a single risk pool. 

To align risk pools for the risk adjustment program and rate development, we proposed to 

merge markets when operating risk adjustment on behalf of a State if the State elects to 
CMS-9964-F 38 

do the same for single risk pool purposes. When the individual and small group markets 

are merged, we proposed that the State average premium described in section III.B.3.c 

would be the average premium of all applicable individual and small group market plans 

in the applicable risk pool, and normalization under the transfer equation would occur 

across all plans in the applicable risk pool in the individual and small group market. 

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

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

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

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

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

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

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

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

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

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

which the policy is filed and approved. 

 We are finalizing these provisions as proposed, with a clarification that risk 

adjustment covered plans in the small group market will be subject to risk adjustment in 

the State in which the employer’s policy is filed and approved. 

Comment: We received a number of comments that expressed support for our 

proposed approach to student health plans, plans not subject to market reform rules, and 

catastrophic plans. Several of these commenters urged HHS to align the single risk pool 

approach to student health plans with the proposed approach in risk adjustment. Some 

commenters expressed concern that separately risk adjusting catastrophic plans would 

prevent the enrollees in these plans from contributing to the general risk pool. 
CMS-9964-F 39 

 Response: Provisions related to the single risk pool provision were finalized in 

the Market Reform Rule, which was made available for public inspection at the Office of 

the Federal Register on February 22, 2013. Non-grandfathered student health insurance 

coverage is exempt from the single risk pool requirement. 

As commenters noted, the risk adjustment program complements the single risk 

pool provision, which broadens the risk pool by including catastrophic claims experience 

in the development of the index rate. Because enrollment in catastrophic plans is limited 

to certain enrollees that are likely to have a different risk profile than enrollees in metallevel plans, we believe it is appropriate to risk adjust these plans in a separate risk pool. 

For this reason, we are finalizing the treatment of catastrophic plans, student health plans, 

and plans not subject to the market reform rules as proposed. 

 Comment: We received comments suggesting several different approaches to our 

proposal that risk adjustment covered plans be subject to risk adjustment in the State in 

which the enrollee’s policy is filed and approved, including that we modify the 

requirement to mirror the MLR program’s situs of contract requirement, and that we 

clarify that the employer, not the enrollee, is the policyholder in the small group market. 

 Response: We are modifying the proposed provision to clarify that risk 

adjustment covered plans in the small group will be subject to risk adjustment in the State 

in which the employer’s policy is filed and approved. 

b. Overview of the HHS Risk Adjustment Model 

The proposed HHS risk adjustment models predict plan liability for an enrollee 

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

proposed separate models for adults, children, and infants to account for cost differences 

in each of these age groups. Each HHS risk adjustment model predicts individual-level 

risk scores, but is designed to predict average group costs to account for risk across plans. 
CMS-9964-F 40 

This method accords with the Actuarial Standard Board’s Actuarial Standard of Practice 

for risk classification. 

We are finalizing the HHS risk adjustment models as proposed with the following 

modifications: we have fixed a typographical error to include individuals over 64 in the 

demographic factors, we have clarified the calculation of age for infants who were born 

in one benefit year and discharged in the following benefit year, and we have updated the 

CSR adjustment factors to align with the induced demand factors used in the CSR 

program. 

Comment: We received a number of comments supporting HHS’s general 

approach to establishing risk adjustment models. 

Response: We are finalizing the models as proposed with minor modifications. 

Comment: One commenter expressed concern that the number of HHS risk 

adjustment models proposed would create inaccuracies in the model. 

Response: The statistical performance of each of the models is well within the 

published ranges for concurrent models. The HHS risk adjustment models better predict 

plan liability because they account for age-related clinical and cost differences and 

differing plan liabilities due to differences in actuarial value across metal levels. 

(1) Data used to develop the HHS risk adjustment models 

In the proposed rule, we described the data used to develop (that is, calibrate) the 

HHS risk adjustment models. We proposed that the HHS risk adjustment models would 

be concurrent and not include prescription drug use as a predictor. Finally, we proposed 

separate risk adjustment models for each metal level because plans at different metal 

levels would have different liability for enrollees with the same expenditure patterns. We 

received the following comments about these approaches: 
CMS-9964-F 41 

Comment: We received several comments in support of HHS’s decision not to 

include prescription drug data as a predictor in the HHS risk adjustment models. A 

number of other commenters suggested that HHS include prescription drug data as a 

predictor in the HHS risk adjustment models to improve each model’s predictive 

accuracy, or consider inclusion of this data as a predictor in the future. 

 Response: HHS is finalizing its proposal to exclude prescription drugs for the 

initial HHS risk adjustment models, but will consider how prescription drugs could be 

included in future HHS risk adjustment models. 

Comment: We received a number of comments in support of the concurrent 

modeling approach, though a number of these comments suggested that we transition to a 

prospective model. 

Response: In 2014, 2013 diagnostic data for individuals enrolled in risk 

adjustment covered plans will not be available. We also anticipate that enrollees may 

move between plans, or between programs. A concurrent model is better able to handle 

changes in enrollment than a prospective model because individuals newly enrolling in 

health plans may not have prior data available that can be used in risk adjustment. We 

are therefore finalizing our approach to use a concurrent model. We plan to investigate 

the feasibility of transitioning to a prospective approach in the future. 

Comment: One commenter asked for further information about the standardized 

benefit designs used to estimate plan liability in the HHS risk adjustment models. 

 Response: Plan liabilities were defined by applying standardized benefit design 

parameters for each given metal level to total expenditures. The standard benefit designs 

were created using the Actuarial Value Calculator to ensure that each benefit design 

aligns with the applicable metal level. While an individual plan’s design may differ from 

the standardized benefit, we believe the design is a reasonable approximation for the 
CMS-9964-F 42 

average plan design at each metal level. The catastrophic plan design was estimated 

using the estimated maximum annual limitation on cost sharing described in section III.E. 

of this final rule. 

Comment: We received several comments on HHS’s approach to account for 

infant claims if there is no separate infant birth claim from which to gather diagnoses. 

Some commenters encouraged HHS to require separate claims for mothers and infants. 

Some commenters recommended that HHS separate these claims in operations. One 

commenter noted that in the State of Washington there are legal impediments to 

separating claims for mothers and infants in the first 21 days of life. 

 Response: HHS calibrated the HHS risk adjustment models by excluding infant 

claims that were bundled with the mothers, as well as infants without birth codes due to 

data limitations. In operation, issuers will separate infant and mother claims when 

possible. If an infant claim cannot be separated, HHS will assign the infant to the lowest 

severity category and the “term” maturity category. We note that HHS does not intend to 

unbundle claims in operation. 

Comment: We received one comment that data used to calibrate the HHS risk 

adjustment models will not reflect the risk adjustment population beginning in 2014. 

Several commenters suggested that the calibration data set did not reflect benefits that 

issuers will offer beginning in 2014. 

 Response: We believe that the commercial data set used for calibration is a 

reasonable approximation of the population that will be risk adjusted in 2014. The 

calibration data set was restricted to individuals with prescription drug coverage, mental 

health coverage, and medical coverage, which are part of the essential health benefits 

package that issuers will offer starting in 2014. 

(2) Principles of Risk Adjustment and the HCC Classification System 
CMS-9964-F 43 

We proposed to use a diagnostic classification system. A diagnostic classification 

system determines which diagnosis codes should be included, how the diagnosis codes 

should be grouped, and how the diagnostic groupings should interact for risk adjustment 

purposes. The ten principles that were used to develop the HCC classification system for 

the Medicare risk adjustment model also guided the creation of the HHS risk adjustment 

models that we proposed to use when HHS operates risk adjustment on behalf of a State. 

We selected 127 of the full classification of 264 HHS HCCs for inclusion in the HHS risk 

adjustment models. 

Comment: We received several comments in support of the HHS HCC 

classification system. 

Response: We are finalizing the HHS HCC classification system as proposed. 

Comment: Several commenters requested that HHS provide the ICD-9 codes 

included in each HHS HCC. 

Response: We have provided this information for the proposed HHS risk 

adjustment models on our website at: 

http://cciio.cms.gov/resources/files/ra_instructions_proposed_1_2013.pdf and 

http://cciio.cms.gov/resources/files/ra_tables_proposed_1_2013.xlsx. We intend to 

provide a final version of these documents to reflect the HHS risk adjustment models in 

the future. 

Comment: Several commenters requested the classification of ICD-10 codes to 

HHS HCCs. 

Response: We are completing the mapping of ICD-10 codes to HHS HCCs and 

will release this information in future guidance. 

Comment: Several commenters suggested that additional HHS HCCs should be 

included in the HHS risk adjustment models. 
CMS-9964-F 44 

Response: In selecting the factors to be included in the HHS risk adjustment 

models, we considered the basic criteria below to determine which HCCs should be 

included in the HHS risk adjustment model: 

• Whether the HCC represents clinically significant medical conditions with 

significant costs for the target population; 

• Whether there will be a sufficient sample size to ensure stable results for 

the HCC; 

• Whether excluding the HCC would exclude (or limit the impact of) 

diagnoses particularly subject to discretionary coding; 

• Whether the HCC identifies chronic or systematic conditions that 

represent insurance risk selection or risk segmentation, rather than random acute events; 

• Whether the HCCs represent poor quality of care; and 

• Whether the HCC is applicable to the model age group. 

We also included a factor to measure increased utilization due to receipt of CSRs. 

Each model’s R-squared and predictive ratios were within published ranges for 

concurrent models. Thus, we have not included additional HCCs at this time. 

Comment: We received a comment in support of our approach to HHS HCC 

selection. 

Response: We are finalizing the HHS HCCs included in the HHS risk adjustment 

models as proposed. 

 (3) Factors included in the HHS risk adjustment models 

The proposed HHS risk adjustment models predict annualized plan liability 

expenditures using age and sex categories, HHS HCCs, and, where applicable, disease 

interactions. Dollar coefficients were estimated for these factors using weighted least 

squares regression, where the weight was the fraction of the year enrolled. For each 
CMS-9964-F 45 

model, the factors were the statistical regression dollar coefficients divided by a weighted 

average plan liability for the full modeling sample. Due to the inherent clinical and cost 

differences in the adult (age 21+), child (age 2-20), and infant (age 0-1) populations, 

HHS proposed separate risk adjustment models for each age group. 

Comment: We received a few comments suggesting the weights of specific 

factors in the HHS risk adjustment models were lower than expected. 

Response: The HHS risk adjustment models predict annualized plan liability. 

The factors were estimated using weighted least squares regression. For each risk 

adjustment model, the factors were the statistical regression dollar values for each factor 

in the model divided by a weighted average plan liability for the full modeling sample. 

Some factors were grouped or constrained and thus do not exactly represent the statistical 

regression dollar value. Some factors were grouped or constrained to reduce model 

complexity, avoid inclusion of HHS HCCs with small sample size, limit upcoding by 

severity within an HCC hierarchy, reduce additivity within a disease group, and avoid 

coefficient values in which a lower-ranked HCC in a disease hierarchy had higher 

coefficient than a higher-ranked HCC. 

Comment: A few commenters requested that age be calculated at the time of 

enrollment. Several commenters asked that age for newborns be defined as date of birth 

rather than the age as of the last day of enrollment in a risk adjustment covered plan. 

Another commenter requested that HHS clarify that age determinations be consistent 

between model calibration and program operation. 

 Response: The HHS risk adjustment models were calibrated using age as of the 

last month of enrollment due to data limitations. To align with model calibration, an 

enrollee’s age for risk score calculation will be the age as of the enrollee’s last day of 

enrollment in a risk adjustment covered plan in the applicable benefit year will be used 
CMS-9964-F 46 

for enrollees in program operation. We are clarifying our approach to calculating the age 

of infants who are born in a benefit year but are not discharged until the following year. 

In such a case, the infant will be defined as age 0 for both benefit years. For example, if 

an infant is born in December of 2014 but has a discharge date of January 2015, the 

infant would be assigned age 0 for purposes of risk score calculation in benefit year 2014 

and for the entire 2015 benefit year. 

Comment: We received comments supporting the inclusion of a demographic 

factor to account for individuals aged 65 or older. We also received comments 

requesting that the HHS risk adjustment models include additional factors such as 

income, receipt of care from an essential community provider, and enrollee language. 

Response: In response to comments, we made a typographical correction to relabel the highest adult age factor as 60+. Because data for individuals 65 or older is not 

captured in the calibration dataset, the estimation of a separate demographic factor for 

those 65 or older is impractical at this time. Other factors such as income are also not 

feasible to include due to data limitations. Therefore, we have not modified the HHS risk 

adjustment models to include such factors. Tables 2, 4, and 5 contain the final factors for 

the HHS risk adjustment models. 

Comment: We received several comments that the HHS risk adjustment models 

do not appropriately account for short-term enrollment. One commenter suggested that 

risk scores for individuals that were enrolled for only part of a year would be inaccurate. 

 Response: Our models were calibrated to account for short-term enrollment in 

several ways. First, enrollee diagnoses were included from the time of enrollment. Also, 

in the statistical estimation strategy for the HHS HCCs, average monthly expenditures 

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

number of enrollment months, annualized expenditures (plan liability) were defined as 
CMS-9964-F 47 

average monthly expenditures multiplied by 12, and regressions were weighted by 

months of enrollment divided by 12. We believe that this statistical strategy, alongside 

the minimum enrollment requirement, ensures that monthly expenditures are correctly 

estimated for all individuals. 

(4) Adjustments to Model discussed in the Risk Adjustment White Paper 

We proposed to include an adjustment for the receipt of CSRs in the HHS risk 

adjustment models, but not to adjust for receipt of reinsurance payments. 

Comment: We received comments that were generally supportive of the CSR 

adjustment to risk scores. One commenter stated that the proposed factors do not 

adequately account for changes in utilization as enrollees in cost-sharing plan variations 

may also use more high cost services. Another commenter requested that HHS clarify 

whether plan liability for increased utilization due to CSR is accounted for by the CSR 

adjustment factor in the HHS risk adjustment models. 

 Response: We are finalizing the CSR adjustment factor as proposed, with the 

modification to the typographical error described in Table 1 below. The CSR adjustment 

factor for the HHS risk adjustment models is intended to account for the increased plan 

liability due to increased utilization of health care services by enrollees receiving CSRs. 

Comment: We received several comments that noted a typographical error in the 

zero cost-sharing adjustments. 

 Response: We have revised the CSR adjustment to align with the CSR 

adjustment in section III.E. for enrollees in zero cost-sharing plan variations. Table 1 

contains the final CSR adjustment factors. 

Comment: Several commenters supported our proposal to not adjust the HHS risk 

adjustment models for reinsurance payments. 
CMS-9964-F 48 

 Response: We are finalizing our proposal to not adjust the HHS risk adjustment 

models for reinsurance payments since reinsurance is a temporary program and already 

offsets adverse selection. 

TABLE 1: Cost-Sharing Reduction Adjustment 

Household Income Plan AV Induced Utilization Factor 

Silver Plan Variant Recipients 

100-150 percent of FPL Plan Variation 94 percent 1.12 

150-200 percent of FPL Plan Variation 87 percent 1.12 

200-250 percent of FPL Plan Variation 73 percent 1.00 

>250 percent of FPL Standard Plan 70 percent 1.00 

Zero Cost-Sharing Recipients 

<300 percent of FPL Platinum (90 percent) 1.00 

<300 percent of FPL Gold (80 percent) 1.07 

<300 percent of FPL Silver (70 percent) 1.12 

<300 percent of FPL Bronze (60 percent) 1.15 

 

>300 percent of FPL Limited Cost-Sharing 

Recipients 

1.00 

(5) Model performance statistics 

To evaluate model performance, we examined the R-squared and predictive ratios 

of the HHS risk adjustment models. 

Comment: Several commenters asked for further details on the statistical 

performance of the HHS risk adjustment models. 

Response: HHS analyzed the statistical performance of each model (adult, child, 

infant at each metal level). The R-squared (the percentage of individual variation 

explained by the model) for each model was within the range of published estimates for 

concurrent models.9

 These values can be found in Table 8. Additionally, the predictive 

ratios for the overall samples for each of the 15 models were also within the range of 

published estimates. 

 

9

 Winkelman, Ross and Syed Mehmud. “A Comparative Analysis of Claims-Based Tools for Health Risk 

Assessment.” Society of Actuaries. April 2007. 
CMS-9964-F 49 

(6) Summary of models 

For clarity, we describe here the HHS risk adjustment models that we are 

finalizing. An individual’s risk score will be calculated for adults and children as the sum 

of the factors in the applicable model for the relevant age and sex categories, HHS HCCs, 

and, where applicable, disease interactions. These factors are listed below in Tables 2 

and 4. In the adult models, an individual with at least one of the HCCs that comprises the 

severe illness indicator variable and at least one of the HCCs interacted with the severe 

illness indicator variable would be assigned a single interaction factor. A hierarchy is 

imposed on these interaction groups such that an individual with a high cost interaction is 

excluded from having a medium cost interaction. The high or the medium interaction 

factor would be added to demographic and diagnosis factors of the individual. The HCCs 

that comprise the severe illness indicator variable can be found in Table 3. The CSR 

adjustment factors listed in Table 1 are multiplied by the sum of the applicable 

demographic, HHS HCCs, and disease interaction factors. 

The infant model utilizes a mutually exclusive group approach in which infants 

are assigned a maturity category (by gestation and birth weight) and a severity category. 

There are 5 maturity categories: Extremely Immature; Immature; Premature/Multiples; 

Term; and Age 1. For the maturity category, age 0 infants would be assigned to one of 

the first four categories and age 1 infants would be assigned to the age 1 category. As 

discussed previously, infants who are born in a benefit year but are not discharged until 

the following year will be defined as age 0 for both benefit years. There are 5 severity 

categories based on the clinical severity and associated costs of the non-maturity HCCs: 

Severity Level 1 (Lowest Severity) to Severity Level 5 (Highest Severity). All infants 

(age 0 or 1) are assigned to a severity category based on the highest severity of their nonmaturity HCCs. The 5 maturity categories and 5 severity categories would be used to 
CMS-9964-F 50 

create 25 mutually exclusive interaction terms to which each infant is assigned. An 

infant who has HCCs in more than one severity category would be assigned to the highest 

of those severity categories. An infant who has no HCCs or only a newborn maturity 

HCC would be assigned to Severity Level 1 (Lowest). The male-age factor would be 

added to the maturity-severity category to which the infant is assigned, and the sum of the 

factors would be multiplied by the CSR adjustment factor. The maturity-severity factors 

and the HCCs that comprise these factors can be found in Tables 5-7. 

TABLE 2: Adult Risk Adjustment Model Factors 

Factor Platinum Gold Silver Bronze Catastrophic

Demographic Factors

Age 21-24, Male 0.258 0.208 0.141 0.078 0.062 

Age 25-29, Male 0.278 0.223 0.150 0.081 0.064 

Age 30-34, Male 0.338 0.274 0.187 0.101 0.079 

Age 35-39, Male 0.413 0.339 0.240 0.140 0.113 

Age 40-44, Male 0.487 0.404 0.293 0.176 0.145 

Age 45-49, Male 0.581 0.487 0.365 0.231 0.195 

Age 50-54, Male 0.737 0.626 0.484 0.316 0.269 

Age 55-59, Male 0.863 0.736 0.580 0.393 0.339 

Age 60+, Male 1.028 0.880 0.704 0.487 0.424 

Age 21-24, Female 0.433 0.350 0.221 0.101 0.072 

Age 25-29, Female 0.548 0.448 0.301 0.156 0.120 

Age 30-34, Female 0.656 0.546 0.396 0.243 0.203 

Age 35-39, Female 0.760 0.641 0.490 0.334 0.293 

Age 40-44, Female 0.839 0.713 0.554 0.384 0.338 

Age 45-49, Female 0.878 0.747 0.583 0.402 0.352 

Age 50-54, Female 1.013 0.869 0.695 0.486 0.427 

Age 55-59, Female 1.054 0.905 0.726 0.507 0.443 

Age 60+, Female 1.156 0.990 0.798 0.559 0.489 

Diagnosis Factors

HIV/AIDS 5.485 4.972 4.740 4.740 4.749 

Septicemia, 

Sepsis, Systemic 

Inflammatory 

Response 

Syndrome/Shock 

13.696 13.506 13.429 13.503 13.529 

Central Nervous 

System Infections, 

Except Viral 

7.277 7.140 7.083 7.117 7.129 
CMS-9964-F 51 

Factor Platinum Gold Silver Bronze Catastrophic

Meningitis 

Viral or 

Unspecified 

Meningitis 

4.996 4.730 4.621 4.562 4.550 

Opportunistic 

Infections 9.672 9.549 9.501 9.508 9.511 

Metastatic Cancer 25.175 24.627 24.376 24.491 24.526 

Lung, Brain, and 

Other Severe 

Cancers, Including 

Pediatric Acute 

Lymphoid 

Leukemia 

11.791 11.377 11.191 11.224 11.235 

Non-Hodgkin`s 

Lymphomas and 

Other Cancers and 

Tumors 

6.432 6.150 6.018 5.983 5.970 

Colorectal, Breast 

(Age < 50), 

Kidney, and Other 

Cancers 

5.961 5.679 5.544 5.500 5.483 

Breast (Age 50+) 

and Prostate 

Cancer, 

Benign/Uncertain 

Brain Tumors, and 

Other Cancers and 

Tumors 

3.509 3.294 3.194 3.141 3.121 

Thyroid Cancer, 

Melanoma, 

Neurofibromatosis

, and Other 

Cancers and 

Tumors 

1.727 1.559 1.466 1.353 1.315 

Pancreas 

Transplant 

Status/Complicatio

ns 

9.593 9.477 9.411 9.434 9.439 

Diabetes with 

Acute 

Complications 

1.331 1.199 1.120 1.000 0.957 

Diabetes with 

Chronic 

Complications 

1.331 1.199 1.120 1.000 0.957 

Diabetes without 

Complication 1.331 1.199 1.120 1.000 0.957 
CMS-9964-F 52 

Factor Platinum Gold Silver Bronze Catastrophic

Protein-Calorie 

Malnutrition 14.790 14.790 14.786 14.862 14.883 

Mucopolysaccharidosis 2.335 2.198 2.130 2.071 2.052 

Lipidoses and 

Glycogenosis 2.335 2.198 2.130 2.071 2.052 

Amyloidosis, 

Porphyria, and 

Other Metabolic 

Disorders 

2.335 2.198 2.130 2.071 2.052 

Adrenal, Pituitary, 

and Other 

Significant 

Endocrine 

Disorders 

2.335 2.198 2.130 2.071 2.052 

Liver Transplant 

Status/Complicatio

ns 

18.445 18.197 18.105 18.165 18.188 

End-Stage Liver 

Disease 6.412 6.102 5.974 6.001 6.012 

Cirrhosis of Liver 2.443 2.255 2.177 2.137 2.125 

Chronic Hepatitis 1.372 1.228 1.152 1.071 1.046 

Acute Liver 

Failure/Disease, 

Including Neonatal 

Hepatitis 

4.824 4.634 4.548 4.547 4.550 

Intestine 

Transplant 

Status/Complicatio

ns 

77.945 78.110 78.175 78.189 78.195 

Peritonitis/Gastroi

ntestinal 

Perforation/Necrot

izing Enterocolitis 

13.144 12.823 12.681 12.743 12.764 

Intestinal 

Obstruction 7.257 6.922 6.789 6.842 6.864 

Chronic 

Pancreatitis 6.682 6.385 6.269 6.309 6.329 

Acute 

Pancreatitis/Other 

Pancreatic 

Disorders and 

Intestinal 

Malabsorption 

3.614 3.380 3.281 3.245 3.234 

Inflammatory 

Bowel Disease 2.894 2.640 2.517 2.398 2.355 

Necrotizing 7.878 7.622 7.508 7.545 7.559 
CMS-9964-F 53 

Factor Platinum Gold Silver Bronze Catastrophic

Fasciitis 

Bone/Joint/Muscle 

Infections/Necrosi

s 

7.878 7.622 7.508 7.545 7.559 

Rheumatoid 

Arthritis and 

Specified 

Autoimmune 

Disorders 

3.414 3.135 3.009 2.987 2.982 

Systemic Lupus 

Erythematosus and 

Other 

Autoimmune 

Disorders 

1.263 1.124 1.051 0.954 0.921 

Osteogenesis 

Imperfecta and 

Other 

Osteodystrophies 

3.524 3.300 3.184 3.126 3.107 

Congenital/Develo

pmental Skeletal 

and Connective 

Tissue Disorders 

3.524 3.300 3.184 3.126 3.107 

Cleft Lip/Cleft 

Palate 2.168 1.978 1.891 1.815 1.793 

Hemophilia 49.823 49.496 49.321 49.330 49.329 

Myelodysplastic 

Syndromes and 

Myelofibrosis 

15.404 15.253 15.182 15.214 15.224 

Aplastic Anemia 15.404 15.253 15.182 15.214 15.224 

Acquired 

Hemolytic 

Anemia, Including 

Hemolytic Disease 

of Newborn 

7.405 7.198 7.099 7.090 7.089 

Sickle Cell 

Anemia (Hb-SS) 7.405 7.198 7.099 7.090 7.089 

Thalassemia Major 7.405 7.198 7.099 7.090 7.089 

Combined and 

Other Severe 

Immunodeficienci

es 

5.688 5.489 5.402 5.419 5.423 

Disorders of the 

Immune 

Mechanism 

5.688 5.489 5.402 5.419 5.423 

Coagulation 

Defects and Other 

Specified 

3.080 2.959 2.899 2.880 2.872 
CMS-9964-F 54 

Factor Platinum Gold Silver Bronze Catastrophic

Hematological 

Disorders 

Drug Psychosis 3.776 3.517 3.389 3.302 3.274 

Drug Dependence 3.776 3.517 3.389 3.302 3.274 

Schizophrenia 3.122 2.854 2.732 2.647 2.624 

Major Depressive 

and Bipolar 

Disorders 

1.870 1.698 1.601 1.476 1.436 

Reactive and 

Unspecified 

Psychosis, 

Delusional 

Disorders 

1.870 1.698 1.601 1.476 1.436 

Personality 

Disorders 1.187 1.065 0.974 0.836 0.790 

Anorexia/Bulimia 

Nervosa 3.010 2.829 2.732 2.657 2.631 

Prader-Willi, 

Patau, Edwards, 

and Autosomal 

Deletion 

Syndromes 

5.387 5.219 5.141 5.101 5.091 

Down Syndrome, 

Fragile X, Other 

Chromosomal 

Anomalies, and 

Congenital 

Malformation 

Syndromes 

1.264 1.171 1.099 1.015 0.985 

Autistic Disorder 1.187 1.065 0.974 0.836 0.790 

Pervasive 

Developmental 

Disorders, Except 

Autistic Disorder 

1.187 1.065 0.974 0.836 0.790 

Traumatic 

Complete Lesion 

Cervical Spinal 

Cord 

11.728 11.537 11.444 11.448 11.449 

Quadriplegia 11.728 11.537 11.444 11.448 11.449 

Traumatic 

Complete Lesion 

Dorsal Spinal Cord 

10.412 10.205 10.108 10.111 10.111 

Paraplegia 10.412 10.205 10.108 10.111 10.111 

Spinal Cord 

Disorders/Injuries 6.213 5.969 5.861 5.843 5.836 

Amyotrophic 

Lateral Sclerosis 3.379 3.094 2.967 2.927 2.919 
CMS-9964-F 55 

Factor Platinum Gold Silver Bronze Catastrophic

and Other Anterior 

Horn Cell Disease 

Quadriplegic 

Cerebral Palsy 2.057 1.810 1.681 1.610 1.589 

Cerebral Palsy, 

Except 

Quadriplegic 

0.729 0.596 0.521 0.437 0.408 

Spina Bifida and 

Other 

Brain/Spinal/Nerv

ous System 

Congenital 

Anomalies 

0.727 0.590 0.522 0.467 0.449 

Myasthenia 

Gravis/Myoneural 

Disorders and 

Guillain-Barre 

Syndrome/Inflam

matory and Toxic 

Neuropathy 

5.174 4.999 4.921 4.900 4.891 

Muscular 

Dystrophy 2.118 1.928 1.848 1.771 1.745 

Multiple Sclerosis 7.441 6.971 6.764 6.830 6.850 

Parkinson`s, 

Huntington`s, and 

Spinocerebellar 

Disease, and Other 

Neurodegenerative 

Disorders 

2.118 1.928 1.848 1.771 1.745 

Seizure Disorders 

and Convulsions 1.578 1.411 1.321 1.229 1.199 

Hydrocephalus 7.688 7.552 7.486 7.492 7.493 

Non-Traumatic 

Coma, and Brain 

Compression/Ano

xic Damage 

9.265 9.102 9.022 9.026 9.025 

Respirator 

Dependence/Trach

eostomy Status 

40.054 40.035 40.022 40.105 40.131 

Respiratory Arrest 12.913 12.707 12.612 12.699 12.728 

Cardio-Respiratory 

Failure and Shock, 

Including 

Respiratory 

Distress 

Syndromes 

12.913 12.707 12.612 12.699 12.728 

Heart Assistive 33.372 33.025 32.877 32.978 33.014 
CMS-9964-F 56 

Factor Platinum Gold Silver Bronze Catastrophic

Device/Artificial 

Heart 

Heart Transplant 33.372 33.025 32.877 32.978 33.014 

Congestive Heart 

Failure 3.790 3.648 3.587 3.591 3.594 

Acute Myocardial 

Infarction 11.904 11.451 11.258 11.423 11.478 

Unstable Angina 

and Other Acute 

Ischemic Heart 

Disease 

6.369 6.001 5.861 5.912 5.935 

Heart 

Infection/Inflamm

ation, Except 

Rheumatic 

6.770 6.611 6.537 6.530 6.528 

Specified Heart 

Arrhythmias 3.363 3.193 3.112 3.063 3.046 

Intracranial 

Hemorrhage 10.420 10.062 9.907 9.943 9.959 

Ischemic or 

Unspecified Stroke 4.548 4.304 4.215 4.242 4.256 

Cerebral 

Aneurysm and 

Arteriovenous 

Malformation 

5.263 5.000 4.890 4.867 4.859 

Hemiplegia/ 

Hemiparesis 5.979 5.846 5.794 5.858 5.881 

Monoplegia, Other 

Paralytic 

Syndromes 

4.176 4.024 3.959 3.938 3.931 

Atherosclerosis of 

the Extremities 

with Ulceration or 

Gangrene 

11.941 11.801 11.745 11.844 11.876 

Vascular Disease 

with 

Complications 

8.228 7.996 7.896 7.922 7.932 

Pulmonary 

Embolism and 

Deep Vein 

Thrombosis 

4.853 4.642 4.549 4.539 4.537 

Lung Transplant 

Status/Complicatio

ns 

31.457 31.161 31.030 31.131 31.161 

Cystic Fibrosis 10.510 10.142 9.957 9.960 9.962 

Chronic 

Obstructive 1.098 0.978 0.904 0.810 0.780 
CMS-9964-F 57 

Factor Platinum Gold Silver Bronze Catastrophic

Pulmonary 

Disease, Including 

Bronchiectasis 

Asthma 1.098 0.978 0.904 0.810 0.780 

Fibrosis of Lung 

and Other Lung 

Disorders 

2.799 2.657 2.596 2.565 2.556 

Aspiration and 

Specified Bacterial 

Pneumonias and 

Other Severe Lung 

Infections 

9.052 8.934 8.883 8.913 8.924 

Kidney Transplant 

Status 10.944 10.576 10.432 10.463 10.482 

End Stage Renal 

Disease 37.714 37.356 37.193 37.352 37.403 

Chronic Kidney 

Disease, Stage 5 2.189 2.048 1.995 1.990 1.992 

Chronic Kidney 

Disease, Severe 

(Stage 4) 

2.189 2.048 1.995 1.990 1.992 

Ectopic and Molar 

Pregnancy, Except 

with Renal Failure, 

Shock, or 

Embolism 

1.377 1.219 1.120 0.912 0.828 

Miscarriage with 

Complications 1.377 1.219 1.120 0.912 0.828 

Miscarriage with 

No or Minor 

Complications 

1.377 1.219 1.120 0.912 0.828 

Completed 

Pregnancy With 

Major 

Complications 

3.778 3.285 3.134 2.931 2.906 

Completed 

Pregnancy With 

Complications 

3.778 3.285 3.134 2.931 2.906 

Completed 

Pregnancy with No 

or Minor 

Complications 

3.778 3.285 3.134 2.931 2.906 

Chronic Ulcer of 

Skin, Except 

Pressure 

2.515 2.371 2.313 2.304 2.304 

Hip Fractures and 

Pathological 9.788 9.570 9.480 9.521 9.536 
CMS-9964-F 58 

Factor Platinum Gold Silver Bronze Catastrophic

Vertebral or 

Humerus Fractures 

Pathological 

Fractures, Except 

of Vertebrae, Hip, 

or Humerus 

1.927 1.805 1.735 1.648 1.620 

Stem Cell, 

Including Bone 

Marrow, 

Transplant 

Status/Complicatio

ns 

30.944 30.908 30.893 30.917 30.928 

Artificial 

Openings for 

Feeding or 

Elimination 

11.093 10.939 10.872 10.943 10.965 

Amputation Status, 

Lower 

Limb/Amputation 

Complications 

7.277 7.087 7.009 7.056 7.073 

Interaction Factors

Severe illness x 

Opportunistic 

Infections 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Metastatic Cancer 12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Lung, Brain, and 

Other Severe 

Cancers, Including 

Pediatric Acute 

Lymphoid 

Leukemia 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Non-Hodgkin`s 

Lymphomas and 

Other Cancers and 

Tumors 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Myasthenia 

Gravis/Myoneural 

Disorders and 

Guillain-Barre 

Syndrome/Inflam

matory and Toxic 

12.094 12.327 12.427 12.527 12.555 
CMS-9964-F 59 

Factor Platinum Gold Silver Bronze Catastrophic

Neuropathy 

Severe illness x 

Heart 

Infection/Inflamm

ation, Except 

Rheumatic 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

Intracranial 

Hemorrhage 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

HCC group G06 

(HCC Group 6 

includes 

Myelodysplastic 

Syndromes and 

Myelofibrosis, and 

Aplastic Anemia) 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

HCC group G08 

(HCC Group 8 

includes 

Combined and 

Other Severe 

Immunodeficienci

es, and Disorders 

of the Immune 

Mechanism) 

12.094 12.327 12.427 12.527 12.555 

Severe illness x 

End-Stage Liver 

Disease 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Acute Liver 

Failure/Disease, 

Including Neonatal 

Hepatitis 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Atherosclerosis of 

the Extremities 

with Ulceration or 

Gangrene 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Vascular Disease 

with 

Complications 

2.498 2.648 2.714 2.813 2.841 
CMS-9964-F 60 

Factor Platinum Gold Silver Bronze Catastrophic

Severe illness x 

Aspiration and 

Specified Bacterial 

Pneumonias and 

Other Severe Lung 

Infections 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

Artificial 

Openings for 

Feeding or 

Elimination 

2.498 2.648 2.714 2.813 2.841 

Severe illness x 

HCC group G03 

(HCC Group 3 

includes 

Necrotizing 

Fasciitis and 

Bone/Joint/Muscle 

Infections/Necrosi

s) 

2.498 2.648 2.714 2.813 2.841 

TABLE 3: HHS HCCs in the Severe Illness Indicator Variable 

Description 

Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock 

Peritonitis/Gastrointestinal Perforation/Necrotizing Enter colitis 

Seizure Disorders and Convulsions 

Non-Traumatic Coma, Brain Compression/Anoxic Damage 

Respirator Dependence/Tracheostomy Status 

Respiratory Arrest 

Cardio-Respiratory Failure and Shock, Including Respiratory Distress 

Syndromes 

Pulmonary Embolism and Deep Vein Thrombosis 

TABLE 4: Child Risk Adjustment Model Factors 

Factor Platinum Gold Silver Bronze Catastrophic

Demographic Factors

Age 2-4, Male 0.283 0.209 0.106 0.019 0.000 

Age 5-9, Male 0.196 0.140 0.064 0.005 0.000 

Age 10-14, Male 0.246 0.189 0.110 0.047 0.033 

Age 15-20, Male 0.336 0.273 0.191 0.114 0.095 

Age 2-4, Female 0.233 0.165 0.071 0.019 0.000 

Age 5-9, Female 0.165 0.113 0.048 0.005 0.000 

Age 10-14, Female 0.223 0.168 0.095 0.042 0.031 
CMS-9964-F 61 

Factor Platinum Gold Silver Bronze Catastrophic

Age 15-20, Female 0.379 0.304 0.198 0.101 0.077 

Diagnosis Factors

HIV/AIDS 2.956 2.613 2.421 2.228 2.166 

Septicemia, Sepsis, 

Systemic Inflammatory 

Response 

Syndrome/Shock 

17.309 17.142 17.061 17.081 17.088 

Central Nervous System 

Infections, Except Viral 

Meningitis 

12.636 12.409 12.296 12.313 12.319 

Viral or Unspecified 

Meningitis 3.202 3.004 2.896 2.750 2.702 

Opportunistic Infections 20.358 20.262 20.222 20.201 20.189 

Metastatic Cancer 34.791 34.477 34.307 34.306 34.300 

Lung, Brain, and Other 

Severe Cancers, Including 

Pediatric Acute Lymphoid 

Leukemia 

11.939 11.618 11.436 11.358 11.334 

Non-Hodgkin`s 

Lymphomas and Other 

Cancers and Tumors 

9.354 9.071 8.908 8.806 8.774 

Colorectal, Breast (Age < 

50), Kidney, and Other 

Cancers 

3.689 3.480 3.337 3.188 3.143 

Benign/Uncertain Brain 

Tumors, and Other 

Cancers and Tumors10 

3.308 3.084 2.954 2.814 2.769 

Thyroid Cancer, 

Melanoma, 

Neurofibromatosis, and 

Other Cancers and Tumors 

1.530 1.368 1.254 1.114 1.066 

Pancreas Transplant 

Status/Complications 18.933 18.476 18.264 18.279 18.289 

Diabetes with Acute 

Complications 2.629 2.354 2.198 1.904 1.799 

Diabetes with Chronic 

Complications 2.629 2.354 2.198 1.904 1.799 

Diabetes without 

Complication 2.629 2.354 2.198 1.904 1.799 

Protein-Calorie 

Malnutrition 13.930 13.794 13.726 13.751 13.759 

Mucopolysaccharidosis 6.177 5.867 5.696 5.642 5.625 

Lipidoses and 

Glycogenosis 6.177 5.867 5.696 5.642 5.625 

 

10 This HCC also includes Breast (Age 50+) and Prostate Cancer. 
CMS-9964-F 62 

Factor Platinum Gold Silver Bronze Catastrophic

Congenital Metabolic 

Disorders, Not Elsewhere 

Classified 

6.177 5.867 5.696 5.642 5.625 

Amyloidosis, Porphyria, 

and Other Metabolic 

Disorders 

6.177 5.867 5.696 5.642 5.625 

Adrenal, Pituitary, and 

Other Significant 

Endocrine Disorders 

6.177 5.867 5.696 5.642 5.625 

Liver Transplant 

Status/Complications 18.322 18.048 17.922 17.898 17.888 

End-Stage Liver Disease 12.960 12.754 12.650 12.622 12.614 

Cirrhosis of Liver 1.177 1.027 0.920 0.871 0.833 

Chronic Hepatitis 1.177 1.027 0.920 0.807 0.775 

Acute Liver 

Failure/Disease, Including 

Neonatal Hepatitis 

6.255 6.092 6.003 5.972 5.966 

Intestine Transplant 

Status/Complications 106.169 106.704 106.991 107.180 107.222 

Peritonitis/Gastrointestinal 

Perforation/Necrotizing 

Enterocolitis 

16.784 16.360 16.156 16.171 16.179 

Intestinal Obstruction 5.715 5.451 5.307 5.210 5.178 

Chronic Pancreatitis 16.692 16.315 16.148 16.163 16.166 

Acute Pancreatitis/Other 

Pancreatic Disorders and 

Intestinal Malabsorption 

3.843 3.685 3.584 3.471 3.434 

Inflammatory Bowel 

Disease 5.049 4.673 4.471 4.320 4.271 

Necrotizing Fasciitis 5.829 5.551 5.398 5.318 5.292 

Bone/Joint/Muscle 

Infections/Necrosis 5.829 5.551 5.398 5.318 5.292 

Rheumatoid Arthritis and 

Specified Autoimmune 

Disorders 

2.689 2.473 2.327 2.171 2.122 

Systemic Lupus 

Erythematosus and Other 

Autoimmune Disorders 

1.397 1.249 1.139 0.996 0.951 

Osteogenesis Imperfecta 

and Other 

Osteodystrophies 

1.536 1.410 1.311 1.211 1.183 

Congenital/Developmental 

Skeletal and Connective 

Tissue Disorders 

1.536 1.410 1.311 1.211 1.183 

Cleft Lip/Cleft Palate 1.785 1.573 1.441 1.281 1.228 

Hemophilia 46.388 45.839 45.551 45.541 45.535 
CMS-9964-F 63 

Factor Platinum Gold Silver Bronze Catastrophic

Myelodysplastic 

Syndromes and 

Myelofibrosis 

29.387 29.168 29.063 29.075 29.078 

Aplastic Anemia 29.387 29.168 29.063 29.075 29.078 

Acquired Hemolytic 

Anemia, Including 

Hemolytic Disease of 

Newborn 

7.791 7.476 7.308 7.229 7.203 

Sickle Cell Anemia (HbSS) 7.791 7.476 7.308 7.229 7.203 

Thalassemia Major 7.791 7.476 7.308 7.229 7.203 

Combined and Other 

Severe 

Immunodeficiencies 

5.690 5.455 5.339 5.270 5.247 

Disorders of the Immune 

Mechanism 5.690 5.455 5.339 5.270 5.247 

Coagulation Defects and 

Other Specified 

Hematological Disorders 

4.909 4.754 4.650 4.543 4.511 

Drug Psychosis 4.067 3.816 3.693 3.596 3.566 

Drug Dependence 4.067 3.816 3.693 3.596 3.566 

Schizophrenia 5.536 5.127 4.916 4.775 4.730 

Major Depressive and 

Bipolar Disorders 1.779 1.591 1.453 1.252 1.188 

Reactive and Unspecified 

Psychosis, Delusional 

Disorders 

1.779 1.591 1.453 1.252 1.188 

Personality Disorders 0.935 0.832 0.723 0.511 0.441 

Anorexia/Bulimia Nervosa 2.565 2.372 2.252 2.146 2.111 

Prader-Willi, Patau, 

Edwards, and Autosomal 

Deletion Syndromes 

3.606 3.347 3.239 3.201 3.189 

Down Syndrome, Fragile 

X, Other Chromosomal 

Anomalies, and Congenital 

Malformation Syndromes 

2.403 2.203 2.093 1.982 1.943 

Autistic Disorder 1.673 1.500 1.372 1.177 1.112 

Pervasive Developmental 

Disorders, Except Autistic 

Disorder 

0.963 0.850 0.723 0.511 0.441 

Traumatic Complete 

Lesion Cervical Spinal 

Cord 

18.394 18.224 18.156 18.210 18.228 

Quadriplegia 18.394 18.224 18.156 18.210 18.228 
CMS-9964-F 64 

Factor Platinum Gold Silver Bronze Catastrophic

Traumatic Complete 

Lesion Dorsal Spinal Cord 18.394 18.224 18.156 18.210 18.228 

Paraplegia 18.394 18.224 18.156 18.210 18.228 

Spinal Cord 

Disorders/Injuries 4.668 4.416 4.287 4.181 4.150 

Amyotrophic Lateral 

Sclerosis and Other 

Anterior Horn Cell 

Disease 

14.484 14.155 13.995 13.958 13.954 

Quadriplegic Cerebral 

Palsy 5.717 5.367 5.223 5.251 5.262 

Cerebral Palsy, Except 

Quadriplegic 1.899 1.672 1.557 1.447 1.412 

Spina Bifida and Other 

Brain/Spinal/Nervous 

System Congenital 

Anomalies 

0.943 0.785 0.686 0.592 0.562 

Myasthenia 

Gravis/Myoneural 

Disorders and GuillainBarre 

Syndrome/Inflammatory 

and Toxic Neuropathy 

5.301 5.071 4.950 4.861 4.832 

Muscular Dystrophy 3.122 2.915 2.800 2.698 2.669 

Multiple Sclerosis 5.370 4.996 4.806 4.769 4.752 

Parkinson`s, Huntington`s, 

and Spinocerebellar 

Disease, and Other 

Neurodegenerative 

Disorders 

3.122 2.915 2.800 2.698 2.669 

Seizure Disorders and 

Convulsions 2.188 2.012 1.882 1.702 1.644 

Hydrocephalus 6.791 6.630 6.550 6.521 6.513 

Non-Traumatic Coma, and 

Brain 

Compression/Anoxic 

Damage 

9.073 8.882 8.788 8.753 8.735 

Respirator 

Dependence/Tracheostomy 

Status 

34.717 34.532 34.471 34.623 34.668 

Respiratory Arrest 14.998 14.772 14.669 14.691 14.696 
CMS-9964-F 65 

Factor Platinum Gold Silver Bronze Catastrophic

Cardio-Respiratory Failure 

and Shock, Including 

Respiratory Distress 

Syndromes 

14.998 14.772 14.669 14.691 14.696 

Heart Assistive 

Device/Artificial Heart 25.734 25.262 25.057 25.189 25.225 

Heart Transplant 25.734 25.262 25.057 25.189 25.225 

Congestive Heart Failure 6.292 6.159 6.073 6.013 5.992 

Acute Myocardial 

Infarction 4.568 4.453 4.410 4.433 4.448 

Unstable Angina and 

Other Acute Ischemic 

Heart Disease 

4.568 4.453 4.410 4.433 4.448 

Heart 

Infection/Inflammation, 

Except Rheumatic 

12.842 12.655 12.573 12.590 12.597 

Hypoplastic Left Heart 

Syndrome and Other 

Severe Congenital Heart 

Disorders 

7.019 6.823 6.668 6.528 6.480 

Major Congenital 

Heart/Circulatory 

Disorders 

2.257 2.143 2.018 1.870 1.828 

Atrial and Ventricular 

Septal Defects, Patent 

Ductus Arteriosus, and 

Other Congenital 

Heart/Circulatory 

Disorders 

1.411 1.319 1.206 1.078 1.047 

Specified Heart 

Arrhythmias 4.483 4.276 4.141 4.052 4.026 

Intracranial Hemorrhage 21.057 20.757 20.616 20.617 20.618 

Ischemic or Unspecified 

Stroke 8.498 8.373 8.324 8.360 8.363 

Cerebral Aneurysm and 

Arteriovenous 

Malformation 

4.704 4.464 4.344 4.280 4.250 

Hemiplegia/Hemiparesis 5.561 5.404 5.334 5.315 5.310 

Monoplegia, Other 

Paralytic Syndromes 5.561 5.404 5.334 5.315 5.310 

Atherosclerosis of the 

Extremities with 

Ulceration or Gangrene 

10.174 9.937 9.799 9.688 9.641 

Vascular Disease with 

Complications 11.571 11.355 11.257 11.260 11.272 

Pulmonary Embolism and 

Deep Vein Thrombosis 13.894 13.661 13.557 13.591 13.604 
CMS-9964-F 66 

Factor Platinum Gold Silver Bronze Catastrophic

Lung Transplant 

Status/Complications 100.413 100.393 100.412 100.660 100.749 

Cystic Fibrosis 13.530 13.006 12.743 12.739 12.742 

Chronic Obstructive 

Pulmonary Disease, 

Including Bronchiectasis 

0.521 0.458 0.354 0.215 0.175 

Asthma 0.521 0.458 0.354 0.215 0.175 

Fibrosis of Lung and Other 

Lung Disorders 5.812 5.657 5.555 5.472 5.450 

Aspiration and Specified 

Bacterial Pneumonias and 

Other Severe Lung 

Infections 

10.730 10.615 10.549 10.566 10.571 

Kidney Transplant Status 18.933 18.476 18.264 18.279 18.289 

End Stage Renal Disease 43.158 42.816 42.659 42.775 42.808 

Chronic Kidney Disease, 

Stage 5 11.754 11.581 11.472 11.374 11.340 

Chronic Kidney Disease, 

Severe (Stage 4) 11.754 11.581 11.472 11.374 11.340 

Ectopic and Molar 

Pregnancy, Except with 

Renal Failure, Shock, or 

Embolism 

1.191 1.042 0.917 0.674 0.590 

Miscarriage with 

Complications 1.191 1.042 0.917 0.674 0.590 

Miscarriage with No or 

Minor Complications 1.191 1.042 0.917 0.674 0.590 

Completed Pregnancy 

With Major Complications 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy 

With Complications 3.419 2.956 2.778 2.498 2.437 

Completed Pregnancy with 

No or Minor 

Complications 

3.419 2.956 2.778 2.498 2.437 

Chronic Ulcer of Skin, 

Except Pressure 1.570 1.479 1.394 1.314 1.289 

Hip Fractures and 

Pathological Vertebral or 

Humerus Fractures 

7.389 7.174 7.022 6.882 6.842 

Pathological Fractures, 

Except of Vertebrae, Hip, 

or Humerus 

2.353 2.244 2.128 1.965 1.912 

Stem Cell, Including Bone 

Marrow, Transplant 

Status/Complications 

30.558 30.485 30.466 30.522 30.538 
CMS-9964-F 67 

Factor Platinum Gold Silver Bronze Catastrophic

Artificial Openings for 

Feeding or Elimination 14.410 14.247 14.197 14.340 14.383 

Amputation Status, Lower 

Limb/Amputation 

Complications 

10.174 9.937 9.799 9.688 9.641 

TABLE 5: Infant Risk Adjustment Models Factors 

Group Platinum Gold Silver Bronze Catastrophic

Extremely Immature * Severity Level 5 

(Highest) 393.816 392.281 391.387 391.399 391.407 

Extremely Immature * Severity Level 4 225.037 223.380 222.424 222.371 222.365 

Extremely Immature * Severity Level 3 60.363 59.232 58.532 58.247 58.181 

Extremely Immature * Severity Level 2 60.363 59.232 58.532 58.247 58.181 

Extremely Immature * Severity Level 1 

(Lowest) 60.363 59.232 58.532 58.247 58.181 

Immature * 

Severity Level 5 (Highest) 207.274 205.589 204.615 204.629 204.644 

Immature * Severity Level 4 89.694 88.105 87.188 87.169 87.178 

Immature * Severity Level 3 45.715 44.305 43.503 43.394 43.379 

Immature * Severity Level 2 33.585 32.247 31.449 31.221 31.163 

Immature * 

Severity Level 1 (Lowest) 33.585 32.247 31.449 31.221 31.163 

Premature/Multiples * Severity Level 5 

(Highest) 173.696 172.095 171.169 171.111 171.108 

Premature/Multiples * Severity Level 4 34.417 32.981 32.155 31.960 31.925 

Premature/Multiples * Severity Level 3 18.502 17.382 16.694 16.311 16.200 

Premature/Multiples * Severity Level 2 9.362 8.533 7.967 7.411 7.241 

Premature/Multiples * Severity Level 1 

(Lowest) 6.763 6.144 5.599 4.961 4.771 

Term * Severity Level 5 (Highest) 132.588 131.294 130.511 130.346 130.292 

Term * Severity Level 4 20.283 19.222 18.560 18.082 17.951 

Term * Severity Level 3 6.915 6.286 5.765 5.092 4.866 

Term * Severity Level 2 3.825 3.393 2.925 2.189 1.951 

Term * Severity Level 1 (Lowest) 1.661 1.449 0.998 0.339 0.188 

Age1 * Severity Level 5 (Highest) 62.385 61.657 61.217 61.130 61.108 

Age1 * Severity Level 4 10.855 10.334 9.988 9.747 9.686 

Age1 * Severity Level 3 3.633 3.299 3.007 2.692 2.608 

Age1 * Severity Level 2 2.177 1.930 1.665 1.320 1.223 

Age1 * Severity Level 1 (Lowest) 0.631 0.531 0.333 0.171 0.137 

Age 0 Male 0.629 0.587 0.574 0.533 0.504 

Age 1 Male 0.117 0.102 0.094 0.065 0.054 

TABLE 6: HHS HCCs Included in Infant Model Maturity Categories 
CMS-9964-F 68 

Maturity Category HCC/Description 

Extremely 

Immature 

Extremely Immature Newborns, Birthweight < 500 Grams 

Extremely 

Immature 

Extremely Immature Newborns, Including Birthweight 500-749 Grams 

Extremely 

Immature 

Extremely Immature Newborns, Including Birthweight 750-999 Grams 

Immature Premature Newborns, Including Birthweight 1000-1499 Grams 

Immature Premature Newborns, Including Birthweight 1500-1999 Grams 

Premature/Multiples Premature Newborns, Including Birthweight 2000-2499 Grams 

Premature/Multiples Other Premature, Low Birthweight, Malnourished, or Multiple Birth 

Newborns 

Term Term or Post-Term Singleton Newborn, Normal or High Birthweight 

Age 1 All age 1 infants 

TABLE 7: HHS HCCs Included in Infant Model Severity Categories 

Severity Category HCC 

Severity Level 5 

(Highest) Metastatic Cancer 

Severity Level 5 Pancreas Transplant Status/Complications 

Severity Level 5 Liver Transplant Status/Complications 

Severity Level 5 End-Stage Liver Disease 

Severity Level 5 Intestine Transplant Status/Complications 

Severity Level 5 Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis 

Severity Level 5 Respirator Dependence/Tracheostomy Status 

Severity Level 5 Heart Assistive Device/Artificial Heart 

Severity Level 5 Heart Transplant 

Severity Level 5 Congestive Heart Failure 

Severity Level 5 Hypoplastic Left Heart Syndrome and Other Severe Congenital Heart 

Disorders 

Severity Level 5 Lung Transplant Status/Complications 

Severity Level 5 Kidney Transplant Status 

Severity Level 5 End Stage Renal Disease 

Severity Level 5 Stem Cell, Including Bone Marrow, Transplant Status/Complications 

Severity Level 4 Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock 

Severity Level 4 Lung, Brain, and Other Severe Cancers, Including Pediatric Acute Lymphoid 

Leukemia 

Severity Level 4 Mucopolysaccharidosis 

Severity Level 4 Major Congenital Anomalies of Diaphragm, Abdominal Wall, and 

Esophagus, Age < 2 

Severity Level 4 Myelodysplastic Syndromes and Myelofibrosis 

Severity Level 4 Aplastic Anemia 

Severity Level 4 Combined and Other Severe Immunodeficiencies 
CMS-9964-F 69 

Severity Category HCC 

Severity Level 4 Traumatic Complete Lesion Cervical Spinal Cord 

Severity Level 4 Quadriplegia 

Severity Level 4 Amyotrophic Lateral Sclerosis and Other Anterior Horn Cell Disease 

Severity Level 4 Quadriplegic Cerebral Palsy 

Severity Level 4 Myasthenia Gravis/Myoneural Disorders and Guillain-Barre 

Syndrome/Inflammatory and Toxic Neuropathy 

Severity Level 4 Non-Traumatic Coma, Brain Compression/Anoxic Damage 

Severity Level 4 Respiratory Arrest 

Severity Level 4 Cardio-Respiratory Failure and Shock, Including Respiratory Distress 

Syndromes 

Severity Level 4 Acute Myocardial Infarction 

Severity Level 4 Heart Infection/Inflammation, Except Rheumatic 

Severity Level 4 Major Congenital Heart/Circulatory Disorders 

Severity Level 4 Intracranial Hemorrhage 

Severity Level 4 Ischemic or Unspecified Stroke 

Severity Level 4 Vascular Disease with Complications 

Severity Level 4 Pulmonary Embolism and Deep Vein Thrombosis 

Severity Level 4 Aspiration and Specified Bacterial Pneumonias and Other Severe Lung 

Infections 

Severity Level 4 Chronic Kidney Disease, Stage 5 

Severity Level 4 Hip Fractures and Pathological Vertebral or Humerus Fractures 

Severity Level 4 Artificial Openings for Feeding or Elimination 

Severity Level 3 HIV/AIDS 

Severity Level 3 Central Nervous System Infections, Except Viral Meningitis 

Severity Level 3 Opportunistic Infections 

Severity Level 3 Non-Hodgkin`s Lymphomas and Other Cancers and Tumors 

Severity Level 3 Colorectal, Breast (Age < 50), Kidney and Other Cancers 

Severity Level 3 Benign/Uncertain Brain Tumors, and Other Cancers and Tumors11 

Severity Level 3 Lipidoses and Glycogenosis 

Severity Level 3 Adrenal, Pituitary, and Other Significant Endocrine Disorders 

Severity Level 3 Acute Liver Failure/Disease, Including Neonatal Hepatitis 

Severity Level 3 Intestinal Obstruction 

Severity Level 3 Necrotizing Fasciitis 

Severity Level 3 Bone/Joint/Muscle Infections/Necrosis 

Severity Level 3 Osteogenesis Imperfecta and Other Osteodystrophies 

Severity Level 3 Cleft Lip/Cleft Palate 

Severity Level 3 Hemophilia 

Severity Level 3 Disorders of the Immune Mechanism 

Severity Level 3 Coagulation Defects and Other Specified Hematological Disorders 

Severity Level 3 Prader-Willi, Patau, Edwards, and Autosomal Deletion Syndromes 

Severity Level 3 Traumatic Complete Lesion Dorsal Spinal Cord 

Severity Level 3 Paraplegia 

Severity Level 3 Spinal Cord Disorders/Injuries 

 

11 This HCC also includes Breast (Age 50+) and Prostate Cancer. 
CMS-9964-F 70 

Severity Category HCC 

Severity Level 3 Cerebral Palsy, Except Quadriplegic 

Severity Level 3 Muscular Dystrophy 

Severity Level 3 Parkinson`s, Huntington`s, and Spinocerebellar Disease, and Other 

Neurodegenerative Disorders 

Severity Level 3 Hydrocephalus 

Severity Level 3 Unstable Angina and Other Acute Ischemic Heart Disease 

Severity Level 3 Atrial and Ventricular Septal Defects, Patent Ductus Arteriosus, and Other 

Congenital Heart/Circulatory Disorders 

Severity Level 3 Specified Heart Arrhythmias 

Severity Level 3 Cerebral Aneurysm and Arteriovenous Malformation 

Severity Level 3 Hemiplegia/Hemiparesis 

Severity Level 3 Cystic Fibrosis 

Severity Level 3 Fibrosis of Lung and Other Lung Disorders 

Severity Level 3 Pathological Fractures, Except of Vertebrae, Hip, or Humerus 

Severity Level 2 Viral or Unspecified Meningitis 

Severity Level 2 Thyroid, Melanoma, Neurofibromatosis, and Other Cancers and Tumors 

Severity Level 2 Diabetes with Acute Complications 

Severity Level 2 Diabetes with Chronic Complications 

Severity Level 2 Diabetes without Complication 

Severity Level 2 Protein-Calorie Malnutrition 

Severity Level 2 Congenital Metabolic Disorders, Not Elsewhere Classified 

Severity Level 2 Amyloidosis, Porphyria, and Other Metabolic Disorders 

Severity Level 2 Cirrhosis of Liver 

Severity Level 2 Chronic Pancreatitis 

Severity Level 2 Inflammatory Bowel Disease 

Severity Level 2 Rheumatoid Arthritis and Specified Autoimmune Disorders 

Severity Level 2 Systemic Lupus Erythematosus and Other Autoimmune Disorders 

Severity Level 2 Congenital/Developmental Skeletal and Connective Tissue Disorders 

Severity Level 2 Acquired Hemolytic Anemia, Including Hemolytic Disease of Newborn 

Severity Level 2 Sickle Cell Anemia (Hb-SS) 

Severity Level 2 Drug Psychosis 

Severity Level 2 Drug Dependence 

Severity Level 2 Down Syndrome, Fragile X, Other Chromosomal Anomalies, and Congenital 

Malformation Syndromes 

Severity Level 2 Spina Bifida and Other Brain/Spinal/Nervous System Congenital Anomalies 

Severity Level 2 Seizure Disorders and Convulsions 

Severity Level 2 Monoplegia, Other Paralytic Syndromes 

Severity Level 2 Atherosclerosis of the Extremities with Ulceration or Gangrene 

Severity Level 2 Chronic Obstructive Pulmonary Disease, Including Bronchiectasis 

Severity Level 2 Chronic Ulcer of Skin, Except Pressure 

Severity Level 1 

(Lowest) 

Chronic Hepatitis 

Severity Level 1 Acute Pancreatitis/Other Pancreatic Disorders and Intestinal Malabsorption 

Severity Level 1 Thalassemia Major 

Severity Level 1 Autistic Disorder 

Severity Level 1 Pervasive Developmental Disorders, Except Autistic Disorder 
CMS-9964-F 71 

Severity Category HCC 

Severity Level 1 Multiple Sclerosis 

Severity Level 1 Asthma 

Severity Level 1 Chronic Kidney Disease, Severe (Stage 4) 

Severity Level 1 Amputation Status, Lower Limb/Amputation Complications 

Severity Level 1 No Severity HCCs 

TABLE 8: R-Squared Statistic for HHS Risk Adjustment Models 

Risk Adjustment Model R-Squared Statistic 

Platinum Adult 0.360 

Platinum Child 0.307 

Platinum Infant 0.292 

Gold Adult 0.355 

Gold Child 0.302 

Gold Infant 0.289 

Silver Adult 0.352 

Silver Child 0.299 

Silver Infant 0.288 

Bronze Adult 0.351 

Bronze Child 0.296 

Bronze Infant 0.289 

Catastrophic Adult 0.350 

Catastrophic Child 0.295 

Catastrophic Infant 0.289 

c. Overview of the payment transfer formula 

In the proposed rule, we proposed to calculate risk adjustment transfers after the 

close of the applicable benefit year, following the completion of issuer risk adjustment 

data reporting. 

Transfers are calculated at the geographic rating area level for each plan (HHS 

would calculate two separate transfer amounts for a plan that operates in two rating 

areas). In other words, the payment transfer formula would treat each rating area 

segment of enrollment as a separate plan for the purposes of calculating transfers. 

Payment transfer amounts would be aggregated at the issuer level (that is, at the level of 

the entity licensed by the State) such that each issuer would receive an invoice and a 
CMS-9964-F 72 

report detailing the basis for the net payment that would be made or the charge that would 

be owed. The invoice would also include plan-level risk adjustment information. 

The payment transfer formula is based on the difference between two plan 

premium estimates: (1) a premium based on plan-specific risk selection; and (2) a 

premium without risk selection. Transfers are intended to bridge the gap between these 

two premium estimates: 

Conceptually, the goal of payment transfers is to provide plans with payments to 

help cover their actual risk exposure beyond the premiums the plans would charge 

reflecting allowable rating and their applicable cost factors. In other words, payments 

would help cover excess actuarial risk due to risk selection. Both of these premium 

estimates are based on the State average premium. The payment transfer formula 

includes the following premium adjustment terms: 

• Plan average risk score: multiplying the plan average risk score by the State 

average premium shows how a plan’s premium would differ from the State average 

premium based on the risk selection experienced by the plan. 

• Actuarial value (AV): a particular plan’s premium may differ from the State 

average premium based on the plan’s cost-sharing structure, or AV. An AV adjustment 

is applied to the State average premium to account for relative differences between a 

plan’s AV and the market average AV. 

• Permissible rating variation: plan rates may differ based on allowable age 

rating factors. The rating adjustment accounts for the impact of allowable rating factors 

on the premium that would be realized by the plan. 
CMS-9964-F 73 

• Geographic cost differences: differences in unit costs and utilization may lead 

to differences in the average premium between intra-State rating areas, holding other cost 

factors (for example, benefit design) constant. The geographic cost adjustment accounts 

for cost differences across rating areas. 

• Induced demand: enrollee spending patterns may vary based on the 

generosity of cost sharing. The induced demand adjustment accounts for greater 

utilization of health care services induced by lower enrollee cost sharing in higher metal 

level plans. 

The State average premium is multiplied by these factors to develop the plan 

premium estimates used in the payment transfer formula. The factors are relative 

measures that compare how plans differ from the market average with respect to the cost 

factors (that is to say, the product of the adjustments is normalized to the market average 

product of the cost factors). 

In the absence of these adjustments, transfers would reflect liability differences 

attributed to cost factors other than risk selection. For example, in the absence of the AV 

adjustment, a low AV plan with lower-risk enrollees would be overcharged because the 

State average premium would not be scaled down to reflect the fact that the plan’s AV is 

lower than the average AV of plans operating in the market in the State. 

The figure below shows how the State average premium, the plan average risk 

score, and other plan-specific cost factors are used to develop the two plan premium 

estimates that are used to calculate payment transfers: 
CMS-9964-F 74 

We are finalizing the payment transfer formula as proposed, with several 

technical corrections. We clarify that IDF stands for induced demand factor in the 

equations, and modify the denominator of the plan average premium formula within the 

State average premium and geographic cost factor calculations to reflect the billable 

member calculation. Therefore, the 2014 HHS risk adjustment payment transfer formula 

is: 

Where: 

 = State average premium; 

 = plan i's plan liability risk score; 

AVi= plan i's metal level AV; 

ARFi= plan i‘s allowable rating factor; 

IDFi = plan i's induced demand factor; 

GCFi = plan i’s geographic cost factor; 

si = plan i’s share of State enrollment; 

and the denominator is summed across all plans in the risk pool in the market in 

the State. 

Risk adjustment transfers will be calculated at the risk pool level. Each State will 

have a risk pool for all of its metal-level plans. Catastrophic plans will be treated as a 

separate risk pool for purposes of risk adjustment. Individual and small group market 

plans will either be pooled together or treated as separate risk pools, depending on how 

the State treats these pools under the single risk pool provisions. 

The payment transfer formula provides a per member per month (PMPM) transfer 

amount for a plan within a rating area. The PMPM transfer amount derived from the 
CMS-9964-F 75 

payment transfer formula ( will be multiplied by each plan’s rating area billable 

member months to calculate the plan’s total risk adjustment payment for a given 

rating area (Ti). 

Comment: We received a number of comments in support of the general 

approach to calculating payment transfers, including HHS’s approach to adjusting for 

plan cost factors in the transfer equation. 

Response: We are finalizing the payment transfer formula as proposed with 

minor technical corrections, specified below. 

Comment: We received one comment requesting that HHS clarify the calculation 

of payment transfers at the plan level. 

Response: Because we have proposed and are finalizing a geographic cost factor, 

transfers must be calculated for each rating area in which a plan operates. However, we 

note that, because the denominator of each term of the payment transfer equation is the 

Statewide average of the product of the terms, transfers occur within the risk pool within 

the market within the State. 

Comment: We received one comment requesting that HHS provide detailed 

examples of the payment transfer formula. 

Response: We anticipate working closely with issuers and other stakeholders to 

provide examples of the payment transfer formula and its application in a market. 

(1) State Average Premium 

We proposed a payment transfer formula that is based on the State average 

premium for the applicable market. Plan average premiums will be calculated from the 

actual premiums charged to their enrollees, weighted by the number of months enrolled. 
CMS-9964-F 76 

We make a technical correction to the formula to calculate PMPM plan average 

premiums, as described below. The equations for calculating State average premiums 

were proposed as: 

and 

 

The first equation calculates the State average premium as the average of 

individual plan averages, weighted by each plan’s share of Statewide enrollment in the 

risk pool in the market, (based on billable member months). 

The second equation shows the proposed formula to calculate plan average 

premiums. The proposed formula, which we are modifying as described below, was the 

weighted mean over all subscribers s of subscriber premiums Ps, with Ms representing the 

number of billable member months of enrollment for each subscriber s. Due to a 

typographical error and to align with the calculation of plan average risk score, we have 

modified the denominator of the plan average premium equation from the proposed rule. 

The denominator in the revised formula is equal to the sum of the billable member 

months for all billable members b enrolled in the plan. The numerator of this formula 

remains unchanged from the proposed rule. The numerator is equal to the product of 

each subscriber’s billable member months (the billable member months attributed to the 

individual that is the policy subscriber) and the average monthly premium for the 

subscriber, summed across all of the subscribers s in the plan. The calculation of each 

plan’s total premium revenue – the numerator of this formula – uses subscriber-level 

premiums in order to align with the way that premium information will be captured in 
CMS-9964-F 77 

data on issuers’ distributed data environments. The final formula is: 

Billable member months are defined as the number of months during the risk 

adjustment period billable members are enrolled in the plan (billable members exclude 

children who do not count towards family rates). In non-community rated States, issuers 

are required to individually rate each member covered under a family policy and, in the 

case of large families, issuers are only allowed to include the three oldest children in the 

development of family rates. Therefore, for large families, only the three oldest children 

are counted as billable members in the risk adjustment transfer formula. In community 

rated States that require family tiering, the number of billable members under a family 

policy may vary based on the State’s tiering structure. For example, if a State’s largest 

family tier is set at two or more children, only the first two children under the family 

policy would count as billable members. HHS will assess each State’s rating 

requirements and will provide community rated States with additional details on how 

billable members will be counted in the transfer formula. 

Comment: We received a number of comments in support of our proposal to use 

the State average premium as the basis for risk adjustment transfers. One commenter 

suggested that use of a plan’s own premium may cause unintended distortions in the 

transfer formula. One commenter suggested that we use net claims, or approximate net 

claims by using 90 percent of the State average premium, as the basis for risk adjustment 

transfers. 

 Response: The goal of the payment transfer formula is, to the extent possible, to 

promote risk-neutral premiums. We agree with commenters that use of a plan’s own 

premium may cause unintended distortions in transfers. We also believe that both claims 
CMS-9964-F 78 

and administrative costs include elements of risk selection, and therefore, that transfers 

should be based on the entire premium. We are finalizing our proposal to base the 

payment transfer formula on the State average premium. 

(2) Plan Average Risk Score 

The proposed plan average risk score calculation included an adjustment to 

account for the family rating rules set forth in the Market Reform Rule, which limits the 

number of dependent children in non-community rated States that count toward the buildup of family rates to three. The formula below shows the final plan average risk score 

calculation including the risk of all members on the policy, including those children not 

included in the premium. 

Where: 

PLRSi is plan i's average plan liability risk score, the subscript e denotes each 

enrollee within the plan; 

PLRSe is each enrollee’s individual plan liability risk score; 

Me is the number of months during the risk adjustment period the enrollee is 

enrolled in the plan; and 

Mb is the number of months during the risk adjustment period the billable member 

b is enrolled in the plan (billable members exclude children who do not count 

towards family rates). 

We received the following comments regarding the calculation of the plan 

average risk score: 

Comment: We received comments in support of this approach to calculating plan 

average risk score. We received one comment that calculating plan average risk score 
CMS-9964-F 79 

with an adjustment for billable members would be administratively burdensome for 

issuers. 

 Response: We are finalizing this term as proposed. We note that, when HHS is 

operating risk adjustment on behalf of the State, HHS will calculate the plan average risk 

score and so there will be no additional administrative burden for issuers. 

(3) Actuarial Value (AV) 

The proposed AV adjustment in the payment transfer formula accounts for 

relative differences in plan liability due to differences in AV. Table 9 shows the AV 

adjustment that will be used for each category of metal level plans. We received no 

comments on this adjustment, and are finalizing this provision as proposed. 

TABLE 9: Actuarial Value (AV) Adjustment Used for Each Metal Level in the 

Payment Transfer Formula 

Metal Level AV Adjustment 

Catastrophic 0.57 

Bronze 0.60 

Silver 0.70 

Gold 0.80 

Platinum 0.90 

(4) Allowable rating variation 

We proposed an allowable rating factor adjustment in the payment transfer 

formula. The Allowable Rating Factor (ARF) adjustment accounts only for age rating. 

Tobacco use, wellness discounts, and family rating requirements will not be included in 

the payment transfer formula. Geographic cost variation is treated as a separate 

adjustment in the payment transfer formula. We recognize that there may be special 

rating circumstances in States (for example, community rating) and we intend to clarify 

how the payment transfer formula will address these circumstances through future 
CMS-9964-F 80 

rulemaking or guidance. We received comments in support of the allowable rating 

variation adjustment, and are finalizing this provision as proposed. 

TABLE 10: Example Allowable Rating Factor Calculation 

Age Band State AgeRating CurvePlan A Plan B Plan C State 

 Enrollment percentages (Share of member-months) 

21 1.000 33.30 

percent 

40.00 

percent 

10.00 

percent 

31.70 

percent 

(Age bands from 22-39 omitted) 

40 1.278 33.30 

percent 

40.00 

percent 

20.00 

percent 

33.30 

percent 

(Age bands from 41-63 omitted) 

64 and older 3.000 33.30 

percent 

20.00 

percent 

70.00 

percent 

35.00 

percent 

Total member-months 300,000 200,000 100,000 600,000 

Allowable Rating Factor 1.758 1.511 2.456 1.793 

(5) Induced demand 

We proposed to use the same induced demand factors in the payment transfer 

formula, shown in Table 11. We received the following comments regarding the induced 

demand proposed provisions: 

Comment: We received comments that, due to a typographical error, the 

definition of the induced demand factor expressed in the full payment transfer formula in 

the proposed rule was “plan i’s allowable rating factor” rather than “plan i’s induced 

demand factor.” 

 Response: We have made this change in the equation above. 

TABLE 11: Induced Demand Adjustment Used for Each Metal Level in the 

Payment Transfer Formula 

Metal Level Induced Demand Adjustment 

Catastrophic 1.00 

Bronze 1.00 

Silver 1.03 

Gold 1.08 

Platinum 1.15 
CMS-9964-F 81 

(6) Geographic Area Cost Variation 

The proposed geographic cost factor (GCF) is an adjustment in the payment 

transfer formula because there are some plan costs – such as input prices or utilization 

rates – that vary geographically and are likely to affect plan premiums. GCFs will be 

calculated for each rating area established by the State under §147.102(b). These factors 

will be calculated based on the observed average silver plan premium for the metal-level 

risk pool (calculated separately for individual and small group if the State does not have a 

merged market) or catastrophic plan premium for the catastrophic risk pool, in a 

geographic area relative to the Statewide average silver or catastrophic plan premium. 

Calculation of the GCF involves three steps. First, the average premium is computed for 

each silver or catastrophic plan, as applicable, in each rating area (using the same formula 

that is used to compute plan premiums in the State average premium calculation 

discussed above). We note that the same modification described above regarding the 

calculation of the plan average premium also applies to this term. The proposed 

calculation was: 

Where: 

, is the average premium for plan i;

s indexes all subscribers enrolled in the plan; 

Ms is the number of billable member months for billable members under the 

policy of subscriber s; and

Ps is the premium for subscriber s.

The final calculation is: 
CMS-9964-F 82 

Where: 

, is the average premium for plan i; 

s indexes all subscribers enrolled in the plan; 

Ms is the number of billable member months for the subscriber s; 

Ps is the premium for subscriber s; and 

Mb is the number of billable members b enrolled in the plan. 

The second step is to generate a set of plan average premiums that standardizes 

the premiums for age rating. Plan premiums are standardized for age by dividing the 

average plan premium by the plan rating factor (calculated at the rating area level), the 

enrollment-weighted rating factor applied to all billable members (discussed above). 

This formula is: 

Where: 

is plan i's age standardized average premium; 

, is the average premium for plan i; and 

ARFi is the allowable rating factor. 

The third and final step is to compute a GCF for each area in each risk pool and 

assign it to all plans in that area. This is accomplished with the following calculation: 

This equation divides the enrollment-weighted average of standardized silverlevel plan premiums in a geographic area by the average of those premiums Statewide. 

The numerator’s summation is over all silver-level plans within plan i's geographic area, 
CMS-9964-F 83 

so . Similarly, the summation in the denominator is over all silver-level 

plans in the State, so . 

With the exception of the plan average risk score calculation discussed above, all 

of the other calculations used in the payment transfer formula are based on billable 

members (that is, children who do not count toward family policy premiums are 

excluded). Member months, the State average premium, the allowable rating factor, and 

the geographic cost factor are all calculated based on billable members. 

Comment: We received one comment requesting that HHS include a geographic 

cost adjustment even if the State elected to use one rating area. Another commenter 

suggested that HHS include an adjustment in the risk adjustment methodology that 

accounts for the increased cost of providing care in rural areas. 

 Response: The purpose of the geographic cost adjustment is to remove 

differences in premium due to allowable geographic rating variation. We believe that the 

cost of care in a particular area are reflected in premiums, and therefore captured in the 

geographic cost factor adjustment. Issuers of plans in a State with a single rating area 

would not vary rates within the State based on geography, and so it would not be 

necessary to remove differences in premiums due to allowed rating variation based on 

geography. 

d. Overview of the data collection approach 

In §153.20, we proposed a technical correction to the definition of risk adjustment 

data collection approach. We proposed to delete “and audited” so that the definition of 

risk adjustment data collection approach means “the specific procedures by which risk 

adjustment data is to be stored, collected, accessed, transmitted, validated and the 

applicable timeframes, data formats, and privacy and security standards.” We received 

no comments on the proposed technical correction to the definition of data collection 
CMS-9964-F 84 

approach, and are finalizing the provision as proposed. Comments regarding the data 

collection approach for the risk adjustment program are addressed in section III.G. of this 

final rule. 

We also proposed to modify §153.340(b)(3) by adding the additional restriction 

that “Use and disclosure of personally identifiable information is limited to those 

purposes for which the personally identifiable information was collected (including for 

purposes of data validation).” “Personally identifiable information” is a broadly used 

term across Federal agencies, and has been defined in the Office of Management and 

Budget Memorandum M-07-16 (May 22, 2007).12 This addition will further ensure the 

privacy and security of potentially sensitive data by limiting the use or disclosure of any 

personally identifiable information collected as a part of this program. We received no 

comments on the proposed modification and are finalizing the provision as proposed. 

e. Schedule for risk adjustment 

Under §153.610(a), issuers of risk adjustment covered plans will provide HHS 

with risk adjustment data in the form and manner specified by HHS. Under the HHSoperated risk adjustment program, issuers will not send, but must make available to HHS, 

anonymized claims and enrollment data, as specified in section III.G. of this final rule, 

for benefit year 2014 beginning January 1, 2014. Enrollee risk scores will be calculated 

based on enrollee enrollment periods and claims dates of discharge that occur between 

January 1, 2014 and December 31, 2014. Enrollee risk scores for subsequent benefit 

years will be calculated based on claims and enrollment periods for that same benefit 

year. 

 

12 Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf . 
CMS-9964-F 85 

As set forth in the proposed §153.730, claims to be used in the risk score 

calculation must be made available to HHS by April 30 of the year following the benefit 

year. We believe this date provides for ample claims run-out to ensure that diagnoses for 

the benefit year are captured, while providing HHS sufficient time to run enrollee risk 

score, plan average risk, and payments and charges calculations and meet the June 30 

deadline described at the redesignated §153.310(e). Comments in response to the 

proposed §153.730 are addressed in section III.G of this final rule. 

Comment: We received a number of comments that HHS should provide issuers 

with interim reports of risk scores and other information. 

 Response: We are committed to implementing the risk adjustment program in a 

transparent way, and seek to provide issuers with the information necessary for program 

operations and rate development. We are assessing the feasibility of providing program 

information prior to the close of the benefit year. 

4. State Alternate Methodology 

a. Technical correction 

The Premium Stabilization Rule established standards for States that establish 

their own risk adjustment programs. Under the proposed revision to §153.310, a State 

may establish a risk adjustment program if it elects to operate an Exchange and is 

approved to operate risk adjustment in the State. If a State does not meet the 

requirements to operate risk adjustment, HHS will carry out all functions of risk 

adjustment on behalf of the State. In §153.320(a), we established that Federally certified 

methodologies must be used in the operation of the risk adjustment program, and defined 

the process by which a methodology may become Federally certified. We proposed to 

modify §153.320(a)(1) and (a)(2) to clarify that these methodologies must be published 

in “the applicable annual” notice of benefit and payment parameters as opposed to “an 
CMS-9964-F 86 

annual” HHS notice of benefit and payment parameters. This proposed change makes 

clear that methodologies must be certified for use each year. We did not receive any 

comments on this proposed change, and will finalize it as proposed. 

b. State Alternate Risk Adjustment Methodology Evaluation Criteria 

In §153.330(a), we specified the elements required to be included with the request 

to HHS for certification of an alternate risk adjustment methodology. Section 

153.330(a)(1)(i) states that a request for certification for an alternate methodology must 

include the elements specified in §153.320(b), which includes a complete description of: 

(1) the risk adjustment model; (2) the calculation of plan average actuarial risk; (3) the 

calculation of payments and charges; (4) the risk adjustment data collection approach; 

and (5) the schedule for the risk adjustment program. Section 153.330(a)(1)(ii) states that 

the alternate methodology request must also include the calibration methodology and 

frequency of calibration, and §153.330(a)(1)(iii) provides that the request must include 

statistical performance metrics specified by HHS. Section 153.330(a)(2) requires that the 

request also include certain descriptive and explanatory information relating to the 

alternate methodology. We proposed to evaluate risk adjustment methodologies based on 

the information submitted under §153.330(a). We proposed additional evaluation criteria 

to certify alternate risk adjustment methodologies in a new paragraph §153.330(b). 

In the new §153.330(b)(1), we proposed to consider whether the alternate risk 

adjustment methodology meets criteria that correspond to the elements of the alternate 

methodology request described in paragraph §153.330(a)(1) and (2). Specifically, we 

stated that we would be evaluating the extent to which an alternate risk adjustment 

methodology: 

(i) Explains the variation in health care costs of a given population; 
CMS-9964-F 87 

(ii) Links risk factors to daily clinical practices and is clinically meaningful to 

providers; 

(iii) Encourages favorable behavior among providers and health plans and 

discourages unfavorable behavior; 

(iv) Uses data that is complete, high in quality, and available in a timely fashion; 

(v) Is easy for stakeholders to understand and implement; 

(vi) Provides stable risk scores over time and across plans; and 

(vii) Minimizes administrative costs. 

For example, to determine the extent that an alternate methodology explains the 

variation in health care costs of a given population, we would consider whether the risk 

adjustment model was calibrated from data reflecting the applicable market benefits, was 

calibrated on a sample that is reasonably representative of the anticipated risk adjustment 

population, and was calibrated using a sufficient sample to ensure stable weights across 

time and plans. In addition, in evaluating this criterion, we would consider whether the 

methodology has suitably categorized the types of plans subject or not subject to risk 

adjustment, given the overall approach taken by the methodology and the goal of the 

program to account for plan average actuarial risk. States must provide a rationale for the 

methodology’s approach to the plans subject to risk adjustment. Under this proposed 

criteria, we would also evaluate the State’s method for calculating payments and charges. 

In the proposed §153.330(b)(2), we would consider whether the alternate 

methodology complies with the requirements of subpart D, especially §153.310(e) (as 

proposed to be renumbered) and §153.340. Section 153.310(e) requires alternate 

methodologies to have a schedule that provides annual notification to issuers of risk 

adjustment covered plans of payments and charges by June 30 of the year following the 

benefit year. Section 153.340(b)(1) sets forth a number of minimum requirements for 
CMS-9964-F 88 

data collection under risk adjustment, including standards relating to data privacy and 

security. While the Federal approach will not directly collect data from issuers, but 

instead will use a distributed approach that will not include personally identifiable 

information, the Premium Stabilization Rule gave States the flexibility to design their 

own data collection approach, provided privacy and security standards are met. The 

privacy and security of enrollees’ data is of paramount importance to HHS, and the data 

collection approach in an alternate methodology must protect personally identifiable 

information, if any, that is stored, transmitted, or analyzed, to be certified. The 

application for certification of the alternate methodology should identify which data 

elements contain personally identifiable information, and should specify how the State 

would meet these data and privacy security requirements. 

In §153.330(b)(3), we proposed to consider whether the alternate risk adjustment 

methodology accounts for payment transfers across metal levels. We believe that sharing 

risk across metal levels is a critical part of a risk adjustment methodology as new market 

reforms are implemented because of the need to mitigate adverse selection across metal 

levels, as well as within metal levels. The proposed HHS risk adjustment methodology 

transfers funds between plans across metal levels, and under this proposal, State alternate 

methodologies would do so as well. 

Under the proposed HHS risk adjustment methodology, we will apply risk 

adjustment to catastrophic plans in their own risk pool – that is, we will transfer funds 

between catastrophic plans, but not between catastrophic plans and metal level plans. For 

a number of plans, such as student health plans and plans not subject to the market reform 

rules, we will not transfer payments under the HHS risk adjustment methodology. 

However, as discussed above, we believe that States should have the flexibility to submit 
CMS-9964-F 89 

a methodology that transfers funds between these types of plans (either in their own risk 

pool or with the other metal levels). 

In §153.330(b)(4), we proposed to consider whether the elements of the alternate 

methodology align with each other. For example, the data collected through the data 

collection approach should align with the data required by the risk adjustment model to 

calculate individual risk scores. 

Comment: A commenter requested further clarity on §153.330(a)(2)(iii), which 

requires that a State’s request to operate an alternate methodology must include an 

assessment of the extent to which the methodology encourages favorable behavior among 

providers and discourages unfavorable behavior. 

 Response: We provided examples of favorable and unfavorable behavior in the 

proposed rule, at 77 FR at 73146. There, we stated that we would consider whether the 

alternate methodology discriminates against vulnerable populations, as evidenced by 

unjustified differential treatment on the basis of features like age, disability, or expected 

length of life. We also stated that alternate methodologies should take into account the 

health care needs of diverse segments of the risk adjustment population, including but not 

limited to women, children, people with disabilities, and other vulnerable groups. We 

will provide further guidance on these criteria in connection with our evaluation of 

particular proposed State alternate methodologies. 

Comment: A commenter requested that HHS delete the reference to 

“stakeholders” in the criterion that an alternate methodology be easy to understand and 

replace it with the term “carriers.” 

 Response: Risk adjustment affects the overall stability of State insurance 

markets, with potential impacts on many individuals and entities, including State 

governments and enrollees. Therefore, we believe the methodology should be reasonably 
CMS-9964-F 90 

comprehensible to all enrollees and entities, or “stakeholders.” We will maintain our use 

of “stakeholders” rather than “carriers” because we believe that all affected individuals 

should be reasonably able to understand the methodology. 

Comment: A commenter requested that HHS approve alternate methodologies 

independent of a State’s factor weights. 

 Response: An alternate methodology’s factor weights may influence the risk 

adjustment methodology’s ability to meet the evaluation criteria. The factor weights, 

therefore, will be included in the evaluation process. 

Comment: A commenter generally supported our alternate methodology 

certification process, but recommended that we additionally require that a State’s 

proposed alternate methodology must perform similarly to or better than the HHS 

methodology in that State. 

 Response: We believe it would be difficult to assess whether a State’s 

methodology performs “better” than the HHS methodology in light of the various policy 

goals that different States may have in mind. We believe that States understand their 

markets well, and that the proposed set of criteria is sufficiently detailed to achieve a high 

quality risk adjustment methodology. Therefore, we are finalizing these criteria as 

proposed. 

Comment: A commenter recommended that State alternate methodology 

applications be made available to the public. 

 Response: HHS is committed to transparency in its process of evaluating and 

certifying State alternate methodologies. We will publish approved State alternate 

methodologies in the annual HHS notice of benefit and payment parameters. Because we 

require that States publish their alternate methodologies in the State notice of benefit and 
CMS-9964-F 91 

payment parameters, we believe that this publication is sufficient for public access to the 

methodology itself and other supporting information. 

c. Payment and Charges 

In the preamble to the Premium Stabilization Rule, we noted that we plan to 

establish a national method for calculation of payments and charges. In the proposed 

rule, we expanded on this approach by designating areas of State flexibility within the 

general approach to payment transfers. We received no comments on the national 

method for calculating payments and charges or the State flexibility within this method. 

We are finalizing this approach as proposed. 

5. Risk Adjustment Data Validation 

We proposed to add a new subsection, §153.630, which set forth risk adjustment 

data validation standards applicable to all issuers of risk adjustment covered plans when 

HHS is operating risk adjustment. We proposed that, beginning in 2014, HHS will 

conduct a six-stage data validation program when operating risk adjustment on behalf of 

a State: (1) sample selection; (2) initial validation audit; (3) second validation audit; (4) 

error estimation; (5) appeals; and (6) payment adjustments. We noted that States are not 

required to adopt this HHS data validation methodology. We are finalizing these 

provisions as proposed. 

Comment: We received a comment asking that the cost of the audits associated 

with data validation be paid for by the Federal government. 

 Response: At this time, it is the policy of HHS that costs related to the second 

validation audit process be borne by the Federal government, while costs associated with 

initial validation audit process be borne by the applicable issuer. We note that a State 

may choose to allocate the costs of data validation differently when operating its own risk 

adjustment program. 
CMS-9964-F 92 

 Comment: We received a comment requesting that data validation requirements 

be expressed in §153.710(c), relating to data collection standards. 

 Response: We are finalizing the data validation requirements in §153.630. We 

believe that the data validation requirements should remain independent of the data 

collection standards because the data validation requirements are specific to the HHSoperated risk adjustment program and the data collection standards apply to both the risk 

adjustment and reinsurance programs when operated by HHS. 

 Comment: We received a comment expressing concern that the data validation 

process as described will extend beyond a year, potentially affecting payment transfers. 

 Response: We appreciate the concerns of the commenter. We intend to complete 

the data validation process within one year, in time for payment adjustments to be made 

the following benefit year. 

Comment: We received a comment asking that States operating risk adjustment 

programs be required to follow uniform Federal data validation standards, particularly 

during the first few years of the program. 

 Response: The risk adjustment program is intended to be a State-based program. 

We believe that a State operating its own risk adjustment program should have the 

flexibility to implement a data validation program that best complements its program 

design, including the State’s data collection approach and desired level of audit 

complexity. We note, however, that States and issuers still must abide by the standards 

for developing a data validation program as described in the Premium Stabilization Rule. 

 Comment: We received a comment requesting clarification on how issuers that 

leave a market during the year will affect the Statewide data validation process. 

 Response: We will provide further detail on this and other data validation issues 

in future rulemaking and guidance. 
CMS-9964-F 93 

a. Data Validation Process When HHS Operates Risk Adjustment 

(1) Sample Selection 

In §153.630 of the proposed rule, we discussed some of the guidelines for 

selecting a statistically valid sample for data validation. We proposed that HHS would 

choose an adequate sample size of enrollees such that the estimated payment errors 

would be statistically sound and enrollee-level risk score distributions would reflect 

enrollee characteristics for each issuer. Additionally, the sample would cover applicable 

subpopulations for each issuer, such as enrollees with and without risk adjustment 

diagnoses. 

Comment: We received a comment asking for additional information on the 

statistical validity of the expected sample size of 300, including the confidence interval 

and expected error rate tolerance. We also received numerous comments requesting the 

opportunity to comment on a proposed statistical selection methodology in future 

guidance. 

 Response: We anticipate providing more detailed information on the HHS 

sampling methodology in future rulemaking and guidance, including sample sizes and 

expected tolerances and confidence intervals. 

 Comment: We received a comment expressing support for the inclusion of 

enrollees both with and without risk adjustment diagnoses in the sample. The commenter 

also suggested that HHS conduct more comprehensive audits for members without any 

risk adjustment diagnoses, including full medical record review during the second 

validation audit. 

 Response: Individuals without risk adjustment diagnoses will be subject to audits 

of their demographic information as well as medical record reviews during both the 

initial and second validation audits to determine whether any risk adjustment HCCs 
CMS-9964-F 94 

should have been assigned that were not. We anticipate revisiting this policy after the 

first year of the program to assess the utility of performing medical record reviews on 

enrollees with no HCCs. Over time, we anticipate that issuers will utilize the front-end 

HHS-operated data submission processes to ensure they are providing all relevant risk 

adjustment diagnosis for enrollees as opposed to relying on back-end audit processes to 

reveal this information. 

(2) Initial Validation Audit 

In §153.630(b), we proposed that once the audit samples are selected by HHS, 

issuers would conduct independent audits of the risk adjustment data for their initial 

validation audit sample enrollees. In §153.630(b)(1), we proposed that issuers of risk 

adjustment covered plans engage one or more auditors to conduct these independent 

initial validation audits. We proposed in §153.630(b)(2) through (4) that issuers ensure 

that initial validation auditors are reasonably capable of performing the audit, the audit is 

completed, the auditor is free from conflicts of interest, and the auditor submits 

information regarding the initial validation audit to HHS in the manner and timeframe 

specified by HHS. These proposed requirements would ensure the initial validation audit 

is conducted according to minimum audit standards, and issuers or auditors transmit 

necessary information to HHS for use in the second validation audit. We are finalizing 

these provisions as proposed. 

We also proposed that issuers conduct data validation in accordance with audit 

standards established by HHS. We described three methods for establishing these audit 

standards, and requested comment on these approaches. 

Comment: We received multiple comments suggesting that auditors conduct 

interim checks of issuer data during the plan year before the formal validation audit. We 

received a few comments proposing that auditors report the findings of the interim checks 
CMS-9964-F 95 

to HHS so that issuers found to have outlier results could be subject to greater audit 

scrutiny. 

Response: We believe that requiring auditors to perform multiple interim checks 

of issuer data throughout the plan year will be burdensome for issuers. However, an 

issuer may voluntarily have such checks performed if it believes them to be necessary for 

appropriate implementation of risk adjustment and compliance. 

 Comment: We received a comment asking that HHS specify in future guidance 

the common coding and documentation standards that issuers will be subject to, and 

provide issuers an opportunity to comment on the standards. 

 Response: We will clarify in future rulemaking and guidance the uniform audit 

standards that issuers and auditors will be subject to. 

Comment: We received many comments supporting a certification requirement 

for auditor firms before acting as a validation auditor. A number of commenters 

supported the development of audit standards. One commenter supported HHS adopting 

both approaches. 

Response: We considered prospectively certifying entities prior to acting as 

validation auditors. This approach is utilized before performing audits on organizations 

collecting and reporting performance measures through Health Effectiveness Data and 

Information Set (HEDIS). While this approach may ensure that entities performing 

validation audits are capable of conducting the audits in accordance with HHS standards, 

we believe at this time that issuers will be diligent in selecting audit entities capable of 

complying with HHS audit standards, and that adequate enforcement remedies exist 

should an audit entity fail to comply with the standards. We will monitor the 

performance of validation auditors to determine whether such certification or additional 

safeguards are necessary in the future. 
CMS-9964-F 96 

(3) Second Validation Audit 

In §153.630(c), we proposed that HHS retain an independent second validation 

auditor to verify the accuracy of the findings of the initial validation audit using a subsample of the initial validation audit sample enrollees for review. Issuers would submit 

(or ensure their initial validation auditor submits) data validation information, as 

specified by HHS, from their initial validation audit for each enrollee included in the 

second validation audit sub-sample. We are finalizing these provisions as proposed. 

Comment: We received a comment suggesting that HHS provide, for both the 

initial and secondary validation audits, a comparison of a plan’s diagnosis reporting 

accuracy to the calibration data set for the risk adjustment models’ diagnosis accuracy as 

reported through MarketScan®. 

Response: We do not have access to the underlying medical records necessary to 

perform such an audit for the calibration data set. We will consider performing similar 

analyses in future years, as more data becomes available. 

Comment: We received a comment seeking clarity on whether the error process 

would be based exclusively on the second validation audit, and whether the results of the 

second validation audit would be applied only to the subsample under §153.630(c). 

 Response: We anticipate applying any error rate determined by the second 

validation audit to the error rate calculated by the initial validation audit. This reconciled 

error rate will be extrapolated to an issuer’s entire risk adjusted population, not just the 

subsample under §153.630(c). We intend to consult with stakeholders on the details of 

the methodology for error rate calculation to inform future rulemaking. 

 Comment: We received a comment asking HHS to permit issuers to submit 

additional information to the second validation auditor if the initial information provided 

to the initial validation auditor does not meet the proposed audit standards. 
CMS-9964-F 97 

 Response: We do not believe that it is appropriate or efficient to permit issuers to 

submit additional information to the second validation auditor in the event that the initial 

information provided does not meet the proposed audit standards. We believe that 

limiting the review of the second validation audit to only that information made available 

during the initial validation will help to ensure the entire validation process is completed 

in a timely manner and will provide incentives for making all relevant information 

available to the initial validation auditor. 

(4) Error Estimation 

In the preamble to the proposed rule, we stated that we would estimate risk score 

error rates based on the findings from the data validation process. HHS plans to conduct 

further analysis to determine the most effective methodology for adjusting plan risk 

scores for calculating risk adjustment payment transfers. We are finalizing these 

provisions as proposed. 

Comment: We received a few comments regarding the error estimation process 

generally. One comment proposed a three-tiered approach to extrapolating error rates to 

overall plan payment. The commenter suggested that sufficiently low error rates within a 

certain range of model accuracy would receive no extrapolation to plan payment, while 

high outlier error rates would subject an issuer to an additional round of audits. All other 

plans would receive an extrapolation of the plan’s error rate to its payment rate. Another 

commenter asked that HHS perform an outlier analysis on risk scores within a State. 

Another commenter suggested that HHS audit all issuers to determine a mean or expected 

error rate, then perform appropriate statistical tests to compare issuer error rates to this 

expected error rate, and then determine the impact on plan payments. We also received a 

comment requesting that HHS use a dollar adjustment instead of a percent adjustment to 

the risk score. 
CMS-9964-F 98 

Response: Following additional engagement with stakeholders, we expect to 

provide further detail on our approach to error estimation and payment transfer 

adjustments in future rulemaking and guidance. 

Comment: We received a comment requesting clarification on whether error 

adjustments apply if an issuer under-reports its risk scores. 

Response: Consistent with the approach in Medicare Advantage, we intend to 

apply error adjustments if an issuer under-reports its risk scores. We will provide further 

detail on these adjustments in future rulemaking and guidance. 

(5) Appeals 

Pursuant to §153.350(d), HHS or a State operating risk adjustment must provide 

an administrative process to appeal data validation findings. We proposed in §153.630(d) 

that issuers may appeal the findings of a second validation audit or the application of a 

risk score error rate to its risk adjustment payments and charges. We anticipate that 

appeals would be limited to instances in which the audit was not conducted in accordance 

with the second validation audit standards established by HHS. 

Comment: We received a few comments expressing support that the appeals 

process be limited to the application of audit standards, and not the standards themselves. 

Response: We are finalizing this provision as proposed. 

(6) Payment Adjustments 

We proposed that HHS would use a prospective approach when making payment 

adjustments based on findings from the data validation process. Specifically, we would 

use an issuer’s data validation error estimates from the prior year to adjust the issuer’s 

average risk score in the current transfer year. Additionally, because the credibility of the 

system is important for the success of the program, we proposed in paragraph 

§153.630(e) that HHS may also adjust payments and charges for issuers that do not 
CMS-9964-F 99 

comply with the initial or second validation audit standards set forth in §153.630(b) and 

(c). 

Comment: We received a comment requesting further clarity on what impact a 

prospective approach to payment adjustments will have on plan pricing assumptions, and 

how actuarial soundness will be maintained if an issuer’s risk profile changes 

substantially from year to year. 

 Response: We anticipate addressing these issues following stakeholder 

consultations prior to further rulemaking on data validation. 

b. Proposed HHS-Operated Data Validation Process for Benefit Years 2014 and 2015 

We proposed that issuers of risk adjustment covered plans adhere to the data 

validation process beginning with data for the 2014 benefit year. However, due to the 

complexity of the risk adjustment program and the data validation process, and the 

uncertainty in the market that will exist in 2014, we are concerned that adjusting 

payments and charges without first gathering information on the prevalence of error 

could lead to a costly and potentially ineffective audit program. Therefore, we proposed 

that issuers conduct an initial validation audit and that we conduct a second validation 

audit for benefit years 2014 and 2015, but that we would not adjust payments and charges 

based on validation findings during these first two years of the program. Although we 

proposed not to adjust payments and charges based on error estimates discovered, we 

noted that other remedies, such as prosecution under the False Claims Act, may be 

applicable to issuers not in compliance with the risk adjustment program requirements. 

We requested comments on this approach, particularly with respect to 

improvements to the data validation process generally, whether there are alternatives to 

forgoing changes to payments and charges that we should adopt, and what methods we 

should adopt to ensure data integrity in the first two years of the program. 
CMS-9964-F 100 

We also requested comments on the possibility of conducting the second 

validation audits at the auditor level as opposed to the issuer level in future years. As we 

anticipate that a small number of audit firms will perform the majority of the initial 

audits, this would allow us to examine the accuracy of the initial validation audit without 

having to draw large initial validation audit record samples from each issuer that 

participates in risk adjustment. 

Comment: A number of commenters supported not altering payments and 

charges based on 2014 and 2015 data validation results. Numerous other commenters 

requested that HHS apply error rates to payment transfers from the outset of the program, 

while another commenter supported a one-year observation period before effecting data 

validation payment transfers. 

Response: While we appreciate the concerns of the commenters, we continue to 

believe that in light of the complexity of the data validation process, two years of 

observation experience will help HHS refine its data validation process by enabling us to 

gather sufficient data on issuer and auditor error, and will provide issuers and auditors 

enough time to adjust to the audit program. Although we are not adjusting payments and 

charges based on error rates, we note that other remedies, such as prosecution under the 

False Claims Act, may be applicable to issuers not in compliance with the risk adjustment 

program requirements when HHS operates risk adjustment on behalf of a State. 

Comment: We received multiple comments supporting the publishing of a report 

on error rates discovered during the first two years of the data validation program. One 

commenter asked for additional clarification of the overall goal of the report, whether the 

report will identify issuers and providers, and if the report will disclose error rates 

attributable to providers. 
CMS-9964-F 101 

Response: The intent of the report is to provide issuers and auditors information 

on the level of error in the commercial market under the HHS-operated risk adjustment 

program. Additionally, we may study the extent to which errors at the auditor level 

contribute to risk score error rate findings during the initial validation audits. We do not 

anticipate that the report will identify providers, but it may identify issuers. We do 

anticipate that the report will identify the error rates attributable to auditors. 

Comment: We received one comment requesting further clarification on the 

timeframe in which issuers will be directed to provide sample data for a benefit year. 

The commenter also asked for further clarification on program integrity efforts if 

payment transfers are not altered by data validation audit results. 

Response: We will issue further guidance and rulemaking on these matters. 

c. Data Security and Transmission 

In §153.630(f), we proposed data security and transmission requirements for issuers 

related to the HHS data validation process. In §153.630(f)(1), we proposed that issuers 

submit any risk adjustment data and source documentation specified by HHS for the 

initial and second validation audits to HHS in the manner and timeframe established by 

HHS. We proposed in §153.630(f)(2) that, in connection with the initial validation audit, 

the second validation audit, and any appeals, an issuer must ensure that it and its initial 

validation auditor complies with the security standards described at §164.308, §164.310, 

and §164.312. We did not receive any comments on these provisions, and are finalizing 

them as proposed. 

6. State-Submitted Alternate Risk Adjustment Methodology 

 HHS received an alternate risk adjustment methodology from one State, the 

Commonwealth of Massachusetts. We are certifying this methodology as a Federally 

certified methodology for use in Massachusetts. A summary of that methodology, as 
CMS-9964-F 102 

prepared by the Commonwealth, is provided below. More detailed information about this 

methodology can be obtained from the Commonwealth of Massachusetts upon request. 

In addition, the Commonwealth of Massachusetts must publish a State notice of benefit 

and payment parameters, which will contain additional detail, within 30 days of the 

publication date of this final rule. Issuers and other interested parties should consult both 

of these sources. Additional questions may be addressed to Jean Yang, Executive 

Director of the Massachusetts Health Connector, at (617) 933-3059. 

a. Policy Goals of the Massachusetts 2014 State Alternate Risk Adjustment Methodology 

The Commonwealth of Massachusetts shares the same view as the Federal 

government with respect to the importance of the risk adjustment program and strives to 

achieve similar policy goals through the State-operated risk adjustment program powered 

by an alternate methodology. These specific goals include the following: 

• The risk adjustment models should accurately explain variation in health care 

costs; 

• The clinical classification used in the Commonwealth’s alternate risk adjustment 

models should link risk factors to daily clinical practice and should be clinically 

meaningful to providers; 

• The design of the clinical classification and the risk weights in the 

Commonwealth’s alternate risk adjustment models should encourage favorable 

behavior from providers and health plans and discourage unfavorable behavior; 

• The design of the Commonwealth’s alternate risk adjustment methodology should 

reflect the Commonwealth’s market characteristics, experience with risk 

adjustment, and be supportive of other health care reform initiatives in the 

Commonwealth; 
CMS-9964-F 103 

• The Commonwealth’s alternate risk adjustment methodology should use data that 

is complete, high quality and available in a timely fashion; 

• The Commonwealth’s alternate risk adjustment methodology should be easy for 

stakeholders to understand and implement; 

• The methodology should account for risk selection across metal levels; 

• The risk adjustment models and additional adjustment factors should provide 

stable risk scores over time and across plans; 

• The operations of the Commonwealth’s risk adjustment program should minimize 

administrative costs; and 

• There should be reasonable alignment among different elements of the alternate 

methodology. 

Starting from the same conceptual foundation as the proposed HHS risk adjustment 

methodology, the proposed Massachusetts alternate methodology is designed to address a 

number of Massachusetts-specific market characteristics and leverage existing data 

infrastructures to reduce the administrative burden for health plan issuers as well as for 

the Health Connector, which will be administering the program. 

b. Conceptual Framework for Risk Adjustment Funds Transfer 

 Massachusetts’s conceptual framework for calculating risk adjustment funds 

transfer is consistent with the proposed Federal risk adjustment methodology in that 

funds transfer is based on State average premium and should provide plans with 

payments to help cover excess actuarial risk due to risk selection; that is, risk exposure 

beyond the premiums issuers can charge reflecting allowable rating and their applicable 

cost factors. 

 Massachusetts proposes a single, merged risk adjustment pool for metal level 
CMS-9964-F 104 

plans in the small group and non-group market to be consistent with Massachusetts’s 

merged market rules. Consistent with the proposed HHS methodology, Massachusetts 

proposes to keep catastrophic plans in their own risk adjustment pool, separate from the 

rest of the merged market. Massachusetts believes this will help ensure the accuracy of 

the risk adjustment calculations as well as the affordability of the catastrophic plans 

because funds transfer will take place amongst the catastrophic plans only, instead of 

between the catastrophic plans and the metal level plans if all plans were merged in one 

risk adjustment pool. It should be noted that under the current regulations in 

Massachusetts, pricing of the catastrophic plans is subject to the same merged market 

rules as the small group and non-group plans. Keeping catastrophic plans in a separate 

risk adjustment pool does not segment the market from a pricing perspective because 

catastrophic plans are still subject to single risk pool requirements, and risk adjustment is 

retrospective and applies to all non-grandfathered small group and non-group health 

plans, including catastrophic plans. 

 Due to the lack of empirical data, Massachusetts is unable to calibrate a separate 

risk adjustment model for catastrophic plans. It proposes to use the bronze risk 

adjustment model and an actuarial value adjustment factor of 0.57 in the funds transfer 

calculation for catastrophic plans in the initial years, and revisit this approach in future 

recalibrations when empirical data is available. Massachusetts proposes to treat student 

health plans and plans that are not subject to the Affordable Care Act Market Reform 

Rules in the same manner as the Federal methodology. 

c. Data Used to Develop Risk Adjustment Methodology 

 Massachusetts used data from three different sources to develop the risk 

adjustment models and additional adjustment factors in the Commonwealth’s alternate 

risk adjustment methodology: 
CMS-9964-F 105 

• For the non-group and small group market, data from the Massachusetts All 

Payer Claims Database (APCD). Calendar Year 2010, and 7/1/2011 to 

6/30/2012 membership and claims data from the Massachusetts APCD. The 

Commonwealth obtained data extracts on non-group policy holders and small 

group members for group size up to 100 with ages 0 to 64 and eligible for medical 

and pharmacy coverage during the two observation periods. Collectively, 

Massachusetts thinks they are representative of a significant portion of the 

population that is subject to the risk adjustment program under the Affordable 

Care Act. About 700,000 unique individuals were included in the model 

development sample. 

• For enrollees under 300 percent FPL who are not eligible for Medicaid, data 

from the Commonwealth Care program. Fiscal Years 2010 and 2011 

Commonwealth Care program’s membership and claims. More than 100,000 

unique members with ages 0 to 64 from Commonwealth Care met the selection 

criteria and were included in the model development sample. 

Commonwealth Care is a subsidized insurance program created as part of the 

2006 Massachusetts health care reform law. It is administered by the Health 

Connector, and serves individuals with income up to 300 percent FPL who are not 

eligible for Medicaid and generally do not have access to employer-sponsored 

health insurance. As of December 2012, there are close to 198,000 members 

enrolled in the program. Massachusetts anticipates that, effective January 1, 

2014, a portion of the current Commonwealth Care members will enroll in the 

expanded Medicaid program, and the remainder will access QHPs with tax credits 
CMS-9964-F 106 

through the Exchange. 

Most health plan issuers that participate in the current Commonwealth Care 

program are local Medicaid managed care organizations (“MMCOs”) whose 

provider reimbursement level is typically lower than that of the commercial 

payers in Massachusetts for the same types of services. To normalize plan paid 

amount between the APCD data and the Commonwealth Care data, 

Massachusetts re-priced Commonwealth Care claims using unit prices derived 

from the APCD data. This was done using the Milliman Health Cost Guidelines® 

(“HCG”) Grouper. The HCG categorizes claims into more than 80 types of 

services, allowing us to directly compare unit prices by service type between the 

Commonwealth Care claims and the APCD claims. There were service types 

with very few members in either dataset. To obtain robust unit cost estimates, 

Massachusetts consolidated them with other service types that are similar in 

nature. 

• For additional sample size for calibration purposes, Calendar Year 2010 

Truven Health Analytics Marketscan® Commercial Claims and Encounters 

database for New England States. Massachusetts selected members with ages 0 

to 64 who were eligible for medical and pharmacy coverage in PPO or 

Comprehensive plan type, and re-sampled them to match the age/gender 

distribution of the APCD data. The primary reason for using the Marketscan® 

data was to obtain a larger sample size which allowed for calibrating more robust 

risk adjustment models and to strengthen the data quality of the overall model 

development sample. Massachusetts notes that data from Marketscan® mostly 
CMS-9964-F 107 

represent large group experience. However, Massachusetts thinks that it is still a 

useful additional data source. More than 700,000 unique members were included 

from the Marketscan® New England States. 

The consolidated claims data was then processed again through the Milliman 

Health Cost Guidelines® grouper system. The results from the grouper were 

compared to regional cost and utilization benchmarks and checked for 

reasonability. In this process, Massachusetts excluded some commercial payers 

in the APCD data, as well as certain claim lines in the Marketscan® data. 

d. Risk Adjustment Models 

(1) HCC Clinical Classification 

 Using claims from clinically valid sources (for example, laboratory, radiology, 

durable medical equipment, and transportation are not considered clinically valid), 

Massachusetts grouped diagnosis codes using the HCC classification system. 

Massachusetts referenced the HCC classification system in Pope et al. (2000), a Federally 

funded research study that laid the foundation for the CMS HCC risk adjustment payment 

system for Medicare Advantage.13 The classification system in Pope et al. (2000) 

contains approximately 780 DxGroups which are then aggregated to more than 180 

condition categories (“CC”s). Clinical hierarchies are then applied on the CCs to create 

HCCs. Because the HCC classification system was originally designed for the senior 

population, the designs of the condition categories may not be fully reflective of the 

characteristics of the commercial population. Through an iterative process using the 

model development sample, Massachusetts identified 20 DxGroups that were not very 

 

13 Available at: http://www.cms.gov/Research-Statistics-Data-andSystems/Research/HealthCareFinancingReview/downloads/04summerpg119.pdf 
CMS-9964-F 108 

well predicted under the original HCC grouping and promoted them into their own 

HCCs. 

 When determining acceptable types of claims for grouping the HCCs, 

Massachusetts modified the approach outlined by Pope et al. (2000) to ensure that risk 

adjustment does not create unintended consequences with respect to how care is accessed 

in the current Massachusetts market environment. For example, Massachusetts accepted 

diagnosis codes from visits/encounters with nurse practitioners and physician assistants, 

recognizing that in patient-center medical home and ACO care settings, nurse 

practitioners and physician assistants play active and important roles in preventive care 

and chronic care management. Massachusetts also accepted diagnosis codes in claims 

from skilled nursing facilities and ambulatory surgical centers if the claims were coded 

by a clinician. 

 In the process of revising the original HCCs to better reflect the characteristics of 

the commercial population, Massachusetts followed the same 10 principles for designing 

a risk adjustment classification system as discussed in the proposed Federal risk 

adjustment methodology. 

 Compared with the 127 HHS-defined HCCs used by the Federal methodology, 

Massachusetts’s methodology includes 162 Massachusetts-defined HCCs.14 Below, 

Massachusetts discusses the key considerations with regard to the Commonwealth’s 

decision to apply a more expansive set of condition categories. 

 Risk adjustment is a premium redistribution process that equalizes actuarial risks 

amongst a State’s health plan issuers and helps stabilize premiums under modified 

community rating and individual mandate. Conceptually, risk adjustment models should 

 

14 Massachusetts’s list of HCCs is available in Table 16 of this alternate methodology, while HHS’s list of 

HCCs is published elsewhere in this rule. Note that the two lists are numbered differently, and different 

ICD-9 codes are associated with different HCCs and DxGs. 
CMS-9964-F 109 

be as accurate as possible while minimizing the potential for “gaming” and coding creep. 

A more accurate model typically requires a higher number of predictive factors, and in 

the case of the HCCs, more HCCs. However, having more HCCs may also open up more 

opportunities for coding creep and gaming of the system. Therefore, a careful balance 

must be achieved. Although Massachusetts acknowledges that its higher number of 

HCCs may create some added potential for gaming or coding creep, it believes this risk is 

minimal because it will use only certain claims types and certain provider types, will 

impose clinical hierarchies, and will exclude certain vague diagnoses and codes subject to 

discretionary coding. Further, Massachusetts and its issuers have experience with the 

necessary best practices of risk adjustment and intend to implement an effective data 

validation process. 

 The Affordable Care Act risk adjustment program is designed to be a budgetneutral revenue redistribution among issuers. Health insurance issuers expect fair and 

adequate transfer of funds; that is, member risk profiles should be accurately stratified 

and correctly ranked. 

 The complete list of the condition categories included in the Massachusetts 

models is provided in Table 16. Although Massachusetts includes more HCCs than 

under the proposed Federal methodology, the Commonwealth notes that most 

commercial risk adjustment models use almost twice as many condition categories as it 

includes here. 

(2) HCC Models 

 Similar to the HHS approach, Massachusetts calibrated models for bronze, silver, 

gold and platinum benefit tiers separately based on actuarial value. Due to the lack of 

empirical data, Massachusetts is unable to apply a separately-calibrated risk adjustment 

model for catastrophic plans until a sufficient amount of data becomes available in the 
CMS-9964-F 110 

future. At the present time, it plans to apply the risk adjustment model developed for 

bronze plans to catastrophic plans, and proposes to use the actuarial value adjustment 

factor of 0.57 (as provided by the Federal methodology) to account for benefit design 

related utilization differences between catastrophic plans and other metal level plans. For 

calculating funds transfer, Massachusetts plans to keep the catastrophic plans in their own 

risk adjustment pool in the initial years, which is consistent with the proposed Federal 

methodology. Please also refer to the conceptual framework for risk adjustment funds 

transfer above for more information on Massachusetts’s treatment of catastrophic plans in 

risk adjustment. 

 The model dependent variable is total plan paid amount, or “plan liability.” 

Factors or explanatory variables included in the risk adjustment models are – 1 constant 

term, 2 age/gender factors, 162 HCCs and 2 disease interaction terms. Unlike the 

proposed Federal methodology where there are 3 sets of risk weights by age cohort for 

each metal level, that is, 15 models in total, Massachusetts’s models do not contain 

separate risk weights by age cohort. The Massachusetts methodology has 4 models, one 

for each metal level. The bronze model will be applicable to both the bronze plans and 

the catastrophic plans. 

 In risk adjustment modeling work, partial-year eligibility is typically addressed by 

annualizing the dependent variable and weighting the least squares regressions by the 

fraction of eligibility. Massachusetts began modeling using this approach and found that 

the predictive accuracy for members with short eligibility, especially newborns, was low. 

Upon further analyses, Massachusetts believes that this was related to annualizing the 

dependent variable and using eligibility duration as weight in regressions. As a result 

Massachusetts explored nonlinear modeling techniques and developed a set of factors to 

adjust for partial-year eligibility. In its risk adjustment models, the minimum eligibility 
CMS-9964-F 111 

duration requirement is 1 month. 

 Massachusetts’s thinking on this issue reflects the Commonwealth’s experience 

with programs that have high turnover rates, such as the Commonwealth Care program. 

Massachusetts believes that prediction biases associated with partial-year eligibility could 

aggravate selection issues if not addressed adequately. 

 Massachusetts took an iterative approach to developing the risk adjustment 

models. In each iteration, factors with negative and/or statistically insignificant 

coefficients and factors without adequate sample size were either excluded or combined 

with other factors. The unique feature of the HCC risk adjustment models is clinical 

hierarchy – that is, the coefficient of a less severe condition category should not exceed 

the coefficient of a more severe condition in the same clinical hierarchy. This ensures 

clinical validity and preserves healthcare resource for treating more severe medical 

conditions. Massachusetts ensured that all coefficients follow the clinical hierarchies. 

Where they did not, it forced monotonicity in the regression coefficients using restricted 

regressions. 

 Because the models are by metal level, one HCC may receive 4 different risk 

weights in the 4 models. Under the assumption that an HCC treated in a lower metal 

level plan should not lead to higher plan liability than if it were treated in a higher metal 

level plan, Massachusetts also forced monotonicity by HCC across metal levels. 

 In the final models, all factors have nonnegative and statistically significant 

coefficients, and have met the monotonicity requirements of the HCCs and the 

monotonicity requirements Massachusetts imposed by metal level. Massachusetts also 

checked that the member-level total predictions are monotonic across benefit tiers by 

age/gender groups. Table 17 provides the full set of coefficients. 

 Below is an example of how to calculate an individual risk score from these HCC 
CMS-9964-F 112 

models. 

 Example: Member 001, male, 25 years old, is enrolled in a Gold plan for 6 

months, and has three HCCs - HCC005, HCC032, and HCC072. 

 Member Risk Score = Constant Term + Demographic Factor + Sum (Medical 

Risk Factors)/Duration Adjustment Factor 

 = 0.108698 + 0 + (4.203378 + 1.093277 + 4.025404)/0.742262 

 = 12.667685 

 The Constant Terms, Demographics Factor and Medical Risk Factors are 

provided in Table 17. The Duration Adjustment Factors are provided in Table 18. 

(3) Predictive Accuracy 

The final model R-Squared is provided below in Table 12. 

TABLE 12: Final Model R-Squared 

Counts of Unique 

Members

Model R-Squared for Predicting

Paid $PMPY

Platinum 344,472 48. 54 percent 

Gold 171,207 52. 91 percent 

Silver 415,245 46. 66 percent 

Bronze 193,725 47. 58 percent 

 These are comparable to the R-Squared levels observed in many commercial risk 

adjustment models. Massachusetts also validated the models using a more recent data 

extract from the Commonwealth’s APCD and obtained similar R-Squared values. 

e. Adjusting for Induced Demand 

(1) Adjusting for Metallic Tier and Cost-Sharing Reduction 

 In the proposed rule, a set of induced utilization adjustment factors were provided 

to account for the expected utilization level differences associated with different benefit 

levels of plans, as well as those that result from CSRs applied to Silver Variation plans. 
CMS-9964-F 113 

 Massachusetts proposes to use the HHS proposed induced demand factors to 

adjust for induced utilization tied to metallic tiers. In terms of adjusting for induced 

utilization associated with CSR through Silver Variation plans, however, its methodology 

must appropriately account for Massachusetts’s unique circumstance as related to the 

anticipated cost-sharing wrap above and beyond the Federal CSR. 

 As a result, from the perspective of induced utilization adjustment, the factors 

supplied in the HHS methodology (specifically calibrated for target AVs of 73 percent, 

87 percent and 94 percent) may not be adequate for Massachusetts. To overcome this 

limitation, Massachusetts constructed a continuous induced demand curve by fitting a 

polynomial trend line to the HHS proposed induced utilization factors by metal level, 

which Massachusetts extended to 100 percent AV and validated as described below. 

 Using the APCD and Commonwealth Care data sets Massachusetts calculated an 

average member-month-weighted risk score and an average PMPM claim amount for 

each metallic tier. It then backed out the average risk score to calculate a risk-neutral 

PMPM claim amount for each metallic tier. Massachusetts performed this analysis 

separately for non-group and small group after adjusting the non-group results for the 

impact of non-group selection. The difference in the risk neutral rate by tier is the impact 

of benefit design induced utilization. With data from both the APCD and 

Commonwealth Care, Massachusetts was able to populate the curve with a continuous 

range of AV values including those that are close to 100 percent. 

The sample size for bronze and silver metal levels was too small to be credible 

but for the gold and platinum metal levels the results were consistent with the HHS 

factors. Massachusetts determined that this validated its decision to use the HHSproposed induced demand factors to adjust for induced utilization tied to metallic tiers. 

 For plans subject to anticipated cost-sharing wrap subsidies Massachusetts intends 
CMS-9964-F 114 

to use the same induced demand curve to determine the increased utilization as a result of 

subsidized cost sharing. In Table 13 below it has listed induced demand factors by 

actuarial value in 2 percent increments. 

TABLE 13: Induced Demand Factors 

Plan AV Induced Demand Factor 

0. 70 1. 000 

0. 72 1. 008 

0. 74 1. 017 

0. 76 1. 027 

0. 78 1. 037 

0. 80 1. 049 

0. 82 1. 061 

0. 84 1. 073 

0. 86 1. 087 

0. 88 1. 101 

0. 90 1. 117 

0. 92 1. 132 

0. 94 1. 149 

0. 96 1. 167 

0. 98 1. 185 

(2) Adjusting for Non-Group Selection 

 The proposed Market Reform Rule and the proposed HHS notice of benefit and 

payment parameters for 2014 contemplate separate risk pools for individual and small 

group policies and modified community rating to be applied separately within each risk 

pool. The Commonwealth has had a merged small and non-group market since its 

landmark reform in 2006, where small groups and non-group plans are subject to the 

same index rate and pricing methodology. 

 In order to determine if there is an underlying selection dynamic related only to 

members’ group versus non-group status, Massachusetts applied concurrent risk 

adjustment models developed for the Commonwealth to merged market membership and 
CMS-9964-F 115 

claims data from the Commonwealth’s APCD. The models account for cost variations 

due to demographics, medical comorbidities and plan benefit design. The risk-adjusted 

paid amount was calculated at the member level. 

 Members were grouped by non-group versus small group. Groups of 1 were 

treated as non-group policies in its analysis. The average actual annual paid amount and 

the average risk-predicted annual paid amount were compared in total and by metal level. 

The ratio of actual paid to the risk-predicted paid for those enrolled in non-group 

products was compared to the same ratio for those enrolled in small group products. Any 

meaningful difference between the ratios for these two groups would indicate that there is 

a cost difference between the types of members – that is, non-group versus small group – 

that is not explained by the characteristics accounted for in the risk adjustment models. 

 Massachusetts found a higher average ratio for the non-group market segment. 

However, it also found that this selection was limited to platinum plans. As such, 

Massachusetts’s methodology includes an induced demand factor that will only be 

applied to those enrolled in platinum plans. Based on two years’ worth of APCD data, 

Massachusetts found that on average the ratio for platinum plans was 5.7 percent higher 

for non-group over small group, while for gold plans it was broadly consistent between 

non-group and small group. The Commonwealth plans to re-calibrate this factor 

periodically based on up-to-date experience of the market. This factor will be applied to 

individuals who enrolled in platinum plans and do not receive premium subsidies or 

CSRs. The individual risk score will be multiplied by this factor. 

 This adjustment mechanism as part of the risk adjustment methodology is 

uniquely relevant to the merged market in Massachusetts. In other States where there are 

separate risk pools for individual plans and small group plans the selection differential is 

embedded in the underlying claims level of each risk pool. 
CMS-9964-F 116 

f. Calculation of Funds Transfer 

 The funds transfer calculation Massachusetts proposes is structurally the same as 

the proposed Federal methodology, although some of the adjustment factors included in 

the Commonwealth’s calculation are defined differently and were developed from the 

Commonwealth’s own data. 

 Massachusetts will use the following formula to calculate risk adjustment funds 

transfers. 

 (1), where 

 = plan i’s risk adjustment transfer amount 

= plan i’s plan liability risk score 

 = average premium for Massachusetts 

 = plan i’s metal level AV 

 = allowable rating factor for plan i

 = plan i’s induced demand factors for benefit design and non-group selection 

 = plan i’s geographic cost factor 

 = plan i’s share of the Commonwealth’s enrollment 

 The first fraction in formula (1) is premium with risk selection, and the second 

fraction is premium without risk selection. Each component will average to 1.0 across all 

plans in the Commonwealth’s merged market. Massachusetts will keep catastrophic 

plans in their own risk adjustment pool. In this case, formula (1) will apply to the 

catastrophic risk adjustment pool and the metal level plans risk adjustment pool 

separately. 

 The calculation of , plan i’s plan liability risk score, is the enrolled member 
CMS-9964-F 117 

month weighted risk scores of plan i using the risk adjustment models and adjusted by 

billable member months. It is calculated as shown by HHS. See the section above on 

HCC models and Tables 17 and 18 below for the risk weights and how to calculate 

member level risk scores. Massachusetts proposes to use this approach for calculating 

plan liability risk scores under the assumption that the proposed Federal rule for family 

rating will be replicated by the Commonwealth. 

 The calculation of the State average premium is as shown by HHS. 

 Massachusetts will use the Federal adjustment factors for plan AV in the 

Commonwealth’s funds transfer calculations. The AV adjustment factors ( for plan i) 

are listed in Table 14 below. 

TABLE 14: AV Adjustment Factors 

Metal Level AV Adjustment Factor 

Catastrophic 0. 57 

Bronze 0. 60 

Silver 0. 70 

Gold 0. 80 

Platinum 0. 90 

 Massachusetts’s methodology includes two separate induced demand factors 

( for plan i), one relates to benefit design and CSR and one for group selection. 

These two factors are multiplicative, except for individuals who will receive Federal 

subsidies and additional State subsidies, because their cost-sharing level is prescribed 

rather than selected. 

 Allowable rating factors ( for plan i) will include the State-defined uniform 

age rating curve. Pending final State decision on all rating factors applicable to 2014, 

Massachusetts will provide additional specifications as needed on additional adjustment 

steps to ensure the accuracy of risk adjustment. 
CMS-9964-F 118 

 Massachusetts proposes to calculate geographic cost factors consistent with the 

HHS methodology, except that it plans to use gold plans as the benchmark for the 

calculations because gold plans are expected to attract the most enrollment in the 

Massachusetts merged market after 2014, whereas silver plans will likely have relatively 

low enrollment based on the product market in Massachusetts today. Having a data 

sample with sufficient enrollment is necessary in order to credibly measure regional cost 

differences. Massachusetts has not yet made a final decision on the number of rating 

areas, permissible range of the rates by area, or the schedule for implementing the 

changes. However, regardless of the specific decisions that determine the actual factors, 

the calculations will follow the formula shown by HHS. 

g. Data Collection Approach 

 Massachusetts proposes an approach to risk adjustment data collection that 

leverages the Commonwealth’s existing APCD as a resource for data submission to 

support risk adjustment data collection. This approach facilitates Massachusetts’s policy 

goals of administrative simplicity and minimizing the number and types of data 

submissions by health plan issuers. Consistent with Federal requirements, it also 

facilitates the use of data that is complete, high in quality, and available in a timely 

fashion. Moreover, as elaborated below, use of the APCD ensures that the 

Commonwealth does not as part of risk adjustment data collection store any personally 

identifiable information for use as a unique identifier (except as may be required for data 

validation). 

 The APCD is maintained by the Massachusetts Center for Health Information and 

Analysis (CHIA) and requires data submission from the following entities: public 

payers, commercial insurance issuers, health maintenance organizations, third-party 

administrators, and self-insured plans. Data submissions must be filed monthly. 
CMS-9964-F 119 

 The APCD collects payer data for all members living in Massachusetts. Health 

plan issuers and other payers submit five files each month: member eligibility, medical 

claims, pharmacy claims, dental claims and provider details. Product description files 

from all of the payers are submitted to the APCD on a quarterly basis. Detailed data 

submission requirements are in place and available for review on CHIA’s website, 

http://www.mass.gov/chia/researcher/health-care-delivery/hcf-data-resources/apcd/. 

Members of a Massachusetts employer group who live out of State are currently excluded 

unless the payer also holds a contract with the Commonwealth’s employee health 

administrator to provide data for State-covered non-resident individuals. The 

Commonwealth is working with CHIA and the affected data submitters actively to have 

this resolved before 2014 to ensure the accuracy of risk adjustment. It is also working 

with CHIA and issuers in the Commonwealth to evaluate additional data elements needed 

to support risk adjustment calculations. 

 The APCD already collects most of the data elements to support risk adjustment 

(see discussion of the data extract elements below), and nearly all other elements have to 

this date been scheduled to be added as part of APCD collection. As part of data intake, 

automated data quality checks are performed by CHIA. Once data are quality checked 

the subset required for risk adjustment are processed for purposes of creating an extract 

for risk adjustment calculations. Creation of the extract signifies the beginning of the risk 

adjustment data collection process. The extract provides only those data elements that 

are necessary for risk adjustment and contains no personally identifiable information for 

use as a unique identifier for an enrollee’s data. 

 Using the data extract from the APCD, the Health Connector will be responsible 

for performing all risk adjustment calculations as well as facilitating payment and charge 

transactions. The data extracts will be maintained in a secure environment that meets 
CMS-9964-F 120 

applicable Federal and State security standards. 

 Below Massachusetts describes the data elements currently submitted to the 

APCD that will be used to create the risk adjustment extract. The Commonwealth also 

reviews the Health Connector’s authority to use the APCD to support risk adjustment 

data collection, and provide additional details on data quality monitoring and control, 

data privacy and security standards, and the data management plan for risk adjustment 

operations. 

h. Available Data in APCD for Risk Adjustment 

 As noted, the APCD already collects most of the data elements needed for risk 

adjustment. Member files include member and subscriber identifiers, relationships, 

demographics, information about the payer, product and coverage, and duration of 

enrollment. Claims files include all paid claims (including encounter data on capitated 

services) for covered services, including but not limited to institutional and professional 

services, therapies, durable medical equipment (DME), transportation, laboratory 

services, imaging, and skilled nursing. Pharmacy files include all prescribed and 

dispensed medications. Dental claims files include all treatments and services. Provider 

files support the identification of providers by specialty and location. Product files 

provide limited information about the different insurance products that correspond to the 

Member file. 

 On the Commonwealth of Massachusetts website, 

http://www.mass.gov/chia/researcher/health-care-delivery/hcf-dataresources/apcd/submitting-data-to-the-apcd.html#regulations, it has made available a 

table of a subset of the data elements that are currently collected from payers. It will use 

the identified elements as inputs for calculating risk adjustment funds transfers and the 

assignment of a member to the correct plan. 
CMS-9964-F 121 

 There are data elements required to calculate risk adjustment funds transfer that 

the APCD currently does not collect, such as monthly premium, employer zip code, 

household income level, Indian status, and AV or inputs used to calculate AV using the 

Federal AV calculator. Massachusetts is currently working with CHIA, other State 

agencies, and the issuers in Massachusetts to add these data elements as part of APCD 

data collection and is working with plans to have them submitted by June 1, 2013. Some 

data elements – Indian status and household income – will be submitted to the APCD via 

the Exchange. 

 In addition, certain plans may not have sufficient claims experience reported in 

the APCD. This gap may occur because plans may be exempt from data submission or 

are new to the Massachusetts market. Current APCD regulations exempt small plans 

with less than 1,000 covered lives in Massachusetts-based plans from submitting regular 

data files. This exemption recognizes the administrative cost of programming and 

providing regular data extracts. Health plan issuers that are new to the Massachusetts 

market will need to take time to build up the capacity to submit data to the APCD on a 

regular basis. As such, Massachusetts plans to establish a method for small and new-tomarket plans to submit minimally necessary data for risk adjustment through an alternate 

mechanism than the APCD. The specifications for this alternate submission, the secure 

data transfer methodology, and the communication of results to the issuers will be 

developed as part of risk adjustment operations and will not use any personally 

identifiable information as a unique identifier. 

(1) Legal Authority for the Health Connector to Access APCD Data for Risk Adjustment 

 Massachusetts General Laws (M. G. L.) Chapter 118G§6 authorized the Division 

of Health Care Finance and Policy (DHCFP) to collect uniform information from public 

and private health care payers and to operate the Commonwealth’s APCD. The 
CMS-9964-F 122 

Commonwealth’s authority to collect, analyze and report health care cost and utilization 

was further expanded with the passage and subsequent enactment of Chapter 224 of the 

Acts of 2012. Section 19 of this law established CHIA with broad responsibility for 

health care data collection, analysis and reporting, including the APCD. CHIA assumes 

all of the data collection, management and analysis tasks previously performed by 

DHCFP. In addition, the statute enables CHIA to provide government agencies and other 

parties access to data for the purpose of lowering total medical expenses, coordinating 

care, benchmarking, quality analysis and other research, for administrative or planning 

purposes. CHIA may also provide information to and work with other State agencies to 

“collect and disseminate data concerning the cost, price and functioning of the health care 

system in the Commonwealth and the health status of individuals.” 

 Massachusetts is currently developing an agreement with CHIA to obtain data 

management and analytic support to administer the risk adjustment program, consistent 

with M. G. L. ch. 12C which gives CHIA the authority to enter into interagency service 

agreements with other Massachusetts agencies “for transfer and use of data.” 

(2) Data Security and Privacy Protection 

 As noted, under existing law and regulation, the Commonwealth already collects 

a range of data through its APCD and protects this information as described below. 

 Specifically in relation to data collection under risk adjustment and Federal 

requirements, the risk adjustment extract created through the APCD will not use or store 

any personally identifiable information for use as a unique identifier for an enrollee’s 

data. Only those data fields that are reasonably necessary as part of the risk adjustment 

methodology will be included in the extract. 

 For background, the APCD data is hosted on servers located at the offices of the 

Commonwealth of Massachusetts Executive Office of Health and Human Services Center 
CMS-9964-F 123 

for Health Information and Analysis at Two Boylston Street, Boston, Massachusetts 

02116. CMS has approved CHIA’s application to receive and hold Medicare data under 

the newly created APCD category. In fact, CHIA was the first APCD to apply and be 

approved. CHIA is fully compliant with the CMS Data Use Agreement (See CMS DUA 

#20937). 

 CHIA is an experienced custodian of protected health information. Since 1982, 

CHIA (as DHCFP) has served as the repository for the State’s Hospital Discharge Data, 

Emergency Room Data and Outpatient Observation Data. CHIA has extensive claims 

processing experience as the operator of the State’s Health Safety Net program. CHIA 

has passed two independent third party security audits – a HIPAA security audit and a 

SAS-70 Type 2 audit. In addition, PCI security audits are done quarterly on CHIA’s web 

portal. 

 As indicated above, the data extract produced by the APCD on behalf of the 

Health Connector for calculating risk adjustment funds transfer will contain no personally 

identifiable information for use as a unique identifier for an enrollee’s data. All personal 

identifiers will be replaced with a scrambled Unique Member Identification number that 

is created independent of any HIPAA Protected Health Information or other personally 

identifiable information. This number will be a string of letters, numbers and symbols 

that cannot be “de-encrypted” to yield decipherable data. 

 The risk adjustment data extract will be securely transmitted into a secure data 

environment that will be established by the Health Connector. Calculations of plan 

actuarial risks and funds transfer will take place in this secure environment, with no 

personally identifiable information being used as a unique identifier. Massachusetts 

states that it has a fully HIPAA-compliant facility and data infrastructure in active use for 

operating the risk adjustment program for the Commonwealth Care program, which can 
CMS-9964-F 124 

be used for administering the Affordable Care Act risk adjustment program. 

Massachusetts also states that it is in active discussions with CHIA on the possibility of 

establishing a dedicated secure data environment for risk adjustment at CHIA’s Data 

Center. 

 Finally, leveraging funding applied through the Health Connector’s Level 2 

Exchange Establishment Grant (currently under CCIIO review), CHIA plans to upgrade 

its disaster recovery program to meet the performance requirement necessary for 

supporting risk adjustment. 

(3) Data Quality Control 

 The APCD data intake and warehousing operation incorporates data quality 

evaluation and monitoring processes to ensure the integrity and accuracy of downstream 

files. 

 CHIA has published a set of data completeness checks containing nearly 800 

unique automated tests that are conducted at intake within the secure processing 

environment. These checks are used to assess the file’s compliance with minimum 

standards. A full list of these checks is available on CHIA’s website: 

http://www.mass.gov/chia/researcher/health-care-delivery/hcf-dataresources/apcd/submitting-data-to-the-apcd.html. 

 When this evaluation process is complete, a report is generated for the payer’s 

review. The report shows the test results and whether the file “passes” and can move 

forward into the next phase of processing. If a file does not pass at any point in this 

process, the APCD does not conduct any further processing and notifies the payer that 

errors must be corrected and the files resubmitted. Full resubmission of a file is required 

in order to maintain file integrity. 

 CHIA will submit further supplemental information detailing its plans to collect 
CMS-9964-F 125 

data from any non-compliant issuers, including additional information on alternate data 

submission procedures. 

(4) Data Collection Timeline 

 Massachusetts plans to provide quarterly funds transfer calculation summaries to 

each issuer that is subject to risk adjustment and will be working with the issuers to 

determine the appropriate content and level of detail for the quarterly report summaries. 

The proposed timeline for processing and analyzing APCD data for Calendar Year 2014 

for the purpose of risk adjustment is illustrated below. Massachusetts is in discussions 

with CHIA and the issuers regarding the timeline and also plan to conduct test runs to 

ensure the feasibility of the timeline and quality of the data collection process. 

TABLE 15: Proposed Timeline for Risk Adjustment Data Collection 

Time Period Activity 

Each quarter: 

Months 1,2,3 Issuers submit data. Data submitters submit on a 

monthly basis. 

Month 3+1 month (Month 4) Claims run-out period 

Month 3+2 months (Month 5) Quality checks at designated points in current APCD 

process 

Member identity resolution and de-identification via 

removal of personal identifiers 

CHIA creates extract with minimally necessary data 

elements and sends to Connector or Connector’s 

designee to calculate risk adjustment 

Quality review by the Connector or its designee. The 

purpose here is to determine whether data meets quality 

standards for risk adjustment purposes. Identified issues 

and recommended action steps will be sent to CHIA and 

the issuers regarding resubmission 

Month 3+3 months (Month 6) Conducts all calculations relating to risk adjustment 

Sends a preliminary report to data submitters for review 

and discusses results and observations with issuers 

January through March of the following 

year 

Claims run-out period. The proposed data submission 

deadline is March 31 of the following year, i. e. , 3 

months claims runout 

April of the following year Filing deadline for claims paid through March 31 of the 

following year 

May of the following year Quality assurance process and creation of the data 

extract 
CMS-9964-F 126 

Grouping and review with data submitters 

June of the following year Funds transfer settlements calculated and reports 

generated by June 30 of the following year 

i. Schedule of Calibration and Recalibration 

 The risk adjustment models and the additional adjustment factors proposed will 

need to be calibrated and recalibrated periodically to be reflective of current market 

conditions, the evolving insured population, medical technology and other secular trends 

in Massachusetts. Massachusetts will evaluate the goodness of fit of the risk adjustment 

models and the appropriateness of the additional adjustment factors on an ongoing basis 

and recalibrate every three years if the evaluation justifies. On October 1, 2014, the 

entire country is expected to transition to ICD-10-CM coding. Massachusetts expects to 

update the current clinical classification system such that it can group ICD-10-CM 

diagnosis codes into the existing HCCs in 2014. However, it does not plan to recalibrate 

the risk factors in the models due to the lack of claims experience under the new coding 

system. 

j. Data Validation 

 While not part of the risk adjustment methodology, Massachusetts is considering 

a range of potential data validation approaches. The Premium Stabilization Rule, 

§153.350 requires States operating a risk adjustment program to conduct data validation 

and provide an appeals process. The key goal from Massachusetts’s perspective is to 

strike a balance between a data validation process that optimizes the identification of 

errors while implementing a workable system that is not administratively burdensome 

and that recognizes the zero sum nature of transfers between health plan issuers. Under 

the Premium Stabilization Rule, Massachusetts will be developing its approach to data 

validation and an appeals process, and will provide an overview of current considerations 
CMS-9964-F 127 

in its State notice of benefit and payment parameters. 

Table 16: List of HCCs in Massachusetts Risk Adjustment Methodology for 2014 

HCC Description

HCC001 HIV/AIDS 

HCC201 Bacteremia 

HCC002 Septicemia/Shock 

HCC003 Central Nervous System Infection 

HCC004 Tuberculosis 

HCC005 Opportunistic Infections 

HCC202 Secondary Cancer Except Lymph Node 

HCC203 Secondary Cancer of Lymph Node 

HCC204 Cancer of the Brain/Nervous System/Pituitary, Pineal Glands 

HCC205 Acute Leukemia 

HCC008 Lung, Upper Digestive Tract, and Other Severe Cancers 

HCC009 Lymphatic, Head and Neck, Brain, and Other Major Cancers 

HCC010 Breast, Prostate, Colorectal and Other Cancers and Tumors 

HCC011 Other Respiratory and Heart Neoplasms 

HCC012 Other Digestive and Urinary Neoplasms 

HCC013 Other Neoplasms 

HCC015 Diabetes with Renal Manifestation 

HCC016 Diabetes with Neurologic or Peripheral Circulatory Manifestation 

HCC017 Diabetes with Acute Complications 

HCC018 Diabetes with Ophthalmologic Manifestation 

HCC019 Diabetes with No or Unspecified Complications 

HCC020 Type I Diabetes Mellitus 

HCC021 Protein-Calorie Malnutrition 

HCC022 Other Significant Endocrine and Metabolic Disorders 

HCC023 Disorders of Fluid/Electrolyte/Acid-Base Balance 

HCC025 End-Stage Liver Disease 

HCC026 Cirrhosis of Liver 

HCC027 Chronic Hepatitis 

HCC028 Acute Liver Failure/Disease 

HCC029 Other Hepatitis and Liver Disease 

HCC030 Gallbladder and Biliary Tract Disorders 

HCC031 Intestinal Obstruction/Perforation 
CMS-9964-F 128 

HCC Description

HCC032 Pancreatic Disease 

HCC033 Inflammatory Bowel Disease 

HCC034 Peptic Ulcer, Hemorrhage, Other Specified Gastrointestinal Disorders 

HCC035 Appendicitis 

HCC036 Other Gastrointestinal Disorders 

HCC037 Bone/Joint/Muscle Infections/Necrosis 

HCC038 Rheumatoid Arthritis and Inflammatory Connective Tissue Disease 

HCC206 Spinal Stenosis 

HCC039 Disorders of the Vertebrae and Spinal Discs (See HCC206) 

HCC040 Osteoarthritis of Hip or Knee 

HCC041 Osteoporosis and Other Bone/Cartilage Disorders 

HCC042 Congenital/Developmental Skeletal and Connective Tissue Disorders 

HCC207 Hemophilia 

HCC044 Severe Hematological Disorders (See HCC207) 

HCC045 Disorders of Immunity 

HCC208 Hereditary Hemolytic Anemias and Coagulation Defects 

HCC209 Toxic/Unspecified Encephalopathy 

HCC048 Delirium and Encephalopathy (See HCC209) 

HCC049 Dementia 

HCC050 Senility, Nonpsychotic Organic Brain Syndromes/Conditions 

HCC051 Drug/Alcohol Psychosis 

HCC052 Drug/Alcohol Dependence 

HCC054 Schizophrenia 

HCC055 Major Depressive, Bipolar, and Paranoid Disorders 

HCC056 Reactive and Unspecified Psychosis 

HCC057 Personality Disorders 

HCC058 Depression 

HCC059 Anxiety Disorders 

HCC061 Profound Mental Retardation/Developmental Disability 

HCC062 Severe Mental Retardation/Developmental Disability 

HCC063 Moderate Mental Retardation/Developmental Disability 

HCC064 Mild/Unspecified Mental Retardation/Developmental Disability 

HCC065 Other Developmental Disability 

HCC066 Attention Deficit Disorder 

HCC067 Quadriplegia, Other Extensive Paralysis 
CMS-9964-F 129 

HCC Description

HCC068 Paraplegia 

HCC069 Spinal Cord Disorders/Injuries 

HCC070 Muscular Dystrophy 

HCC071 Polyneuropathy 

HCC072 Multiple Sclerosis 

HCC073 Parkinson's and Huntington's Diseases 

HCC074 Seizure Disorders and Convulsions 

HCC075 Coma, Brain Compression/Anoxic Damage 

HCC076 Mononeuropathy, Other Neurological Conditions/Injuries 

HCC077 Respirator Dependence/Tracheostomy Status 

HCC078 Respiratory Arrest 

HCC210 

Post Trauma/Surgery Pulmonary Insufficiency, Incl Adult Respir Distress 

Syndr 

HCC079 Cardio-Respiratory Failure and Shock (See HCC210) 

HCC080 Congestive Heart Failure 

HCC081 Acute Myocardial Infarction 

HCC082 Unstable Angina and Other Acute Ischemic Heart Disease 

HCC083 Angina Pectoris/Old Myocardial Infarction 

HCC084 Coronary Atherosclerosis/Other Chronic Ischemic Heart Disease 

HCC085 Heart Infection/Inflammation, Except Rheumatic 

HCC086 Valvular and Rheumatic Heart Disease 

HCC087 Major Congenital Cardiac/Circulatory Defect 

HCC088 Other Congenital Heart/Circulatory Disease 

HCC092 Specified Heart Arrhythmias 

HCC093 Other Heart Rhythm and Conduction Disorders 

HCC095 Cerebral Hemorrhage 

HCC096 Ischemic or Unspecified Stroke 

HCC097 Precerebral Arterial Occlusion and Transient Cerebral Ischemia 

HCC098 Cerebral Atherosclerosis and Aneurysm 

HCC100 Hemiplegia/Hemiparesis 

HCC102 Speech, Language, Cognitive, Perceptual Deficits 

HCC104 Vascular Disease with Complications 

HCC105 Vascular Disease 

HCC106 Other Circulatory Disease 

HCC107 Cystic Fibrosis 
CMS-9964-F 130 

HCC Description

HCC108 Chronic Obstructive Pulmonary Disease 

HCC109 Fibrosis of Lung and Other Chronic Lung Disorders 

HCC110 Asthma 

HCC111 Aspiration and Specified Bacterial Pneumonias 

HCC112 Pneumococcal Pneumonia, Empyema, Lung Abscess 

HCC113 Viral and Unspecified Pneumonia, Pleurisy 

HCC114 Pleural Effusion/Pneumothorax 

HCC115 Other Lung Disorders 

HCC116 Legally Blind 

HCC117 Major Eye Infections/Inflammations 

HCC118 Retinal Detachment 

HCC119 Proliferative Diabetic Retinopathy and Vitreous Hemorrhage 

HCC120 Diabetic and Other Vascular Retinopathies 

HCC122 Glaucoma 

HCC125 Significant Ear, Nose, and Throat Disorders 

HCC126 Hearing Loss 

HCC128 Kidney Transplant Status 

HCC130 Dialysis Status 

HCC211 Acute Renal Failure 

HCC131 Non-Acute Renal Failure (See HCC211) 

HCC132 Nephritis 

HCC133 Urinary Obstruction and Retention 

HCC134 Incontinence 

HCC135 Urinary Tract Infection 

HCC136 Other Urinary Tract Disorders 

HCC137 Female Infertility 

HCC138 

Pelvic Inflammatory Disease and Other Specified Female Genital 

Disorders 

HCC141 Ectopic Pregnancy 

HCC142 Miscarriage/Abortion 

HCC143 Completed Pregnancy With Major Complications 

HCC144 Completed Pregnancy With Complications 

HCC145 Completed Pregnancy Without Complications (Normal Delivery) 

HCC146 Uncompleted Pregnancy With Complications 

HCC147 Uncompleted Pregnancy With No or Minor Complications 
CMS-9964-F 131 

HCC Description

HCC148 Decubitus Ulcer of Skin 

HCC150 Extensive Third-Degree Burns 

HCC151 Other Third-Degree and Extensive Burns 

HCC152 Cellulitis, Local Skin Infection 

HCC154 Severe Head Injury 

HCC155 Major Head Injury 

HCC156 Concussion or Unspecified Head Injury 

HCC157 Vertebral Fractures 

HCC158 Hip Fracture/Dislocation 

HCC159 Major Fracture, Except of Skull, Vertebrae, or Hip 

HCC160 Internal Injuries 

HCC161 Traumatic Amputation 

HCC164 Major Complications of Medical Care and Trauma 

HCC168 Extremely Low Birthweight Neonates 

HCC169 Very Low Birthweight Neonates 

HCC212 Low Birthweight (1500-2499 grams) or Unspecified 

HCC170 Serious Perinatal Problem Affecting Newborn (See HCC212) 

HCC171 Other Perinatal Problems Affecting Newborn 

HCC172 Normal, Single Birth 

HCC213 Bone Marrow Transplant Status/Complications 

HCC174 Major Organ Transplant Status (See HCC213) 

HCC175 Other Organ Transplant/Replacement 

HCC176 Artificial Openings for Feeding or Elimination 

HCC177 Amputation Status, Lower Limb/Amputation Complications 

HCC180 Radiation Therapy 

HCC181 Chemotherapy 

HCC182 Rehabilitation 

TABLE 17: Proposed Risk Adjustment Models for Massachusetts Risk Adjustment 

Methodology for 2014 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

Constant 

Term 0. 108698 0. 108698 0. 054613 0. 054613 

Female, 0- 0. 120243 0. 120243 0. 120243 0. 076300 
CMS-9964-F 132 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

1 

Male, 0-1 0. 430573 0. 252549 0. 252549 0. 130423 

HCC001 4. 151453 4. 151453 3. 974417 3. 974417 

HCC201 5. 439483 5. 439483 5. 439483 5. 439483 

HCC002 4. 911655 4. 911655 4. 911655 4. 911655 

HCC003 2. 070673 2. 070673 2. 070673 2. 070673 

HCC004 1. 458104 0. 580915 0. 580915 0. 580915 

HCC005 4. 203378 4. 203378 4. 203378 4. 203378 

HCC202 6. 482786 6. 482786 6. 482786 6. 482786 

HCC203 6. 482786 6. 482786 5. 475333 5. 475333 

HCC204 6. 047288 4. 581452 4. 147687 2. 272855 

HCC205 10. 703344 10. 703344 10. 703344 10. 703344 

HCC008 2. 272855 2. 272855 2. 272855 2. 272855 

HCC009 1. 075169 1. 075169 1. 075169 1. 075169 

HCC010 1. 075169 1. 075169 1. 075169 1. 075169 

HCC011 1. 075169 1. 075169 1. 075169 1. 075169 

HCC012 0. 375903 0. 373614 0. 373614 0. 373614 

HCC013 0. 375903 0. 373614 0. 373614 0. 373614 

HCC015 0. 921977 0. 921977 0. 921977 0. 921977 

HCC016 0. 395184 0. 395184 0. 395184 0. 395184 

HCC017 0. 395184 0. 395184 0. 395184 0. 320869 

HCC018 0. 320869 0. 320869 0. 320869 0. 320869 

HCC019 0. 320869 0. 320869 0. 320869 0. 320869 

HCC020 0. 844671 0. 844671 0. 769198 0. 769198 

HCC021 8. 780537 8. 780537 8. 780537 8. 780537 

HCC022 0. 976845 0. 976845 0. 976845 0. 976845 

HCC023 1. 346099 1. 346099 1. 346099 1. 346099 

HCC025 1. 601166 1. 601166 1. 346120 1. 346120 

HCC026 0. 986228 0. 986228 0. 408007 0. 408007 

HCC027 0. 460726 0. 460726 0. 408007 0. 408007 

HCC028 1. 601166 1. 601166 1. 346120 1. 346120 

HCC029 0. 408007 0. 408007 0. 408007 0. 408007 

HCC030 1. 977590 1. 977590 1. 882379 1. 882379 

HCC031 3. 749986 3. 749986 3. 749986 3. 749986 

HCC032 1. 093277 1. 093277 1. 093277 1. 093277 

HCC033 1. 790188 1. 790188 1. 595541 1. 595541 

HCC034 0. 940108 0. 940108 0. 940108 0. 940108 
CMS-9964-F 133 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

HCC035 2. 683705 2. 683705 2. 683705 2. 011126 

HCC036 0. 405518 0. 405518 0. 377057 0. 377057 

HCC037 2. 952592 2. 952592 2. 952592 2. 952592 

HCC038 1. 094796 1. 094796 1. 094796 1. 094796 

HCC206 2. 098343 2. 098343 2. 098343 2. 098343 

HCC039 0. 569751 0. 569751 0. 569751 0. 569751 

HCC040 1. 094796 1. 094796 1. 094796 1. 094796 

HCC041 0. 311993 0. 311993 0. 311993 0. 311993 

HCC042 1. 125274 1. 125274 1. 125274 1. 125274 

HCC207 30. 636640 30. 636640 14. 101544 7. 514115 

HCC044 5. 694090 5. 694090 5. 694090 5. 694090 

HCC045 1. 011533 1. 011533 1. 011533 1. 011533 

HCC208 1. 404092 1. 404092 1. 404092 1. 404092 

HCC209 2. 918243 2. 918243 2. 918243 2. 918243 

HCC048 1. 345886 1. 345886 1. 182955 1. 182955 

HCC049 1. 216549 1. 216549 1. 086774 1. 086774 

HCC050 1. 019842 1. 019842 1. 019842 1. 019842 

HCC051 1. 343297 1. 343297 1. 343297 1. 343297 

HCC052 0. 845301 0. 845301 0. 845301 0. 845301 

HCC054 2. 625043 2. 625043 2. 161218 2. 161218 

HCC055 0. 848033 0. 848033 0. 772826 0. 772826 

HCC056 0. 848033 0. 848033 0. 772826 0. 772826 

HCC057 0. 338729 0. 338729 0. 338729 0. 338729 

HCC058 0. 338729 0. 338729 0. 338729 0. 338729 

HCC059 0. 293976 0. 234661 0. 234661 0. 234661 

HCC061 2. 234452 0. 911836 0. 911836 0. 416412 

HCC062 0. 551357 0. 551357 0. 416412 0. 416412 

HCC063 0. 551357 0. 416412 0. 416412 0. 416412 

HCC064 0. 416412 0. 416412 0. 416412 0. 206061 

HCC065 0. 315057 0. 315057 0. 315057 0. 206061 

HCC066 0. 229744 0. 229744 0. 206061 0. 206061 

HCC067 5. 447025 5. 447025 5. 447025 5. 447025 

HCC068 2. 224234 2. 224234 2. 224234 2. 224234 

HCC069 2. 098343 2. 098343 2. 098343 2. 098343 

HCC070 1. 390521 1. 390521 1. 390521 1. 390521 

HCC071 1. 209341 1. 209341 1. 209341 1. 209341 

HCC072 4. 312296 4. 025404 4. 025404 4. 025404 
CMS-9964-F 134 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

HCC073 1. 217710 1. 217710 1. 217710 1. 217710 

HCC074 1. 302181 0. 980434 0. 980434 0. 980434 

HCC075 6. 388482 6. 388482 6. 388482 5. 638247 

HCC076 0. 382239 0. 382239 0. 382239 0. 382239 

HCC077 30. 588977 30. 588977 17. 179162 17. 179162 

HCC078 6. 741034 6. 741034 6. 741034 2. 760821 

HCC210 14. 638331 14. 638331 14. 638331 14. 638331 

HCC079 4. 963995 4. 963995 2. 922954 2. 760821 

HCC080 1. 268543 1. 268543 1. 268543 1. 268543 

HCC081 5. 873126 5. 873126 5. 873126 5. 873126 

HCC082 3. 409746 3. 409746 3. 409746 3. 170501 

HCC083 1. 185868 1. 185868 1. 185868 1. 185868 

HCC084 0. 518025 0. 518025 0. 518025 0. 518025 

HCC085 3. 358496 3. 358496 3. 358496 3. 358496 

HCC086 0. 748725 0. 748725 0. 748725 0. 748725 

HCC087 4. 962870 4. 456078 2. 859281 2. 119499 

HCC088 0. 748725 0. 748725 0. 748725 0. 748725 

HCC092 1. 226834 1. 226834 1. 226834 1. 226834 

HCC093 1. 005026 1. 005026 1. 005026 1. 005026 

HCC095 6. 224877 6. 224877 4. 744856 4. 744856 

HCC096 0. 917154 0. 917154 0. 705810 0. 705810 

HCC097 0. 065189 0. 065189 0. 065189 0. 065189 

HCC098 0. 065189 0. 065189 0. 065189 0. 065189 

HCC100 2. 224234 2. 224234 2. 224234 2. 224234 

HCC102 2. 941517 2. 941517 2. 941517 2. 941517 

HCC104 2. 598472 2. 598472 2. 598472 2. 598472 

HCC105 0. 831150 0. 831150 0. 831150 0. 831150 

HCC106 0. 685084 0. 685084 0. 685084 0. 685084 

HCC107 8. 318393 7. 678688 4. 188453 3. 417106 

HCC108 0. 445827 0. 445827 0. 445827 0. 445827 

HCC109 0. 445827 0. 445827 0. 445827 0. 445827 

HCC110 0. 327310 0. 327310 0. 298068 0. 298068 

HCC111 4. 185448 4. 185448 4. 185448 4. 185448 

HCC112 2. 487771 2. 487771 2. 487771 2. 487771 

HCC113 0. 459994 0. 459994 0. 459994 0. 459994 

HCC114 4. 665050 4. 665050 4. 461861 4. 461861 

HCC115 0. 245923 0. 245923 0. 174247 0. 174247 
CMS-9964-F 135 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

HCC116 1. 846476 1. 846476 1. 846476 1. 846476 

HCC117 0. 871167 0. 871167 0. 871167 0. 293138 

HCC118 0. 425465 0. 303314 0. 303314 0. 303314 

HCC119 0. 975698 0. 975698 0. 975698 0. 975698 

HCC120 0. 975698 0. 629335 0. 629335 0. 387584 

HCC122 0. 156864 0. 156864 0. 156864 0. 156864 

HCC125 0. 441244 0. 441244 0. 441244 0. 441244 

HCC126 0. 343108 0. 245527 0. 245527 0. 245527 

HCC128 3. 935445 3. 086230 3. 086230 3. 086230 

HCC130 25. 095071 25. 095071 25. 095071 25. 095071 

HCC211 5. 931077 5. 931077 3. 957413 3. 957413 

HCC131 0. 609381 0. 609381 0. 609381 0. 548312 

HCC132 0. 609381 0. 609381 0. 548312 0. 548312 

HCC133 0. 828794 0. 828794 0. 828794 0. 828794 

HCC134 0. 333109 0. 333109 0. 179712 0. 179712 

HCC135 0. 186132 0. 186132 0. 186132 0. 186132 

HCC136 0. 308014 0. 308014 0. 308014 0. 308014 

HCC137 2. 229861 2. 019901 1. 191632 1. 191632 

HCC138 0. 587042 0. 587042 0. 587042 0. 587042 

HCC141 1. 003553 1. 003553 1. 003553 0. 718760 

HCC142 0. 557164 0. 557164 0. 480684 0. 431174 

HCC143 4. 184966 4. 184966 3. 619387 3. 002414 

HCC144 3. 332900 2. 868669 2. 280000 1. 954919 

HCC145 1. 171729 0. 774339 0. 774339 0. 216043 

HCC146 0. 557164 0. 557164 0. 480684 0. 216043 

HCC147 0. 280304 0. 280304 0. 216043 0. 216043 

HCC148 12. 543259 12. 543259 6. 014584 6. 014584 

HCC150 2. 424426 2. 424426 2. 424426 2. 424426 

HCC151 2. 424426 2. 424426 2. 424426 2. 424426 

HCC152 0. 333411 0. 322440 0. 322440 0. 322440 

HCC154 15. 385354 15. 385354 10. 060566 10. 060566 

HCC155 1. 019842 1. 019842 1. 019842 1. 019842 

HCC156 0. 378295 0. 378295 0. 378295 0. 378295 

HCC157 2. 098343 2. 098343 2. 098343 2. 098343 

HCC158 3. 274125 3. 274125 3. 274125 3. 274125 

HCC159 0. 995242 0. 995242 0. 995242 0. 995242 

HCC160 1. 169886 1. 169886 1. 169886 1. 169886 
CMS-9964-F 136 

Factor Platinum Gold Silver Bronze / 

Catastrophic 

HCC161 4. 800076 4. 800076 3. 252883 3. 252883 

HCC164 4. 416936 4. 416936 4. 416936 4. 416936 

HCC168 50. 030035 31. 846702 8. 770478 1. 517088 

HCC169 31. 846702 31. 846702 8. 770478 1. 517088 

HCC212 5. 348103 4. 531656 2. 869468 1. 517088 

HCC170 5. 118321 3. 980982 2. 713315 1. 517088 

HCC171 0. 944286 0. 944286 0. 833781 0. 833781 

HCC172 0. 766750 0. 282812 0. 282812 0. 282812 

HCC213 26. 085463 26. 085463 22. 031148 22. 031148 

HCC174 13. 907770 13. 907770 10. 852783 6. 023029 

HCC175 0. 417558 0. 391105 0. 391105 0. 145153 

HCC176 5. 768476 5. 768476 5. 768476 5. 768476 

HCC177 0. 879358 0. 879358 0. 879358 0. 879358 

HCC180 4. 989476 4. 989476 4. 989476 4. 989476 

HCC181 13. 774728 13. 774728 13. 774728 13. 774728 

HCC182 1. 791185 1. 791185 1. 791185 1. 791185 

INT01 3. 869565 3. 869565 3. 869565 3. 869565 

INT02 1. 608754 1. 608754 1. 608754 1. 608754 

Definition of the interaction terms:

INT01=CANCER*IMMUNE, and INT02=CVD*VD, where 

 

CANCER=MAX(MAX(of HCC008-HCC014),MAX(of HCC202-HCC205)); 

IMMUNE=HCC045; 

CVD=MAX(of HCC095-HCC103); 

VD=MAX(HCC104,HCC105); 
CMS-9964-F 137 

TABLE 18: Duration Adjustment in Risk Adjustment Models in Massachusetts 

Risk Adjustment Methodology for 2014 

Month of 

Eligibility Platinum Gold Silver Bronze 

1 0. 225160 0. 343520 0. 474510 1. 000000

2 0. 341279 0. 462802 0. 584191 1. 000000

3 0. 435275 0. 550953 0. 659754 1. 000000

4 0. 517282 0. 623502 0. 719223 1. 000000

5 0. 591389 0. 686292 0. 769018 1. 000000

6 0. 659754 0. 742262 1. 000000 1. 000000

7 0. 723686 0. 793130 1. 000000 1. 000000

8 1. 000000 0. 840003 1. 000000 1. 000000

9 1. 000000 1. 000000 1. 000000 1. 000000

10 1. 000000 1. 000000 1. 000000 1. 000000

11 1. 000000 1. 000000 1. 000000 1. 000000

12 1. 000000 1. 000000 1. 000000 1. 000000

TABLE 19: Clinical Hierarchies in Massachusetts Risk Adjustment Methodology 

for 2014 

DISEASE 

HIERARCHIES 

Hierarchical 

Condition 

Category (HCC) 

If the Condition Category is Listed in this 

column... 

...Then drop the 

HCC(s) listed in 

this column 

 Hierarchical Condition Category (HCC) Label 

5 Opportunistic Infections 112,113,115 

202 Secondary Cancer Except Lymph Node 

203,204,8,9,10,11,1

2,13 

203 Secondary Cancer of Lymph Node 204,8,9,10,11,12,13 

204 

Cancer of the Brain/Nervous System/Pituitary, 

Pineal Glands 8,9,10,11,12,13 

205 Acute Leukemia 8,9,10,11,12,13 

8 

Lung, Upper Digestive Tract, and Other Severe 

Cancers 9,10,11,12,13 

9 

Lymphatic, Head and Neck, Brain, and Other 

Major Cancers 10,11,12,13 

10 

Breast, Prostate, Colorectal and Other Cancers 

and Tumors 11,12,13 

11 Other Respiratory and Heart Neoplasms 12,13 

12 Other Digestive and Urinary Neoplasms 13 

15 Diabetes with Renal Manifestation 16,17,18,19 
CMS-9964-F 138 

DISEASE 

HIERARCHIES 

Hierarchical 

Condition 

Category (HCC) 

If the Condition Category is Listed in this 

column... 

...Then drop the 

HCC(s) listed in 

this column 

16 

Diabetes with Neurologic or Peripheral 

Circulatory Manifestation 17,18,19 

17 Diabetes with Acute Complications 18,19 

18 Diabetes with Ophthalmologic Manifestation 19 

25 End-Stage Liver Disease 26,27,28,29,34,36 

26 Cirrhosis of Liver 27,29 

27 Chronic Hepatitis 29 

28 Acute Liver Failure/Disease 29 

31 Intestinal Obstruction/Perforation 34,36 

32 Pancreatic Disease 36 

33 Inflammatory Bowel Disease 34,36 

34 

Peptic Ulcer, Hemorrhage, Other Specified 

Gastrointestinal Disorders 36 

38 

Rheumatoid Arthritis and Inflammatory 

Connective Tissue Disease 39,40 

206 Spinal Stenosis 39 

207 Hemophilia 44,208 

44 Severe Hematological Disorders 208 

209 Toxic/Unspecified Encephalopathy 48,50 

48 Delirium and Encephalopathy 50 

49 Dementia 50 

51 Drug/Alcohol Psychosis 52 

54 Schizophrenia 55,56,57,58,59 

55 

Major Depressive, Bipolar, and Paranoid 

Disorders 56,57,58,59 

56 Reactive and Unspecified Psychosis 57,58,59 

57 Personality Disorders 58,59 

58 Depression 59 

61 

Profound Mental Retardation/Developmental 

Disability 62,63,64,65,66 

62 

Severe Mental Retardation/Developmental 

Disability 63,64,65,66 

63 

Moderate Mental Retardation/Developmental 

Disability 64,65,66 

64 

Mild/Unspecified Mental 

Retardation/Developmental Disability 65,66 

65 Other Developmental Disability 66 

67 Quadriplegia, Other Extensive Paralysis 68,69,76,100,157 

68 Paraplegia 69,76,100,157 

69 Spinal Cord Disorders/Injuries 39,76,157 

70 Muscular Dystrophy 76 

71 Polyneuropathy 76 

72 Multiple Sclerosis 76 
CMS-9964-F 139 

DISEASE 

HIERARCHIES 

Hierarchical 

Condition 

Category (HCC) 

If the Condition Category is Listed in this 

column... 

...Then drop the 

HCC(s) listed in 

this column 

73 Parkinson's and Huntington's Diseases 76 

74 Seizure Disorders and Convulsions 76 

75 Coma, Brain Compression/Anoxic Damage 209,48,50,76 

77 Respirator Dependence/Tracheostomy Status 78,210,79 

210 

Post Trauma/Surgery Pulmonary Insufficiency, 

Incl Adult Respir Distress Syndrom 79 

78 Respiratory Arrest 79 

81 Acute Myocardial Infarction 82,83,84 

82 

Unstable Angina and Other Acute Ischemic 

Heart Disease 83,84 

83 Angina Pectoris/Old Myocardial Infarction 84 

85 

Heart Infection/Inflammation, Except 

Rheumatic 86,88 

86 Valvular and Rheumatic Heart Disease 88 

87 Major Congenital Cardiac/Circulatory Defect 88 

92 Specified Heart Arrhythmias 93 

95 Cerebral Hemorrhage 96,97,98 

96 Ischemic or Unspecified Stroke 97,98 

97 

Precerebral Arterial Occlusion and Transient 

Cerebral Ischemia 98 

104 Vascular Disease with Complications 105,106 

105 Vascular Disease 106 

107 Cystic Fibrosis 108,109,110,115 

108 Chronic Obstructive Pulmonary Disease 109,110,115 

109 

Fibrosis of Lung and Other Chronic Lung 

Disorders 110,115 

110 Asthma 115 

111 Aspiration and Specified Bacterial Pneumonias 112,113,115 

112 

Pneumococcal Pneumonia, Empyema, Lung 

Abscess 113,115 

113 Viral and Unspecified Pneumonia, Pleurisy 115 

114 Pleural Effusion/Pneumothorax 115 

119 

Proliferative Diabetic Retinopathy and Vitreous 

Hemorrhage 120 

128 Kidney Transplant Status 

130,131,132,136,17

5 

130 Dialysis Status 211,131,132,136 

131 Non-Acute Renal Failure 132,136 

132 Nephritis 136 

137 Female Infertility 138 

141 Ectopic Pregnancy 142,146,147 

142 Miscarriage/Abortion 146,147 

143 Completed Pregnancy With Major 144,145,146,147 
CMS-9964-F 140 

DISEASE 

HIERARCHIES 

Hierarchical 

Condition 

Category (HCC) 

If the Condition Category is Listed in this 

column... 

...Then drop the 

HCC(s) listed in 

this column 

Complications 

144 Completed Pregnancy With Complications 145,146,147 

145 

Completed Pregnancy Without Complications 

(Normal Delivery) 146,147 

146 Uncompleted Pregnancy With Complications 147 

150 Extensive Third-Degree Burns 151 

154 Severe Head Injury 

209,48,50,75,76,15

5,156 

155 Major Head Injury 50,156 

157 Vertebral Fractures 206,39 

161 Traumatic Amputation 177 

168 Extremely Low Birthweight Neonates 

169,212,170,171,17

2 

169 Very Low Birthweight Neonates 212,170,171,172 

212 

Low Birthweight (1500-2499 grams) or 

Unspecified 171,172 

170 Serious Perinatal Problem Affecting Newborn 171,172 

171 Other Perinatal Problems Affecting Newborn 172 

213 Bone Marrow Transplant Status/Complications 175 

174 Major Organ Transplant Status 175 

k. Caveats and Limitations 

 In preparing its application Massachusetts relied on data from Massachusetts 

APCD, Commonwealth Care and Marketscan® New England in developing the risk 

adjustment models and additional adjustment factors, and as such the results may not 

apply to other States’ risk adjustment programs. Additionally, there are limitations in the 

datasets which may affect the accuracy and robustness of the models and factors 

presented here. 

C. Provisions and Parameters for the Transitional Reinsurance Program 

The Affordable Care Act directs the establishment of a transitional reinsurance 

program in each State to help stabilize premiums for coverage in the individual market 
CMS-9964-F 141 

from 2014 through 2016. The reinsurance program is designed to alleviate the need to 

build into premiums the risk of enrolling individuals with significant unmet medical 

needs. By equitably stabilizing premiums in the individual market throughout the United 

States, the reinsurance program is intended to help millions of Americans purchase 

affordable health insurance, reduce unreimbursed usage of hospital and other medical 

facilities by the uninsured, and thereby lower medical expenses and premiums for all 

people with private health insurance. 

In the proposed rule, we aimed to administer the reinsurance program to provide 

reinsurance payments in an efficient, fair, and accurate manner, where reinsurance 

assistance is needed most, to effectively stabilize premiums nationally. In addition, we 

stated our intent to implement the reinsurance program in a manner that minimizes the 

administrative burden of collecting contributions and making reinsurance payments. For 

example, we proposed to collect contributions from health insurance issuers and selfinsured group health plans in all States, including States that elect to operate reinsurance. 

We also stated our intent to simplify collections by using a uniform per capita 

contribution rate. In addition, in the HHS-operated reinsurance program, we proposed to 

calculate reinsurance payments using the same distributed approach for data collection 

that we will use when operating the risk adjustment program on behalf of States.15 This 

would permit issuers to receive reinsurance payments using the same systems established 

for the risk adjustment program, resulting in less administrative burden and lower costs, 

while maintaining the security of identifiable health information. 

In the proposed rule, we proposed uniform reinsurance payment parameters to be 

used across all States, regardless of whether the State, or HHS on behalf of a State, 

 

15 See our discussion of this distributed data collection approach in section III.G. of this final rule. 
CMS-9964-F 142 

operates reinsurance. In addition, we proposed an annual calendar under which 

reinsurance contributions would be collected from all contributing entities, and 

reinsurance payments would be disbursed to issuers of reinsurance-eligible plans. 

Furthermore, we proposed to distribute reinsurance payments based on the need for 

reinsurance payments in each State. We believe that allocating contributions in this 

manner better meets States’ individual reinsurance needs and fulfills HHS’s obligation to 

provide equitable allocation of these funds under section 1341(b)(2)(B) of the Affordable 

Care Act, than does a policy that limits the disbursement of reinsurance payments only to 

the State in which the contributions are collected. 

Comment: One commenter requested that HHS consider extending the 

reinsurance program past 2016. 

Response: Section 1341 of the Affordable Care Act mandates that the transitional 

reinsurance program operate in the three year period beginning January 1, 2014, which 

we interpret to mean that the program will operate in benefit years 2014, 2015 and 2016. 

As a result, we have no statutory authority to extend the program. We note that, under 

this final rule, reinsurance payments for benefit year 2016 will be made in 2017, and 

section 1341(a)(4)(B) provides that amounts remaining unexpended as of December 2016 

may be used to make payments under any reinsurance program of a State in the 

individual market in effect in the two-year period beginning on January 1, 2017. 

1. State Standards Related to the Reinsurance Program 

a. State-operated reinsurance programs, generally 

 In the proposed rule, we set forth a reinsurance contribution and payment process, 

and the uniform contribution rate and reinsurance payment parameters that would apply 

to all States in the 2014 benefit year. We proposed to amend §153.100(a)(1) to delete the 

reference to State modification of data collection frequency as set forth in the Premium 
CMS-9964-F 143 

Stabilization Rule. That deletion would remove the ability of a State electing to operate 

reinsurance to modify, via a State notice of benefit and payment parameters, the data 

collection frequency for issuers to receive reinsurance payments. Under §153.100(a)(1), 

a State establishing a reinsurance program may still modify the data requirements for 

health insurance issuers to receive reinsurance payments, provided that the State 

publishes a State notice of benefit and payment parameters that specifies those 

modifications. 

In §153.100(a)(2), we proposed that a State electing to collect additional 

reinsurance contributions for purposes of making supplemental reinsurance payments or 

using additional funds for supplemental reinsurance payments under §153.220(d) publish 

supplemental State reinsurance payment parameters in its State notice of benefit and 

payment parameters. To create the most effective reinsurance program, we proposed to 

collect reinsurance contributions on behalf of all States from both health insurance issuers 

and self-insured group health plans in the aggregate, and we proposed to disburse 

reinsurance payments based on a State’s need for reinsurance payments, not based on 

where the contributions were collected. As a result, HHS would no longer be able to 

attribute additional funds for administrative expenses back to a State. We therefore 

proposed to amend §153.100(a)(3) of the Premium Stabilization Rule to clarify that any 

additional contributions collected for administrative expenses must be collected by the 

State operating reinsurance. 

Section 1341 of the Affordable Care Act provides that States may elect to operate 

reinsurance. Based on HHS’s communications with States, as of February 25, 2013, 

Maryland and Connecticut are the only States electing to operate reinsurance for 2014. 

Pursuant to §153.100, a State that wishes to collect additional reinsurance funds pursuant 

to §153.220(d) must publish the supplemental contribution rate and supplemental State 
CMS-9964-F 144 

reinsurance payment parameters in a State notice of benefit and payment parameters, 

which for 2014 must be published by the 30th day following the publication of this final 

rule. 

We are finalizing these provisions as proposed, with a technical amendment to 

§153.210(a)(2) in which we clarify that a State’s obligation to ensure that each applicable 

reinsurance entity operates in a distinct geographic area applies regardless of whether the 

State contracts with or establishes the applicable reinsurance entities. As we also clarify 

below, governmental entities may serve as applicable reinsurance entities. We are also 

amending §153.100(a)(2) by replacing the cross-reference to §153.220(d) with 

§153.220(d)(1). We are making corresponding revisions in §153.100(d)(2); and 

§153.110(b); 153.400(a). 

Comment: One commenter requested that HHS prohibit States operating 

reinsurance from modifying the data requirements for health insurance issuers to receive 

reinsurance payments. 

Response: Although we recognize the efficiencies to multi-State issuers of 

having a uniform set of data requirements, we believe that a State should have the 

flexibility to collect the data it deems necessary, in the manner it deems most appropriate, 

to calculate reinsurance payments for issuers of non-grandfathered individual market 

plans in the State. Accordingly, we will permit State flexibility regarding data 

requirements. As set forth in §153.100(a)(1), a State modifying the data requirements 

must describe those requirements in its State notice of benefit and payment parameters. 

Comment: One commenter asked that HHS permit a governmental entity to be 

eligible to serve as an applicable reinsurance entity. 

Response: We interpret the definition of an applicable reinsurance entity in 

section 1341(c)(1) of the Affordable Care Act as a “not-for-profit organization,” the 
CMS-9964-F 145 

purpose of which is to stabilize premiums in the first three years of Exchange operation 

and the duties of which are to carry out the reinsurance program, to be broad enough to 

include a governmental entity. Accordingly, we believe that an applicable reinsurance 

entity is a not-for-profit organization that is exempt from taxation under Chapter 1 of the 

Internal Revenue Code of 1986, including a governmental entity and a quasigovernmental entity that was not created for and does not operate to make a profit, and 

carries out reinsurance functions under this part on behalf of the State. 

Comment: One commenter requested that HHS permit a State to obtain a waiver 

from the reinsurance program set forth in section 1341 of the Affordable Care Act. 

Response: HHS has no authority to grant such a waiver. As set forth in the Premium 

Stabilization Rule, if a State does not elect to operate reinsurance, HHS will operate 

reinsurance on behalf of the State. 

Comment: One commenter asked whether HHS will implement an approval 

process for States choosing to operate reinsurance, similar to the process used to approve 

States choosing to operate the risk adjustment program. 

Response: Unlike the risk adjustment program, there will be no formal approval 

process for State-operated reinsurance programs. However, HHS will establish a 

consultative pre-implementation process to ensure that each State operating reinsurance is 

ready to operate beginning in 2014. HHS intends to work closely with States throughout 

the duration of the reinsurance program to ensure States’ operational readiness. 

Comment: One commenter sought clarification on the functions that a State 

operating reinsurance must perform. 

Response: This final rule sets forth a number of functions that a State operating 

reinsurance must perform, consistent with the functions of the HHS-operated reinsurance 

program. For example, under §153.240, a State operating reinsurance must ensure that 
CMS-9964-F 146 

the State’s applicable reinsurance entity collects data required to calculate reinsurance 

payments, makes reinsurance payments, and provides a process for reinsurance-eligible 

plans that do not generate individual enrollee claims in the normal course of business to 

submit claims. In addition, a State operating reinsurance must notify issuers of requests 

for reinsurance payments made and actual reinsurance payments to be provided. In 

addition to performing payment functions, a State operating reinsurance may elect to 

collect additional funds or use State funds under §153.220(d)(1)(ii) or §153.220(d)(2) 

(proposed as (d)(3) in the proposed rule) to fund administrative expenses or set up and 

fund supplemental reinsurance payment parameters that “wrap around” the uniform 

reinsurance payment parameters. 

b. Reporting to HHS 

In §153.210(e) of the proposed rule, we stated that a State establishing the 

reinsurance program would be required to provide information to HHS regarding all 

requests for reinsurance payments received from all reinsurance-eligible plans for each 

quarter during the benefit year in the State. In §153.240(b)(2), we proposed that a State, 

or HHS on behalf of the State, would use the information collected by HHS or submitted 

under §153.210(e) to provide issuers of reinsurance-eligible plans with quarterly updates 

of requests for reinsurance payments for the plan under both the uniform payment 

parameters and any State supplemental payments parameters set forth under §153.232, as 

determined by HHS or the State’s applicable reinsurance entity, as applicable. This 

information could be used by an individual market issuer in developing rates in 

subsequent benefit years. We are finalizing these provisions as proposed, with 

modifications in §153.240(b)(2) to clarify that a State must provide to an issuer of a 

reinsurance-eligible plan the calculation of the total reinsurance payments requested 

under the national reinsurance payment parameters and State supplemental reinsurance 
CMS-9964-F 147 

payment parameters, on a quarterly basis during the applicable benefit year in a 

timeframe and manner determined by HHS. 

Comment: Several commenters supported the proposal that HHS or States 

operating reinsurance provide to issuers quarterly updates of requests for reinsurance 

payments made under the uniform payment parameters and State supplemental payment 

parameters, as applicable. Several commenters urged HHS not to require a State 

operating reinsurance to provide these quarterly estimates. 

Response: Because the purpose of the reinsurance program is to help stabilize 

premiums, and because interim information on reinsurance claims will be useful for 

issuers in setting rates in subsequent benefit years, we are finalizing §153.240(b) as 

proposed. 

Comment: One commenter requested clarification on whether updates of 

reinsurance payment requests made would be provided on a rolling basis throughout the 

benefit year, or only after all reinsurance payment requests have been submitted. 

Commenters suggested that total payment requests across all issuers be specified so that 

issuers can estimate whether total payments will exceed total contributions. 

Response: A State operating reinsurance or HHS, on behalf of the State, will 

issue reports on a quarterly basis on the total amount of reinsurance requests submitted. 

We appreciate the suggestions for the quarterly reporting format, and will take them 

under consideration. We anticipate issuing guidance for States and issuers regarding 

quarterly reporting. 

c. Additional State Collections 

In §153.220(d), we proposed that a State operating reinsurance may elect to 

collect more than the amounts based on the national contribution rate set forth in the 

annual HHS notice of benefit and payment parameters for administrative expenses of the 
CMS-9964-F 148 

applicable reinsurance entity or for additional reinsurance payments. In addition, under 

§153.220(d)(2), we proposed that a State must notify HHS within 30 days after 

publication of the draft annual HHS notice of benefit and payment parameters for the 

applicable benefit year of the additional contribution rate that it elects to collect. We are 

finalizing these provisions as proposed with the following modification: we are deleting 

§153.220(d)(2), which required a State to 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. 

Comment: We received several comments asking HHS to eliminate the 

requirement set forth in §153.220(d)(2), which provided that a State must notify HHS 

within 30 days after publication of the draft annual HHS notice of benefit and payment 

parameters for the applicable benefit year of the additional contribution rate that it elects 

to collect. However, one commenter encouraged HHS to keep this requirement. 

Response: Because HHS will no longer collect additional contributions on behalf 

of a State, and will not immediately need this information, we are removing 

§153.220(d)(2) from this final rule. Any State operating reinsurance and electing to 

collect additional contributions under §153.220(d) must set forth any additional 

contribution rate that it elects to collect in its State notice of benefit and payment 

parameters. 

Comment: One commenter asked HHS to clarify that States may collect 

additional administrative expenses only when a State is operating reinsurance. 

Response: Only a State operating reinsurance is permitted to collect additional 

administrative expenses under §153.220(d). The State must set forth any additional 

contribution rate in its State notice of benefit and payment parameters. 

Comment: One commenter asked HHS to prohibit States from collecting 
CMS-9964-F 149 

additional funds for administrative expenses. 

Response: To allow State flexibility in operating reinsurance, a State operating 

reinsurance will be permitted to collect additional funds for administrative expenses as 

the State deems necessary. 

Comment: Several commenters opposed the collection of additional funds by 

States from self-insured plans, and urged HHS to specify in regulatory text that States 

cannot collect from self-insured plans covered by ERISA. 

Response: We reiterate that nothing in section 1341 of the Affordable Care Act 

or 45 CFR part 153 of this final rule gives a State the authority to collect any funds – 

whether under the national contribution rate or under an additional State contribution rate 

– from self-insured group health plans covered by ERISA. 

Comment: One commenter requested that HHS specify that the Federal 

Employees Health Benefit Act prohibits States from imposing additional State 

reinsurance fund collections on Federal Employees Health Benefits Program (FEHB) 

plans. 

Response: Although §153.220(d) provides that a State may elect to collect 

additional reinsurance contributions for administrative expenses or reinsurance payments, 

we do not interpret section 1341 of the Affordable Care Act or 45 CFR part 153 of this 

final rule as giving States any additional authority to collect from contributing entities. 

Any such authority must come from other State or Federal law. 

d. State Collections 

In §153.220(a), we proposed that if a State establishes a reinsurance program, 

HHS will collect all reinsurance contributions from all contributing entities for that State 

under a national contribution rate. In §153.220(d)(3) of the proposed rule (which we now 

renumber as §153.220(d)(2)), we proposed that States may use additional funds, which 
CMS-9964-F 150 

were not collected as additional reinsurance contributions, to make supplemental 

reinsurance payments under the State supplemental reinsurance payment parameters. 

This would allow States to use other revenue sources, such as funds collected for State 

high-risk pools. This would also ensure that additional State collections for reinsurance 

payments and other State funds may be used to reduce premiums. We are finalizing these 

provisions as proposed. 

Comment: Several commenters asked that HHS permit States to collect 

contributions from health insurance issuers. Other commenters supported the proposed 

centralized collection of reinsurance contribution under the national contribution rate. 

Response: HHS will collect contributions from health insurance issuers and selfinsured group health plans in all States, including States that elect to operate reinsurance. 

This will allow for a centralized and streamlined process for the collection of 

contributions, and will avoid inefficiencies resulting from the use of different collection 

processes in different States. Federal collections will also leverage economies of scale, 

reducing the overall administrative costs of the transitional reinsurance program. 

e. High-Risk Pools 

Section 1341(d) of the Affordable Care Act and §153.250 of the Premium 

Stabilization Rule provide that a State must eliminate or modify its high-risk pool to the 

extent necessary to carry out the transitional reinsurance program. However, any changes 

made to a State high-risk pool must comply with the terms and conditions of Grants to 

States for Operation of Qualified High-Risk Pools (CFDA 93.780), as applicable. Under 

§153.400(a)(2)(iii), we proposed that State high-risk pools would be excluded from 

making reinsurance contributions and would not receive reinsurance payments. 
CMS-9964-F 151 

The Affordable Care Act permits a State to coordinate its high-risk pool with the 

reinsurance program “to the extent not inconsistent”16 with the statute. We clarify that 

nothing in the Premium Stabilization Rule or this final rule prevents a State that 

establishes the reinsurance program from using State money designated for the State’s 

high-risk pool towards the reinsurance program. However, a State may not use funds 

collected for the Affordable Care Act reinsurance program for its high-risk pool. Finally, 

a State could designate its high-risk pool as its applicable reinsurance entity, provided 

that the high-risk pool meets all the criteria for being an applicable reinsurance entity. 

Comment: Several commenters requested that we permit State high-risk pools to 

be eligible for reinsurance payments for their high-risk enrollees. Commenters stated that 

the sudden termination of high-risk pools in 2014 would result in high-risk pool enrollees 

flooding the individual market, potentially resulting in premium increases for all 

individual market enrollees and a loss of access to providers currently administering care 

for high-risk pool enrollees. 

Response: Under the definition of a reinsurance-eligible plan in §153.20 of the 

Premium Stabilization Rule, State high-risk pools are not eligible to receive reinsurance 

payments for their high-risk enrollees because high-risk pool coverage is not individual 

market coverage. We note that if a high-risk pool were to be structured as individual 

market coverage subject to the market reform rules, it would be eligible for reinsurance 

payments and would also, therefore, be a contributing entity. 

Comment: Several commenters asked that HHS clarify that States can continue to 

operate high-risk pools to complement the reinsurance program and to provide continuity 

of coverage to risk pool enrollees. 

 

16See section 1341(d) of the Affordable Care Act. 
CMS-9964-F 152 

Response: States have the flexibility to decide whether to maintain, phase-out, or 

eliminate their high-risk pools. Because State high-risk pools and the reinsurance 

program both target high-cost enrollees, high-risk pools can operate alongside 

reinsurance serving a distinct subset of the target population. 

Comment: Several commenters asked that the Federal government continue to 

provide funding for the State High Risk Pool Grant program. 

Response: Funding for the State High Risk Pool Grant Program is not addressed 

in this final rule. 

2. Contributing Entities and Excluded Entities 

Section 1341 of the Affordable Care Act provides that health insurance issuers 

and third party administrators on behalf of group health plans must make payments to an 

applicable reinsurance entity. In the proposed rule, we stated that, with respect to insured 

coverage, issuers are responsible for making reinsurance contributions. With respect to a 

self-insured group health plan, the plan is responsible, although a third party 

administrator (TPA) or administrative services only (ASO) contractor may be utilized to 

transfer reinsurance contributions on behalf of a plan. A self-insured, self-administered 

group health plan without a TPA or ASO contractor would make its reinsurance 

contributions directly. For the reasons described above and in the preamble of the 

proposed rule, we are modifying the definition of “contributing entity” in §153.20 to 

clarify that a “contributing entity” is a health insurance issuer or a self-insured group 

health plan. 

Comment: Several commenters asked that HHS amend the definition of 

contributing entity, clarifying the liability of TPAs. 

Response: We have amended the definition of “contributing entity” in §153.20 to 

include the clarification we provided in the proposed rule at 77 FR 73152. This amended 
CMS-9964-F 153 

definition states that a contributing entity is a health insurance issuer or a self-insured 

group health plan. Thus, we clarify that a self-insured group health plan is ultimately 

responsible for the reinsurance contributions, even though it may elect to use a TPA or 

ASO contractor to transfer the reinsurance contributions. 

Comment: Several commenters sought clarification regarding whether selfinsured group health plans may remit reinsurance contributions directly to HHS even if 

the plan otherwise contracts with a TPA or ASO contractor for administration of benefits. 

Response: A self-insured group health plan may elect to make its reinsurance 

contributions directly to HHS or through a TPA or an ASO contractor. 

Comment: One commenter suggested that requiring issuers to submit a separate 

payment for each insured group would add significant administrative burden. 

Response: HHS will provide details on the process for submission of reinsurance 

contributions in future guidance. 

Comment: One commenter stated that the proposed rule does not address whether 

a TPA may charge administrative fees for the additional work it will undertake to collect 

reinsurance fees and forward them to HHS. 

Response: Any fee for such services would be negotiated between the plan and 

the TPA or ASO contractor. We note that the program is designed to minimize 

administrative costs, which we expect to be relatively low. 

Comment: Several commenters asked that HHS clarify that a plan with several 

TPAs should determine if and which TPA will calculate the enrollment count and submit 

reinsurance payments. 

Response: The self-insured group health plan is liable for reporting enrollment 

counts and making reinsurance contributions. It may utilize any TPA or ASO contractor 

it wishes (or none) to perform these functions. 
CMS-9964-F 154 

Under section 1341(b)(3)(B)(i) of the Affordable Care Act, contribution amounts 

for reinsurance are to reflect, in part, an issuer’s “fully insured commercial book of 

business for all major medical products.” We interpret this statutory language to mean 

that reinsurance contributions are not required for coverage that is not “major medical 

coverage” or for health insurance coverage that is non-commercial. We also interpret this 

statutory language to exclude expatriate health coverage, as defined by the Secretary. 

HHS plans to define expatriate health coverage in the near future. 

(1) Major Medical Coverage: In §153.400(a)(1)(i), we proposed that a 

contributing entity make reinsurance contributions for its health coverage except to the 

extent that such coverage is not “major medical coverage.” Section 1341(b)(3)(B)(i) of 

the Affordable Care Act refers to “major medical products,” but does not define the term. 

The preamble to the proposed rule at 77 FR 73152 discussed the definition that should 

apply for reinsurance purposes. We are finalizing the provisions as proposed. 

Comment: One commenter requested that we codify in regulation text the 

description of major medical coverage that was set forth in preamble. 

Response: We reiterate that for purposes of the reinsurance program only, our 

view is that major medical coverage is health coverage, which may be subject to 

reasonable enrollee cost sharing, for a broad range of services and treatments including 

diagnostic and preventive services, as well as medical and surgical conditions provided in 

various settings, including inpatient, outpatient, and emergency room settings. Coverage 

that is limited in scope (for example, dread disease coverage, hospital indemnity 

coverage, or stand-alone vision coverage or stand-alone dental coverage), or extent (for 
CMS-9964-F 155 

example, coverage that is not subject to section 2711 of the PHS Act and its 

implementing regulations) would not be major medical coverage.17 

In the proposed rule, we stated that when an individual has both Medicare 

coverage and employer-provided group health coverage, the Medicare Secondary Payer 

(MSP) rules under section 1862(b) of the Act would apply, and the group health coverage 

would be considered major medical coverage only if the group health coverage is the 

primary payer of medical expenses (and Medicare is the individual’s secondary payer) 

under the MSP rules. For example, a working 68-year-old employee enrolled in a group 

health plan who, under the MSP rules, is a beneficiary for whom Medicare is the 

secondary payer would be counted for purposes of reinsurance contributions. However, a 

68-year-old retiree enrolled in a group health plan who, under the MSP rules, is a 

beneficiary for whom Medicare is the primary payer would not be counted for purposes 

of reinsurance contributions. Similarly, an individual covered under a group health plan 

with only Medicare Part A (hospitalization) benefits (where Medicare is the primary 

payer) would not be counted for purposes of reinsurance contributions because the group 

health coverage would not be considered major medical coverage. We also stated that 

individuals entitled to Medicare because of disability or end-stage renal disease that have 

other primary coverage under the MSP rules would be treated consistently with the 

working aged, as outlined above. 

We are finalizing the proposed provisions with the following revisions, described 

below: (a) we are modifying the exception in §153.400(a)(1)(iii) to exclude from 

reinsurance contributions expatriate health coverage, as defined by the Secretary; (b) we 

 

17See Section 7F of the National Association of Insurance Commissioners (NAIC) Model Regulation to 

Implement the Accident and Sickness Insurance Minimum Standards Model Act, (MDL-171) for a 

definition of major medical expense coverage. Available at: 

http://naic.org/committees_index_model_description_a_c.htm#accident_health. 
CMS-9964-F 156 

are adding §153.400(a)(1)(iv) to codify the Medicare coordination rule; and (c) we are 

adding §153.400(a)(2)(xiii) to exclude a self-insured group health plan or health 

insurance coverage that is limited to prescription drug benefits from reinsurance 

contributions. 

Comment: Several commenters supported the proposed treatment of group health 

coverage that is considered secondary to Medicare under the MSP rules; some requested 

that the Medicare coordination rule contained in the preamble of the proposed rule appear 

in regulation text. 

Response: We have added paragraph (iv) to §153.400(a)(1) to codify the rule in 

regulation text. We have included this rule at §153.400(a)(1) to clarify that, to the extent 

a plan or coverage applies to individuals with respect to which benefits under Title XVIII 

of the Social Security Act (Medicare) are primary under the MSP rules, reinsurance 

contributions are not required on behalf of those enrollees under that plan or coverage. In 

order for a contributing entity to determine its enrollment count as required by §153.405 

while taking into account enrollees for which the employer group health coverage is 

considered secondary to Medicare under the MSP rules, we clarify that the contributing 

entity may use any reasonable method of estimating the number or percentage of its 

enrollees. For example, a contributing entity may calculate the percentage of enrollees 

for which the employer group health coverage is secondary under the MSP rules on the 

dates it uses when applying the snapshot counting method or actual count method, or on 

other periodic dates, and reduce the enrollment count calculated using one of the methods 

in §153.405 by that percentage. A contributing entity may also calculate the total 

enrollment of individuals for which the employer group health coverage is secondary 

under the MSP rules on the last day of the third quarter and reduce the enrollment count 

that was calculated using one of the methods in §153.405. 
CMS-9964-F 157 

Comment: Several commenters requested that employer-provided retiree 

coverage be excluded from reinsurance contributions. 

Response: We have no statutory authority to make the requested change under 

section 1341 of the Affordable Care Act. We clarify that employer-provided retiree 

coverage is subject to reinsurance contributions unless one of the general exceptions 

applies (for example, the coverage is not major medical coverage). 

Comment: One commenter requested that we expand the Medicare coordination 

rule to exclude from reinsurance contributions any employer-provided coverage that is 

secondary to any other coverage. 

Response: We decline to make this exclusion because we believe that it would be 

difficult for an individual sponsor or issuer to determine and verify (and it would be 

difficult for HHS to confirm) without extensive coordination with other issuers and 

sponsors which enrollees have another source of coverage, whether that other source of 

coverage is major medical coverage, and which coverage is primary. We also believe 

that few individuals will have two sources of primary major medical coverage. 

Comment: Two commenters requested additional clarification as to how the MSP 

rules interact with the reinsurance program when an individual has employer-provided 

group health coverage and is eligible for Medicare due to end-stage renal disease or 

disability.

Response: If an individual is eligible for Medicare due to end-stage renal disease 

or disability, then whether reinsurance contributions would be required on behalf of the 

individual would depend upon whether the Medicare coverage is primary, as with the 

working-aged. 

Comment: A few commenters requested that the preamble language in the 

proposed rule clarifying that a separate plan that provides coverage for prescription drugs 
CMS-9964-F 158 

is excluded from reinsurance contributions be codified in regulation text. One 

commenter requested clarification that retiree drug plans including employer group 

waiver plans and other employer-sponsored Part D plans are excluded from reinsurance 

contributions. 

Response: We are amending §153.400(a)(2) to include a new paragraph (xiii) 

providing that a self-insured group health plan or health insurance coverage that is 

limited to prescription drug benefits is excluded from reinsurance contributions. Since 

they only provide coverage for prescription drug benefits, these plans are not major 

medical coverage. We also note that §153.400(a)(2)(ii)(A) contains an exception for 

coverage provided by an issuer under contract to provide benefits under Medicare 

because these private Medicare plans are not part of an issuer’s commercial book of 

business (as discussed in the next section of this preamble). . 

(2) Commercial Book of Business: The second general exception at 

§153.400(a)(1)(ii) from the reinsurance contribution requirement applies to health 

insurance coverage that is not part of an issuer’s commercial book of business. Section 

1341(b)(3)(B)(i) of the Affordable Care Act refers to a “commercial book of business,” 

which we proposed to interpret to refer to large and small group health insurance policies 

and individual market health insurance policies. For example, products offered by an 

issuer under Medicare Part C or D would be part of a “governmental” book of business, 

not a commercial book of business. Similarly, a plan or coverage offered by a Tribe to 

Tribal members and their spouses and dependents, and other persons of Indian descent 

closely affiliated with the Tribe in the capacity of the Tribal members as Tribal members 

(and not in their capacity as current or former employees of the Tribe or their dependents) 

would not be part of a commercial book of business. But a plan or coverage offered by 

the Federal government, a State government, or a Tribe to employees (or retirees or 
CMS-9964-F 159 

dependents) because of a current or former employment relationship would be part of a 

commercial book of business. 

We are finalizing the provisions as proposed. 

Comment: One commenter agreed that coverage offered to Federal, State, or 

Tribal employees should be subject to reinsurance contributions, and that this coverage 

would be part of an issuer’s commercial book of business. Another commenter stated 

that since Federal and State employee plans make up a significant share of the market’s 

large group enrollment, these plans should be included in a carrier’s book of business for 

purposes of the reinsurance contribution. 

Response: For reinsurance purposes, we agree that insured coverage offered to 

Federal, State or Tribal employees is part of an issuer’s commercial book of business. As 

discussed in the preamble to the proposed rule, we interpret “commercial book of 

business” to refer to insured large and small group policies and individual market 

policies. 

(3) Policy filed and approved by a State: The third proposed general exception 

from reinsurance contributions at §153.400(a)(1)(iii) was for insured coverage not filed 

or approved by a State. As noted in the preamble to the proposed rule at 77 FR at 73153, 

this exception was intended primarily to address group expatriate coverage for 

individuals whose work requires them to spend a substantial period of time overseas. We 

are amending §153.400(a)(1)(iii) so that expatriate health coverage, as defined by the 

Secretary, is excluded from reinsurance contributions. 

Comment: Some commenters requested that all expatriate coverage be excluded 

from reinsurance contributions, including coverage filed with and approved by a State, as 

well as self-insured expatriate coverage. 
CMS-9964-F 160 

Response: As described above, we are amending this provision so that all 

expatriate health coverage, as defined by the Secretary, is excluded from reinsurance 

contributions. We plan to define expatriate health coverage, as well as explain the 

applicability of the Affordable Care Act to such coverage, in the near future. 

Comment: A few commenters noted considerable variation in filing methods for 

issuers of health insurance coverage in the large group market. The commenters 

expressed concern that issuers that should make reinsurance contributions may be 

excluded because of the different filing and approval requirements. For example, some 

States may not require explicit approval of certain new policy forms, but instead those 

forms may be deemed approved via issuer certification. One commenter requested 

clarification as to whether an issuer that is regulated by a State agency other than a 

department of insurance would be subject to reinsurance contributions under the “filed 

and approved by a State” language. 

Response: We recognize that States can and do use different filing methods to 

obtain the information from issuers necessary to carry out their regulatory 

responsibilities. However, we are amending §153.400(a)(1)(iii) so that the exception 

from reinsurance contributions applies to all expatriate health coverage, as defined by the 

Secretary. 

We proposed in §153.400(a)(2) to explicitly exclude the following types of plans 

and coverage from reinsurance contributions. We are finalizing these provisions as 

proposed. 

(a) Excepted benefits. We proposed no change in policy with respect to plans or 

health insurance coverage that consist solely of excepted benefits as defined by section 

2791(c) of the PHS Act, as currently described in §153.400(a)(2)(i) of the Premium 

Stabilization Rule. 
CMS-9964-F 161 

 Comment: A few commenters noted that stand-alone dental or vision coverage is 

excluded from reinsurance contributions, and requested that other dental or vision 

coverage should be excluded as well. One commenter suggested that reinsurance 

contributions should not apply to “carve-out” arrangements that must be offered 

alongside an employer’s major medical coverage that are similar to prescription drug 

carve-outs, for example, behavioral health and transplant coverage. 

 Response: An employer decides whether to offer group health coverage, the 

scope of the coverage, and its structure. An employer that provides dental or vision 

coverage may do so on a stand-alone basis, in which case the benefits may qualify as 

excepted benefits, or may include the coverage with the major medical benefits as part of 

a group health plan. Excepted benefits are not subject to reinsurance contributions. 

 (b) Private Medicare, Medicaid, CHIP, State high-risk pools, and Basic Health 

Plans: Both Medicare and Medicaid have fee-for-service or traditional components, as 

well as managed care components in which private health insurance issuers, under 

contract with HHS, deliver the requisite benefits. As discussed in the preamble to the 

Premium Stabilization Rule, these private Medicare or Medicaid plans are excluded from 

reinsurance contributions because they are not part of a commercial book of business. 

We also clarified in the proposed rule that for purposes of reinsurance contributions, 

programs under the CHIP, Federal and State high-risk pools (including the Pre-Existing 

Condition Insurance Plan Program under section 1101 of the Affordable Care Act), and 

Basic Health Plans described in section 1331 of the Affordable Care Act are similarly 

excluded from reinsurance contributions because they are not part of a commercial book 

of business. 

 (c) Health Reimbursement Arrangements (HRAs) integrated with a group health 

plan. Section 153.400(a)(2)(v) of the proposed rule excluded HRAs that are integrated 
CMS-9964-F 162 

with a group health plan offered in conjunction with a major medical plan (integrated 

HRAs) from reinsurance contributions. The preamble to the proposed rule noted that 

reinsurance contributions generally would be required for that group health plan. 

 Comment: Several commenters requested that stand-alone HRAs be excluded 

from reinsurance contributions. Alternatively, some commenters requested that the “one 

covered life” rule that the Fees on Health Insurance Policies and Self-Insured Plans for 

the Patient-Centered Outcomes Research Trust final rule (the PCORTF Rule)18 applies to 

stand-alone HRAs also apply for purposes of reinsurance contributions. Some

commenters requested clarification on when an HRA is “integrated” with a traditional 

group health plan or health insurance coverage, on how to classify arrangements similar 

to HRAs that do not meet the technical definition of an HRA, and regarding the treatment 

of specific types of HRAs (for example, an HRA that only may be used to pay premiums 

under a fully insured plan). 

Response: As described above, integrated HRAs are excluded from reinsurance 

contributions. We note that the Department of Labor, the U.S. Treasury and HHS 

recently issued guidance on certain HRA-related issues in “Affordable Care Act 

Implementation FAQs-Set 11,” which can be found at 

http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs11.html. 

 (d) Health saving accounts (HSAs): Section 153.400(a)(2)(vi) of the proposed 

rule excluded HSAs from reinsurance contributions. An HSA is an individual 

arrangement that is offered along with a high deductible health plan. For purposes of 

reinsurance contributions, we believe that an HSA is not major medical coverage because 

it consists of a fixed amount of funds that are available for both medical and non-medical 

 

18See the Fees on Health Insurance Policies and Self-Insured Plans for the Patient-Centered Outcomes 

Research Trust final rule (the PCORTF Rule) published on December 6, 2012 (77 FR 72721) 
CMS-9964-F 163 

purposes, and thus would be excluded from reinsurance contributions. We note that 

reinsurance contributions generally would be required for the high deductible health plan 

because it is major medical coverage. 

 Comment: Some commenters requested clarification on HSAs “integrated with a 

group health plan” for reinsurance contributions purposes. 

 Response: HSAs are excluded from reinsurance contributions because they 

consist of a fixed amount of funds that are available for both medical and non-medical 

purposes and therefore do not provide major medical coverage. 

 (e) Health flexible spending arrangements (FSAs): Health FSAs are usually 

funded by an employee’s voluntary salary reduction contributions under section 125 of 

the Code. Because section 9005 of the Affordable Care Act limits the annual amount that 

may be contributed by an employee to a health FSA to $2,500 (indexed for inflation), we 

believe that a health FSA is not major medical coverage under this final rule, and 

therefore is excluded from reinsurance contributions. 

 (f) Employee assistance plans, disease management programs, and wellness 

programs: Employee assistance plans, disease management programs, and wellness 

programs typically provide ancillary benefits to employees that in many cases do not 

constitute major medical coverage. Employers, plan sponsors, and health insurance 

issuers have flexibility in designing these programs to provide services that are additional 

benefits to employees, participants, and beneficiaries. If the program (whether selfinsured or insured) does not provide major medical coverage, we proposed to exclude it 

from reinsurance contributions and we are finalizing that provision in the final rule. We 

also note that employers that provide one or more of these ancillary benefits often 

sponsor major medical plans which would be subject to reinsurance contributions, absent 

other excluding circumstances. 
CMS-9964-F 164 

 (g) Stop-loss and indemnity reinsurance policies: For purposes of reinsurance, we 

proposed to exclude stop-loss insurance and indemnity reinsurance because they do not 

constitute major medical coverage for the applicable covered lives. Generally, a stop-loss 

policy is an insurance policy that protects against health insurance claims that are 

catastrophic or unpredictable in nature and provides coverage to self-insured group health 

plans once a certain level of risk has been absorbed by the plan. Stop-loss insurance 

allows an employer to self-insure for a set amount of claims costs, with the stop-loss 

insurance covering all or most of the remainder of the claims costs that exceed the set 

amount. An indemnity reinsurance policy is an agreement between two or more 

insurance companies under which the reinsuring company agrees to accept and to 

indemnify the issuing company for all or part of the risk of loss under policies specified 

in the agreement, and the issuing company retains its liability to, and its contractual 

relationship with, the applicable lives covered. We believe these types of policies were 

not intended to be subject to the reinsurance program. No inference is intended as to 

whether stop-loss or reinsurance policies constitute health insurance policies for purposes 

other than reinsurance contributions. 

 (h) Military Health Benefits: TRICARE is the component of the Military Health 

System that furnishes health care insurance to active duty and retired personnel of the 

uniformed services (and covered dependents) through private issuers under contract. 

Although TRICARE coverage is provided by private issuers, it is not part of a 

commercial book of business because the relationship between the uniformed services 

and service members differs from the traditional employer-employee relationship in 

certain important respects. For example, service members may not resign from duty 

during a period of obligated service, may not form unions, and may be subject to 

discipline for unexcused absences from duty. 
CMS-9964-F 165 

In addition to TRICARE, the Military Health System also includes health care 

services that doctors, dentists, and nurses provide to uniformed services members on 

military bases and ships. The Veterans Health Administration within the U.S. 

Department of Veterans Affairs provides health care to qualifying veterans of the 

uniformed services at its outpatient clinics, hospitals, medical centers, and nursing 

homes. Because we do not consider these programs to be part of a commercial book of 

business, such military health programs are excluded from reinsurance contributions. 

 (i) Tribal coverage: Section 153.400(a)(2)(xi) of the proposed rule excluded 

plans or coverage (whether fully insured or self-insured) offered by a Tribe to Tribal 

members and their spouses and dependents (and other persons of Indian descent closely 

affiliated with the Tribe) in their capacity as Tribal members (and not in their capacity as 

current or former employees of the Tribe or their dependents). Similarly, we proposed 

that coverage provided to Tribal members through programs operated under the authority 

of the Indian Health Service (IHS), Tribes or Tribal organizations, or Urban Indian 

organizations, as defined in section 4 of the Indian Health Care Improvement Act would 

be excluded from reinsurance contributions because it is not part of a commercial book of 

business. We note, however, that a plan or coverage offered by a Tribe to its employees 

(or retirees or dependents) on account of a current or former employment relationship 

would be required to make reinsurance contributions. 

 Comment: Some commenters asked that self-insured Tribal plans that cover 

Tribal employees be excluded from reinsurance contributions, in a manner similar to 

Tribal plans that cover Tribal members based on their status as Tribal members. 

 Response: Similar to Federal and State-based employment coverage, these Tribal 

plans are based on employment relationships. We do not have the authority to make this 

exclusion. 
CMS-9964-F 166 

 We received additional comments which requested exceptions for other types of 

entities. 

 Comment: Several commenters requested that plans or coverage provided by a 

voluntary employee beneficiary association (VEBA) established and maintained under 

the terms of a class action or bankruptcy settlement ordered by a court (court-ordered 

VEBA) be excluded from reinsurance contributions. A court-ordered VEBA provides 

retiree medical benefits to former employees of certain companies. The court order 

specifies the funding and the eligible individuals, and the former employers have no 

ongoing financial or administrative responsibility. A significant percentage of existing 

court-ordered VEBAs are not well funded. 

Response: We are unable to categorically exclude court-ordered VEBAs. We 

note, however, that many VEBAs may be excluded from reinsurance contributions 

because they do not provide major medical coverage. 

Comment: Some commenters requested that certain jointly administered TaftHartley plans that provide health coverage to collectively bargained employees be 

excluded from reinsurance contributions. Generally, many of these plans are self-insured 

and self-administered, and include multiemployer plans within the meaning of section 

3(37) of ERISA. 

Response: While we recognize the unique nature of these plans, and their 

important role in providing coverage to collectively bargained employees and covered 

dependents, we do not have authority under the statute to exclude them from reinsurance 

contributions. As clarified in the Premium Stabilization Rule and in this final rule, we do 

not interpret the application of section 1341 of the Affordable Care Act to be limited to 

issuers and TPAs on behalf of group health plans. We view the plans’ coverage as 
CMS-9964-F 167 

employment-based, and as a result subject to reinsurance contributions (unless another 

exclusion applies). 

Comment: Several commenters asked for clarification as to whether individuals 

with group health coverage that elect Consolidated Omnibus Budget Reconciliation Act 

(COBRA) continuation coverage or similar continuation coverage under State law are 

covered lives for reinsurance purposes. 

Response: Our view is that COBRA or other continuation coverage is a form of 

employment-based group health coverage paid for by the former employee. Therefore, to 

the extent the COBRA coverage qualifies as major medical coverage (and no other 

exception applies), it is subject to reinsurance contributions. 

Comment: A few commenters stated that employer-provided coverage for parttime employees should be excluded from reinsurance contributions. 

Response: Unless the coverage for part-time employees is self-insured and is not 

major medical coverage, or is not part of an issuer’s commercial book of business, it is 

subject to reinsurance contributions (so long as no other exception applies). 

3. National Contribution Rate 

a. 2014 Rate 

As specified in §153.220(c) of the Premium Stabilization Rule, HHS plans to 

publish in the annual HHS notice of benefit and payment parameters the national per 

capita reinsurance contribution rate for the upcoming benefit year. Section 

1341(b)(3)(B)(iii) of the Affordable Care Act specifies the total contribution amounts to 

be collected from contributing entities (reinsurance pool) as $10 billion for 2014, $6 

billion for 2015, and $4 billion for 2016, and sections 1341(b)(3)(B)(iv) and 1341(b)(4) 

of the Affordable Care Act direct the collection of funds for contribution to the U.S. 

Treasury in the amounts of $2 billion for 2014, $2 billion for 2015, and $1 billion for 
CMS-9964-F 168 

2016. We sought comments on whether deferring the collection of the $2 billion in funds 

payable to the U.S. Treasury for 2014 until 2016 would be consistent with the statutory 

requirements described above, and whether there are other steps that could be taken to 

reduce the burden of these collections on contributing entities. Finally, section 

1341(b)(3)(B)(ii) of the Affordable Care Act allows for the collection of additional 

amounts for administrative expenses. Taken together, these three components make up 

the total dollar amount to be collected from contributing entities for each of the three 

years of the reinsurance program under the national per capita contribution rate. 

Each year, the national per capita contribution rate will be calculated by dividing 

the sum of the three amounts (the national reinsurance pool, the U.S. Treasury 

contribution, and administrative costs) by the estimated number of enrollees in plans that 

must make reinsurance contributions. As an illustration, under the Affordable Care Act, 

the 2014 national reinsurance pool is $10 billion, and the contribution to the U.S. 

Treasury is $2 billion. The amount to be collected for administrative expenses for benefit 

year 2014 is $20.3 million (or 0.2 percent of the $10 billion dispersed), as discussed in 

greater detail below. The HHS estimate of the number of enrollees in plans that must 

make reinsurance contributions that total the $12.02 billion described above yields an 

annual per capita contribution rate of $63.00 in benefit year 2014 or $5.25 per month. 

Section 153.220(c) of the proposed rule (previously designated as §153.220(e) in 

the Premium Stabilization Rule) stated that HHS plans to set in the annual HHS notice of 

benefit and payment parameters for the applicable benefit year the proportion of 

contributions collected under the national contribution rate to be allocated to reinsurance 

payments, payments to the U.S. Treasury, and administrative expenses. In Table 20, we 

specify these proportions (or amounts, as applicable): 
CMS-9964-F 169 

TABLE 20: Proportion of Contributions Collected under the National Contribution 

Rate for Reinsurance Payments, Payments to the U.S. Treasury and Administrative 

Expenses 

Proportion or amount for: If total contribution 

collections under the 

national contribution rate 

are less than or equal to 

$12.02 billion 

If total contribution 

collections under the 

national contribution rate 

are more than $12.02 

billion 

Reinsurance payments 83.2 percent ($10 

billion/$12.02 billion) 

The difference between 

total national collections 

and those contributions 

allocated to the U.S. 

Treasury and administrative 

expenses 

Payments to the U.S. 

Treasury 

16.6 percent ($2 

billion/$12.02 billion) 

$2 billion 

Administrative expenses 0.2 percent ($20.3 

million/$12.02 billion) 

$20.3 million 

In light of the comments received, we are finalizing these provisions as proposed. 

 Comment: Many commenters stated that a national contribution rate would 

penalize States with lower medical costs, and require those States to subsidize other 

States with higher medical costs. Some commenters asked that HHS vary the 

contribution rate using an index of health care costs by State. Conversely, many 

commenters supported a national per capita contribution rate. One commenter asked that 

the national contribution rate be calculated based on a percentage of premium and not on 

a per capita basis. 

Response: As stated in the Premium Stabilization Rule (77 FR 17227), we are 

using a national, per capita contribution rate because it is a simpler approach that 

minimizes the administrative burden of collections. In addition, varying the contribution 

rate using an index of health care costs would not capture a State’s reinsurance needs, 

which will also vary based upon the relative sizes of the State’s individual, group, selfinsured markets, and the uninsured. 
CMS-9964-F 170 

Comment: Several commenters expressed concern about the annual per capita 

national contribution rate of $63.00 for benefit year 2014, and suggested lowering the 

rate. Many commenters were concerned with the expense of the reinsurance contribution 

for employees. 

Response: Section 1341 of the Affordable Care Act states that the total 

contribution amounts to be collected from contributing entities for 2014 is $12 billion 

plus administrative expenses. We estimate that the $63 annual ($5.25 monthly) per 

capita contribution rate for benefit year 2014 will lead to collections in the statutory 

amount (plus administrative expenses) which we have concluded we have no regulatory 

authority to change. 

Comment: One commenter expressed concern that self-insured group health 

plans are excluded from receiving reinsurance payments and do not benefit 

proportionally or directly from their reinsurance contribution. As such, this commenter 

suggested that HHS prorate the contribution rate for self-insured group health plans, by 

collecting less than the $63 annual per capita national contribution rate from those plans. 

Response: Section 1341 of the Affordable Care Act directs health insurance 

issuers and self-insured group health plans to make reinsurance contributions. HHS has 

set forth a national per capita contribution rate for the 2014 benefit year which applies to 

all contributing entities, including self-insured group health plans. 

Comment: Several commenters asked HHS to defer the collection of the $2 

billion payable to the U.S. Treasury in 2014 until 2016. 

Response: We considered the commenters’ statutory interpretations for how such 

a deferral may be permissible under section 1341 of the Affordable Care Act and would 

support such a deferral, but concluded that we have no statutory authority to defer the 

collection. 
CMS-9964-F 171 

Comment: Several commenters asked HHS to eliminate the $20.3 million 

collection for administrative expenses. One commenter stated that HHS has no authority 

to collect administrative expenses to pay for HHS operating reinsurance on behalf of a 

State. 

Response: We interpret section 1341(b)(3)(B)(ii) of the Affordable Care Act to 

authorize the collection of additional amounts for administrative expenses, including for 

HHS when HHS operates reinsurance on behalf of a State. We agree with the 

commenters on the need to keep these administrative expenses at a minimum, and intend 

to operate the program efficiently. We note that our estimate of administrative expenses 

– $20.3 million – represents approximately 0.2 percent of the reinsurance amounts to be 

collected for 2014, and the costs of Federal employees are not included in the national 

contribution rate. 

Comment: Several commenters asked for clarification regarding whether an 

employer may pass the cost of the reinsurance contribution to its enrollees in self-insured 

group health plans. 

Response: This final rule does not address how an employer would meet the 

reinsurance contribution requirements. 

Comment: One commenter asked how the national contribution rate will affect 

premiums or the affordability of coverage once implemented. 

Response: As set forth in the regulatory impact analysis to this final rule, HHS 

estimates that reinsurance payments to issuers will reduce premiums in the individual 

market by between 10 to 15 percent. This is an HHS estimate for the 2014 benefit year, 

based in part on a 2009 analysis of health insurance premiums by the Congressional 

Budget Office. 
CMS-9964-F 172 

Comment: Several commenters asked HHS to explain the methodology used to 

develop the national contribution rate and the assumptions behind the enrollment 

estimates that were used to calculate the national contribution rate for 2014. 

Response: As described in the proposed rule, HHS developed the Affordable 

Care Act Health Insurance Model (ACAHIM), which estimates market enrollment in a 

manner that incorporates the effects of State and Federal policy choices and accounts for 

the behavior of individuals and employers. We used the ACAHIM, which was developed 

with reference to existing models such as those of the Congressional Budget Office and 

the Office of the Actuary, to characterize medical expenditures and enrollment choices 

across the 2014 marketplace. The ACAHIM is made up of integrated modules which 

predict the number and characteristics of market entrants and medical spending. The 

outputs of the ACAHIM, especially the estimated enrollment and expenditure 

distributions, were used to analyze estimated enrollment in the 2014 marketplace. 

The market enrollment module of the ACAHIM predicts coverage status of 

individuals in 2014, incorporating the effects of State and Federal policy choices and 

accounting for the behavior of individuals and employers. Using recent Current 

Population Survey data with appropriate population adjustments, the ACAHIM assigns 

individuals to a single health insurance market as their baseline (pre-Affordable Care 

Act) insurance status. The module estimates transitions from coverage status in the 

baseline to individuals’ projected status in 2014, taking into account factors such as 

Medicaid eligibility, eligibility for advance payments of the premium tax credit and costsharing reductions under the Exchange, and current take-up rates of insurance. 

Comment: Several commenters sought clarification on whether the reinsurance 

contributions may be charged back to an ERISA plan as a reasonable plan expense. 

Several commenters asked whether IRS had indicated that the reinsurance contribution is 
CMS-9964-F 173 

tax-deductible as an ordinary and necessary business expenses. Several commenters also 

asked HHS to clarify that the contribution amount will be considered a “plan cost” for all 

purposes. 

Response: The Department of Labor advised HHS upon its review of this final 

rule that paying reinsurance contributions would constitute a permissible expense of the 

plan for purposes of Title I of the ERISA because the payment is required by the plan 

under the Affordable Care Act (see, 77 FR 73198, fn 56). Questions seeking clarification 

regarding particular situations should be directed to the Department of Labor. See 

generally Advisory Opinion 2001–01A to Mr. Carl Stoney, Jr., available at 

www.dol.gov/ebsa (discussing settlor versus plan expenses). For a discussion regarding 

the tax status of reinsurance contributions pursuant to the Affordable Care Act, see the 

FAQ issued by the IRS (http://www.irs.gov/uac/Newsroom/ACA-Section-1341-

Transitional-Reinsurance-Program-FAQs). 

b. Federal Administrative Fees 

In the proposed rule, we estimated the Federal administrative expenses of 

operating reinsurance for the 2014 benefit year to be approximately $20.3 million, or 0.2 

percent of the $10 billion in reinsurance funds to be distributed for the 2014 benefit year. 

This figure reflects the Federal government’s significant economies of scale in operating 

the program, and results in a national per capita contribution rate of $0.11 annually for 

HHS administrative expenses. 

 In the proposed rule, we set forth the process for apportioning the annual per 

capita amount of $0.11 of administrative expenses as follows: $0.055 of the total amount 

collected per capita would be allocated to administrative expenses incurred in the 

collection of contributions from health insurance issuers and self-insured group health 

plans; and $0.055 of the total amount collected per capita would be allocated to 
CMS-9964-F 174 

administrative expenses incurred for activities supporting the administration of payments 

to issuers of reinsurance-eligible plans. We proposed that if a State operates reinsurance, 

HHS would retain $0.055 to offset the costs of contributions collection, and would 

allocate $0.055 towards administrative expenses for reinsurance payments. The total 

amounts allocated towards administrative expenses for reinsurance payments would be 

distributed to States operating reinsurance (or retained by HHS where HHS is operating 

reinsurance) in proportion to the State-by-State total requests for reinsurance payments 

made under the uniform payment parameters. We are finalizing these provisions as 

proposed. 

Comment: Several commenters sought clarification on how administrative 

expenses will be distributed to States operating reinsurance. 

Response: The 2014 allocation for Federal administrative expenses for operating 

reinsurance totals $20.3 million. HHS will keep 50 percent to cover the administrative 

expense of collecting reinsurance contributions from health insurance issuers and selfinsured group health plans. The 50 percent allocated for reinsurance payment activities 

will be distributed in proportion to the State-by-State total requests for reinsurance 

payments (by total dollars) made under the uniform payment parameters. States 

operating reinsurance will receive that allocation; HHS will retain the allocation for 

States not operating reinsurance. 

Comment: Several commenters sought clarification on the methodology used to 

develop the Federal administrative expenses of implementing the reinsurance program in 

2014. 

Response: We determined HHS’s total costs for administering reinsurance on 

behalf of States by examining HHS’s contract costs of operating reinsurance. These 

contracts cover collections, payments, account management, data collection, program 
CMS-9964-F 175 

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

We did not include the cost of Federal personnel. We divided HHS’s projected total 

costs for administering reinsurance on behalf of States by the expected enrollment in 

health insurance plans and self-insured group health plans. We anticipate that the total 

cost for HHS to operate reinsurance on behalf of States for the 2014 benefit year will be 

$20.3 million, or $0.11 per capita per year. 

Comment: One commenter expressed concern that HHS under-estimated the cost 

to a State of administering reinsurance. 

Response: The cost estimates in the proposed rule are estimates of HHS’s costs 

of administering the program. HHS may benefit from economies of scale not available to 

the States. We understand that States operating reinsurance may need to collect 

additional funds for administrative expenses. 

4. Calculation and Collection of Reinsurance Contributions 

a. Calculation of Reinsurance Contribution Amount and Timeframe for Collections 

HHS intends to administer the reinsurance program in a manner that minimizes 

the administrative burden on health insurance issuers and self-insured group health plans, 

while ensuring that contributions are calculated accurately. Thus, we proposed in 

§153.400(a) and §153.240(b)(1), respectively, to collect and pay out reinsurance funds 

annually to minimize the costs of administering the reinsurance program and the burden 

on contributing entities. 

In the Premium Stabilization Rule, we stated that we would collect reinsurance 

contributions through a per capita assessment on contributing entities. To clarify how 

this assessment is made, we proposed in §153.405 that the reinsurance contribution of a 

contributing entity be calculated by multiplying the average number of covered lives of 

reinsurance contribution enrollees during the benefit year for all of the contributing 
CMS-9964-F 176 

entity’s plans and coverage that must pay reinsurance contributions, by the national 

contribution rate for the applicable benefit year. 

In §153.405(b), we proposed that a contributing entity must submit to HHS an 

annual enrollment count of the average number of covered lives of reinsurance 

contribution enrollees no later than November 15 of benefit year 2014, 2015, and 2016, 

as applicable. The count must be determined as specified in proposed §153.405(d), (e), 

(f), or (g), as applicable. We proposed to amend §153.400(a) so that each contributing 

entity would make annual reinsurance contributions at the national contribution rate, and 

under any additional applicable State supplemental contribution rate, if a State elects to 

collect additional contributions for administrative expenses or supplemental reinsurance 

payments under §153.220(d). We believe that this annual collection schedule will ensure 

a more accurate count of a contributing entity’s average covered lives, and will avoid the 

need for any initial estimates and subsequent reconciliation to account for fluctuations in 

enrollment during the course of the benefit year. 

 In §153.405(c)(1), we proposed that within 15 days of submission of the annual 

enrollment count or by December 15, whichever is later, HHS would notify each 

contributing entity of the reinsurance contribution amounts to be paid based on the 

submitted annual enrollment count. We specified in §153.405(c)(2) that a contributing 

entity remit contributions to HHS within 30 days after the date of the notification of 

contributions due for the applicable benefit year. The amount to be paid by the 

contributing entity would be based upon the notification received under §153.405(c)(1). 

 We are finalizing these provisions as proposed, with technical corrections to 

§153.400, where we clarify that each contributing entity must make reinsurance 

contributions annually at the national contribution rate; to §153.405(c), where we clarify 

that HHS will notify a contributing entity of reinsurance contributions amounts to be paid 
CMS-9964-F 177 

for a benefit year by the later of December 15 or 30 days after the submission of the 

annual enrollment count; and §153.405(a)(1), §153.405(b) and §153.405(d), where we 

delete “average” to clarify that reinsurance contributions are calculated by multiplying 

the number of covered lives of reinsurance contribution enrollees during the applicable 

benefit year for all contributing entities by the national contribution rate, pursuant to 

§153.405(a). 

 Comment: Several commenters asked HHS to collect contributions after all 

reinsurance payment requests are submitted and aggregated, emphasizing that the 

reinsurance contributions should equal the 2014 requests for reinsurance payments. 

Response: Under the Affordable Care Act, the total contribution amounts to be 

collected from contributing entities for reinsurance payments and payments to the U.S. 

Treasury for 2014 are $12 billion. We estimate that the $63.00 ($5.25 monthly) annual 

per capita contribution rate for benefit year 2014 will lead to collections in that amount, 

including the $20.3 million in administrative expenses. We recognize the possibility that 

reinsurance payment requests for 2014 may be less than contributions collected for 2014, 

but section 1341(b)(3)(B)(4)(A) of the Affordable Care Act provides that unused funds 

after making the 2014 reinsurance payments may be used to stabilize premiums for the 

three years of the reinsurance program. As set forth in §153.235(b), any unused funds 

will be used for reinsurance payments under the uniform reinsurance payment parameters 

for subsequent benefit years. 

Comment: One comment received sought clarification on whether contributing 

entities are required to make reinsurance contributions once per year. 

Response: As set forth in §153.400(a), a contributing entity makes reinsurance 

contributions at the national contribution rate annually. 

Comment: Several commenters requested that HHS revise the date by which a 
CMS-9964-F 178 

contributing entity must submit the annual enrollment count date to the end of the benefit 

year, so that issuers may submit enrollment counts on 12 months of data. 

Response: Due to operational time constraints surrounding the collection of 

reinsurance contributions, HHS must receive annual enrollment counts by November 15 

of the applicable benefit year in order to invoice and collect contributions in time to 

aggregate payment requests and make payments. We do not believe the earlier 

submission will significantly impair the accuracy of the enrollment count. 

 Counting Methods for Health Insurance Issuers: In §153.405(d), we proposed a 

number of methods that a health insurance issuer may use to determine the average 

number of covered lives of reinsurance contribution enrollees under a health insurance 

plan for a benefit year for purposes of the annual enrollment count. These methods 

promote administrative efficiencies by building on the methods permitted for purposes of 

the fee to fund the Patient-Centered Outcomes Research Trust Fund (77 FR 72721), 

modified for applicability to the transitional reinsurance program so that a health 

insurance issuer may determine an annual enrollment count during the fourth quarter of 

the benefit year. Thus, under each of these methods, the number of covered lives will be 

determined based on the first nine months of the benefit year. 

 (1) Actual Count Method: Under the PCORTF Rule, an issuer may use the 

“actual count method” to determine the number of lives covered under the plan for the 

plan year by calculating the sum of the lives covered for each day of the plan year and 

dividing that sum by the number of days in the plan year. We proposed that, for 

reinsurance contributions purposes, a health insurance issuer would add the total number 

of lives covered for each day of the first nine months of the benefit year and divide that 

total by the number of days in those nine months of the benefit year. 
CMS-9964-F 179 

 (2) Snapshot Count Method: Under the PCORTF Rule, a health insurance 

issuer may use the “snapshot count method” generally by adding the total number of lives 

covered on a certain date during the same corresponding month in each quarter, or an 

equal number of dates for each quarter, and dividing the total by the number of dates on 

which a count was made. For reinsurance contributions purposes, an issuer would add 

the totals of lives covered on a date (or more dates, if an equal number of dates are used 

for each quarter) during the same corresponding month in each of the first three quarters 

of the benefit year (provided that the dates used for the second and third quarters must be 

within the same week of the quarter as the date used for the first quarter), and divide that 

total by the number of dates on which a count was made. For this purpose, the same 

months must be used for each quarter (for example, January, April and July). 

 (3) Member Months Method or State Form Method: Under the PCORTF 

Rule, a health insurance issuer may use the “Member Months Method” or “State Form 

Method” by using data from the NAIC Supplemental Health Exhibit or similar data from 

other State forms. However, data from these forms may be out of date at the time of the 

annual enrollment count submission, and we believe that it is important that health 

insurance issuers achieve an accurate count of covered lives, particularly for individual 

market plans. We expect that the individual market will be subject to large increases in 

enrollment between 2014 and 2016. Therefore, we proposed a modified counting method 

based upon the ratio of covered lives per policy in the NAIC or State form. Specifically, 

we proposed that health insurance issuers using this method multiply the average number 

of policies for the first nine months of the applicable benefit year by the ratio of covered 

lives per policy calculated from the NAIC Supplemental Health Care Exhibit (or from a 

form filed with the issuer’s State of domicile for the most recent time period). Issuers 

would count the number of policies in the first nine months of the applicable benefit year 
CMS-9964-F 180 

by adding the total number of policies on one date in each quarter, or an equal number of 

dates for each quarter (or all dates for each quarter), and dividing the total by the number 

of dates on which a count was made.19 

Counting Methods for Self-Insured Group Health Plans: In §153.405(e), we 

proposed a number of methods that a self-insured group health plan may use to determine 

the average number of covered lives for purposes of the annual enrollment count. These 

methods mirror the methods permitted for sponsors of self-insured group health plans 

under the PCORTF Rule, modified slightly for timing with the reinsurance program, so 

that enrollment counts may be obtained on a more current basis. 

(1) Actual Count Method or Snapshot Count Method: We proposed that selfinsured plans, like health insurance issuers, may use the actual count method or snapshot 

count method as described above. 

(2) Snapshot Factor Method: Under the PCORTF Rule, a plan sponsor generally 

may use the “snapshot factor method” by adding the total number of lives covered on any 

date (or more dates if an equal number of dates are used for each quarter) during the same 

corresponding month in each quarter, and dividing that total by the number of dates on 

which a count was made, except that the number of lives covered on a date is calculated 

by adding the number of participants with self-only coverage on the date to the product of 

the number of participants with coverage other than self-only coverage on the date and a 

factor of 2.35. 20 For this purpose, the same months must be used for each quarter (for 

 

19For example, if a health insurance issuer indicated on the NAIC form for the most recent time period that 

it had 2,000 policies covering 4,500 covered lives, it would apply the ratio of 4,500 divided by 2,000, 

equaling 2.25 to the number of policies it had over the first three quarters of the applicable benefit year. If 

the issuer had an average of 2,300 policies in the three quarters of the applicable benefit year, it would 

report 2.25 multiplied by 2,300 as the number of covered lives for the purposes of reinsurance 

contributions. 

20The preamble to the proposed PCORTF Rule published on April 17, 2012 (77 FR 22691) explains that 

“the 2.35 dependency factor reflects that all participants with coverage other than self-only have coverage 

for themselves and some number of dependents. The Treasury Department and the IRS developed the 
CMS-9964-F 181 

example, January, April, July, and October). For reinsurance contributions purposes, a 

self-insured group health plan would use this PCORTF counting method over the first 

three quarters of the benefit year, provided that the corresponding dates for the second 

and third quarters of the benefit year must be within the same week of the quarter as the 

date selected for the first quarter. 

(3) Form 5500 Method: Under the PCORTF Rule, a plan sponsor may use the 

“Annual Return/Report of Employee Benefit Plan” filed with the Department of Labor 

(Form 5500) by using data from the Form 5500 for the last applicable plan year. We 

proposed that, for purposes of reinsurance contributions, a self-insured group health plan 

may also rely upon such data, even though the data may reflect enrollment in a previous 

benefit year. Our modeling of the 2014 health insurance marketplace, discussed in 

section III.C.6. of this final rule, suggests that enrollment in self-insured group health 

plans is less likely to fluctuate than enrollment in the individual market. Thus, we 

proposed that a self-insured group health plan may calculate the number of lives covered 

for a plan that offers only self-only coverage by adding the total participants covered at 

the beginning and end of the benefit year, as reported on the Form 5500, and dividing by 

two. Additionally, a self-insured group plan that offers self-only coverage and coverage 

other than self-only coverage may calculate the number of lives covered by adding the 

total participants covered at the beginning and the end of the benefit year, as reported on 

the Form 5500. 

Counting Methods for Plans with Self-insured and Insured Options: An employer 

may sponsor a group health plan that offers one or more coverage options that are selfinsured and one or more other coverage options that are insured. In §153.405(f), we 

 

factor, and other similar factors used in the regulations, in consultation with Treasury Department 

economists and in consultation with plan sponsors regarding the procedures they currently use for 

estimating the number of covered individuals.” 
CMS-9964-F 182 

proposed that to determine the number of covered lives of reinsurance contribution 

enrollees under a group health plan with both self-insured and insured options for a 

benefit year, a plan sponsor must use one of the methods specified in either 

§153.405(d)(1) or §153.405(d)(2) – the “actual count” method or “snapshot count” for 

health insurance issuers. 

Aggregation of self-insured group health plans and health insurance plans: We 

proposed in §153.405(g)(1) that if a plan sponsor maintains two or more group health 

plans or health insurance plans that collectively provide major medical coverage for the 

same covered lives, which we refer to as “multiple plans” for purposes of the reinsurance 

program, then these multiple plans must be treated as a single self-insured group health 

plan for purposes of calculating any reinsurance contribution amount due under 

paragraph (c) of this section. This approach would prevent the double counting of a 

covered life for major medical coverage offered across multiple plans, and prohibit plan 

sponsors that provide such major medical coverage from splitting the coverage into 

separate arrangements to avoid reinsurance contributions on the grounds that it does not 

offer major medical coverage. 

For purposes of §153.405(g)(1), the plan sponsor is responsible for paying 

reinsurance contributions. We proposed to define “plan sponsor” in proposed 

§153.405(g)(2) based on the definition of the term in the PCORTF Rule as: 

(A) The employer, in the case of a plan established or maintained by a single 

employer; 

 (B) The employee organization, in the case of a plan established or maintained by 

an employee organization; 

(C) The joint board of trustees, in the case of a multiemployer plan (as defined in 

section 414(f) of the Code); 
CMS-9964-F 183 

 (D) The committee, in the case of a multiple employer welfare arrangement; 

 (E) The cooperative or association that establishes or maintains a plan established 

or maintained by a rural electric cooperative or rural cooperative association (as such 

terms are defined in section 3(40)(B) of ERISA); 

 (F) The trustee, in the case of a plan established or maintained by a voluntary 

employees’ beneficiary association (meaning that the association is not merely serving as 

a funding vehicle for a plan that is established or maintained by an employer or other 

person); 

 (G) In the case of a plan, the plan sponsor of which is not described in (A) 

through (F) above, the person identified or designated by the terms of the document 

under which the plan is operated as the plan sponsor, provided that designation is made 

and consented to by no later than the date by which the count of covered lives for that 

benefit year is required to be provided. After that date, the designation for that benefit 

year may not be changed or revoked, and a person may be designated as the plan sponsor 

only if the person is one of the persons maintaining the plan (for example, one of the 

employers that is maintaining the plan with one or more other employers); or 

 (H) In the case of a plan the sponsor of which is not described in (A) through (F) 

above, and for which no identification or designation of a plan sponsor has been made 

under (G), each employer or employee organization that maintains the plan (with respect 

to employees of that employer or employee organization), and each board of trustees, 

cooperative or association that maintains the plan. 

Exceptions: We proposed two exceptions to this aggregation rule, in 

§153.405(g)(3). A plan sponsor is not required to include as part of a single group health 

plan as determined under paragraph §153.405(g)(1): (a) any group health plan that 

consists solely of excepted benefits within the meaning of section 2791(c) of the PHS Act 
CMS-9964-F 184 

(such as stand-alone dental or vision benefits); or (b) benefits related to prescription drug 

coverage. These exceptions were designed to reduce the burden on plan sponsors who 

have chosen to structure their coverage in that manner. 

Multiple Plans: In §153.405(g)(4), we proposed the counting requirements for 

multiple plans in which at least one of the plans is an insured plan (§153.405(g)(4)(i)), 

and multiple plans not including an insured plan (§153.405(g)(4)(ii)). First, we anticipate 

that a plan sponsor would generate or obtain a list of the participants in each plan and 

then analyze the lists to identify those participants that have major medical coverage 

across all the plans collectively. To calculate the average number of covered lives of 

reinsurance contribution enrollees across multiple plans, we proposed that a plan sponsor 

must use one of the methods applicable to health insurance plans or self-insured group 

health plans under §153.405(d) and §153.405(e), respectively, applied across the multiple 

plans as a whole. We also proposed to require reporting to HHS or the applicable 

reinsurance entity concerning multiple plans, as discussed in §153.405(g)(4). 

Additionally, it is important to note that the reinsurance program will operate on a benefit 

year basis, which is defined in §153.20 of the proposed rule (by reference to §155.20) as 

the calendar year. Therefore, the applicable counting methods, whether or not a 

particular plan operates on a calendar year basis, would not vary. 

 Multiple Group Health Plans Including an Insured Plan: When one or more of the 

multiple group health plans is an insured plan, we proposed that the actual count method 

for health insurance issuers in §153.405(d)(1) or the snapshot count method for health 

insurance issuers in §153.405(d)(2) must be used. We proposed to prohibit the use of the 

“Member Months Method” or “State Form Method” to count covered lives across 

multiple insured plans because those methods would not easily permit aggregate 

counting, since the identities of the covered lives are not available on the applicable 
CMS-9964-F 185 

forms. We proposed that the plan sponsor must determine and report, in a timeframe and 

manner established by HHS, to HHS (or the applicable reinsurance entity, if the multiple 

plans all consist solely of health insurance plans and the applicable reinsurance entity of a 

State is collecting contributions from health insurance issuers in such State): (1) the 

average number of covered lives calculated; (2) the counting method used; and (3) the 

names of the multiple plans being treated as a single group health plan as determined by 

the plan sponsor and reported to HHS. 

 Multiple Self-Insured Group Health Plans Not Including an Insured Plan: We 

described the counting provisions applicable to multiple self-insured group health plans 

(that is, when none of the plans is an insured plan) in proposed paragraph 

§153.405(g)(4)(ii). There are four counting methods available for self-insured plans 

which are set forth in §153.405(e)(1) through §153.405(e)(4). Section 153.405(e)(1) 

permits a plan sponsor to use the actual count method under §153.405(d)(1) or the 

snapshot count method under §153.405(d)(2) that are also available for insured plans. 

Paragraph (e)(2) permits an additional method (the snapshot factor method) for selfinsured plans. We proposed not to permit a plan sponsor to use the fourth method, the 

“Form 5500 Method” as described in proposed §153.405(e)(3) to count covered lives 

across multiple self-insured plans because that method would not easily permit aggregate 

counting, since the identities of the covered lives are not available on that form. Thus, 

we proposed three possible methods for multiple self-insured plans under paragraph 

§153.405(g)(4)(ii). We further proposed that the plan sponsor must report to HHS, in a 

timeframe and manner established by HHS: (1) the average number of covered lives 

calculated; (2) the counting method used; and (3) the names of the multiple plans being 

treated as a single group health plan as determined by the plan sponsor. 
CMS-9964-F 186 

 Consistency with PCORTF Rule Not Required: We proposed not to require 

consistency in counting methods between the count calculated under the PCORTF Rule 

and the count calculated for reinsurance purposes. In other words, we would allow a 

contributing entity to use, either the counting method corresponding to the method 

selected for the PCORTF Rule or a different counting method for reinsurance purposes. 

Because time periods and counting methods may differ, we would not require that a 

contributing entity submit consistent estimates of its covered lives in the return required 

in connection with the PCORTF Rule and the annual enrollment count required for 

reinsurance contributions (although these counts should be performed in accordance with 

the rules of the counting method chosen). However, when calculating the average 

number of covered lives across two or more plans under proposed paragraph (g) for 

purposes of reinsurance, the same counting method would be used across all of the 

multiple plans, because they would be treated as a single plan for counting purposes. 

We are finalizing these provisions as proposed, with the following modifications: 

we updated the footnotes that referenced the proposed PCORTF Rule with the citation for 

the final POCRTF Rule; we made a number of technical adjustments to the aggregation 

rules set forth in §153.405 – we provided plan sponsors with the option to count any 

coverage options within a single group health plan separately if the coverage options are 

treated as offering major medical coverage, we provided plan sponsors with the option 

not to aggregate group health plans for purposes of counting covered lives if each group 

health plan is treated as offering major medical coverage, and we included HRAs, HSAs, 

and FSAs in the categories of group health plans that are excluded from the counting 

rules. 

Comment: One commenter asked that HHS confirm that the count of covered 

lives for purposes of determining reinsurance contributions would be members enrolled 
CMS-9964-F 187 

in the first nine months of each year throughout the reinsurance program (and will not be 

calculated on a twelve-month basis for the second and third years of the reinsurance 

program). 

Response: We intend that the number of covered lives will be determined based 

on the first nine months of each of the 2014, 2015, and 2016 benefit years. 

Comment: Some commenters asked HHS to clarify how the counting methods 

apply to plans that have a non-calendar plan year. 

Response: The reinsurance program will operate on a calendar year basis. As set 

forth in §153.405, a contributing entity will determine its enrollment count by counting 

the average number of covered lives of reinsurance contribution enrollees during the first 

nine months of the benefit year (that is, calendar year) for all of the contributing entity’s 

plans and coverage that must pay reinsurance contributions. 

Comment: Several commenters stated that when a TPA or ASO contractor is 

submitting reinsurance contributions on behalf of a self-insured group health plan, the 

TPA or ASO contractor should be permitted to count members consistent with the 

methodology they use for fully insured lives. 

Response: Many of the counting methods available to fully insured plans are also 

available to self-insured plans. If a self-insured plan’s TPA or ASO contractor is an 

issuer that can easily perform such a count, such a choice may be the most efficient. 

However, this final rule does not require one specific counting method, and provides a 

self-insured plan, which is responsible for reporting the enrollment count and ensuring 

the payment of the reinsurance contribution, with the flexibility to use the counting 

method that it chooses. 

Comment: Several commenters generally appreciated the use of PCORTF 

counting methods. Some commenters suggested that HHS direct plan sponsors or issuers 
CMS-9964-F 188 

to count enrollment on the last day of each month and calculate membership based on an 

average across all months. 

Response: In order to relieve the administrative burden of submitting the annual 

enrollment count, HHS has incorporated, with slight modifications for timing, the 

counting methods set forth in the PCORTF Rule. Allowing contributing entities to 

choose from a variety of counting methods gives contributing entities the flexibility to 

choose a counting method that works best for that plan or coverage. 

Comment: Numerous commenters stated that it is unreasonable to believe that 

employers are unable to identify the States in which their employees reside or work. 

Several commenters supported HHS’s proposal to eliminate the need for employers to 

allocate employees by State of residence. 

Response: State-based allocation of enrollees in a contributing entity’s plans or 

coverage is not necessary because reinsurance contributions will be collected by HHS 

and placed into a national pool from which reinsurance payments will be made in an 

efficient, fair, and accurate manner where they are needed most. We believe that this will 

be most effective in helping stabilize premiums nationally. 

Comment: One commenter asked HHS to revise the snapshot counting methods 

so that issuers would be permitted to use the same date in the first month in each quarter 

for counting members, in addition to being able to use any date within the same week of 

the quarter. 

Response: Under the “snapshot count method,” a health insurance issuer or selfinsured group health plan would add the totals of covered lives on a date (or more dates if 

an equal number of dates are used for each quarter) during the same corresponding month 

in each of the first three quarters of the benefit year (provided that the dates used for the 

second and third quarters must fall within the same week of the quarter as the date used 
CMS-9964-F 189 

for the first quarter), and divide that total by the number of dates on which a count was 

made. For this purpose, the same months must be used for each quarter (for example, 

January, April and July). Under the “snapshot factor method,” a self-insured group 

health plan would use this PCORTF counting method over the first three quarters of the 

benefit year, provided that for this purpose, the corresponding dates for the second and 

third quarters of the benefit year must fall within the same week of the quarter as the date 

selected for the first quarter. We believe that those counting methods provide sufficient 

flexibility, and intend to keep these methods consistent with the PCORTF Rule. 

Comment: One commenter asked that HHS permit contributing entities to submit 

enrollment counts and contributions electronically. One commenter encouraged HHS to 

permit contributing entities to submit reinsurance contributions electronically in a manner 

similar to that used for submissions of collections under the PCORTF Rule. 

Response: HHS will provide details on the submission of enrollment counts and 

contributions in future guidance. 

Comment: One commenter asked that HHS give contributing entities flexibility 

in correcting errors when making reinsurance contributions. 

Response: Given the complexities related to the first year of the reinsurance 

program, HHS is aware that operational difficulties may arise. We intend to work closely 

with contributing entities in establishing the operational processes for the submission of 

enrollment counts and contributions. 

Comment: One commenter suggested that HHS clarify that the enrollee counting 

methods exclude plan participants who do not have major medical coverage. 

Response: As set forth in §153.400(a)(1)(i), reinsurance contributions are not 

required for a plan or health insurance coverage that is not major medical coverage. 

Consequently, enrollees in those plans are not required to be included in a count of 
CMS-9964-F 190 

covered lives for purposes of reinsurance contributions unless required under §153.405(f) 

or (g). 

Comment: One commenter stated that in order to apply the enrollee counting 

rules accurately, an employer must be able to determine in what circumstances different 

health coverage options constitute a single group health plan. The commenter suggested 

that for the purposes of reinsurance, group health plans be identified by reference to the 

COBRA rules because they are widely used. Under the COBRA rules, group health 

arrangements maintained by the same employer generally are treated as a single group 

health plan unless the instruments governing the arrangements designate them as separate 

plans and the employer operates them as separate plans. 

Response: Section 1301(b)(3) of the Affordable Care Act defines “group health 

plan” by reference to section 2791(a) of the Public Health Service Act, which states that a 

group health plan is an employee welfare benefit plan (as defined in section 3(1) of 

ERISA) to the extent that the plan provides medical care (as defined in section 

2791(a)(2)) to employees or their dependents (as defined under the terms of the plan), 

directly or through insurance, reimbursement, or otherwise. 

However, we note that the IRS has promulgated COBRA regulations for 

determining the number of group health plans an employer maintains. 26 CFR 

54.4980B-2, QA 6 (2001)21 states, in relevant part, that except as otherwise provided in 

the regulation, all health care benefits provided by a corporation, partnership or other 

entity or trade or business shall constitute one group health plan unless it is clear from the 

instruments governing the arrangement(s) that the benefits are being provided under 

separate plans, and the arrangement(s) are operated under such instruments as separate 

 

21 See http://www.gpo.gov/fdsys/pkg/CFR-2011-title26-vol17/pdf/CFR-2011-title26-vol17-sec54-4980B2.pdf. 
CMS-9964-F 191 

plans. The COBRA regulations include an anti-abuse rule which states that if a principal 

purpose of establishing separate plans is to evade any requirement of law, the separate 

plans will be considered a single plan to the extent necessary to prevent the evasion. We 

clarify that for purposes of counting covered lives for reinsurance contributions, an 

employer may count its group health plans in accordance with these regulations, subject 

to the anti-abuse rule. 

Comment: One commenter suggested that HHS revise proposed §153.405(f) to 

permit employers to disaggregate a group health plan that offers both self-insured and 

insured coverage options to different groups, and to permit an issuer with respect to one 

group health plan that contains multiple insured options written by more than one issuer 

to treat the insured options as separate group health plans for purposes of the counting 

rules. The commenter stated that §153.405(f) as currently drafted is not consistent with 

current plan sponsor and issuer practices. 

Response: We are amending §153.405(f) to permit such disaggregation, so long 

as each coverage option is treated as major medical coverage, except if a coverage option 

consists solely of excepted benefits as defined by section 2791(c) of the PHS Act, only 

provides benefits related to prescription drugs, or is an HRA, HSA, or FSA. This 

amendment is designed to allow contributing entities flexibility in performing enrollment 

counts, while collecting reinsurance contributions for all enrollees with major medical 

coverage, without “double-counting.” 

Comment: One commenter suggested that the plan aggregation rules be 

permissive rather than mandatory, and that it should apply only to overlapping 

simultaneous coverage. 

Response: We agree that the plan aggregation rules should only apply to 

overlapping, simultaneous coverage. For the reasons set forth in the prior response, we 
CMS-9964-F 192 

are amending §153.405(f) and (g) to permit disaggregation, so long as each coverage 

option or separate group health plan is treated as major medical coverage, except if a 

coverage option or separate group health plan consists solely of excepted benefits as 

defined by section 2791(c) of the PHS Act, only provides benefits related to prescription 

drugs, or is a HRA, HSA, or FSA. 

Comment: One commenter suggested that the plan aggregation rules set forth in 

§153.405(g) should not apply to any plan or health insurance coverage that is excluded 

from making reinsurance contributions. 

Response: We have clarified that the plan aggregation rules do not apply to a 

plan or health insurance coverage that consists solely of excepted benefits as defined by 

section 2791(c) of the PHS Act, only provides benefits related to prescription drugs, or is 

an HRA, HSA, or FSA. However, we decline to exempt other plans or coverage 

excluded from making reinsurance contributions from the aggregation rules because the 

aggregation rules are designed in part to ensure reinsurance contribution collections from 

arrangements involving multiple plans that collectively provide major medical coverage, 

even when each component plan does not. Thus, a plan providing only hospital benefits 

might have to be aggregated with a plan that provides medical coverage other than 

hospital benefits, even though the hospital benefit plan on its own would be excluded 

from making reinsurance contributions because it is not major medical coverage. 

b. State Use of Contributions Attributed to Administrative Expenses 

In the proposed rule, HHS provided guidance on three restrictions that we intend 

to propose on the use of reinsurance contributions for administrative expenses, to permit 

States operating the reinsurance program to accurately estimate the cost of administrative 

expenses. First, we intend to apply the prohibitions described in section 1311(d)(5)(B) of 

the Affordable Care Act to the reinsurance program which prohibit an Exchange from 
CMS-9964-F 193 

using funds intended for administrative and operational expenses of the Exchange for 

such purposes as staff retreats, promotional giveaways, and excessive executive 

compensation. Second, we intend to propose that reinsurance funds intended for 

administrative expenses may not be used for any expense not necessary to the operation 

or administration of the reinsurance program. Third, we intend to propose that an 

applicable reinsurance entity must allocate any shared, indirect, or overhead costs 

between reinsurance-related and other State expenses based on generally accepted 

accounting principles, consistently applied. We received no comments on this guidance. 

We intend to issue future rulemaking including these provisions. 

5. Eligibility for Reinsurance Payments under the Health Insurance Market Reform 

Rules 

We proposed to add §153.234 to clarify that, under either the uniform reinsurance 

payment parameters or the State supplemental reinsurance payment parameters, a 

reinsurance-eligible plan’s covered claims costs for an enrollee incurred prior to the 

application of 2014 market reform rules – §147.102 (fair health insurance premiums), 

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

provisions at §147.145), §147.106 (guaranteed renewability of coverage, subject to the 

student health insurance provisions at §147.145), §156.80 (single risk pool), and subpart 

B of part 156 (essential health benefits package) – would not count toward either the 

uniform or State supplemental attachment points, reinsurance caps, or coinsurance rates. 

In other words, those claims would not be eligible for reinsurance payments. We noted 

in the preamble of the proposed rule that, unlike plans subject to the 2014 market reform 

rules under the Affordable Care Act, plans not subject to these 2014 market reforms rules 

may use several mechanisms to avoid claims costs for newly insured individuals. (We 

also noted that student health plan eligibility would be subject to the modified guaranteed 
CMS-9964-F 194 

availability and guaranteed issue requirements only, to the extent that they apply, as set 

forth in §147.145, and we would require that the student health plans meet those modified 

requirements to be eligible for reinsurance payments.) The market reform rules will be 

effective for the individual market for policy years beginning on or after January 1, 2014. 

As a result, policies that are issued in 2013 will be subject to these rules at the time of 

renewal in 2014, and therefore, become eligible for reinsurance payments at the time of 

renewal in 2014. 

We believe that providing reinsurance payments only to those reinsurance-eligible 

plans that are subject to the 2014 market reform rules better reflects the reinsurance 

program’s purpose of mitigating premium adjustments to account for risk from newly 

insured individuals. We also proposed that State-operated reinsurance programs 

similarly limit eligibility for reinsurance payments, although we recognize that this policy 

contrasts with the approach proposed for State-operated risk adjustment programs, under 

which States are permitted to choose to risk-adjust plans not subject to the 2014 market 

reform rules. Because some States may have enacted State-specific rating and market 

reforms that they believe would justify the inclusion of these plans in risk adjustment 

before their renewal dates, permitting State flexibility on the applicability of risk 

adjustment to plans not subject to the 2014 market reform rules furthers the goals of the 

risk adjustment program. However, we believe that State flexibility for eligibility for 

reinsurance payments does not further the goal of the reinsurance program. Last, we 

proposed to operate the reinsurance program on a calendar year basis, which we believe 

to be most feasible from policy and administrative standpoints. For the reasons 

described in the proposed rule and considering the comments received, we are finalizing 

the provisions proposed in §153.234. 

Comment: Commenters generally supported the operation of the reinsurance 
CMS-9964-F 195 

program on a calendar year basis. Commenters also requested that HHS use a calendar 

year approach versus a plan year approach for administrative simplicity. A commenter 

also requested that HHS use the term “calendar year” instead of “benefit year” to avoid 

confusion among issuers. 

Response: We use the term “benefit year” throughout this final rule instead of 

“calendar year” because, under §155.20 of the Exchange Establishment Rule, “benefit 

year” is defined as a calendar year for which a health plan provides coverage for health 

benefits. For consistency, HHS will continue to use the term “benefit year.” 

6. Reinsurance Payment Parameters 

 As described in the Premium Stabilization Rule, reinsurance payments to eligible 

issuers would be made for a portion of an enrollee’s claims costs paid by the issuer that 

exceeds an attachment point, subject to a coinsurance rate and a reinsurance cap. The 

coinsurance rate, attachment point, and reinsurance cap are the reinsurance “payment 

parameters.” We proposed uniform reinsurance payment parameters that would be 

applicable to the reinsurance program for each State, whether or not operated by a State. 

We believe that using uniform payment parameters will result in equitable access to the 

reinsurance funds across States and will further the goal of premium stabilization across 

all States by disbursing reinsurance contributions where they are most needed. 

We noted in the proposed rule that the primary purpose of the transitional 

reinsurance program is to stabilize premiums by setting the reinsurance payment 

parameters to achieve the greatest impact on rate setting, and therefore, premiums, 

through reductions in plan risk, while complementing the current commercial reinsurance 

market. The reinsurance program is designed to protect against issuers’ potential 

perceived need to raise premiums due to the implementation of the 2014 market reform 

rules, specifically, guaranteed availability. HHS expects that any potential new high-cost 
CMS-9964-F 196 

claims from newly insured individuals would be balanced out by low-cost claims from 

many newly insured individuals who enter the individual market as a result of the 

availability of premium tax credits, more affordable coverage, the minimum coverage 

provision, and greater transparency and competition in the market. To that end, the 

reinsurance program is designed to alleviate the concern of new high-cost claims from 

newly insured individuals. 

 We proposed that the 2014 uniform reinsurance payment parameters be 

established at: (a) an attachment point of $60,000, when reinsurance payments would 

begin, (b) a national reinsurance cap of $250,000, when the reinsurance program stops 

paying claims for a high-cost individual, and (c) a uniform coinsurance rate of 80 percent, 

which is the reimbursement percentage applied to the issuer’s aggregated paid claims 

amounts on behalf of an enrollee while giving issuers an incentive to contain costs 

between the attachment point and reinsurance cap. These three proposed payment 

parameters would help offset high-cost enrollees. The parameters would not interfere 

with traditional commercial reinsurance, which typically has attachment points in the 

$250,000 range. We estimate that these uniform payment parameters will result in total 

requests for reinsurance payments of approximately $10 billion in the 2014 benefit year. 

We intend to continue to monitor individual market enrollment and claims patterns to 

appropriately disburse reinsurance payments throughout each of the benefit years during 

which the reinsurance program is in effect. 

We are finalizing the proposed payment parameters, and the associated payment 

provisions proposed in §153.230(a) through §153.230(c), with a technical revision in 

§153.230(a) changing “non-grandfathered individual market plan” to “reinsuranceeligible plan” and clarifying in §153.230(c) that national reinsurance payments are 

calculated as the product of the national coinsurance rate multiplied by the health 
CMS-9964-F 197 

insurance issuer’s claims costs for an individual enrollee’s covered benefits that the 

health insurance issuer incurs in the applicable benefit year. 

Comment: Several commenters supported the use of uniform payment 

parameters. Many commenters, however, suggested that States should be able to set their 

own payment parameters using State contributions to better target their local markets. 

Several commenters sought State flexibility and autonomy, with some commenters 

stating that they had spent substantial time and money preparing a State-operated 

program specific to the State. One commenter stated that uniform payment parameters 

and the national allocation of reinsurance payments will not ensure issuers of the 

aggregate funding available to pay claims in their respective markets until well after 

premium setting decisions for the next benefit year must be made. 

Response: We believe that these uniform payment parameters best meet the 

reinsurance program’s goals to promote premium stabilization and market stability in all 

States while providing plans incentives to continue effective management of enrollee 

costs. We aim to administer the transitional reinsurance program in an efficient, fair, and 

accurate manner so that reinsurance funds are allocated equitably and can maximize 

downward pressure on premiums. To maximize the program’s impact on premiums, 

uniform reinsurance payment parameters would allow the allocation of reinsurance 

contributions where they are most needed, to reimburse issuers with high costs in the 

individual market in 2014, 2015 and 2016. This policy is consistent with the statutory 

goals of the reinsurance program – to stabilize premiums in the initial years of Exchange 

implementation and market reform. Additionally, as set forth in §153.240(b)(2), a State, 

or HHS on behalf of the State, will provide each reinsurance-eligible plan the expected 

requests for reinsurance payments made under the national payment parameters and State 

supplemental parameters, if applicable. These reports can provide the information 
CMS-9964-F 198 

necessary for issuers to set rates in subsequent benefit years. 

Comment: Several commenters requested more detail on the methodology used 

to calculate the uniform reinsurance payment parameters. One commenter requested that 

HHS detail the methodology used to determine the $60,000 attachment point. Another 

commenter requested that HHS raise the reinsurance cap to $500,000 to account for 

attachment points in commercial reinsurance higher than $250,000. Alternately, one 

commenter suggested that HHS use a first-dollar approach with no attachment point and 

a lower coinsurance rate to better incentivize issuers to control costs from the beginning 

of an individual’s care. Several commenters suggested that the proposed contribution 

rate is insufficient to fully fund the proposed uniform reinsurance payment parameters, 

and asked HHS to set the uniform payment parameters such that expected payments 

would be fully funded. 

Response: As described in the proposed rule and earlier in this preamble, we used 

the ACAHIM, which estimates market enrollment incorporating the effects of State and 

Federal policy choices and accounting for the behavior of individuals and employers. 

These assumptions and projections led to our estimate of the 2014 individual and 

employer-sponsored insurance markets and expenditures, and permitted us to estimate 

uniform payment parameters that will lead to requests for reinsurance payments of 

approximately $10 billion. 

Comment: One commenter asked HHS for guidance on how to account for 

quality improvement costs and attribute those to an individual, though they are not claims 

costs. Another commenter suggested that HHS use an alternate method for reinsurance 

payments, such as a fixed fee schedule or a percentage of Medicare reimbursement rates, 

instead of claims costs. 
CMS-9964-F 199 

Response: HHS believes that using claims costs most appropriately reimburses 

issuers for costs related to higher risk individuals and will most effectively stabilize 

premiums. 

Comment: One commenter suggested that HHS synchronize reinsurance 

payments with rules governing claims responsibility, such that if a patient changes 

coverage over the course of a single claim, the issuer paying the claim should be eligible 

for reinsurance payments. 

Response: We believe that using the date of discharge for claims payments 

effectively synchronizes reinsurance payments with claims responsibility. 

7. Uniform Adjustment to Reinsurance Payments 

We proposed in §153.230(d) that HHS would adjust reinsurance payments by a 

uniform, pro rata adjustment rate if HHS determines that the total requests for reinsurance 

payments under the reinsurance payment parameters will exceed the reinsurance 

contributions collected under the national contribution rate during a given benefit year. 

In the preamble to the proposed rule, we stated that the total amount of contributions 

considered for this purpose would include any contributions collected but unused under 

the national contribution rate during any previous benefit year. We are finalizing 

§153.230(d) as proposed. 

Comment: Several commenters supported the uniform adjustment to reinsurance 

payments in the event that total payment requests exceed reinsurance contributions. One 

commenter objected to the lower coinsurance rate that will effectively result from a 

uniform adjustment to payments, stating that this could lead to additional uncertainty for 

issuers. 

Response: We developed the national contribution rate and uniform reinsurance 

payment parameters using enrollment and expenditure estimates for 2014, based on the 
CMS-9964-F 200 

ACAHIM. We recognize that requests for reinsurance payments may be greater than 

predicted, or that collections may be lower than predicted. However, we believe that a 

uniform adjustment to payments is the most equitable approach in these situations. 

Comment: We received a comment seeking clarification on when, if necessary, 

the uniform adjustment to national reinsurance payments set forth in §153.230(d) would 

occur, and how HHS will disburse reinsurance funds to States operating reinsurance, in 

order for the States to make reinsurance payments. 

Response: As described in §153.235, HHS plans to allocate and disburse to each 

State operating reinsurance (and will distribute directly to issuers if HHS is operating 

reinsurance on behalf of a State), reinsurance contributions collected from contributing 

entities under the national contribution rate for reinsurance payments. The disbursed 

funds would be based on the total requests for reinsurance payments made under the 

national reinsurance payment parameters by all States and submitted under §153.410, net 

of any adjustment under §153.230(d). Thus, prior to the disbursement, HHS would 

uniformly adjust reinsurance payments, if applicable, following the collection of 

contributions and after the receipt of all claims for reinsurance payments, which must be 

submitted by April 30 of the year following the applicable benefit year. Following that 

adjustment, HHS will make reinsurance payments in States where HHS is operating 

reinsurance on behalf of the State, and will distribute funds to States operating 

reinsurance. 

8. Supplemental State Reinsurance Payment Parameters 

In §153.232(a), we proposed that a State establishing the reinsurance program 

may modify the uniform reinsurance payment parameters only by establishing State 

supplemental payment parameters that cover an issuer’s claims costs beyond the uniform 

reinsurance payment parameters. We further proposed that reinsurance payments under 
CMS-9964-F 201 

these State supplemental payments parameters be made only with the additional funds 

that the State collects for reinsurance payments under §153.220(d)(1)(ii) or State funds 

applied to the reinsurance program under §153.220(d)(2) (proposed as (d)(3) in the 

proposed rule). We stated our belief that this approach would not prohibit States from 

collecting additional amounts for reinsurance payments as provided for under section 

1341(b)(3)(B) of the Affordable Care Act, while allowing issuers in all States access to 

the reinsurance payments from the contributions collected under the national reinsurance 

contribution rate. 

We proposed in §153.232(a) that a State choosing to establish State supplemental 

reinsurance payment parameters must set those parameters by adjusting the uniform 

reinsurance payment parameters in one or more of the following ways: (1) decreasing the 

national attachment point; (2) increasing the national reinsurance cap; or (3) increasing 

the national coinsurance rate. We also proposed that a State may not alter the uniform 

reinsurance payment parameters in a manner that could result in reduced reinsurance 

payments. 

To provide issuers with greater certainty for premium rate setting purposes, we 

proposed that a State must ensure that any additional funds for reinsurance payments it 

collects under §153.220(d)(1)(ii) or State funds under §153.220(d)(2) (proposed as (d)(3) 

in the proposed rule), as applicable, are reasonably calculated to cover additional 

reinsurance payments projected to be made under the State’s supplemental reinsurance 

payment parameters for a given benefit year. In §153.232(b), we proposed that 

contributions collected under §153.220(d)(1)(ii) or additional funds collected under 

§153.220(d)(2) (proposed as (d)(3) in the proposed rule), as applicable, must be applied 

toward requests for reinsurance payments made under the State supplemental reinsurance 

payments parameters for each benefit year commencing in 2014 and ending in 2016. 
CMS-9964-F 202 

We also proposed in §153.232(c) that a reinsurance-eligible plan becomes eligible 

for reinsurance payments under a State’s supplemental reinsurance parameters if its 

incurred claims costs for an individual enrollee’s covered benefits during a benefit year 

exceed: (1) the supplemental State attachment point; (2) the national reinsurance cap; or 

(3) the national attachment point, if the State has established a State supplemental 

coinsurance rate. This would allow reinsurance payments made under the State 

supplemental payment parameters to “wrap around” the uniform reinsurance payment 

parameters so that the State could apply any additional contributions it collects under 

proposed §153.220(d) towards reinsurance payments beyond the uniform reinsurance 

payment parameters. We explained in the proposed rule that this approach permits HHS 

to distribute funds under the uniform payment formula to where they are needed most, 

while allowing States that elect to operate reinsurance the flexibility to supplement 

nationally calculated reinsurance payments. As set forth in §153.240(b), States would be 

required to separate in their reporting to issuers the reinsurance payments paid under the 

uniform reinsurance payment parameters and State supplemental reinsurance payment 

parameters. 

To ensure that reinsurance payments under State supplemental payment 

parameters do not overlap with the uniform reinsurance payment parameters, we 

proposed the method for calculating State supplemental reinsurance payments. 

Specifically, we proposed in §153.232(d) that supplemental reinsurance payments with 

respect to a health insurance issuer’s claims costs for an individual enrollee’s covered 

benefits must be calculated by taking the sum of: (1) the product of such claims costs 

between the supplemental State attachment point and the national attachment point, 

multiplied by the national coinsurance rate (or applicable State supplemental coinsurance 

rate); (2) the product of such claims costs between the national reinsurance cap and the 
CMS-9964-F 203 

supplemental State reinsurance cap, multiplied by the national coinsurance rate (or 

applicable State supplemental coinsurance rate); and (3) the product of such claims costs 

between the national attachment point and the national reinsurance cap, multiplied by the 

difference between the State supplemental coinsurance rate and the national coinsurance 

rate. 

Similar to payment calculations under the uniform reinsurance payment 

parameters, we proposed in §153.232(e) that if all reinsurance payments requests under 

the State supplemental reinsurance parameters calculated in a State for a benefit year will 

exceed all the additional funds a State collects for reinsurance payments under 

§153.220(d)(1)(ii) or State funds under §153.220(d)(2) (proposed as (d)(3) in the 

proposed rule) as applicable, the State must determine a uniform pro rata adjustment to 

be applied to all such requests for reinsurance payments in the State. We proposed that 

each applicable reinsurance entity in the State must reduce all requests for reinsurance 

payments under the State supplemental reinsurance payment parameters for the 

applicable benefit year by that adjustment. 

Finally, in §153.232(f), we proposed that a State must ensure that reinsurance 

payments made to issuers under the State supplemental reinsurance payment parameters 

do not exceed the issuer’s total paid amount for the reinsurance-eligible claims, and any 

remaining additional funds collected under §153.220(d)(1)(ii) must be used for 

reinsurance payments under the State supplemental parameters in subsequent benefit 

years. 

We are finalizing these provisions as proposed, with a technical correction 

changing “non-grandfathered individual market plan” to “reinsurance-eligible plan” and 

clarifying that the incurred claims costs for an individual enrollee’s covered benefits are 

those incurred in the applicable benefit year in §153.232(c). We are clarifying in 
CMS-9964-F 204 

§153.232(d) that reinsurance payments will be calculated with respect to an issuer’s 

incurred claims costs for an individual enrollee’s covered benefits incurred in the 

applicable benefit year. 

Comment: Several commenters urged HHS to allow additional State flexibility 

for the State supplemental reinsurance payment parameters under the reinsurance 

program. In addition, several commenters requested flexibility for a State to design a 

program that would cover any shortfall in payments under the reinsurance program’s 

uniform parameters. 

Response: One of HHS’s goals is to provide the greatest amount of flexibility to 

States while ensuring consistency with the policy goals of the reinsurance program. 

Therefore, under these final rules, we have provided States with the flexibility to increase 

the coinsurance rate on reinsurance-eligible claims, which would have the effect of 

increasing payouts under the uniform parameters. Additionally, nothing in these final 

rules prevents a State from establishing a separate program that would operate alongside 

the reinsurance program established under section 1341 of the Affordable Care Act. A 

State establishing such a program is free to implement the collections methodology and 

payment formula of its own choosing. 

9. Allocation and Distribution of Reinsurance Contributions 

Section 153.220(d) of the Premium Stabilization Rule provided that HHS would 

distribute reinsurance contributions collected for reinsurance payments from a State to 

the applicable reinsurance entity for that State. In the proposed rule, we proposed to 

replace this section with §153.235(a), which provided that HHS would allocate and 

distribute the reinsurance contributions collected under the national contribution rate 

based on the need for reinsurance payments, regardless of where the contributions are 

collected. HHS would disburse all contributions collected under the national contribution 
CMS-9964-F 205 

rate from all States for the applicable benefit year, based on all available contributions 

and the aggregate requests for reinsurance payments, net of the pro rata adjustment, if 

any. We believe that this method of disbursing reinsurance contributions will allow the 

reinsurance program to equitably stabilize premiums across the nation, and permit HHS 

to direct reinsurance funds based on the need for reinsurance payments. Consistent with 

this proposal, we proposed to amend §153.220(a) to clarify that even if a State establishes 

the reinsurance program, HHS would directly collect the reinsurance contributions for 

enrollees who reside in that State from both health insurance issuers and self-insured 

group health plans. 

We are finalizing the provisions as proposed in §153.220(a). We are revising 

§153.235(a) to provide that HHS will allocate and disburse to each State operating 

reinsurance (and will distribute directly to issuers if HHS is operating reinsurance on 

behalf of a State), reinsurance contributions collected from contributing entities under the 

national contribution rate for reinsurance payments. The disbursed funds would be based 

on the total requests for reinsurance payments made under the national reinsurance 

payment parameters in all States and submitted under §153.410, net of any adjustment 

under §153.230(d). We are amending §153.410(a) to clarify that an issuer of a 

reinsurance-eligible plan may make requests for reinsurance payments when an issuer’s 

claims costs for an enrollee of that reinsurance-eligible plan has met the criteria for 

reinsurance payments in 45 CFR subpart B and this final rule and where applicable the 

State notice of benefit and payment parameters. 

Comment: Several commenters stated that the proposed allocation of reinsurance 

payments would penalize States that effectively and efficiently manage health care costs 

and have fewer uninsured individuals. Commenters stated that individual markets are 

largely State-based and that reinsurance works in conjunction with risk adjustment, which 
CMS-9964-F 206 

is also a State-based program. Commenters also stated that disbursing reinsurance 

payments under uniform reinsurance payment parameters in all States is contrary to the 

intent of the statute for a State-based program. We also received comments stating that 

the implementation of the reinsurance program as proposed would increase the burden for 

States that wish to supplement the reinsurance program. One commenter suggested that 

reinsurance payment allocations in accordance with need could discourage issuers from 

maintaining grandfathered status in order to compete for funds, thereby making it 

difficult for enrollees to keep their current plan. 

Response: To maximize the reinsurance program’s impact on premium rates, an 

allocation of reinsurance payments under uniform payment parameters allows for HHS to 

disburse reinsurance contributions where they are most needed, to reimburse issuers with 

high cost claims in the individual market in 2014, 2015 and 2016. This policy is 

consistent with the statutory goals of the reinsurance program – to stabilize premiums in 

the initial years of Exchange implementation and market reform. Considering the 

comments received, we are finalizing these provisions as proposed. 

Comment: Several commenters asked that HHS refund any unused contributions 

collected or use those funds to lower the contribution rate for subsequent benefit years. 

Response: The purpose of the reinsurance program is to stabilize premiums in the 

individual market beginning in 2014. If any funds remain after all requests for 

reinsurance payments are made for any benefit year, as required by the statute, HHS 

plans to use those funds for reinsurance payments in subsequent benefit years, furthering 

the goal of section 1341 of the Affordable Care Act. 

Comment: Several commenters supported HHS’s proposed annual payments 

schedule coupled with quarterly reporting estimates. One commenter requested 

clarification on whether reinsurance payments would be issued on a rolling basis 
CMS-9964-F 207 

throughout the year, or once annually. Several commenters requested that HHS 

administer reinsurance payments throughout the year instead of annually to better 

accommodate issuers’ cash flow. 

Response: Because we are seeking to stabilize premiums nationally, an annual 

disbursement of payments preserves fairness in making reinsurance payments and allows 

for HHS to appropriately adjust payments, if needed. To better address administrative 

and operational issues, we proposed to make an annual reinsurance payment for each 

benefit year. If we were to collect and make reinsurance payments throughout the benefit 

year, we would likely be required to hold the disbursement of a large portion of the 

reinsurance payments until the end of the benefit year to ensure an equitable allocation of 

payments. 

Comment: Several commenters sought clarification on the process by which 

HHS plans to ensure that reinsurance funds will be used to reduce and stabilize premiums 

in the individual market. 

Response: We expect that an issuer that receives reinsurance payments will 

reduce premiums in the individual market accordingly. We note that a State, or HHS 

operating reinsurance on behalf of the State, will provide issuers the estimated amount of 

the reinsurance payments throughout a benefit year so that those issuers can account for 

reinsurance payments in developing their premiums for subsequent benefit years. We 

note that under the single risk pool requirement of the final Market Reform Rule 

(§156.80), issuers of non-grandfathered individual market plans must adjust their index 

rate based on the total expected market-wide payments and charges under the risk 

adjustment and reinsurance programs in the State, and based on Exchange user fees. 

Comment: Several commenters asked HHS how excess reinsurance funds would 

be distributed after 2016. 
CMS-9964-F 208 

Response: HHS will provide details regarding this issue in future rulemaking and 

guidance. 

10. Reinsurance Data Collection Standards 

a. Data Collection Standards for Reinsurance Payments 

 Section 153.240(a) of the Premium Stabilization Rule directs a State’s applicable 

reinsurance entity to collect data needed to determine reinsurance payments as described 

in §153.230. We proposed to amend §153.240(a) by adding subparagraph (1) which 

would direct a State to ensure that its applicable reinsurance entity either collects or is 

provided access to the data necessary to determine reinsurance payments from an issuer 

of a reinsurance-eligible plan. When HHS operates reinsurance on behalf of a State, 

HHS would utilize the same distributed data collection approach proposed for risk 

adjustment. This proposed amendment was meant to clarify that an applicable 

reinsurance entity may either use a distributed data collection approach for its reinsurance 

program or directly collect privacy-protected data from issuers to determine an issuer’s 

reinsurance payments. The distributed data collection approach would not involve the 

direct collection of data; instead, HHS or the State would access data on issuers’ secure 

servers. 

 We also proposed to amend §153.240(a) by adding subparagraph (3), directing 

States to provide a process through which an issuer of a reinsurance-eligible plan that 

does not generate individual enrollee claims in the normal course of business, such as a 

capitated plan, may request reinsurance payments or submit data to be considered for 

reinsurance payments based on estimated costs of encounters for the plan, in accordance 

with the requirements of §153.410. We proposed to direct States to ensure that such 

requests (or a subset of such requests) are subject to, to the extent required by the State, a 

data validation program. A State would have the flexibility to design a data validation 
CMS-9964-F 209 

program that meets its adopted methodology and State-specific circumstances. This 

proposed amendment would enable certain reinsurance-eligible plans, such as staff-model 

health maintenance organizations, that do not generate claims with associated costs in the 

normal course of business to provide data to request and receive reinsurance payments. 

When HHS operates reinsurance on behalf of a State, issuers of capitated plans 

would generate claims for encounters, and derive costs for those claims when submitting 

requests for reinsurance payments (or submitting data to be considered for reinsurance 

payments). It is our understanding that many capitated plans currently use some form of 

encounter data pricing methodology to derive claims, often by imputing an amount based 

upon the Medicare fee-for-service equivalent price or the usual, customary, and 

reasonable equivalent that would have been paid for the service in the applicable market. 

As set forth in §153.710(c), a capitated plan would be required to use its principal 

internal methodology for pricing encounters for reinsurance purposes, such as the 

methodology in use for other State or Federal programs (for example, a methodology 

used for the Medicare Advantage market). If a capitated plan has no such methodology, 

or has an incomplete methodology, it would be permitted to implement a methodology or 

supplement the methodology in a manner that yields derived claims that are reasonable in 

light of the specific market that the plan is serving. Capitated plans, like all plans that 

submit reinsurance payment requests (or data to be considered for reinsurance payments) 

in the HHS-operated reinsurance program, would be subject to validation and audit. 

Because capitated plans already use pricing methodologies, we believe this proposed 

policy would permit capitated plans to participate in the reinsurance program with a 

minimal increase in administrative burden. We have responded to the comments 

received regarding capitated plans in section III.G. of this final rule, where capitated 

plans are discussed in §153.710(c). We are finalizing these provisions as proposed. 
CMS-9964-F 210 

b. Notification of Reinsurance Payments 

We proposed to add §153.240(b)(1), which would direct a State, or HHS on 

behalf of the State, to notify issuers of the total amount of reinsurance payments that will 

be made no later than June 30 of the year following the applicable benefit year. This 

corresponds with the date on which a State or HHS must notify issuers of risk adjustment 

payments and charges. As such, by June 30 of the year following the applicable benefit 

year, issuers would be notified of reinsurance payments and risk adjustment payments 

and charges, allowing issuers to account for their total reinsurance payments and risk 

adjustment payments and charges when submitting data for the risk corridors and MLR 

programs. To provide issuers in the individual market with information to assist in 

development of premiums and rates in subsequent benefit years, we also proposed in 

§153.240(b)(2) that a State provide quarterly notifications of estimates to each 

reinsurance-eligible plan of the expected requests for reinsurance payments. HHS 

intends to collaborate with issuers and States to develop these early notifications. We are 

finalizing these provisions as proposed. 

Comment: Several commenters requested that HHS specify a date by which HHS 

will make reinsurance payments. 

Response: Under §153.240(b), HHS would notify issuers of reinsurance 

payments to be made under the uniform payment parameters by June 30 of the year 

following the applicable benefit year. We will make every effort to issue payments as 

quickly as possible. We anticipate issuing further guidance regarding reinsurance 

payments. 

Comment: One commenter requested that, if a State is operates reinsurance in the 

2014 benefit year, the deadline for issuers to file rates be moved to April 30 because State 

supplemental reinsurance payment parameters will affect premium rate setting. The 
CMS-9964-F 211 

commenter also requested that for the 2015 and 2016 benefit years, HHS require States to 

publish the State notice of benefit and payments parameters no later than January 31 of 

the prior year to provide issuers with ample time to calculate and submit rates for filing 

approval by March 28. 

Response: We understand the challenges posed by various State and Federal 

deadlines, and anticipate that all stakeholders will work together with both States and 

HHS to meet those deadlines. However, State deadlines for submitting rates are within 

the authority of the State. 

c. Privacy and Security Standards 

We proposed in §153.240(d)(1) that a State establishing the reinsurance program 

ensure that the applicable reinsurance entity’s collection of personally identifiable 

information22 is limited to information reasonably necessary for use in the calculation of 

reinsurance payments, and that use and disclosure of personally identifiable information 

is limited to those purposes for which the personally identifiable information was 

collected (including for purposes of data validation). In §153.240(d)(2), we proposed to 

require that an applicable reinsurance entity implement specific privacy and security 

standards to ensure enrollee privacy and to protect sensitive information. Specifically, 

this provision would require an applicable reinsurance entity to provide administrative, 

physical, and technical safeguards for personally identifiable information that may be 

used to request reinsurance payments. This provision is meant to ensure that an 

applicable reinsurance entity complies with the same privacy and security standards that 

apply to issuers and providers, specifically, the security standards described at §164.308, 

§164.310, and §164.312. We are finalizing these provisions as proposed. 

 

22 As discussed above, the term “personally identifiable information” is a broadly used term across Federal 

agencies, and has been defined in the Office of Management and Budget Memorandum M-07-16 (May 22, 

2007). Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf. 
CMS-9964-F 212 

Comment: We received comments supporting the privacy and security standards 

set forth in §153.240(d) and suggesting audits and other safeguards to protect personal 

health information from inappropriate disclosure. 

Response: HHS takes seriously its responsibility to monitor the implementation 

of these programs, including the protection of the privacy of consumers. We will provide 

more information on our approach to these and other oversight matters in future 

rulemaking. 

d. Data Collection 

We proposed in §153.420(a) that an issuer of a reinsurance-eligible plan seeking 

reinsurance payments submit or make accessible data, in accordance with the reinsurance 

data collection approach established by the State, or HHS on behalf of the State. In 

§153.420(b), we proposed that an issuer of a reinsurance-eligible plan submit data to be 

considered for reinsurance payments for the applicable benefit year by April 30 of the 

year following the end of the applicable benefit year. The April 30 deadline would apply 

to all issuers of reinsurance-eligible plans, regardless of whether HHS or the State is 

operating reinsurance. Further details surrounding the data collection process when HHS 

is operating reinsurance on behalf of a State is set forth in subpart H of part 153 and 

section III.G. of this final rule. We are finalizing these provisions as proposed. 

Comment: Several commenters requested clarification on the claims run-out 

period. 

Response: An issuer of a risk adjustment covered plan or reinsurance eligible 

plan in a State in which HHS is operating the risk adjustment or reinsurance program 

would submit data for a benefit year by April 30 of the year following the applicable 

benefit year. For example, claims incurred in the 2014 benefit year must be submitted to 

HHS by April 30, 2015. The submission deadline (the latest date by which data can be 
CMS-9964-F 213 

provided for the applicable benefit year) will allow issuers the time necessary to process 

claims and submit data to their distributed data systems for HHS evaluation. The 

submission deadline of April 30 of the year following the applicable benefit year also 

permits HHS an appropriate timeline for payment calculations. However, as described in 

section III.G. of this final rule, claims submitted for the reinsurance program and 

encounter data submitted for the risk adjustment program must be for claims and 

encounters with discharge dates within the applicable benefit year. Use of the discharge 

date best ensures that services provided across benefit years will be considered in their 

entirety rather than being partially or fully excluded from consideration as a result of the 

data submission timing requirements. 

D. Provisions for the Temporary Risk Corridors Program

1. Definitions 

In the Premium Stabilization Rule, we stated in response to comments that we 

intended to propose that taxes and profits be accounted for in the risk corridors 

calculation, in a manner consistent with the MLR program. Therefore, in the proposed 

rule, we proposed to amend §153.500 by defining “taxes” with respect to a QHP as 

Federal and State licensing and regulatory fees paid with respect to the QHP as described 

in §158.161(a), and Federal and State taxes and assessments paid for the QHP as 

described in §158.162(a)(1) and §158.162(b)(1). This definition aligns with the 

regulatory fees and taxes and assessments deductible from premiums in the MLR 

calculation. We used this definition to define “after-tax premiums earned,” which we 

proposed to mean, with respect to a QHP, premiums earned minus “taxes.” We also 

proposed to revise the definition of “administrative costs” in §153.500 to mean, with 

respect to a QHP, the total non-claims costs incurred by the QHP issuer for the QHP, 

including taxes. We noted that under this broader definition, administrative costs may 
CMS-9964-F 214 

also include regulatory fees and assessments other than those included in “taxes,” as 

defined above. 

Using the definitions above, we proposed to amend §153.500 by defining 

“profits” with respect to a QHP to mean the greater of: (1) 3 percent of after-tax 

premiums earned; and (2) premiums earned by the QHP minus the sum of allowable costs 

and administrative costs of the QHP. Thus, we proposed to define profits for a QHP 

through the use of the risk corridors equation; however, we provided for a 3 percent profit 

margin so that the risk corridors program would protect a reasonable profit margin 

(subject to the 20 percent cap on allowable administrative costs as described below). 

Finally, using the definition of profits discussed above, we proposed to revise the 

definition of “allowable administrative costs” in §153.500 to mean, with respect to a 

QHP, the sum of administrative costs other than taxes, and profits earned, which sum is 

limited to 20 percent of after-tax premiums earned (including any premium tax credit 

under any governmental program), plus taxes. This definition reflects the inclusion of 

profits and taxes discussed above, and clarifies that the 20 percent cap on allowable 

administrative costs applies to taxes, assessments and regulatory fees other than those 

taxes, assessments and regulatory fees defined as deductible from premium revenue 

under the MLR rules, a result that is consistent with the way they are accounted for by the 

MLR rules. 

The preamble to our proposed rule contained an example that illustrated the 

proposed operation of the risk corridors calculation. We have included a minor 

correction to the calculation of profits in this example: 

• Premiums earned: Assume a QHP with premiums earned of $200. 

• Allowable costs: Assume allowable costs of $140, including expenses for 

health care quality and health information technology, and other applicable adjustments. 
CMS-9964-F 215 

• Non-claims costs: Assume that the QHP has non-claims costs of $50, of 

which $15 are properly allocable to licensing and regulatory fees and taxes and 

assessments described in §158.161(a), §158.162(a)(1), and §158.162(b)(1) (that is, 

“taxes”). 

The following calculations result: 

• “Taxes”: Under the proposed definition of taxes, the QHP’s “taxes” will be 

$15. 

• Administrative costs are defined as non-claims costs. In this case, those costs 

would be $50. Administrative costs other than “taxes” would be $35. 

• After-tax premiums earned are defined as premiums earned minus “taxes,” or 

in this case $200 - $15 = $185. 

• Profits are proposed to be defined as the greater of: 3 percent of premiums 

earned, or 3 percent * $185 = $5.55; and premiums earned by the QHP minus the sum of 

allowable costs and administrative costs, or $200 – ($140 + $50) = $200 - $190 = $10. 

Therefore, profits for the QHP would be $10, which is greater than $5.55 

• Allowable administrative costs are defined as the sum of administrative costs, 

other than “taxes,” plus profits earned by the QHP, which sum is limited to 20 percent of 

after-tax premiums earned by the QHP (including any premium tax credit under any 

governmental program), plus “taxes.” 

= ($35 + $10), limited to 20 percent of $185, plus $15 

= $45, limited to $37, plus $15 

= $37, plus $15 

= $52. 

• The target amount is defined as premiums earned reduced by allowable 

administrative costs, or $200 - $52 = $148. 
CMS-9964-F 216 

• The risk corridors ratio is the ratio of allowable costs to target amount, or the 

ratio of $140 to $148, or approximately 94.6 percent (rounded to the nearest one-tenth of 

one percent), meaning that the QHP issuer would be required to remit to HHS 50 percent 

of approximately (97 percent - 94.6 percent) = 50 percent of 2.4 percent, or 

approximately 1.2 percent of the target amount, or approximately 0.012 * $148, or 

approximately $1.78. 

We sought comments on the estimates, data sources, and appropriate profit 

margin to use in the risk corridors calculation in the proposed rule. We are finalizing 

these proposed provisions with the following modifications. As discussed below, in 

order to conform with changes finalized in this rule for the MLR program, and in 

response to comments, we are deleting §153.530(b)(1)(ii) to eliminate the adjustment to 

allowable costs for reinsurance contributions made by an issuer, and are clarifying the 

treatment of community benefit expenditures within the risk corridors calculation. We 

are also modifying our proposed definition of “taxes” in §153.500, by replacing the term 

“taxes” with “taxes and regulatory fees.” 

 Comment: A few commenters noted that, while the proposed rule stated that the 

risk corridors profits calculation was based on after-tax premiums, the example in the 

preamble to the proposed rule calculated 3 percent of profits based on a pre-tax premium 

amount (that is, earned premiums). 

Response: We are finalizing the definition of “profits” based on after-tax 

premiums, as proposed. We have corrected the profits calculation example in the 

preamble. 

 Comment: Two commenters stated that the risk corridors formula is potentially 

circular, and asked us to reexamine the treatment of profits and taxes in the risk corridors 

calculation. Because taxes are a parameter in the risk corridors calculation, if risk 
CMS-9964-F 217 

corridors payments are taken into account when estimating taxes, the commenters 

believed that it would result in an iterative effect that could affect the width of the risk 

corridors. They stated that a similar effect would occur with respect to profits. 

 Response: In response to these comments, we are clarifying that, similar to the 

manner in which the MLR is calculated, an issuer should not consider risk corridors 

payments and charges when estimating taxes under the risk corridors formula. As 

described in the preamble to the Premium Stabilization Rule, we seek alignment between 

the MLR and risk corridors programs when practicable so that similar concepts in the two 

programs are handled in a similar manner, and similar policy goals are reflected. 

Consequently, our treatment of taxes for risk corridors purposes follows the approach of 

the MLR program, as outlined in section 3C of the model MLR regulation published by 

the National Association of Insurance Commissioners (NAIC).23 We note that, because 

of the way profits is defined for the risk corridors calculation, no such circularity will 

occur with profits. 

 Comment: One commenter asked whether reinsurance contributions could be 

considered as “taxes and regulatory fees” when determining “allowable administrative 

costs” in the denominator of the risk corridors calculation. 

 Response: We note that other provisions of this final rule amend the MLR 

calculation so that reinsurance contributions are included in Federal and State licensing 

and regulatory fees paid with respect to the QHP as described in §158.161(a), and are 

deducted from premiums for MLR purposes. Our proposed definition of “taxes” for 

purposes of the risk corridors program cross-referenced §158.161(a) and similarly 

 

23 Section 3C of the NAIC model regulation, available at 

http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf states, "[a]ll terms defined in this 

Regulation, whether in this Section or elsewhere, shall be construed, and all calculations provided for by 

this Regulation shall be performed, as to exclude the financial impact of any of the rebates provided for in 

sections 8, 9, and 10 [rebate calculation sections]." 
CMS-9964-F 218 

included reinsurance contributions. Thus, in response to these comments, and to 

maintain consistency with the MLR calculation and our proposed definition, which we 

are finalizing as proposed, we are making a conforming amendment to §153.530(b)(1). 

In this final rule, we are deleting §153.530(b)(1)(ii) and clarifying that reinsurance 

contributions are included in Federal and State licensing and regulatory fees paid with 

respect to the QHP as described in §158.161(a), and thus are included in allowable 

administrative costs for risk corridors purposes. We are also making a conforming 

change to §153.520(d) to remove the requirement that a QHP issuer must attribute 

reinsurance contributions to allowable costs for the benefit year. In addition, we are 

making a conforming modification to the proposed definition of “taxes” in §153.500, by 

replacing the term “taxes” with “taxes and regulatory fees.” 

 Comment: Nearly all those that commented on the risk corridors profit margin 

agreed with the 3 percent profit margin set in the proposed rule. One commenter 

suggested that a 2 percent profit margin would be more appropriate. 

Response: Based on the comments received and the policy arguments outlined in 

our proposed rule, we are finalizing the definition of “profits” in §153.500 as proposed. 

Comment: One commenter expressed concern that an allowance for up to 3 

percent profit could disrupt the budget neutrality of the risk corridors program, and asked 

for clarification on HHS’s plans for funding risk corridors if payments exceed receipts. 

Response: The risk corridors program is not statutorily required to be budget 

neutral. Regardless of the balance of payments and receipts, HHS will remit payments as 

required under section 1342 of the Affordable Care Act. 

Comment: One commenter stated that the risk corridors calculation does not 

account for the credibility adjustment that is part of the MLR formula, and recommended 

setting maximum allowable administrative costs at 20 percent plus the allowed credibility 
CMS-9964-F 219 

adjustment for the carrier's block of business. The commenter believed that this change 

would be consistent with the MLR formula and make it more viable for carriers to 

maintain their smaller blocks of business, given the higher claims volatility that often 

characterizes these smaller blocks of business. 

Response: Although we seek consistency with MLR where the risk corridors and 

MLR formulas contain similar parameters, we believe that the credibility adjustment is a 

unique parameter in the MLR formula. The MLR statute provides for a credibility 

adjustment through “methodologies . . . designed to take into account the special 

circumstances of smaller plans, different types of plans, and newer plans” at section 

2718(c) of the Affordable Care Act. No similar reference appears in section 1342 of the 

Affordable Care Act. 

Comment: One commenter requested clarification on whether community benefit 

expenses would be included in the taxes of non-profit entities for the purposes of 

calculating the risk corridors target amount. 

Response: We believe that accounting for these expenses as taxes when 

calculating the target amount would appropriately align the risk corridors formula with 

the MLR calculation. Our proposed definition of “taxes” in §153.500 includes Federal 

and State taxes defined in §158.162(b), which describes payments made by a tax-exempt 

issuer for community benefit expenditures. Consequently, we are clarifying that nonprofit entities may account for community benefit expenditures as “taxes and regulatory 

fees” in a manner consistent with the MLR reporting requirements set forth in §158.162 

for the purposes of calculating the risk corridors target amount. 

2. Risk Corridors Establishment and Payment Methodology

We proposed to add paragraph (d) to §153.510, which would specify the due date 

for QHP issuers to remit risk corridors charges to HHS. Under this provision, an issuer 
CMS-9964-F 220 

would be required to remit charges within 30 days after notification of the charges. By 

June 30 of the year following an applicable benefit year, under §153.310(e), QHP issuers 

will have been notified of risk adjustment payments and charges for the applicable 

benefit year. By that same date, under §153.240(b)(1), QHP issuers also will have been 

notified of all reinsurance payments to be made for the applicable benefit year. As such, 

we proposed in §153.530(d) that the due date for QHP issuers to submit all information 

required under §153.530 of the Premium Stabilization Rule is July 31 of the year 

following the applicable benefit year. We also proposed that the MLR reporting deadline 

be revised to align with this schedule. We are finalizing this provision as proposed. 

Comment: We received several supportive comments on our proposal to require 

issuers to submit risk corridors information by July 31 of the year following the 

applicable benefit year. 

Response: We are finalizing §153.530(d) as proposed, so that the due date for 

QHP issuers to submit all risk corridors information is July 31 of the year following the 

applicable benefit year. In section III.I.1. of this final rule, we also finalize our proposal 

to align the MLR reporting deadline with this schedule. 

Comment: One commenter asked how payments made under the State 

supplemental reinsurance payment parameters are taken into account in the risk corridors 

calculation. Another commenter requested that HHS clarify the treatment of State “wraparound” reinsurance payments under the risk corridors calculation, and asked for 

information on the way in which HHS analyzed the impact of the administrative burden 

associated with removing these costs. 

Response: Under section 1342(c)(1)(B) of the Affordable Care Act, allowable 

costs are to be reduced by any risk adjustment and reinsurance payments received under 

sections 1341 and 1343. Supplemental reinsurance payments made under State 
CMS-9964-F 221 

supplemental reinsurance payment parameters are reinsurance payments received under 

sections 1341 of the Affordable Care Act; thus, allowable costs in the risk corridors 

formula are to be reduced by the reinsurance payments received both under the uniform 

payment parameters and any State supplemental reinsurance payment parameters. 

We do not believe that adjusting the risk corridors formula to account for this 

parameter will result in any additional administrative burden on issuers, because issuers 

will be performing the calculations to account for these adjustments at the same time they 

adjust for reinsurance payments under the uniform payment parameters. 

Comment: One commenter suggested that we align the risk corridors calculation 

with their suggestions on the MLR calculation, which would entail accounting for risk 

adjustment transfers and reinsurance contributions as adjustments to premiums, rather 

than claims. Another commenter similarly recommended that reinsurance payments be 

treated as an adjustment to premiums in the risk corridors calculation, noting that such an 

approach would reflect current market practices. 

Response: We do not believe we have the statutory authority to accommodate this 

request, because section 1342(c)(1)(B) of the Affordable Care Act requires reducing 

allowable costs for reinsurance and risk adjustment payments received. 

Comment: A number of commenters indicated that risk corridors should be 

calculated at the issuer level as opposed to the QHP level. One commenter indicated that 

the current policy of calculating risk corridors at the plan level is inconsistent with the 

single risk pool requirement in the proposed Market Reform Rule (77 FR 70584), and 

other issuers pointed out other policy concerns, such as non-alignment with MLR and 

lack of statistical credibility. 

Response: We agree that a plan-level risk corridors calculation creates an 

incongruity with the single risk pool requirement set forth at §156.80. Under the 
CMS-9964-F 222 

regulation as written, risk corridors would compare allowable costs (adjusted claims), 

which are currently plan-specific, and target amount (adjusted premiums), which under 

the single risk pool requirement must be based on market-wide expected claims. After 

considering comments received on the proposed rule, we are publishing an interim final 

rule elsewhere in this issue of the Federal Register to address alignment of the risk 

corridors calculations with the single risk pool requirement. Under the approach 

implemented in the interim final rule, an issuer could reasonably allocate, in accordance 

with §153.520, allowable administrative costs across its business pro rata by premiums 

earned, leading to an issuer-level risk corridors calculation for its QHP business. 

3. Risk Corridors Data Requirements 

In §153.530 of the Premium Stabilization Rule, we stated that to support the risk 

corridors program calculations, a QHP issuer must submit data related to actual premium 

amounts collected, including premium amounts paid by parties other than the enrollee in 

a QHP, specifically, advance premium tax credits. We further specified that risk 

adjustment and reinsurance payments be regarded as after-the-fact adjustments to 

allowable costs for purposes of determining risk corridors amounts, and that allowable 

costs be reduced by the amount of any cost-sharing reductions received from HHS. For 

example, if a QHP incurred $200 in allowable costs for a benefit year, but received a risk 

adjustment payment of $25, received reinsurance payments of $35, and received costsharing reduction payments of $15, the QHP issuer’s allowable costs would be $125 

($200 allowable costs - $25 risk adjustment payments received - $35 reinsurance 

payments received – $15 cost-sharing reduction payments). 

We additionally proposed an approach to reimbursement of cost-sharing 

reductions that would add an additional reimbursement requirement for cost-sharing 

reductions by providers with whom the issuer has a fee-for-service compensation 
CMS-9964-F 223 

arrangement. We proposed that issuers be reimbursed for, in the case of a benefit for 

which the issuer compensates the provider in whole or in part on a fee-for-service basis, 

the actual amount of cost-sharing reductions provided to the enrollee for the benefit and 

reimbursed to the provider by the issuer. However, we clarified that cost-sharing 

reductions on benefits rendered by providers for which the issuer provides compensation 

other than on a fee-for-service arrangement (such as a capitated system), would not be 

held to this standard. 

We also proposed to amend §153.530(b)(2)(iii) so that allowable costs are 

reduced by any cost-sharing reduction payments received by the issuer for the QHP to the 

extent not reimbursed to the provider furnishing the item or service. We received no 

responses to our request for comment on this proposal. Therefore, we are finalizing this 

provision as proposed. 

4. Manner of Risk Corridor Data Collection 

 We also proposed to amend §153.530(a), (b), and (c) to specify that we will 

address the manner of submitting required risk corridors data in future guidance rather 

than in this HHS notice of benefit and payment parameters. We received no responses to 

our request for comment on this proposal. Therefore, we are finalizing this provision as 

proposed. 

E. Provisions for the Advance Payment of the Premium Tax Credit and Cost-Sharing 

Reduction Programs

1. Exchange Responsibilities with Respect to Advance Payments of the Premium Tax 

Credit and Cost-Sharing Reductions 

a. Special Rule for Family Policies 

 We proposed to amend §155.305(g)(3), currently entitled “special rule for 

multiple tax households.” Our proposed amendment renamed this paragraph “special 
CMS-9964-F 224 

rule for family policies,” added a category for qualified individuals who are not eligible 

for any cost-sharing reductions, and revised the introductory text to address situations in 

which Indians (as defined in §155.300(a)) and non-Indians enroll in a family policy. The 

proposed amendment also extended the current policy with respect to tax households 

such that individuals on a family policy would be eligible to be assigned to the most 

generous plan variation for which all members of the family are eligible. We noted that 

nothing in this provision precludes qualified individuals with different levels of eligibility 

for cost-sharing reductions from purchasing separate policies to secure the highest costsharing reductions for which they are respectively eligible. 

We discuss this policy further with regard to Indians eligible for cost-sharing 

reductions under section 1402(d) of the Affordable Care Act in section III.E.4.i. of this 

final rule. We are finalizing these provisions as proposed. 

Comment: Several commenters supported the proposed policy, noting that it 

would be operationally infeasible for QHP issuers to have two family members with 

different cost-sharing levels enrolled in the same policy. Other commenters stated that 

families should not need to purchase multiple individual plans so that each family 

member can receive the full value of the cost-sharing reductions for which they are 

eligible. Commenters expressed concern that for large families, premiums for multiple 

individual plans could offset the value of the cost-sharing reduction, as well as potentially 

subjecting family members to separate out-of-pocket maximums and separate 

deductibles. One commenter suggested the option of a family-based plan that offers a 

weighted actuarial value reflecting the cost-sharing reductions available to individual 

members. Another commenter was concerned about the ability of Exchanges to explain 

to consumers the advantages and disadvantages of buying multiple policies versus one 

family policy. 
CMS-9964-F 225 

Response: As deductibles and out-of-pocket limits are calculated at the policy 

level, we believe it will be operationally difficult to establish separate cost-sharing 

requirements for different enrollees covered by the same policy at this time. HHS will 

encourage Exchanges to provide appropriate guidance to consumers on the relative costs 

and benefits of enrolling in one family policy versus multiple individual policies so that 

families can best take advantage of cost-sharing reductions. 

b. Recalculation of Advance Payments of the Premium Tax Credit and Cost-Sharing 

Reductions 

 We proposed to add paragraph (g) to §155.330 to clarify how an Exchange would 

redetermine the eligibility of an enrollee during a benefit year if an Exchange receives 

and verifies new information reported by an enrollee or identifies updated information 

through data matching that affects eligibility for advance payments of the premium tax 

credit and cost-sharing reductions. We proposed that when an Exchange recalculates the 

amount of advance payments of the premium tax credit available after considering such a 

change, an Exchange must account for any advance payments already made on behalf of 

the tax filer in that benefit year to minimize, to the extent possible, any projected 

discrepancies between the advance payments and the tax filer’s projected premium tax 

credit for the benefit year. We specified that this recalculation will only include months 

for which the tax filer has been determined eligible for advance payments of the premium 

tax credit. We also proposed that, when redetermining eligibility for cost-sharing 

reductions during the benefit year, an Exchange must determine an individual to be 

eligible for the category of cost-sharing reductions that corresponds to the individual’s 

expected annual household income for the benefit year. Further detail and examples of 

this policy were provided in the proposed rule. 
CMS-9964-F 226 

 We further noted in the preamble that we considered taking a different approach if 

an eligibility redetermination during the benefit year resulted in an increase in advance 

payments of the premium tax credit—we considered proposing that in such a situation, 

HHS would make retroactive payments to the QHP issuer for all prior months of the 

benefit year to reflect the increased advance payment amount, not to exceed the total 

premium for each month. We solicited comments regarding whether we should adopt 

this approach, and if so, how QHP issuers should be required to provide the retroactive 

payments to enrollees. Several commenters raised concerns regarding the operational 

and administrative challenges associated with such retroactive payments. 

 We are finalizing the policy substantially as proposed, with modifications to the 

language in paragraph (g) to increase clarity. We are not implementing the retroactive 

payment approach. 

 Comment: A number of commenters expressed their support for the proposed 

approach, though some sought further clarification regarding the impact of eligibility 

redeterminations on advance payments of the premium tax credit and cost-sharing 

reductions. Several commenters also requested that HHS modify the proposed approach, 

by placing a limit on the number of redeterminations per benefit year to reduce 

administrative burden, or by providing that when accounting for advance payments of the 

premium tax credit already received by an enrollee whose income has since increased, an 

Exchange should never reduce the enrollee’s future payments by more than the limits on 

repayment following the benefit year as specified in 26 CFR 1.36B-4(a). Another 

commenter urged that HHS require QHP issuers to conduct extensive outreach to 

enrollees to effectively implement this provision. 

 Further, although several commenters expressed support for how the alternative 

proposal could assist enrollees with issues such as past due premium amounts, we also 
CMS-9964-F 227 

received several comments raising concerns and seeking additional specificity. 

Commenters mentioned the operational and administrative challenges that the alternative 

proposal would pose for both QHP issuers as well as HHS, and stated that the potential 

advantages for enrollees would be minimal. 

 Response: We provide additional detail on redeterminations during the benefit 

year and their implications for cost-sharing reductions in §156.425. We note that 

redetermining eligibility when changes occur is important to the accuracy of eligibility 

determinations during the year. We also note that we expect that QHP issuers will 

provide guidance to enrollees regarding the importance of reporting changes, and the 

avenues through which changes can be reported. In finalizing the policy as proposed, we 

do not specify that the Exchange will consider the statutory limits on repayment, as these 

limits are separate from the premium tax credit calculation itself, and are intended to be 

applied at the time of tax filing. 

 After considering the comments regarding the operational and administrative 

challenges involved with the alternative proposal, we decided to maintain the approach 

proposed. We believe that the comments received that questioned the benefits associated 

with the alternative on which we requested comment, combined with the operational 

concerns regarding how HHS would provide such retroactive payments to QHP issuers 

and the process through which QHP issuers would reimburse enrollees, outweigh the 

potential benefit for enrollees. 

c. Administration of Advance Payments of the Premium Tax Credit and Cost-Sharing 

Reductions 

 Under our authority to administer the payment of cost-sharing reductions and 

advance payments of the premium tax credits conferred in section 1412 and the 

rulemaking authority conferred in section 1321(a) of the Affordable Care Act, we 
CMS-9964-F 228 

proposed to add two paragraphs to §155.340. First, we proposed to add paragraph (e) to 

§155.340, which would provide that if one or more individuals in a tax household who 

are eligible for advance payments of the premium tax credit collectively enroll in more 

than one policy through the Exchange (whether by enrolling in more than one policy 

under a QHP, enrolling in more than one QHP, or enrolling in one or more QHPs and one 

or more stand-alone dental plans) for any month in a benefit year, the Exchange would 

allocate the advance payment of the premium tax credit(s) in accordance with the 

methodology proposed in §155.340(e)(1) and (2). Under that methodology, the 

Exchange must first allocate the portion of the advance payment of the premium tax 

credit(s) that is less than or equal to the aggregate adjusted monthly premiums for the 

QHP policies, as defined under 26 CFR 1.36B-3(e), properly allocated to EHB, among 

the QHP policies in proportion to the respective portions of the premiums for the policies 

properly allocated to EHB. Any remaining advance payment of the premium tax credit(s) 

must be allocated among the stand-alone dental policies in proportion to the respective 

portions of the adjusted monthly premiums for the stand-alone dental policies properly 

allocated to the pediatric dental EHB. We provided additional detail on the allocation 

methodology in the proposed rule and welcomed comments on this proposal. 

 As discussed in greater detail below, we received a number of comments on the 

allocation of advance payments of premium tax credits among QHPs and stand-alone 

dental plans. We also received one comment expressing concern that the proposed 

allocation methodology was too complicated and may prevent consumers from selecting 

a plan or the plans that are in the household’s best interest. In particular, the proposed 

pro rata distribution by premium delays the calculation of the allocation of the advance 

payments until after QHPs have been selected. This delay would prevent an Exchange 
CMS-9964-F 229 

from displaying the amount of premium that a household would pay out-of-pocket for 

each plan until all plans have been selected. 

 We do not want to restrict the way that an Exchange develops the consumer 

shopping experience, and therefore, considering the comment received on this approach, 

we are modifying the proposed rule and finalizing a policy to allow Exchanges greater 

flexibility in allocating the advance payment of the premium tax credit if the individuals 

in the tax filers’ tax household(s) are enrolled in more than one QHP or stand-alone 

dental plan. Specifically, as finalized in §155.340(e), if one or more advance payments of 

the premium tax credit are to be made on behalf of a tax filer (or two tax filers covered by 

the same plan(s)), and individuals in the tax filers’ tax households are enrolled in more 

than one QHP or stand-alone dental plan, then the advance payment must be allocated as 

follows: (1) that portion of the advance payment of the premium tax credit that is less 

than or equal to the aggregate adjusted monthly premiums, as defined in 26 CFR §1.36B3(e), for the QHP policies properly allocated to EHB must be allocated among the QHP 

policies in a reasonable and consistent manner specified by the Exchange; and (2) any 

remaining advance payment of the premium tax credit must be allocated among the 

stand-alone dental policies (if any) in a reasonable and consistent manner specified by the 

Exchange. We do not choose to set specific parameters for the allocation approach; 

however, the Exchange must apply the same approach to all advance payments of the 

premium tax credit provided during a benefit year. We are also making some clarifying 

modifications to the language of this provision. 

 For Federally-facilitated Exchanges, we establish a methodology at §155.340(f) in 

which the advance payment of the premium tax credit is allocated based on the number of 

enrollees covered under the QHP or stand-alone dental policy, weighted by the age of the 

enrollees, using the default uniform age rating curve established by the Secretary of HHS 
CMS-9964-F 230 

under §147.102(e) of the final Market Reform Rule.24 If this methodology results in an 

advance payment of the premium tax credit allocation that exceeds a QHP’s adjusted 

monthly premium properly allocated to EHB, the surplus advance payment of the 

premium tax credit will be allocated evenly to any of the other QHP policies, up to the 

applicable adjusted monthly premium properly allocated to EHB. And, in accordance 

with the general policy, any advance payment of the premium tax credit above the 

aggregate adjusted monthly premiums for the QHP policies properly allocated to EHB 

must be allocated among the stand-alone dental policies in a similar manner. We provide 

the following example: 

• A family that is eligible for a premium tax credit and is made up of a child age 18 

and two parents age 53 purchases two QHP policies and a stand-alone dental policy on an 

FFE. One parent and the child are enrolled in QHP A, with an adjusted monthly 

premium allocable to EHB of $470. The other parent is enrolled in QHP B, with an 

adjusted monthly premium allocable to EHB of $350. The child is enrolled in the standalone dental policy, with an adjusted monthly premium of $20, with all $20 allocable to 

EHB. The family receives a monthly advance payment of the premium tax credit equal 

to $830. On an FFE, $820 would be allocated between the two QHPs (that is, the portion 

of the advance payment of the premium tax credit that is less than or equal to the 

aggregate premiums for the QHP policies allocable to EHB), and the remainder ($10) 

would be allocated to the stand-alone dental plan. Assuming the default uniform age 

curve requires rates for an individual aged 53 to be adjusted by 2.04, and rates for an 

individual aged 18 to be adjusted by 0.635, $465 ((820/(2.04+2.04+0.635))* 

(2.04+0.635)) would be allocated to QHP A and $355 (820/(2.04+2.04+0.635))*2.04) 

 

24 We note that to simplify operations, even if a State establishes a uniform age rating curve as allowed 

under §147.102(e), we will continue to use the default uniform age rating curve with a 3:1 ratio established 

by the Secretary of HHS for purposes of allocating advance payments of the premium tax credit. 
CMS-9964-F 231 

would be allocated to QHP B. However, because $355 exceeds the portion of QHP A’s 

premium allocable to EHB, the surplus allocation ($5) is shifted from QHP A to QHP B. 

Therefore, $350 will be applied to the premium for QHP A, $470 for QHP B, and $10 for 

the stand-alone dental plan. 

 This approach will allow an FFE to determine the allocation of the advance 

payment of the premium tax credit prior to plan selection so that we may display the 

amount of premium that a household would pay out-of-pocket for each plan during the 

shopping experience. At the same time, this approach approximates an allocation based 

on premiums (prioritizing the QHP policies over the stand-alone dental plan coverage as 

we proposed). State-based Exchanges may choose to adopt the Federal methodology or 

another reasonable methodology under §155.340(e) of this final rule. 

 Comment: We received a comment stating that the methodology proposed in 

§155.340(e)(1) and (2) will be too complicated for the average consumer to understand, 

particularly for complex households. The proposed methodology would prevent an 

Exchange from displaying the amount of premium that a household would pay out-ofpocket for each plan until all plans have been selected. If out-of-pocket costs cannot be 

shown at a plan level prior to selection, consumers could be dissuaded from purchasing 

coverage or might select a single plan for all household members, even if doing so is not 

in the household’s best interest. The commenter proposed that Exchanges allocate the 

advance payment of the premium tax credit(s) equally to each household member to 

allow consumers to view the amounts of advance payment of the premium tax credit(s) 

allocated to each QHP or stand-alone dental plan during the shopping experience, and to 

permit consumers to compare more effectively different plan options and family member 

groupings. 
CMS-9964-F 232 

 Response: We recognize the importance of providing a transparent and 

consumer-friendly shopping experience, and are modifying our proposal to allow 

Exchanges the flexibility to choose a reasonable allocation methodology. This policy 

would allow an Exchange to allocate the portion of the advance payment of the premium 

tax credit that is less than or equal to the aggregated adjusted monthly premiums for the 

QHP policies properly allocated to EHB among the QHPs using a per member approach. 

However, the Exchange must still allocate the remainder to the stand-alone dental plan(s), 

though this portion may also be allocated using a per member approach. 

 The approach that will be used by FFEs to allocate the advance payment of the 

premium tax credit will allow the FFE to display the amount of premium that a household 

would pay out-of-pocket for each plan during the shopping experience. In addition, the 

FFE approach approximates an allocation based on premiums (prioritizing the QHP 

policies). 

 Comment: We received several comments regarding the methodology proposed 

in §155.340(e)(2). Commenters noted that because we proposed that advance payments 

of the premium tax credit(s) be allocated first to QHP policies, and any remainder be 

allocated to stand-alone dental policies, it is unlikely that advance payments of the 

premium tax credit(s) will be available to offset the cost of the stand-alone dental 

policies. One commenter stated that advance payments of the premium tax credit(s) 

should be allocated pro rata among QHP policies and stand-alone dental policies 

according to premium to assist families with purchasing pediatric dental coverage, which 

is one of the essential health benefits. Another commenter suggested that advance 

payments of the premium tax credit(s) should be allocated first to any stand-alone dental 

policy, and the remainder allocated to the QHP(s). A third commenter stated that the cost 

to issuers of stand-alone dental policies to develop a process to accept advance payments 
CMS-9964-F 233 

of the premium tax credit(s) on behalf of enrollees outweighs the potential benefit, and 

consequently, advance payments of the premium tax credit(s) should only be allocated to 

QHP policies. 

 Response: We believe that advance payments of the premium tax credit(s) should 

first be allocated to QHP policies, and any remainder should be allocated to stand-alone 

dental policies. This approach will ensure that the majority of the tax credit is allocated 

to the most costly portion of an individual’s coverage. While we understand the burden 

on stand-alone dental plans of implementing a process to accept the advance payments of 

the premium tax credit, we believe that consumers should not be required to wait until tax 

filing in order to receive the full amount of their premium tax credit benefit. 

 We are finalizing paragraph (e) with the changes from the proposed rule noted 

above. The second provision we proposed to add to §155.340 was paragraph (f), now 

relabeled as paragraph (g) in this final rule. The standards proposed in this paragraph are 

discussed below in section III.E.4.g. 

2. Exchange Functions: Certification of Qualified Health Plans 

 We proposed to add §155.1030 to set forth standards for Exchanges to ensure that 

QHPs in the individual market on the Exchange meet the requirements related to advance 

payments of the premium tax credit and cost-sharing reductions, as proposed in §156.215 

and described below. We proposed these standards under section 1311(c) of the 

Affordable Care Act, which provides for the Secretary to establish criteria for the 

certification of health plans as QHPs, as well as section 1321(a)(1), which provides 

general rulemaking authority for title I of the Affordable Care Act, including the 

establishment of programs for the provision of advance payments of the premium tax 

credit and cost-sharing reductions. 
CMS-9964-F 234 

 In §155.1030(a)(1), we proposed that the Exchange ensure that each issuer that 

offers or seeks to offer a QHP in the individual market on the Exchange submit the 

required plan variations, as proposed in §156.420, for each of its health plans proposed to 

be offered in the individual market on the Exchange and certify that the submitted plan 

variations meet the requirements of §156.420. We expect that an Exchange would collect 

prior to each benefit year the information necessary to validate that the issuer meets the 

requirements for silver plan variations, as detailed in §156.420(a), and collect for 

certification the information necessary to validate that the issuer meets the requirements 

for zero and limited cost sharing plan variations, as detailed in §156.420(b). We 

proposed in §155.1030(a)(2) that the Exchange provide the actuarial values of the QHPs 

and silver plan variations to HHS. As described in proposed §156.430, HHS would use 

this information to determine the advance payments to QHP issuers for the value of the 

cost-sharing reductions. 

 In §155.1030(b)(1), we proposed the Exchange collect and review certain 

information that an issuer must submit under §156.470 that would allow for the 

calculation of the advance payments of cost-sharing reductions and the premium tax 

credit; in addition, the proposal would direct an Exchange to ensure that the allocations 

provided by the issuer are consistent with the standards identified in §156.470(c)-(d). 

Specifically, in §156.470(a), we proposed that an issuer provide to the Exchange annually 

for approval, for each metal level health plan (that is, a health plan at any of the four 

levels of coverage, as defined in §156.20) offered, or proposed to be offered, in the 

individual market on the Exchange, an allocation of the rate and the expected allowed 

claims costs for the plan, in each case, to: (1) EHB, other than services described in 
CMS-9964-F 235 

§156.280(d)(1),25 and (2) any other services or benefits offered by the health plan not 

described in clause (1). In the preamble to the proposed rule, we explained that the rate 

allocation information would allow the Exchange to calculate the percentage of the rate 

attributable to EHB; this percentage could then be multiplied by the adjusted monthly 

premium, as defined by 26 CFR 1.36B-3(e), and the monthly premium of the QHP in 

which the taxpayer enrolls, to calculate the premium assistance amount. The allocation 

of the expected allowed claims costs would be used to validate the rate allocation, and to 

calculate the advance payments for cost-sharing reductions as described in §156.430. 

 In §156.470(e), we further proposed that an issuer of a metal level health plan 

offered, or proposed to be offered, in the individual market on the Exchange also submit 

to the Exchange annually for approval, an actuarial memorandum with a detailed 

description of the methods and specific bases used to perform the allocations. The 

Exchange and HHS would use this memorandum to verify that the allocations meet the 

standards proposed in §156.470(c). First, the issuer must ensure that the allocation is 

performed by a member of the American Academy of Actuaries in accordance with 

generally accepted actuarial principles and methodologies. Second, the rate allocation 

should reasonably reflect the allocation of the expected allowed claims costs attributable 

to EHB (excluding those services described in §156.280(d)(1)). Third, the allocation 

should be consistent with the allocation of State-required benefits to be submitted by the 

issuer as proposed and finalized in §155.170(c) of the final EHB/AV Rule, and the 

allocation requirements described in §156.280(e)(4) for certain services. Fourth, the 

issuer should calculate the allocation as if it were a premium under the fair health 

insurance premium standards described at §147.102, the single risk pool standards 

 

25 45 CFR 156.280(e)(1)(i) provides that if a QHP provides coverage of services described in paragraph 

(d)(1) of that section, the QHP issuer must not use Federal funds, including advance payments of the 

premium tax credit or cost-sharing reductions, to pay for the services. 
CMS-9964-F 236 

described at §156.80, and the same premium rate standards described at §156.255. We 

proposed this standard because we believe the allocation of rates should be performed 

consistent with the standards applicable to the setting of rates. 

 In §156.470(b), we proposed somewhat similar standards for the allocation of 

premiums for stand-alone dental plans. Specifically, we proposed that an issuer provide 

to the Exchange annually for approval, for each stand-alone dental plan offered, or 

proposed to be offered, in the individual market on the Exchange, a dollar allocation of 

the expected premium for the plan, to: (1) the pediatric dental essential health benefit, 

and (2) any benefits offered by the stand-alone dental plan that are not the pediatric 

essential health benefit. As described in 26 CFR 1.36B-3(k), this allocation will be used 

to determine the premium tax credit, and thus the advance payment of the premium tax 

credit, available if an individual enrolls in both a QHP and a stand-alone dental plan. We 

noted that unlike issuers of metal level health plans, issuers of stand-alone dental plans 

would be required to submit a dollar allocation of the expected premium for the plan. We 

specified this because, unlike QHPs, issuers of stand-alone dental plans are not required 

to finalize premiums prior to the start of the benefit year. However, §156.470(b) as 

proposed and finalized here directs stand-alone dental plan issuers to finalize the dollar 

amount of the premium allocable to the pediatric dental essential health benefit prior to 

the start of the benefit year to allow for the calculation of advance payments of the 

premium tax credit. 

 In §156.470(e), we also proposed that issuers of stand-alone dental plans submit 

to the Exchange annually for approval an actuarial memorandum with a detailed 

description of the methods and specific bases used to perform the allocations, 

demonstrating that the allocations meet the standards proposed in §156.470(d). These 

standards were similar to those proposed for issuers of metal level health plans offered or 
CMS-9964-F 237 

proposed to be offered as QHPs, with some adaptations specific to stand-alone dental 

plans. Specifically, in §156.470(d)(1) and (2) we proposed that the allocation be 

performed by a member of the American Academy of Actuaries in accordance with 

generally accepted actuarial principles and methodologies, and be consistent with the 

allocation applicable to State-required benefits to be submitted by the issuer under 

§155.170(c). In addition, in §156.470(d)(3), we proposed that the allocation be 

calculated as if it were a premium subject to the fair health insurance premium standards 

at §147.102 and the single risk pool standards at §156.80, as well as the same premium 

standard described at §156.255. However, in §156.470(d)(4) we provided a specific 

standard for age-adjustments to account for the fact that the dental essential health benefit 

only applies to the pediatric population. We also noted that issuers of stand-alone dental 

plans are not required to submit an allocation of their expected allowed claims costs 

because these plans are not eligible for cost-sharing reductions, as described in 

§156.440(b). 

 In §155.1030(b)(1), we proposed that the Exchange collect and review annually 

the rate or premium allocation, the expected allowed claims cost allocation, and the 

actuarial memorandum that an issuer submits, to ensure that such allocations meet the 

standards set forth in §156.470(c) and (d). To ensure that the allocations are completed 

appropriately, we explained in the preamble to the proposed rule that we expect that the 

Exchange will review the allocation information in conjunction with the rate and benefit 

information that the issuer submits under §156.210 as finalized in the Exchange 

Establishment Rule. In addition, an Exchange that coordinates its review of QHP rates 

and benefits with the State’s Effective Rate Review program would be able to also 

coordinate the allocation review because the revised reporting requirements for issuers 

seeking to increase rates set forth in the Market Reform Rule at §154.215(d)(3)-(4), and 
CMS-9964-F 238 

detailed in the accompanying PRA package, include the rate allocation and expected 

allowed claims cost allocation information. These reporting requirements will reduce the 

need for duplicate submissions by issuers and reviews by Exchanges. However, we 

noted that it is ultimately the responsibility of the Exchange to ensure that the issuer 

performs the allocations appropriately for each health plan or stand-alone dental plan that 

the issuer offers, or seeks to offer, on the individual market in the Exchange, including 

those that are not seeking to increase rates. Therefore, the preamble identified our 

expectation that Exchanges will collect the allocation information through either securing 

access to the data submission by QHP issuers for rate increases under §154.215, or the 

QHP certification and annual submission process under parts 155 and 156, as appropriate. 

 In §155.1030(b)(2), we proposed that the Exchange submit to HHS the approved 

allocation(s) and actuarial memorandum for each QHP and stand-alone dental plan. In 

paragraph (b)(4), we proposed authority for the use of this data by HHS for the approval 

of the estimates that issuers submit for advance payments of cost-sharing reductions 

described in §156.430, and for the oversight of the advance payments of cost-sharing 

reductions and premium tax credit programs. 

 In §155.1030(b)(3), we proposed that the Exchange collect annually any estimates 

and supporting documentation that a QHP issuer submits to receive advance payments for 

the value of the cost-sharing reductions under §156.430(a). The Exchange would then 

submit the estimates and supporting documentation to HHS for review. We clarified 

further that the Exchange would not review these estimates, and HHS’s review would 

simply ensure that the estimates were developed in a manner consistent with the 

methodology established by HHS in the preamble to §156.430(a) of this final rule, in 

keeping with HHS’s obligation to safeguard Federal funds. 
CMS-9964-F 239 

 We are finalizing the provisions in §155.1030 as proposed, with technical 

corrections to §155.1030(a) and (b)(2). We replace the phrase, “The Exchange” in the 

beginning of proposed §155.1030(a) with “An Exchange,” to align with other provisions 

in part 155. We also replace the phrase “[an issuer] offers or seeks to offer” from the 

proposed rule with the phrase “[an issuer] offers, or intends to offer” in the final rule, to 

align with the language in §156.430(a) requiring issuers to submit information for the 

advance payment of cost-sharing reductions; the scope of these regulatory requirements 

is intended to be the same. Similarly, we are making technical corrections to 

§156.470(a), (b) and (e) to standardize the phrase describing the issuers who must 

comply with the rule as those issuers with plans “offered, or intended to be offered” on an 

Exchange. 

 We are also adding paragraph (c) to §155.1030 and paragraph (f) to §156.470 to 

clarify the application of these provisions to multi-State plans. Section 1334 of the 

Affordable Care Act directs OPM to enter into contracts with issuers to offer multi-State 

plans. Accordingly, OPM is responsible for ensuring that multi-State plans and their 

issuers comply with various Exchange standards, including standards relating to costsharing reductions and advance payments of the premium tax credit. 

 We are also finalizing the provisions proposed in §156.470(a), (b), (c), (d)(1), and 

(e). To allow greater flexibility for stand-alone dental plan issuers in developing the 

allocation of dental premiums to EHB, we are not finalizing the allocation standards 

described in paragraphs (d)(2), (3), and (4) of the proposed rule. We believe the 

allocation standard previously described in subparagraph (d)(1), which requires that the 

allocation be performed by a member of the American Academy of Actuaries in 

accordance with generally accepted actuarial principles and methodologies, is a sufficient 

standard for ensuring that stand-alone dental plan issuers allocate the premium 
CMS-9964-F 240 

accordingly. We intend to provide further details on the reporting process for stand-alone 

dental plan premium allocations for the FFE. 

 Comment: We received one comment in support of the provisions at §155.1030 

that all QHP issuers provide the plan variations as part of the certification process. We 

also received a comment requesting that HHS provide to issuers a good-faith compliance 

safe harbor on the new cost-sharing reductions standards and suggesting that this safe 

harbor could be revisited prior to the 2016 plan year. 

 Response: We will take the comment into consideration in future rulemaking on 

oversight functions. 

 Comment: In regard to §156.470, we received a comment asking for one set of 

guidance on all actuarial data submissions required for QHP certification, rate review, 

and market stabilization. The commenter suggested that HHS develop a standard 

template for the annual actuarial memorandum with specific instructions on what data 

should be included in the actuarial memorandum. In addition, we received a specific 

comment asking for guidance on how issuers should allocate the cost of prescription drug 

essential health benefits. 

 Response: As discussed in the preamble of the proposed rule, we have attempted 

to streamline actuarial reporting requirements. In the Market Reform Rule, at 

§154.215(d)(3)-(4), and detailed in the accompanying PRA package, we revised the 

reporting requirements for issuers seeking to increase rates to include the rate allocation 

and expected allowed claims cost allocation information that issuers of metal level health 

plans would submit to an Exchange under§156.470(a) finalized here. We created a 

unified data template for the submission, as well as detailed instructions for completing 

the actuarial memorandum. We suggest that Exchanges require issuers not seeking rate 

increases, and stand-alone dental plan issuers who are not subject to the rate review 
CMS-9964-F 241 

program, to use similar reporting processes in order to submit the rate and claims cost 

allocation information to the Exchange under §156.470 as finalized in this final rule. 

 In response to the specific comment asking for guidance on allocating the cost of 

prescription drug essential health benefits, we refer readers to §156.122 of the final 

EHB/AV Rule, which specifies that for a plan to meet the EHB requirements, it must 

cover at least the greater of: (1) one drug in every category and class within the United 

States Pharmacopeia’s (USP) classification system; or (2) the same number of drugs in 

each category and class as the EHB-benchmark plan. We do not specify a maximum 

number of drugs that a plan may cover. Therefore, when determining the claims costs for 

EHB, QHP issuers should include all prescription drug claims costs within the USP 

classification system, except for claims costs associated with drugs for services described 

in §156.280(d)(1). 

 Comment: We received several comments relating to the provisions at 

§156.470(b) and (d) on the allocation of premiums for stand-alone dental plans for 

purposes of calculating advance payments of the premium tax credit. One commenter 

stated that because stand-alone dental plans are exempt from the rating standards set forth 

in the final Market Reform Rule, issuers of stand-alone dental plans should not be 

required to follow such standards when determining the premium allocation. Another 

commenter supported the proposed policy because it provides equal treatment for the 

pediatric dental essential health benefit with other essential health benefits. However, the 

same commenter asked for clarification that this policy permits an issuer of a stand-alone 

dental plan to offer adult and family dental benefits through an Exchange so long as they 

are offered and priced separately. The commenter also asked for clarification of the 

definition of pediatric coverage and the standard proposed at §156.470(d)(4), given that 
CMS-9964-F 242 

the final EHB/AV Rule specified that states may set alternative age limits for pediatric 

coverage. 

 Response: We agree that stand-alone dental plans, as defined at §155.1065, are 

“excepted benefits” under section 2791(c) of the PHS Act, and clarify that issuers of 

stand-alone dental plans are not required to follow the rating standards set forth in the 

final Market Reform Rule for purposes of pricing stand-alone dental coverage. In 

addition, to allow greater flexibility in the implementation of the provisions in §156.470 

related to stand-alone dental plans, we are not finalizing the allocation standards 

proposed in paragraphs (d)(2), (3), and (4) of §156.470. We believe the allocation 

standard proposed at §156.470(d)(1), which requires that the allocation be performed by a 

member of the American Academy of Actuaries in accordance with generally accepted 

actuarial principles and methodologies, is a sufficient standard for ensuring that issuers 

allocate the premium accordingly, so we are finalizing that provision in this final rule. 

We intend to provide further details on the reporting process for stand-alone dental plan 

premium allocations for the FFE. 

3. QHP Minimum Certification Standards Relating to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

 Under HHS’s rulemaking authority under sections 1311(c)(1), 1321(a)(1), 1402 

and 1412 of the Affordable Care Act, we proposed to add §156.215. This section would 

amend the QHP minimum certification standards and specify that an issuer seeking to 

offer a health plan on the individual market in the Exchange meet the requirements 

described in subpart E of part 156 related to the administration of advance payments of 

the premium tax credit and cost-sharing reductions. We proposed to add this section to 

clarify that compliance with part 156 subpart E, including the standards and submission 

requirements proposed at §156.420 and §156.470, is a requirement of QHP certification, 
CMS-9964-F 243 

and therefore, is included in the standard described at §155.1000(b), under which an 

Exchange must offer only health plans that meet the minimum certification requirements. 

Under our proposal, continuing compliance with subpart E requirements by QHPs and 

QHP issuers is a condition of certification; failure to comply with the requirements could 

result in decertification of the QHP as well as other enforcement actions. This 

corresponds to the proposed addition of §155.1030, which sets forth the Exchange 

responsibilities on certification with respect to advance payments of the premium tax 

credit and cost-sharing reductions (described previously). We received no comments on 

this provision. For the reasons described in the proposed rule, we are finalizing these 

provisions as proposed. 

4. Health Insurance Issuer Responsibilities with Respect to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions 

a. Definitions 

Under §156.400, we proposed definitions for terms that are used throughout 

subpart E of part 156. These terms apply only to subpart E. Some of these definitions 

cross-reference definitions elsewhere in parts 155 or 156, including some definitions set 

forth in the final EHB/AV Rule; the terms “advance payments of the premium tax credit” 

and “Affordable Care Act” were proposed as defined by reference to §155.20, and the 

term “maximum annual limitation on cost sharing” was proposed as defined by reference 

to §156.130 of the final EHB/AV Rule. The terms “Federal poverty level or FPL” and 

“Indian” were proposed to be defined by reference to §155.300(a). The term “de minimis 

variation” was proposed to be defined by reference to §156.140(c)(1) of the final 

EHB/AV Rule. We also proposed to define “stand-alone dental plan” as a plan offered 

through an Exchange under §155.1065. 
CMS-9964-F 244 

We proposed to rely on the definitions of “cost sharing” and “cost-sharing 

reductions” from §156.20. Finally, we noted in the preamble to the proposed rule that 

cost-sharing reductions are subject to §156.280(e)(1)(ii) and do not apply to benefits that 

are not EHB. 

Other definitions were proposed to effectuate the regulations proposed in subpart 

E. These definitions were described in detail in the proposed rule and listed below for 

reference: 

• We proposed to define “standard plan” as a QHP offered at one of the four levels 

of coverage, defined at §156.140, with an annual limitation on cost sharing that conforms 

to the requirements of §156.130(a). A standard plan at the bronze, silver, gold, or 

platinum level of coverage is referred to as a standard bronze plan, a standard silver plan, 

a standard gold plan, and a standard platinum plan, respectively. 

• We proposed to define “silver plan variation” as, with respect to a standard silver 

plan, any of the variations of that standard silver plan described in §156.420(a). 

• We proposed to define “zero cost sharing plan variation” as, with respect to a 

QHP at any level of coverage, the variation of such QHP described in §156.420(b)(1), 

which provides for the elimination of cost sharing for Indians based on household income 

level. 

• We proposed to define “limited cost sharing variation” as, with respect to a QHP 

at any level of coverage, the variation of such QHP described in §156.420(b)(2), which 

provides for the prohibition on cost sharing applicable to the receipt of benefits from IHS 

or certain other providers, irrespective of income level. 

• We proposed to define “plan variation” as a zero cost sharing plan variation, 

limited cost sharing plan variation, or silver plan variation. We emphasized that the plan 
CMS-9964-F 245 

variations of a QHP are not separate plans, but variations in how the cost sharing required 

under the QHP is to be shared between the enrollee(s) and the Federal government. 

 We proposed these definitions to administer and implement the cost-sharing 

reductions established under section 1402 of the Affordable Care Act. Although an 

issuer will only offer one actual QHP (for example, a standard silver plan) with one 

standard cost-sharing structure, we proposed the concept of plan variations to describe 

how certain eligible individuals will pay only a portion of the total cost sharing required 

under that QHP, with the Federal government bearing the remaining cost-sharing 

obligations under section 1402 of the Affordable Care Act. 

 To reflect how the Affordable Care Act creates different eligibility categories 

with different associated cost-sharing reductions, we proposed that each plan variation 

would reflect the enrollee’s portion of the cost sharing requirements for the QHP. We 

referred to “assigning” enrollees to the applicable plan variation to describe how the 

enrollees will receive the benefits described in section 1402 of the Affordable Care Act. 

We reiterated that these variations are not different QHPs and that a change in eligibility 

for cost-sharing reductions simply changes the enrollee’s responsibility for part of the 

total cost sharing under the same QHP. 

In addition, we also proposed to define “de minimis variation for a silver plan 

variation” as a single percentage point. That is, we proposed that a 1 percentage point 

variation in the AV of a silver plan variation would not result in a material difference in 

the true dollar value of the silver plan variation. We noted that this proposal differed 

from the 2 percentage point de minimis variation standard for health plans finalized in 

§156.140(c) of the final EHB/AV Rule. 

We proposed to define “most generous” or “more generous” as, between a QHP 

(including a standard silver plan) or plan variation and one or more other plan variations 
CMS-9964-F 246 

of the same QHP, the QHP or plan variation designed for the category of individuals last 

listed in §155.305(g)(3). 

We proposed to define the “annual limitation on cost sharing” as the annual dollar 

limit on cost sharing required to be paid by an enrollee that is established by a particular 

QHP. We noted that this definition refers to the plan-specific cost-sharing parameters, 

while the defined term “maximum annual limitation on cost sharing” was proposed to 

refer to the uniform maximum that would apply to all QHPs (other than QHPs with costsharing reductions) for a particular year under standards at §156.130. Finally, we 

proposed to define the “reduced maximum annual limitation on cost sharing” as the 

dollar value of the maximum annual limitation on cost sharing for a silver plan variation 

that remains after applying the reduction in the maximum annual limitation on cost 

sharing required by section 1402 of the Affordable Care Act, as announced in the annual 

HHS notice of benefit and payment parameters. The reduced maximum annual limitation 

on cost sharing for each silver plan variation for 2014 was proposed in the preamble for 

§156.420 of this Payment Notice. The reduced maximum annual limitation applies, as 

does the maximum annual limitation, only with respect to cost sharing on EHB, and does 

not apply to cost sharing on services provided by out-of-network providers. See §156.20 

(defining cost sharing) and §156.130(c). 

We are finalizing these provisions, with the following modification: we are 

amending the reference for the definition of the term “de minimis variation” to 

§156.140(c) instead of §156.140(c)(1), in alignment with the final EHB/AV rule. The 

reduced maximum limitation on cost sharing for each silver plan variation is finalized in 

section III.E.4.c. below. 

Comment: Several commenters recommended that the de minimis variation for 

silver plan variations be increased to +/-2 percent as proposed in the AV/CSR Bulletin 
CMS-9964-F 247 

and proposed for standard plans under the final EHB/AV rule. Other commenters 

supported the +/-1 percent de minimis variation for silver plan variations. 

Response: We believe that a narrower de minimis variation for plan variations 

prevents differences in cost sharing between plan variations and ensures that low- and 

moderate-income enrollees receive the cost-sharing reductions for which they are 

eligible. We believe that because cost-sharing reductions are reimbursed by the Federal 

government, the degree of flexibility afforded to issuers of silver plan variations in their 

cost-sharing design should be somewhat less. With this standard, we seek to balance the 

need to ensure that individuals receive the full value of the cost-sharing reductions for 

which they are eligible, and issuers’ ability to set reasonable cost-sharing requirements. 

Comment: One commenter suggested we define “de minimis” variation to mean 

the allowable variation in the AV of a health plan such that the proportion of EHB paid 

by the health plan is within the range established in §156.140(c). 

Response: The definition of de minimis variation is incorporated by reference to 

§156.140(c) of the final EHB/AV rule. We do not believe that a separate definition of the 

term “de minimis” itself for the purpose of plan variations is warranted. 

Comment: We received a number of comments requesting that cost-sharing 

reductions be limited to in-network services. One commenter opposed excluding out-ofnetwork services from counting towards the annual limitation on cost sharing. 

Response: As provided in §156.130(c) of the final EHB/AV rule, in the case of a 

plan using a network of providers, cost sharing for services provided out of network do 

not count toward the annual limitation on cost sharing. We reference this definition and 

we note that cost-sharing requirements for out-of-networks services will similarly not 

count towards a reduced annual limitation on cost sharing. We note, however, that section 

1402(c)(2) of the Affordable Care Act does not specify how any additional reductions 
CMS-9964-F 248 

should be achieved for individuals eligible for cost-sharing reductions. We therefore 

clarify that in developing silver plan variations, issuers have the flexibility to reduce cost 

sharing only for in-network services as long as the required AV levels are achieved and 

the plan design does not violate the standards set forth in §§156.420(c)-(f). 

b. Cost-sharing reductions for enrollees 

 In §156.410(a), we proposed that a QHP issuer must ensure that an individual 

eligible for cost-sharing reductions, as demonstrated by assignment to a particular plan 

variation, pay only the cost sharing required of an eligible individual for the applicable 

covered service under a plan variation. We also proposed in this paragraph that the 

enrollee receive this reduction in cost sharing when the cost sharing is collected, which 

might occur when the enrollee visits the emergency room for care. This proposal would 

apply to all forms of cost sharing, including copayments, coinsurance, and deductibles. 

Under our proposal, the QHP issuer would ensure that the enrollee is not charged any 

type of cost sharing after the applicable annual limitation on cost sharing has been met. 

Furthermore, we explained in the preamble that for services subject to cost sharing, an 

individual eligible for cost-sharing reductions would not be eligible for a reduced 

copayment or coinsurance rate until any applicable (potentially reduced) deductible has 

been paid. For the reasons described in the proposed rule and considering the comments 

received, we are finalizing these provisions as proposed. 

 Comment: Several commenters supported this policy. One commenter was 

concerned that the reduced deductible must be applied before an enrollee becomes 

eligible for the cost-sharing reductions. Another commenter was concerned there could 

be confusion among providers about the amount of cost sharing to collect and suggested 

that HHS require QHP issuers to issue membership cards to enrollees that clearly explain 

the enrollee’s cost-sharing obligations. 
CMS-9964-F 249 

 Response: We believe it is appropriate for enrollees eligible for cost-sharing 

reductions to continue to be required to pay any applicable deductibles before taking 

advantage of other cost-sharing reductions. We recognize that QHP issuers will be 

required to supply providers with the necessary cost-sharing information to meet the 

obligation under §156.410(a) of this final rule to ensure that the cost-sharing reductions 

are provided when the cost sharing is collected. 

In §156.410(b), we proposed that after a qualified individual makes a plan 

selection, a QHP issuer would assign the individual to the applicable plan variation based 

on the eligibility determination sent to the QHP issuer by the Exchange. We noted in 

preamble that the QHP issuer is entitled to rely upon the eligibility determination sent to 

the QHP issuer by the Exchange. 

In §156.410(b)(1), we proposed that a QHP issuer assign a qualified individual 

who chooses to enroll in a silver plan in the individual market in the Exchange to the 

silver plan variation for which the qualified individual is eligible. Comments on 

§156.410(b)(2) and (3) are discussed below in the section of this final rule related to the 

special cost-sharing reduction rules for Indians. In §156.410(b)(4), we proposed that a 

QHP issuer must assign an individual determined ineligible by the Exchange for costsharing reductions to the selected QHP with no cost-sharing reductions. We are 

finalizing these provisions without modification. 

 Comment: Commenters generally supported requiring QHP issuers to assign 

enrollees to the plan variation for which they are eligible. One commenter specifically 

suggested that Exchanges only display the plan variation of each QHP for which the 

consumer is eligible to avoid confusion. 

 Response: The standards set forth in §156.420 ensure that consumers will be best 

served by being assigned to the most generous plan variation for which they are eligible. 
CMS-9964-F 250 

Therefore, we encourage Exchanges to only display the variation of each QHP plan for 

which the consumer is eligible. As noted in the proposed rule, if an individual does not 

wish to receive cost-sharing reductions, the individual may elect to decline to apply for 

cost-sharing reductions. 

c. Plan Variations 

In §156.420, we proposed that issuers submit to the Exchange for certification and 

approval the variations of the health plans that they seek to offer or continue to offer in 

the individual market on the Exchange as QHPs that include required levels of costsharing reductions. We further clarified that under our proposal, multi-State plans, as 

defined in §155.1000(a), and CO–OP QHPs, as defined in §156.505, would be subject to 

the provisions of this subpart. OPM will certify the plan variations of the multi-State 

plans and determine the time and manner for submission. 

 Sections 1402(a) through (c) of the Affordable Care Act direct issuers to reduce 

cost sharing for EHB for eligible insureds enrolled in a silver health plan with household 

incomes between 100 and 400 percent of the FPL, such that the plan’s share (before any 

reimbursement from HHS for cost-sharing reductions) of the total allowed costs of the 

benefits are a certain percentage (that is, the health plan meets a certain AV level). To 

achieve these AV levels, the law directs issuers to first reduce the maximum annual 

limitation on cost sharing. After the issuer reduces the annual limitation on cost sharing 

to comply with the applicable reduced maximum annual limitation, section 1402(c)(2) of 

the Affordable Care Act directs the Secretary to establish procedures under which an 

issuer is to further reduce cost sharing if necessary to achieve the specified AV levels. 

 For individuals with household incomes of 250 to 400 percent of the FPL, we 

noted that without any change in other forms of cost sharing, any reduction in the 

maximum annual limitation on cost sharing will cause an increase in AV. Therefore, we 
CMS-9964-F 251 

proposed not to reduce the maximum annual limitation on cost sharing for individuals 

with household incomes between 250 and 400 percent of the FPL. We are finalizing this 

policy as proposed, with the following modifications. We are adding a new paragraph (g) 

to clarify that OPM, rather than the Exchange, will determine the time and manner for 

multi-State plans to submit silver plan variations and zero and limited cost sharing plan 

variations for the purpose of certification. Additionally, we note a technical correction 

with regard to the submission of plan variations under §156.420(a); we replace the phrase 

“[an issuer] seeks to offer or to continue to offer” with the phrase “[an issuer] offers, or 

intends to offer,” to align with the language in §156.430(a). 

Comment: Two commenters recommended that HHS require plans to provide 

individuals with incomes between 250 percent and 400 percent of FPL the option of 

enrolling in a plan variation with a lower annual limitation on cost sharing and higher 

deductibles, copayments, and coinsurance in order to reach the statutorily required AV. 

Another commenter recommended that HHS rebate excess cost sharing for individuals 

between 250 percent and 400 percent of the FPL or work with IRS to issue a tax credit. 

 Response: As noted in the proposed rule, a reduction in the maximum annual 

limitation on cost sharing could require corresponding increases in other forms of cost 

sharing to maintain the statutorily required AV levels for individuals between 250-400 

percent of FPL. Since we anticipate that most individuals would not be expected to reach 

the annual limitation on cost sharing, most individuals would be required to pay more upfront costs under such a cost-sharing structure. Furthermore, given the additional 

administrative burden required in designing and operating additional silver plan 

variations, we do not modify the proposed policy in this final rule. In addition, we do not 

believe we have the authority to provide individuals in this income range with an 
CMS-9964-F 252 

additional tax credit (beyond that provided for in sections 1401 and 1411 of the 

Affordable Care Act and section 36B of the Code). 

 For individuals with a household income of 100 to 250 percent of the FPL, we 

proposed an annual three-step process for the design of cost-sharing structures in the 

silver plan variations, as follows: 

Step 1. In the first step, we identify in the annual HHS notice of benefit and 

payment parameters the maximum annual limitation on cost sharing applicable to all 

plans that will offer the EHB package. 

Maximum Annual Limitation on Cost Sharing for Benefit Year 2014: As 

discussed in §156.130(a) of the final EHB/AV Rule, the maximum annual limitation on 

cost sharing for 2014 is the dollar limit on cost sharing for high deductible health plans 

set by the IRS under section 223(c)(2)(A)(ii) of the Code for 2014. The IRS will publish 

this dollar limit in the spring of 2013. However, to allow time for HHS to analyze the 

impact of the reductions in the maximum annual limitation on cost sharing on health plan 

AV levels, and to allow issuers adequate time to develop the cost-sharing structures of 

their silver plan variations for submission during the QHP certification process, we 

proposed to estimate the dollar limit for 2014. Based on the proposed methodology, we 

estimated that the maximum annual limitation on cost sharing for self-only coverage for 

2014 will be approximately $6,400 (the maximum annual limitation on cost sharing for 

other than self-only coverage for 2014 would be twice that amount, or $12,800).26 This 

estimate was developed and proposed for purposes of setting the reduced maximum 

annual limitation on cost sharing for silver plan variations. Under section 1302(c)(1)(A) 

of the Affordable Care Act, cost sharing incurred under plans offering EHB packages, as 

 

26 The methodology is discussed in detail at 77 FR 73171-73172 of the proposed rule. 
CMS-9964-F 253 

defined in §156.20, in 2014 cannot exceed the limit set by the IRS under section 

223(c)(2)(A)(ii)(I) and (II) of the Code for the 2014 plan year. For a benefit year 

beginning after 2014, the maximum annual limitation on cost sharing will equal the dollar 

limit for 2014 benefit year adjusted by a premium adjustment percentage determined by 

HHS, under section 1302(c)(4) of the Affordable Care Act. We plan to propose the 

premium adjustment percentage applicable to the 2015 benefit year in the next HHS 

notice of benefit and payment parameters. 

Step 2. In the second step, we analyze the effect on AV of the reductions in the 

maximum annual limitation on cost sharing described in section 1402(c)(1)(A) of the 

Affordable Care Act. Under section 1402(c)(1)(B)(ii), we may adjust the reduction in the 

maximum annual limitation on cost sharing, if necessary, to ensure that the actuarial 

values of the applicable silver plan variations do not exceed the actuarial values specified 

in section 1402(c)(1)(B)(i). We proposed to describe these analyses and the reduced 

annual limitations on cost sharing for the three income categories in the annual HHS 

notice of benefit and payment parameters. 

Reduced Maximum Annual Limitation on Cost Sharing for Benefit Year 2014. 

 As described in the proposed rule, for the 2014 benefit year, we analyzed the 

impact on the actuarial values of three model silver level QHPs of the reductions 

described in the Affordable Care Act to the estimated maximum annual limitation on cost 

sharing for self-only coverage for 2014 ($6,400). These model plans were meant to 

represent the broad sets of plan designs that we expect issuers to offer at the silver level 

of coverage through an Exchange. All three model plans meet the actuarial value 

requirements for silver health plans, and start with an annual limitation on cost sharing 

equal to the estimated maximum annual limitation on cost sharing ($6,400). The plan 
CMS-9964-F 254 

design features of the model QHPs were entered into the AV calculator developed by 

HHS. 

As described in the preamble to the proposed rule, we determined that a reduction 

in the maximum annual limitation on cost sharing specified in the Affordable Care Act 

for enrollees with household incomes between 100 and 150 percent of the FPL (2/3 

reduction), and 150 and 200 percent of the FPL (2/3 reduction), would not cause the AVs 

of any of the model QHPs to exceed the statutorily specified AV levels (94 and 87, 

respectively). In contrast, the reduction in the maximum annual limitation on cost 

sharing specified in the Affordable Care Act for enrollees with household incomes 

between 200 and 250 percent of FPL (1/2 reduction), did cause the AVs of the model 

QHPs to exceed the specified AV level of 73 percent. As a result, we proposed that QHP 

issuers only be required to reduce their annual limitation on cost sharing for enrollees in 

the 2014 benefit year with household incomes between 200 and 250 percent of FPL by 

approximately 1/5, rather than 1/2. We further proposed to moderate the reductions in 

the maximum annual limitation on cost sharing for all three income categories, as shown 

in Table 21, to account for any potential inaccuracies in our estimate of the maximum 

annual limitation on cost sharing for 2014, and unique plan designs that may not be 

captured by our three model QHPs. Based on this analysis, in Table 21, we proposed the 

following reduced maximum annual limitations on cost sharing for benefit year 2014: 

TABLE 21: Reductions in Maximum Annual Limitation on Cost Sharing for 2014 

Eligibility Category Reduced Maximum Annual 

Limitation on Cost Sharing 

for Self-Only Coverage for 

2014 

Reduced Maximum 

Annual Limitation on 

Cost Sharing for Other 

Than Self-Only 

Coverage for 2014 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(i) (that is, 100-

150 percent of FPL) 

$2,250 $4,500 
CMS-9964-F 255 

Eligibility Category Reduced Maximum Annual 

Limitation on Cost Sharing 

for Self-Only Coverage for 

2014 

Reduced Maximum 

Annual Limitation on 

Cost Sharing for Other 

Than Self-Only 

Coverage for 2014 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(ii) (that is, 150-

200 percent of FPL) 

$2,250 $4,500 

Individuals eligible for costsharing reductions under 

§155.305(g)(2)(iii) (that is, 200-

250 percent of FPL) 

$5,200 $10,400 

We proposed that QHP issuers may rely on the reduced maximum annual 

limitations on cost sharing published in the final HHS notice of benefit and payment 

parameters to develop their silver plan variations for the 2014 benefit year. 

 Step 3. In the proposed third step of the process for structuring cost sharing in the 

silver plan variations, a QHP issuer offering coverage in the individual market on an 

Exchange would be required to develop three variations of its standard silver plan – one 

each for individuals with household incomes between 100 and 150 percent of the FPL, 

150 and 200 percent of the FPL, and 200 and 250 percent of the FPL – with each 

variation having an annual limitation on cost sharing that does not exceed the applicable 

reduced maximum annual limitation on cost sharing published in the annual HHS notice 

of benefit and payment parameters. If the application of the reduced annual limitation on 

cost sharing results in an AV for a particular silver plan variation that differs from the 

required 73, 87, or 94 percent AV level by more than the permitted amount (that is, the 1 

percent de minimis amount for silver plan variations, subject to §156.420(f), as described 

below), the QHP issuer would adjust the cost-sharing structure in that silver plan 

variation to achieve the applicable AV level. 
CMS-9964-F 256 

 We proposed specifications in §156.420(a)(1) through (3) for the three silver plan 

variations, and proposed that they may deviate from the required AV levels by the de 

minimis variation for silver plan variations that is, 1 percentage point. We further 

proposed that issuers submit these silver plan variations annually to the Exchange for 

certification, prior to the benefit year. Under our proposal, silver plan variations would 

be approved annually even if the standard silver plan does not change, since the reduced 

maximum annual limitation on cost sharing may change annually due to the premium 

adjustment percentage. For the reasons described in the proposed rule and considering 

the comments received and discussed below, we are finalizing these provisions, including 

the reductions in the maximum limitation on cost sharing for silver plan variations 

offered in the 2014, as proposed with certain clarifications. 

Comment: One commenter noted that the IRS does not release the dollar limit on 

cost sharing until late spring and this would be too late for issuers to adjust their product 

designs to be compliant with the IRS limit and also meet State and Federal filing 

deadlines. The commenter suggested that HHS develop an estimate of the maximum 

annual limit on cost sharing that can be used as a safe harbor. 

Response: We are finalizing the proposal to permit QHP issuers to rely on the 

reduced maximum annual limitations on cost sharing published in the final HHS notice of 

benefit and payment parameters to develop their silver plan variations for the 2014 

benefit year. We plan to provide separate guidance on the maximum annual limitation on 

cost sharing for standard plans to QHP issuers seeking to participate in a Federallyfacilitated Exchange consistent with the approach finalized in this Payment Notice. 

Comment: One commenter recommended that the maximum annual limitation on 

cost sharing should be published no later than July 1 of the year prior to open enrollment, 

with a 45-day comment period. 
CMS-9964-F 257 

Response: We understand the need for issuers and stakeholders to have adequate 

time to consider how the maximum annual limitation on cost-sharing should be applied in 

the development of plan variations. We note that in later benefit years, the maximum 

annual limitation on cost sharing will be established under a premium adjustment 

percentage established by HHS in the annual notice of benefit and payment parameters 

for the applicable plan year. 

Comment: One commenter suggested that HHS should not adjust the reductions 

in the maximum annual limitation on cost sharing, as these adjustments could affect other 

cost-sharing requirements that a State-based Exchange might put in place under its 

authority to develop certification standards, as described at §155.1000(c)(2). 

 Response: We believe it is important to make these adjustments to ensure that 

issuers have flexibility when developing their plan designs. Without these adjustments, it 

could be difficult for issuers to achieve the required actuarial value levels for certain plan 

variations, while complying with other applicable rules on cost-sharing structures, such 

as the provision at §156.420(e). Additionally, we anticipate working with States and 

Exchanges individually to address the interaction between the standards in the Payment 

Notice and any additional Exchange-specific certification standards. 

 Comment: One commenter suggested that when silver plan variations cannot be 

accommodated by the AV calculator, HHS should require that the AV determinations be 

certified by a member of the American Academy of Actuaries. 

Response: We clarify that the definition of and standards for determining 

actuarial value in §156.20 and §156.135 of the final EHB/AV Rule apply to both standard 

plans and plan variations. Accordingly, if a health plan’s design for plan variation is not 

compatible with the AV calculator, the issuer would be required to follow the processes 

specified in §156.135(b) of the final EHB/AV Rule. 
CMS-9964-F 258 

Comment: One commenter requested that HHS clarify which “desired metal tier” 

should be inputted into the AV calculator to determine the AV for the silver plan 

variations. 

Response: We have designed the AV Calculator such that users may select the 

option to determine whether the plan design satisfies the plan variations standards 

finalized here. To use the AV Calculator to verify the AV of a plan variation, users 

should select the indicator that the plan meets the cost-sharing reduction standard, and 

select the desired metal tier. In the below table, we provide guidance on which metal tier 

should be chosen to align with the expected utilization for each plan variation. Additional 

information on the AV Calculator can be found at 

http://cciio.cms.gov/resources/regulations/index.html#pm. 

TABLE 22: Desired Metal Tier for Silver Plan Variation AV 

Household Income Silver Plan Variation AV Desired Metal Tier 

100-150 percent of FPL Plan Variation 94 percent Platinum 

150-200 percent of FPL Plan Variation 87 percent Gold 

200-250 percent of FPL Plan Variation 73 percent Silver 

Comment: One commenter asked HHS to clarify how silver plan variations could 

be designed to be compatible with HSAs. 

Response: We are considering this issue and will provide future guidance. 

Comment: One commenter asked if HHS could make public its modeling 

regarding the expected rate of change in cost-sharing reduction eligibility within a plan 

year. 

Response: HHS does not have such an analysis to share at this time. 

Comment: Another commenter was concerned about the ability of States to 

supplement cost-sharing reductions under the proposed policy, and requested HHS give 
CMS-9964-F 259 

States that wish to supplement cost sharing the flexibility to determine whether issuers 

must offer all plan variations. 

Response: We intend to work with States to assess how the requirements 

regarding plan variations would interact with any supplemental cost-sharing reductions a 

State intends to provide. 

Comment: Several commenters recommended that HHS establish parameters for 

deductibles in silver plan variations. One commenter suggested that cost-sharing 

reductions to reach the required AV levels identified in §156.420(a) should first be used 

to lower the deductible and then reduce coinsurance or copayments, and that enrollees 

should receive negotiated pharmacy prices during the deductible phase. The same 

commenter suggested waiving or reducing the deductible for outpatient pharmacy for 

individuals eligible for cost-sharing reductions and making cost-sharing reductions in the 

forms of lower coinsurance and copayments available to enrollees assigned to plan 

variations immediately. One commenter asked for allowances to be made to permit 

issuers to develop innovative plan designs. 

Response: We believe that the standards we are finalizing strike the appropriate 

balance between protecting consumers and preserving QHP issuer flexibility. The 

standard in §156.420(e) that cost sharing for a silver plan variation not exceed the 

corresponding cost sharing for a standard silver plan or silver plan variation with a lower 

AV protects low-income populations who are assigned to plan variations. We also clarify 

that, for purposes of the plan variations, any cost sharing that an enrollee would have 

been required to pay under the standard plan, but was not required to pay under the plan 

variation, should not be applied to the annual limitation on cost sharing. 

Comment: Several commenters sought clarification on whether issuers must 

submit a silver plan variation for every plan offered on the individual market. 
CMS-9964-F 260 

Response: We clarify that for each silver health plan that an issuer offers, or 

intends to offer in the individual market on an Exchange, the issuer must submit the three 

silver plan variations. This policy will ensure that low-income individuals can receive 

cost-sharing reductions while enrolled in any silver level QHP offered through the 

Exchange, consistent with section 1402 of the Affordable Care Act. 

Sections 156.420(b) and (d) are discussed below in section III.E.4.i. related to the 

special cost-sharing reduction rules for Indians. 

In §156.420(c) and (e), we proposed additional coverage standards for silver plan 

variations as part of implementing section 1402. In §156.420(c), we proposed that silver 

plan variations cover the same benefits and include the same providers as the standard 

silver plan. We further proposed that silver plan variations must require the same out-ofpocket spending for benefits other than EHB. Lastly, we proposed that silver plan 

variations be subject to all requirements applicable to the standard silver plan (except for 

the requirement that the plan have an AV as set forth in §156.140(b)(2) of the final 

EHB/AV Rule). This means, for example, that silver plan variations must meet standards 

relating to marketing and benefit design of QHPs, network adequacy standards, and 

essential community providers. Although these requirements are implicit because a plan 

variation is not a separate plan, we proposed these requirements explicitly as regulatory 

standards to ensure that QHP issuers develop appropriate plan variations. 

In §156.420(e), we proposed a standard to govern the design of cost-sharing 

structures for silver plan variations. Under this approach, the cost sharing for enrollees 

under any silver plan variation for an EHB from a provider may not exceed the 

corresponding cost sharing in the standard silver plan or any other silver plan variation of 

the standard silver plan with a lower AV. This proposed standard would apply to all 

types of cost-sharing reductions, including reductions to deductibles, coinsurance, and 
CMS-9964-F 261 

co-payments. An issuer would have the flexibility to vary cost sharing on particular 

benefits or providers so long as that cost sharing did not increase for a particular benefit 

or provider in higher AV silver plan variations. For the reasons described in the proposed 

rule and considering the comments received, we are finalizing these provisions in 

paragraphs (c) and (e) as proposed. 

Comment: A number of commenters supported the requirement that silver plan 

variations cover the same benefits and include the same providers as the standard silver 

plan. Several commenters also generally supported the proposal that the cost sharing for 

enrollees under any silver plan variation for an EHB from a provider may not exceed the 

corresponding cost sharing in the standard silver plan or any other silver plan variation of 

the standard silver plan with a lower AV. One commenter supported allowing QHP 

issuers to have greater flexibility to vary cost-sharing structures across plan variations, 

and asked for clarification on whether QHP issuers can continue to use medical 

management policies for silver plan variations. Another commenter asked whether 

issuers may switch between copayments and coinsurance for silver plan variations as 

long as the cost sharing in aggregate does not exceed that of plans with lower actuarial 

values. 

Response: We are finalizing the policy as proposed at §156.420(e). We intend to 

interpret and enforce this provision such that a QHP issuer may not switch between 

copayments and coinsurance for silver plan variations for the same benefit. We believe 

that allowing this type of substitution could result in an enrollee being subject to greater 

cost sharing under a plan variation with a higher AV, which §156.420(e) is intended to 

prohibit. However, this provision does not limit an issuer’s ability to appropriately use 

reasonable medical management techniques in managing costs consistently in its silver 

plan variations. We also direct the commenter’s attention to §156.125(c) of the final 
CMS-9964-F 262 

EHB/AV Rule, which codifies this protection in connection with anti-discrimination 

requirements, and section 1563(d) of the Affordable Care Act. 

In §156.420(f), we proposed that, notwithstanding the permitted de minimis 

variation in AV for a health plan or the permitted de minimis variation for a silver plan 

variation, the AV of the standard silver plan (which must be 70 percent plus or minus 2 

percentage points) and the AV of the silver plan variation applicable to individuals with 

household incomes between 200 and 250 percent of the FPL (which must be 73 percent 

plus or minus 1 percentage point) must differ by at least 2 percentage points. We are 

finalizing the provision as proposed. 

 Comment: Several commenters supported this requirement. Another commenter 

was concerned about the ability of issuers to create a viable 73 percent plan variation 

given the number of plan design constraints. 

Response: We believe that a 2 percentage point differential will ensure that a 

difference in cost-sharing reductions provided to each income category is maintained, 

while providing issuers the flexibility to adjust cost-sharing requirements within these 

standards. 

d. Changes in Eligibility for Cost-Sharing Reductions 

In §156.425(a), we proposed that if the Exchange notifies a QHP issuer of a 

change in an enrollee’s eligibility for cost-sharing reductions (including a change 

following which the enrollee will not be eligible for cost-sharing reductions), then the 

QHP issuer must change the individual’s assignment so that the individual is assigned to 

the applicable standard plan or plan variation. We also proposed that the QHP issuer 

effectuate the change in eligibility in accordance with the effective date of eligibility 

provided by the Exchange. We explained in preamble that an Exchange would establish 

such dates under §155.330(f). We noted that if an enrollee changes QHPs after the 
CMS-9964-F 263 

effective date of the eligibility change as the result of a special enrollment period, once 

the Exchange notifies the issuer of the new QHP of the enrollment, that QHP issuer must 

assign the enrollee to the applicable standard plan or plan variation of the QHP selected 

by the enrollee, consistent with §156.410(b). We are finalizing these provisions as 

proposed. 

Comment: Commenters generally supported the policy, but several stated that a 

change in an enrollee’s eligibility for cost-sharing reductions should only be applied 

prospectively. One commenter requested that HHS clarify that cost-sharing reductions 

would not be available until the first day of the following month, to eliminate the need to 

re-adjudicate claims. Another commenter suggested that if retroactive changes in 

eligibility for cost-sharing reductions are permitted, only claims the issuer receives after 

the effective date of the new assignment should be processed under the new cost-sharing 

requirements. 

Response: We are finalizing the policy as proposed. This policy aligns with the 

eligibility standards and effective dates proposed for the amendment at §155.330(f) of the 

proposed Medicaid and Exchange Eligibility Appeals and Notices Rule, which aim to 

reduce the need for retroactive eligibility changes for cost-sharing reductions, except in 

certain limited scenarios, discussed in that rule. 

Comment: One commenter recommended that HHS ensure that individuals who 

are not assigned to the applicable plan variation in a timely manner should be refunded 

any cost sharing they should not have been responsible for after the effective date of the 

eligibility change. 

Response: We believe that it is important that eligible individuals receive the 

appropriate cost-sharing reductions as of the effective date required by the Exchange. As 

noted in the proposed rule, an individual would not be penalized based on changes in 
CMS-9964-F 264 

eligibility for cost-sharing reductions during the benefit year, although he or she would be 

ineligible for any refund on cost sharing to the extent the newly applicable deductible or 

annual limitation on cost sharing is exceeded by prior cost sharing. 

Comment: We received a comment seeking clarification that the QHP issuer be 

held harmless for any cost-sharing reductions provided beyond the enrollee’s actual 

eligibility level so long as the QHP issuer makes assignments and reassignments in 

accordance with Exchange instructions. 

Response: We reiterate that our final rule requires a QHP issuer to follow the 

eligibility instructions from an Exchange in ensuring the provision of cost-sharing 

reductions and plan variation assignments under §156.410(a) and §156.425. Therefore, a 

QHP issuer may rely upon the eligibility determination sent by the Exchange. If a QHP 

issuer does not receive notification of an eligibility redetermination, the QHP issuer 

would not be permitted to re-assign the enrollee to a different plan variation or standard 

plan. 

In §156.425(b), we proposed that in the case of a change in assignment to a 

different plan variation (or standard plan without cost-sharing reductions) of the same 

QHP in the course of a benefit year (including in the case of a re-enrollment into the QHP 

following enrollment in a different plan), the QHP issuer must ensure that any cost 

sharing paid by the applicable individuals under the previous plan variations (or standard 

plan without cost-sharing reductions) is accounted for in the calculation of deductibles 

and annual limitations on cost sharing in the individual’s newly assigned plan variation 

(or standard plan without cost sharing) for the remainder of the benefit year. As 

discussed above, we noted in the preamble that a change from or to an individual or 

family policy of a QHP due to the addition or removal of a family member does not 
CMS-9964-F 265 

constitute a change in plan for the family members originally on the individual or family 

policy. We are finalizing these provisions as proposed. 

Comment: One commenter suggested that enrollees not be permitted to switch 

QHPs as a result of a mid-year change in eligibility for cost-sharing reductions, because 

an enrollee could mistakenly forfeit credit for previously paid cost sharing. Another 

commenter suggested that Exchanges be required to explain to consumers the policy 

relating to continuity of deductibles and annual limitations on cost sharing and the 

implications of switching QHPs mid-year. 

Response: Prohibiting enrollees from switching QHPs would conflict with 

§155.420(d)(6) of the Exchange Establishment Rule, which allows an individual who has 

a change in eligibility for cost-sharing reductions to enroll in or change from one QHP to 

another during a special enrollment period. We note that enrollees may choose a plan 

variation of the same QHP in order to ensure that any cost sharing previously paid by the 

individual is taken into account. We encourage Exchanges to provide information to 

consumers on this topic. 

Comment: One commenter asked HHS to consider instituting safe harbors if the 

enrollee already met the annual limit on cost sharing, but due to lags in data the QHP is 

not informed. 

Response: We appreciate the difficulties caused by lags in data, and anticipate 

consulting with stakeholders to provide guidance on these sorts of operational issues. 

Comment: One commenter requested an example to illustrate whether an 

individual will be required to satisfy the additional deductible amount when moving to a 

plan with a higher deductible. Another commenter recommended that deductible 

amounts carried forward to a policy with a lower deductible be counted towards the 

annual limitation on cost sharing. 
CMS-9964-F 266 

Response: In accordance with the rule finalized here at §156.425(b), as long as 

the change of assignment is to a different plan variation of the same QHP, any cost 

sharing paid by the applicable individual under the previous plan variation must be taken 

into account. This requirement would also apply to Indians who change plan variations 

within the same QHP as a result of a change in income, such as an Indian who moves 

from a limited cost sharing plan variation to a zero cost sharing plan variation, and then 

returns to the limited cost sharing plan variation of the same QHP. 

Furthermore, as noted in the proposed rule, an individual eligible for cost-sharing 

reductions would not be eligible for a reduced copayment or coinsurance until the 

applicable deductible has been met. For example, if the individual satisfies a $500 

deductible and pays $100 in co-payments in one plan variation, then moves to a different 

plan variation of the same QHP with a $750 deductible as a result of a change in 

eligibility, the plan would apply $600 towards the new deductible and the individual 

would need to satisfy the remaining $150 of the new deductible to be eligible for the 

reduced co-payment or coinsurance. Conversely, if an enrollee satisfies a $900 

deductible in a standard plan and then moves to a plan variation of the same QHP with a 

$750 deductible as a result of a change in eligibility, the additional $150 the individual 

already paid must be applied towards the reduced annual limitation on cost sharing of the 

new plan variation. However, as we explained in connection with this proposal, the 

enrollee would not receive a rebate for the amount already paid above the deductible for 

the new plan variation. 

Comment: One commenter sought clarification on how the requirements for 

continuity of deductibles and the annual limitation on cost sharing would apply if a QHP 

enrollee becomes eligible for Medicaid, and then later, re-enrolls in the QHP. The same 
CMS-9964-F 267 

commenter asked how the policy would apply if the individual switches to a different 

QHP. 

Response: As noted in the proposed rule, the requirement regarding the 

continuity of deductibles and out-of-pocket maximums would apply as long as the change 

in assignment is to a different plan variation of the same QHP. We interpret this to 

include re-enrollment into the QHP following enrollment in a different QHP or another 

type of coverage such as Medicaid within the coverage year. As we also noted in the 

proposed rule, the QHP issuer is not prohibited from or required to extend the continuity 

of deductibles and annual limitations on cost sharing policy to situations in which the 

individual changes QHPs, but is permitted to extend this policy, provided that this 

extension of the policy is applied across all enrollees in a uniform manner. 

Comment: One commenter sought clarification on how the proposed policy will 

affect the reconciliation of advance payments of cost-sharing reductions with actual 

payments. 

Response: Under the reconciliation policy finalized in this rule, cost-sharing 

reductions properly provided in accordance with this rule will be reimbursed. Thus, if an 

enrollee changes plan variations mid-year and is properly credited with amounts 

previously accumulated towards a deductible, then cost-sharing reductions on 

copayments and coinsurance that are provided because the deductible under the new plan 

variation is reached more quickly are reimbursable as part of reconciliation. 

e. Payment for Cost-Sharing Reductions 

 We proposed to implement a payment approach under which we would make 

monthly advance payments to issuers to cover projected cost-sharing reduction amounts, 

and then reconcile those advance payments at the end of the benefit year to the actual 
CMS-9964-F 268 

cost-sharing reduction amounts.27 This approach fulfills the Secretary’s obligation to 

make “periodic and timely payments equal to the value of the reductions” under section 

1402(c)(3) of the Affordable Care Act. We expect that this approach would not require 

issuers to fund the value of any cost-sharing reductions prior to reimbursement. This 

approach is similar to the one employed for the low-income subsidy under Medicare Part 

D. 

 We are finalizing our payment approach as proposed with five specific 

modifications. The first two modifications relate to reimbursement for cost-sharing 

reductions for Indians, which are discussed in section III.E.4.i. of this final rule. The 

third modification is the addition of paragraph §156.430(a)(4), clarifying that issuers of 

multi-State plans must provide the estimates described in paragraphs (1) and (2) of 

§156.430(a) to OPM, rather than the Exchange, in the time and manner established by 

OPM. The fourth modification authorizes HHS to adjust the advance payments for costsharing reductions during the benefit year. As we acknowledged in the proposed rule, 

QHP issuers will have access to limited data on its expected enrollees prior to 2014, 

which could reduce the accuracy of the estimates used to develop the advance payment 

amounts. Because we wish to use the advance payment process to protect QHP issuers 

from being required to bear the entire financial burden of providing cost-sharing 

reductions over the benefit year, we are finalizing a change from the proposed rule to 

authorize HHS to adjust the advance payments if the QHP issuer provides evidence, 

certified by a member of the American Academy of Actuaries in accordance with 

generally accepted actuarial principles and methodologies, that the advance payments for 

a particular QHP are likely to be substantially different than the cost-sharing reduction 

 

27 We noted that these payments (both advance and reconciled), and the estimated or actual cost-sharing 

reductions underlying them, are subject to 45 CFR 156.280(e)(1)(ii). 
CMS-9964-F 269 

amounts provided by the issuer that will be reimbursed by HHS after the end of the year 

during the reconciliation process. We discuss this policy further below in relation to 

§156.430(b). 

 The fifth modification is to §156.430(c). As discussed below, we are preserving 

the intent of the provisions proposed at §156.430(c)(1) and (2) in finalized paragraphs 

(c)(1), (2) and (5). This restructuring allows for the addition of paragraphs (c)(3), and 

(4), which are established in an interim final rule with comment published elsewhere in 

this issue of the Federal Register. In that interim final rule with comment, we describe 

an approach that would permit a QHP issuer to calculate the value of the cost-sharing 

reductions provided under the methodology described in this final rule at §156.430(c)(2), 

or to use an alternative, simplified methodology, under which the QHP issuer would 

calculate the value of the cost-sharing reductions provided using certain summary costsharing parameters. As discussed below and in that interim final rule with comment, we 

believe this flexibility to use an alternative methodology will reduce the administrative 

burden on QHP issuers. 

 Comment: We received several comments on our proposed payment approach. 

One commenter supported our proposal to provide advance payments and then reconcile 

those advance payments at the end of the benefit year to the actual cost-sharing reduction 

amounts. Another commenter suggested that the advance payment and reconciliation 

process would be too cumbersome and instead, HHS should simply reimburse issuers at 

the end of the year for the actual value of cost-sharing reductions provided. A third 

commenter agreed that an annual reconciliation process would be burdensome, and 

suggested that in the initial years the submission of data on the amount of cost-sharing 

reductions provided and the reconciliation of payments should be optional. These 
CMS-9964-F 270 

commenters urged that in future years, HHS should reimburse based on monthly 

estimates of the amount of cost-sharing reductions provided. 

 Response: We discuss below, in relation to §156.430(c) and (d), our approach for 

addressing commenters’ concerns regarding the submission of the amount of cost-sharing 

reductions provided and the reconciliation process. 

To implement our proposed payment approach, in §156.430(a)(1)(i) through (iv), 

we proposed that for each health plan that an issuer offers, or intends to offer, in the 

individual market on the Exchange as a QHP, the issuer must provide to the Exchange 

annually prior to the benefit year, for approval by HHS, an estimate of the dollar value of 

the cost-sharing reductions to be provided over the benefit year. If the QHP is a silver 

health plan, the submission must identify separately the per member per month dollar 

value of the cost-sharing reductions to be provided under each silver plan variation 

identified in §156.420(a)(1), (2), and (3). And for each QHP, regardless of metal level, 

the submission must identify the per member per month dollar value of the cost-sharing 

reductions to be provided under the zero cost sharing plan variation. In addition, the 

estimate should be accompanied by supporting documentation validating the estimate. 

We expect that Exchanges will collect this information from issuers through the QHP 

certification process or an annual submission process, and then send the information to 

HHS for review as required by §156.1030(b)(3) finalized under this rule. Sections 

156.430(a)(1)(ii) and 156.430(a)(2) are further described in section III.E.4.i. of this final 

rule. 

 We further proposed that issuers develop the estimates using the methodology 

specified by HHS in the applicable annual HHS notice of benefit and payment 

parameters. In §156.430(a)(3), we proposed that HHS approve estimates that follow this 

methodology. For the 2014 benefit year, we proposed that issuers use a methodology that 
CMS-9964-F 271 

utilizes the data that issuers submit under §156.420 and §156.470. As a result, issuers 

would not be required under this proposal to submit any additional data or supporting 

documentation to receive advance payments in benefit year 2014 for the value of the 

cost-sharing reductions that would be provided under silver plan variations. 

 Methodology for Developing Estimate of Value of Cost-Sharing Reductions for 

Silver Plan Variations for 2014 Benefit Year. 

For the 2014 benefit year, we proposed that advance payments be estimated on a 

per enrollee per month basis using the following formula: 

Per Enrollee Per Month Advance Payment 

= Monthly Expected Allowed Claims Costs for Silver Plan Variation 

x (Silver Plan Variation AV – Standard Plan AV) 

 In this formula, the monthly expected allowed claims cost for a silver plan 

variation would equal one-twelfth of the annual expected allowed claims costs allocated 

to EHB, other than services described in §156.280(d)(1),28 for the standard silver plan, 

multiplied by a factor to account for the increased utilization that may occur under the 

specific plan variation due to the reduced cost-sharing requirements. As proposed in 

§156.470, the QHP issuer would submit the expected allowed claims cost information to 

the Exchange annually. The Exchange would then review this estimate, and submit the 

approved information to HHS, as described in §155.1030(b)(2) above, for use in the 

advance payment calculation. HHS would then multiply the monthly expected allowed 

claims cost by one of the following induced utilization factors, to arrive at the monthly 

expected allowed claims cost for the particular plan variation. We proposed the 

 

28Based on the definition of “cost sharing” in 45 CFR 156.20 and limits on cost-sharing reductions in 

section 1402(c)(4) of the Affordable Care Act, cost-sharing reductions are only provided on EHB. In 

addition, §156.280(e)(1)(i) states that if a QHP provides coverage of services described in paragraph (d)(1) 

of that section, the QHP issuer must not use Federal funds, including cost-sharing reductions, to pay for the 

service. 
CMS-9964-F 272 

following induced utilization factors based on our analysis of the expected difference in 

expenditures for enrollees in QHPs of different actuarial values. For this analysis, we 

used the Actuarial Value Calculator, developed by HHS using the Health Intelligence 

Company, LLC (HIC) database from calendar year 2010.29 

TABLE 23: Induced Utilization Factors for Purposes of Cost-Sharing Reduction 

Advance Payments 

Household Income Silver Plan AV Induced Utilization Factor 

100-150 percent of FPL Plan Variation 94 percent 1.12 

150-200 percent of FPL Plan Variation 87 percent 1.12 

200-250 percent of FPL Plan Variation 73 percent 1.00 

 In the second half of the formula, we proposed the multiplication of the monthly 

expected allowed claims cost for the particular plan variation by the difference in AV 

between the standard silver plan and the plan variation. We proposed to use the actuarial 

values of the QHPs and silver plan variations that the Exchange will submit to HHS 

under §155.1030(a)(2). 

 We are finalizing the methodology for determining advance payments for the 

2014 benefit year as proposed. As noted above, we are also adding paragraph (4) to 

§156.430(a), clarifying that issuers of multi-State plans must provide the estimates 

described in paragraphs (1) and (2) of §156.430(a) to OPM, in the time and manner 

established by OPM. 

 In §156.430(b), we proposed making periodic advance payments to issuers based 

on the approved advance estimates provided under §156.430(a) and the actual enrollment 

information. We proposed to use the methodology described above to determine the 

amount of these advance payments. We are finalizing the provisions at §156.430(a) and 

 

29 http://cciio.cms.gov/resources/regulations/index.html#pm. 
CMS-9964-F 273 

(b) relating to the advance payments as proposed, with the following modification. In 

response to comments discussed below, we are adding subparagraph (b)(2) in the final 

rule to authorize HHS to adjust the advance payment amount for a particular QHP during 

the benefit year if the QHP issuer provides evidence, certified by a member of the 

American Academy of Actuaries in accordance with generally accepted actuarial 

principles and methodologies, that the advance payments for a particular QHP are likely 

to be substantially different than the cost-sharing reduction amounts that the QHP 

provides that will be reimbursed by HHS. Although QHP issuers will be made whole for 

the value of all cost-sharing reductions provided through the reconciliation process after 

the close of the benefit year, we recognize that in certain situations, QHP issuers may 

require adjustments to the advance payments during the benefit year. We do not include 

in this final rule a formal process for the submission of information for the adjustment of 

advance payments because we believe the need for an adjustment will be rare, and the 

circumstances necessitating the adjustment will likely be unique to each QHP issuer. 

HHS is also considering other mechanisms for mid-year adjustments to advance 

payments to ensure that QHP issuers are provided sufficient advance payments and to 

safeguard Federal funds. We anticipate providing further details on such mechanisms in 

future rulemaking. We also anticipate working closely with QHP issuers in order to 

monitor whether the advance payments are likely to be significantly greater than or less 

than the reconciled cost-sharing reduction amounts. 

 Comment: We received several comments on the methodology for developing 

estimates of the value of cost-sharing reductions for advance payments. One commenter 

stated that the formula appeared to be appropriate and will likely result in accurate 

estimates. However, the commenter was concerned that the formula could produce 

results that vary based on member rating factors. 
CMS-9964-F 274 

 Response: As discussed in the proposed Payment Notice in regard to the 

submission of the expected allowed claims costs under §156.470(a) and (c), which is the 

basis of the proposed methodology for estimating the value of cost-sharing reductions, 

we expect issuers to calculate the expected allowed claims cost for a plan based on the 

cost of the EHB for all enrollees in all plans in the relevant risk pool under §156.80 of the 

final Market Reform Rule, and not across a standardized population or a plan-specific 

population. This approach should average the effects of the allowable rating factors on 

plan liability. Therefore, we believe the results of the formula will be appropriately 

adjusted for the allowable rating factors. 

 Comment: Although commenters generally supported adjusting the expected 

allowed claims costs by an induced utilization factor, one commenter stated that the 

proposed factors do not adequately account for changes in utilization as enrollees in plan 

variations may also use more high-cost services. 

 Response: We recognize that additional adjustments are necessary to account for 

the expected increased utilization of enrollees in plan variations, and as a result created a 

cost-sharing reduction adjustment for the HHS risk adjustment model. As described in 

section III.B.3.b. of this final rule, this factor will help compensate QHP issuers with a 

high number of enrollees that qualify for cost-sharing reductions. 

 Comment: We received comments asking for additional detail on the process that 

HHS will use to approve the advance payment amounts. One commenter asked that 

issuers be permitted to make adjustments to the advance payment amounts to account for 

enrollment fluctuations or changing demographics of their enrolled population. Another 

commenter suggested that a process be developed to handle discrepancies in the advance 

payments on a prospective basis. 
CMS-9964-F 275 

 Response: Section 156.430(a)(3) as finalized here states that HHS’s approval of 

the advance payment amounts will be based on whether the estimate is made consistent 

with the methodology specified in the HHS notice of benefit and payment parameters. 

 In addition, as discussed above, in response to the comments received, we are 

finalizing an additional provision to allow HHS to adjust the advance payment amount 

for a particular QHP during the benefit year if the QHP issuer provides evidence that 

meets certain standards. The addition of subparagraph (b)(2) aligns with our goal to 

reduce the financial burden resulting from cost-sharing reductions on QHP issuers during 

the benefit year, our proposal to perform periodic reconciliations, and the comments 

received. 

 In §156.430(c), we proposed that a QHP issuer report to HHS the actual amount 

of cost-sharing reductions provided for use by HHS under §156.430(d) in performing 

periodic reconciliations of the advance payments to the cost-sharing reductions actually 

provided. We noted that additional specifications regarding the submission of actual 

cost-sharing reduction amounts will be provided in future guidance; however, the 

preamble indicated our expectation that QHP issuers will submit the actual amount of 

cost-sharing reductions provided after the close of the benefit year. In §156.430(c)(1) 

and (c)(2), we proposed specific standards for the reporting of cost-sharing reduction 

amounts. In §156.430(c)(1), we proposed that in the case of a benefit for which the QHP 

issuer compensates the applicable provider in whole or in part on a fee-for-service basis, 

the QHP issuer submit the total allowed costs for essential health benefits charged for an 

enrollees’ policy for the benefit year, broken down by what the issuer paid, what the 

enrollee paid, and the amount reimbursed to the provider for the amount that the enrollee 

would have paid under the standard QHP without cost-sharing reductions. In 

§156.430(c)(2), we proposed that in the case of a benefit for which the QHP issuer 
CMS-9964-F 276 

compensates the applicable provider in any other manner (such as on a capitated basis), 

the QHP issuer submit the total allowed costs for essential health benefits charged for an 

enrollees’ policy for the benefit year, broken down by what the issuer paid, what the 

enrollee paid, and the amount that the enrollee would have paid under the standard QHP 

without cost-sharing reductions. When we referred to compensation made on a capitated 

basis in this context, we meant a compensation model under which issuers make 

payments to providers based on a contracted rate for each enrollee, commonly referred to 

as a “per-member-per-month” rate, regardless of the number or type of services provided. 

We noted that a non-fee-for-service provider is not required to be reimbursed by the 

issuer. However, we indicated that we expected that issuers and providers in non-fee-forservice arrangements would make available to providers compensation for cost-sharing 

reductions through their negotiated capitation payments. We sought comments on this 

assumption and other payment approaches for QHPs that use a capitated system to pay 

providers. 

In §156.430(d), we proposed to periodically reconcile advance payments to 

issuers against the actual cost-sharing reduction amounts reported under §156.430(c). 

Thus, where a QHP issuer compensates a provider in whole or in part on a fee-for-service 

basis, we would reconcile the advance payments provided to the issuer against the actual 

amount of cost-sharing reductions reimbursed to providers and provided to enrollees. 

Where the QHP issuer compensates a provider under another arrangement, such as a 

capitated arrangement, we would reconcile the advance payments made to issuers against 

the actual cost-sharing reduction amounts provided to enrollees. 

We are finalizing paragraph (d) as proposed. However, as noted before, we are 

modifying §156.430(c). We are preserving the intent of the provisions proposed at 

§156.430(c)(1) and (2), but restructuring the provisions into finalized paragraphs (c)(1), 
CMS-9964-F 277 

(2) and (5). This restructuring allows for the addition of paragraphs (c)(3) and (4), which 

are established in an interim final rule with comment published elsewhere in this issue of 

the Federal Register, and discussed below. 

 In this final rule, we simplify the language proposed at §156.430(c)(1) so that it 

applies to all benefits, including those for which the QHP issuer compensates the 

applicable provider in a manner other than fee-for-service. Specifically, we establish that 

a QHP issuer, for each plan variation that it offers on the Exchange, submit to HHS, in 

the manner and timeframe established by HHS, for each policy, the total allowed costs 

for EHB charged for the policy for the benefit year, broken down by: (i) the amount the 

issuer paid; (ii) the amount the enrollee(s) paid; and (iii) the amount the enrollee(s) would 

have paid under the standard plan without cost-sharing reductions. In paragraph (c)(2), 

we codify in regulation text the methodology discussed in the preamble of the proposed 

rule for calculating the amount the enrollee(s) would have paid under the standard plan 

without cost-sharing reductions. We specify that QHP issuers must apply the actual costsharing requirements for the standard plan to the allowed costs for EHB under the 

enrollee’s policy for the benefit year. 

 Lastly, we establish in paragraph (c)(5) that in the case of a benefit for which the 

QHP issuer compensates an applicable provider in whole or in part on a fee-for-service 

basis, allowed costs associated with the benefit may be included in the calculation of the 

amount that an enrollee(s) would have paid under the standard plan without cost-sharing 

reductions only to the extent the amount was either payable by the enrollee(s) as cost 

sharing under the plan variation or was reimbursed to the provider by the QHP issuer. 

This provision has the same effect as the language in §156.430(c)(1) of the proposed rule. 

Although we do not specify a similar provision for issuers and providers in non-fee-for-
CMS-9964-F 278 

service arrangements, we expect that those issuers will compensate providers for costsharing reductions through other payment processes. 

Comment: We received a number of comments stating that the reporting 

requirements under §156.430(c) are too burdensome. Commenters noted that although 

the reporting and reconciliation process is appropriate for the Medicare Part D LowIncome Subsidy Program, medical benefits are more complex than pharmaceutical 

benefits and often have a longer lag between submission and adjudication. Commenters 

stated that to meet the reporting requirements under §156.430(c), QHP issuers would 

need to re-adjudicate each claim for enrollees receiving cost-sharing reductions in order 

to determine the difference in cost sharing between the applicable plan variation and the 

standard plan. This process could require the development of new information systems in 

a short period of time. One commenter stated that QHP issuers could provide HHS with 

access to member-level claims data for enrollees receiving cost-sharing reductions 

through a distributed data model, similar to the approach used for the risk adjustment 

program. The commenter stated that this would simplify administrative processes and 

provide issuers with more time to modify their IT systems. We also received several 

comments suggesting that HHS should allow QHP issuers to calculate an estimate of the 

value of cost-sharing reductions at the end of the year using a formula similar to that used 

for the advance payments, but based on the actual claims experience of the enrollees. 

These calculated amounts could be used for a reconciliation process, and would place less 

of a reporting burden on issuers. Commenters also offered another alternative approach 

under which issuers would file with the appropriate State department of insurance an 

adjusted net claims rate for each of their plan variations. HHS would then reimburse 

QHP issuers for cost-sharing reductions by multiplying the number of enrollees in each 

plan variation by the difference in net claims for the plan variation and the standard plan. 
CMS-9964-F 279 

Commenters also requested additional guidance on the reporting and reconciliation 

process. 

 Response: In the initial years of the Exchanges, before adequate data is available 

on the costs that will be associated with QHPs and their plan variations, we believe it is 

necessary to balance the need to safeguard Federal funds and the need to minimize 

burden on issuers. Therefore, as noted above, we are restructuring §156.430(c) to allow 

for the addition of paragraphs (c)(3) and (4), which are established in an interim final rule 

with comment published elsewhere in this issue of the Federal Register. Paragraph 

(c)(3) permits QHP issuers to choose to calculate the amounts that would have been paid 

under the standard plan without cost-sharing reductions using a simplified methodology. 

Under this simplified methodology, as described in paragraph (c)(4), a QHP issuer may 

calculate the value of the cost-sharing reductions provided by using a formula based on 

certain summary cost-sharing parameters of the standard plan, applied to the total 

allowed costs for each policy. We believe this amendment will allow QHP issuers to 

choose the methodology that best aligns with their operational practices, which should 

reduce the administrative burden on issuers in the initial years of the Exchanges. 

 Comment: We received several comments stating that both the advance payments 

and the reconciliation process should account for the full cost of any induced utilization 

resulting from the cost-sharing reductions. 

Response: Section 1402(c)(3) provides for the Secretary of HHS to make 

payments to QHP issuers equal to the value of the cost-sharing reductions. We interpret 

this provision to require the Secretary to reimburse QHP issuers for the reduction in cost 

sharing associated with any induced utilization; however, we do not believe this 

provision provides for the reimbursement of the remaining plan liability resulting from 

any induced utilization. Therefore, we finalize the payment methodology as proposed. 
CMS-9964-F 280 

Comment: In response to the provisions proposed in §156.430(c) under which 

QHP issuers would submit to HHS the portion of the total allowed costs for EHB paid by 

the enrollee, one commenter noted that issuers cannot report this amount with certainty 

since the provider ultimately collects this amount from the enrollee. 

Response: We clarify that QHP issuers should report the amount that a provider 

could charge to an enrollee, accounting for the cost-sharing reduction. We also clarify 

that the amount reported as paid by the enrollee should include any cost sharing paid by a 

third party, including a State, on behalf of the enrollee. 

Comment: We received several comments that the reporting requirements under 

§156.430(c) will be difficult for issuers to meet that do not use fee-for-service 

reimbursement methods. Commenters suggested that such issuers should receive 

capitated payments and be exempt from the reconciliation process. 

Response: We support the use of such payment methods by issuers to pay 

providers; therefore, the restriction finalized at §156.430(c)(5) does not apply to issuers 

that do not use fee-for-service reimbursement methods. However, we believe that these 

plans must still reconcile the advance cost-sharing reductions payments they receive from 

the Federal government. 

Comment: Another commenter proposed that QHP issuers make available to 

providers the amounts reported under §156.430(c). The commenter stated that this 

information would allow providers to verify that enrollees received the correct costsharing reductions and to identify any inappropriate payments from QHP issuers. 

Response: At this time, we are not addressing this issue, but encourage QHP 

issuers and providers to develop processes to support the provision of cost-sharing 

reductions. 
CMS-9964-F 281 

We proposed in §156.430(e) that if the actual amounts of cost-sharing reductions 

exceed the advance payment amounts provided to the issuer, HHS would reimburse the 

issuer for the shortfall, assuming that the issuer has submitted its actual cost-sharing 

reduction amounts to HHS in accordance with §156.430(c). If the actual amounts of 

cost-sharing reductions are less than the advance payment amounts provided to the issuer, 

we proposed that the QHP issuer must repay the difference to HHS. 

 In §156.430(f), we proposed rules on advance payment and reimbursement of 

cost-sharing reductions during special transitional periods of coverage where eligibility 

and enrollment are uncertain, including requirements relating to cost-sharing reductions 

provided during grace periods following non-payment of premium. In §156.430(f)(1), 

we proposed that a QHP issuer will be eligible for reimbursement of cost-sharing 

reductions provided prior to a termination of coverage effective date. Furthermore, any 

advance payments of cost-sharing reductions would be paid to a QHP issuer for coverage 

prior to a determination of termination, including during any grace period as described in 

§155.430(b)(2)(ii)(A) and (B). The determination of termination occurs on the date that 

the Exchange sends termination information to the QHP issuer and HHS under 

§155.430(c)(2). The QHP issuer would be required to repay any advance payments of 

cost-sharing reductions made with respect to any month after any termination of coverage 

effective date during a grace period. A QHP issuer generally would not be eligible for 

reimbursement of cost-sharing reductions provided after the termination of coverage 

effective date with respect to a grace period. This proposed policy aligns with the 

approach for advance payments of the premium tax credit described in §156.270(e). 

 We proposed in §156.430(f)(2) and (3) that in the case of any other retroactive 

termination, if the termination (or late determination thereof) is the fault of the QHP 

issuer, as reasonably determined by the Exchange, the QHP issuer would not be eligible 
CMS-9964-F 282 

for advance payments and reimbursement for cost-sharing reductions provided during the 

period following the termination of coverage effective date and prior to the determination 

of the termination; and if the termination (or the late determination thereof) is not the 

fault of the QHP issuer, as reasonably determined by the Exchange, the QHP issuer 

would be eligible for advance payments and reimbursement for cost-sharing reductions 

provided during such period. 

 In §156.430(f)(4), we proposed that a QHP issuer would be eligible for advance 

payments and reimbursement of cost-sharing reductions provided during any period for 

resolution of inconsistencies in information required to determine eligibility for 

enrollment under §155.315(f). 

 We are finalizing these provisions as proposed. 

 Comment: In general, commenters expressed their support for the policies set 

forth at §156.430(f), but asked for clarification on the application of the grace period in 

relation to cost-sharing reductions. Commenters noted that in many states, issuers are not 

permitted to pend claims, and that pharmaceutical claims in particular are typically 

processed at the time and place of service. Other commenters stated that QHP issuers 

should not be permitted to pend claims because it shifts the collection burden to health 

care providers. Commenters also requested clarification on whether QHP issuers may 

pend cost-sharing reductions during the second and third months of a grace period. 

 Response: The Exchange Establishment Final Rule, at §156.270(d), authorizes 

QHP issuers to pend or pay claims during the second and third month of a grace period in 

accordance with company policy and State laws. However, as provided in 

§156.270(d)(3), QHP issuers must notify providers of the possibility for denied claims 

when an enrollee is in the second and third months of the grace period. We continue to 

believe this policy appropriately balances these financial risks, while protecting enrollees. 
CMS-9964-F 283 

We clarify that we expect QHP issuers to ensure throughout the grace period that costsharing reductions are applied at the point of collection for eligible enrollees, as required 

by §156.410(a) as finalized here. If an enrollee’s coverage is terminated, QHP issuers 

may deny any claims that were pending, including the reimbursement to the provider for 

the value of the cost-sharing reductions. Providers could then seek payment directly from 

the enrollee for any services provided after the termination of coverage, including a 

refund for the cost-sharing reduction. For a discussion of the standards finalized at 

§156.430(b), (d) and (g) in relation to cost-sharing reductions for Indians, please refer to 

section III.E.4.i below. 

f. Plans Eligible for Advance Payments of the Premium Tax Credit and CostSharing Reductions 

 In §156.440, we clarified the applicability of advance payments of the premium 

tax credit and cost-sharing reductions to certain QHPs. We proposed that the provisions 

of part 156 subpart E generally apply to qualified health plans offered in the individual 

market on the Exchange. 

 However, we proposed in §156.440(a) that the provisions not apply to 

catastrophic plans because section 36B(c)(3)(A) of the Code defines a QHP to exclude 

catastrophic plans – a definition that also applies to section 1402 of the Affordable Care 

Act, by means of section 1402(f)(1) of the Affordable Care Act. Further, eligibility for 

cost-sharing reductions is tied to a “coverage month with respect to which a premium tax 

credit is paid,” which would exclude months during which the individual is enrolled in a 

catastrophic health plan. Therefore, we proposed that enrollment in a catastrophic plan 

precludes eligibility for cost-sharing reductions. 

 We proposed in §156.440(b) that the provisions of subpart E, to the extent related 

to cost-sharing reductions, not apply to stand-alone dental plans. Section 
CMS-9964-F 284 

1311(d)(2)(B)(ii) of the Affordable Care Act provides that an Exchange must allow a 

stand-alone dental plan that provides pediatric dental benefits that are EHB to be offered 

separately from or in conjunction with a QHP. The Exchange Establishment Rule, at 

§155.1065, implements these provisions. However, section 1402(c)(5) of the Affordable 

Care Act states if an individual enrolls in both a QHP and a stand-alone dental plan, the 

provisions on cost-sharing reductions under sections 1402(a) and (c) of the Affordable 

Care Act do not apply to that portion of the cost-sharing reductions properly allocable to 

pediatric dental EHB. Thus, if an individual enrolls in both a QHP and a stand-alone 

dental plan offered on an Exchange, cost-sharing reductions are not payable with respect 

to pediatric dental benefits offered by the stand-alone dental plan. 

 In §156.440(b), we also proposed that the provisions of subpart E, to the extent 

relating to advance payments of the premium tax credit, apply to stand-alone dental plans 

because section 36B(b)(3)(E) of the Code provides for the portion of the premium for 

such plans that is allocable to EHB coverage be taken into account in calculating the 

premium tax credit. 

 We proposed to clarify in §156.440(c) that the provisions of this subpart E apply 

to child-only plans. Section 1302(f) of the Affordable Care Act and §156.200(c)(2) 

provide that an issuer that offers a QHP at any level of coverage in an Exchange also 

must offer the plan at the same level of coverage in the Exchange only to individuals that 

have not attained age 21. Under section 1302(f) of the Affordable Care Act, the childonly plan is to be treated as a QHP, and is therefore subject to the provisions of subpart E. 

We are finalizing these provisions as proposed with minor technical corrections in 

paragraphs (a) and (c) to clarify the cross-references. 

 Comment: One commenter was concerned with the exclusion of stand-alone 

dental plans from the cost-sharing reduction program. The commenter stated that, 
CMS-9964-F 285 

because pediatric dental coverage is a required essential health benefit and the statute 

guarantees cost-sharing reductions for eligible individuals for essential health benefits, 

cost-sharing reductions should apply to stand-alone dental plans. 

 Response: We read section 1402(c)(5) of the Affordable Care Act to provide that 

cost-sharing reductions are not payable with respect to pediatric dental benefits offered 

by a stand-alone dental plan. Additionally, requiring payment of cost-sharing reductions 

on pediatric dental benefits offered by a stand-alone dental plan would create significant 

operational complexities. However, cost-sharing reductions will be provided for 

pediatric dental benefits if they are offered by a QHP (that is not a stand-alone dental 

plan). 

g. Reduction of Enrollee’s Share of Premium to Account for Advance Payments of the 

Premium Tax Credit 

 In §156.460(a), we proposed to codify QHP issuer requirements set forth in 

section 1412(c)(2)(B) (i) – (iii) of the Affordable Care Act. The law authorizes the 

payment of advance tax credits to QHP issuers on behalf of certain eligible enrollees. 

The advance payment must be used to reduce the portion of the premium charged to 

enrollees. In §156.460(a)(1), we proposed to codify clause (i) of that subparagraph, 

which requires that a QHP issuer reduce the portion of the premium charged to the 

enrollee by the amount of the advance payment of the premium tax credit for the 

applicable month(s). 

 In §156.460(a)(2), we proposed to codify section 1412(c)(2)(B)(ii) of the statute, 

which requires that the QHP issuer notify the Exchange of any reduction in the portion of 

the premium charged to the individual. This notification will be sent to the Exchange 

through the standard enrollment acknowledgment in accordance with §156.265(g). That 
CMS-9964-F 286 

information would then be submitted to the Secretary via enrollment information sent 

from the Exchange to HHS under §155.340(a)(1). 

 In §156.460(a)(3), we proposed to codify section 1412(c)(2)(B)(iii), which 

requires that a QHP issuer display the amount of the advance payment of the premium 

tax credit for the applicable month(s) on an enrollee’s billing statement. This 

requirement would ensure that the enrollee is aware of the total cost of the premium and 

would allow the enrollee to verify that the correct amount for the advance payment of the 

premium tax credit has been applied to his or her account. 

 Further, in §156.460(b), we proposed to prohibit QHP issuers from terminating or 

refusing to commence coverage on account of any delay in payment of an advance 

premium tax credit on behalf of an enrollee if the issuer has been notified by the 

Exchange under §155.340(a) that it will receive such advance payment. We stated that 

we expect that monthly advance payments of the premium tax credit will be paid in the 

middle of the month, and proposed to prohibit QHP issuers from declining or terminating 

coverage when the enrollee’s payments have been timely but the advance payments of 

the premium tax credit are not made before the due date for the premium. 

 We also proposed to add paragraph (f) to §155.340 (which we designated as 

§155.340(g) in this final rule), which sets forth standards for an Exchange when it is 

facilitating the collection and payment of premiums to QHP issuers and stand-alone 

dental plans on behalf of enrollees, as permitted under §155.240(c). Consistent with 

§156.460(a), proposed §155.340(f)(1) would direct the Exchange to reduce the portion of 

the premium for the policy collected from the enrollee by the amount of the advance 

payment of the premium tax credit for the applicable month(s). Proposed §155.340(f)(2) 

directs an Exchange to display the amount of the advance payment of the premium tax 

credit for the applicable month(s) on an enrollee’s billing statement. Collectively, 
CMS-9964-F 287 

proposed §155.340(f) and §156.460 as proposed ensure that an enrollee is aware of the 

total cost of the premium so that he or she may verify that the correct advance payment of 

the premium tax credit has been applied. The goals of these provisions are to promote 

transparency between Exchanges or QHP issuers and consumers, accurate application of 

advance payments of the premium tax credit, and continuity of coverage for individuals. 

For the reasons described in the proposed rule and considering the comments received, 

we are finalizing §156.460 as proposed, and are finalizing proposed §155.340(f) as 

§155.340(g). 

 Comment: A number of commenters stated their support for these provisions 

directing QHP issuers and Exchanges facilitating the collection and payment of 

premiums to reduce premiums collected from enrollees by the amount of the advance 

payments of the premium tax credit. The commenters also supported having QHP issuers 

and Exchanges display the advance payment of the premium tax credit on enrollees’ 

billing statements. One commenter urged HHS to test the format of the billing statement 

to ensure it is clear to consumers. Several commenters also supported the proposed 

prohibition on a QHP issuer terminating coverage following a delay in the issuer’s receipt 

of advance payments of the premium tax credit if the issuer has been notified by the 

Exchange that it will receive the payment. One commenter stated that HHS should 

implement a process to ensure that individuals prematurely terminated in violation of 

such a provision have coverage reinstated quickly. 

 Response: Although at this time we do not intend to propose additional 

requirements related to the format of billing statements, we encourage Exchanges and 

QHP issuers to test billing statement formats with consumers to ensure that the purpose 

of the document is clear. We appreciate the comment that we implement a process to 
CMS-9964-F 288 

quickly correct instances of premature termination. We will take this into consideration 

in future rulemaking. 

h. Allocation of Rates and Claims Costs for Advance Payments of Cost-Sharing 

Reductions and the Premium Tax Credit 

 As described in section III.E.2. of this final rule, we proposed in §156.470 to 

direct issuers to allocate the rate or expected premium for each metal level health plan 

and stand-alone dental plan offered, or proposed to be offered, in the individual market 

on the Exchange, and the expected allowed claims costs for the metal level health plans, 

among EHB and additional benefits. Under the proposal, issuers would submit these 

allocations annually to the Exchange, along with an actuarial memorandum with a 

detailed description of the methods and specific bases used to perform the allocations. 

The Exchange and HHS would use this memorandum to verify that these allocations 

meet the standards set forth in paragraphs (c) and (d) of §156.470. 

 The comments on the provisions at §156.470, and our response, are discussed in 

section III.E.2. of this final rule. We are finalizing the provisions proposed in §156.470, 

with a modification to paragraph (d), and technical modifications to §156.470(a),(b), and 

(e). We are also adding paragraph (f) to §156.470 to clarify the application of these 

provisions to multi-State plans. 

i. Special Cost-Sharing Reduction Rules for Indians 

In this section, we address certain provisions throughout proposed subpart E governing 

cost-sharing reductions for Indians. 

 Interpretation of section 1402(d)(2) of the Affordable Care Act: In the proposed 

rule, we discussed in detail our interpretation of sections 1402(d)(1), 1402(d)(2), and 

1402(f)(2) of the Affordable Care Act. The implication of these interpretations is that 

cost-sharing reductions under sections 1402(a) and 1402(d)(1) of the Affordable Care Act 
CMS-9964-F 289 

are only available to individuals who are eligible for premium tax credits. However, we 

stated that under our interpretation, cost-sharing reductions under section 1402(d)(2) of 

the Affordable Care Act would be available to Indians regardless of their eligibility for 

premium tax credits. This approach aligns with the typical practice today, under which 

cost sharing is not required with respect to services provided to an Indian by the IHS, an 

Indian Tribe, Tribal Organization, or Urban Indian Organization. 

 We also noted that section 1402(d) of the Affordable Care Act specifies that 

reductions in cost sharing must be provided to Indians who purchase coverage on the 

Exchange. Although section 1402(d)(1) of the Affordable Care Act applies only to the 

individual market, section 1402(d)(2) of the Affordable Care Act does not contain this 

explicit restriction. We proposed to interpret section 1402(d)(2) of the Affordable Care 

Act to apply only to the individual market because we believe section 1402(d)(2) flows 

from and builds upon the identification of “any qualified health plans” made in section 

1402(d)(1) and because we believe that Congress did not intend for reductions in cost 

sharing to be available outside the individual market Exchanges. We are finalizing this 

interpretation of the statute, which underlies the provisions implementing cost-sharing 

reductions for Indians. 

Comment: Several commenters recommended that HHS issue uniform operational 

guidance on the identification of Indians for use by Exchanges and by the IRS that is 

consistent with the existing HHS regulations under 42 CFR 447.50. Commenters 

expressed concern that the lack of uniform operational guidance will impede Exchange, 

Medicaid, and IRS staff in efficiently making accurate and consistent determinations of 

eligibility and will result in delayed or denied access for some Indians to specific benefits 

afforded them under the Affordable Care Act. 
CMS-9964-F 290 

 Response: The definition proposed for Indian in §156.400 has the meaning given 

the term in §155.330(a). We also note that §155.350 of the Exchange Establishment Rule 

currently provides guidance on the verification of Indian status. Further guidance on this 

issue is outside the scope of this Payment Notice. 

 Proposed provisions of part 156 relating to Indians: Similar to cost-sharing 

reductions for non-Indians, we proposed to use the concept of plan variations to describe 

how Indians would pay only limited, or as appropriate, none of the total cost sharing 

required under that QHP, with the Federal government bearing the remaining costsharing obligation. Our proposed regulations cross-referenced the eligibility regulations 

at §155.305(g), as finalized here, and §155.350(b), finalized in the Exchange 

Establishment Rule. In §156.410(b)(2), we proposed that a QHP issuer assign an Indian 

determined by the Exchange to have an expected household income that does not exceed 

300 percent of the FPL to a zero cost sharing plan variation of the selected QHP (no 

matter the level of coverage) with no cost sharing, based on the enrollment and eligibility 

information submitted to the QHP issuer by the Exchange. In §156.410(b)(3), we 

proposed that a QHP issuer assign an Indian determined eligible by the Exchange for 

cost-sharing reductions under section 1402(d)(2) of the Affordable Care Act to a limited 

cost sharing plan variation of the selected QHP (no matter the level of coverage) with no 

cost sharing required on benefits received from the IHS and certain other providers. 

 The assignments to the plan variations would be subject to §155.305(g)(3), which 

governs plan variation placement decisions when a single policy covers two or more 

individuals who are eligible for different levels of cost-sharing reductions. In the 

preamble, we also discussed an alternative approach to the provision of cost-sharing 

reductions for Indians. Rather than requiring QHP issuers to assign Indians to zero and 

limited cost sharing plan variations, QHP issuers would simply assign Indians to the 
CMS-9964-F 291 

standard plan (or as appropriate, silver plan variation), and waive the cost-sharing 

requirements, as appropriate. We proposed the approach first described above, but 

sought comments on which approach HHS should adopt beginning January 1, 2016. For 

the reasons described in the proposed rule, and considering the comments we received, 

we are finalizing the policy as proposed, though we continue to welcome comments on 

what approach HHS should adopt for benefit year beginning on or after January 1, 2016. 

 Comment: Several commenters expressed their support for the proposed policy at 

§155.305(g)(3), noting that the alternative approach would be difficult to administer and 

would require QHP issuers to make significant changes to their claims systems because 

issuers today are not able to administer member-based cost-sharing rules. One commenter 

was concerned that it would be difficult for issuers to waive cost sharing for Indians at or 

below 300 percent of FPL at the point of service under the alternate approach. 

Other commenters, however, expressed concern that the proposed approach 

would require families with Indian members and non-Indian members to purchase 

multiple plans in order for each family member to receive the full value of the costsharing reductions to which they are entitled. Commenters stated that under this policy, 

the cost savings available to Indians could be negated by shifting the liability to other 

non-eligible family members. 

A number of commenters recommended a different approach to address the 

potential increase in costs to be paid by Indian and non-Indian members who elect to 

enroll in different plans in order to take full advantage of the cost-sharing reductions 

available to them. These commenters recommended that if family members are enrolled 

in separate plan variations, the combination of the premiums be required to be no greater 

than the premium the family would pay if all members were enrolled in the same plan 

variation. They also recommended that the maximum out-of-pocket liability for the plan 
CMS-9964-F 292 

variation in which the non-Indians enrolled be set at a proportion of the maximum 

liability of a single family plan. These commenters also suggested that HHS should 

implement the alternative approach sooner than 2016. 

Response: We will consider adopting the approach recommended by commenters 

for future benefit years; however, given the current timeframe and operational concerns, 

we believe that for the 2014 benefit year it is infeasible to require issuers to submit plan 

variations that take into account cost-sharing obligations for Indian and non-Indian 

family members covered under a single QHP policy. Therefore, in accordance with the 

policy in the proposed rule that we are finalizing here, the assignment of Indians to plan 

variations would be subject to §155.305(g)(3). If we propose to change the policy for 

years beginning in 2016, we will provide issuers with sufficient notice and opportunity to 

comment to effectuate the required operational change. 

 In §156.420(b), we proposed that QHP issuers submit to the Exchange the zero 

cost sharing plan variation and limited cost sharing plan variation for each of the QHPs 

(at any level of coverage) that it intends to offer on the Exchange. The zero cost sharing 

plan variation – addressing cost-sharing reductions under section 1402(d)(1) of the 

Affordable Care Act and available to Indians with expected household incomes that do 

not exceed 300 percent of the FPL, as determined under §155.350(a) – must have all cost 

sharing eliminated. The limited cost sharing plan variation – addressing cost-sharing 

reductions under section 1402(d)(2) of the Affordable Care Act and available to all 

Indians as determined in §155.350(b) – must have no cost sharing on any item or service 

furnished directly by the IHS, an Indian Tribe, Tribal Organization, Urban Indian 

Organization, or through referral under contract health services, as defined in 25 U.S.C. 

1603. We noted that unlike silver plan variations, zero cost sharing plan variations and 
CMS-9964-F 293 

limited cost sharing plan variations must only be submitted for certification when the 

standard plan is submitted for QHP certification. 

 In §156.420(d), we proposed language similar to that proposed in §156.420(c) for 

silver plan variations – that the zero cost sharing plan variations and limited cost sharing 

plan variations cover the same benefits and include the same providers as the standard 

QHP, and require the same out-of-pocket spending for benefits other than EHB. We also 

proposed that a limited cost sharing plan variation, which would have no cost sharing on 

any item or service furnished directly by the IHS, Indian Tribe, Tribal Organization, or 

Urban Indian Organization, or through referral under contract health services, must have 

the same cost sharing on items or services not described in §156.420(b)(2) as the QHP 

with no cost-sharing reductions. 

 Lastly, we proposed that zero cost sharing plan variations and limited cost sharing 

plan variations be subject to all standards applicable to the standard QHP (except for the 

requirement that the plan have an AV as set forth in §156.140(b)). We are finalizing 

these provisions as proposed with two modifications. With regard to the submission of 

plan variations under §156.420(b), we are revising the language to align with the 

language in §156.420(a), and §156.470(a) and (b) as finalized. We are also adding 

paragraph (g) to §156.420 to clarify the applicability of these provisions to multi-State 

plans. 

Comment: We received a comment stating that QHP issuers should not be 

required to count the cost sharing that an enrollee in a zero cost sharing plan variation 

would have paid towards the annual limitation on cost sharing, stating that this would 

require a manual process which would be resource-intensive and result in errors. 

Response: We clarify that for purposes of administering the plan variations and 

providing cost-sharing reductions, QHP issuers are not required to apply any cost sharing 
CMS-9964-F 294 

that an enrollee would have been required to pay under the standard plan but was not 

required to pay under the plan variation to the annual limitation on cost sharing. 

However, any cost sharing that an enrollee is required to pay (for example, for those in 

the limited cost sharing plan variation, cost sharing for services provided by non-IHS or 

related providers), would count towards the annual limitation on cost sharing. This 

would also apply to silver health plans when there is no cost sharing for a benefit or 

service. 

Comment: We received a comment in relation to the policy proposed at 

§156.410(a), requiring QHP issuers to ensure than an individual eligible for cost-sharing 

reductions pay only the cost sharing required of an eligible individual when the cost 

sharing is collected. The commenter suggested that this language might be confusing 

since in many cases, individuals assigned to a zero cost sharing plan variation or a limited 

cost sharing plan variation will have no cost sharing. The commenter also suggested that 

QHP issuers should provide information electronically to providers concerning an 

individual’s cost-sharing protections. 

Response: We are finalizing the regulation as proposed without modification, 

though we clarify that a QHP issuer would be required to ensure that an individual 

assigned to a zero cost sharing plan variation must not be required to pay any cost sharing 

at the time when cost sharing would normally be collected. Similarly, a QHP issuer must 

ensure that an individual assigned to a limited cost sharing plan variation must not be 

required to pay any cost sharing at the time when cost sharing would normally be 

collected if the individual receives services or items from IHS or a related provider. 

 Comment: Several commenters stated that cost-sharing reductions for Indians 

should not be limited to EHB. Commenters stated that the cost-sharing exemptions for 

Indians in section 1402(d) of the Affordable Care Act were enacted as distinct, special 
CMS-9964-F 295 

provisions for Indians and are not subject to the general cost sharing limitation to EHB in 

section 1402(c)(4) of the Affordable Care Act. 

 Response: We interpreted and implemented section 1301(c) of the Affordable 

Care Act to limit the definition of cost sharing to EHB when finalizing §155.20 of the 

Exchange Establishment Rule. The regulation defines “cost sharing” as any expenditure 

required by or on behalf of an enrollee with respect to EHB. Further, section 1402(c)(4) 

of the Affordable Care Act provides that all cost-sharing reductions under that section are 

applicable only to cost-sharing for EHB and not for additional benefits. 

 Comment: Several commenters raised concerns that providers would be confused 

regarding the payment they can expect from QHP issuers when an Indian is referred 

through the contract health services program to an out-of-network provider, or when an 

Indian is not enrolled in a QHP. Some commenters requested further clarification on the 

definition of “contract health services.” 

 Response: We are working to ensure that referrals through the contract health 

services program are processed in accordance with the standards in this final rule in a 

manner that is clear to providers and QHP issuers. In addition, we note that “contract 

health services” is defined under 25 U.S.C. section 1603, and we do not propose to codify 

this definition in the final rule. 

 In addition, we note that the proposed Medicaid and Exchange Eligibility Appeals 

and Notices Rule proposes to codify a prohibition in section 1916(j) of the Social 

Security Act on imposing premiums or cost sharing on an Indian who is eligible to 

receive or has received and item or service furnished directly by the Indian Health 

Service, an Indian Tribe, Tribal Organization, or Urban Indian Organization, or through 

referral under contract health services. We note the similarity in the statutory language, 

but note the different income levels and benefits provided under the respective statutes. 
CMS-9964-F 296 

We intend to continue to review this issue and anticipate issuing guidance to address the 

operational concerns raised by the commenters. 

Comment: Several commenters suggested that issuers should be permitted to 

submit zero cost sharing plan variations at only one metal level, unless there are 

significant differences in plan design such as prescription drug formularies, provider 

networks or covered benefits between metal levels. These commenters noted that it is 

unlikely that an individual will choose a higher cost plan in that situation because the 

lower metal level plan will provide the same benefits and networks, at a lower premium 

and with no cost sharing. One commenter suggested that QHP issuers could administer 

cost-sharing reductions for Indians regardless of income on a case-by-case basis. 

Response: We recognize that there is no practical need to ensure that eligible 

Indians have access to higher metal level plans if a lower metal level plan offers identical 

benefits and networks, at a lower premium and with no cost sharing. We also recognize 

the burden on QHP issuers of developing plan variations that provide no additional 

benefit to enrollees. Finally, we do not wish to unnecessarily task Exchanges with 

certifying such plan variations. Therefore, we clarify that HHS will deem an Exchange to 

be adequately enforcing the requirements of §156.420(b)(1) if, within a set of standard 

plans offered by an issuer that differ only by the cost sharing or premium (that is, the 

benefits, networks, and all other aspects of the standard plans are exactly the same), the 

Exchange allows the issuer to submit one zero cost sharing plan variation for only the 

standard plan within the set with the lowest premium. If an issuer offers standard plans 

with different benefits or networks, each set of standard plans must have a zero cost 

sharing plan variation. We do not propose to extend this interpretation to the submission 

of limited cost sharing plan variations because these variations may still have cost 

sharing, which could vary among standard plans. We note that for 2014, for operational 
CMS-9964-F 297 

reasons, the FFE will still require QHP issuers to submit a zero cost sharing plan 

variation for any level of coverage that the QHP issuer seeks certification. While this 

operational limitation for 2014 does present additional data inputs, we do not expect it to 

require additional analysis by issuers because the content of the submissions would be 

identical except for cost sharing, which would be eliminated for the zero cost sharing 

plan variation. We will consider changing this approach in later benefit years through 

future rulemaking. 

 Section 1402(d)(3) of the Affordable Care Act directs the Secretary to pay a QHP 

issuer the amount necessary to reflect the increase in AV of a QHP required by reason of 

the changes in cost sharing for Indians under section 1402(d) of the Affordable Care Act. 

We proposed to use the same payment approach to reimburse cost-sharing reductions for 

Indians under section 1402(d) of the Affordable Care Act as we proposed to use for costsharing reductions provided to eligible individuals with household incomes between 100 

and 250 percent of the FPL under section 1402(a) of the Affordable Care Act. That is, 

we proposed that QHP issuers submit estimates for the dollar value of the cost-sharing 

reductions to be provided under the zero cost sharing plan variation and limited cost 

sharing plan variations in order to receive advance payments, and then reconcile the 

advance payments to the actual cost-sharing reduction amounts. This unified approach 

satisfies both the requirement for “periodic and timely payments equal to the value of the 

reductions” under section 1402(c)(3) of the Affordable Care Act, and payment of “the 

amount necessary to reflect the increase in AV of the plan” under section 1402(d)(3) of 

the Affordable Care Act. We are finalizing the payment approach as proposed, with one 

amendment at §156.430(g) relating to compensation for items and services provided 

directly by the Indian Health Service, an Indian Tribe, Tribal Organization, or Urban 

Indian Organization, or through referral under contract health services. 
CMS-9964-F 298 

 In §156.430(a)(1)(ii), we proposed that for each metal level QHP that an issuer 

offers, or intends to offer in the individual market on the Exchange, the issuer must 

provide to the Exchange annually prior to the benefit year, for approval by HHS, 

estimates, and supporting documentation validating the estimates, of the per member per 

month dollar value of cost-sharing reductions to be provided under the zero cost sharing 

plan variation. These estimates must be developed using the methodology specified by 

HHS in the applicable annual HHS notice of benefit and payment parameters. We 

proposed that issuers use the same methodology described above for estimating advance 

payments for the cost-sharing reductions provided under silver plan variations for 

estimating advance payments for the cost-sharing reductions provided under the zero cost 

sharing plan variation. This methodology would utilize data that QHP issuers submit for 

other requirements, such as §156.420 and §156.470. As a result, QHP issuers would not 

be required under the proposal to submit separate estimates or supporting documentation 

to receive advance payments in benefit year 2014 for the value of the cost-sharing 

reductions that would be provided under the zero cost sharing plan variation. 

As in the case of silver plan variations, the following formula would be used: 

Per Enrollee Per Month Advance Payment 

= Monthly Expected Allowed Claims Costs for Zero Cost Sharing Plan Variation 

x (Zero Cost Sharing Plan Variation AV – Standard Plan AV) 

 In this formula, the monthly expected allowed claims cost for the zero cost 

sharing plan variation would equal one-twelfth of the expected allowed claims costs 

allocated to EHB, other than services described in §156.280(d)(1), for the standard plan, 

multiplied by a factor to account for the increased utilization that may occur under the 

zero cost sharing plan variation due to the elimination of the cost-sharing requirements. 

As proposed at §156.470, the QHP issuer would submit the expected allowed claims cost 
CMS-9964-F 299 

information to the Exchange annually. The Exchange would then review this allocation, 

and submit the approved allocation to HHS, as described in §155.1030(b)(2), for use in 

the advance payment calculation. HHS would then multiply the monthly expected 

allowed claims cost by the induced utilization factor, to arrive at the monthly expected 

allowed claims cost for the zero cost sharing plan variation. We proposed the following 

induced utilization factors for the zero cost sharing plan variation, based on our analysis 

of the HIC database from calendar year 2010. 

TABLE 24: Induced Utilization Factors for Advance Payments of Cost-Sharing 

Reductions for Indians 

Zero Cost Sharing Plan Variation Induced Utilization Factor 

Zero Cost Sharing Plan Variation of Bronze QHP 1.15 

Zero Cost Sharing Plan Variation of Silver QHP 1.12 

Zero Cost Sharing Plan Variation of Gold QHP 1.07 

Zero Cost Sharing Plan Variation of Platinum QHP 1.00 

 

 In the second half of the formula, we proposed to multiply the monthly expected 

allowed claims cost for the zero cost sharing plan variation by the difference in AV 

between the standard plan and the plan variation. The AV of the zero cost sharing plan 

variation would be 100, because all cost sharing is eliminated for this plan variation. 

Lastly, the per enrollee per month estimate will be multiplied by the number of 

individuals assigned to the zero cost sharing plan variation (based on the most recent 

confirmed enrollment data) in a given month to arrive at the total advance payment that 

will be provided to the issuer for each QHP. We are finalizing these provisions as 

proposed. 

Comment: One commenter requested clarification on the induced utilization 

factors for cost-sharing reductions for Indians, and whether these factors would ensure 

that QHP issuers are “made whole” for the value of the cost-sharing reductions. 
CMS-9964-F 300 

Response: As in the case of the silver plan variations, we incorporated an induced 

utilization factor into the advance payment formula to ensure that QHP issuers are 

compensated for the elimination of cost sharing for any increase in utilization resulting 

from the modification of the cost-sharing requirements. In addition, we developed an 

induced utilization adjustment for the risk adjustment model, to further offset the higher 

costs that enrollees eligible for cost-sharing reductions might incur, as described in 

section III.B.3.b. of this final rule. We believe this approach ensures that issuers are 

appropriately compensated for the value of the cost-sharing reductions. 

In §156.430(a)(2), we proposed the process for estimating the value of costsharing reductions to be provided under the limited cost sharing plan variation open to 

Indians regardless of household income. We proposed that QHP issuers have the option 

to forgo submitting an estimate of the value of these cost-sharing reductions if they 

believe the operational cost of developing the estimate is not worth the value of the 

advance payment. If a QHP issuer chooses to not submit an estimate, the issuer would 

provide the cost-sharing reductions as required, and would be reimbursed by HHS after 

the close of the benefit year, as proposed in §156.430(c). If a QHP issuer does seek 

advance payments for the these cost-sharing reductions, the issuer would provide to the 

Exchange annually prior to the benefit year, for approval by HHS, an estimate and 

supporting documentation validating the estimate, of the per member per month dollar 

value of the cost-sharing reductions to be provided under the limited cost sharing plan 

variation of the QHP. Under our proposal, the estimate would be developed using the 

methodology specified by HHS in the applicable annual HHS notice of benefit and 

payment parameters. For the 2014 benefit year, we simply proposed that issuers submit a 

reasonable estimate of the value of the reductions, developed by a member of the 

American Academy of Actuaries in accordance with generally accepted actuarial 
CMS-9964-F 301 

principles and methodologies, and that the estimate should be no higher than the 

corresponding estimate for the zero cost sharing plan variation. We did not propose a 

standardized methodology because, unlike other plan variations, these cost-sharing 

reductions are to be provided for only a specific subset of providers, and the Affordable 

Care Act does not prescribe an AV for these reductions. As noted above, because the 

actuarial value calculator is based on a standard population, it will not have the 

functionality to generate an accurate AV for these plan variations. 

We are finalizing both our proposal for annual rulemaking in the notice of 

benefits and payment provisions to establish a methodology for advance payments for 

cost-sharing reductions under the limited cost sharing plan variation, and our proposal of 

a specific methodology for the 2014 benefit year. As in the case of the other plan 

variations, we plan to review the methodology for calculating the advance payments once 

more data is available, and future notices of benefits and payment parameters may 

include different methodologies. We welcome comments to consider as part of this 

process. We are also clarifying the language at §156.430(a)(2) by replacing the phrase 

“[an issuer] offers or seeks to offer” from the proposed rule with the phrase “[an issuer] 

offers, or intends to offer” in the final rule, to align with the language in §156.430(a)(1). 

As described above, the Exchange will collect the estimate and supporting 

documentation, and submit the estimate and supporting documentation to HHS for 

review, as finalized under §155.1030. If HHS finds the estimate to be reasonable, HHS 

will make advance payments to a QHP issuer following the same procedure as for the 

other plan variations, under §156.430(b), as finalized in this rule. 

 In §156.430(c) through (e), we proposed that QHP issuers submit to HHS the 

amount of cost-sharing reductions provided under each plan variation. These amounts 

would then be reconciled against any advance payments. As explained in more detail in 
CMS-9964-F 302 

section III.E.4.e, we are modifying the reporting provisions described in §156.430(c), and 

finalizing as proposed the reconciliation process described in §156.430(d) and (e). We 

are also publishing an interim final rule with comment elsewhere in this issue of the 

Federal Register providing an alternative methodology for reporting the value of the 

cost-sharing reductions provided. We expect that QHP issuers would be able to use this 

alternative methodology, if they so choose, for reporting the value of cost-sharing 

reductions provided under the zero cost sharing plan variation and the limited cost 

sharing plan variation. 

 Comment: In general, commenters supported HHS’s proposal to use the same 

payment approach to reimburse cost-sharing reductions for Indians under section 1402(d) 

as we proposed to use for cost-sharing reductions provided to eligible individuals with 

household incomes between 100 and 250 percent of the FPL under section 1402(a) of the 

Affordable Care Act. One commenter, however, stated that due to demographics, very 

few individuals will be assigned to the limited cost sharing plan variation, and as a result, 

QHP issuers should simply receive a capitated payment for the value of these costsharing reductions, and not be required to submit information for the reconciliation of 

payments. 

 Response: At this time, we believe it would be difficult for issuers and HHS to 

accurately estimate the “increase in AV of the plan” resulting from the cost-sharing 

reductions provided under section 1402(d)(2) of the Affordable Care Act. Relevant data 

on Indian populations’ cost sharing is not easily available, and issuers would not be able 

to use the AV calculator to estimate Indian-only cost-sharing features of a plan because 

the calculator is based on a standard population. Therefore, we finalize the approach set 

forth in the proposed rule for QHP issuers to submit data on the dollar value of cost-
CMS-9964-F 303 

sharing reductions provided to eligible Indians under zero cost sharing and limited cost 

sharing plan variations, which will be reconciled against any advance payments. 

 Comment: Another commenter was concerned about the prohibition on cost 

sharing under the limited cost sharing plan variation for services or items provided 

through referral under the contract health services program. The commenter suggested 

that until an accurate, online verification system for contract health services referrals can 

be established, QHP issuers should be able to rely on the information they receive from 

providers, and be held harmless for these cost-sharing reductions in the reconciliation 

process. 

 Response: We recognize issuers’ concerns about this provision, and plan to issue 

guidance on this topic in the future. 

 In the proposed rule, we noted that section 1402(d)(2)(B) of the Affordable Care 

Act states that QHP issuers cannot reduce payments to the relevant facility or provider for 

an item or service by the amount of any cost sharing that would be due from an Indian 

but for the prohibition on cost sharing set forth in section 1402(d)(2) of the Affordable 

Care Act. We proposed not to codify this provision in regulation because we believed it 

is clear and self-enforcing, and because we believe that it would also be impermissible 

for an issuer to reduce payments to a provider for any cost-sharing reductions required 

under sections 1402(a) or 1402(d)(1) of the Affordable Care Act – particularly because 

these cost-sharing reductions are to be reimbursed by HHS. We also noted that nothing 

in this section exempts an issuer from section 206 of the Indian Health Care Improvement 

Act, which provides that the United States, an Indian Tribe, Tribal organization, or urban 

Indian organization has the right to recover from third party payers, including QHPs, up 

to the reasonable charges billed for providing health services, or, if higher, the highest 

amount an insurer would pay to other providers. 
CMS-9964-F 304 

Comment: Commenters asserted that regulation text is needed to ensure there are 

no reductions in payments to the relevant facility or provider for an item or service by the 

amount of any cost sharing that would be due from an Indian but for the prohibition on 

cost sharing set forth in section 1402(d)(2) of the Affordable Care Act. 

 Response: We have codified this provision by adding §156.430(g) to the final 

rule. Regardless of the contracting relationship between a QHP issuer and the Indian 

health provider, the issuer may not reduce payments to the provider by the amount of any 

cost sharing that would be due from the Indian under this final rule. 

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

Section 1311(d)(5)(A) of the Affordable Care Act contemplates an Exchange 

charging assessments or user fees to participating health insurance issuers to generate 

funding to support its operations. If a State does not elect to operate an Exchange or does 

not have an approved Exchange, section 1321(c)(1) of the statute directs HHS to operate 

an Exchange within the State. In addition, 31 U.S.C. 9701 permits a Federal agency to 

establish a charge for a service provided by the agency. Circular No. A-25R establishes 

Federal policy regarding user fees, and specifies that a user charge will be assessed 

against each identifiable recipient of special benefits derived from Federal activities 

beyond those received by the general public. We proposed to revise §156.50(b) and to 

add paragraph (c) to provide for a user fee from participating issuers (as defined in 

§156.50(a)) to support the operation of FFEs under these authorities. 

Circular No. A-25R states that user charges should generally be set at a level so 

that they are sufficient to recover the full cost to the Federal government of providing the 

service when the government is acting in its capacity as sovereign (as is the case when 

HHS operates a FFE). However, Circular No. A-25R also allows for exceptions to this 

policy, if approved by OMB. Because we wish to encourage issuers to offer plans on 
CMS-9964-F 305 

FFEs and to align with the administrative cost structure of State-based Exchanges, and 

because we believe that growing enrollment is likely to increase user fee receipts in 

future years, we are seeking an exception to the policy for 2014. 

We proposed to revise §156.50(b) so that it would apply only to user fees to 

support State-based Exchanges. In §156.50(c), we proposed that a participating issuer 

offering a plan through a FFE remit a user fee to HHS each month, in the time and 

manner established by HHS, equal to the product of the billable members enrolled 

through the Exchange in the plan offered by the issuer, and the monthly user fee rate 

specified in the annual HHS notice of benefit and payment parameters for the applicable 

benefit year. For the 2014 benefit year, we proposed a monthly user fee rate equal to 3.5 

percent of the monthly premium charged by the issuer for a particular policy under the 

plan. We note that this user fee would apply to plans offered through FF-SHOPs, as well 

as individual market FFEs. We noted that additional guidance on user fee collection 

processes would be provided in the future. We anticipate collecting user fees by 

deducting the user fee from Federally-administered Exchange-related program payments. 

If a QHP issuer does not receive any Exchange-related program payments, the issuer 

would be invoiced for the user fee on a monthly basis. 

In addition, we welcomed comments on a policy that we were considering that 

would provide for the pooling of Exchange user fees, distribution costs, or all 

administrative costs across a particular market (in the case of the FFE, however, the user 

fee would be collected only from issuers participating in the FFE). We note that our 

proposed rule, “Coverage of Certain Preventive Services under the Affordable Care Act” 

(78 FR 8457), contemplates a proposal to reduce the amount of the FFE user fee for QHP 

issuers that provide coverage for contraceptive services for participants of a self-insured 

plan that is established or maintained by an eligible organization (or have an affiliated 
CMS-9964-F 306 

issuer that does so).30 Comments are separately welcome on that proposed regulation on 

or before April 8, 2013. 

Based on the comments we received, we are finalizing the proposal and the 

regulation text with the following modification: we are clarifying the calculation of the 

user fee so that the user fee rate is applied directly to the premium set by the issuer for a 

policy and is charged on each policy with enrollment through the FFE. 

Comment: A number commenters expressed concern that our proposed FFE user 

fee would increase coverage costs for consumers; however, other commenters expressed 

support for the proposed FFE user fee. 

Response: We do not believe that the FFE user fee rate, set at 3.5 percent of 

premiums, would increase the cost of coverage or discourage consumers from purchasing 

health insurance through an FFE. We anticipate that the user fee will account for the cost 

of many of the Exchange-related administrative functions that issuers would otherwise 

have to perform, such as consumer assistance and enrollment support, and that the cost of 

the user fee will be outweighed by the many benefits that result from participation in an 

Exchange. The Exchanges are expected to enhance competition among issuers in the 

non-group market, which should lower premiums due to the elimination of medical 

underwriting and the associated issuer administrative costs. Exchanges will also create 

larger purchasing pools, which should create economies of scale, lowering administrative 

costs for QHP issuers, and further reducing premiums. 

Comment: Several commenters requested that we provide more details regarding 

our user fee calculations and a breakdown of costs by jurisdiction. Several commenters 

suggested that we calculate the FFE user fee amount on a per capita basis rather than as a 

 

30 See 78 FR 8474. 
CMS-9964-F 307 

percent of premiums, and a few other commenters supported the percent of premium 

approach. 

Response: We are finalizing our policy to calculate the FFE user fee as a 

percentage of premium; however, we are modifying the proposed rule to clarify that the 

FFE user fee amount is set as a percent of premium, without regard to the number of 

billable members on a policy. This clarification does not change the value of the user fee. 

We appreciate commenters’ concerns that FFE operating costs be minimized and 

transparent, and will take those comments into consideration in our approach to FFE 

operating costs. 

Comment: One commenter noted that basing the user fee amount on a percent of 

premium for a particular policy was confusing. 

Response: We are clarifying that an issuer’s monthly user fee amount is equal to 

the product of the monthly user fee rate specified in the annual HHS notice of benefit and 

payment parameters for the applicable benefit year - which for 2014 is 3.5 percent - and 

the monthly premium charged by the issuer for each policy offered through a Federallyfacilitated Exchange. 

Comment: One commenter expressed concern about HHS’s proposal to align the 

FFE user fee rate with the user fee rate assessed by State-based Exchanges. Other 

commenters urged HHS to ensure that the overall amount of the FFE user fee reflected 

only HHS’s actual costs related to FFE operations. 

Response: We are clarifying that we are establishing the FFE user fee rate for 

2014 only, with the intent of keeping the user fee as low as possible. Independent of final 

SBE user fee rates, we clarify that we are not considering raising the FFE user fee beyond 

our operating costs in the future. 

Comment: We received several comments on our proposal to pool user fees 
CMS-9964-F 308 

across all plans in a market within a State. Some commenters suggested that this policy 

would unfairly increase costs for members that are not enrolled on an Exchange. 

However, other commenters supported the pooling Exchange user fees. A few 

commenters requested clarification on how issuers would be permitted to account for user 

fees on their members’ bills, specifically whether issuers would be able to account for 

user fees in their premium amounts or whether user fees would be billed separately. 

Response: We believe that including Exchange user fees in the single risk pool 

requirement will help prevent adverse selection against QHPs on Exchanges. In the final 

Market Reform Rule at §156.80, we require issuers to pool all user fee costs across their 

applicable market in a State. We refer readers to the discussion associated with §156.80 

of the Market Reform Rule for additional details on this policy. 

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

Programs 

1. Background 

In the proposed rule, we proposed to amend 45 CFR part 153 by adding subpart 

H, entitled “Distributed Data Collection for HHS-Operated Programs,” which set forth 

the data collection process that HHS would use when operating a risk adjustment or 

reinsurance program on behalf of a State. We proposed to use a distributed approach to 

data collection for the risk adjustment and reinsurance programs when HHS operates 

those programs on behalf of a State. In the proposed rule, we described a distributed 

approach as one in which each issuer formats its own data in a manner consistent with the 

applicable database, and then passes the relevant information to the entity responsible for 

making payments and charges for the program. We believe that this approach minimizes 

issuer burden while protecting enrollees’ privacy. We received a number of comments 

supporting the proposed distributed data approach, and are finalizing the provisions as 
CMS-9964-F 309 

proposed. 

2. Issuer Data Collection and Submission Requirements 

Under the HHS-operated risk adjustment and reinsurance programs, we proposed 

to use a distributed data collection approach to run software on enrollee-level and claimslevel data that reside on an issuer’s dedicated data environment. This approach requires 

close technological coordination between issuers and HHS. 

a. Distributed data environments 

In §153.700(a), we proposed that an issuer of a risk adjustment covered plan or a 

reinsurance-eligible plan in a State where HHS is operating the risk adjustment or 

reinsurance program on behalf of the State establish a dedicated data environment and 

provide data access to HHS, in a manner and timeframe specified by HHS, for risk 

adjustment and reinsurance operations. To accomplish the distributed data collection 

approach for both the reinsurance and risk adjustment programs, issuers would establish 

secure, dedicated, electronic server environments to house medical and pharmacy claims, 

encounter data, and enrollment information. Issuers would be directed to make this data 

accessible to HHS in HHS-specified electronic formats, and to provide HHS with access 

to the data environment to install, update, and operate common software and specific 

reference tables for the purpose of executing risk adjustment and reinsurance program 

operations. Issuers would also be directed to correct submitted files to resolve problems 

detected by HHS during file processing. Except for purposes of data validation and audit, 

HHS will not store any personally identifiable enrollee information or individual claimlevel information. 

We note that HHS will store, in a private and secure HHS computing 

environment, aggregate plan summary data and reports based on activities performed on 

each issuer’s dedicated server environment. 
CMS-9964-F 310 

Comment: Several commenters expressed concern that the distributed approach 

would have limited use because it would not track the same enrollee across multiple 

years. 

Response: The distributed data approach would not constrain the risk adjustment 

methodology when HHS operates risk adjustment because the concurrent model does not 

require tracking of enrollees over multiple years 

Comment: We received a few comments requesting clarification as to what 

information from the distributed data environments would be shared with States. A few 

commenters asked for States to have access to data on the distributed data environments. 

Response: We are considering ways to provide States with information about 

HHS-operated programs, and welcome feedback about the types of summary information 

would be most useful to States. In doing so, we must balance program transparency with 

protection of potentially sensitive information, including consumer health information. 

We will provide further information in subsequent guidance, as appropriate. 

Comment: A number of commenters requested technical details about the 

distributed data environment. Several commenters requested the specific requirements 

for the necessary enrollment, claims and encounter data, applicable software and testing 

schedule for risk adjustment data submissions. One commenter asked that issuers be 

permitted to provide two separate data sets on the distributed data environment – one for 

risk adjustment in the individual and small group markets, and a second for the 

reinsurance that will only include data for the individual market. One commenter asked 

for further details on the types of accepted information and recommended that chart 

reviews be considered acceptable data. 

Response: HHS has provided a list of required data for the HHS-operated 

distributed data approach in the PRA package approved under OMB Control Number 
CMS-9964-F 311 

0938-1155. HHS will make available the data formats, definitions, and technical 

standards applicable to the HHS-operated distributed data approach in future guidance, 

including standards relating to data from chart reviews. 

Comment: We received comments requesting further clarification about the uses 

of data collected through the distributed data approach. 

Response: We intend to provide further guidance on this issue. We do note that 

data use will be consistent with HHS’s commitment to protecting the privacy and security 

of enrollees. As a result, we would not store any personally identifiable enrollee 

information or individual claim-level information in connection with this data collection, 

except for the purposes of data validation and audit. We believe that this approach 

minimizes issuer burden while protecting enrollees’ privacy. 

Comment: One commenter requested that the recalibrations of the risk adjustment 

models not be based on data from the distributed data environment, but asked that HHS 

conduct a separate data collection designed specifically for the recalibration of the risk 

adjustment models. 

Response: We are exploring using data from the distributed data environment for 

future recalibration of the HHS risk adjustment models. We will provide further details 

on model recalibration in future rulemaking and guidance. 

b. Timeline 

We proposed in §153.700(b) that issuers must establish the dedicated data 

environment (and confirm proper establishment through successfully testing the 

environment to conform with HHS standards for such testing) three months prior to the 

first date of full operation. 

Comment: A few commenters sought clarification on when HHS would conduct 

testing of the distributed data environment in order to develop the distributed data 
CMS-9964-F 312 

environment for full operation. 

Response: To ensure accuracy in the application of the distributed data approach, 

HHS will work with issuers to establish robust systems. Issuers will have the opportunity 

to submit data files to a test environment. HHS will provide support for issuers who 

conduct such testing as well as provide ongoing support for the duration of the programs. 

As testing and implementation will be ongoing, we note that an issuer must establish the 

dedicated data environment (and confirm proper establishment through successfully 

testing the environment to conform with applicable HHS standards for such testing) three 

months prior to full operation, that is, three months prior to the first date the plan could 

accrue claims for risk adjustment and reinsurance purposes. Even after an issuer’s 

dedicated data environment is fully operational, further testing and modifications may be 

necessary. Further details and specifications for such testing will be provided in future 

guidance. 

c. Enrollment, claims and encounter data 

In §153.710(a), we proposed that an issuer of a risk adjustment covered plan or 

reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or 

reinsurance program, as applicable, provide to HHS, through the dedicated data 

environment, access to the enrollee-level plan enrollment data, enrollee claims data, and 

enrollee encounter data specified by HHS. 

Comment: Several commenters sought clarification on whether claims will be 

dated by the date of admission or the date of discharge. One commentator requested 

clarification on how claims that straddle the benefit year would be handled. Several 

commenters requested that claims be dated by date of admission rather than date of 

discharge, to address the issue of claims that straddle multiple years. Another commenter 

recommended that risk adjustment scores be based on claims with dates of service from 
CMS-9964-F 313 

January 1 through December 31. 

Response: The proposed rule stated that data should be submitted for the 

applicable benefit year by April 30 of the year following the end of the applicable benefit 

year. The discharge date would be used to date claims, because we believe that the 

discharge date best ensures that services provided across benefit years will be considered 

in their entirety rather than being partially or fully excluded from consideration as a result 

of the data submission timing requirements. For example, if an individual is admitted to 

a hospital in December 2014 and is discharged in January 2015, the incurred costs that 

occurred in both December 2014 and January 2015 would be considered in the 2015 

benefit year for both reinsurance payments and calculation of enrollee risk scores for risk 

adjustment when HHS operates either of those programs. 

Comment: We received several comments requesting clarification on HHS’ data 

storage requirements. 

Response: Under §153.620(b), an issuer that offers risk adjustment covered plans 

would be required to retain any information requested to support risk adjustment data 

validation for a period of at least ten years after the date of the report. We will provide 

further guidance on the data storage requirements for reinsurance-eligible plans and risk 

adjustment covered plans in forthcoming rulemaking and guidance. 

d. Data Requirements 

In the proposed rule, we described the types of data that would be acceptable for 

the reinsurance and risk adjustment programs when HHS operates these programs on 

behalf of a State. 

When HHS is operating reinsurance on behalf of a State, we proposed that 

medical and pharmacy claims with discharge dates or through dates of service ( when no 

discharge date is applicable, as is often the case for professional services) that fall in the 
CMS-9964-F 314 

applicable benefit year would be eligible for reinsurance payments for that benefit year. 

When HHS is operating risk adjustment on behalf of a State, we proposed that 

institutional and medical claims and encounter data with discharge dates or through dates 

of service that fall in the applicable benefit year would be eligible for risk adjustment 

payments and charges for that benefit year. The data to calculate enrollee risk scores for 

purposes of risk adjustment would include diagnoses reported on institutional and 

medical claims that result in final payment action or encounters that result in final 

accepted status. Only the diagnoses reported on certain hospital inpatient facility, 

hospital outpatient, and physician provider claims will be acceptable when HHS operates 

risk adjustment. The risk adjustment model discussed earlier in this preamble provides a 

description of HHS’s criteria for identifying and excluding claims from providers. 

Comment: We received a comment requesting clarification on the acceptable 

provider types. 

Response: Diagnoses will only be acceptable for risk adjustment enrollee risk 

score calculations if they meet criteria that are acceptable for HHS risk adjustment data 

collection. Generally, for both inpatient and outpatient services, diagnoses are acceptable 

if from a qualified provider, but only if the procedure code was not for diagnostic 

laboratory or diagnostic radiology services. HHS will release the full list of acceptable 

provider types and criteria in forthcoming guidance. 

Comment: One commenter recommended that unpaid claims be included in the 

calculation of enrollee risk scores. 

 Response: While there may be some advantages to inclusion of unpaid claims, 

we do not plan to accept claims where services were denied or not covered because HHS 

risk adjustment models were calibrated on paid claims. However, if services were 

approved and an issuer incurred no expenses because the claim was fully paid through 
CMS-9964-F 315 

cost sharing, then those claims would be acceptable for consideration (for example, if the 

allowable cost of a service provided was $15 and the enrollee’s co-pay was $15). 

e. Claims Data 

 We proposed in §153.710(b) that all claims data submitted by an issuer of a risk 

adjustment covered plan or reinsurance-eligible plan in a State in which HHS is operating 

the risk adjustment or reinsurance program, as applicable, must have resulted in payment 

by the issuer (payment of cost sharing by the enrollee). The enrollee-level data must 

include information from claims and encounter data (including data related to costsharing reductions, to permit HHS to calculate enrollee paid claims net of cost-sharing 

reductions) as sourced from all medical and pharmacy providers, suppliers, physicians, or 

other practitioners who furnished items or services to the issuer’s health plan members 

for all permitted paid medical and pharmacy services during the benefit period. All data 

must be provided at the level of aggregation specified by HHS. 

Comment: Several commenters asked HHS to notify issuers when HHS identifies 

errors with data submitted to distributed data environments. One commenter requested 

that HHS flag claims with derived costs that have not been accepted for payment. 

Response: We intend to provide each issuer with a periodic report on data 

functions performed in each issuer’s distributed data environment, and to identify 

reinsurance-eligible claims. The reports would indicate whether HHS accepted or 

rejected submitted files and data, and would identify errors detected by HHS. Issuers 

would need to provide corrected files and data to address errors identified in HHSprovided reports for those files and data to be eligible for reinsurance processing. 

Timeframes for the processing and reporting of these reports, including for receipt of 

corrected files and discrepancy resolution, will be provided in future guidance. 

Comment: Several commenters requested that HHS provide interim estimates for 
CMS-9964-F 316 

reinsurance payments and risk adjustment scores. These comments noted that interim 

estimates will assist issuers in completing financial statements and developing rates for 

the next calendar year. 

Response: We recognize that both the risk adjustment and reinsurance programs 

are important programs in stabilizing premiums in the individual and small group 

markets. We will provide further detail on our approach to interim reporting in 

forthcoming guidance. 

f. Claims data from capitated plans 

In §153.710(c), we proposed that an issuer that does not generate claims in the 

normal course of business must derive costs on all applicable provider encounters using 

their principal internal methodology for pricing those encounters. If a plan has no such 

methodology, or has an incomplete methodology, we proposed that the plan be permitted 

to implement a methodology or supplement the methodology in a manner that yields 

derived claims that are reasonable in light of the specific market that the plan is serving. 

Comment: Commenters generally supported HHS’s inclusion of capitated plans’ 

data in the reinsurance and risk adjustment programs. We received many comments 

asking HHS to provide additional guidance on deriving claims costs or methodological 

examples of how different types of capitation arrangements would derive their costs, 

including deriving costs for value-based strategies. Commenters also requested that the 

State and HHS approve fee schedules to ensure compliance with the reinsurance 

program. 

Response: The proposed approach allows capitated plans the flexibility to use 

current pricing methodologies, if applicable. Many capitated plans have methods in place 

for deriving the costs of encounters for participation in other State and Federal programs. 

If a plan has no such methodology, or has an incomplete methodology, the plan would be 
CMS-9964-F 317 

permitted to implement a methodology or supplement the methodology in a manner that 

yields derived claims that are reasonable in light of the specific market that the plan is 

serving. We believe that permitting flexibility, rather than setting forth specific 

methodologies or fee schedules, better enables issuers to determine methodologies which 

are reasonable for the issuer’s market. 

Comment: One commenter stated that some health plans that sub-capitate 

payments to providers may face difficulty in collecting comprehensive and accurate data 

on a timely basis. 

Response: HHS initially considered a claims submission deadline of March 31 

but extended the deadline to April 30 to allow issuers more time to submit the necessary 

enrollment and claim data. The claims submission deadline of April 30 of the year 

following the applicable benefit year is the latest possible date for HHS to meet our 

payment processing and reporting obligations codified in the Premium Stabilization Rule. 

Reinsurance and risk adjustment payment reporting obligations must be completed before 

the calculations for the risk corridors and MLR programs, and consequently require 

claims to be submitted by April 30. 

Comment: Commenters requested that HHS set forth in regulatory text that 

capitated plans’ derived cost claims will be subject to audit. 

Response: Capitated plans, like all plans that submit reinsurance payment 

requests, or data to be considered for reinsurance payments or risk adjustment, would be 

subject to validation and audit. We have included data validation language in 

§153.240(a)(3) for State-operated reinsurance programs, and in §153.350 and §153.630 

for State- and HHS-operated risk adjustment programs, respectively. We will issue 

further rulemaking with regard to HHS-operated reinsurance program oversight for all 

claims, including those from capitated plans. 
CMS-9964-F 318 

g. Establishment and usage of masked enrollee identification numbers: 

We proposed in §153.720(a) that an issuer of a risk adjustment covered plan or 

reinsurance-eligible plan in a State in which HHS operates risk adjustment or 

reinsurance, as applicable, must establish a unique masked enrollee identification number 

for each enrollee, in accordance with HHS-defined requirements as described in this 

section, and maintain the same masked enrollee identification number for an enrollee 

across enrollments or plans within the issuer, within the State, during a benefit year. In 

§153.720(b), we proposed that an issuer of a risk adjustment covered plan or reinsuranceeligible plan in a State in which HHS is operating the risk adjustment or reinsurance 

program, as applicable, may not include an enrollee’s personally identifiable information 

in the masked enrollee identification number or use the same masked enrollee 

identification number for different enrollees enrolled with the issuer. As discussed in 

OMB Memorandum M-07-16, the term “personally identifiable information” is a broadly 

used term across Federal agencies, and has been defined in the Office of Management 

and Budget Memorandum M-07-16 (May 22, 2007).31 

Comment: We received several comments in support of using a masked enrollee 

number. However one commenter expressed concern that the provisions may not be 

sufficiently protective. 

Response: HHS has taken several steps to ensure robust privacy and security 

standards. A distributed data approach protects consumer health data in a number of 

ways. First, a distributed data approach eliminates the need to transmit sensitive data. 

Data can be particularly vulnerable during transmission, so this approach eliminates this 

risk. HHS expects that information provided to HHS will be limited to information 

 

31 Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf. 
CMS-9964-F 319 

reasonably necessary for use in the risk adjustment and reinsurance programs. Also, with 

this approach, we are better able to limit the amount of data needed for program 

operations. We will be releasing, in forthcoming rulemaking, compliance standards for 

privacy and security standards, as applicable. 

h. Deadline for submission of data 

We proposed in §153.730 that an issuer of a risk adjustment covered plan or 

reinsurance-eligible plan in a State in which HHS operates risk adjustment or 

reinsurance, as applicable, submit data to be considered for risk adjustment payments and 

charges and reinsurance payments for the applicable benefit year by April 30 of the year 

following the end of the applicable benefit year. In order for HHS to provide periodic 

reports on data functions performed in each issuer’s distributed data environment, HHS 

recommends issuers submit data at least quarterly throughout the benefit year to support 

the calculation of reinsurance payments and risk adjustment payments and charges. 

Comment: We received a comment requesting clarification on the penalty for 

non-compliant data submission. 

Response: Compliance requirements will be forthcoming. We note, however, that 

one consequence of an issuer failing to timely submit claims and enrollment data would 

be that the information needed to calculate risk scores and reinsurance allowable amounts 

would not be available, potentially resulting in a loss of risk adjustment or reinsurance 

payments for the issuer. 

Comment: Several commenters requested clarification on the claims run out 

period. 

Response: An issuer of a risk adjustment covered plan or reinsurance eligible 

plan in a State in which HHS operates risk adjustment or reinsurance should submit data 

by April 30 of the year following the applicable benefit year. For example, claims 
CMS-9964-F 320 

incurred in the 2014 benefit year must be submitted to HHS by April 30, 2015. The 

submission deadline will allow issuers time to process claims and submit data to their 

distributed data systems for HHS evaluation, and will provide HHS adequate time to 

calculate payments and charges. 

H. Small Business Health Options Program 

1. Employee Choice in the Federally-Facilitated SHOP (FF-SHOP) 

 In our proposed rule, we proposed that qualified employers in FF-SHOPs will 

choose a level of coverage (bronze, silver, gold, or platinum) and a contribution, and 

employees can then choose any QHP at that level. 

 In stakeholder consultations following the publication of the Exchange 

Establishment Rule, some issuers expressed openness to allowing the employee to “buy 

up” to certain plans at the next higher level of coverage, thereby offering employees a 

broader range of health plans. We sought comments on whether FF-SHOPs should offer 

an additional employer option that would allow a qualified employer to make available to 

employees all QHPs at the level of coverage selected by the employer plus any QHPs at 

the next higher level of coverage that a QHP issuer agrees to make available under this 

option. QHP issuers could decide whether or not to make available QHPs at the next 

higher level of coverage above the level of coverage selected by the employer. 

We also sought comments on a transitional policy in which a Federally-facilitated 

SHOP (FF-SHOP) would allow or direct employers to choose a single QHP from those 

offered through the FF-SHOP. We received the following comments regarding the 

proposed provisions of choice in the Federally-facilitated SHOP: 

Comment: A few commenters opposed offering employers the single QHP 

option, suggesting that each SHOP should focus on providing employee choice. Most 

commenters on this issue supported offering a single QHP option for employers, either as 
CMS-9964-F 321 

an additional option or as the only option in the initial years of each SHOP. The 

commenters who supported allowing a qualified employer only the option of offering a 

single QHP in the initial years of SHOP operation cited several concerns, including 

whether issuers could complete enrollment and accounting system changes required to 

interact with the SHOP enrollment and premium aggregation systems required by 

employee choice; and whether there would be adequate time to educate employers, 

employees, brokers about the employer and employee choices available in the SHOP. 

They further suggested that tying Exchange participation to SHOP participation could 

lead some issuers to participate in neither the Exchange nor the SHOP. 

Response: Each SHOP has the option to allow employers to offer employees a 

single QHP. We have concluded for the reasons identified by the commenters that, as a 

transition to broader employer adoption of employee choice models, each FF-SHOP 

should exercise this option, providing employers the option of offering a single QHP to 

employees, as the small group market customarily does today. This employer option will 

allow employers who prefer to offer employees a single QHP to participate in an FFSHOP and retain potential eligibility for the small business tax credit, which is only 

available through a SHOP Exchange beginning in 2014. 

We have also concluded that effective implementation of employee choice in the 

federally-facilitated SHOP will not be possible in 2014 because of operational challenges 

noted by the commenters. Therefore, we are proposing in the Small Business Health 

Options Program proposed rule issued simultaneously with this final rule and published 

elsewhere in this issue of the Federal Register that: (1) the effective date of the 

employee choice requirements (§155.705(b)(2)) and the premium aggregation 

requirements (§155.705(b)(4)) will be January 1, 2015; (2) SHOP Exchanges may offer 

employee choice and perform premium aggregation for plan years beginning on or after 
CMS-9964-F 322 

January 1, 2014; and (3) an FF-SHOP will not offer employee choice and premium 

aggregation until plan years beginning on or after January 1, 2015. 

Comment: A few commenters supported a single QHP option but only if linked 

to the required use of composite premiums. 

Response: We believe the decision about the use of calculated composite 

premiums should remain an employer decision, unless State law requires that premiums 

be presented to employers as composite premiums, and have not adopted the linkage 

suggested by the commenters. 

Comment: The employer option of broader, two-level plan choice was supported 

by a number of commenters, either as proposed or as two-level plan choice among all 

plans at those levels, without the QHP issuer’s choice whether to offer as a buy-up. 

Several commenters characterized employee choice as a key distinguishing feature of the 

SHOP, and one suggested considering full employee choice. Many commenters, 

however, cited the adverse selection that may occur with choices across levels of 

coverage and recommended restricting employee choice to a single level of coverage 

chosen by the employer. One commenter noted the operational complexity of a buy-up 

option. 

Response: We are not finalizing the rule with provisions for the FF-SHOPs to 

accommodate the two-level plan choice because of concerns about adverse selection in 

the first year of SHOP operation. We note that broader employee choice is a desirable 

feature of a FF-SHOP that will be explored in subsequent years. Further, the final rule at 

§155.705(b)(3)(i) permits each SHOP the flexibility to offer qualified employers choices 

beyond making one metal level available to employees. Although we are not exercising 

this flexibility for the FF-SHOPs, we anticipate that some State-based SHOPs may do so. 

Comment: One commenter asked that the final notice reflect that employer 
CMS-9964-F 323 

offerings may also be subject to collective bargaining agreements. 

Response: We concur with that comment and note here that employer offers of 

benefits may be subject to the provisions of collective bargaining agreements. 

We are finalizing the rule for the FF-SHOPs with some modifications from the 

proposal. Under §155.705(b)(3) as finalized, each FF-SHOP will allow qualified 

employers the choice of offering employees either all QHPs at a single level of coverage 

selected by the employer or a single QHP selected by the employer. However, we are 

proposing elsewhere in this issue of the Federal Register that, as a matter of transition, 

each SHOP have the option to choose whether to implement employee choice and 

premium aggregation beginning January 1, 2014 or January 1, 2015, with each FF-SHOP 

exercising the January 1, 2015 implementation option. 

2. Methods for Employer Contributions in an FF-SHOP 

 Employers may elect a variety of ways to contribute toward health coverage that 

are consistent with Federal law. Because employees in the SHOP may be choosing their 

own coverage and will need to know the net cost to them after the employer’s 

contribution, each employer will need to choose a contribution method before its 

employees select their qualified health plans. To facilitate this, we proposed in §155.705 

(b)(11)(i) that each SHOP could define a standard method by which employers would 

contribute toward the employee coverage. We also proposed in §155.705 (b)(11)(ii) a 

specific, standardized method for the FF-SHOPs – a method that reflects a meaningful 

employer choice and that conforms to existing Federal law.32

Comment: A broad range of commenters supported our proposal. One 

commenter expressed concern about the effect on older employees, but recognized the 

 

32See 77 FR 73184-85. 
CMS-9964-F 324 

need to match the outside market options. Two commenters suggested requiring a 

calculated composite premium as the only allowable method. 

Response: The choice of contribution method offered in each FF-SHOP reflects a 

meaningful choice available to employers in 2014, absent a provision in State law to the 

contrary. We note that the premium differential effect on older employees is limited by 

the maximum 3:1 ratio for adults. As noted in the proposal, we believe the decision 

about whether to use a calculated composite premium is best made by the employer so 

long as that choice is consistent with applicable State law. 

Comment: One commenter suggested addressing the contribution method by 

allowing employers to offer only a single QHP as a transition, which would also give 

issuers time to adopt SHOP per member rating rules. 

Response: Whether an employer offers a single QHP or all QHPs at a given level 

of coverage, an FF-SHOP will still need to adopt an approach to employer contributions. 

The approach proposed in the draft Notice and finalized in this rule will allow employers 

options regarding how they and their employees contribute toward coverage that applies 

to both single QHP and single level of coverage offers. 

Comment: One commenter stated that an issuer should not be involved in 

employer decisions about allocation of premium between employer and employee. 

Response: We do not believe that either the proposed rule or the final rule 

involves the QHP issuer in employer decisions about the employer contribution toward 

the premium. The FF-SHOP standard contribution method, as proposed and finalized, 

does establish a method by which the employer can contribute in a standardized, nondiscriminatory way. The QHP issuer is not involved in the FF-SHOP policy nor is the 

issuer involved in employer decisions about the allocation of premium between employer 

and employee. 
CMS-9964-F 325 

Comment: One commenter asked for clarification about how mid-year turnover 

would be handled with a calculated composite premium method. 

Response: In future guidance, we will discuss mid-year changes in group 

composition and how a SHOP might address the resulting changes in the average 

premium for the group. 

We proposed at §155.705(b)(11)(ii)(D) to permit a qualified employer 

participating in an FF-SHOP to establish, to the extent allowed by Federal and State law, 

different contribution percentages for different employee categories. We have concluded 

that this provision is inconsistent with the uniformity provisions established in Internal 

Revenue Service Notice 2010-82, which require employers to contribute a uniform 

percentage to all employees in order to claim a small business tax credit for health 

insurance premiums paid. Although the provisions in Notice 2010-82 apply only to 

employers claiming the tax credit in tax years through December 31, 2013, the use of a 

uniform percentage for all employees helps assure that the employer contributions do not 

violate other anti-discrimination provisions. We therefore are not finalizing the proposal 

at §155.705(b)(11)(ii)(D) and the final rule redesignates the proposed paragraphs 

(b)(11)(ii)(E) and (F) as paragraphs (b)(11)(ii)(D) and (E). We are otherwise finalizing 

the rule as proposed. 

3. Linking Issuer Participation in an FFE to Participation in an FF-SHOP 

 We proposed standards that we believe will help ensure that qualified employers 

and qualified employees enrolling through an FF-SHOP are offered a robust set of QHP 

choices in a competitive small group marketplace. We believe that a competitive 

marketplace offering qualified individuals, qualified employers, and qualified employees 

a choice of issuers and QHPs is a central goal of the Affordable Care Act, and that the 

SHOP can provide an effective way for small employers to offer their employees a choice 
CMS-9964-F 326 

of issuers and QHPs. We proposed in §156.200(g) to leverage issuers’ participation in an 

FFE to ensure participation in the corresponding FF-SHOP, provided that no issuer 

would be required to begin offering small group market products as a result of this 

provision. We sought comments on this issue and whether or not the policy meets three 

intended goals: enhancing employer and employee choice, assuring similar effects on 

single issuers and issuer groups, and not requiring any issuer to begin offering coverage 

in the small group market in order to meet this provision. 

Comment: A substantial number of commenters supported the tying provision 

and the issuer group definition, concluding that the provision would enhance consumer 

choice in FF-SHOPs. 

Many commenters opposed the tying provision, arguing that plans should have 

full choice about participation and that requiring participation may make it harder to meet 

the timeline for QHP submission in the individual market FFE. Several commenters 

specifically suggested that the tying provision might result in decreased issuer 

participation in the individual market FFE in some states. Several commenters noted the 

extensive efforts that would be required to offer plans in the SHOP, even if the issuer 

were already participating in the State’s small group market. 

Response: We have considered the concerns about the tying provision and 

conclude that adopting the provision will help assure that small group market QHPs are 

available to employers and employees. We have also considered comments that tying 

would lead to issuers declining participation in both the FFE and the FF-SHOP, and 

concluded that it is more likely to result in that outcome among issuers with relatively 

low market shares for whom the administrative costs to modify systems to enable SHOP 

participation may outweigh the value of increased enrollment. Finally, we considered 

how these issuer concerns about tying might relate to issuer concerns about the effects of 
CMS-9964-F 327 

employee choice, and whether those concerns might be reduced by our concurrent 

proposal to allow SHOPs to delay the implementation of employee choice by a year. 

Adoption of a tying standard that applies only to issuers with more than a 

threshold market share will serve the goal of assuring that QHPs are available in each FFSHOP in 2014 without unduly burdening issuers. We examined small group market 

share data based on earned premiums reported to HHS in conjunction with evaluations of 

issuer minimum loss ratios and have concluded that using a 20 percent market share to 

determine whether a small group market issuer is subject to the tying provision will result 

in sufficient competition and the ability to offer a robust set of QHPs in the FF-SHOPs, 

while minimizing the burden on small issuers. We are finalizing the rule accordingly. 

Comment: One commenter objected because OPM does not require multi-State 

plans to offer SHOP products until 2017, and CO-OPs are not subject to a similar 

provision. 

Response: In a final rule published elsewhere in this issue of the Federal 

Register, OPM establishes a similar tying provision for multi-State plans based on 

market share. CO-OPs operate under a different tying provision. We direct the 

commenter’s attention to §156.515(c)(2), which requires CO-OPs to comply with a strict 

tying provision with no market share exception. If a CO-OP participates in a State’s 

small group market, it must offer silver and gold plans on the SHOP. 

Comment: One commenter suggested implementing the tying provision but 

reevaluating the policy in two years. A second commenter suggested the possibility of 

delaying introduction of the tying provision. 

Response: We will be evaluating on an ongoing basis the effectiveness of the 

tying provision in enhancing employer and employee choice in FF-SHOPs without 

adversely affecting participation in the FFEs. 
CMS-9964-F 328 

We are finalizing these provisions as proposed, with a modification to limit the 

tying rule to at the applicant issuer itself or an issuer member of the same issuer group 

that has a 20 percent share of the small group market in the State, based on the most 

recent earned premium data reported under §158.110 to fulfill minimum loss ratio 

reporting requirements. 

4. Broker Compensation for Coverage Sold Through an FFE or FF-SHOP 

In a new paragraph §156.200(f), we proposed that QHP certification by an FFE 

and an FF-SHOP be conditioned on the QHP issuer paying similar broker compensation 

for QHPs offered through an FFE or FF-SHOP that it would pay for similar health plans 

offered outside an FFE and an FF-SHOP. We requested comments on whether “similar 

health plans” is a sufficient standard and if not, which factors should be considered in 

identifying “similar health plans.” We also requested comments on how this standard 

might apply when small group market product commissions are calculated on a basis 

other than an amount per employee or covered life or a percentage of premium. 

Comment: Multiple commenters representing both consumer groups and issuers 

supported the compensation proposal, with several recommending that “similar” be more 

clearly defined. One commenter proposed that “similar” be defined by the issuer. One 

commenter opposed the proposal, recommending that the issuer be allowed to set 

different compensation on and off the Exchange. 

Response: For the reasons outlined in the preamble to the proposed rule, we are 

finalizing these provisions as proposed. We do not at this time propose a specific 

definition of “similar.” We expect to issue further guidance at a later date. 

5. Minimum Participation Rate in FF-SHOPs 

As discussed the preamble to the proposed rule, we aim to minimize the potential 

for risk selection in the small group market and in SHOPs. In the final Market Reform 
CMS-9964-F 329 

Rule, we discussed this issue in connection with section 2702 of the PHS Act, which 

requires issuers in the individual and group markets to accept every employer and 

individual that applies for such coverage but permits issuers to limit enrollment in 

coverage to only open and special enrollment periods. That final rule implements this 

provision by permitting an issuer offering health insurance coverage in the small group 

market to limit its offering of coverage to the limited open enrollment periods described 

in §147.104(b)(1) in the case of an employer that fails to meet contribution or minimum 

participation requirements. In connection with the SHOP, the Exchange Establishment 

final rule permits a SHOP to authorize minimum participation requirements for qualified 

employers participating in the SHOP so long as the participation is measured at the 

SHOP level and not based on enrollment in a single QHP. 

We proposed a minimum participation rate for an FF-SHOP of 70 percent, 

calculated at the level of the participation of the employees of the qualified employer in 

the FF-SHOP and not enrollment in a single QHP. We based the proposed rate on 

consultations with issuer organizations and regulators about customary minimum 

participation rates and proposed that it apply to all qualified employers in the FF-SHOP 

serving a given State. Because State law, regulation, and market practices vary from 

State to State, we also proposed an option for an FF-SHOP to adopt a different uniform 

minimum participation rate in a State with a FF-SHOP if there is evidence that: 

(1) A State law sets the rate; or 

(2) A higher or lower rate is customarily used by the majority of QHP issuers in 

that State for products in the State’s small group market outside the SHOP. 

In addition, we proposed to exclude employees with certain types of alternative coverage 

from the calculation of the minimum participation rate: 

(1) A group health plan offered by another employer; or 
CMS-9964-F 330 

(2) A governmental program such as Medicare, Medicaid, or TRICARE. 

The preamble, and the proposed regulation text, also acknowledged that imposition of 

any minimum participation rate would have to be subject to the exception to the 

guaranteed issue requirements of section 2702 of the PHS Act and the then-pending 

proposed rule implementing guaranteed issue. 

We sought comments on the default minimum participation rate and the 

exceptions that will help ensure alignment with current State practice and standards 

inside and outside the SHOP. 

Comment: Many commenters were supportive of both setting a default and 

allowing flexibility to adapt to different states. 

Response: We are retaining both the default and the flexibility, as proposed. 

Comment: One commenter questioned the necessity of a minimum participation 

rate given market reforms and suggested using minimum contribution instead. 

Response: While the degree of risk segmentation is substantially reduced by 

market reform, we conclude that a minimum participation rate should be applied, at least 

in the early years of an FF-SHOP. We have no authority under the Exchange 

Establishment Rule to set a minimum contribution rate for an FF-SHOP. We note, 

however, that a minimum participation rate encourages employers to set their 

contributions toward coverage high enough that the minimum participation rate is 

achieved. 

We are finalizing the provisions as proposed, with minor revisions to the text 

consistent with the discussion in the preamble. The introductory text at §155.705(b)(10), 

as well as the text at subparagraph (b)(10)(i), is amended to include the phrase “Subject 

to §147.104 of this title” to clarify when and how a minimum participation rate may be 

imposed under applicable law. Under this final rule, when an FF-SHOP makes the 
CMS-9964-F 331 

employee choice model available to qualified employers, it will use a consistent 

minimum participation rate across issuers. 

6. Determining Employer Size for Purposes of SHOP Participation 

 We proposed to amend the definitions of “small employer” and “large employer” 

in §155.20 to specify the method for determining employer size for Exchange purposes 

and to add the definition of large employer to §157.20. In determining whether an 

employer is a small employer for purposes related to the SHOP, we proposed that the 

full-time equivalent method used in section 4980H(c)(2)(e) of the Code, as added by 

section 1513 of the Affordable Care Act, be used. We sought comments on the proposed 

definition. 

Comment: Some commenters suggested that each SHOP, including FF-SHOPs, 

should use State counting methods permanently. Other commenters supported an 

immediate move to a federal standard counting method that takes all employees into 

account. One commenter noted that the more comprehensive reference for the counting 

method used in the IRC would be Section 4980H(c)(2), which includes a provision to 

exclude certain seasonal employees when determining whether an employer is subject to 

the shared responsibility provisions. 

Response: We believe that the Affordable Care Act requires the use of a counting 

method that takes part time employees into account, and that the full-time equivalent 

method used in section 4980H(c)(2)(e) of the IRC is a reasonable method to apply with 

regard to Exchanges. We have changed the IRC reference from section 4980H(c)(2)(e) 

to 4980H(c)(2) in response to the comment. We believe that the broader cross-reference 

is appropriate because it brings here the limit in § 49080H(c)(2)(B) on how certain 

seasonal employees are counted. We believe that excluding certain seasonal employees 

when determining whether an employer has more than 50 employees would be closer to 
CMS-9964-F 332 

counting provisions used in many states and that employers should be able to use the 

same method to determine SHOP eligibility that they will use to determine whether they 

will be subject to section 4980H. This method of determining SHOP eligibility will be 

reevaluated before 2016, when the small group market in all states will consist of 

employers with from 1 to 100 employees rather than 1 to 50 employees. 

Comment: Several commenters recommended that any counting method used to 

define employer size and thus the corresponding group market should apply for all ACA 

purposes, not just for purposes relating to Exchanges. 

Response: Based on the scope of the proposed regulations, we are unable to 

adopt definitions in this Notice that apply beyond the Exchange regulations. 

We are finalizing the provisions as proposed, changing the reference to section 

4980H(c)(2) of the IRC. 

7. Definition of a Full-Time Employee for Purposes of Exchanges and SHOPs 

We proposed to add to §155.20 a definition of full-time employee that crossreferences section 4980H(c)(4) of the Code, which provides that a full-time employee 

with respect to any month is generally an employee who is employed an average at least 

30 hours of service per week, subject to the transitional policies discussed in the next 

paragraph. Under our proposal, this definition would control for purposes of the section 

1312(f)(2)(A) requirement that qualified employers offer coverage to all full-time 

employees. 

Comment: Only one commenter addressed the definition of full time employee, 

suggested that full-time employee be defined as an employee working more than 1300 

hours in the past year. 
CMS-9964-F 333 

Response: We find no rationale for adopting that definition of a full time 

employee, and retain instead the definition based on 30 hours a week used elsewhere in 

the Affordable Care Act. 

We are finalizing the definition as proposed. 

8. Transitional Policies 

With our proposed definitions of large and small employer and full-time 

employee, for purposes of Exchange and SHOP administration, we proposed policies to 

provide for a transition from different, existing State law. With respect to State-operated 

SHOPs for 2014 and 2015 only, we proposed that HHS will not take any enforcement 

actions against a State-operated SHOP for including a group in the small group market 

based on a State definition that does not include part-time employees when the group 

should have been classified as part of the large group market based on the Federal 

definition. Our proposal did not address application of State-specific definitions or 

counting rules that would exclude a small group health plan from protections provided 

under federal law. Similarly, during 2014 and 2015, an employer and a State-operated 

SHOP may adopt a reasonable basis for their determination of whether they have met the 

SHOP requirement to offer coverage to all full-time employees, such as the definition of 

full-time employee from the State’s small group market definition or the Federal 

definition from section 4980H of Chapter 43 of the Code. 

Under our proposal, however, each FF-SHOP would use a counting method that 

takes part-time employees into account. We proposed that these definitions will be 

effective October 1, 2013 for each FF-SHOP. We requested comments on the proposed 

definitions and on the proposed transition policies. 
CMS-9964-F 334 

Comment: Most commenters supported using State methods, either long term or 

as a transitional method in 2014-2015. Two commenters supported an immediate move 

to a federal standard counting method that takes all employees into account. 

Response: We conclude that, for purposes relating to the Exchange regulations, 

the definition of “full-time employee” and the definitions of “small employer” and “large 

employer” and their associated counting methods using a full-time equivalent (FTE) 

methodology should be effective for plan years beginning on or after January 1, 2016. 

During 2014 and 2015, when states have the discretion to choose whether the upper limit 

of small employer size is 50 or 100, we will exercise enforcement discretion, relying on 

State methods of determining group size and status as a full-time employee. However, in 

operating the FF-SHOPs, we do not have the same discretion; for plan years beginning on 

or after January 1, 2014 and in connection with open enrollment activities beginning 

October 1, 2013, we will use definitions of full-time employee, small employer, and large 

employer based on the FTE method of determining group size. Thus, prior to 2016, an 

FF-SHOP will use the State’s choice of 50 or 100 employees, but will count those 

employees using the full-time equivalent method referenced in the definitions. 

We are finalizing the effective dates of the definitions of “full-time employee,” 

“small employer,” and “large employer” as proposed, with a minor modification to 

clarify that the definitions will apply to plan years beginning on or after January 1, 2014 

and in connection with open enrollment activities beginning October 1, 2013. As the 

SHOP, including FF-SHOPs, will not provide access to coverage until January 1, 2014, 

we believe the proposed text may have been subject to unintended ambiguity and are 

finalizing revised text to eliminate that concern. 

9. Web Site Disclosures Relating to Agents and Brokers 
CMS-9964-F 335 

We proposed modifications to the website disclosure standards relating to brokers 

in §155.220(b). Specifically, we proposed a new paragraph (b)(1) that would allow an 

Exchange or SHOP to limit the display of agent and broker information to include only 

those licensed agents and brokers who are registered with the Exchange or SHOP and a 

new paragraph (b)(2) that would specifically adopt this provision for an FFE and an 

FF-SHOP. We believed that listing only brokers who have registered with the Exchange 

is in the best interest of the consumer, both because the registration and training helps 

assure that the agent or broker is familiar with the Exchange policies and application 

process and because the proposed listing will not contain large numbers of licensed 

brokers who are not active in the market. We welcomed comments on these proposals. 

Comment: Several commenters expressed strong support for the authority to list 

only registered brokers. One suggested the broader authority to list only those actually 

selling exchange QHPs. None opposed the proposal. 

Response: We are finalizing the regulation as proposed. At this time, we do not 

propose further limiting the listing based on actual sales. 

10. QHP issuer standards specific to SHOP. 

 We proposed modifications to the QHP issuer standards specific to SHOP for 

enrollment in §156.285. Specifically, we proposed a technical correction in paragraph 

(c)(7) such that QHP issuers participating in the SHOP must enroll qualified employees if 

they are eligible for coverage. This correction aligns SHOP enrollment standards to 

Exchange enrollment standards. 

Comment: One commenter supported the proposed regulation. No other 

comments were received. 

Response: We are finalizing the regulation as proposed. 

I. Medical Loss Ratio Requirements under the Patient Protection and Affordable Care 
CMS-9964-F 336 

Act

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

and Distribution of Rebates 

In the December 2012 HHS Notice of Benefit and Payment Parameters for 2014 

proposed rule (77 FR 73187), we proposed to modify the definition of premium revenue 

in §158.130, the formula in §158.221(c) for calculating an issuer’s MLR, and the formula 

in §158.240(c) for calculating an issuer’s rebate if the MLR standard is not met, in the 

current MLR regulation to account for payments and receipts related to the premium 

stabilization programs. Specifically, we proposed to account for all premium 

stabilization amounts in a way that would not have a net impact on the adjusted earned 

premium used in calculating the MLR denominator and rebates. Additionally, we 

proposed to amend §158.140(b) to include all premium stabilization amounts (positive or 

negative) as adjustments to incurred claims in calculating the MLR numerator as 

provided in §158.221. We invited comment on this approach. We also indicated in the 

proposed rule that we considered adopting a methodology under which premium 

stabilization amounts would have a net impact on the MLR denominator, and invited 

public comment on that approach as well. 

In addition, as discussed in the proposed rule, we proposed to amend §158.110(b), 

§158.240(d), and §158.241(a)(2) to change the MLR reporting and rebate deadlines, 

beginning with the 2014 MLR reporting year, to coordinate them with the reporting 

cycles of the premium stabilization programs. Comments on the proposed timeline were 

welcomed. 

Comment: Most commenters supported our proposal to include risk corridors 

amounts and reinsurance payments as adjustments to the MLR numerator, but many 

commenters suggested a change in our proposed approach with respect to reinsurance 
CMS-9964-F 337 

contributions and all risk adjustment amounts, which these commenters recommended be 

applied as adjustments to the MLR denominator. With respect to the reinsurance 

contributions, most commenters expressed the view that these are assessments on issuers 

that are more properly regarded as assessments or regulatory fees, and consequently 

should be deducted from premium in MLR and rebate calculations. With respect to risk 

adjustment, several commenters asserted that because State average premium is used to 

calculate risk adjustment amounts, MLR and rebate calculations should treat these 

transfer amounts as adjustments to premium. Two commenters expressed concern that 

including any premium stabilization amounts in the MLR numerator would reduce 

rebates. One commenter also suggested that we clarify the rebate calculation example in 

§158.240(c)(2) to make it clear that the rebate calculations account for premium 

stabilization amounts at the aggregation level, rather than at an individual enrollee level. 

Response: We recognize commenters’ concerns regarding inclusion of risk 

adjustment amounts in the MLR numerator. However, as noted in the proposed rule, 

while PHS Act section 2718 provides that premium revenue should “account for” 

collections or receipts for the premium stabilization programs, section 1342(c) of the 

Affordable Care Act requires that risk corridors calculations treat reinsurance and risk 

adjustment payments as adjustments to allowable cost. Because the MLR and the risk 

corridors programs are closely related and rely on the same definitions, there should be 

consistency between these two programs. Proper functioning of the MLR and premium 

stabilization programs will be especially important in 2014-2016, the initial years the 

health insurance market will undergo significant changes. Thus, with respect to premium 

stabilization amounts other than reinsurance contributions (that is, risk adjustment 

amounts, risk corridors amounts, and reinsurance payments), we are adopting our 

proposed approach that these adjustments have a net impact on the MLR numerator. 
CMS-9964-F 338 

However, we agree with those commenters that stated that reinsurance contributions 

could reasonably be characterized as fees or assessments deductible from premium in 

MLR and rebate calculations, and this final rule amends §158.161(a) accordingly. 

Additionally, we are making clarifying changes to the rebate calculation example in 

§158.240(c)(2) in response to comments. 

In sum, this final rule amends the formula for calculating the MLR as follows: 

MLR = [(i + q – s + n – r) / {(p + s – n + r) – t – f – (s – n + r)}] + c 

Where, 

 i = incurred claims 

 q = expenditures on quality improving activities 

 p = earned premiums 

 t = Federal and State taxes and assessments 

 f = licensing and regulatory fees, including transitional reinsurance 

contributions 

 s = issuer’s transitional reinsurance receipts 

 n = issuer’s risk corridors and risk adjustment related payments 

 r = issuer’s risk corridors and risk adjustment related receipts 

 c = credibility adjustment, if any. 

 Issuers must provide rebates to enrollees if their MLRs fall short of the applicable 

MLR standard for the reporting year. Rebates for a company whose MLR falls below the 

minimum MLR standard in a given State market will be calculated using the following 

amended formula: 

Rebates = (m – a) * [(p + s – n + r) – t – f – (s – n + r)] 

Where, 

 m = the applicable minimum MLR standard for a particular State and 
CMS-9964-F 339 

market 

 a = issuer’s MLR for a particular State and market. 

The amendments made by this final rule will be effective for MLR reporting years 

beginning in 2014. 

Comment: Three commenters recommended that HHS include the Federallyfacilitated Exchange user fees and user fees assessed on issuers participating in the HHSoperated risk adjustment programs as regulatory fees deductible from premium in MLR 

and rebate calculations. Two commenters recommended that issuer costs associated with 

operating risk adjustment data validation systems also be deducted for MLR purposes, 

either as an addition or offset to the payments or receipts related to the premium 

stabilization programs, or as regulatory fees or assessments deducted from premium. 

Three commenters further suggested that fees and/or operational costs related to the 

premium stabilization programs and Exchanges, that are priced into premium for policy 

years spanning 2013-2014, and consequently will be partially reflected in 2013 premium, 

be either deducted or excluded from 2013 premium. 

Response: We have previously addressed the deductibility of State and Federal 

Exchange user fees in sub-regulatory guidance issued on April 20, 2012.33 We agree 

with the commenters’ suggestion regarding the deductibility of the risk adjustment user 

fees, and we interpret §158.161(a) as allowing these user fees to be deducted from 

premium in MLR and rebate calculations. However, we do not agree with commenters 

that issuer expenditures on risk adjustment data validation systems, or any other 

operational costs related to the premium stabilization programs, constitute a regulatory 

fee or assessment or a transfer under the premium stabilization programs. We do not 

 

33 CCIIO Technical Guidance (CCIIO 2012—002): Questions and Answers Regarding the Medical Loss 

Ratio Regulation, Q&A #34 (Apr. 20, 2012), available at http://cciio.cms.gov/resources/files/mlr-qna04202012.pdf. 
CMS-9964-F 340 

think that these types of expenditures can be distinguished from issuers’ other 

administrative costs involved in compliance with laws and regulations. We also do not 

agree with comments suggesting that it would be appropriate to reduce rebates to 2013 

enrollees by applying estimated 2014 regulatory fees priced into 2013 premium to 2013 

MLR and rebate calculations. PHS Act section 2718 does not provide for estimated 

regulatory fees for future years to be deducted from premium used in MLR and rebate 

calculations for the reporting year. 

Comment: We received several comments supporting our proposal to extend the 

MLR and rebate deadlines. Two commenters opposed extending the rebate deadline. 

Response: We appreciate the comments regarding the proposed deadlines. As 

noted in the proposed rule, we recognize both consumers’ and policyholders’ interests in 

maintaining the dates for MLR reporting and rebates as close to the June 1 and August 1 

dates as possible, as well as issuers’ interests in having the necessary data to submit their 

annual MLR reports and having sufficient time to disburse any rebates. We believe that 

the proposed deadlines strike a balance between these competing interests. Therefore, 

this final rule extends the MLR and rebate deadlines in §158.110(b), §158.240(d), and 

§158.241(a)(2) as proposed in the December 2012 HHS Notice of Benefit and Payment 

Parameters for 2014 proposed rule (77 FR 73187). 

2. Deduction of Community Benefit Expenditures 

In the December 2012 HHS Notice of Benefit and Payment Parameters for 2014 

proposed rule (77 FR 73187), we proposed to amend §158.162(b)(1)(vii) to allow an 

issuer exempt from Federal income tax to deduct both State premium taxes and 

community benefit expenditures from earned premium in MLR and rebate calculations. 

The proposal limited the community benefit expenditure deduction available to a tax 

exempt issuer to the higher of (1) the highest premium tax rate in the State; or (2) 3 
CMS-9964-F 341 

percent of premium, ensuring a level playing field. The proposed amendment would not 

change the treatment of State premium taxes and community benefit expenditures for 

those issuers that are not exempt from paying Federal income tax. 

Comment: Several commenters suggested that the proposed treatment is 

unnecessary and would give Federal income tax exempt entities a competitive advantage. 

These commenters suggested that tax-exempt entities have sufficient advantages 

stemming from their favored tax treatment. These commenters further asserted that the 

deduction of community benefit expenditures should not depend on an issuer’s tax status 

because such funds are not available to be used on subscribers’ claims. The commenters 

proposed either allowing any issuer to deduct all taxes and community benefit 

expenditures, or eliminating the community benefit expenditure deduction. 

In contrast, most other commenters agreed that a Federal income tax exempt 

issuer is required to make community benefit expenditures to maintain its Federal income 

tax exempt status and supported the deduction of both State premium taxes and 

community benefit expenditures from earned premium for such issuers. These 

commenters agreed that the proposed treatment levels the MLR playing field and would 

allow a Federal income tax exempt issuer to deduct its community benefit expenditures in 

the same manner that a for-profit issuer is allowed to deduct its Federal income taxes. 

Response: We agree that, because an issuer that is exempt from Federal income 

taxes must make community benefit expenditures, such an issuer should be allowed to 

deduct community benefit expenditures and State premium taxes. This final rule allows a 

Federal income tax exempt issuer to deduct its community benefit expenditures in the 

same manner that another issuer is allowed to deduct its Federal income taxes. This rule 

does not alter the community benefit expenditure deduction currently available to an 

issuer that is not exempt from Federal income taxes. Such issuers are allowed to deduct 
CMS-9964-F 342 

the higher of (1) their State premium taxes or (2) their community benefit expenditures 

limited to the highest premium tax rate charged to an issuer in the State. This final rule 

accordingly amends §158.162(b)(1)(vii) as proposed in the December 2012 HHS Notice 

of Benefit and Payment Parameters for 2014 proposed rule (77 FR 73187). We note that 

the amount of community benefit expenditures deducted is not allowed to exceed the 

amount of actual community benefit expenditures in the reporting year. 

Comment: One commenter suggested that the proposed community benefit 

expenditure deduction could lead to abuse, while another suggested that the deduction 

limit was speculative. However, most commenters agreed with the proposed community 

benefit expenditure limit. 

Response: In its MLR model rule, the National Association of Insurance 

Commissioners (NAIC) adopted and limited the community benefit deduction to the 

State premium tax rate. We adopted the NAIC methodology in the December 1, 2010 

interim final rule (75 FR 74864, as amended), and comments in response to it noted that 

some States do not subject every type of issuer to State premium taxes and the 

community benefit deduction might not be available to those tax exempt issuers. In 

balancing the availability of the deduction and the potential for abuse, this final rule 

implements the community benefit expenditure deduction cap of the highest of (1) 3 

percent of premium, or (2) the highest premium tax rate charged in the State, as proposed 

in the December 2012 HHS Notice of Benefit and Payment Parameters for 2014 

proposed rule (77 FR 73187). 

3. Summary of Errors in the MLR Regulation 

In the December 2012 HHS Notice of Benefit and Payment Parameters for 2014 

proposed rule (77 FR 73187), we proposed to correct three errors in the December 1, 

2010 interim final rule (75 FR 74864, as amended): the date by which issuers must 
CMS-9964-F 343 

define the formula they use for the blended rate adjustment, described in 

§158.140(b)(5)(i); the date after which partially-credible issuers that consistently fail to 

meet the MLR standard will not be allowed to use a credibility adjustment, described in 

§158.232(d); and the calculation of the per-person deductible described in 

§158.232(c)(1)(i). 

Comment: We received one comment regarding our proposed correction to 

§158.232(d). The commenter recommended that an issuer that fails to meet the MLR 

standard for four or more consecutive years be penalized only once every three years. 

The commenter stated that after an issuer fails to meet the MLR standard for three 

consecutive years (the statistical probability of which is generally 50 percent x 50 percent 

x 50 percent, or 12.5 percent), the probability of it failing to meet the MLR standard for 

the fourth consecutive year is 50 percent. 

Response: We disagree with the commenter’s calculation. The commenter is 

correct that the statistical probability of an issuer failing to meet the MLR standard in any 

given year may be 50 percent. However, the probability of an issuer failing to meet the 

MLR standard for a number of consecutive years is 50 percent ^ n, where n is the number 

of years. Consequently, the probability of an issuer failing to meet the MLR standard for 

four consecutive years is 6.25 percent, and for five consecutive years it is 3.125 percent. 

With each additional year, the probability of an issuer failing to meet the MLR standard 

due to statistical fluctuations continues to shrink, increasingly indicating an intentional 

pricing below the MLR standard. 

This final rule therefore implements the technical corrections to 

§158.140(b)(5)(i), §158.232(d), and §158.232(c)(1)(i) as proposed in the December 2012 

HHS Notice of Benefit and Payment Parameters for 2014 proposed rule (77 FR 73187). 

Comment: We received several comments suggesting that HHS clarify the MLR 
CMS-9964-F 344 

treatment of State high-risk pool assessments, events occurring after MLR reporting 

deadlines, and cost-sharing reductions. We also received one comment suggesting a 

larger adjustment for fraud prevention activities, an extension of allowable ICD-10 costs 

to the 2013 reporting year, and inclusion of all-payer claims databases in quality 

improving activities. 

Response: The matters discussed in these comments are not within the scope of 

this final rule. However, we will continue to consider the need to issue clarifying 

guidance regarding the various accounting and actuarial elements affecting MLR and 

rebate calculations. 

IV. Provisions of the Final Regulations 

 For the most part, this final rule incorporates the provisions of the proposed rule. 

Those provisions of this final rule that differ from the proposed rule are as follows:

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

• We are not amending §153.100(c) to provide that, if a State is required to publish 

an annual State notice of benefit and payment parameters for benefit year 2014, it must 

do so by the 30th day following the publication of the final HHS notice of benefit and 

payment parameters. 

B. Provisions and Parameters for the Permanent Risk Adjustment Program 

• We are modifying the requirement at §153.360 to clarify that small group market 

plans will be risk adjusted in the State in which the employer’s policy was filed and 

approved. 

• We are adding §153.610(f) to describe the risk adjustment user fees. 

C. Provisions and Parameters for the Transitional Reinsurance Program
CMS-9964-F 345 

• We are amending the definition of “contributing entity” in §153.20 to include 

clarifying language that a contributing entity is a health insurance issuer or a self-insured 

group health plan. 

• We are amending §153.100(a)(2) by replacing the cross-reference to §153.220(d) 

with §153.220(d)(1). We are making corresponding revisions in §153.100(d)(2); and 

§153.110(b); 153.400(a). 

• We are deleting §153.220(d)(2), which required a State to notify HHS within 30 

days after publication of the draft annual HHS notice of benefit and payment parameters 

for the applicable benefit year of the additional contribution rate that it elects to collect. 

• We are revising §153.230(a) by replacing non-grandfathered individual market 

plan with reinsurance-eligible plan. 

• We are revising §153.230(c) to clarify that national reinsurance payments are 

calculated as the product of the national coinsurance rate multiplied by the health 

insurance issuer’s claims costs for an individual enrollee’s covered benefits that the 

health insurance issuer incurs in the applicable benefit year. 

• We are revising §153.232(c) by replacing non-grandfathered individual market 

plan with reinsurance-eligible plan and clarifying that the incurred claims costs for an 

individual enrollee’s covered benefits are those incurred in the applicable benefit year. 

• We are revising §153.232(d) by clarifying that reinsurance payments will be 

calculated with respect to an issuer’s incurred claims costs for an individual enrollee’s 

covered benefits incurred in the applicable benefit year. 

• We are revising §153.235(a) to provide that HHS will allocate and disburse to 

each State operating reinsurance (and will distribute directly to issuers if HHS is 

operating reinsurance on behalf of a State), reinsurance contributions collected from 

contributing entities under the national contribution rate for reinsurance payments. The 
CMS-9964-F 346 

disbursed funds would be based on the total requests for reinsurance payments made 

under the national reinsurance payment parameters in all States and submitted under 

§153.410, net of any adjustment under §153.230(d). 

• We are amending §153.240(b)(2) to clarify that a State must provide to an issuer 

of a reinsurance-eligible plan the calculation of the total reinsurance payments requested, 

on a quarterly basis during the applicable benefit year in a timeframe and manner 

determined by HHS, made under the national reinsurance payment parameters and State 

supplemental reinsurance payment parameters. 

• We are amending §153.400 to clarify that each contributing entity must make 

reinsurance contributions annually at the national contribution rate for all reinsurance 

contribution enrollees, in a manner specified by HHS. 

• We are amending §153.400(a)(1)(iii) to exclude from reinsurance contributions 

expatriate health coverage, as defined by the Secretary. 

• We are amending §153.400(a)(1) by adding paragraph (iv) to exempt employerprovided health coverage, when such coverage applies to individuals with respect to 

which benefits under Title XVIII of the Social Security Act (Medicare) are primary under 

the Medicare Secondary Payor rules under section 1862(b) of the Social Security Act. 

• We are amending §153.400(a)(2) by adding paragraph (xiii) to exempt a selfinsured group health plan or health insurance coverage that is limited to prescription drug 

benefits from reinsurance contributions. 

• We are revising §153.405(a)(1), §153.405(b) and §153.405(d) by deleting 

“average” to clarify that reinsurance contributions are calculated by multiplying the 

number of covered lives of reinsurance contribution enrollees during the applicable 

benefit year for all contributing entities by the national contribution rate, pursuant to 

§153.405(a). 
CMS-9964-F 347 

• We are amending §153.405(c) to provide that HHS will notify contributing 

entities of the reinsurance contribution amount to be paid for the applicable benefit year 

within 30 days of submission of the annual enrollment count. 

• We are amending §153.405(f) to revise the procedures for counting covered lives 

for group health plans with a self-insured coverage option and an insured coverage 

option. 

• We are amending §153.405(g) to revise the aggregation of multiple group health 

plans maintained by the same plan sponsor. 

• We are amending §153.405(g)(3) to clarify that a plan sponsor is not required to 

include as part of a single group health plan any group health plan that consists solely of 

excepted benefits, that only provide prescription drugs benefits, or that is an HRA, HSA, 

or FSA. 

• We are amending §153.410(a) to clarify that an issuer of a reinsurance-eligible 

plan may make requests for reinsurance payments when an issuer’s claims costs for an 

enrollee of that reinsurance-eligible plan has met the criteria for reinsurance payments in 

45 CFR subpart B and this final rule and where applicable the State notice of benefit and 

payment parameters. 

D. Provisions for the Temporary Risk Corridors Program

• We are modifying our proposed definition of “taxes” in §153.500, by replacing 

the term “taxes” with the term “taxes and regulatory fees.” We are clarifying that 

reinsurance contributions are included within the definition of “taxes and regulatory fees” 

in §153.500. 

• We are amending §153.520 to remove references to reinsurance contributions in 

paragraph (d). 
CMS-9964-F 348 

• We are also deleting §153.530(b)(1)(ii) and amending §153.530(b)(1) to eliminate 

the adjustment to allowable costs for reinsurance contributions made by an issuer, and are 

clarifying the treatment of community benefit expenditures within the risk corridors 

calculation. 

E. Provisions for the Advance Payment of the Premium Tax Credit and Cost-Sharing 

Reduction Programs

• We are finalizing the provisions in §155.330(g) substantially as proposed, with 

modifications to the language to increase clarity. 

• We are adding additional language at §155.340(e) to allow Exchanges greater 

flexibility in allocating the advance payment of the premium tax credit if one or more 

individuals in a tax household enroll in more than one policy through the Exchange. We 

also clarify our language in regard to tax filers covered by the same plan(s). In addition, 

we are adding paragraph (f) in which we specify the methodology that will be used for 

allocating advance payments of the premium tax credit provided through Federallyfacilitated Exchanges. 

• We are relabeling §155.340(f) as §155.340(g). 

• We are making a minor technical correction at §155.1030(a). 

• We are making clarifying revisions to the provisions at §155.1030(a) and (b)(2), 

§156.420(a) and (b), §156.430(a)(2), and 156.470(a), (b), and (e) to standardize language 

across the final rule. 

• We are adding paragraph (c) to §155.1030, paragraph (g) to §156.420, paragraph 

(a)(4) to §156.430, and paragraph (f) to §156.470 to clarify the application of these 

provisions to issuers of multi-State plans. 

• We are substituting §156.140(c) for §156.140(c)(1) as the cross-reference for the 

term “de minimis variation” in §156.400. 
CMS-9964-F 349 

• We are making a clarifying revision to the provision at §156.410(a).

• We are modifying the provisions at §156.430(b) to permit HHS to adjust the costsharing reduction advance payments if the QHP issuer demonstrates that the cost-sharing 

reductions provided are likely to differ significantly from the advance payment amounts. 

• We are modifying paragraph (c)(1) and (2) of §156.430, reserving paragraphs 

(c)(3) and (4), and adding paragraph (c)(5). The modified structure of §156.430(c) will 

allow for the amendments established in the interim final rule with comment published 

elsewhere in this issue of the Federal Register. 

• We are adding paragraph (g) to §156.430 to provide that if an Indian is enrolled in 

a QHP in the individual market through an Exchange and is furnished an item or service 

directly by the Indian Health Service, an Indian Tribe, Tribal Organization, or Urban 

Indian Organization, or through referral under contract health services, the QHP issuer 

may not reduce the payment to any such entity for such item or service by the amount of 

any cost sharing that would be due from the Indian but for the prohibitions on cost 

sharing set forth in §156.410(b)(2) and (3).

• We are making minor technical corrections to paragraphs (a) and (c) of §156.440 

to clarify the cross-references. 

• We are deleting paragraphs (d)(2) through (4) of §156.470, relating to certain 

allocation standards for stand-alone dental plans. 

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

• We are removing the reference to billable enrollees, so that the user fee rate is 

applied directly to the premium set by the issuer. 

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

Programs

• We are finalizing the proposed provisions. 
CMS-9964-F 350 

H. Small Business Health Options Program

• In §155.20, the definitions of “full-time employee,” “small employer,” and “large 

employer,” we are clarifying the effective date for use of these definitions. In 

addition, in the definition of “large employer,” we are correcting the word 

“larger” to “large.” 

• In §155.705(b)(3)(ii), we are adding a provision requiring each FF-SHOP to allow 

qualified employers the choice of offering employees either all QHPs at a single 

level of coverage selected by the employer or, as a transition policy, a single QHP 

selected by the employer. 

• We are revising §155.705(b)(10) to include language limiting authority to impose 

a minimum participation rate subject to 45 CFR 147.104. 

• In §155.705(b)(11)(ii), we are deleting a provision at subparagraph (D) requiring 

each FF-SHOP to allow employers to define different contribution percentages for 

different employee categories and relabeling the remaining subparagraphs 

accordingly. 

• We are finalizing §156.200(g) with modifications in new subparagraph (g)(3) so 

that the QHP certification standard relating to participation in the FFE and FFSHOP does not apply if neither the issuer nor any other issuer in the issuer group 

has a market share of the State’s small group market greater than 20 percent, as 

determined using information submitted pursuant to 45 CFR 158.110. 

I. Medical Loss Ratio Requirements under the Patient Protection and Affordable Care 

Act

• We are amending the MLR formula to subtract reinsurance contributions from 

earned premium as regulatory fees, instead of treating them as an addition to 

incurred claims. 
CMS-9964-F 351 

V. Collection of Information Requirements

 Under the Paperwork Reduction Act of 1995 (PRA), we are required to provide 

30-day notice in the Federal Register and solicit public comment before a collection of 

information requirement is submitted to the Office of Management and Budget (OMB) 

for review and approval. To fairly evaluate whether an information collection should be 

approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 

requires that we solicit comment on the following issues: 

● The need for the information collection and its usefulness in carrying out the 

proper functions of our agency. 

● The accuracy of our estimate of the information collection burden. 

● The quality, utility, and clarity of the information to be collected. 

● Recommendations to minimize the information collection burden on the 

affected public, including automated collection techniques. 

The following sections of this document contain estimates of paperwork burden; 

however, not all of these estimates are subject to the information collection requirements 

(ICRs) under the PRA for the reasons noted. 

A. Collections Related to State Operation of Reinsurance & Risk Adjustment Programs 

(§153.210 through §153.240, §153.310)

In sections §153.210 through §153.240 and §153.310 of the proposed rule, we 

estimated the cost of collecting data for State-operated reinsurance and risk adjustment. 

Fewer than 10 States have told HHS that they will operate reinsurance or risk adjustment 

for the 2014 benefit year. Since collections from fewer than 10 persons are exempt from 

the PRA under 44 U.S.C. 3502(3)(A)(i), we are not seeking PRA approval for these 

information collection requirements. However, if more than nine States elect to operate 
CMS-9964-F 352 

risk adjustment in the future, we will seek PRA approval for these information 

collections. 

Comment: One commenter stated that our administrative cost estimates for these 

provisions were too low to be credible. Another commenter stated that we

underestimated the cost to States of administering supplemental reinsurance payment 

parameters and monitoring fund balances. In particular, the commenter stated that 

establishing a governing board, engaging with stakeholders, and hiring independent 

actuaries would be expensive. One commenter believed that the cost to submit a report 

should include the State’s costs for executive-level review to determine whether to 

operate reinsurance, and that HHS was confusing regulatory cost with the PRA’s 

information collection burden. 

Response: We limited our estimates in the proposed rule to the incremental 

information collection associated with the requirements of these provisions. In the 

“Supporting Statement for Paperwork Reduction Act submissions: Standards related to 

Reinsurance, Risk Corridors, and Risk Adjustment” (Premium Stabilization Rule 

Supporting Statement), we estimated a baseline cost for the development of the State 

notice of benefit and payment. Therefore, we believe that there will only be a small 

incremental cost to States as a result of the reporting requirements at §153.210 through 

§153.240, §153.310. However, for reasons described earlier in this Collection of 

Information section, we are not seeking PRA approval for these collections. We have 

moved our discussion of the administrative costs associated with these provisions to the 

Regulatory Impact Analysis section of this final rule. 

B. ICRs Regarding Calculation of Reinsurance Contributions (§153.405) 

 In §153.405, we finalize the rules related to an annual enrollment count of 

covered lives by contributing entities using counting methods derived from the PCORTF 
CMS-9964-F 353 

Rule. We are requiring contributing entities to provide annual counts of their enrollment 

and remit reinsurance contributions to HHS based on that enrollment count. The work 

associated with this requirement is the time and effort required by an issuer or selfinsured group health plan to derive an annual enrollment count. Because issuers or selfinsured group health plans will already be obligated to determine a count of covered lives 

using a PCORTF counting method, the cost associated with this requirement is 

conducting these counts using the slightly modified counting methods specified in this 

final rule. In this final rule, we are modifying our estimate of the number of contributing 

entities from the proposed rule. We estimate that 22,900 contributing entities will be 

subject to this requirement, based on the Department of Labor’s estimated count of selfinsured plans and the number of fully insured issuers that we estimate will make 

reinsurance contributions.34 On average, we estimate it will take each issuer or selfinsured group health plan 1 hour (at a wage rate of $55 for an operations analyst) to 

calculate and submit final enrollment counts to HHS. Therefore, we estimate an 

aggregate cost of $1,259,500 for 22,900 reinsurance contributing entities as a result of 

this requirement. We will revise the Premium Stabilization Rule Supporting Statement to 

include the required data elements that issuers or self-insured group health plans will 

need to submit their annual enrollment counts in accordance with the counting 

methodology established in this final rule. 

C. Requests for Reinsurance Payment (§153.410)

 As described in §153.410, issuers of reinsurance-eligible plans seeking 

reinsurance payments must make requests in accordance with the requirements of this 

 

34 We use an estimate of self-insured entities published by the Department of Labor in the April 2012 

“Report to Congress: Annual Report of Self-insured Group Health Plans,” which reflects only those selfinsured health plans (including 14,800 self-insured plans and 6,300 plans that mixed self-insurance and 

insurance) that are required to file a Form 5500 with the Department of Labor. 
CMS-9964-F 354 

final rule or the State notice of benefit and payment parameters, as applicable. To be 

eligible for reinsurance payments, issuers of reinsurance-eligible plans must submit or 

make accessible to HHS or the State, as applicable, all necessary data to be considered 

for reinsurance payments for the applicable benefit year. 

 To minimize burden on issuers, HHS intends to collect data in an identical 

manner for HHS-operated reinsurance programs and HHS-operated risk adjustment. 

Although we clarified the data elements issuers would be required to submit as part of the 

reinsurance payment request process, the burden associated with this requirement is 

already accounted for under the Premium Stabilization Rule Supporting Statement with 

an October 31, 2015 expiration date, and we will update it to reflect these clarified data 

elements. 

D. Upload of Risk Adjustment and Reinsurance Data (§153.420, §153.700, §153.710, 

§153.720) 

Under the HHS-operated risk adjustment and reinsurance programs, HHS will use 

a distributed data collection approach for enrollee-level enrollment, claims and encounter 

data that reside on an issuer’s dedicated data environment. Under §153.710(a), an issuer 

of a risk adjustment covered plan or a reinsurance-eligible plan in a State where HHS is 

operating the risk adjustment or reinsurance on behalf of the State, as applicable, must 

provide HHS, through the dedicated data environment, access to enrollee-level plan 

enrollment data, enrollee claims data, and enrollee encounter data, as specified by HHS. 

Under §153.710(b), all claims data submitted by an issuer of a risk adjustment covered 

plan or a reinsurance-eligible plan in a State in which HHS is operating risk adjustment 

or reinsurance, as applicable, must have resulted in payment by the issuer. Under 

§153.710(c), an issuer of a risk adjustment covered plan or a reinsurance-eligible plan in 

a State in which HHS is operating risk adjustment or reinsurance, as applicable, that does 
CMS-9964-F 355 

not generate individual enrollee claims in the normal course of business must derive costs 

on all applicable provider encounters using its principal internal methodology for pricing 

those encounters. 

Issuers will be directed to make risk adjustment and reinsurance data accessible to 

HHS in a way that conforms to HHS-established guidelines and applicable standards for 

electronic data collection and submission, storage, privacy and security, and processing. 

In §153.720(a), we require these issuers to establish a unique masked enrollee 

identification number for each enrollee, in accordance with HHS-defined requirements 

and maintain the same masked enrollee identification number for enrollees that enroll in 

different plans within the issuer, within the State, during a benefit year. Issuers must 

provide all data to HHS in the specified formats, and must correct submitted files to 

resolve problems detected by HHS during file processing. The cost associated with this 

requirement is the time and effort to ensure that information in the dedicated data 

environment complies with HHS requirements. We estimate this will affect 1,800 issuers 

and will cost each issuer approximately $178 per year, reflecting three hours of work by a 

technical employee at $59.39 per hour. Therefore, we estimate an aggregate cost of 

$320,706 for all issuers as a result of these provisions. 

In addition, we discussed in the proposed rule an updating amendment to the 

Premium Stabilization Rule Supporting Statement that was approved with an October 31, 

2015 expiration date reflecting updated cost estimates for implementing the distributed 

data approach. We are making a slight modification to the labor estimate we assumed in 

our proposed rule by assuming Federal holidays and two weeks of vacation time for full 

time employees. In this final rule, we estimate that this data submission requirement will 

affect 1,800 issuers, and will cost each issuer approximately $342,086 in total labor costs. 

This cost reflects an estimate of three full-time equivalent employees (5,760 hours per 
CMS-9964-F 356 

year) at an average hourly rate of $59.39 per hour. We anticipate that approximately 400 

data processing servers will be established across the market in 2014 (at an average cost 

of $15,000), and these servers will process approximately 9 billion claims and enrollment 

files. Therefore, we estimate an aggregate cost that includes labor and capital of 

$621,754,800 for all issuers as a result of these provisions. Although we had previously 

accounted for this estimate as a new administrative cost to issuers in the proposed rule, 

we are not doing so in this final rule because it is not an incremental cost that issuers will 

incur as a result of the provisions in this final rule. We had previously estimated the costs 

associated with these risk adjustment and reinsurance enrollment data submission 

requirements in the Premium Stabilization Rule Supporting Statement that was approved 

with an October 31, 2015 expiration date. We will revise that supporting statement to 

reflect our updated estimate. We are also amending the tables in the Collection of 

Information section and Regulatory Impact Analysis section of this final rule so that the 

tables reflect only those incremental costs that result from provisions of this final rule. 

Comment: One commenter stated that there was no basis for the proposed 

estimate and that the values seemed low considering the importance and complexity of 

the tasks involved. The commenter also believed that the estimate did not account for 

costs associated with overhead, administrative tasks, and employee benefits. 

Response: We believe that our proposed estimate is reasonable for first year 

operations. The estimate reflects average labor and capital costs associated with standing 

up a dedicated data environment, as well as average claims volume. Some issuers will 

have appropriate staff and infrastructure in place to support the data collection and other 

issuers will need to acquire resources. While we anticipate an initial concentrated effort 

for set-up of the dedicated data environment, we believe that three full-time equivalents 

would cover the number of hours needed (on average) for set-up and maintenance in the 
CMS-9964-F 357 

first year of operations. The average hourly rate of $59.39 is based on the Bureau of 

Labor Statistics, U.S. Department of Labor, National Compensation Survey: 

Occupational Earnings in the United States, 2011. We note that it approximates the 

lower range of hourly wages, $60, estimated by respondents to a recent industry survey35, 

and that industry respondents’ cost estimates ranged widely to reflect different pricing 

and conditions. Our aggregate cost estimate also includes costs associated with capital 

purchases, overhead, and fringe benefits. 

E. ICR Regarding User Fee when HHS operates Risk Adjustment (§153.610)

Under §153.610(f), we establish a user fee to support Federal operation of risk 

adjustment. This per capita monthly fee will be charged to issuers of risk adjustment 

covered plans based on enrollment estimates provided to HHS in the distributed data 

environment. HHS will calculate user fees owed, and issuers will remit the fee owed 

only once, in June of the year following the benefit year, in connection with processing of 

payments and charges for risk adjustment. 

We estimate that 1,800 issuers will be required to pay risk adjustment user fees, 

and the additional cost associated with this requirement is the time and effort for an issuer 

to provide monthly enrollment data and remit fees. Because HHS will utilize existing 

data collection and payments and charges processing, we do not anticipate that this 

provision will alter the collection cost that is already approved in the Premium 

Stabilization Rule Supporting Statement under OMB control number 0938-1155 with an 

October 31, 2015 expiration date. 

 

35 “Health Plans’ Estimated Costs of Compliance with Expanded Federal Rate Review and with Data 

Collection for Risk Adjustment and Reinsurance,” Center for Policy Research, America’s Health Insurance 

Plans, December 2012.
CMS-9964-F 358 

F. ICRs Regarding Data Validation Requirements When HHS Operates Risk Adjustment 

(§153.630)

Under §153.630(b), an issuer that offers at least one risk adjustment covered plan 

in a State where HHS is operating risk adjustment on behalf of the State for the 

applicable benefit year must have an initial validation audit performed on its risk 

adjustment data. The cost associated with this requirement is the issuer’s time and effort 

to provide HHS with source claims, records, and enrollment information to validate 

enrollee demographic information for initial and second validation audits and the issuer’s 

cost to employ an independent auditor to perform the initial validation audit on a 

statistically valid sample of enrollees. 

The statistically valid sample of enrollees provided to each issuer will consist of 

enrollees both with and without HCCs. We estimate that each issuer sample will consist 

of approximately 300 enrollees, with approximately two-thirds of the sample consisting 

of enrollees with HCCs. We anticipate that this audit will affect approximately 1,800 

issuers. 

Based on Truven Health Analytics 2010 MarketScan® data, we have determined 

that for enrollees with HCCs, the average number of HCCs to be reviewed by an auditor 

per enrollee is approximately two. Additionally, based on HHS audit experience, we 

estimate that it will cost approximately $180 ($90 per hour for two hours) for an auditor 

to review the medical record documentation for one enrollee with two HCCs. In the 

proposed rule, we did not estimate the cost of reviewing medical records for enrollees 

without HCCs. HHS intends to require the review of medical records for all sample 

enrollees in the initial validation audit. Therefore, we are revising our estimate to align 

with the policy finalized in this rule. We expect that it may cost approximately $60 per 

enrollee ($90 per hour for 40 minutes) to validate demographic information and review 
CMS-9964-F 359 

medical records for all enrollees in the audit sample, totaling approximately $210 per 

enrollee with HCCs ($90 per hour for two hours and 20 minutes) and $60 per enrollee 

with no HCCs. We assume that an initial validation audit will be performed on 180,000 

enrollees without HCCs, and 360,000 enrollees with HCCs. Based on the information 

above, we estimate that the total cost per issuer to retain initial validation auditors to 

perform the initial validation would cost approximately $48,000. Therefore, for 1,800 

issuers, the total cost of conducting initial validation audits will be $86.4 million. We 

will revise the information collection currently approved OMB Control Number 0938-

1155 with an October 31, 2015 expiration date to account for this additional burden. 

Under §153.630(d), issuers will have the opportunity to appeal errors identified 

through the second validation audit process. Because we intend to provide further detail 

on this process in later guidance and rulemaking, we currently cannot estimate the 

number of issuers that will appeal HCC findings, or the cost per issuer for doing so. 

Therefore, we will seek OMB approval and solicit public comment on the information 

collection requirements established under §153.630(d) at a future date. 

G. ICRs Regarding QHP Certification Standards Related to Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions (§155.1030)

 In §155.1030(a)(1) of this final rule, we establish that the Exchange must ensure 

that each issuer that offers or intends to offer a QHP in the individual market on the 

Exchange submit the required plan variations, as set forth in §156.420, for each of its 

health plans proposed to be offered as a QHP in the individual market on the Exchange. 

Further, the Exchange must certify that the plan variations meet the requirements detailed 

in §156.420. We expect that an Exchange will collect prior to each benefit year the 

information necessary to validate that the issuer meets the requirements for silver plan 

variations, as detailed in §156.420(a), and collect as part of QHP certification the 
CMS-9964-F 360 

information necessary to validate that the issuer meets the requirements for zero and 

limited cost sharing plan variations, as detailed in §156.420(b). We expect that this data 

collection would include the cost-sharing requirements for the plan variations, such as the 

annual limitation on cost sharing, and any reductions in deductibles, copayments or 

coinsurance. In addition, the Exchange will collect or calculate the actuarial values of 

each QHP and silver plan variation, calculated under §156.135 of the final EHB/AV 

Rule. We proposed in §155.1030(a)(2) that the Exchange provide the actuarial values of 

the QHPs and silver plan variations to HHS. As set forth in §155.1030(b)(4), HHS may 

use this information in connection with approving estimates for advance payment of costsharing reductions submitted by issuers under §156.430 finalized here. Because HHS 

will already have this information for Federally-facilitated Exchanges, the burden 

associated with this requirement is the time and effort for a State participating in each 

State Partnership and for a State-based Exchange to submit this information to HHS. We 

estimate that the submission from each of these entities will take approximately 3.5 hours 

to collect, validate, and submit to HHS (3 hours by a database administrator at $47.70 per 

hour, and 0.5 hours by a manager at $75.15 per hour). We estimate that this will cost 

each submitting entity approximately $181 per year. We plan to revise the supporting 

statement published under CMS form number 10433, which is pending OMB approval, to 

account for this additional burden. 

In paragraph (b)(1) and (2), we established that the Exchange collect, review, and 

submit the rate or expected premium allocation, the expected allowed claims cost 

allocation, and the actuarial memorandum that a metal level health plan or stand-alone 

dental plan issuer submits under §156.470. This collection will allow for the calculation 

of the advance payments of cost-sharing reductions and the premium tax credit. The 

Exchange must ensure that such allocations meet the standards set forth in §156.470(c) 
CMS-9964-F 361 

and (d). This allocation information must be collected and approved before a health plan 

or stand-alone dental plan can be certified for participation in the Exchange. We expect 

that the Exchange will collect the allocation information in conjunction with the rate and 

benefit information that the issuer submits under §156.210 or the rate information that the 

QHP issuers submits through the Effective Rate Review program. Therefore, we believe 

that the cost for Partnership Exchanges or State-based Exchanges to submit to HHS this 

information collected from QHPs is generally part of the cost that is accounted for in the 

PRA approved under OMB Control Number 0938-1141 or the cost that is accounted for 

in the supporting statement published under CMS form number 10433, which is pending 

OMB approval. We estimate that Partnership and State-based Exchanges will incur 

additional cost to submit allocation information to HHS for stand-alone dental plans. We 

estimate that it will take each Exchange 30 minutes to submit this information for each 

stand-alone dental plan, and assume that this submission will be performed at the hourly 

wage rate of $38.49 for an insurance analyst. Assuming 20 stand-alone dental plans 

across the market, we estimate an aggregate cost of approximately $385 for all 

Partnership or State-based Exchanges to submit this information to HHS. We plan to 

revise the supporting statement published under CMS form number 10433, which is 

pending OMB approval, to account for this additional burden. 

In subparagraph (b)(3), we establish that the Exchange must collect any estimates 

and supporting documentation that a QHP issuer submits to receive advance payments of 

certain cost-sharing reductions, as described in §156.430(a), and submit, in the manner 

and timeframe established by HHS, the estimates and supporting documentation to HHS 

for review. Because HHS will already have this information for Federally-facilitated 

Exchanges, the burden associated with this requirement is the time and effort for each 

Partnership or State-based Exchange to submit this information. We believe that this 
CMS-9964-F 362 

provision will impose minimal burden, and that it will take an insurance analyst five 

minutes (at an hourly wage rate of $38.49), to collect and submit this information to HHS 

for each Partnership or State-based Exchange. Therefore, we estimate a cost of $3.21 for 

each Partnership or State-based Exchange as a result of this requirement. 

H. ICRs Regarding Plan Variations (§156.420)

In §156.420, we set forth standards for issuers to submit to the Exchange for 

certification the variations of the health plans that they offer or propose to offer in the 

individual market on the Exchange that include the required levels of cost-sharing 

reductions. We provide an overview of the submission process associated with this 

requirement in this final rule. In paragraph (a), we establish that, for each silver health 

plan that an issuer offers or intends to offer in the individual market on the Exchange, the 

QHP issuer must submit to the Exchange for certification the standard silver plan and 

three variations of the standard silver plan. In paragraph (b), we further establish that a 

QHP issuer must, for each of its health plans at any metal level of coverage, submit a 

zero cost sharing plan variation and a limited cost sharing plan variation of each health 

plan offered or proposed to be offered in the individual market on the Exchange. 

However, in this final rule, we clarify that an Exchange is adequately enforcing this 

requirement if, within a set of standard plans offered by an issuer that differ only by the 

cost sharing or premium, it allows an issuer to submit one zero cost sharing plan variation 

for only the standard plan with the lowest premium within the set. Although this 

approach will likely reduce the burden on issuers and Exchanges, it is unclear how many 

Exchanges will adopt this approach, and as a result, we have not adjusted our burden 

estimates below. 

We estimate that 1,200 issuers will participate in an Exchange nationally, and that 

each issuer will offer one QHP per metal level with four zero cost sharing plan variations 
CMS-9964-F 363 

and four limited cost sharing plan variations (one per metal level QHP) and three plan 

variations for low-income populations, for a total of four standard plans and eleven plan 

variations. Our estimate assumes that each issuer will submit these plan variations as part 

of their electronic QHP application, which is described in further detail in the 

“Supporting Statement for Initial Plan Data Collection to Support QHP Certification and 

other Financial Management and Exchange Operations,” which was provided for public 

comment on November 21, 2012 (77 FR 69846). We estimate that it will take 

approximately 1.5 hours to submit the requisite information for a plan variation (0.75 

hours by an actuary at a wage rate of $56.89, 0.5 hours by an insurance analyst at a wage 

rate of $38.49, and 0.25 hours by an insurance manager at a wage rate of $67.44). Based 

on the figures above, we estimate it will cost each issuer approximately $866 to submit 

11 plan variations annually, for an aggregate cost of $1,039,698 for all issuers 

participating in the Exchanges. We plan to revise the supporting statement published 

under CMS form number 10433, which is pending final OMB approval, to account for 

this additional burden. 

I. ICRs Regarding Payment of Cost-Sharing Reductions (§156.430)

 In §156.430(a)(1), we establish that for each silver plan variation and zero cost 

sharing plan variation that an issuer offers or proposes to offer in the individual market 

on the Exchange, the QHP issuer must provide to the Exchange, for approval by HHS, 

estimates, and supporting documentation validating the estimates, of the dollar value of 

cost-sharing reductions to be provided. However, as described in the preamble to this 

final rule, we are finalizing a simplified methodology for calculating the advance 

payments for the initial years of the cost-sharing reduction program. This methodology 

will utilize data that QHP issuers submit for other requirements, such as §156.420 and 
CMS-9964-F 364 

§156.470. As a result, there will be no additional burden associated with this requirement 

for QHP issuers. 

In §156.430(a)(2), we discuss the process for estimating the value of cost-sharing 

reductions to be provided under the limited cost sharing plan variation open to Indians 

with a household income above 300 percent of the FPL, described in §156.420(b)(2). If a 

QHP issuer seeks advance payments for these cost-sharing reductions, the issuer must 

provide to the Exchange, for approval by HHS, an estimate, and supporting 

documentation validating the estimate, of the dollar value of the cost-sharing reductions 

to be provided under the limited cost sharing plan variation of the QHP. We estimate that 

1,200 issuers will participate in Exchanges nationally, and that each issuer will offer one 

QHP per metal level, with one limited cost sharing plan variation for each metal level. 

For each plan variation, the issuer may submit an estimate and supporting documentation 

of the dollar value of the cost-sharing reductions. We expect estimates and supporting 

documentation will be submitted as part of the electronic QHP application, which is 

described in further detail in the “Supporting Statement for Initial Plan Data Collection to 

Support QHP Certification and other Financial Management and Exchange Operations,” 

which was provided for public comment on November 21, 2012 (77 FR 69846). We 

estimate that it will take approximately one hour to submit each response for a plan 

variation (0.5 hours by an actuary at a wage rate of $56.89 and 0.5 hours by an insurance 

analyst at a wage rate of $38.49.) We estimate that each response for a plan variation 

will cost an issuer $47.69, for an estimated total issuer cost to submit responses for four 

plan variations of $228,912 for the year. We plan to revise the supporting statement 

published under CMS form number 10433, which is pending final OMB approval, to 

account for this additional burden. 

In §156.430(c)(1), (c)(2), and (c)(5), we finalize a standard that directs a QHP 
CMS-9964-F 365 

issuer to submit to HHS, in the manner and timeframes established by HHS, the actual 

amount of cost-sharing reductions provided to each enrollee. This information is 

necessary so that HHS can reconcile advance payments made throughout the year to the 

actual cost-sharing reduction amounts. Based upon preliminary discussions with the 

issuer and vendor community regarding the costs associated with implementing the 

standard methodology, we assume that the information technology necessary to 

implement the standard methodology will be developed by three vendors at a cost of 

approximately $6 million per vendor, for total costs of approximately $18 million. We 

also expect that each issuer will need to spend approximately $100,000 to customize the 

vendor solution technology and/or modify their claims system. Therefore, we estimate 

total administrative costs of approximately $138 million. While these information 

collection requirements are subject to the Paperwork Reduction Act, the information 

collection process and instruments associated with this requirement are currently under 

development. We will seek OMB approval and solicit public comments upon their 

completion. We note that we have not included our initial cost estimate of this approach 

in Table 25 or Table 26. 

As discussed in section III.E.4.e, we are issuing an interim final rule with 

comment elsewhere in this issue of the Federal Register to provide QHP issuers with the 

option to submit data about the actual amount of cost-sharing reductions using an 

alternate methodology for purposes of payment reconciliation. We address the burden 

associated with this alternate approach in the Collection of Information section of the 

interim final rule with comment. 

J. ICRs Regarding Reduction of an Enrollee’s Share of Premium to Account for 

Advance Payment of the Premium Tax Credit (§156.460)
CMS-9964-F 366 

Under §156.460(a)(2), if a QHP issuer receives an advance payment of the 

premium tax credit on behalf of an individual, the QHP issuer must notify the Exchange 

of any reduction in premium through the standard enrollment acknowledgment in 

accordance with §156.265(g). Because this notification will occur through the 

enrollment acknowledgment process that already exists under the final Exchange 

Establishment Rule (77 FR 18310), at §156.265(g), we believe that this requirement will 

impose minimal burden on QHP issuers, and that it will take an insurance analyst five 

minutes (at an hourly wage of $38.49), to collect and submit this information to each 

Exchange Therefore, we estimate a cost of approximately $3.21 for each QHP issuer, 

and an aggregate cost of approximately $3,849 for all 1,200 QHP issuers, as a result of 

this requirement. 

K. ICRs Regarding Allocation of Rates and Claims Costs for Advance Payments of the 

Premium Tax Credit and Cost-Sharing Reductions (§156.470) 

 In §156.470(a), we establish that an issuer provide to the Exchange annually for 

approval, for each metal level health plan offered or intended to be offered in the 

individual market on the Exchange, an allocation of the rate and the expected allowed 

claims costs for the plan, for EHB, other than services described in §156.280(d)(1), and 

any other services or benefits offered by a health plan that do not meet the definition of 

EHB. In §156.470(b), we establish that an issuer of a stand-alone dental plan provide to 

the Exchange for approval a dollar allocation required by the expected premium for the 

plan to the pediatric dental essential health benefit. In §156.470(c), we are finalizing 

standards for QHP issuers for calculating the allocation required by paragraph (a). As 

discussed above, we are modifying §156.470(d) and finalizing one standard for issuers of 

stand-alone dental plans for calculating the allocation in paragraph (b). Lastly, in 

§156.470(e), we are finalizing the requirement that an issuer of a metal level health plan 
CMS-9964-F 367 

or stand-alone dental plan offered, or intended to be offered, in the individual market on 

the Exchange, submit an actuarial memorandum with a detailed description of the 

methods and specific bases used to perform the allocations that would be required under 

paragraphs (a) and (b) of that section, demonstrating that the allocations meet the 

standards set forth in paragraphs (c) and (d). 

 QHP issuers will submit these allocations and justifications through the Effective 

Rate Review program (as finalized in the Market Reform Rule at §154.215(d)(3)-(4), and 

detailed in the accompanying PRA package with OMB Control Number 0938-1141) or 

directly to the Exchange if the issuer is not required to submit rates to the Effective Rate 

Review program. The Rate Increase Disclosure and Review Rule establishes a process to 

ensure the public disclosure of all information and justifications relating to unreasonable 

rate increases. To that end, the regulation establishes various reporting requirements for 

health insurance issuers, including a Preliminary Justification for a proposed rate 

increase, a Final Justification for any rate increase determined by a State or HHS to be 

unreasonable, and a notification requirement for unreasonable rate increases that will not 

be implemented. The Preliminary Justification includes data supporting the potential rate 

increase as well as a written explanation of the rate increase. For those rates HHS will be 

reviewing, issuers’ submissions also will include data and information that HHS will 

need to make a valid actuarial determination regarding whether a rate increase is 

unreasonable. Therefore, there will be no additional burden on QHP issuers that submit 

their rates through the Effective Rate Review program. The burden for the Effective Rate 

Review submission is already accounted for in OMB Control Number 0938-1141. We 

are also revising the supporting statement of the information collection approved under 

OMB Control Number 0938-1141 to clarify that we will be collecting this allocation 
CMS-9964-F 368 

information from metal plans to be offered on an Exchange, whether they are new or 

existing. 

 This requirement will result in additional burden for stand-alone dental plans. We 

estimate that it will take each stand-alone dental plan five hours to prepare and submit 

this information to the Exchange. We assumed that this requirement will require three 

hours of labor by an insurance analyst (at an hourly wage rate of $38.49) and two hours 

of labor by an actuary (at an hourly wage rate of $56.89). Assuming 20 stand-alone 

dental plans across the market, we estimate an aggregate cost of approximately $4,585 

for all stand-alone dental plans to submit these allocations and justifications to the 

Exchange. We plan to revise the supporting statement published under HHS form 

number 10433, which is pending final OMB approval, to account for this additional 

burden. 

L. ICRs Regarding QHP Participation Standards in SHOP (§156.200)

 In §156.200(g)(1), we establish a QHP certification standard for the FFE. If the 

issuer of a QHP in an FFE also participates in the State’s small group market, the QHP 

certification standard would be met if the issuer offers at least one small group market 

QHP at the silver level of coverage and one QHP at the gold level of coverage in a FFSHOP serving that State. We also propose that, if neither the issuer nor any issuer in the 

same issuer group has a share of the State’s small group market greater than 20 percent, 

the standard would be met. Therefore, no issuer would be required to begin offering 

small group market plans to meet this requirement. The burden associated with this 

requirement is the time and effort for an issuer to prepare a QHP certification application 

for a SHOP for at least one silver level and one gold level plan design. This burden 

would be incurred by issuers who, absent this requirement, would otherwise not have 

participated in a SHOP. We describe the burden associated with this requirement in the 
CMS-9964-F 369 

30-day Federal Register Notice for the Initial Plan Data Collection published on 

November 21, 2012 (77 FR 69846). The market share determination is based on earned 

premiums already submitted by all issuers in the State’s small group market under 

§158.110, and thus poses no additional reporting burden. 

M. ICRs Regarding Medical Loss Ratio Reporting (§158.130, §158.140, §158.162, 

§158.221, §158.240)

This final rule directs issuers to include all payments and receipt amounts related 

to the reinsurance, risk corridors and risk adjustment programs in the annual MLR report. 

The existing information collection requirement is approved under OMB Control 

Number 0938-1164. This includes the annual reporting form that is currently used by 

issuers to submit MLR information to HHS. Prior to the deadline for the submission of 

the annual MLR report for the 2014 MLR reporting year, and in accordance with the 

PRA, HHS plans to solicit public comment and seek OMB approval for an updated 

annual form that will include reporting of the premium stabilization payments and will 

reflect the changes in deduction for community benefit expenditures for Federal income 

tax exempt not-for-profit issuers. 
CMS-9964-F 370 
CMS-9964-F 371 

TABLE 25: Estimated Fiscal Year Reporting Recordkeeping and Cost Burdens 

Regulation Sections 

OMB Control No./CMS Form No. 

Respondents Responses 

Burden per Response  (hours) 

Total Annual Burden (hours) 

Hourly Labor Cost of Reporting

36($) 

Total LaboCost ($) 

§153.405 0938-1155 22,900 22,900 1.00 22,900 55.00 1,259,500 §153.630(b) 0938-1155 1,800 540,000 1.78 960,000 90.00 86,400,000 §153.720(a) 0938-1155 1,800 1,800 3.00 5,400 59.39 320,706 §155.1030(a) 0938-

NEW/CMS10433 

51 51 3.50 179 51.62 9,240 

§155.1030(b)(2) 

0938-NEW/CMS10433 

20 20 0.50 10 38.49 385 

§155.1030(b)(3) 

0938-NEW/CMS10433 

51 51 0.08 4.25 38.49 164 

§156.420 0938-

NEW/CMS10433 

1,200 13,200 1.50 19,800 52.51 1,039,698 

§156.430(a)(2) 0938-

NEW/CMS10433 

1,200 4,800 1.00 4,800 47.69 228,912 

§156.460(a)(2) 0938-

NEW/CMS 10433 

1,200 1,200 0.08 100 38.49 3,849 

36 Bureau of Labor Statistics, U.S. Department of Labor, National Compensation Survey: Occupational Earnings in the United States, 2

Government Printing Office. May 2011. Retrieved from http://www.bls.gov/ncs/ncswage2010.htm 
CMS-9964-F 372 

Regulation Sections 

OMB Control No./CMS Form No. 

Respondents Responses 

Burden per Response  (hours) 

Total Annual Burden (hours) 

Hourly Labor Cost of Reporting

36($) 

Total LaboCost ($) 

§156.470 0938-

NEW/CMS10433 

20 20 5 100 45.85 4,585 

Total 24,171 89,267,039 
CMS-9964-F 373 

VI. Regulatory Impact Statement (or Analysis) 

A. Statement of Need

This final rule implements standards related to premium stabilization programs 

(reinsurance, risk adjustment, and risk corridors), consistent with the Affordable Care Act. This 

final rule also includes provisions governing the cost-sharing reductions program, the advance 

payment of the premium tax credit program, the medical loss ratio program, the SHOP 

Exchange, and user fees for Federally-facilitated Exchanges. The purpose of the three premium 

stabilization programs is to prevent adverse selection and to protect consumers from increases in 

premiums due to issuer uncertainty. The Premium Stabilization Rule explained that further 

details on the implementation of these programs, including the specific parameters applicable to 

these programs, would be included in this rule. 

B. Overall Impact

We have examined the impacts of this rule as required by Executive Order 12866 on 

Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving 

Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) 

(September 19, 1980, Pub. L. 96-354), section 202 of the Unfunded Mandates Reform Act of 

1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), 

and the Congressional Review Act (5 U.S.C. 804(2)). 

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of 

available regulatory alternatives and, if regulation is necessary, to select regulatory approaches 

that maximize net benefits (including potential economic, environmental, public health and 

safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the 

importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and 
CMS-9964-F 374 

of promoting flexibility. A regulatory impact analysis (RIA) must be prepared for rules with 

economically significant effects ($100 million or more in any 1 year). 

OMB has determined that this Payment Notice is “economically significant” within the 

meaning of section 3(f)(1) of Executive Order 12866, because it is likely to have an annual effect 

of $100 million in at least one year. Accordingly, we have prepared a regulatory impact analysis 

that presents the costs and benefits of this final rule. 

The overarching goal of the premium stabilization and Exchange-related provisions and 

policies in the Affordable Care Act is to make affordable health insurance available to 

individuals who do not have access to affordable employer-sponsored coverage. The provisions 

within this final rule are integral to the goal of expanding coverage. For example, the premium 

stabilization programs (risk adjustment, reinsurance, and risk corridors) decrease the risk of 

financial loss that health insurance issuers might otherwise expect in 2014. The cost-sharing 

reductions program and advance payments of the premium tax credit assist low- and moderateincome consumers in purchasing health insurance. The combined impacts of these provisions 

affect the private sector, issuers, and consumers, through increased access to health care services 

including preventive services, decreased uncompensated care, lower premiums, and increased 

plan (and thereby cost) transparency. Through the reduction of financial uncertainty for issuers 

and increased affordability for consumers, the provisions are expected to increase access to 

health coverage. 

 Recent research37 analyzed the effects of increased insurance coverage. The analysis 

studied the health effects of expanded Medicaid eligibility in three States (New York, Maine, and 

 

37 Sommers, Ben et al “Mortality and Access to Care among Adults after State Medicaid Expansions” New England 

Journal of Medicine .No: 367 20121025-1034 
CMS-9964-F 375 

Arizona) with comparable States that did not expand Medicaid over a multiyear time period. 

The study found that increased coverage resulted in: 

• Significant reduction in mortality (19.6 deaths per 100,000) during the period of study; 

• Increased rate of self-reported health status (by three percent); and 

• Reduction in cost-related delays in care (by 21 percent). 

While these results may not be entirely generalizable given the population and coverage 

type, they do replicate other research findings38 of the importance of health coverage in 

improving health and delaying mortality. 

There are administrative costs to States to administer these programs, although Federal 

grants are available through 2014 for States seeking to establish State-based Exchanges, and to 

support certain State activities related to the establishment of FFEs or State Partnership 

Exchanges. 

Issuers making reinsurance contributions but not receiving reinsurance payments may 

receive indirect benefits in the form of lower uncompensated care costs. . There are also 

reporting costs for issuers to submit data and financial information. This regulatory impact 

analysis discusses the benefits and costs of the provisions in this final rule. 

In this analysis, we discuss programs and standards newly implemented by the final rule, 

such as certain provisions related to the cost-sharing reductions program, the advance payment of 

the premium tax credit program, the medical loss ratio program, the SHOP Exchange, and user 

fees for a Federally-facilitated Exchange, as well as new regulatory provisions for the three 

premium stabilization programs (reinsurance, risk adjustment, and risk corridors) which were 

introduced in the Premium Stabilization Rule (77 FR 17220). In addition to building on the 

 

38 Finkelstein, A et al. “The Oregon Health Insurance Experiment: Evidence from the First Year.” NBER Working 

Paper No. 17190, July 2011. 
CMS-9964-F 376 

regulatory impact analysis for that earlier rule, we are able, for the analysis of much of the final 

rule, to use the Congressional Budget Office’s estimates of the Affordable Care Act’s impact on 

Federal spending, revenue collection, and insurance enrollment. 

Comment: Two commenters urged further analysis of the costs and benefits of the rule. 

Specifically, one commenter asked HHS to provide analysis showing how this rule would affect 

consumer premiums, employer costs, and taxpayer subsidies. The commenter asked HHS to 

project how increased use of health care would impact employers and wages for lower-income 

workers. 

Response: While we cannot precisely predict the price of insurance, the premium 

stabilization programs are designed to mitigate premium increases for all consumers. In the 

individual and small group markets, the advance payment of the premium tax credit and costsharing reduction programs are intended to make health insurance affordable for low-income 

individuals. CBO’s estimates remain the most comprehensive accounting of all the interacting 

provisions pertaining to the Affordable Care Act, and contain Federal budget impact estimates of 

some provisions that have not been independently estimated by CMS. Table 26 shows 

accounting projections on the costs and transfers of this rule. We are unable to project either the 

potential economic and social benefit from a more productive workforce that could result from 

access to health care or the potential economic and social cost when more people use health care. 

HHS relied on the Bureau of Labor Statistics, U.S. Department of Labor, National Compensation 

Survey Occupational Earnings in the United States, 2011, for estimates of most job descriptions 

and wages. We believe that our analysis reflects our best estimate of the costs associated with 

the proposed rule. Therefore, we are not modifying the proposed estimates of regulatory impact 

in this final rule. 
CMS-9964-F 377 

C. Impact Estimates of the Payment Notice Provisions and Accounting Table

In accordance with OMB Circular A-4, Table 26 below depicts an accounting statement 

summarizing HHS’s assessment of the benefits, costs, and transfers associated with this rule. 

This final rule implements standards for programs that will have numerous effects, 

including providing consumers with affordable health insurance coverage, reducing the impact of 

adverse selection, and stabilizing premiums in the individual and small group health insurance 

markets and in an Exchange. We are unable to quantify the benefits of the final rule, such as 

improved health, longevity, and national productivity due to increased insurance enrollment, and 

some of its costs, such as the cost of providing additional medical services to newly-enrolled 

individuals. Direct costs in the Table 26 below reflect administrative costs to States (including 

those costs associated with operating risk adjustment and reinsurance), health insurance issuers, 

and Exchanges, but do not include administrative costs incurred by the Federal government. As 

discussed earlier, we estimate costs associated with establishing a dedicated data environment in 

the Premium Stabilization Rule Supporting Statement, and do not include those costs in Table 

26. The effects in Table 26 reflect estimated cost-sharing reduction payments, which are 

transfers from the General Fund of the U.S. Treasury to consumers who qualify for cost-sharing 

reductions. These transfer estimates are based on the Congressional Budget Office’s March 

2012 baseline estimates, and have been annualized over the five-year period from fiscal years 

(FYs) 2013 through 2017. Estimated transfers do not reflect any user fees paid by insurance 

issuers for the Federally-facilitated Exchange. Estimated transfers from health insurance issuers 

resulting from risk adjustment user fees are included in the table below. 

TABLE 26: Accounting Table 

Category Estimates Units 

 Year 

Dollar 

Discount Rate Period 

Covered 
CMS-9964-F 378 

Benefits

Annualized Monetized Not Estimated 

($millions/year) Not Estimated 

Costs

Annualized Monetized 

($millions/year) 

$68.95 2013 7% 2013-2017 

 $70.37 2013 3% 2013-2017 

Transfers

Federal Annualized 

Monetized 

($millions/year) 

$6,529.29 2013 7% 2013-2017 

 $6,803.02 2013 3% 2013-2017 

This impact analysis for the premium stabilization programs references estimates from 

CBO and CMS. CBO’s estimates remain the most comprehensive accounting of all the 

interacting provisions pertaining to the Affordable Care Act, and contain Federal budget impact 

estimates of some provisions that have not been independently estimated by CMS. Based on our 

review, we expect that the provisions of this final rule will not significantly alter CBO’s 

estimates of the budget impact of the reinsurance, risk corridors, and risk adjustment programs. 

The requirements of these programs are well within the parameters used by CBO in the modeling 

of the Affordable Care Act. Our review and analysis of the requirements indicate that the 

impacts are likely within the model’s margin of error. 

For this regulatory impact analysis, we are shifting the estimates for the reinsurance and 

risk adjustment programs to reflect the four-year period from FYs 2014 through 2017. Table 27 

includes the CBO estimates for outlays and receipts for the reinsurance and risk adjustment 

programs from FYs 2014 through 2017. These estimates for reinsurance and risk adjustment 

reflect CBO’s scoring of these provisions. CBO assumed risk adjustment payments and charges 

would begin to be made in 2014, when in fact these payments and charges will begin in 2015, as 
CMS-9964-F 379 

discussed in section III.B. of this final rule; therefore, the estimates are assigned one year later in 

Table 27 than they were in the original CBO report. 

CBO did not separately estimate the program costs of risk corridors, but assumed 

aggregate collections from some issuers would offset payments made to other issuers. Table 27 

summarizes the effects of the risk adjustment and reinsurance programs on the Federal budget, 

with the additional, societal effects of this rule discussed in this regulatory impact analysis. We 

note that transfers associated with risk adjustment and reinsurance were previously estimated in 

the Premium Stabilization Rule; therefore, to avoid double-counting, we do not include them in 

the accounting statement for this rule (Table 26). 

TABLE 27: Estimated Federal Government Outlays and Receipts for the Reinsurance and 

Risk Adjustment Programs from FYs 2014-2017, in billions of dollars 

Year 2014 2015 2016 2017 2014-

2017 

Reinsurance and Risk Adjustment 

Program Payments*

-- 11 18 18 47 

Reinsurance and Risk Adjustment 

Program Receipts*

-- 12 16 18 46 

*

Risk adjustment program payments and receipts lag by one quarter. Receipt will fully offset 

payments over time. The CBO estimates do not reflect the $5 billion in reinsurance contributions 

that are submitted to the U.S. Treasury. 

Source: Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010. 

Risk Adjustment 

Risk adjustment is a permanent program that may be administrated by States that operate 

an HHS-approved Exchange. States have the option of proposing alternative methodologies. 

Risk adjustment is generally applied to non-grandfathered health plans offered in the individual 

and small group markets, both inside and outside of the Exchange. The Exchange may operate 

risk adjustment, although a State may also elect to have an entity other than the Exchange 

perform the risk adjustment functions, provided that the State is approved by HHS to operate risk 
CMS-9964-F 380 

adjustment. Similar to the approach for reinsurance, multiple States may contract with a single 

entity to administer risk adjustment, provided that transfers do not occur between States and that 

each State is approved to operate their risk adjustment program. Having a single entity 

administer risk adjustment in multiple States may provide administrative efficiencies. In this 

final rule, we establish a risk adjustment State approval process. We estimate it will take each 

State approximately 180 hours to complete the initial risk adjustment entity approval process. 

We estimate it will take an operations analyst 72 hours (at $55 an hour), a contract administrator 

72 hours (at $40 per hour), a senior manager 24 hours (at $77 an hour), and an attorney 12 hours 

(at $77 an hour) to meet the initial approval requirements. Therefore, we estimate administrative 

costs of approximately $9,612 for each entity, as a result of these approval requirements.39 

The details of the HHS-developed risk adjustment methodology are specified in this final 

rule. The HHS-developed risk adjustment methodology is based on a model that is concurrent 

and uses demographic and diagnosis information in a benefit year to predict total plan liability in 

the benefit year. The national payment transfer methodology is based on the State average 

premium to ensure that payments and charges net to zero. 

States may use this methodology or develop and propose alternate risk adjustment 

methodologies that meet Federal standards. Once HHS approves an alternate risk adjustment 

methodology, it will be considered a Federally certified risk adjustment methodology that any 

State may elect to use. In this final rule, we lay out the criteria that HHS will use to evaluate 

alternate risk adjustment methodologies. Approved Federally certified risk adjustment 

methodologies will be published annually in the HHS notice of benefit and payment parameters. 

 

39 For purposes of Table 26, we assume that one State will operate risk adjustment. 
CMS-9964-F 381 

States that elect to develop their own risk adjustment methodologies are likely to have 

increased administrative costs. Developing a risk adjustment methodology requires complex 

data analysis, including population simulation, predictive modeling, and model calibration. 

States that elect to use the HHS-developed methodology would likely reduce administrative 

costs. We describe these administrative costs in the Collection of Information Requirements 

section of this final rule. 

In the Premium Stabilization Rule, we defined a risk adjustment covered plan as any 

health insurance coverage offered in the individual or small group market with the exception of 

grandfathered health plans, group health insurance coverage described in §146.145(c) of this 

subchapter, individual health insurance coverage described in §148.220 of this subchapter, and 

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

benefit and payment parameters. In this final rule, we clarify that plans not subject to certain 

market reforms and student health plans will not be subject to the issuer requirements in subparts 

G and H of 45 CFR part 153. Under Section 1312(c)(3) of the Affordable Care Act, States have 

the flexibility to merge the individual and small group markets into a single risk pool, or keep 

them separate. In this final rule, we clarify that HHS will merge markets when operating risk 

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

Developing the technology infrastructure required for data submission will likely require 

an administrative investment. The risk adjustment process will require significant amounts of 

demographic and diagnostic data to run through a risk assessment model to determine individual 

risk scores that form the basis for plan and State averages. The Premium Stabilization Rule 

requires States to collect or calculate individual risk scores at a minimum. States may vary the 

amount and type of data collected, provided that States meet specified data collection standards. 
CMS-9964-F 382 

Administrative costs will vary across States and health insurance issuers depending on 

the type of data collection approach used in the State. In States opting to operate risk adjustment 

using a distributed model of data collection, the costs associated with mapping and storing the 

required data and, in some cases, the costs associated with running the risk adjustment software 

will likely be borne by the issuer. 

States and issuers that already have systems in place for data collection and reporting will 

have reduced administrative costs. For example, issuers that already report data for Medicare 

Advantage (MA) or Medicaid Managed Care may see minimal additional administrative cost for 

risk adjustment. Additionally, some States risk-adjust their Medicaid Managed Care programs. 

States with all-payer or multi-payer claims databases may need to modify their systems to meet 

the requirements of risk adjustment. However, these costs of modification will be less than the 

costs of establishing these systems. States and issuers that do not have existing technical 

capabilities will have larger administrative costs related to developing necessary infrastructure. 

Issuer characteristics, such as size and payment methodology, will also affect 

administrative costs. In general, national issuers will likely be better prepared for the 

requirements of risk adjustment than small issuers. 

In this final rule, we provide more details on the data collection approach when we 

operate risk adjustment on behalf of a State. The Premium Stabilization Rule established that 

when HHS operates risk adjustment on behalf of a State, it will use a distributed approach. We 

believe that this approach minimizes issuer burden while protecting enrollee privacy. Under a 

distributed approach, issuers will need to format risk adjustment data, and maintain that data in 

compliance with HHS-established guidelines and applicable standards. We describe these 

administrative costs in the Collection of Information Requirements section of this final rule. 
CMS-9964-F 383 

The Premium Stabilization Rule directs States to audit a sample of data from each issuer 

and to ensure proper implementation of risk adjustment software by all issuers that participate in 

risk adjustment. States may extrapolate results from the sample to adjust the average actuarial 

risk for the plan. This approach is consistent with the approach now used in Medicare 

Advantage, where audit sample error rates will be extrapolated to contract-level payments to 

recoup overpayment amounts. 

In this final rule, we establish data validation standards for when HHS operates risk 

adjustment on behalf of a State. HHS will conduct a data validation program consisting of six 

stages: (1) sample selection; (2) initial validation audit; (3) second validation audit; (4) error 

estimation; (5) appeals; and (6) payment adjustments. Issuers will engage independent initial 

auditors to conduct an initial audit of an HHS-selected sample of risk adjustment data. HHS will 

retain a second validation auditor to verify the findings of the initial validation audit and provide 

error estimates. However, in this final rule we note that there will be no adjustments to payments 

and charges based on the error estimates for benefit years 2014 and 2015. We describe these 

administrative costs in the Collection of Information Requirements section of this final rule. We 

also describe a process to appeal data validation findings. Issuers will have an opportunity to 

appeal findings from both the initial validation audit and second validation audit. In addition, 

HHS will collect approximately $20 million in user fees to support the Federally operated risk 

adjustment program. 

Risk adjustment transfers dollars from health plans with lower-risk enrollees to health 

plans with higher-risk enrollees. We are updating the cost estimates for this RIA to include 2017, 
CMS-9964-F 384 

using CBO estimates.40 From 2014 through 2017, we estimated that there will be $45 billion 

transferred among issuers. 

Risk adjustment protects against adverse selection by allowing insurers to set premiums 

according to the average actuarial risk in the individual and small group market without respect 

to the type of risk selection the insurer would otherwise expect to experience with a specific 

product offering in the market. This should lower the risk premium and allow issuers to price 

their products closer to the average actuarial risk in the market. In addition, it mitigates the 

incentive for health plans to avoid unhealthy members. 

The risk adjustment program also serves to level the playing field inside and outside of 

the Exchange, as payments and charges are applied to non-grandfathered individual and small 

group plans inside and outside of the Exchange. This mitigates the potential for excessive 

premium growth within the Exchange due to anticipated adverse selection. 

Comment: One commenter disagreed with the $600 million in aggregate administrative 

costs estimated in the Collection of Information section of the proposed rule, and reflected in this 

regulatory impact analysis. The commenter stated that the cost associated with this rule would 

be much higher than the $600 million estimated in the proposed rule. 

Response: The cost to States of developing their own risk adjustment and reinsurance 

programs was addressed in the Premium Stabilization Rule, Standards Related to Reinsurance, 

Risk Corridors, and Risk Adjustment, published March 23, 2012. We recognize States may 

require significant analysis to assess whether to operate risk adjustment or reinsurance programs. 

Many states received grants available under the Affordable Care Act to underwrite such analyses 

 

40 Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010. We note that these estimates 

include only risk adjustment transfers whereas Table 27 shows transfer estimates for risk adjustment and 

reinsurance. 
CMS-9964-F 385 

(although we note that these grants would affect who bears the cost of the rule, not the amount 

incurred by society as a whole). States choosing in the future to operate risk adjustment may 

benefit from methodologies developed by other States and approved by HHS. The cost of 

reporting data to HHS should decline once systems are in place. 

We have limited our estimate to the incremental information collection associated with 

the requirements of the proposed rule. HHS relied on the Bureau of Labor Statistics, U.S. 

Department of Labor, National Compensation Survey Occupational Earnings in the United 

States, 2011, for estimates of most job descriptions and wages. We believe that our analysis 

reflects our best estimate of the costs associated with the proposed rule. We also note we have 

modified some estimates from our proposed rule to better reflect the most current agency 

estimates. 

Reinsurance 

The Affordable Care Act creates a transitional reinsurance program for benefit years 

2014, 2015, and 2016. Each State is eligible to operate reinsurance. If a State operates 

reinsurance, the State must enter into a contract with an applicable reinsurance entity to carry out 

the program. If a State does not elect to operate reinsurance, HHS will carry out reinsurance for 

that State. 

The Affordable Care Act requires a reinsurance pool of $10 billion in 2014, $6 billion in 

2015, and $4 billion in 2016. It also requires annual contributions payable to the U.S. Treasury 

of $2 billion, $2 billion, and $1 billion for those years, respectively. These contributions are 

funded by health insurance issuers and self-insured group health plans. Section 1341(b)(3) of the 

Affordable Care Act directs the Secretary of HHS to establish the method for determining 

contribution levels for the program. In this final rule, HHS establishes a national per capita 
CMS-9964-F 386 

contribution rate designed to collect the $12.02 billion in 2014 to cover the required $10 billion 

in reinsurance payments, the $2 billion contribution to the U.S. Treasury, and the additional 

$20.3 million to cover the Federal administrative expenses of operating reinsurance in 2014. We 

estimate that we will collect these authorized amounts from 2014 through 2016. 

HHS will collect the required contributions under the national contribution rate from 

health insurance issuers and self-insured group health plans.41 States operating reinsurance may 

collect additional contributions for administrative costs, reinsurance payments, or both. Section 

1341(a)(3)(B) of the Affordable Care Act requires that the reinsurance contribution amount for 

each issuer reflect each issuer’s fully insured commercial book of business for all major medical 

products. In this final rule, we clarify which types of health insurance coverage and self-insured 

group health plans are to make reinsurance contributions, and which are not. This clarification 

does not affect the amounts authorized to be collected for reinsurance. 

A State that establishes the reinsurance program may elect to collect additional 

contributions to provide funding for administrative expenses or supplemental reinsurance 

payments. Additional contributions for administrative expenses may be collected by the State’s 

applicable reinsurance entity, at the State’s election. Any additional contributions for 

reinsurance payments must be collected by the State’s applicable reinsurance entity. In this final 

rule, we establish that HHS will collect administrative expenses for HHS-operated reinsurance 

programs. A State that operates the reinsurance program bears the administrative costs of the 

applicable reinsurance entity, and must ensure that the applicable reinsurance entity complies 

with program requirements. HHS will share some of its collections for administrative costs with 

 

41 The Department of Labor has reviewed this rule and advised that paying required reinsurance contributions would 

constitute a permissible expense of the plan for purposes of Title I of the Employee Retirement Income Security Act 

(ERISA) because the payment is required by the plan under the Affordable Care Act as interpreted in this rule. (See 

generally, Advisory Opinion 2001-01A to Mr. Carl Stoney, Jr., available at www.dol.gov/ebsa discussing settlor 

versus plan expenses.) 
CMS-9964-F 387 

States that run the program. If a State operates reinsurance, HHS would retain $0.055 per capita 

per year to offset the costs of contributions collection, and would allocate $0.055 per capita per 

year towards administrative expenses for reinsurance payments. The total amounts allocated 

towards administrative expenses for reinsurance payments would be distributed to States 

operating reinsurance (or retained by HHS where HHS is operating the reinsurance program) in 

proportion to the State-by-State total requests for reinsurance payments made under the uniform 

payment parameters. A State may have more than one applicable reinsurance entity, and two or 

more States may jointly enter into an agreement with the same applicable reinsurance entity to 

carry out reinsurance functions in their State. Administrative costs will likely increase if 

multiple applicable reinsurance entities are established within a State, whereas administrative 

efficiencies may be found if multiple States contract with one applicable reinsurance entity. 

We also finalize an annual collections and payment cycle in this final rule. We 

considered a quarterly collections and payment cycle, as envisioned by the Premium 

Stabilization Rule. However, a quarterly cycle would impose significant costs on contributing 

entities. Additionally, because HHS and States operating reinsurance would likely need to hold 

back a significant portion of reinsurance funds until the end of the year to ensure equitable 

payment of requests for reinsurance payments, issuers would receive only limited benefits from a 

quarterly payment cycle. 

Under §153.100(a), a State operating reinsurance must issue an annual notice of benefit 

and payment parameters specific to that State if it elects to: (i) modify the data requirements 

from the HHS-operated reinsurance program; (ii) collect additional reinsurance contributions, 

under §153.220(d); or (iii) use more than one applicable reinsurance entity. 

States that establish the reinsurance program will also maintain any records associated 
CMS-9964-F 388 

with the reinsurance program, as set forth in §153.240(c) of the Premium Stabilization Rule. The 

Premium Stabilization Rule established that reinsurance contributions will be based on a per 

capita amount. The per capita approach will be less complex to administer in comparison to the 

percent of premium approach that HHS considered but ultimately decided not to pursue. Further, 

the per capita approach will better enable HHS to maintain the goals of the reinsurance program 

by providing issuers with a more straightforward approach to reinsurance contributions. States 

will be permitted to collect additional contributions towards supplemental reinsurance payments. 

We estimate that it will take an operations analyst 8 hours (at $55 an hour) and a senior manager 

2 hours (at $77 an hour) to ensure that reinsurance contributions collected and funds used are 

reasonably calculated to cover additional reinsurance payments that are projected to be made 

only under the supplemental reinsurance payment parameters. We believe that it will cost each 

State choosing to collect additional contributions approximately $594 to comply with this 

requirement. Additionally, under §153.232(e), if all requested reinsurance payments under the 

State supplemental reinsurance parameters exceed all reinsurance contributions collected under 

the additional State contribution rate for the benefit year, the State must determine a uniform pro 

rata adjustment to be applied to all requests for supplemental reinsurance payments. The State or 

the applicable reinsurance entity must reduce all such requests for supplemental reinsurance 

payments for the applicable benefit year by that adjustment. We estimate it will take an 

operations analyst 40 hours (at $55 an hour) and a senior manager 12 hours (at $77 an hour) to 

determine appropriate payment calculations and, if necessary, a pro rata adjustment. Therefore, 

we estimate that it will cost each State choosing to collect additional contributions approximately 

$3,124 to comply with this requirement.42

 

42 For purposes of Table 26, we assume that two States will operate reinsurance. 
CMS-9964-F 389 

In this final rule, we establish the methodology to be used for counting covered lives for 

purposes of calculating reinsurance contributions. This methodology offers contributing entities 

a choice similar to counting methods permitted under the PCORTF Rule. We believe that 

relying on a previously established process set forth in the PCORTF Rule for counting enrollees 

will minimize issuer burden for conducting these counts. In the Collection of Information 

Requirements section of this final rule, we describe the administrative costs for issuers associated 

with the data requirements in §153.400(b) for all contributing entities both inside and outside the 

Exchange. The contributing entities will provide enrollment data to HHS to substantiate 

contribution amounts. 

Reinsurance payments will be made to issuers of individual market insurance coverage 

for high claims costs for enrollees. In this final rule, we establish a national attachment point, 

national reinsurance cap, and national coinsurance rate. In the Premium Stabilization Rule, we 

established that payments will be made on a portion of claims costs for enrollees in reinsurance 

eligible plans incurred above an attachment point, subject to a reinsurance cap. 

Use of a reinsurance cap, as well as the requirement for health insurance issuer cost 

sharing above the attachment point and below the cap, is designed to incentivize health insurance 

issuers to control costs. This approach based on claims costs is simpler to implement and more 

familiar to health insurance issuers, and therefore will likely result in savings in administrative 

costs as compared to a condition-based reinsurance approach. 

A State operating reinsurance may supplement the reinsurance payment parameters 

proposed by HHS only if the State elects to collect additional contributions for supplemental 

reinsurance payments or use additional State funds for supplemental reinsurance payments, and 

must specify these supplemental payment parameters in its State notice of benefit and payment 
CMS-9964-F 390 

parameters. We estimate that it will take an operations analyst 2 hours (at $55 an hour) to gather 

the relevant information, for a total burden of $110 per State electing to run reinsurance. Note 

that a State may develop a separate reinsurance program using entirely its own design. 

In this final rule, we require States to provide a process through which a reinsuranceeligible plan that does not generate individual enrollee claims in its normal course of business 

may derive costs to request reinsurance payments. In addition, we clarify that when HHS 

operates the reinsurance program on behalf of a State that these plans may price encounters in 

accordance with their existing principal, internal encounter pricing methodology. Additionally, 

in §153.240(b) of this final rule, States operating the reinsurance program must notify issuers 

annually of reinsurance payments to be made, as well as provide reinsurance-eligible plans 

quarterly estimates of requests for reinsurance payments. Moreover, we establish that for both 

State- and HHS-operated reinsurance programs, only plans subject to the 2014 market reform 

rules are eligible for reinsurance payment. 

We estimate it will take an operations analyst 40 hours (at $55 an hour), 10 hours per 

quarter, and a senior manager 12 hours (at $77 an hour), 3 hours per quarter, to determine 

appropriate quarterly estimates of expected reinsurance payments and to notify plans. 

Additionally, we expect it will take an operations analyst 40 hours (at $55 an hour) and a senior 

manager 12 hours (at $77 an hour) to determine the total amount of reinsurance payments for 

each reinsurance-eligible plan. Therefore, we estimate that it will cost each State choosing to run 

reinsurance approximately $6,248 to comply with this requirement. 

We also believe that these provisions will result in a small administrative cost to States 

associated with determining a format for submission of reinsurance payment data and notifying 

capitated plans of the acceptable method and format of data collection. We anticipate that a 
CMS-9964-F 391 

State will only need to establish this process once. On average, we estimate that it will take each 

State approximately 50 hours to comply with this requirement. We estimate it will take an 

operations analyst 40 hours (at $55 an hour) and a senior manager 10 hours (at $77 an hour) to 

determine an appropriate format for submission of reinsurance payment data for capitated plans 

and to notify plans of the acceptable method and format for data collection. Therefore, we 

estimate that it will cost each State choosing to run reinsurance approximately $2,970 to comply 

with these requirements. 

In this final rule, we also provide more details on the data collection approach for HHSoperated reinsurance programs. HHS plans to use the same distributed data collection approach 

used for risk adjustment; however, only data elements necessary for reinsurance claim selection 

will be considered for the purpose of determining reinsurance payments. In the Collection of 

Information Requirements section, we describe the administrative costs required in §153.410 for 

issuers of reinsurance-eligible plans in States where HHS is operating reinsurance to receive 

reinsurance payments. We believe details on the reinsurance data collection approach finalized 

in this rule are reflected in these cost estimates. 

A wide range of health insurance issuers and self-insured group health plans contribute to 

the reinsurance pool because successful implementation of this rule, in combination with the 

range of Affordable Care Act reforms starting in 2014, benefit all of their enrollees; for example, 

those reforms should lead to fewer unreimbursed health costs, lowering the costs for issuers and 

group health plans. Providing reinsurance payments to health insurance issuers with plans in the 

individual market serves to stabilize premiums in the individual market. Reinsurance will put 

downward pressure on individual market rates as new enrollees with unknown risk join the 

market. It will also help prevent insurers from building in risk premiums to their rates given the 
CMS-9964-F 392 

unknown health of their new enrollees. It is expected that the cost of reinsurance contributions 

will be roughly equal to 1 percent of premiums in the total market in 2014, less in 2015 and 

2016, and will end in 2017. In contrast, it is anticipated that reinsurance payments will result in 

premium decreases in the individual market of between 10 and 15 percent. 

Evidence from the Healthy New York (Healthy NY) program43 supports the magnitude of 

these estimates. In 2001, the State of New York began operating Healthy NY and required all 

HMOs in the State to offer policies for which small businesses and low-income individuals 

would be eligible. The program contained a “stop-loss” reinsurance provision designed to lower 

premiums for enrollees. Under the program, if any enrollee incurred $30,000 in annual claims, 

his or her insurer was reimbursed for 90 percent of the next $70,000 in claims. Premiums for 

Healthy NY policies were about 15 percent to 30 percent less than those for comparable HMO 

policies in the small group market. 

Comment: One commenter asked how HHS derived the estimate that reinsurance 

contributions would increase total market premiums paid by 1 percent, and that reinsurance 

payments to issuers would reduce premiums in the individual market by between 10 percent and 

15 percent. 

Response: This is an HHS estimate for the effects of reinsurance in 2014 that relied in 

part on a 2009 analysis of health insurance premiums by the Congressional Budget Office. 

Risk Corridors 

The Affordable Care Act creates a temporary risk corridors program for the years 2014, 

2015, and 2016 that applies to QHPs. The risk corridors program creates a mechanism for 

sharing risk for allowable costs between the Federal government and QHP issuers. The 

 

43 Swartz, K. “Health New York: Making Insurance More Affordable for Low-Income Workers.” The 

Commonwealth Fund. November 2001. 
CMS-9964-F 393 

Affordable Care Act establishes the risk corridors program as a Federal program; consequently, 

HHS will operate the risk corridors program under Federal rules with no State variation. The 

risk corridors program will help protect against inaccurate rate setting in the early years of the 

Exchanges by limiting the extent of issuer losses and gains. 

QHP issuers must submit to HHS data on premiums earned, allowable claims and quality 

costs, and allowable administrative costs, reflecting data categories required under the Medical 

Loss Ratio Interim Final Rule (75 FR 74918). In designing the program, HHS has sought to 

leverage existing data reporting for Medical Loss Ratio purposes as much as possible. 

As noted above, the risk corridors program is intended to protect QHP issuers in the 

individual and small group markets against inaccurate rate setting. Due to uncertainty about the 

population during the first years of Exchange operation, issuers may not be able to predict their 

risk accurately, and their premiums may reflect costs that are ultimately lower or higher than 

predicted. To determine whether an issuer pays into, or receives payments from, the risk 

corridors program, HHS will compare allowable costs (essentially, claims costs subject to 

adjustments for health care quality, health IT, risk adjustment payments and charges and 

reinsurance payments) and the target amount – the difference between a plan’s earned premiums 

and allowable administrative costs. In this final rule, we have provided for adjustments to the 

risk corridors calculation to account for taxes and profits within its allowable administrative 

costs. The threshold for risk corridor payments and charges is reached when a QHP issuer’s 

allowable costs exceed, or fall short of, the target amount by at least three percent. A QHP with 

allowable costs that are at least three percent less than its target amount will pay into the risk 

corridors program. Conversely, a QHP with allowable costs that exceed its target amount by at 

least 3 percent will receive payments. Risk corridor payments and charges are a percentage of 
CMS-9964-F 394 

the difference between allowable costs and target amount and therefore are not on a “first dollar” 

basis. 

In this final rule, HHS also specifies the annual schedule for the risk corridors program, 

including dates for claims run-out, data submission, and notification of risk corridors payments 

and charges. 

We believe the proposals on the risk corridors program in this final rule have a negligible 

effect on the impact of the program established by and described in the Premium Stabilization 

Rule. 

Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions

The impact analysis for Payment Notice provisions relating to advance payments of the 

premium tax credit and cost-sharing reductions references estimates from the CBO’s March 2012 

baseline projections. Based on our review, we expect that those provisions will not alter CBO’s 

March 2012 baseline estimates of the budget impact of those two programs. The requirements 

are well within the parameters used in the modeling of the Affordable Care Act. Our review and 

analysis of the requirements indicate that the impacts are likely within the model’s margin of 

error. The Affordable Care Act provides for premium tax credits and the reduction or 

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

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

obtain health insurance – for many people, cost sharing is a barrier to obtaining needed health 

care.44 

Section 1402(a)-(c) of the Affordable Care Act directs issuers to reduce cost sharing for 

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

 

44 Brook, et. al. 
CMS-9964-F 395 

the FPL who are enrolled in a QHP offered at the silver level of coverage in the individual 

market on the Exchange and are eligible for a premium tax credit or advance payment of 

premium tax credits. The Affordable Care Act, at section 1402(d), also directs issuers to 

eliminate cost sharing for Indians (as defined in §155.300) with a household income at or below 

300 percent of the FPL who are enrolled in a QHP of any metal level in the individual market on 

the Exchange, and prohibits issuers from requiring cost sharing for Indians, regardless of 

household income, for items or services furnished directly by the IHS, an Indian Tribe, a Tribal 

Organization, or an Urban Indian Organization or through referral under contracted health 

services. Finally, the Affordable Care Act, at section 1412, provides for the advance payments 

of the premium tax credit and cost-sharing reductions. 

A subset of the persons who enroll in QHPs in the individual market through the 

Exchanges beginning in 2014 will be affected by the provisions relating to advance payments of 

premium tax credit and cost-sharing reductions (those with household incomes below 400 

percent of the FPL and Indians enrolled in QHPs). In March 2012, CBO estimated that there 

will be approximately 20 million enrollees in Exchange coverage by 2016, including 

approximately 16 million Exchange enrollees who will be receiving subsidies.45 Participation 

rates are expected to be lower in the first few years of Exchange availability as employers and 

individuals adjust to the features of the Exchanges.46 

 In this final rule, we provide additional details for Exchanges and QHP issuers on the 

administration of advance payments of premium tax credit and cost-sharing reductions for 

individuals and families. We clarify the approach to providing for cost-sharing reductions to 

 

45 “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” Congressional Budget 

Office, March 2012. 

46 Congressional Budget Office, "Letter to the Honorable Evan Bayh: An Analysis of Health Insurance Premiums 

under the Patient Protection and Affordable Care Act," Washington, DC, 2009. 
CMS-9964-F 396 

eligible individuals who purchase a family policy. We also establish standards applicable to 

Exchanges when collecting premiums from enrollees and administering advance payments of 

cost-sharing reductions and the premium tax credit. We describe these administrative costs in 

the Collection of Information Requirements section of this final rule. 

Finally, we direct QHP issuers to enroll individuals in the plan variation with the correct 

cost-sharing structure, and to provide those individuals with the cost-sharing reductions for 

which they are eligible. QHP issuers are responsible for submitting plan variations containing 

the cost-sharing structures proposed by HHS as required by the Affordable Care Act. We also 

clarify which plans are eligible for cost-sharing reductions, and we set forth standards relating to 

advance payments of cost-sharing reductions and reconciliation of those advance payments 

against actual cost-sharing reduction provided. In addition, we establish standards for QHP 

issuers to reduce an enrollee’s share of premium to account for advance payments of the 

premium tax credit, and submit allocations of rates and claims costs to allow for the calculation 

of advance payments of cost-sharing reductions and the premium tax credit. We describe these 

administrative costs in the Collection of Information Requirements section of this final rule. 

 The cost-sharing reductions and advance payments of the premium tax credit policies will 

apply to all issuers that choose to seek certification to offer QHPs through the Exchanges for the 

individual market. QHP issuers will experience costs related to preparing and submitting to 

HHS data to support the administration of cost-sharing reductions and advance payments of the 

premium tax credit. We anticipate that the provisions for advance payments of the premium tax 

credit and cost-sharing reductions will result in transfers from the General Fund of the Treasury 

to those individuals who qualify for those programs. 

User Fees
CMS-9964-F 397 

 To support certain Federal operations of Federally-facilitated Exchanges, we establish in 

this final rule, under section 1311(d)(5)(A) of the Affordable Care and 31 U.S.C. 9701, that a 

participating issuer offering a plan through a Federally-facilitated Exchange must remit a user 

fee to HHS each month equal to the product of the monthly user fee rate specified in the annual 

HHS notice of benefit and payment parameters for the applicable benefit year and the monthly 

premium charged by the issuer for each policy under the plan offered through a Federallyfacilitated Exchange. For the 2014 benefit year, we establish a monthly user fee rate equal to 3.5 

percent. 

SHOP 

The SHOP facilitates the enrollment of small businesses into small group health 

insurance plans. A qualitative analysis of the costs and benefits of establishing a SHOP was 

included in the regulatory impact analysis published in conjunction with the Exchange 

Establishment Rule.47 This impact analysis addresses the additional costs and benefits of the 

proposed modifications in this rule to the SHOP sections of the Exchange Establishment Rule. 

In this final rule, we implement policies for FF-SHOPs designed to prevent significant 

adverse selection while promoting QHP choice for employees. These policies include methods 

a qualified employer may use to make QHPs available to its employees, rules to ensure parity 

with a market’s group participation requirements, rules to permit the display of agent and broker 

information on FF-SHOP websites, alignment of market definitions with other applicable rules, 

and incentives for issuers to participate in FF-SHOPs. Many of these proposed policies are 

expected to create no significant new costs. 

Section 1312 of the Affordable Care Act permits a qualified employer participating in a 

 

47 Available at: http://cciio.cms.gov/resources/files/Files2/03162012/hie3r-ria-032012.pdf
CMS-9964-F 398 

SHOP to select a metal level of coverage and make all plans in that level of coverage available to 

its employees. Permitting employers to choose a single level of coverage reduces potential 

adverse selection within the group and therefore any additional cost due to expanded choice. In 

the Exchanges Establishment final rule, we provided each SHOP the flexibility to choose 

additional means by which a qualified employer could make QHPs available to qualified 

employees. In this final rule, we add an FF-SHOP option to allow qualified employers to offer 

qualified employees only a single QHP. This employer option is designed to further reduce 

adverse selection, although it may reduce the benefit to the employee resulting from broader 

choice. In the Exchange Establishment Rule, we did not quantify either the small risk premium 

or the modest additional consumer benefit resulting from employee choice at a single level of 

coverage, and we do not quantify the reduction in risk premium or consumer benefit resulting 

from this change. 

The Exchange Final Rule permits a SHOP to set a minimum participation rate; such 

authority is limited to the extent a minimum participation rate is permissible under the PHS Act 

and applicable State law. Minimum participation rates require participation in the health plan by 

a substantial portion of the employer’s group, thereby assuring a more representative risk pool 

and reducing adverse selection. Setting a minimum participation rate that is too low would make 

it ineffective, while setting it too high would reduce the number of employers offering coverage. 

This final rule establishes, subject to permissibility under the PHS Act, that FF-SHOPs use a 

default participation rate of 70 percent that may be modified if there is evidence that a higher or 

lower rate is either customary in the State or required by State statute. Because this policy 

results in no change in market dynamics, it places no additional costs on employers or issuers. 

This final rule establishes that health insurance issuers with shares of a State’s small 
CMS-9964-F 399 

group market greater than 20 percent will participate in the FF-SHOP if they also seek to 

participate in the FFE in the State. This policy promotes robust issuer participation in the FFSHOP which will help qualified employers offer their employees a broad choice of health plan. 

The benefits of broad plan choice are quite significant. One study suggests expanding plan 

choice while holding premiums constant for employees results in a median increase in value to 

consumers (“consumer surplus”) of 20 percent of the premium cost of coverage.48 Some of this 

benefit is due to expanded choice in plan type and health insurance issuer. There are two 

additional impacts associated with this policy. The first is the cost for the QHP issuer of 

submitting plans for certification in the FF-SHOP, which is described in the 30-day Federal 

Register Notice for the Initial Plan Data Collection published on November 21, 2012 (77 FR 

69846). The second is the transfer associated with user fees for additional enrollees in QHPs in 

the FF-SHOP. 

Medical Loss Ratio

This final rule amends the MLR and rebate calculation methodologies to include 

payments and receipts related to the premium stabilization programs. The definition of premium 

revenue is modified to account for these payments and receipts. When the MLR annual 

reporting form is updated for the reporting year 2014 and later, premium stabilization payment 

and receipt amounts will be considered a part of gross earned premium reported to the Secretary, 

similar to other elements involved in the derivation of earned premium. Gross earned premium 

will not be reduced by the amount of contributions under the transitional reinsurance program. 

The MLR annual reporting form will then account for premium stabilization payment and receipt 

amounts other than the reinsurance contributions by removing them from adjusted earned 

 

48 Dafny, L., Ho, K., & Varela, M. (2010). Let them have choice: Gains from shifting away from employer-sponsored health 

insurance and toward an individual exchange (No. w15687). National Bureau of Economic Research. 
CMS-9964-F 400 

premium, so that these amounts do not have a net impact on the adjusted earned premium used in 

calculating the MLR denominator and rebates. Contributions under the transitional reinsurance 

program will be included with the Federal assessments that are deducted from earned premium in 

MLR and rebate calculations. Additionally, this final rule amends the MLR calculation 

methodology to add or subtract premium stabilization payment and receipt amounts, other than 

reinsurance contributions, in the MLR numerator, consistent with the way the statute prescribes 

the calculation methodology for risk corridors. These adjustments will reduce or increase 

issuers’ MLRs, and may increase or reduce issuers’ rebates, respectively. The amended 

methodology will result in a more accurate calculation of MLR and rebate amounts, since it will 

reflect issuers’ actual claims-related expenditures. This approach will also support the 

effectiveness of both the MLR and the premium stabilization programs by correctly offsetting 

the premium stabilization payment and receipt amounts against rebates, consistently with the risk 

corridors calculation methodology adopted in §153.530. 

Based on HHS’s experience with the 2011 MLR reporting year, there are 466 health 

insurance issuers49 offering coverage in the individual and group markets to almost 80 million 

enrollees that will be affected by the proposed amendment to account for premium stabilization 

payments in MLR and rebate calculations. In 2012, an estimated 54 issuers paid $396 million in 

rebates for the 2011 MLR reporting year to approximately 4 million enrollees in the individual 

markets, while 59 issuers in the small group market provided approximately $289 million in 

rebates to policyholders and subscribers on behalf of over 3 million enrollees, and 47 issuers in 

the large group market provided approximately $403 million in rebates to policyholders and 

subscribers on behalf of almost 6 million enrollees. Lack of data makes it difficult to predict 

 

49 Issuers represent companies (for example, NAIC company code). These estimates do not include issuers of plans 

with total annual limits of $250,000 or less (sometimes referred to as “mini-med” plans) or expatriate plans. 
CMS-9964-F 401 

how high-risk enrollees will be distributed among issuers and, therefore, how MLRs and total 

rebates would be affected. Issuers with relatively low-risk enrollees are likely to have positive 

net premium stabilization payments (that is, payments would be greater than receipts) and, if so, 

their MLRs will increase as a result of the amended MLR calculation methodology. If any of 

these issuers fail to meet the MLR standard, taking the premium stabilization payments and 

receipts into account in the MLR calculations will result in lower rebate payments. Issuers with 

relatively high-risk enrollees are likely to have positive net receipts (that is, receipts would be 

greater than payments) and, if so, their MLRs would decrease as a result. If any such issuer fails 

to meet the MLR standard, its rebate amount will increase. Since such issuers are likely to have 

high claims expenditures and therefore, high MLRs, they would be less likely to owe rebates. So 

we do not anticipate that rebates will go up for such issuers. 

This final rule also changes the deadlines for MLR report submission and rebate 

payments so that the deadlines occur after all the premium stabilization payment and receipt 

amounts are determined. The change in the deadlines will allow issuers to calculate the MLR 

and rebate amounts based on actual calculated payments and receipts rather than estimated 

amounts and will improve the accuracy of the rebate payments and reports. This will also 

reinforce the effectiveness of the premium stabilization programs, since issuers are less likely to 

pay higher or lower rebates based on inaccurate payment and receipt estimations. Accordingly, 

this final rule changes the date of MLR reporting to the Secretary from June 1 to July 31, and the 

rebate due date from August 1 to September 30. 

Issuers will also have to report their payments and receipts related to the premium 

stabilization programs in the annual MLR report beginning in the 2014 MLR reporting year. 

Once issuers calculate these amounts, which they will be required to do regardless of the MLR 
CMS-9964-F 402 

reporting requirements, the administrative cost of including these amounts in the report will be 

minimal. 

The previous MLR calculation methodology allowed an issuer to deduct from premiums 

in the calculation of an issuer’s MLR and rebates either the amount it paid in State premium 

taxes, or the amount of its community benefit expenditures up to a maximum of the highest 

premium tax rate in the State, whichever is greater, as provided in the final rule with comment 

period (76 FR 76574) published on December 7, 2011. This final rule amends the MLR 

methodology to allow a Federal income tax exempt not-for-profit issuer to deduct from premium 

both community benefit expenditures and State premium taxes, limited to the higher of the 

State’s highest premium tax rate or 3 percent of premium. Other issuers will continue to use the 

previous methodology. This will create a level playing field for Federal income tax exempt notfor-profit issuers, who are required to make community benefit expenditures to maintain their 

Federal income tax exempt status and will not discourage community benefit expenditures. This 

is likely to increase the MLRs for tax exempt not-for-profit issuers. If any of these issuers fail to 

meet the MLR standard, then this will result in lower rebate payments. 

Based on MLR annual reports submitted by issuers for the 2011 MLR reporting year, we 

estimate that there are 132 not-for-profit issuers that will be affected by this amendment. In the 

absence of data on tax exempt not-for-profit issuers, we use the estimates for not-for-profit 

issuers in our analysis. Therefore, the actual impact is likely to be lower. For the 20 not-forprofit issuers that submitted data on community benefit expenditures, such expenditures as a 

percentage of earned premiums ranged from 0.04 percent to 4.11 percent with an average of 1.57 

percent, which is likely to be less than the current limit for most of the issuers and is less than the 

proposed limit as well. We assume that in 2012 issuers will maintain the level of community 
CMS-9964-F 403 

benefit expenditures as reported in their MLR annual reports for the 2011 MLR reporting year. 

Therefore, we estimate that under the current policy, in the 2012 MLR reporting year, 17 not-forprofit issuers will owe approximately $182 million in rebates to approximately 1.5 million 

enrollees, which is the same as the experience in the 2011 MLR reporting year. The adopted 

change in treatment of community benefit expenditures for such issuers will have minimal effect 

on their MLRs and rebates under this assumption, since their current expenditures are below the 

current deduction limits. 

Issuers with lower rebate payments as a result of these adjustments will need to send 

fewer rebate notices, and therefore, will have lower administrative costs related to rebates and 

rebate notices. 

D. Alternatives Considered

Risk Adjustment 

We considered State flexibility for risk adjustment. This option would have allowed 

States to develop State-specific characteristics but it would have resulted in few Federal 

standards by which to compensate for risk. This final rule describes a HHS risk adjustment 

methodology but allows States to seek HHS approval for alternate methodologies based on 

criteria established in this final rule. This compromise gives States some flexibility but also 

reduces the burden on multi-State issuers and the Federal government. 

Reinsurance 

We proposed State flexibility to establish the reinsurance program in the Premium 

Stabilization Rule. This option would have allowed for State innovation, but it would have 

greatly increased the administrative burden on self-insured group health plans, multi-State 

issuers and the Federal government. A national approach is more efficient and less expensive. 
CMS-9964-F 404 

Moreover, we believe that uniform reinsurance payment parameters deliver payments where they 

are most needed—to issuers with high cost claims in the individual market. Centralized 

collection of contributions, an annual contribution and payment schedule, as well as a national 

contribution rate provide a more effective approach to stabilize premiums, while decreasing 

administrative burden. 

Risk Corridors

 Elsewhere in this issue of the Federal Register, we are implementing an 

alternative to our current policy, under which the risk corridor calculation methodology 

compares plan-specific allowable costs (adjusted claims) to a target amount (adjusted premiums). 

In order to align the risk corridor calculation methodology with the single risk pool requirements 

finalized at §156.80, we are modifying the definition of “allowable costs” for the risk corridors 

calculation at §153.500 such that “allowable costs” are calculated in a manner consistent with the 

single risk pool requirement for premiums. We believe that this approach will better align risk 

sharing under the program with how issuers will be required to set rates. We address the burden 

associated with this approach in the Collection of Information Section of the interim final rule 

with comment “Amendments to the HHS Notice of Benefit and Payment Parameters for 2014”, 

published elsewhere in this issue of the Federal Register.

Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions

As discussed in section III.E.4.i, we considered requiring QHP issuers to provide costsharing reductions to Indians by waiving the cost sharing as appropriate, rather than assigning 

the eligible Indian to a particular plan variation. However, we believe this alternative approach 

would be too burdensome for issuers to implement in the short term. As discussed in section 

III.E.4.e, we are issuing an interim final rule with comment to provide QHP issuers with the 
CMS-9964-F 405 

option to submit data about the actual amount of cost-sharing reductions using an alternate 

methodology for purposes of payment reconciliation. This alternative will provide greater 

flexibility to issuers and may reduce the reporting burden for some issuers. We describe the 

burden associated with this alternative in the Collection of Information Section of the interim 

final rule with comment “Amendments to the HHS Notice of Benefit and Payment Parameters 

for 2014”, published elsewhere in this issue of the Federal Register.

User Fees

We considered calculating user fees on a per capita basis, but that approach fails to adjust 

for premium variation and geographic wage differences, and commenters suggest that most 

issuers and stakeholders prefer that such costs be calculated as a percentage of premium. 

SHOP

We considered making no change to the employer options in the FF-SHOP, but 

concluded that allowing employers the option of offering a single QHP to employees would 

simplify the transition from current market practices to the SHOP. We will be proposing further 

rulemaking to ease the transition from the current market to the SHOP. 

We considered a range of threshold values for determining which issuers would be 

subject to the QHP certification requirement linking FFE and FF-SHOP participation and chose a 

threshold (20 percent market share) that minimized the number of issuers affected by the 

certification requirement while still ensuring that at least one large issuer in each State would 

offer QHPs in the FF-SHOP. 

E. Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) requires agencies to prepare 

a final regulatory flexibility analysis to describe the impact of the final rule on small entities, 
CMS-9964-F 406 

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 a change in revenues of more than three to five percent as 

its measure of significant economic impact on a substantial number of small entities. 

This final rule contains rules for premium stabilization programs required of health plan 

issuers and self-insured group health plans. These programs include the risk adjustment 

program, the transitional reinsurance program and the temporary risk corridors programs. 

Because we believe that few insurance firms offering comprehensive health insurance policies 

fall below the size thresholds for “small entities” established by the SBA, we do not believe that 

a final regulatory flexibility analysis is required with respect to such firms. 

For purposes of the RFA, we expect the following types of entities to be affected by this 

final rule: (1) health insurance issuers; (2) health insurance plan sponsors; (3) applicable 

reinsurance entities; (4) risk adjustment entities; (5) self-insured group health plans and (6) thirdparty administrators. We believe that health insurance issuers and plan sponsors would be 

classified under the North American Industry Classification System (NAICS) code 524114 

(Direct Health and Medical Insurance Carriers); applicable reinsurance entities, risk adjustment 

entities and third party administrators would be classified under NAICS codes 524130 

(Reinsurance Carriers), 524298 (Actuarial Services) and 524292 (Third Party Administration of 

Insurance). According to SBA size standards, entities with average annual receipts of $7 million 

or less would be considered small entities for these NAICS codes. Issuers could possibly be 
CMS-9964-F 407 

classified in 621491 (HMO Medical Centers) and, if this is the case, the SBA size standard 

would be $10 million or less. 

Based on data from Medical Loss Ratio annual report submissions for the 2011 MLR 

reporting year, there are 22 small entities (companies), each with less than $7 million in earned 

premiums, that offer individual or group health insurance coverage and would therefore be 

subject to the provisions related to MLR. Thirty six percent of these small issuers belong to 

holding groups, and many if not all of these small issuers are likely to have other lines of 

business that would result in their revenues exceeding $7 million. 

We believe that a number of sponsors of self-insured group health plans could qualify as 

“small entities.” This final rule specifies that third-party administrators may incur the 

operational costs associated with submitting reinsurance contributions to HHS. We do not 

believe that the reinsurance contribution amount or the operational cost associated with 

submitting the contribution are likely to result in a change in revenues of more than 3 to 5 

percent for a substantial number of self-insured group health plans or third-party administrators 

that meet the definition of a small entity. We requested comment on whether the small entities 

affected by the proposed rule have been fully identified. We also requested comment and 

information on potential costs for these entities and on any alternatives that we should consider. 

Comment: We received no comments on whether the small entities described in this rule 

have been fully identified or on potential costs to them. However, one State expressed concern 

that the number of small self-insured entities is expected to grow and could cause an uneven 

playing field if not included in reinsurance contribution assessments. The State said maintaining 

a level playing field is desirable so as not to provide additional incentive to self-insure and 
CMS-9964-F 408 

thereby deny employees the consumer protection applicable to insured products on the 

Exchange.

Response: We are aware that a growing number of small entities may consider selfinsuring since self-insured groups are exempt from community ratings and minimum health care 

benefits. HHS will collect reinsurance contributions on a per enrollee basis from all self-insured 

group health plans regardless of their size. This will help ensure that entities are not incentivized 

to self-insure in order to avoid making reinsurance contributions. Because these contributions 

will be calculated on a per capita basis, we believe that is it unlikely that the amount of these 

contributions (or the operational costs associated with making these contributions) will result in a 

significant change in revenue for a substantial number of small entities. 

In this final rule, we establish requirements on employers that choose to participate in a 

SHOP Exchange. As discussed above, the SHOP is limited by statute to employers with at least 

one but not more than 100 employees. For this reason, we expect that many employers would 

meet the SBA standard for small entities. We do not believe that the regulation imposes 

requirements on employers offering health insurance through SHOP that are more restrictive 

than the current requirements on small employers offering employer-sponsored coverage. For 

example, the FF-SHOP will generally match existing minimum participation rates in the outside 

market. Additionally, as discussed in the regulatory impact analysis, we believe the employee 

choice option will ultimately provide greater choice for the employee among QHPs and issuers, 

benefitting both employer and employee and simplifying the process for the employer of 

administering multiple health benefit plans while allowing a SHOP to let an employer choose 

one plan eases the transition from the current marketplace. We believe the processes that we 

have established constitute the minimum amount of requirements necessary to implement 
CMS-9964-F 409 

statutory mandates and accomplish our policy goals, and that no appropriate regulatory 

alternatives could be developed to further lessen the compliance burden. 

F. Unfunded Mandates 

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that 

agencies assess anticipated costs and benefits and take certain other actions before issuing a final 

rule that includes any Federal mandate that may result in expenditures in any one year by a State, 

local, or Tribal governments, in the aggregate, or by the private sector, of $100 million in 1995 

dollars, updated annually for inflation. In 2013, that threshold is approximately $141 million. 

Although we have not been able to quantify the user fees that will be associated with this rule, 

the combined administrative cost and user fee impact on State, local, or Tribal governments and 

the private sector may be above the threshold. Earlier portions of this RIA constitute our UMRA 

analysis. 

G. Federalism 

Executive Order 13132 establishes certain requirements that an agency must meet when it 

promulgates a final rule that imposes substantial direct costs on State and local governments, 

pre-empts State law, or otherwise has Federalism implications. Because States have flexibility in 

designing their risk adjustment, reinsurance, and Exchange-related programs, State decisions will 

ultimately influence both administrative expenses and overall premiums. States are not required 

to establish a risk adjustment or reinsurance program, or an Exchange. 

In HHS’s view, while this final rule does not impose substantial direct requirement costs 

on State and local governments, this regulation has Federalism implications due to direct effects 

on the distribution of power and responsibilities among the State and Federal governments 

relating to determining standards relating to health insurance that is offered in the individual and 
CMS-9964-F 410 

small group markets. Each State electing to establish a risk adjustment or reinsurance program 

or an Exchange must adopt the Federal standards contained in the Affordable Care Act and in 

this final rule, or have in effect a State law or regulation that implements these Federal standards. 

However, HHS anticipates that the Federalism implications (if any) are substantially mitigated 

because under the statute, States have choices regarding the structure and governance of these 

programs. Additionally, the Affordable Care Act does not require States to establish these 

programs; if a State elects not to establish these programs (or the State’s risk adjustment program 

or Exchange is not approved), HHS must establish and operate these programs in that State. 

In compliance with the requirement of Executive Order 13132 that agencies examine 

closely any policies that may have Federalism implications or limit the policy making discretion 

of the States, HHS has engaged in efforts to consult with and work cooperatively with affected 

States, including participating in conference calls with and attending conferences of the National 

Association of Insurance Commissioners, and consulting with State insurance officials on an 

individual basis. 

Throughout the process of developing this final rule, HHS has attempted to balance the 

States’ interests in regulating health insurance issuers, and Congress’ intent to provide access to 

Affordable Insurance Exchanges for consumers in every State. By doing so, it is HHS’s view 

that we have complied with the requirements of Executive Order 13132. 
CMS-9964-F 411 

List of Subjects 

45 CFR Part 153

Administrative practice and procedure, Adverse selection, Health care, Health insurance, 

Health records, Organization and functions (Government agencies), Premium stabilization, 

Reporting and recordkeeping requirements, Reinsurance, Risk adjustment, Risk corridors, Risk 

mitigation, State and local governments. 

45 CFR Part 155 

 Administrative practice and procedure, Health care access, Health insurance, Reporting 

and recordkeeping requirements, State and local governments, Cost-sharing reductions, Advance 

payments of premium tax credit, Administration and calculation of advance payments of the 

premium tax credit, Plan variations, Actuarial value. 

45 CFR Part 156

Administrative practice and procedure, Advertising, Advisory Committees, Brokers, 

Conflict of interest, Consumer protection, Grant programs-health, Grants administration, Health 

care, Health insurance, Health maintenance organization (HMO), Health records, Hospitals, 

American Indian/Alaska Natives, Individuals with disabilities, Loan programs-health, 

Organization and functions (Government agencies), Medicaid, Public assistance programs, 

Reporting and recordkeeping requirements, State and local governments, Sunshine Act, 

Technical assistance, Women, and Youth. 

45 CFR Part 157

Employee benefit plans, Health insurance, Health maintenance organization (HMO), 

Health records, Hospitals, Indians, Individuals with disabilities, Organization and functions 

(Government agencies), Medicaid, Public assistance programs, Reporting and recordkeeping 
CMS-9964-F 412 

requirements, Safety, State and local governments, Sunshine Act, Technical Assistance, Women, 

and Youth. 

45 CFR Part 158

Administrative practice and procedure, Claims, Health care, Health insurance, Health plans, 

penalties, Reporting and recordkeeping requirements, Premium revenues, Medical loss ratio, 

Rebating. 
CMS-9964-F 413 

 
CMS-9964-F 414 

 For the reasons set forth in the preamble, the Department of Health and Human Services 

amends 45 CFR parts 153, 155, 156, 157 and 158 as set forth below:

 
CMS-9964-F 415 

PART 153 – STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS, AND 

RISK ADJUSTMENT UNDER THE AFFORDABLE CARE ACT 

1. The authority citation for part 153 continues to read as follows: 

Authority: Secs. 1311, 1321, 1341–1343, Pub. L. 111–148, 24 Stat. 119. 

2. Section 153.20 is amended by revising the definitions of “Contributing entity”, “Risk 

adjustment covered plan” and “Risk adjustment data collection approach” to read as follows: 

§153.20 Definitions. 

* * * * * 

Contributing entity means a health insurance issuer or self-insured group health plan. A 

self-insured group health plan is responsible for the reinsurance contributions, though it may 

elect to use a third party administrator or administrative services only contractor for transfer of 

the reinsurance contributions. 

* * * * * 

Risk adjustment covered plan means, for the purpose of the risk adjustment program, any 

health insurance coverage offered in the individual or small group market with the exception of 

grandfathered health plans, group health insurance coverage described in §146.145(c) of this 

subchapter, individual health insurance coverage described in §148.220 of this subchapter, and 

any plan determined not to be a risk adjustment covered plan in the applicable Federally certified 

risk adjustment methodology. 

* * * * * 

Risk adjustment data collection approach means the specific procedures by which risk 

adjustment data is to be stored, collected, accessed, transmitted, and validated and the applicable 

timeframes, data formats, and privacy and security standards. 
CMS-9964-F 416 

* * * * * 

3. Section 153.100 is amended by – 

A. Revising paragraph (a)(1). 

B. Removing paragraph (a)(2). 

C. Redesignating paragraphs (a)(3) and (4) as paragraphs (a)(2) and (3). 

D. Revising newly designated paragraph (a)(2). 

E. Removing paragraph (a)(5). 

F. Revising paragraph (d)(1). 

G. Removing paragraph (d)(2). 

H. Redesignating paragraphs (d)(3) and (4) as paragraphs (d)(2) and (3). 

I. Revising newly designated paragraph (d)(2). 

J. Removing paragraph (d)(5). 

K. Redesignating paragraph (d)(6) as paragraph (d)(4). 

The revisions read as follows: 

§153.100 State notice of benefit and payment parameters. 

 (a) * * * 

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

payments from those specified in the annual HHS notice of benefit and payment parameters for 

the applicable benefit year; 

 (2) Collect additional reinsurance contributions under §153.220(d)(1) or use additional 

funds for reinsurance payments under §153.220(d)(2); or 

* * * * * 

(d) * * * 
CMS-9964-F 417 

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

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

applicable benefit year; 

 (2) Forgo the collection of additional reinsurance contributions under §153.220(d)(1) and 

the use of additional funds for reinsurance payments under §153.220(d)(2); 

 * * * * * 

4. Section 153.110 is amended by: 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as paragraph (b) and revising newly designated paragraph 

(b). 

D. Redesignating paragraph (d) as paragraph (c). 

E. Removing newly designated paragraph (c)(2). 

F. Redesignating paragraph (c)(3) as paragraph (c)(2). 

G. Removing newly designated paragraph (c)(4). 

H. Removing newly designated paragraph (c)(5). 

I. Redesignating paragraph (c)(6) as paragraph (c)(3). 

J. Removing paragraph (e). 

K. Redesignating paragraph (f) as paragraph (d). 

The revisions read as follows: 

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

(a) Data requirements. If a State that establishes a reinsurance program elects to modify 

the data requirements for health insurance issuers to receive reinsurance payments from those 
CMS-9964-F 418 

specified in the annual HHS notice of benefit and payment parameters for the applicable benefit 

year, the State notice of benefit and payment parameters must specify those modifications. 

 (b) Additional collections. If a State that establishes a reinsurance program elects to 

collect additional funds under §153.220(d)(1) or use additional funds for reinsurance payments 

under §153.220(d)(2), the State must publish in the State notice of benefit and payment 

parameters the following: 

(1) A description of the purpose of the additional collection, including whether it will be 

used to cover reinsurance payments made under §153.232, administrative costs, or both; 

(2) The additional contribution rate at which the funds will be collected; and 

(3) If the purpose of the additional collection includes reinsurance payments (or if the 

State is using additional funds for reinsurance payments under §153.220(d)(2)), the State 

supplemental reinsurance payment parameters required under §153.232. 

* * * * * 

5. Section 153.210 is amended by revising paragraph (a)(2) and adding paragraph (e) to 

read as follows: 

§153.210 State establishment of a reinsurance program. 

(a) * * * 

(2) If a State contracts with or establishes more than one applicable reinsurance entity, 

the State must ensure that each applicable reinsurance entity operates in a distinct geographic 

area with no overlap of jurisdiction with any other applicable reinsurance entity. 

* * * * * 

(e) Reporting to HHS. Each State that establishes a reinsurance program must ensure 

that each applicable reinsurance entity provides information regarding requests for reinsurance 
CMS-9964-F 419 

payments under the national contribution rate made under §153.410 for all reinsurance-eligible 

plans for each quarter during the applicable benefit year in a manner and timeframe established 

by HHS. 

6. Section 153.220 is amended by – 

A. Revising paragraph (a). 

B. Removing paragraph (b). 

C. Redesignating paragraph (c) as paragraph (b). 

D. Removing paragraph (d). 

E. Redesignating paragraph (e) as paragraph (c). 

F. Revising newly designated paragraph (c)(2). 

G. Removing paragraph (f). 

H. Redesignating paragraph (g) as paragraph (d). 

I. Revising newly designated paragraph (d). 

J. Removing paragraph (h). 

The revisions read as follows: 

§ 153.220 Collection of reinsurance contribution funds. 

(a) Collections. If a State establishes a reinsurance program, HHS will collect all 

reinsurance contributions from all contributing entities for that State under the national 

contribution rate. 

* * * * * 

(c) * * * 

(2) Payments to the U.S. Treasury as described in paragraph (b)(2) if this section; and 

* * * * * 
CMS-9964-F 420 

(d) Additional State collections. If a State establishes a reinsurance program: 

(1) The State may elect to collect more than the amounts that would be collected based 

on the national contribution rate set forth in the annual HHS notice of benefit and payment 

parameters for the applicable benefit year to provide: 

(i) Funding for administrative expenses of the applicable reinsurance entity; or 

(ii) Additional funds for reinsurance payments. 

 (2) A State may use additional funds which were not collected as additional reinsurance 

contributions under this part for reinsurance payments under the State supplemental payment 

parameters under §153.232. 

 * * * * * 

7. Section 153.230 is revised to read as follows: 

§ 153.230 Calculation of reinsurance payments made under the national contribution rate. 

(a) Eligibility for reinsurance payments under the national reinsurance parameters. A 

health insurance issuer of a reinsurance-eligible plan becomes eligible for reinsurance payments 

from contributions under the national contribution rate when its claims costs for an individual 

enrollee’s covered benefits in a benefit year exceed the national attachment point. 

(b) National reinsurance payment parameters. The national reinsurance payment 

parameters for each benefit year commencing in 2014 and ending in 2016 set forth in the annual 

HHS notice of benefit and payment parameters for each applicable benefit year will apply with 

respect to reinsurance payments made from contributions received under the national 

contribution rate. 

(c) National reinsurance payments. Each reinsurance payment made from contributions 

received under the national contribution rate will be calculated as the product of the national 
CMS-9964-F 421 

coinsurance rate multiplied by the health insurance issuer’s claims costs for an individual 

enrollee’s covered benefits that the health insurance issuer incurs in the applicable benefit year 

between the national attachment point and the national reinsurance cap. 

(d) Uniform adjustment to national reinsurance payments. If HHS determines that all 

reinsurance payments requested under the national payment parameters from all reinsuranceeligible plans in all States for a benefit year will exceed all reinsurance contributions collected 

under the national contribution rate in all States for an applicable benefit year, HHS will 

determine a uniform pro rata adjustment to be applied to all such requests for reinsurance 

payments for all States. Each applicable reinsurance entity, or HHS on behalf of a State, must 

reduce all requests for reinsurance payments for the applicable benefit year by any adjustment 

required under this paragraph (d). 

8. Section 153.232 is added to read as follows: 

§153.232 Calculation of reinsurance payments made under a State additional contribution 

rate. 

(a) State supplemental reinsurance payment parameters. (1) If a State establishes a 

reinsurance program and elects to collect additional contributions under §153.220(d)(1)(ii) or use 

additional funds for reinsurance payments under §153.220(d)(2), the State must set supplemental 

reinsurance payment parameters using one or more of the following methods: 

(i) Decreasing the national attachment point; 

(ii) Increasing the national reinsurance cap; or 

(iii) Increasing the national coinsurance rate. 

(2) The State must ensure that additional reinsurance contributions and funds projected to 

be received under §153.220(d)(1)(ii) and §153.220(d)(2), as applicable, for any applicable 
CMS-9964-F 422 

benefit year are reasonably calculated to cover additional reinsurance payments that are projected 

to be made only under the State supplemental reinsurance payment parameters (that will not be 

paid under the national payment parameters) for the given benefit year. 

(3) All applicable reinsurance entities in a State collecting additional reinsurance 

contributions must apply the State supplemental reinsurance payment parameters established 

under paragraph (a)(1) of this section when calculating reinsurance payments. 

(b) General requirement for payments under State supplemental reinsurance parameters. 

Contributions collected under §153.220(d)(1)(ii) or funds under §153.220(d)(2), as applicable, 

must be applied towards requests for reinsurance payments made under the State supplemental 

reinsurance payments parameters for each benefit year commencing in 2014 and ending in 2016. 

(c) Eligibility for reinsurance payments under State supplemental reinsurance parameters. 

If a State establishes State supplemental reinsurance payment parameters under §153.232(a)(1), a 

reinsurance-eligible plan becomes eligible for reinsurance payments from contributions under 

§153.220(d)(1)(ii) or funds under §153.220(d)(2), as applicable, if its incurred claims costs for 

an individual enrollee’s covered benefits in the applicable benefit year: 

(1) Exceed the State supplemental attachment point set forth in the State notice of benefit 

and payment parameters for the applicable benefit year if a State has established such a 

supplemental attachment point under §153.232(a)(1)(i); 

(2) Exceed the national reinsurance cap set forth in the annual HHS notice of benefit and 

payment parameters for the applicable benefit year if a State has established a State supplemental 

reinsurance cap under §153.232(a)(1)(ii); or 
CMS-9964-F 423 

(3) Exceed the national attachment point set forth in the annual HHS notice of benefit and 

payment parameters for the applicable benefit year if a State has established a supplemental 

coinsurance rate under §153.232(a)(1)(iii). 

(d) Payments under State supplemental reinsurance parameters. Each reinsurance 

payment made from contributions received under §153.220(d)(1)(ii) or funds under 

§153.220(d)(2), as applicable, will be calculated with respect to an issuer’s incurred claims costs 

for an individual enrollee’s covered benefits in the applicable benefit year as the sum of the 

following: 

(1) If the State has established a State supplemental attachment point, to the extent the 

issuer’s incurred claims costs for such benefits in the applicable benefit year exceed the State 

supplemental attachment point but do not exceed the national attachment point, the product of 

such claims costs between the State supplemental attachment point and the national attachment 

point multiplied by the national coinsurance rate (or, if the State has established a State 

supplemental coinsurance rate, the State supplemental coinsurance rate); 

(2) If the State has established a State supplemental reinsurance cap, to the extent the 

issuer’s incurred claims costs for such benefits in the applicable benefit year exceed the national 

reinsurance cap but do not exceed the State supplemental reinsurance cap, the product of such 

claims costs between the national reinsurance cap and the State supplemental reinsurance cap 

multiplied by the national coinsurance rate (or, if the State has established a State supplemental 

coinsurance rate, the State supplemental coinsurance rate); and 

(3) If the State has established a State supplemental coinsurance rate, the product of the 

issuer’s incurred claims costs for such benefits in the applicable benefit year between the 
CMS-9964-F 424 

national attachment point and the national reinsurance cap multiplied by the difference between 

the State supplemental coinsurance rate and the national coinsurance rate. 

(e) Uniform adjustment to payments under State supplemental reinsurance payment 

parameters. If all requested reinsurance payments under the State supplemental reinsurance 

parameters calculated in accordance with paragraph (a)(1) of this section from all reinsuranceeligible plans in a State for a benefit year will exceed all reinsurance contributions collected 

under §153.220(d)(1)(ii) or funds under §153.220(d)(2) for the applicable benefit year, the State 

must determine a uniform pro rata adjustment to be applied to all such requests for reinsurance 

payments. Each applicable reinsurance entity in the State must reduce all such requests for 

reinsurance payments for the applicable benefit year by that adjustment. 

(f) Limitations on payments under State supplemental reinsurance parameters. A State 

must ensure that: 

(1) The payments made to issuers must not exceed the issuer’s total paid amount for the 

reinsurance-eligible claim(s); and 

(2) Any remaining additional funds for reinsurance payments collected under 

§153.220(d)(1)(ii) must be used for reinsurance payments under the State supplemental 

reinsurance payment parameters in subsequent benefit years. 

9. Section 153.234 is added to read as follows: 

§153.234 Eligibility under health insurance market rules. 

A reinsurance-eligible plan’s covered claims costs for an enrollee incurred prior to the 

application of the following provisions do not count towards either the national reinsurance 

payment parameters or the State supplemental reinsurance payment parameters: 45 CFR 
CMS-9964-F 425 

147.102, 147.104 (subject to 147.145), 147.106 (subject to 147.145), 156.80, and subpart B of 

part 156. 

10. Section 153.235 is added to read as follows: 

§153.235 Allocation and distribution of reinsurance contributions 

 (a) Allocation of reinsurance contributions. HHS will allocate and disburse to each State 

operating reinsurance (and will distribute directly to issuers if HHS is operating reinsurance on 

behalf of a State), reinsurance contributions collected from contributing entities under the 

national contribution rate for reinsurance payments. The disbursed funds would be based on the 

total requests for reinsurance payments made under the national reinsurance payment parameters 

in all States and submitted under §153.410, net of any adjustment under §153.230(d). 

(b) Excess reinsurance contributions. Any reinsurance contributions collected from 

contributing entities under the national contribution rate for reinsurance payments for any benefit 

year but unused for the applicable benefit year will be used for reinsurance payments under the 

national reinsurance payment parameters for subsequent benefit years. 

11. Section 153.240 is amended by revising paragraphs (a) and (b) and by adding a new 

paragraph (d) to read as follows: 

§153.240 Disbursement of reinsurance payments. 

(a) Data collection. If a State establishes a reinsurance program, the State must ensure 

that the applicable reinsurance entity: 

(1) Collects data required to determine reinsurance payments as described in §153.230 

and §153.232, as applicable, from an issuer of reinsurance-eligible plans or is provided access to 

such data, according to the data requirements specified by the State in the State notice of benefit 

and payment parameters described in subpart B of this part. 
CMS-9964-F 426 

 (2) Makes reinsurance payments to the issuer of a reinsurance-eligible plan after 

receiving a valid claim for payment from that health insurance issuer in accordance with the 

requirements of §153.410. 

(3) Provides a process through which an issuer of a reinsurance-eligible plan that does not 

generate individual enrollee claims in the normal course of business may use estimated claims 

costs to make a request for payment (or to submit data to be considered for reinsurance 

payments) in accordance with the requirements of §153.410. The State must ensure that such 

requests for reinsurance payment (or a subset of such requests) are subject to validation. 

(b) Notification of reinsurance payments. For each applicable benefit year, 

(1) A State, or HHS on behalf of the State, must notify issuers annually of: 

(i) Reinsurance payments under the national payment parameters, and 

(ii) Reinsurance payments under the State supplemental payment parameters if 

applicable, to be made for the applicable benefit year no later than June 30 of the year following 

the applicable benefit year. 

(2) A State must provide to each issuer of a reinsurance-eligible plan the calculation of 

total reinsurance payment requests, on a quarterly basis during the applicable benefit year in a 

timeframe and manner specified by HHS, made under: 

(i) The national reinsurance payment parameters, and 

(ii) State supplemental reinsurance payments parameters if applicable. 

* * * * * 

(d) Privacy and security. (1) If a State establishes a reinsurance program, the State must 

ensure that the applicable reinsurance entity’s collection of personally identifiable information is 

limited to information reasonably necessary for use in the calculation of reinsurance payments, 
CMS-9964-F 427 

and that use and disclosure of personally identifiable information is limited to those purposes for 

which the personally identifiable information was collected (including for purposes of data 

validation). 

(2) If a State establishes a reinsurance program, the State must ensure that the applicable 

reinsurance entity implements security standards that provide administrative, physical, and 

technical safeguards for the personally identifiable information consistent with the security 

standards described at 45 CFR 164.308, 164.310, and 164.312. 

12. Section 153.310 is amended by: 

A. Redesignating paragraphs (c) and (d) as paragraphs (e) and (f), respectively. 

B. Adding new paragraphs (a)(4), (c) and (d). 

The additions read as follows: 

§153.310 Risk adjustment administration. 

(a) * * * 

(4) Beginning in 2015, any State that is approved to operate an Exchange and elects to 

operate risk adjustment but has not been approved by HHS to operate risk adjustment prior to 

publication of its State notice of benefit and payment parameters for the applicable benefit year, 

will forgo implementation of all State functions in this subpart, and HHS will carry out all of the 

provisions of this subpart on behalf of the State. 

* * * * * 

(c) State responsibility for risk adjustment. (1) A State operating a risk adjustment 

program for a benefit year must administer the applicable Federally certified risk adjustment 

methodology through an entity that – 
CMS-9964-F 428 

(i) Is operationally ready to implement the applicable Federally certified risk adjustment 

methodology and process the resulting payments and charges; and 

(ii) Has experience relevant to operating the risk adjustment program. 

 (2) The State must ensure that the risk adjustment entity complies with all applicable 

provisions of subpart D of this part in the administration of the applicable Federally certified risk 

adjustment methodology. 

(3) The State must conduct oversight and monitoring of its risk adjustment program. 

(d) Certification for a State to operate risk adjustment. (1) To be approved by HHS to 

operate risk adjustment under a particular Federally certified risk adjustment methodology for a 

benefit year, a State must establish that it and its risk adjustment entity meet the standards set 

forth in paragraph (c) of this section. 

(2) To obtain such approval, the State must submit to HHS, in a form and manner 

specified by HHS, evidence that its risk adjustment entity meets these standards. 

* * * * * 

13. Section 153.320 is amended by revising paragraphs (a)(1) and (a)(2) to read as follows: 

§153.320 Federally certified risk adjustment methodology. 

(a) * * * 

(1) The risk adjustment methodology is developed by HHS and published in the 

applicable annual HHS notice of benefit and payment parameters; or 

(2) An alternate risk adjustment methodology is submitted by a State in accordance with 

§153.330, reviewed and certified by HHS, and published in the applicable annual HHS notice of 

benefit and payment parameters. 

* * * * * 
CMS-9964-F 429 

14. Section 153.330 is amended by— 

A. Redesignating paragraph (b) as paragraph (c). 

B. Adding new paragraph (b). 

The additions read as follows: 

§153.330 State alternate risk adjustment methodology. 

* * * * * 

 (b) Evaluation criteria for alternate risk adjustment methodology. An alternate risk 

adjustment methodology will be certified by HHS as a Federally certified risk adjustment 

methodology based on the following criteria: 

(1) The criteria listed in paragraph (a)(2) of this section; 

(2) Whether the methodology complies with the requirements of this subpart D; 

(3) Whether the methodology accounts for risk selection across metal levels; and 

(4) Whether each of the elements of the methodology are aligned. 

* * * * * 

15. Section 153.340 is amended by revising paragraph (b)(3) to read as follows: 

§153.340 Data collection under risk adjustment. 

* * * * * 

(b) * * * 

(3) If a State is operating a risk adjustment program, the State must ensure that any 

collection of personally identifiable information is limited to information reasonably necessary 

for use in the applicable risk adjustment model, calculation of plan average actuarial risk, or 

calculation of payments and charges. Except for purposes of data validation, the State may not 

collect or store any personally identifiable information for use as a unique identifier for an 
CMS-9964-F 430 

enrollee’s data, unless such information is masked or encrypted by the issuer, with the key to that 

masking or encryption withheld from the State. Use and disclosure of personally identifiable 

information is limited to those purposes for which the personally identifiable information was 

collected (including for purposes of data validation). 

 * * * * * 

16. Section 153.360 is added to subpart D to read as follows: 

§153.360 Application of risk adjustment to the small group market. 

Enrollees in a risk adjustment covered plan must be assigned to the applicable risk pool 

in the State in which the employer’s policy was filed and approved. 

17. Section 153.400 is revised to read as follows: 

§153.400 Reinsurance contribution funds. 

(a) General requirement. Each contributing entity must make reinsurance contributions 

annually: at the national contribution rate for all reinsurance contribution enrollees, in a manner 

specified by HHS; and at the additional State supplemental contribution rate if the State has 

elected to collect additional contributions under §153.220(d)(1), in a manner specified by the 

State. 

(1) A contributing entity must make reinsurance contributions for its self-insured group 

health plans and health insurance coverage except to the extent that: 

 (i) Such plan or coverage is not major medical coverage; 

 (ii) In the case of health insurance coverage, such coverage is not considered to be part of 

an issuer’s commercial book of business; 

(iii) Such plan or coverage is expatriate health coverage, as defined by the Secretary; or 
CMS-9964-F 431 

(iv) In the case of employer-provided health coverage, such coverage applies to 

individuals with respect to which benefits under Title XVIII of the Act (Medicare) are primary 

under the Medicare Secondary Payor rules under section 1862(b) of the Act and the regulations 

issued thereunder. 

(2) Accordingly, as specified in paragraph (a)(1) of this section, a contributing entity is 

not required to make contributions on behalf of the following: 

(i) A self-insured group health plan or health insurance coverage that consists solely of 

excepted benefits as defined by section 2791(c) of the PHS Act; 

(ii) Coverage offered by an issuer under contract to provide benefits under any of the 

following titles of the Act: 

(A) Title XVIII (Medicare); 

(B) Title XIX (Medicaid); or 

(C) Title XXI (Children’s Health insurance Program); 

(iii) A Federal or State high-risk pool, including the Pre-Existing Condition Insurance 

Plan Program; 

(iv) Basic health plan coverage offered by issuers under contract with a State as described 

in section 1331 of the Affordable Care Act; 

(v) A health reimbursement arrangement within the meaning of IRS Notice 2002-45 

(2002-2 CB 93) or any subsequent applicable guidance, that is integrated with a self-insured 

group health plan or health insurance coverage; 

 (vi) A health savings account within the meaning of section 223(d) of the Code; 

(vii) A health flexible spending arrangement within the meaning of section 125 of the 

Code; 
CMS-9964-F 432 

(viii) An employee assistance plan, disease management program, or wellness program 

that does not provide major medical coverage; 

(ix) A stop-loss policy or an indemnity reinsurance policy; 

(x) TRICARE and other military health benefits for active and retired uniformed services 

personnel and their dependents; 

(xi) A plan or coverage provided by an Indian Tribe to Tribal members and their spouses 

and dependents (and other persons of Indian descent closely affiliated with the Tribe), in the 

capacity of the Tribal members as Tribal members (and not in their capacity as current or former 

employees of the Tribe or their dependents); 

(xii) Health programs operated under the authority of the Indian Health Service; or 

(xiii) A self-insured group health plan or health insurance coverage that consists solely 

of benefits for prescription drugs. 

(b) Data requirements. Each contributing entity must submit to HHS data required to 

substantiate the contribution amounts for the contributing entity, in the manner and timeframe 

specified by HHS. 

18. Section 153.405 is added to read as follows: 

§153.405 Calculation of reinsurance contributions. 

(a) In general. The reinsurance contribution required from a contributing entity for its 

reinsurance contribution enrollees during a benefit year is calculated by multiplying: 

(1) The number of covered lives of reinsurance contribution enrollees during the 

applicable benefit year for all plans and coverage described in §153.400(a)(1) of the contributing 

entity; by 

(2) The contribution rate for the applicable benefit year. 
CMS-9964-F 433 

(b) Annual enrollment count. No later than November 15 of benefit year 2014, 2015, or 

2016, as applicable, a contributing entity must submit an annual enrollment count of the number 

of covered lives of reinsurance contribution enrollees for the applicable benefit year to HHS. 

The count must be determined as specified in paragraphs (d) or (e) of this section, as applicable. 

(c) Notification and payment. (1) Within 30 days of the submission of the annual 

enrollment count described in paragraph (b) of this section or by December 15 of the applicable 

benefit year, whichever is later, HHS will notify the contributing entity of the reinsurance 

contribution amount to be paid for the applicable benefit year. 

(2) A contributing entity must remit reinsurance contributions to HHS within 30 days 

after the date of the notification. 

(d) Procedures for counting covered lives for health insurance issuers. To determine the 

number of covered lives of reinsurance contribution enrollees under a health insurance plan for a 

benefit year, a health insurance issuer must use one of the following methods: 

(1) Adding the total number of lives covered for each day of the first nine months of the 

benefit year and dividing that total by the number of days in the first nine months; 

(2) Adding the total number of lives covered on any date (or more dates, if an equal 

number of dates are used for each quarter) during the same corresponding month in each of the 

first three quarters of the benefit year, and dividing that total by the number of dates on which a 

count was made. For this purpose, the same months must be used for each quarter (for example 

January, April and July) and the date used for the second and third quarter must fall within the 

same week of the quarter as the corresponding date used for the first quarter; or 

(3) Multiplying the average number of policies in effect for the first nine months of the 

benefit year by the ratio of covered lives per policy in effect, calculated using the prior National 
CMS-9964-F 434 

Association of Insurance Commissioners (NAIC) Supplemental Health Care Exhibit (or a form 

filed with the issuer’s State of domicile for the most recent time period). 

(e) Procedures for counting covered lives for self-insured group health plans. To 

determine the number of covered lives of reinsurance contribution enrollees under a self-insured 

group health plan for a benefit year, a plan must use one of the following methods: 

(1) One of the methods specified in either paragraph (d)(1) or paragraph (d)(2) of this 

section; 

(2) Adding the total number of lives covered on any date (or more dates, if an equal 

number of dates are used for each quarter) during the same corresponding month in each of the 

first three quarters of the benefit year (provided that the date used for the second and third 

quarters must fall within the same week of the quarter as the corresponding date used for the first 

quarter), and dividing that total by the number of dates on which a count was made, except that 

the number of lives covered on a date is calculated by adding the number of participants with 

self-only coverage on the date to the product of the number of participants with coverage other 

than self-only coverage on the date and a factor of 2.35. For this purpose, the same months must 

be used for each quarter (for example, January, April, and July); or 

 (3) Using the number of lives covered for the benefit year calculated based upon the 

“Annual Return/Report of Employee Benefit Plan” filed with the Department of Labor (Form 

5500) for the last applicable time period. For purposes of this paragraph (e)(3), the number of 

lives covered for the benefit year for a plan offering only self-only coverage equals the sum of 

the total participants covered at the beginning and end of the benefit year, as reported on the 

Form 5500, divided by 2, and the number of lives covered for the benefit year for a plan offering 

self-only coverage and coverage other than self-only coverage equals the sum of the total 
CMS-9964-F 435 

participants covered at the beginning and the end of the benefit year, as reported on the Form 

5500. 

(f) Procedures for counting covered lives for group health plans with a self-insured 

coverage option and an insured coverage option. 

(1) To determine the number of covered lives of reinsurance contribution enrollees under 

a group health plan with a self-insured coverage option and an insured coverage option for a 

benefit year, a plan must use one of the methods specified in either paragraph (d)(1) or paragraph 

(d)(2) of this section. 

(2) Notwithstanding paragraph (f)(1), a plan with multiple coverage options may use any 

of the counting methods specified for self-insured coverage or insured coverage, as applicable to 

each option, if it determines the number of covered lives under each option separately as if each 

coverage option provided major medical coverage (not including any coverage option that 

consists solely of excepted benefits as defined by section 2791(c) of the PHS Act, that only 

provides benefits related to prescription drugs, or that is a health reimbursement arrangement, 

health savings account, or health flexible spending arrangement). 

(g) Multiple group health plans maintained by the same plan sponsor. 

(1) General rule. If a plan sponsor maintains two or more group health plans (including 

one or more group health plans that provide health insurance coverage) that collectively provide 

major medical coverage for the same covered lives simultaneously, then those multiple plans 

must be treated as a single group health plan for purposes of calculating any reinsurance 

contribution amount due under this section. However, a plan sponsor may treat the multiple 

plans as separate group health plans for purposes of calculating any reinsurance contribution due 
CMS-9964-F 436 

under this section if it determines the number of covered lives under each separate group health 

plan as if the separate group health plan provided major medical coverage. 

(2) Plan sponsor. For purposes of this paragraph (g), the term “plan sponsor” means: 

(i) The employer, in the case of a plan established or maintained by a single employer; 

(ii) The employee organization, in the case of a plan established or maintained by an 

employee organization; 

(iii) The joint board of trustees, in the case of a multiemployer plan (as defined in section 

414(f) of the Code); 

(iv) The committee, in the case of a multiple employer welfare arrangement; 

(v) The cooperative or association that establishes or maintains a plan established or 

maintained by a rural electric cooperative or rural cooperative association (as such terms are 

defined in section 3(40)(B) of ERISA); 

(vi) The trustee, in the case of a plan established or maintained by a voluntary employees’ 

beneficiary association (meaning that the association is not merely serving as a funding vehicle 

for a plan that is established or maintained by an employer or other person); 

(vii) In the case of a plan, the sponsor of which is not described in paragraph (g)(2)(i) 

through (g)(2)(vi) of this section, the person identified by the terms of the document under which 

the plan is operated as the plan sponsor, or the person designated by the terms of the document 

under which the plan is operated as the plan sponsor, provided that designation is made, and that 

person has consented to the designation, by no later than the date by which the count of covered 

lives for that benefit year is required to be provided, after which date that designation for that 

benefit year may not be changed or revoked, and provided further that a person may be 

designated as the plan sponsor only if the person is one of the persons maintaining the plan (for 
CMS-9964-F 437 

example, one of the employers that is maintaining the plan with one or more other employers or 

employee organizations); or 

(viii) In the case of a plan, the sponsor of which is not described in paragraph (g)(2)(i) 

through (g)(2)(vi) of this section, and for which no identification or designation of a plan sponsor 

has been made under paragraph (g)(2)(i)(vii) of this section, each employer that maintains the 

plan (with respect to employees of that employer), each employee organization that maintains the 

plan (with respect to members of that employee organization), and each board of trustees, 

cooperative or association that maintains the plan. 

(3) Exception. A plan sponsor is not required to include as part of a single group health 

plan as determined under paragraph (g)(1) of this section any group health plan that consists 

solely of excepted benefits as defined by section 2791(c) of the PHS Act, that only provides 

benefits related to prescription drugs, or that is a health reimbursement arrangement, health 

savings account, or health flexible spending arrangement. 

(4) Procedures for counting covered lives for multiple group health plans treated as a 

single group health plan. The rules in this paragraph (g)(4) govern the determination of the 

average number of covered lives in a benefit year for any set of multiple self-insured group 

health plans or health insurance plans (or a combination of one or more self-insured group health 

plans and one or more health insurance plans) that are treated as a single group health plan under 

paragraph (g)(1) of this section. 

(i) Multiple group health plans including an insured plan. If at least one of the multiple 

plans is an insured plan, the average number of covered lives of reinsurance contribution 

enrollees must be calculated using one of the methods specified in either paragraph (d)(1) or 

paragraph (d)(2) of this section, applied across the multiple plans as a whole. The following 
CMS-9964-F 438 

information must be determined by the plan sponsor and reported to HHS, in a manner and 

timeframe specified by HHS: 

(A) The average number of covered lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans being treated as a single group health plan as 

determined by the plan sponsor and reported to HHS. 

(ii) Multiple group health plans not including an insured plan. If each of the multiple 

plans is a self-insured group health plan, the average number of covered lives of reinsurance 

contribution enrollees must be calculated using one of the methods specified either in paragraph 

(e)(1) or paragraph (e)(2) of this section, applied across the multiple plans as a whole. The 

following information must be determined by the plan sponsor and reported to HHS, in a manner 

and timeframe specified by HHS: 

(A) The average number of covered lives calculated; 

(B) The counting method used; and 

(C) The names of the multiple plans being treated as a single group health plan as 

determined by the plan sponsor. 

19. Section 153.410 is amended by revising paragraph (a) as follows: 

§153.410 Requests for reinsurance payments. 

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

payment when that issuer’s claims costs for an enrollee of that reinsurance-eligible plan has met 

the criteria for reinsurance payment set forth in subpart B of this part and the HHS notice of 

benefit and payment parameters and State notice of benefit and payment parameters for the 

applicable benefit year, if applicable. 
CMS-9964-F 439 

* * * * * 

20. Section 153.420 is added to subpart E to read as follows: 

§153.420 Data collection. 

(a) Data requirement. To be eligible for reinsurance payments, an issuer of a reinsuranceeligible plan must submit or make accessible all required reinsurance data in accordance with the 

reinsurance data collection approach established by the State, or by HHS on behalf of the State.

(b) Deadline for submission of data. An issuer of a reinsurance-eligible plan must submit 

or make accessible data to be considered for reinsurance payments for the applicable benefit year 

by April 30 of the year following the end of the applicable benefit year. 

21. Section 153.500 is amended by-- 

A. Revising the definitions of “Administrative costs” and “Allowable administrative 

costs.” 

B. Adding the definitions of “After-tax premiums earned,” “Profits,” and “Taxes and 

regulatory fees” in alphabetical order. 

The revisions and additions read as follows: 

§153.500 Definitions. 

* * * * * 

Administrative costs mean, with respect to a QHP, total non-claims costs incurred by the 

QHP issuer for the QHP, including taxes and regulatory fees. 

After-tax premiums earned mean, with respect to a QHP, premiums earned with respect 

to the QHP minus taxes and regulatory fees. 

Allowable administrative costs mean, with respect to a QHP, the sum of administrative 

costs of the QHP, other than taxes and regulatory fees, plus profits earned by the QHP, which 
CMS-9964-F 440 

sum is limited to 20 percent of after-tax premiums earned with respect to the QHP (including any 

premium tax credit under any governmental program), plus taxes and regulatory fees. 

* * * * * 

Profits mean, with respect to a QHP, the greater of: 

(1) Three percent of after-tax premiums earned, and 

(2) Premiums earned of the QHP minus the sum of allowable costs and administrative 

costs of the QHP. 

* * * * * 

Taxes and regulatory fees mean, with respect to a QHP, Federal and State licensing and 

regulatory fees paid with respect to the QHP as described in §158.161(a) of this subchapter, and 

Federal and State taxes and assessments paid with respect to the QHP as described in 

§158.162(a)(1) and (b)(1) of this subchapter. 

* * * * * 

22. Section 153.510 is amended by adding new paragraph (d) to read as follows: 

§153.510 Risk corridors establishment and payment methodology. 

* * * * * 

(d) Charge submission deadline. A QHP issuer must remit charges to HHS within 30 

days after notification of such charges. 

23. Section 153.520 is amended by revising paragraph (d) to read as follows: 

§153.520 Attribution and allocation of revenue and expense items. 

* * * * * 

(d) Attribution of reinsurance and risk adjustment to benefit year. A QHP issuer must 

attribute reinsurance payments and risk adjustment payments and charges to allowable costs for 
CMS-9964-F 441 

the benefit year with respect to which the reinsurance payments or risk adjustment calculations 

apply. 

* * * * * 

24. Section 153.530 is amended by – 

A. Revising paragraphs (a), (b) introductory text, (b)(1), (b)(2)(iii), and (c). 

B. Adding new paragraph (d). 

The revisions and additions read as follows: 

§153.530 Risk corridors data requirements. 

(a) Premium data. A QHP issuer must submit to HHS data on the premiums earned with 

respect to each QHP that the issuer offers in a manner specified by HHS. 

(b) Allowable costs. A QHP issuer must submit to HHS data on the allowable costs 

incurred with respect to each QHP that the QHP issuer offers in a manner specified by HHS. For 

purposes of this subpart, allowable costs must be– 

(1) Increased by any risk adjustment charges paid by the issuer for the QHP under the 

risk adjustment program established under subpart D of this part. 

(2) * * * 

(iii) Any cost-sharing reduction payments received by the issuer for the QHP to the extent 

not reimbursed to the provider furnishing the item or service. 

(c) Allowable administrative costs. A QHP issuer must submit to HHS data on the 

allowable administrative costs incurred with respect to each QHP that the QHP issuer offers in a 

manner specified by HHS. 

(d) Timeframes. For each benefit year, a QHP issuer must submit all information required 

under this section by July 31 of the year following the benefit year. 
CMS-9964-F 442 

25. Section 153.610 is amended by adding paragraph (f) to read as follows: 

§153.610 Risk adjustment issuer requirements.

* * * * * 

(f) Assessment and collection of user fees for HHS risk adjustment operations. Where 

HHS is operating risk adjustment on behalf of a State, an issuer of a risk adjustment covered plan 

(other than a student health plan or a plan not subject to 45 CFR 147.102, 147.104, 147.106, 

156.80, and subpart B of part 156) must, for each benefit year— 

(1) Submit or make accessible to HHS its monthly enrollment for the risk adjustment 

covered plan for the benefit year through the risk adjustment data collection approach established 

at §153.610(a), in a manner and timeframe specified by HHS; and 

(2) Remit to HHS an amount equal to the product of its monthly enrollment in the risk 

adjustment covered plan multiplied by the per-enrollee-per-month risk adjustment user fee 

specified in the annual HHS notice of benefit and payment parameters for the applicable benefit 

year. 

26. Section 153.630 is added to subpart G to read as follows: 

§153.630 Data validation requirements when HHS operates risk adjustment. 

(a) General requirement. An issuer of a risk adjustment covered plan in a State where 

HHS is operating risk adjustment on behalf of the State for the applicable benefit year must have 

an initial and second validation audit performed on its risk adjustment data as described in this 

section. 

(b) Initial validation audit. (1) An issuer of a risk adjustment covered plan must engage 

one or more independent auditors to perform an initial validation audit of a sample of its risk 

adjustment data selected by HHS
CMS-9964-F 443 

(2) The issuer must ensure that the initial validation auditors are reasonably capable of 

performing an initial data validation audit according to the standards established by HHS for 

such audit, and must ensure that the audit is so performed. 

(3) The issuer must ensure that each initial validation auditor is reasonably free of 

conflicts of interest, such that it is able to conduct the initial validation audit in an impartial 

manner and its impartiality is not reasonably open to question. 

(4) The issuer must ensure validation of the accuracy of risk adjustment data for a sample 

of enrollees selected by HHS. The issuer must ensure that the initial validation audit findings are 

submitted to HHS in a manner and timeframe specified by HHS. 

(c) Second validation audit. HHS will select a subsample of the risk adjustment data 

validated by the initial validation audit for a second validation audit. The issuer must comply 

with, and must ensure the initial validation auditor complies with, standards for such audit 

established by HHS, and must cooperate with, and must ensure that the initial validation auditor 

cooperates with, HHS and the second validation auditor in connection with such audit. 

(d) Data validation appeals. An issuer may appeal the findings of a second validation 

audit or the application of a risk score error rate to its risk adjustment payments and charges. 

 (e) Adjustment of payments and charges. HHS may adjust payments and charges for issuers 

that do not comply with audit requirements and standards, as specified in paragraphs (b) and (c) 

of this section. 

 (f) Data security and transmission. (1) An issuer must submit the risk adjustment data and 

source documentation for the initial and second validation audits specified by HHS to HHS or its 

designee in the manner and timeframe specified by HHS. 
CMS-9964-F 444 

(2) An issuer must ensure that it and its initial validation auditor comply with the security 

standards described at 45 CFR 164.308, 164.310, and 164.312 in connection with the initial 

validation audit, the second validation audit, and any appeal. 

27. Subpart H is added to read as follows:

Subpart H—Distributed Data Collection for HHS-Operated Programs 

Sec. 

153.700 Distributed data environment. 

153.710 Data requirements. 

153.720 Establishment and usage of masked enrollee identification numbers. 

153.730 Deadline for submission of data. 

Subpart H—Distributed Data Collection for HHS-Operated Programs 

§153.700 Distributed data environment. 

(a) Dedicated distributed data environments. For each benefit year in which HHS 

operates the risk adjustment or reinsurance program on behalf of a State, an issuer of a risk 

adjustment covered plan or a reinsurance-eligible plan in the State, as applicable, must establish 

a dedicated data environment and provide data access to HHS, in a manner and timeframe 

specified by HHS, for any HHS-operated risk adjustment and reinsurance program. 

(b) Timeline. An issuer must establish the dedicated data environment (and confirm 

proper establishment through successfully testing the environment to conform with applicable 

HHS standards for such testing) three months prior to the first date of full operation. 

§153.710 Data requirements. 

(a) Enrollment, claims, and encounter data. An issuer of a risk adjustment covered plan 

or a reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or 
CMS-9964-F 445 

reinsurance program, as applicable, must provide to HHS, through the dedicated data 

environment, access to enrollee-level plan enrollment data, enrollee claims data, and enrollee 

encounter data as specified by HHS. 

(b) Claims data. All claims data submitted by an issuer of a risk adjustment covered plan 

or a reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or 

reinsurance program, as applicable, must have resulted in payment by the issuer (or payment of 

cost sharing by the enrollee). 

(c) Claims data from capitated plans. An issuer of a risk adjustment covered plan or a 

reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or reinsurance 

program, as applicable, that does not generate individual enrollee claims in the normal course of 

business must derive the costs of all applicable provider encounters using its principal internal 

methodology for pricing those encounters. If the issuer does not have such a methodology, or 

has an incomplete methodology, it must supplement the methodology in a manner that yields 

derived claims that are reasonable in light of the specific service and insurance market that the 

plan is serving. 

§153.720 Establishment and usage of masked enrollee identification numbers. 

(a) Enrollee identification numbers. An issuer of a risk adjustment covered plan or a 

reinsurance-eligible plan in a State in which HHS is operating the risk adjustment or reinsurance 

program, as applicable, must – 

(1) Establish a unique masked enrollee identification number for each enrollee; and 

(2) Maintain the same masked enrollee identification number for an enrollee across 

enrollments or plans within the issuer, within the State, during a benefit year. 

(b) Prohibition on personally identifiable information. An issuer of a risk adjustment 
CMS-9964-F 446 

covered plan or a reinsurance-eligible plan in a State in which HHS is operating the risk 

adjustment or reinsurance program on behalf of the State, as applicable, may not – 

(1) Include enrollee’s personally identifiable information in the masked enrollee 

identification number; or 

 (2) Use the same masked enrollee identification number for different enrollees enrolled 

with the issuer. 

§153.730 Deadline for submission of data. 

A risk adjustment covered plan or a reinsurance-eligible plan in a State in which HHS is 

operating the risk adjustment or reinsurance program, as applicable, must submit data to be 

considered for risk adjustment payments and charges and reinsurance payments for the 

applicable benefit year by April 30 of the year following the applicable benefit year. 

PART 155—EXCHANGE ESTABLISHMENT STANDARDS AND OTHER RELATED 

STANDARDS UNDER THE AFFORDABLE CARE ACT 

28. The authority citation for part 155 continues to read as follows: 

Authority: Secs. 1301, 1302, 1303, 1304, 1311, 1312, 1313, 1321, 1322, 1331, 1334, 

1401, 1402, 1411, 1412, 1413. 

29. Section 155.20 is amended by— 

A. Revising the definitions of “Large employer” and “Small employer.” 

B. Adding definitions of “Federally-facilitated Exchange,” “Federally-facilitated 

SHOP,” and “Full-time employee” in alphabetical order. 

The revisions and additions read as follows: 

§155.20 Definitions. 

* * * * * 
CMS-9964-F 447 

Federally-facilitated Exchange means an Exchange established and operated within a 

State by the Secretary under section 1321(c)(1) of the Affordable Care Act.

Federally-facilitated SHOP means a Small Business Health Options Program established 

and operated within a State by the Secretary under section 1321(c)(1) of the Affordable Care Act.

Full-time employee has the meaning given in section 4980H (c)(4) of the Code effective 

for plan years beginning on or after January 1, 2016, except for operations of a Federallyfacilitated SHOP for which it is effective for plan years beginning on or after January 1, 2014 

and in connection with open enrollment activities beginning October 1, 2013. 

* * * * * 

Large employer means, in connection with a group health plan with respect to a calendar 

year and a plan year, an employer who employed an average of at least 101 employees on 

business days during the preceding calendar year and who employs at least 1 employee on the 

first day of the plan year. In the case of plan years beginning before January 1, 2016, a State 

may elect to define large employer by substituting “51 employees” for “101 employees.” The 

number of employees shall be determined using the method set forth in section 4980H(c)(2) of 

the Code, effective for plan years beginning on or after January 1, 2016, except for operations of 

a Federally-facilitated SHOP for which the method shall be used for plan years beginning on or 

after January 1, 2014 and in connection with open enrollment activities beginning October 1, 

2013. 

* * * * * 

Small employer means, in connection with a group health plan with respect to a calendar 

year and a plan year, an employer who employed an average of at least 1 but not more than 100 

employees on business days during the preceding calendar year and who employs at least 1 
CMS-9964-F 448 

employee on the first day of the plan year. In the case of plan years beginning before January 1, 

2016, a State may elect to define small employer by substituting “50 employees” for “100 

employees.” The number of employees shall be determined using the method set forth in section 

4980H(c)(2) of the Code, effective for plan years beginning on or after January 1, 2016, except 

for operations of a Federally-facilitated SHOP for which the method shall be used for plan years 

beginning on or after January 1, 2014 and in connection with open enrollment activities 

beginning October 1, 2013. 

* * * * * 

30. Section 155.220 is amended by revising paragraph (b) to read as follows— 

§155.220 Ability to States to permit agents and brokers to assist qualified individuals, 

qualified employers, or qualified employees enrolling in QHPs. 

* * * * * 

(b)(1) Web site disclosure. The Exchange or SHOP may elect to provide information 

regarding licensed agents and brokers on its Web site for the convenience of consumers seeking 

insurance through that Exchange and may elect to limit the information to information regarding 

licensed agents and brokers who have completed any required Exchange or SHOP registration 

and training process. 

(2) A Federally-facilitated Exchange or SHOP will limit the information provided on its 

Web site regarding licensed agents and brokers to information regarding licensed agents and 

brokers who have completed registration and training. 

* * * * * 

31. Section 155.305 is amended by revising paragraph (g)(3) to read as follows: 

§155.305 Eligibility standards. 
CMS-9964-F 449 

* * * * * 

(g) * * * 

 (3) Special rule for family policies. To the extent that an enrollment in a QHP in the 

individual market offered through an Exchange under a single policy covers two or more 

individuals who, if they were to enroll in separate individual policies would be eligible for 

different cost sharing, the Exchange must deem the individuals under such policy to be 

collectively eligible only for the category of eligibility last listed below for which all the 

individuals covered by the policy would be eligible: 

(i) Individuals not eligible for changes to cost sharing; 

(ii) Individuals described in §155.350(b) (the special cost-sharing rule for Indians 

regardless of income); 

(iii) Individuals described in paragraph (g)(2)(iii) of this section; 

(iv) Individuals described in paragraph (g)(2)(ii) of this section; 

(v) Individuals described in paragraph (g)(2)(i) of this section; and 

 (vi) Individuals described in §155.350(a) (the cost-sharing rule for Indians with 

household incomes under 300 percent of the FPL). 

* * * * * 

 32. Section 155.330 is amended by adding paragraph (g) to read as follows: 

§155.330 Eligibility redetermination during a benefit year. 

* * * * * 

 (g) Recalculation of advance payments of the premium tax credit and cost-sharing 

reductions. (1) When an eligibility redetermination in accordance with this section results in a 

change in the amount of advance payments of the premium tax credit for the benefit year, the 
CMS-9964-F 450 

Exchange must recalculate the amount of advance payments of the premium tax credit in such a 

manner as to — 

(i) Account for any advance payments already made on behalf of the tax filer for the 

benefit year for which information is available to the Exchange, such that the recalculated 

advance payment amount is projected to result in total advance payments for the benefit year that 

correspond to the tax filer’s total projected premium tax credit for the benefit year, calculated in 

accordance with 26 CFR 1.36B-3; and 

(ii) Ensure that the advance payment provided on the tax filer’s behalf is greater than or 

equal to zero and is calculated in accordance with 26 CFR 1.36B-3(d). 

(2) When an eligibility redetermination in accordance with this section results in a change 

in cost-sharing reductions, the Exchange must determine an individual eligible for the category 

of cost-sharing reductions that corresponds to his or her expected annual household income for 

the benefit year (subject to the special rule for family policies set forth in §155.305(g)(3)). 

 33. Section 155.340 is amended by adding paragraphs (e), (f), and (g) to read as follows: 

§155.340 Administration of advance payments of the premium tax credit and cost-sharing 

reductions. 

* * * * * 

 (e) Allocation of advance payments of the premium tax credit among policies. If one or 

more advance payments of the premium tax credit are to be made on behalf of a tax filer (or two 

tax filers covered by the same plan(s)), and individuals in the tax filers’ tax households are 

enrolled in more than one QHP or stand-alone dental plan, then the advance payment must be 

allocated as follows: 
CMS-9964-F 451 

 (1) That portion of the advance payment of the premium tax credit that is less than or 

equal to the aggregate adjusted monthly premiums, as defined in 26 CFR 1.36B-3(e), for the 

QHP policies properly allocated to EHB must be allocated among the QHP policies in a 

reasonable and consistent manner specified by the Exchange; and 

 (2) Any remaining advance payment of the premium tax credit must be allocated among 

the stand-alone dental policies in a reasonable and consistent manner specified by the Exchange. 

 (f) Allocation of advance payments of the premium tax credit among policies offered 

through a Federally-facilitated Exchange. If one or more advance payments of the premium tax 

credit are to be made on behalf of a tax filer (or two tax filers covered by the same plan(s)), and 

individuals in the tax filers’ tax households are enrolled in more than one QHP or stand-alone 

dental plan offered through a Federally-facilitated Exchange, then that portion of the advance 

payment of the premium tax credit that is less than or equal to the aggregate adjusted monthly 

premiums, as defined in 26 CFR 1.36B-3(e), properly allocated to EHB for the QHP policies, 

will be allocated among the QHP policies, as described in §155.340(f)(1); and any remaining 

advance payment of the premium tax credit will be allocated among the stand-alone dental 

policies based on the methodology described in §155.340(f)(2). 

 (1) That portion of the advance payment(s) of the premium tax credit to be allocated 

among QHP policies will be allocated based on the number of enrollees covered under the QHP, 

weighted by the age of the enrollees, using the default uniform age rating curve established by 

the Secretary of HHS under 45 CFR 147.102(e), with the portion allocated to any single QHP 

policy not to exceed the portion of the QHP’s adjusted monthly premium properly allocated to 

EHB. If the portion of the advance payment(s) of the premium tax credit allocated to a QHP 

under this subparagraph exceeds the portion of the same QHP’s adjusted monthly premium 
CMS-9964-F 452 

properly allocated to EHB, the remainder will be allocated evenly among all other QHPs in 

which individuals in the tax filers’ tax households are enrolled. 

 (2) That portion of the advance payment(s) of the premium tax credit to be allocated 

among stand-alone dental policies will be allocated based on the number of enrollees covered 

under the stand-alone dental policy, weighted by the age of the enrollees, using the default 

uniform age rating curve established by the Secretary of HHS under 45 CFR 147.102(e), with the 

portion allocated to any single stand-alone dental policy not to exceed the portion of the standalone dental policy premium properly allocated to EHB. If the portion of the advance 

payment(s) of the premium tax credit allocated to a stand-alone dental policy under this 

subparagraph exceeds the portion of the same policy’s premium properly allocated to EHB, the 

remainder will be allocated evenly among all other stand-alone dental policies in which 

individuals in the tax filers’ tax households are enrolled. 

 (g) Reduction of enrollee’s portion of premium to account for advance payments of the 

premium tax credit. If an Exchange is facilitating the collection and payment of premiums to 

QHP issuers and stand-alone dental plans on behalf of enrollees under §155.240, and if a QHP 

issuer or stand-alone dental plan has been notified that it will receive an advance payment of the 

premium tax credit on behalf of an enrollee for whom the Exchange is facilitating such functions, 

the Exchange must – 

 (1) Reduce the portion of the premium for the policy collected from the individual for 

the applicable month(s) by the amount of the advance payment of the premium tax credit; and 

 (2) Include with each billing statement, as applicable, to or for the individual the amount 

of the advance payment of the premium tax credit for the applicable month(s) and the remaining 

premium owed for the policy. 
CMS-9964-F 453 

34. Section 155.705 is amended by revising paragraph (b)(3), (b)(10), and (b)(11) to read 

as follows: 

§155.705 Functions of a SHOP. 

* * * * * 

(b) * * * 

(3)(i) SHOP options with respect to employer choice requirements. With regard to QHPs 

offered through the SHOP, the SHOP may allow a qualified employer to make one or more 

QHPs available to qualified employees by a method other than the method described in 

paragraph (b)(2) of this section. 

(ii) A Federally-facilitated SHOP will only permit a qualified employer to make available 

to qualified employees either: 

(A) All QHPs at the level of coverage selected by the employer as described in 

paragraph (b)(2) of this section, or 

(B) A single QHP. 

* * * * * 

(10) Participation rules. Subject to §147.104 of this subchapter, the SHOP may authorize 

uniform group participation rules for the offering of health insurance coverage in the SHOP. If 

the SHOP authorizes a minimum participation rate, such rate must be based on the rate of 

employee participation in the SHOP, not on the rate of employee participation in any particular 

QHP or QHPs of any particular issuer. 

(i) Subject to §147.104 of this subchapter, a Federally-facilitated SHOP must use a 

minimum participation rate of 70 percent, calculated as the number of qualified employees 

accepting coverage under the employer’s group health plan, divided by the number of qualified 
CMS-9964-F 454 

employees offered coverage, excluding from the calculation any employee who, at the time the 

employer submits the SHOP application, is enrolled in coverage through another employer’s 

group health plan or through a governmental plan such as Medicare, Medicaid, or TRICARE. 

(ii) Notwithstanding paragraph (b)(10)(i) of this section, a Federally-facilitated SHOP 

may utilize a different minimum participation rate in a State if there is evidence that a State law 

sets a minimum participation rate or that a higher or lower minimum participation rate is 

customarily used by the majority of QHP issuers in that State for products in the State’s small 

group market outside the SHOP. 

(11) Premium calculator. In the SHOP, the premium calculator described in § 155.205(b)(6) 

must facilitate the comparison of available QHPs after the application of any applicable 

employer contribution in lieu of any advance payment of the premium tax credit and any cost 

sharing reductions. 

(i) To determine the employer and employee contributions, a SHOP may establish one or 

more standard methods that employers may use to define their contributions toward employee 

and dependent coverage. 

(ii) A Federally-facilitated SHOP must use the following method for employer 

contributions: 

(A) The employer will select a level of coverage as described in paragraph (b)(2) and 

(b)(3) of this section. 

(B) The employer will select a QHP within that level of coverage to serve as a reference 

plan on which contributions will be based. 
CMS-9964-F 455 

(C) The employer will define a percentage contribution toward premiums for employeeonly coverage under the reference plan and, if dependent coverage is offered, a percentage 

contribution toward premiums for dependent coverage under the reference plan. 

(D) Either State law or the employer may require that a Federally-facilitated SHOP base 

contributions on a calculated composite premium for the reference plan for employees, for adult 

dependents, and for dependents below age 21. 

(E) The resulting contribution amounts for each employee’s coverage may then be 

applied toward the QHP selected by the employee. 

 35. Section 155.1030 is added to read as follows: 

§155.1030 QHP certification standards related to advance payments of the premium tax 

credit and cost-sharing reductions. 

 (a) Review of plan variations for cost-sharing reductions. (1) An Exchange must ensure 

that each issuer that offers, or intends to offer a health plan at any level of coverage in the 

individual market on the Exchange submits the required plan variations for the health plan as 

described in §156.420 of this subchapter. The Exchange must certify that the plan variations 

meet the requirements of §156.420. 

 (2) The Exchange must provide to HHS the actuarial values of each QHP and silver plan 

variation, calculated under §156.135 of this subchapter, in the manner and timeframe established 

by HHS. 

 (b) Information for administering advance payments of the premium tax credit and 

advance payments of cost-sharing reductions. (1) The Exchange must collect and review 

annually the rate allocation, the expected allowed claims cost allocation, and the actuarial 
CMS-9964-F 456 

memorandum that an issuer submits to the Exchange under §156.470 of this subchapter, to 

ensure that such allocations meet the standards set forth in §156.470(c) and (d). 

 (2) The Exchange must submit, in the manner and timeframe established by HHS, to 

HHS the approved allocations and actuarial memorandum underlying the approved allocations 

for each health plan at any level of coverage or stand-alone dental plan offered, or intended to be 

offered in the individual market on the Exchange. 

 (3) The Exchange must collect annually any estimates and supporting documentation 

that a QHP issuer submits to receive advance payments of certain cost-sharing reductions, under 

§156.430(a) of this subchapter, and submit, in the manner and timeframe established by HHS, 

the estimates and supporting documentation to HHS for review. 

 (4) HHS may use the information provided to HHS by the Exchange under this section 

for the approval of the estimates that an issuer submits for advance payments of cost-sharing 

reductions, as described in §156.430 of this subchapter, and the oversight of the advance 

payments of cost-sharing reductions and premium tax credits programs. 

 (c) Multi-State plans. The U.S. Office of Personnel Management will ensure compliance 

with the standards referenced in this section for multi-State plans, as defined in §155.1000(a). 

PART 156 – HEALTH INSURANCE ISSUER STANDARDS UNDER THE 

AFFORDABLE CARE ACT, INCLUDING STANDARDS RELATED TO EXCHANGES 

36. The authority citation for part 156 is revised to read as follows: 

Authority: Title I of the Affordable Care Act, sections 1301–1304, 1311–1312, 1321–

1322, 1324, 1334, 1342–1343, 1401–1402, and 1412, Pub. L. 111-148, 124 Stat. 119 (42 U.S.C. 

18021–18024, 18031–18032, 18041–18042, 18044, 18054, 18061, 18063, 18071, 18082, 26 

U.S.C. 36B, and 31 U.S.C. 9701). 
CMS-9964-F 457 

37. Section 156.20 is amended by adding definitions for “Federally-facilitated SHOP” 

and “Issuer group” in alphabetical order to read as follows: 

§156.20 Definitions. 

* * * * * 

Federally-facilitated SHOP has the meaning given to the term in § 155.20 of this 

subchapter. 

* * * * * 

Issuer group means all entities treated under subsection (a) or (b) of section 52 of the 

Internal Revenue Code of 1986 as a member of the same controlled group of corporations as (or 

under common control with) a health insurance issuer, or issuers affiliated by the common use of 

a nationally licensed service mark. 

 * * * * * 

 38. Section 156.50 is amended by revising paragraph (b) and by adding paragraph (c) to 

read as follows: 

§156.50 Financial support. 

 * * * * * 

(b) Requirement for State-based Exchange user fees. A participating issuer must remit 

user fee payments, or any other payments, charges, or fees, if assessed by a State-based 

Exchange under §155.160 of this subchapter. 

(c) Requirement for Federally-facilitated Exchange user fee. To support the functions of 

Federally-facilitated Exchanges, a participating issuer offering a plan through a Federallyfacilitated Exchange must remit a user fee to HHS each month, in the timeframe and manner 

established by HHS, equal to the product of the monthly user fee rate specified in the annual 
CMS-9964-F 458 

HHS notice of benefit and payment parameters for the applicable benefit year and the monthly 

premium charged by the issuer for each policy under the plan where enrollment is through a 

Federally-facilitated Exchange. 

 39. Section 156.200 is amended by adding paragraphs (f) and (g) to read as follows: 

§156.200 QHP issuer participation standards. 

* * * * * 

(f) Broker compensation in a Federally-facilitated Exchange. A QHP issuer must pay the 

same broker compensation for QHPs offered through a Federally-facilitated Exchange that the 

QHP issuer pays for similar health plans offered in the State outside a Federally-facilitated 

Exchange. 

(g) Certification standard specific to a Federally-facilitated Exchange. A Federallyfacilitated Exchange may certify a QHP in the individual market of a Federally-facilitated 

Exchange only if the QHP issuer meets one of the conditions below: 

(1) The QHP issuer also offers through a Federally-facilitated SHOP serving that State at 

least one small group market QHP at the silver level of coverage and one at the gold level of 

coverage as described in section 1302(d) of the Affordable Care Act; 

(2) The QHP issuer does not offer small group market products in that State, but another 

issuer in the same issuer group offers through a Federally-facilitated SHOP serving that State at 

least one small group market QHP at the silver level of coverage and one at the gold level of 

coverage; or 

(3) Neither the issuer nor any other issuer in the same issuer group has a share of the 

small group market, as determined by HHS, greater than 20 percent, based on the earned 

premiums submitted by all issuers in the State’s small group market, under §158.110 of this 
CMS-9964-F 459 

subchapter, on the reporting date immediately preceding the due date of the application for QHP 

certification. 

 40. Section 156.215 is added to read as follows: 

§156.215 Advance payments of the premium tax credit and cost-sharing reduction 

standards. 

 (a) Standards relative to advance payments of the premium tax credit and cost-sharing 

reductions. In order for a health plan to be certified as a QHP initially and to maintain 

certification to be offered in the individual market on the Exchange, the issuer must meet the 

requirements related to the administration of cost-sharing reductions and advance payments of 

the premium tax credit set forth in subpart E of this part. 

 (b) [Reserved] 

41. Section 156.285 is amended by adding paragraph (c)(7) to read as follows: 

§156.285 Additional standards specific to SHOP. 

* * * * * 

(c) * * * 

 (7) A QHP issuer must enroll a qualified employee only if the SHOP – 

(i) Notifies the QHP issuer that the employee is a qualified employee; and 

(ii) Transmits information to the QHP issuer as provided in § 155.400(a) of this 

subchapter. 

 * * * * * 

 42. Subpart E is added to read as follows: 

Subpart E – Health Insurance Issuer Responsibilities with Respect to Advance Payments of 

the Premium Tax Credit and Cost-Sharing Reductions 
CMS-9964-F 460 

Sec. 

156.400 Definitions. 

156.410 Cost-sharing reductions for enrollees. 

156.420 Plan variations. 

156.425 Changes in eligibility for cost-sharing reductions. 

156.430 Payment for cost-sharing reductions. 

156.440 Plans eligible for advance payments of the premium tax credit and cost-sharing 

reductions. 

156.460 Reduction of enrollee’s share of premium to account for advance payments of the 

premium tax credit. 

156.470 Allocation of rates and claims costs for advance payments of cost-sharing reductions 

and the premium tax credit. 

Subpart E – Health Insurance Issuer Responsibilities with Respect to Advance Payments of 

the Premium Tax Credit and Cost-Sharing Reductions 

§156.400 Definitions. 

 The following definitions apply to this subpart: 

Advance payments of the premium tax credit has the meaning given to the term in 

§155.20 of this subchapter. 

Affordable Care Act has the meaning given to the term in §155.20 of this subchapter. 

Annual limitation on cost sharing means the annual dollar limit on cost sharing required 

to be paid by an enrollee that is established by a particular qualified health plan. 
CMS-9964-F 461 

De minimis variation means the allowable variation in the AV of a health plan that does 

not result in a material difference in the true dollar value of the health plan as established in 

§156.140(c). 

De minimis variation for a silver plan variation means a single percentage point. 

Federal poverty level or FPL has the meaning given to the term in §155.300(a) of this 

subchapter. 

Indian has the meaning given to the term in §155.300(a) of this subchapter. 

Limited cost sharing plan variation means, with respect to a QHP at any level of 

coverage, the variation of such QHP described in §156.420(b)(2). 

Maximum annual limitation on cost sharing means the highest annual dollar amount that 

qualified health plans (other than QHPs with cost-sharing reductions) may require in cost sharing 

for a particular year, as established for that year under §156.130. 

Most generous or more generous means, between a QHP (including a standard silver 

plan) or plan variation, and one or more other plan variations of the same QHP, the QHP or plan 

variation designed for the category of individuals last listed in §155.305(g)(3) of this subchapter. 

Plan variation means a zero cost sharing plan variation, a limited cost sharing plan 

variation, or a silver plan variation. 

Reduced maximum annual limitation on cost sharing means the dollar value of the 

maximum annual limitation on cost sharing for a silver plan variation that remains after applying 

the reduction, if any, in the maximum annual limitation on cost sharing required by section 1402 

of the Affordable Care Act as announced in the annual HHS notice of benefit and payment 

parameters. 
CMS-9964-F 462 

Silver plan variation means, with respect to a standard silver plan, any of the variations of 

that standard silver plan described in §156.420(a). 

Stand-alone dental plan means a plan offered through an Exchange under §155.1065 of 

this subchapter.

Standard plan means a QHP offered at one of the four levels of coverage, defined at 

§156.140, with an annual limitation on cost sharing that conforms to the requirements of 

§156.130(a). A standard plan at the bronze, silver, gold, or platinum level of coverage is referred 

to as a standard bronze plan, a standard silver plan, a standard gold plan, and a standard platinum 

plan, respectively. 

Zero cost sharing plan variation means, with respect to a QHP at any level of coverage, 

the variation of such QHP described in §156.420(b)(1). 

§156.410 Cost-sharing reductions for enrollees. 

(a) General requirement. A QHP issuer must ensure that an individual eligible for costsharing reductions, as demonstrated by assignment to a particular plan variation, pays only the 

cost sharing required of an eligible individual for the applicable covered service under the plan 

variation. The cost-sharing reduction for which an individual is eligible must be applied when 

the cost sharing is collected. 

(b) Assignment to applicable plan variation. If an individual is determined to be eligible 

to enroll in a QHP in the individual market offered through an Exchange and elects to do so, the 

QHP issuer must assign the individual under enrollment and eligibility information submitted by 

the Exchange as follows – 

(1) If the individual is determined eligible by the Exchange for cost-sharing reductions 

under §155.305(g)(2)(i), (ii), or (iii) of this subchapter (subject to the special rule for family 
CMS-9964-F 463 

policies set forth in §155.305(g)(3) of this subchapter) and chooses to enroll in a silver health 

plan, the QHP issuer must assign the individual to the silver plan variation of the selected silver 

health plan described in §156.420(a)(1), (2), or (3), respectively. 

(2) If the individual is determined eligible by the Exchange for cost-sharing reductions 

for Indians with lower household income under §155.350(a) of this subchapter (subject to the 

special rule for family policies set forth in §155.305(g)(3) of this subchapter), and chooses to 

enroll in a QHP, the QHP issuer must assign the individual to the zero cost sharing plan variation 

of the selected QHP with all cost sharing eliminated described in §156.420(b)(1). 

(3) If the individual is determined by the Exchange to be eligible for cost-sharing 

reductions for Indians regardless of household income under §155.350(b) of this subchapter 

(subject to the special rule for family policies set forth in §155.305(g)(3) of this subchapter), and 

chooses to enroll in a QHP, the QHP issuer must assign the individual to the limited cost sharing 

plan variation of the selected QHP with the prohibition on cost sharing for benefits received from 

the Indian Health Service and certain other providers described in §156.420(b)(2). 

(4) If the individual is determined by the Exchange not to be eligible for cost-sharing 

reductions (including eligibility under the special rule for family policies set forth in 

§155.305(g)(3) of this subchapter), and chooses to enroll in a QHP, the QHP issuer must assign 

the individual to the selected QHP with no cost-sharing reductions. 

§156.420 Plan variations. 

(a) Submission of silver plan variations. For each of its silver health plans that an issuer 

offers, or intends to offer in the individual market on an Exchange, the issuer must submit 

annually to the Exchange for certification prior to each benefit year the standard silver plan and 

three variations of the standard silver plan, as follows – 
CMS-9964-F 464 

(1) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(i) of this 

subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum annual 

limitation on cost sharing specified in the annual HHS notice of benefit and payment parameters 

for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 94 

percent plus or minus the de minimis variation for a silver plan variation; 

(2) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(ii) of this 

subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum annual 

limitation on cost sharing specified in the annual HHS notice of benefit and payment parameters 

for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 87 

percent plus or minus the de minimis variation for a silver plan variation; and 

(3) For individuals eligible for cost-sharing reductions under §155.305(g)(2)(iii) of this 

subchapter, a variation of the standard silver plan with: 

(i) An annual limitation on cost sharing no greater than the reduced maximum annual 

limitation on cost sharing specified in the annual HHS notice of benefit and payment parameters 

for such individuals, and 

(ii) Other cost-sharing reductions such that the AV of the silver plan variation is 73 

percent plus or minus the de minimis variation for a silver plan variation (subject to 

§156.420(h)). 
CMS-9964-F 465 

(b) Submission of zero and limited cost sharing plan variations. For each of its health 

plans at any level of coverage that an issuer offers, or intends to offer in the individual market on 

an Exchange, the issuer must submit to the Exchange for certification the health plan and two 

variations of the health plan, as follows – 

(1) For individuals eligible for cost-sharing reductions under §155.350(a) of this 

subchapter, a variation of the health plan with all cost sharing eliminated; and 

(2) For individuals eligible for cost-sharing reductions under §155.350(b) of this 

subchapter, a variation of the health plan with no cost sharing on any item or service that is an 

EHB furnished directly by the Indian Health Service, an Indian Tribe, Tribal Organization, or 

Urban Indian Organization (each as defined in 25 U.S.C. 1603), or through referral under 

contract health services. 

(c) Benefit and network equivalence in silver plan variations. A standard silver plan and 

each silver plan variation thereof must cover the same benefits and providers, and require the 

same out-of-pocket spending for benefits other than essential health benefits. Each silver plan 

variation is subject to all requirements applicable to the standard silver plan (except for the 

requirement that the plan have an AV as set forth in §156.140(b)(2)). 

(d) Benefit and network equivalence in zero and limited cost sharing plan variations. A 

QHP and each zero cost sharing plan variation or limited cost sharing plan variation thereof must 

cover the same benefits and providers, and require the same out-of-pocket spending for benefits 

other than essential health benefits. A limited cost sharing plan variation must have the same 

cost sharing on items or services not described in paragraph (b)(2) of this section as the QHP 

with no cost-sharing reductions. Each zero cost sharing plan variation or limited cost sharing 
CMS-9964-F 466 

plan variation is subject to all requirements applicable to the QHP (except for the requirement 

that the plan have an AV as set forth in §156.140(b)). 

(e) Decreasing cost sharing in higher AV silver plan variations. The cost sharing 

required of enrollees under any silver plan variation of a standard silver plan for an essential 

health benefit from a provider (including a provider outside the plan’s network) may not exceed 

the corresponding cost sharing required in the standard silver plan or any other silver plan 

variation thereof with a lower AV. 

(f) Minimum AV differential between 70 percent and 73 percent silver plan variations. 

Notwithstanding any permitted de minimis variation in AV for a health plan or permitted de 

minimis variation for a silver plan variation, the AVs of a standard silver plan and the silver plan 

variation thereof described in paragraph (a)(3) of this section must differ by at least 2 percentage 

points. 

(g) Multi-state plans. The U.S. Office of Personnel Management will determine the time 

and manner for multi-State plans, as defined in §155.1000(a) of this subchapter, to submit silver 

plan variations, zero cost sharing plan variations, and limited cost sharing plan variations. 

§156.425 Changes in eligibility for cost-sharing reductions. 

(a) Effective date of change in assignment. If the Exchange notifies a QHP issuer of a 

change in an enrollee’s eligibility for cost-sharing reductions (including a change in the 

individual’s eligibility under the special rule for family policies set forth in §155.305(g)(3) of 

this subchapter due to a change in eligibility of another individual on the same policy), then the 

QHP issuer must change the individual’s assignment such that the individual is assigned to the 

applicable standard plan or plan variation of the QHP as required under §156.410(b) as of the 

effective date of eligibility required by the Exchange. 
CMS-9964-F 467 

(b) Continuity of deductible and out-of-pocket amounts. In the case of a change in 

assignment to a different plan variation (or standard plan without cost-sharing reductions) of the 

same QHP in the course of a benefit year under this section, the QHP issuer must ensure that any 

cost sharing paid by the applicable individual under previous plan variations (or standard plan 

without cost-sharing reductions) for that benefit year is taken into account in the new plan 

variation (or standard plan without cost-sharing reductions) for purposes of calculating cost 

sharing based on aggregate spending by the individual, such as for deductibles or for the annual 

limitations on cost sharing. 

§156.430 Payment for cost-sharing reductions. 

(a) Estimates of value of cost-sharing reductions for purposes of advance payments. (1) 

For each health plan that an issuer offers, or intends to offer, in the individual market on an 

Exchange as a QHP, the issuer must provide to the Exchange annually prior to the benefit year, 

for approval by HHS, an estimate of the dollar value of the cost-sharing reductions to be 

provided over the benefit year. The estimate must: 

(i) If the QHP is a silver health plan, identify separately the per member per month dollar 

value of the cost-sharing reductions to be provided under each silver plan variation identified in 

§156.420(a)(1), (2), and (3); 

(ii) Regardless of the level of coverage of the QHP, identify the per member per month 

dollar value of the cost-sharing reductions to be provided under the zero cost sharing plan 

variation; 

(iii) Be accompanied by supporting documentation validating the estimate; and 

(iv) Be developed using the methodology specified by HHS in the applicable annual HHS 

notice of benefit and payment parameters. 
CMS-9964-F 468 

(2) If an issuer seeks advance payments for the cost-sharing reductions to be provided 

under the limited cost sharing plan variation of a health plan it offers, or intends to offer, in the 

individual market on the Exchange as a QHP at any level of coverage, the issuer must provide to 

the Exchange annually prior to the benefit year, for approval by HHS, an estimate of the per 

member per month dollar value of the cost-sharing reductions to be provided over the benefit 

year under such limited cost sharing plan variation. The estimate must: 

(i) Be accompanied by supporting documentation validating the estimate; and 

(ii) Be developed using the methodology specified by HHS in the annual HHS notice of 

benefit and payment parameters. 

(3) HHS’s approval of the estimate will be based on whether the estimate is made 

consistent with the methodology specified by HHS in the annual HHS notice of benefit and 

payment parameters. 

(4) Issuers of multi-State plans, as defined in §155.1000(a) of this subchapter, must 

provide the estimates described in paragraphs (a)(1) and (2) of this section to the U.S. Office of 

Personnel Management, in the time and manner established by the U.S. Office of Personnel 

Management. 

(b) Advance payments for cost-sharing reductions. (1) A QHP issuer will receive 

periodic advance payments based on the approved advance estimates provided under paragraph 

(a) of this section and the actual enrollment in the applicable plan variation. 

 (2) HHS may adjust the advance payment amount for a particular QHP during the benefit 

year if the QHP issuer provides evidence, certified by a member of the American Academy of 

Actuaries in accordance with generally accepted actuarial principles and methodologies, that the 

advance payments for a particular QHP are likely to be substantially different than the cost-
CMS-9964-F 469 

sharing reduction amounts that the QHP provides that will be reimbursed by HHS. 

(c) Submission of actual amounts. (1) General. For each plan variation that a QHP issuer 

offers on the Exchange, it must submit to HHS, in the manner and timeframe established by 

HHS, for each policy, the total allowed costs for essential health benefits charged for the policy 

for the benefit year, broken down by all of the following: 

(i) The amount the issuer paid. 

(ii) The amount the enrollee(s) paid. 

(iii) The amount the enrollee(s) would have paid under the standard plan without costsharing reductions. 

(2) Standard methodology. A QHP issuer must calculate the value of the amount the 

enrollee(s) would have paid under the standard plan without cost-sharing reductions by applying 

the actual cost-sharing requirements for the standard plan to the allowed costs for essential health 

benefits under the enrollee’s policy for the benefit year. 

(3) [Reserved] 

(4) [Reserved] 

(5) Reimbursement of providers. In the case of a benefit for which the QHP issuer 

compensates an applicable provider in whole or in part on a fee-for-service basis, allowed costs 

associated with the benefit may be included in the calculation of the amount that an enrollee(s) 

would have paid under the standard plan without cost-sharing reductions only to the extent the 

amount was either payable by the enrollee(s) as cost sharing under the plan variation or was 

reimbursed to the provider by the QHP issuer. 
CMS-9964-F 470 

(d) Reconciliation of amounts. HHS will perform periodic reconciliations of any advance 

payments of cost-sharing reductions provided to a QHP issuer under paragraph (b) of this section 

against – 

(1) The actual amount of cost-sharing reductions provided to enrollees and reimbursed to 

providers by the QHP issuer for benefits for which the QHP issuer compensates the applicable 

providers in whole or in part on a fee-for-service basis; and 

(2) The actual amount of cost-sharing reductions provided to enrollees for benefits for 

which the QHP issuer compensates the applicable providers in any other manner. 

(e) Payment of discrepancies. If the actual amounts of cost-sharing reductions described 

in paragraphs (d)(1) and (2) of this section are – 

(1) More than the amount of advance payments provided and the QHP issuer has timely 

provided the actual amounts of cost-sharing reductions as required under paragraph (c) of this 

section, HHS will reimburse the QHP issuer for the difference; and 

(2) Less than the amount of advance payments provided, the QHP issuer must repay the 

difference to HHS in the manner and timeframe specified by HHS. 

(f) Cost-sharing reductions during special periods. (1) Notwithstanding the cost-sharing 

reduction reconciliation process described in paragraphs (c) through (e) of this section, a QHP 

issuer will not be eligible for reimbursement of any cost-sharing reductions provided following a 

termination of coverage effective date with respect to a grace period as described in 

§155.430(b)(2)(ii)(A) or (B) of this subchapter. However, the QHP issuer will be eligible for 

reimbursement of cost-sharing reductions provided prior to the termination of coverage effective 

date. Advance payments of cost-sharing reductions will be paid to a QHP issuer prior to a 

determination of termination (including during any grace period, but the QHP issuer will be 
CMS-9964-F 471 

required to repay any advance payments made with respect to any month after any termination of 

coverage effective date during a grace period). 

(2) Notwithstanding the cost-sharing reduction reconciliation process described in 

paragraphs (c) through (e) of this section, if the termination of coverage effective date is prior to 

the determination of termination other than in the circumstances described in paragraph (f)(1) of 

this section, and if the termination (or the late determination thereof) is the fault of the QHP 

issuer, as reasonably determined by the Exchange, the QHP issuer will not be eligible for 

advance payments and reimbursement for cost-sharing reductions provided during the period 

following the termination of coverage effective date and prior to the determination of the 

termination. 

(3) Subject to the requirements of the cost-sharing reduction reconciliation process 

described in paragraphs (c) through (e) of this section, if the termination of coverage effective 

date is prior to the determination of termination other than in the circumstances described in 

paragraph (f)(1) of this section, and if the reason for the termination (or late determination 

thereof) is not the fault of the QHP issuer, as reasonably determined by the Exchange, the QHP 

issuer will be eligible for advance payments and reimbursement for cost-sharing reductions 

provided during such period. 

(4) Subject to the requirements of the cost-sharing reduction reconciliation process 

described in paragraphs (c) through (e) of this section, a QHP issuer will be eligible for advance 

payments and reimbursement for cost-sharing reductions provided during any period of coverage 

pending resolution of inconsistencies in information required to determine eligibility for 

enrollment under §155.315(f) of this subchapter. 
CMS-9964-F 472 

(g) Prohibition on reduction in payments to Indian health providers. If an Indian is 

enrolled in a QHP in the individual market through an Exchange and is furnished an item or 

service directly by the Indian Health Service, an Indian Tribe, Tribal Organization, or Urban 

Indian Organization, or through referral under contract health services, the QHP issuer may not 

reduce the payment to any such entity for such item or service by the amount of any cost sharing 

that would be due from the Indian but for the prohibitions on cost sharing set forth in 

§156.410(b)(2) and (3). 

§156.440 Plans eligible for advance payments of the premium tax credit and cost-sharing 

reductions. 

 Except as noted in paragraph (a) through (c) of this section, the provisions of this subpart 

apply to qualified health plans offered in the individual market on the Exchange. 

(a) Catastrophic plans. The provisions of this subpart do not apply to catastrophic plans 

described in §156.155. 

(b) Stand-alone dental plans. The provisions of this subpart, to the extent relating to 

cost-sharing reductions, do not apply to stand-alone dental plans. The provisions of this subpart, 

to the extent relating to advance payments of the premium tax credit, apply to stand-alone dental 

plans. 

 (c) Child-only plans. The provisions of this subpart apply to child-only QHPs, described 

in §156.200(c)(2). 

§156.460 Reduction of enrollee’s share of premium to account for advance payments of the 

premium tax credit. 
CMS-9964-F 473 

 (a) Reduction of enrollee’s share of premium to account for advance payments of the 

premium tax credit. A QHP issuer that receives notice from the Exchange that an individual 

enrolled in the issuer’s QHP is eligible for an advance payment of the premium tax credit must – 

 (1) Reduce the portion of the premium charged to or for the individual for the applicable 

month(s) by the amount of the advance payment of the premium tax credit; 

 (2) Notify the Exchange of the reduction in the portion of the premium charged to the 

individual in accordance with §156.265(g); and 

 (3) Include with each billing statement, as applicable, to or for the individual the amount 

of the advance payment of the premium tax credit for the applicable month(s), and the remaining 

premium owed. 

 (b) Delays in payment. A QHP issuer may not refuse to commence coverage under a 

policy or terminate coverage on account of any delay in payment of an advance payment of the 

premium tax credit on behalf of an enrollee if the QHP issuer has been notified by the Exchange 

under §155.340(a) of this subchapter that the QHP issuer will receive such advance payment.

§156.470 Allocation of rates and claims costs for advance payments of cost-sharing 

reductions and the premium tax credit. 

(a) Allocation to additional health benefits for QHPs. An issuer must provide to the 

Exchange annually for approval, in the manner and timeframe established by HHS, for each 

health plan at any level of coverage offered, or intended to be offered, in the individual market 

on an Exchange, an allocation of the rate and the expected allowed claims costs for the plan, in 

each case, to: 

(1) EHB, other than services described in §156.280(d)(1), and 
CMS-9964-F 474 

(2) Any other services or benefits offered by the health plan not described paragraph 

(a)(1) of this section. 

(b) Allocation to additional health benefits for stand-alone dental plans. An issuer must 

provide to the Exchange annually for approval, in the manner and timeframe established by 

HHS, for each stand-alone dental plan offered, or intended to be offered, in the individual market 

on the Exchange, a dollar allocation of the expected premium for the plan, to: 

(1) The pediatric dental essential health benefit, and 

(2) Any benefits offered by the stand-alone dental plan that are not the pediatric dental 

essential health benefit. 

(c) Allocation standards for QHPs. The issuer must ensure that the allocation described 

in paragraph (a) of this section— 

(1) Is performed by a member of the American Academy of Actuaries in accordance with 

generally accepted actuarial principles and methodologies; 

(2) Reasonably reflects the allocation of the expected allowed claims costs attributable to 

EHB (excluding those services described in §156.280(d)(1)); 

(3) Is consistent with the allocation applicable to State-required benefits to be submitted 

by the issuer under §155.170(c) of this subchapter, and the allocation requirements described in 

§156.280(e)(4) for certain services; and 

(4) Is calculated under the fair health insurance premium standards described at 45 CFR 

147.102, the single risk pool standards described at 45 CFR 156.80, and the same premium rate 

standards described at 45 CFR 156.255. 

(d) Allocation standards for stand-alone dental plans. The issuer must ensure that the 

dollar allocation described in paragraph (b) of this section is performed by a member of the 
CMS-9964-F 475 

American Academy of Actuaries in accordance with generally accepted actuarial principles and 

methodologies. 

(e) Disclosure of attribution and allocation methods. An issuer of a health plan at any 

level of coverage or a stand-alone dental plan offered, or intended to be offered, in the individual 

market on the Exchange must submit to the Exchange annually for approval, an actuarial 

memorandum, in the manner and timeframe specified by HHS, with a detailed description of the 

methods and specific bases used to perform the allocations set forth in paragraphs (a) and (b), 

and demonstrating that the allocations meet the standards set forth in paragraphs (c) and (d) of 

this section, respectively. 

(f) Multi-State plans. Issuers of multi-State plans, as defined in §155.1000(a) of this 

subchapter, must submit the allocations and actuarial memorandum described in this section to 

the U.S. Office of Personnel Management, in the time and manner established by the U.S. Office 

of Personnel Management. 

PART 157—EMPLOYER INTERACTIONS WITH EXCHANGES AND SHOP 

PARTICIPATION 

 43. The authority citation for part 157 continues to read as follows: 

Authority: Title I of the Affordable Care Act, sections 1311, 1312, 1321, 1411, 1412, 

Pub. L. 111-148, 124 Stat. 199. 

44. Section 157.20 is amended by adding the definitions for “Federally-facilitated 

SHOP,” “Full-time employee,” and “Large employer” in alphabetical order to read as follows: 

§157.20 Definitions.

* * * * * 
CMS-9964-F 476 

Federally-facilitated SHOP has the meaning given to the term in §155.20 of this 

subchapter. 

Full-time employee has the meaning given to the term in §155.20 of this subchapter. 

Large employer has the meaning given to the term in §155.20 of this subchapter. 

* * * * * 

PART 158—ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE 

REQUIREMENTS 

45. The authority citation for part 158 continues to read as follows: 

Authority: Section 2718 of the Public Health Service Act (42 U.S.C. 300gg-18), as 

amended. 

46. Section 158.110 is amended by revising paragraph (b) to read as follows: 

§158.110 Reporting requirements related to premiums and expenditures. 

* * * * * 

(b) Timing and form of report. The report for each of the 2011, 2012, and 2013 MLR 

reporting years must be submitted to the Secretary by June 1 of the year following the end of an 

MLR reporting year, on a form and in the manner prescribed by the Secretary. Beginning with 

the 2014 MLR reporting year, the report for each MLR reporting year must be submitted to the 

Secretary by July 31 of the year following the end of an MLR reporting year, on a form and in 

the manner prescribed by the Secretary. 

* * * * * 

47. Section 158.130 is amended by adding paragraph (b)(5) to read as follows: 

§158.130 Premium revenue. 

* * * * * 
CMS-9964-F 477 

(b) * * * 

(5) Account for the net payments or receipts related to risk adjustment, risk corridors, and 

reinsurance programs under sections 1341, 1342, and 1343 of the Patient Protection and 

Affordable Care Act, 42 U.S.C. 18061, 18062, 18063. 

48. Section 158.140 is amended by adding paragraph (b)(4)(ii) and revising paragraph 

(b)(5)(i) to read as follows: 

§158.140 Requirements for clinical services provided to enrollees. 

* * * * * 

(b) * * * 

(4) * * * 

(ii) Receipts related to the transitional reinsurance program and net payments or receipts 

related to risk adjustment and risk corridors programs under sections 1341, 1342, and 1343 of the 

Patient Protection and Affordable Care Act, 42 U.S.C. 18061, 18062, 18063. 

(5) * * * 

(i) Affiliated issuers that offer group coverage at a blended rate may choose whether to 

make an adjustment to each affiliate’s incurred claims and activities to improve health care 

quality, to reflect the experience of the issuer with respect to the employer as a whole, according 

to an objective formula that must be defined by the issuer prior to January 1 of the MLR 

reporting year, so as to result in each affiliate having the same ratio of incurred claims to earned 

premium for that employer group for the MLR reporting year as the ratio of incurred claims to 

earned premium calculated for the employer group in the aggregate. 

* * * * * 

49. Section 158.161 is amended by revising paragraph (a) to read as follows: 
CMS-9964-F 478 

§158.161 Reporting of Federal and State licensing and regulatory fees. 

(a) Licensing and regulatory fees included. The report required in §158.110 must include 

statutory assessments to defray operating expenses of any State or Federal department, 

transitional reinsurance contributions assessed under section 1341 of the Patient Protection and 

Affordable Care Act, 42 U.S.C. 18061, and examination fees in lieu of premium taxes as 

specified by State law. 

* * * * * 

50. Section 158.162 is amended by revising paragraph (b)(1)(vii) and adding paragraph 

(b)(1)(viii) to read as follows: 

§158.162 Reporting of Federal and State taxes. 

* * * * * 

(b) * * * 

(1) * * * 

(vii) Payments made by a Federal income tax exempt issuer for community benefit 

expenditures as defined in paragraph (c) of this section, limited to the highest of either: 

(A) Three percent of earned premium; or 

(B) The highest premium tax rate in the State for which the report is being submitted, 

multiplied by the issuer’s earned premium in the applicable State market. 

(viii) In lieu of reporting amounts described in paragraph (b)(1)(vi) of this section, an 

issuer that is not exempt from Federal income tax may choose to report payment for community 

benefit expenditures as described in paragraph (c) of this section, limited to the highest premium 

tax rate in the State for which the report is being submitted multiplied by the issuer’s earned 

premium in the applicable State market. 

* * * * * 
CMS-9964-F 479 

 51. Section 158.221 is amended by revising paragraph (c) to read as follows: 

§158.221 Formula for calculating an issuer’s medical loss ratio. 

* * * * * 

(c) Denominator. The denominator of an issuer’s MLR must equal the issuer’s premium 

revenue, as defined in §158.130, excluding the issuer’s Federal and State taxes and licensing and 

regulatory fees, described in §§158.161(a) and 158.162(a)(1) and (b)(1), and after accounting for 

payments or receipts related to risk adjustment, risk corridors, and reinsurance, described in 

§158.130(b)(5). 

52. Section 158.232 is amended by revising paragraph (c)(1)(i) and paragraph (d) 

introductory text to read as follows: 

§158.232 Calculating the credibility adjustment. 

* * * * * 

(c) * * * 

(1) * * * 

(i) The per person deductible for a policy that covers a subscriber and the subscriber’s 

dependents shall be the lesser of: the deductible applicable to each of the individual family 

members; or the overall family deductible for the subscriber and subscriber’s family divided by 

two (regardless of the total number of individuals covered through the subscriber). 

* * * * * 

(d) No credibility adjustment. Beginning with the 2013 MLR reporting year, the 

credibility adjustment for and MLR based on partially credible experience is zero if both of the 

following conditions are met: 

* * * * * 
CMS-9964-F 480 

53. Section 158.240 is amended by revising paragraphs (c) and (d) to read as follows: 

§158.240 Rebating premium if the applicable medical loss ratio standard is not met. 

* * * * * 

(c) Amount of rebate to each enrollee. (1) For each MLR reporting year, an issuer must 

rebate to the enrollee the total amount of premium revenue, as defined in §158.130, received by 

the issuer from the enrollee, after subtracting Federal and State taxes and licensing and 

regulatory fees as provided in §§158.161(a) and 158.162(a)(1) and (b)(1), and after accounting 

for payments or receipts for risk adjustment, risk corridors, and reinsurance as provided in 

§158.130(b)(5), multiplied by the difference between the MLR required by §158.210 or 

§158.211, and the issuer’s MLR as calculated under §158.221.

(2) For example, an issuer must rebate a pro rata portion of premium revenue if it does 

not meet an 80 percent MLR for the individual market in a State that has not set a higher MLR. 

If an issuer has a 75 percent MLR for the coverage it offers in the individual market in a State 

that has not set a higher MLR, the issuer must rebate 5 percent of the premium paid by or on 

behalf of the enrollee for the MLR reporting year after subtracting a pro rata portion of taxes and 

fees and accounting for payments or receipts related to reinsurance, risk adjustment and risk 

corridors. If the issuer’s total earned premium for the MLR reporting year in the individual 

market in the State is $200,000, the issuer received transitional reinsurance payments of $2,500, 

and made net payments related to risk adjustment and risk corridors of $20,000, the issuer’s 

gross earned premium in the individual market in the State would be $200,000 plus $2,500 

minus $20,000, for a total of $182,500. If the issuer’s Federal and State taxes and licensing and 

regulatory fees, including reinsurance contributions, that may be excluded from premium 

revenue as described in §§158.161(a), 158.162(a)(1) and 158.162(b)(1), allocated to the 
CMS-9964-F 481 

individual market in the State are $15,000, and the net payments related to risk adjustment and 

risk corridors, reduced by reinsurance receipts, that must be accounted for in premium revenue as 

described in §§158.130(b)(5), 158.221 and 158.240, are $17,500 ($20,000 reduced by $2,500), 

then the issuer would subtract $15,000 and add $17,500 to gross premium revenue of $182,500, 

for a base of $185,000 in premium. The issuer would owe rebates of 5 percent of $185,000, or 

$9,250 in the individual market in the State. In this example, if an enrollee of the issuer in the 

individual market in the State paid $2,000 in premiums for the MLR reporting year, or 1/100 of 

the issuer’s total premium in that State market, then the enrollee would be entitled to 1/100 of the 

total rebates owed by the issuer, or $92.50. 

(d) Timing of rebate. For each of the 2011, 2012, and 2013 MLR reporting years, an 

issuer must provide any rebate owing to an enrollee no later than August 1 following the end of 

the MLR reporting year. Beginning with the 2014 MLR reporting year, an issuer must provide 

any rebate owing to an enrollee no later than September 30 following the end of the MLR 

reporting year. 

* * * * * 

 54. Section 158.241 is amended by revising paragraph (a)(2) to read as follows: 

§158.241 Form of rebate. 

(a) * * * 

 (2) For each of the 2011, 2012, and 2013 MLR reporting years, any rebate provided in 

the form of a premium credit must be provided by applying the full amount due to the first 

month’s premium that is due on or after August 1 following the MLR reporting year. If the 

amount of the rebate exceeds the premium due for August, then any overage shall be applied to 

succeeding premium payments until the full amount of the rebate has been credited. Beginning 
CMS-9964-F 482 

with the 2014 MLR reporting year, any rebate provided in the form of a premium credit must be 

provided by applying the full amount due to the first month’s premium that is due on or after 

September 30 following the MLR reporting year. If the amount of the rebate exceeds the 

premium due for October, then any overage shall be applied to succeeding premium payments 

until the full amount of the rebate has been credited. 

 * * * * *
CMS-9964-F 

Dated: February 25, 2013. 

 _____________________________ 

Marilyn Tavenner, 

Acting Administrator, 

Centers for Medicare & Medicaid Services. 

Approved: February 27, 2013. 

 ___________________________________ 

Kathleen Sebelius, 

Secretary, 

Department of Health and Human Services. 

BILLING CODE 4120-01-P 

[FR Doc. 2013-04902 Filed 03/01/2013 at 11:15 am; Publication Date: 03/11/2013]