76574 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

45 CFR Part 158 

[CMS–9998–FC] 

RIN 0938–AQ71 

Medical Loss Ratio Requirements 

Under the Patient Protection and 

Affordable Care Act 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule with comment period. 

SUMMARY: This final rule with comment 

period revises the regulations 

implementing medical loss ratio (MLR) 

requirements for health insurance 

issuers under the Public Health Service 

Act in order to address the treatment of 

‘‘mini-med’’ and expatriate policies 

under these regulations for years after 

2011; modify the way the regulations 

treat ICD–10 conversion costs; change 

the rules on deducting community 

benefit expenditures; and revise the 

rules governing the distribution of 

rebates by issuers in group markets. 

DATES: Effective date. This rule is 

effective on January 3, 2012. 

Comment date. We will consider 

comments on § 158.150(b)(2)(i)(A)(6) 

and (c)(5) regarding the treatment of 

ICD–10 conversion costs, and 

§ 158.242(b) and § 158.260 regarding the 

process for providing rebates to group 

enrollees and reporting of rebates that 

are received at one of the addresses 

provided in the ADDRESSES section of 

this rule no later than 5 p.m. EST on 

January 6, 2012. 

Applicability Date. The amendments 

to Part 158 generally apply beginning 

January 1, 2012, to health insurance 

issuers offering group or individual 

health insurance coverage. 

ADDRESSES: In commenting please refer 

to file code CMS–9998–FC. Because of 

staff and resource limitations, we cannot 

accept comments by email or facsimile 

(Fax) transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the instructions under the ‘‘More Search 

Options’’ tab. 

2. By regular mail. You may mail 

written comments to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–9998–FC, P.O. Box 8010, 

Baltimore, MD 21244–8010. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address only: Centers for 

Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–9998–FC, 

Mail Stop C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

4. By hand or courier. Alternatively, 

you may deliver (by hand or courier) 

your written comments only to the 

following addresses prior to the close of 

comment period: 

a. For delivery in Washington, DC— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Room 445–G, Hubert 

H. Humphrey Building, 200 

Independence Avenue SW., 

Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey Building is not 

readily available to persons without 

Federal government identification, 

commenters are encouraged to leave 

their comments in the CMS drop slots 

located in the main lobby of the 

building. A stamp-in clock is available 

for persons wishing to retain a proof of 

filing by stamping in and retaining an 

extra copy of the comments being filed.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

9994 in advance to schedule your 

arrival with one of our staff members. 

Comments erroneously mailed to the 

addresses indicated as appropriate for 

hand or courier delivery may be delayed 

and received after the comment period. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://regulations.gov. 

Follow the search instructions on that 

Web site to view public comments. 

Comments received timely will be 

also available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 

8:30 a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone (800) 743–3591. 

FOR FURTHER INFORMATION CONTACT: 

Carol Jimenez, (301) 492–4457. 

SUPPLEMENTARY INFORMATION: 

Comment Subject Areas: We will 

consider comments on the treatment of 

ICD–10 conversion costs, and the 

process for providing rebates to group 

enrollees, as discussed in this final rule 

with comment period that are received 

by the date and time indicated in the 

DATES section of this final rule with 

comment period. 

I. Background 

The Patient Protection and Affordable 

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. In this preamble, we refer to the 

two statutes collectively as the 

Affordable Care Act. The Affordable 

Care Act reorganizes, amends, and adds 

to the provisions of Part A of title XXVII 

of the Public Health Service Act (PHS 

Act) relating to group health plans and 

health insurance issuers in the group 

and individual markets. 

A request for information relating to 

the medical loss ratio (MLR) provisions 

of PHS Act section 2718 was published 

in the Federal Register on April 14, 

2010 (75 FR 19297). On December 1, 

2010, HHS published an interim final 

rule (75 FR 74864) with 60 day public 

comment period, entitled ‘‘Health 

Insurance Issuers Implementing Medical 

Loss Ratio (MLR) Requirements Under 

the Patient Protection and Affordable 

Care Act,’’ that added a new 45 CFR Part 

158. A technical correction to the 

interim final rule was issued on 

December 30, 2010 (75 FR 82277). 

II. Provisions of the Interim Final Rule 

and Responses to Comments 

We received approximately 90 public 

comments on the December 1, 2010 

interim final rule with comment period. 

Commenters included consumer and 

patient organizations, insurance 

regulators, health insurance issuers, 

provider groups, actuarial professional 

group, and others. In this final rule, we 

do not address all of the comments we 

received on the interim final rule, but 

only those comments that pertain to the 

provisions in this final rule: (1) Rules 

regarding the treatment of ‘‘mini-med’’ 

and expatriate policies; (2) rules 

governing how ICD–10 conversion costs, 

fraud reduction expenses, and 

community benefit expenditures are 

accounted for; and (3) rules regarding 


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Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 76575 

1This analysis takes into consideration issuers 

that operate in States which have been granted an 

adjustment to the MLR standard for the individual 

market, pursuant to § 158.301. 

the distribution of rebates in group 

markets. In this section of the preamble, 

we summarize the provisions of the 

interim final rule and respond to the 

public comments received on these 

subjects. 

A. ‘‘Mini-med’’ Policies (45 CFR 

158.110(b)(2), 158.120(d)(3), and 

158.221(b)(3)) 

For purposes of the MLR 

requirements, the interim final rule 

provided separate treatment for minimed policies with total annual benefit 

limits of $250,000 or less by requiring 

issuers to report mini-med experience 

separately from other experience, by 

State and by market, for the 2011 MLR 

reporting year. Issuers of mini-med 

policies with total annual benefit limits 

of $250,000 or less were also directed to 

use a special methodology for 

calculating the MLR numerator for 

calendar year 2011 reporting and rebate 

purposes. Specifically, incurred claims 

and activities that improve health care 

quality are multiplied by 2.00 in 

calculating the MLR for mini-med 

policies. Issuers of mini-med policies 

were directed to submit a report for each 

of the first three quarters of the 2011 

MLR reporting year as provided under 

§ 158.110(b), in addition to the annual 

report required of all issuers subject to 

MLR standards. The authority for this 

treatment of special circumstances is 

provided under section 2718(c) of the 

PHS Act, which directs HHS to ‘‘take 

into account the special circumstances 

of smaller plans, different types of 

plans, and newer plans.’’ 

The preamble to the interim final rule 

notes that, after reviewing the quarterly 

filings of the mini-med policies’ 2011 

experience, CMS would make a 

determination as to whether this 

treatment of special circumstances 

should continue and, if so, whether it 

should be modified beyond the 2011 

MLR reporting year. 

Comment: We received comments 

that both support and oppose an 

adjustment for issuers of mini-med 

policies. Commenters that supported a 

special methodology for mini-med 

experience generally claimed that the 

unique cost structure of mini-med 

policies make issuers unable to meet the 

statutory MLR without an adjustment to 

the reporting methodology. Specifically, 

issuers of mini-med policies asserted 

that such plans have higher 

administrative costs relative to benefits 

paid, as compared to other more 

comprehensive coverage, as a result of— 

(1) Higher enrollee turnover; (2) shorter 

enrollment periods; and (3) lower 

incurred claims due to high deductibles 

and limited coverage. Two commenters 

asserted that an adjustment is necessary 

to preserve access to mini-med policies 

for employers and participants. 

Three commenters requested that 

HHS extend until 2014 the 2011 special 

circumstances methodology of a 

multiplier of 2.00 for mini-med policies. 

These commenters stated that the 

unique structure of these plans would 

remain consistent between 2011 and 

2014, after which a total prohibition on 

annual dollar limits under PHS Act 

section 2711 will be in effect, other than 

for grandfathered plans in the 

individual market. These commenters 

asserted that without this MLR 

treatment for the interim years, before 

new coverage options and premium tax 

credits are available through the 

Affordable Insurance Exchanges, issuers 

may withdraw from the market. This 

withdrawal could leave employers 

unable to afford other health care 

coverage for their employees, leaving 

some consumers without affordable 

health care coverage that will be 

available to them in 2014. 

Many commenters, however, opposed 

any continuation of this methodology 

for issuers of mini-med policies. 

Consumer advocates, healthcare 

organizations, and a labor organization 

asserted that mini-med policies do not 

need a special circumstances 

adjustment. They noted that issuers did 

not request such an adjustment during 

the public comment period of the 

National Association of Insurance 

Commissioners (NAIC) model rule 

making process and that the NAIC did 

not recommend such an adjustment. 

They also asserted that issuers of minimed policies should be required to 

operate with the same efficiency as 

more robust policies and to meet the 

statutory MLR standard. Two 

commenters did not support extending 

the adjustment for mini-med policies 

any longer than 2014. 

Response: In determining the 

appropriate treatment for mini-med 

policies with total annual benefit limits 

of $250,000 or less with respect to MLR, 

we considered commenters’ concerns 

about loss of coverage if issuers of minimed policies exit the market absent 

separate MLR treatment. We also 

considered commenters’ concerns about 

the need for issuers to operate 

efficiently and provide valuable 

coverage. 

In the interim final rule, we requested 

three quarters of data, including amount 

of premium spent on claims, quality 

improving activities, non-claims costs, 

and taxes. This final rule is being issued 

after receiving and analyzing two 

quarters of this data. We believe it is 

necessary to determine the final MLR 

policy as to the treatment of mini-med 

policies, despite the fact that we have 

not yet analyzed the third quarter data, 

because otherwise we could not issue 

rules in time for the special 

circumstances adjustment to be effective 

for 2012 and to minimize the chance 

that issuers may withdraw these 

policies due to uncertainty about MLR 

requirements. After analyzing the first 

and second quarter data, seeking to 

strike a balance that ensures continued 

access for consumers while ensuring 

that they receive value for their 

premium dollar, we have determined 

that in 2012, the appropriate multiplier 

for mini-med policy experience is 1.75, 

in 2013, the appropriate multiplier is 

1.50, and in 2014, the appropriate 

multiplier is 1.25. 

The Department only addresses minimed policy experience for the 2012, 

2013, and 2014 MLR reporting years. 

Section 2711 of the PHS Act provides 

that for policy years beginning on and 

after January 1, 2014, when the 

Affordable Insurance Exchanges will be 

in place to provide consumers with 

better, more affordable coverage options, 

non-grandfathered plans in all markets 

and grandfathered plans in the large and 

small group markets will no longer be 

permitted to have annual dollar limits. 

Thus, policies with annual limits under 

§ 158.110(d)(3) will no longer exist in 

those markets. We have applied a 

multiplier through the 2014 MLR 

reporting year to account for mini-med 

policies with a plan year that begins 

after January 1, 2013 and ends sometime 

in 2014. 

Based upon the data we received from 

the first and second quarterly reports of 

2011, without any multiplier, in 2011, 

seven of the 12 issuers in the individual 

market, and six of the 15 issuers in the 

large group market would not meet the 

MLR of 80 and 85 percent, respectively. 

With the multiplier of 2.00, three of the 

12 issuers in the individual market 

would not meet the MLR standard 1, and 

all issuers in the small group or large 

group market would meet the MLR 

standard. 

A graduated allowance for an 

adjustment of 1.75 in 2012, 1.50 in 2013 

and 1.25 in 2014 will incentivize issuers 

to reduce their administrative expenses 

and operate more efficiently to ensure 

that they meet the MLR standard while 

minimizing issuer market withdrawal, 

maintaining access to coverage for 

consumers and ensuring that they 

receive greater value from these policies 


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76576 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

2CMS is basing its determination on two quarters 

of data for the same reasons set forth above with 

respect to mini-med policies. 

3No issuers of expatriate policies in the small 

group market had credible experience in 2011. 

However, they may become credible in 2012, when 

issuers’ MLRs will generally be calculated based on 

multiple years of experience and data. 

until 2014. We plan on publishing the 

data used in this analysis in the spring 

of 2012. 

B. ‘‘Expatriate’’ Policies (45 CFR 

158.110(b)(2), 158.120(d)(4), and 

158.221(b)(4)) 

The interim final rule defines 

expatriate policies as ‘‘group policies 

that provide coverage for employees 

working outside their country of 

citizenship, employees working outside 

of their country of citizenship and 

outside the employer’s country of 

domicile, and non-U.S. citizens working 

in their home country * * *’’ (45 CFR 

158.120(d)(4)). Several public comments 

were received regarding the definition 

of expatriate policies. In this final rule, 

we are amending the definition of 

expatriate policies to read ‘‘group 

policies that provide coverage to 

employees, substantially all of whom 

are: Working outside their country of 

citizenship; working outside of their 

country of citizenship and outside the 

employer’s country of domicile; or nonU.S. citizens working in their home 

country * * *.’’ We add the phrase 

‘‘substantially all of whom are’’ to 

ensure that issuers do not classify a 

policy as an expatriate policy when 

expatriates account for only a limited 

proportion of the covered population. 

The preamble to the interim final rule 

states that expatriate policies issued by 

non-U.S. issuers for services rendered 

outside the United States are not subject 

to the MLR regulation, nor are expatriate 

policies written on a form not filed with 

and approved by a State insurance 

department. Issuers must report 

expatriate policy experience separately 

from other experience for the 2011 MLR 

reporting year and must aggregate that 

experience on a national level for the 

large group market and the small group 

market. The definition of expatriate 

policies does not include policies issued 

in the individual market. 

Section 158.221(b)(4) directs issuers 

of expatriate policies to use a separate 

methodology for calculating the MLR 

numerator for reporting and rebate 

purposes for the 2011 MLR reporting 

year. Specifically, incurred claims and 

activities that improve health care 

quality are to be multiplied by a factor 

of 2.00 in calculating the MLR. The 

interim final rule directs issuers to 

submit a report for each of the first three 

quarters of the 2011 MLR reporting year. 

The preamble to the interim final rule 

notes that, after reviewing the quarterly 

filings of the expatriate policies based 

on 2011 experience, we will make a 

determination as to whether this 

treatment should continue or be 

modified beyond the 2011 MLR 

reporting year. 

Comment: CMS received six 

comments regarding the treatment of 

expatriate policies in the interim final 

rule. The majority of the commenters 

supported the interim final rule’s 

treatment of expatriate policies for the 

2011 MLR reporting year. Specifically, 

issuers and trade associations supported 

the special methodology for calculating 

the MLR numerator for expatriate 

policies, noting that these policies have 

higher administrative costs as a result of 

(1) Providing international access to 

providers; (2) maintaining emergency 

evacuation services; and (3) navigating 

health care and legal systems in 

different countries. These policies may 

also have unpredictable experience 

depending on the location of the 

enrollees. One issuer stated that a large 

portion of international policies are sold 

through brokers, and high broker fees 

contribute to the increased 

administrative cost. We received no 

comments opposing a special 

circumstances adjustment for expatriate 

policies. 

Other issuers and commenters 

suggested that the interim final rule’s 

adjustment to the MLR numerator does 

not do enough to relieve expatriate 

issuers from the MLR standards 

provided in the Affordable Care Act. 

One issuer claimed that the MLR 

reporting requirement creates an unlevel 

playing field because U.S. issuers must 

disclose proprietary cost structure 

information under the MLR reporting 

requirements, while foreign issuers 

would not be required to do so. Two 

commenters specifically suggested that 

the adjustment for expatriate policies 

should extend beyond the 2011 MLR 

reporting year, either temporarily or 

permanently. 

Response: We recognize the unique 

administrative costs associated with 

expatriate policies as evidenced from 

the public comments and the first two 

quarterly reports of 2011.2 Commenters 

asserted that the costs of: (1) Identifying 

and credentialing providers worldwide 

in countries with different licensing and 

other requirements; (2) processing 

claims submitted in various languages; 

(3) standardizing billing procedures; (4) 

providing translation and other services 

to enrollees; and (5) helping subscribers 

locate qualified providers 

internationally justify a separate 

methodology that takes into account 

these special circumstances. After 

reviewing the first and second quarter 

data, we have determined that 

continuing a special circumstances 

adjustment of a multiplier of 2.00 to the 

numerator of the MLR is appropriate for 

expatriate policies. 

According to the year-to-date second 

quarter data provided by issuers of 

expatriate policies, without applying the 

special circumstances adjustment 

provided in the interim final rule, the 

majority of issuers in the large group 

market 3 reported credibility-adjusted 

MLRs significantly below 85 percent 

MLR standard. However, with the 

multiplier of 2.00, we estimate that 

issuers’ credibility-adjusted MLRs will 

meet the MLR standards, thus ensuring 

that Americans working abroad will still 

have access to U.S.-based coverage. 

Based on the reported data and on 

information from stakeholders 

concerning this unique market, we 

believe that a multiplier of two is 

appropriate to ensure that issuers 

remain in the expatriate market. As 

discussed previously, expatriate policies 

have significantly different and 

additional administrative costs than do 

policies that provide primarily domestic 

coverage. In addition, the experience of 

expatriate policies is subject to more 

variability than other types of policies, 

due to the fact that they primarily cover 

care in all parts of the world in a wide 

variety of health care systems, which 

also makes pricing to a particular MLR 

standard much more difficult. Due to 

this inherent uncertainty in pricing and 

their unique administrative costs, we 

have determined that it is appropriate to 

provide this special circumstances 

multiplier to expatriate policies. We 

understand that the experience of 

expatriate policies is significantly more 

variable than the experience of other 

types of policies, warranting a larger 

adjustment to account for this. This 

multiplier of two applies to expatriate 

policies beginning in the 2012 MLR 

reporting year, and applies indefinitely. 

We believe that the MLR standards do 

not materially affect U.S. issuers’ ability 

to compete with foreign issuers, in part 

because U.S. employers want to provide 

their employees who are working 

abroad and their dependents with 

comprehensive health insurance that 

meets the unique needs of expatriates 

and provides benefits that are 

comparable to the coverage of their U.S.- 

based employees. Also, U.S.-based 

issuers generally will not be required to 

disclose any proprietary financial 

structure information that is not already 


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Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 76577 

being provided to the States through the 

NAIC’s Supplemental Health Care 

Exhibit (SHCE). 

C. Fraud Reduction Expenses (45 CFR 

158.140(b)(2)(iv) and 158.150(c)(8)) 

The interim final rule describes the 

types of expenses that are adjustments 

to claims under the MLR disclosure and 

reporting requirements. Specifically, 

under § 158.140(b)(2)(iv), the amount of 

claim payments recovered through fraud 

reduction efforts, not to exceed the 

amount of fraud reduction expenses, 

can be included in incurred claims. 

Fraud reduction efforts include fraud 

prevention as well as fraud recovery. In 

addition, the interim final rule provides 

that fraud prevention activities are 

excluded from quality improvement 

activities (QIA). 

Comment: We received 12 comments 

on the treatment of fraud prevention 

activities in the interim final rule. 

Eleven of the commenters supported the 

inclusion of fraud prevention activities 

as QIA. Specifically on this point, 

issuers argued that fraud prevention 

activities improve patient safety, and 

deter the use of medically unnecessary 

services, thus providing a higher level of 

health care quality. Commenters 

asserted that, by not including all fraud 

reduction efforts as QIA, issuers would 

reduce their fraud reduction efforts, 

which would decrease patient safety 

and quality of care. Two commenters 

added that by prohibiting plans from 

including the costs they incur for fraud 

prevention activities as QIA, the rule 

likens the costs to wages, overhead, and 

advertising expenses. Two trade 

associations asserted that HHS should 

be consistent with the Administration’s 

efforts to prevent fraud in government 

programs, stating that excluding fraud 

prevention as QIA undermines the 

federal government’s efforts to prevent, 

detect, and prosecute fraud. Two 

commenters provided information 

regarding the savings that fraud 

prevention programs can provide 

issuers. This information suggested that 

among large issuers surveyed, the net 

savings from anti-fraud operations were 

more than $3 per enrollee in 2008, that 

medium sized issuers reported $1 

savings per enrollee, and that small 

issuers estimated $2.70 savings per 

enrollee. 

Not all commenters supported 

characterizing fraud prevention 

activities as QIA. A provider association 

expressed concerns that Pharmacy 

Benefit Managers may improperly try to 

categorize certain activities as fraud 

detection due to the lack of a clear 

definition for fraud detection and 

recovery. This commenter asserted that 

excluding fraud prevention activities 

from QIA is an appropriate way to 

apportion medical costs versus 

administrative costs, and urged HHS to 

allow only those efforts to reduce fraud, 

as defined by Medicare, to be allowed 

to be deducted from an issuer’s 

administrative costs. 

Response: We considered the 

comments regarding fraud reduction 

expenses, and are maintaining the MLR 

treatment of fraud reduction expenses 

provided in the interim final rule. We 

will continue to exclude fraud 

prevention activities from QIA. The 

current treatment of fraud reduction 

efforts under the MLR rule is consistent 

with the NAIC’s position and 

adequately addresses the concerns of 

issuers, while still recognizing that 

many fraud prevention efforts are not 

directly targeted towards quality 

improvement. We recognize the 

importance of fraud reduction expenses 

and the disincentive it could create if 

these expenses were treated solely as 

non-claims and non-quality improving 

expenses. Thus, allowing payments 

recovered through fraud reduction 

efforts as adjustments to incurred claims 

gives issuers the opportunity to recoup 

monies invested to deter fraud. 

Modifying the interim final rule to allow 

an unlimited adjustment would 

undermine the purpose of requiring 

issuers to meet the MLR standard in the 

Affordable Care Act. 

We believe that issuers will continue 

to invest in fraud reduction, including 

fraud prevention, regardless of the MLR 

treatment and encourage issuers to do 

so. Issuers have incentives to reduce 

fraud regardless of how this expense is 

classified within the MLR, as 

demonstrated from the comments and 

data provided by issuers. By allowing 

fraud reduction expenses as an 

adjustment to incurred claims, up to the 

amount of fraudulent claims recovered, 

the interim final rule mitigates any 

disincentive issuers may have to invest 

in these programs. We appreciate the 

comments from the industry regarding 

the savings that result from fraud 

reduction efforts, which support the 

MLR policy in the interim final rule that 

the amount of claims payments 

recovered through fraud reduction 

efforts, not to exceed the amount of 

fraud reduction expenses, should be 

included in incurred claims. 

D. ICD–10 Conversion Expenses (45 CFR 

158.150(b)(2)(i)(A)(6) and (c)(5)) 

Under § 158.150(a), health insurance 

issuers are required to submit an annual 

report to the Secretary documenting 

their expenditures for activities that 

improve health care quality. As 

provided by § 158.150(b), in order for an 

activity to be considered a QIA, it must 

be designed, among other things, to 

improve health quality and increase the 

likelihood of desired health outcomes in 

ways that are capable of being 

objectively measured and of producing 

verifiable results and achievements. In 

addition, the activity must be primarily 

designed to—(1) Improve health 

outcomes; (2) prevent hospital 

readmissions; (3) improve patient safety; 

or (4) implement, promote and increase 

wellness and health activities. Health 

Information Technology (HIT) 

expenditures that meet the requirements 

under § 158.150 are considered QIA. 

The list of activities excluded as QIA 

includes—(1) Those activities designed 

primarily to control or contain costs; 

and (2) those that establish or maintain 

a claims adjudication system, including 

costs directly related to upgrades in HIT 

that are designed primarily or solely to 

improve claims payment capabilities or 

to meet regulatory requirements for 

processing claims (for example, costs of 

implementing new administrative 

simplification standards and code sets 

adopted pursuant to the Health 

Insurance Portability and 

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

1320d–2, as amended, including ICD–10 

requirements). The preamble to the 

interim final rule stated that CMS would 

examine the reported conversion costs 

of ICD–10 to determine whether the 

policy to exclude these costs from QIA 

should be revisited. In addition, the 

interim final rule specifically requested 

comments on whether ICD–10 should be 

included as a QIA. 

Comment: Provider associations and 

advocacy groups supported the interim 

final rule’s treatment of ICD–10. 

Specifically, provider associations 

contended that ICD–10 does not have 

any bearing on the treatment that an 

enrollee receives, and that there is no 

direct impact on patient outcomes, even 

if it benefits the medical community as 

a whole. Commenters also noted that 

issuers will achieve greater 

administrative efficiency with ICD–10’s 

more detailed coding, allowing claims 

to be paid more efficiently. For these 

reasons, such commenters asserted that 

these costs are administrative in nature 

and should be excluded from QIA. A 

consumer advocate further suggested 

that excluding ICD–10 costs from QIA 

would prevent issuers from reclassifying 

administrative tasks as QIAs. 

Issuers opposed the interim final 

rule’s treatment of ICD–10 conversion 

costs, asserting that ICD–10 costs are a 

QIA because they are meant to improve 

data collection for diagnoses and 

medical procedure coordination, patient 


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76578 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

safety, health outcomes, and medical 

research. They also stated that ICD–10 

conversion allows for alignment of 

quality and wellness programs, which 

are QIA. In support of classifying ICD– 

10 expenses as QIA, a health insurance 

issuer stated that ICD–10 coding can 

improve health plans’ ability to share 

data among clinicians for the purpose of 

quality improvement and care 

coordination activities, thereby allowing 

for a better understanding of diagnoses 

and better treatment. An issuer and an 

industry association asserted that 

because ICD–10 implementation is a 

legal requirement, the burden of cost 

should not be on the issuers. 

Finally, issuers acknowledged that 

conversion costs can be tracked and 

separated from maintenance costs 

through current accounting processes, 

and most supported excluding ICD–10 

maintenance costs occurring after 

October 1, 2013 from QIA. 

Response: In response to the 

comments highlighting the dual nature 

of ICD–10, we considered the impact of 

ICD–10 on improving data collection for 

diagnoses and medical procedure 

coordination, patient safety, health 

outcomes, and medical research. In 

addition, we consulted with the Office 

of E-Health Standards and Services 

(OESS) within CMS. OESS oversees 

ICD–10 and considers some of the 

impact of ICD–10 to be QIA, and 

supports the treatment of ICD–10 set 

forth in this final rule. 

We also recognize that ICD–10 has 

some claims processing functions as 

well. This final rule recognizes the dual 

nature of ICD–10 and includes as QIA 

ICD–10 conversion costs incurred in 

2012 and 2013 up to 0.3 percent of an 

issuer’s earned premium in the relevant 

State market in each of those years. 

Analysis of the 2010 SHCE filings 

reveals that ICD–10 expenses, as a 

percent of earned premium, account for 

less than 0.02 percent of issuer spending 

in each market (individual, small group 

and large group). However, significant 

ICD–10 conversion efforts will be made 

in 2012 and 2013, as issuers cannot 

convert to ICD–10 until after January 1, 

2012, when the new version 5010 

standards for electronic health care 

transactions will be upgraded. Federal 

HIPAA regulations direct that the ICD– 

10 transition must be completed by 

October 2013. The industry provided a 

range of percentages using their 

projected expenditures of ICD–10 

conversion costs on their MLRs, if 

allowed as a QIA. After reviewing the 

data provided by issuers and 2010 SHCE 

filings, we chose a cap that allows as 

QIA amounts that issuers projected 

spending on ICD–10 conversion, 

without permitting issuers to include 

claims adjudication systems costs in 

QIA. 

In addition, ICD–10 maintenance 

costs are excluded from QIA in this final 

rule, based on the industry’s collective 

comments stating that separating 

conversion costs from maintenance 

costs is feasible, and based on their 

support for excluding ICD–10 

maintenance costs from QIA. 

We request further comment on the 

treatment of ICD–10 conversion costs 

adopted in this final rule. Specifically, 

we are soliciting comments on whether 

including as QIA ICD–10 conversion 

costs as a QIA is appropriate, and if the 

cap set at up to 0.3 percent of an issuer’s 

earned premium is an appropriate 

amount based on past and future ICD– 

10 conversion expenses. 

E. Community Benefit Expenditures 

(45 CFR 158.160(b)(2)(vi) and 

158.162(b)(1)(vii), (c)(1)) 

In the interim final rule, we requested 

comment on the treatment of 

community benefit expenditures. The 

interim final rule allows a not-for-profit, 

tax-exempt issuer to deduct from earned 

premium the amount of its community 

benefit expenditures, limited to the 

State premium tax rate applicable to forprofit issuers. The interim final rule also 

requires a not-for-profit issuer to report 

community benefit expenditures ‘‘in 

lieu of taxes * * * but not to exceed the 

amount of taxes [it] would otherwise be 

required to pay.’’ (45 CFR 158.162(c)(1)). 

Comment: CMS received nine 

comments on the treatment of 

community benefit expenditures, 

including from six issuers, a labor 

union, a law firm, and an issuer 

coalition organization. Seven 

commenters agreed that the MLR rule 

should not discourage not-for-profit 

issuers from providing services and 

financial support to the community. 

Three commenters expressed concern 

that limiting community benefit 

expenditures deductibility would 

discourage community benefit 

expenditures and community 

investment. Two commenters suggested 

that the definition of community benefit 

expenditures be expanded to include 

expenses not specifically targeted at 

increasing access to health care. 

Another commenter suggested that 

community benefit expenditures be 

considered QIA. 

Some commenters expressed concern 

that the treatment of community benefit 

expenditures in the interim final rule 

would result in unequal treatment 

among not-for-profit issuers, and 

between not-for-profit and for-profit 

issuers, for several reasons. Five 

commenters noted that the community 

benefit expenditures deduction would 

not be uniformly available to a not-forprofit issuer because State premium tax 

rates vary by State, and within some 

States, vary by issuer type (for example, 

PPO or HMO). They also suggested that 

the varying premium tax rates by type 

of issuer within a State would result in 

confusion when determining which 

premium tax rate to apply to the 

community benefit expenditures limit. 

The commenters asserted that in States 

without a premium tax, a not-for-profit 

issuer’s community benefit 

expenditures would not be deductible 

and therefore its MLR would be 

relatively lower than an issuer in a State 

with a premium tax. 

Six commenters suggested that a flat 

national community benefit 

expenditures deduction limit would 

result in a more even playing field, as 

well as simplify the administrative 

burden in determining community 

benefit expenditures deduction limits. 

Five commenters proposed a flat 

deduction limit ranging from three to 

five percent of earned premium. 

Another commenter proposed allowing 

not-for-profit issuers to deduct all 

community benefit expenditures from 

earned premium. 

Four commenters asserted that 

because of the different corporate 

structures, business plans, missions, 

and tax liabilities of not-for-profit and 

for-profit issuers, it would be 

speculative and burdensome to 

determine what a not-for-profit issuer’s 

hypothetical tax liability would be if it 

were a for-profit issuer. Finally, issuers 

expressed concern that not-for-profit 

issuers have fundamentally different 

missions than for-profit issuers, that tax 

liability is determined based on a series 

of credits and adjustments built into a 

taxable issuer’s business plan, and that 

it would be too burdensome and 

speculative for a tax-exempt or not-forprofit issuer to estimate its ‘‘but for’’ tax 

liability. 

Response: Although we share the 

concern that the MLR standard should 

not discourage a not-for-profit issuer 

from spending on community benefit 

expenditures, we are not persuaded that 

the definition of community benefit 

expenditures should generally be 

expanded and maintain the definition 

currently in § 158.160(c)(2). We note 

that existing laws pertaining to not-forprofit issuer status and the benefits 

associated with this status continue to 

apply. However, based on the comments 

regarding the variance of State premium 

tax rates by type of issuer, in this final 

rule the community benefit 

expenditures deduction is revised to 


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help ameliorate such disparate effects. 

Currently, 48 States have premium 

taxes, but tax rates in many States differ 

for different kinds of plans and in some 

States they differ for not-for-profit and 

for-profit issuers. Several States do not 

tax HMOs or not-for-profit issuers at all. 

In this final rule, we modify 

§ 158.162(b)(1)(vii) to allow an issuer to 

deduct either the amount it paid in State 

premium taxes, or the amount of its 

community benefit expenditures up to a 

maximum of the highest State premium 

tax rate in the State, whichever is 

greater. This treatment does not create a 

disincentive against community benefit 

expenditures, while equalizing some of 

the disparities that were identified in 

comments to the interim final rule. 

We also considered the comments 

regarding a hypothetical tax reporting 

requirement in § 158.162(c)(1) and agree 

that it is not necessary. Because of the 

modification to the community benefit 

expenditures deduction limit, it is no 

longer necessary for an issuer to report 

community benefit expenditures limited 

by its hypothetical tax liability, and thus 

this final rule removes that requirement. 

By removing § 158.162(c)(1) of the 

interim final rule, this final rule 

simplifies the reporting requirement. 

Section 158.160(b)(2)(vi) of the 

interim final rule directs issuers to 

report non-claims costs by type, 

including all community benefit 

expenditures. This reporting standard 

applies regardless of whether an issuer 

elects to adjust earned premium for 

community benefit expenditures, as 

permitted by § 158.162(b)(1)(vii) in this 

final rule. 

F. Rebates to Enrollees in Group 

Markets (45 CFR 158.241(b), 158.242(b), 

158.243(a)(1), 158.250, and 158.260(c)) 

In § 158.242(b), the interim final rule 

directs issuers in the large and small 

group markets that have not met the 

applicable MLR standard to provide any 

owed rebate to the policyholder and 

each subscriber, ‘‘in amounts 

proportionate to the amount of premium 

each paid.’’ The interim final rule also 

allows an issuer to enter into an 

agreement with the group policyholder 

to distribute the rebates on behalf of the 

issuer if the policyholder agrees to 

distribute it proportionately as directed 

and provide detailed documentation 

regarding the distribution to each 

subscriber. However, under the interim 

final rule, the issuer remains liable for 

complying with all of its obligations 

under the statute and for maintaining 

records that demonstrate rebates were 

provided accurately to individual 

enrollees. 

Comment: CMS received several 

comments regarding rebate distribution 

in the group market. Generally, 

commenters supported the pro rata 

distribution of rebates to the 

policyholder and each subscriber. Many 

commenters, however, expressed 

significant concern about the logistical 

and tax problems inherent in the 

interim final rule’s mechanism for 

providing rebates in the group markets. 

For example, several issuers expressed 

concern that the issuer lacks access to 

the information needed to distribute 

rebates to individual enrollees covered 

under a group policy, asserting that the 

policyholder (and not the issuer) has 

information regarding the premium 

contribution amount from the employer 

and the employee. A few commenters 

expressed their concern that it is unfair 

for issuers to remain liable under the 

interim final rule, even when the issuer 

enters into an agreement with a 

policyholder, since issuers are unable to 

monitor or control the actions of the 

policyholder. 

Issuers, trade associations, and a State 

regulator recommended that issuers be 

allowed to distribute rebates to 

policyholders, and that the policyholder 

should become responsible for 

distributing rebates to enrollees. Two 

commenters noted that the proposed 

distribution treatment should be 

governed by the Employee Retirement 

Income Security Act of 1974, as 

amended (ERISA). However, one 

commenter asserted that rebates should 

not be considered plan assets under 

ERISA for which plan administrators 

owe a fiduciary duty. 

A few commenters also recommended 

allowing issuers to rely on the 

representations made by policyholders 

that they calculated and disbursed 

rebates as required and that making a 

good faith effort to obtain the 

information from policyholders should 

fulfill issuers’ reporting obligations 

under the interim final rule. 

Subsequent to the closing of the 

public comment period on the interim 

final rule, CMS received several 

inquiries to our public email address 

asking about the tax implications to 

issuers, employers, and consumers, as a 

result of the mechanism for providing 

rebates established in the interim final 

rule. 

Response: In response to the 

comments we received and the inquiries 

to our public email address, we 

examined the issue in consultation with 

the Departments of Labor and Treasury. 

Requiring issuers to apportion and pay 

rebates directly to policyholders and 

each of their subscribers (who are 

generally employees) in the group 

health plan context, as provided by the 

interim final rule, has unintended 

administrative consequences as well as 

potential tax consequences for issuers, 

employers, and consumers. For the 

portion of the premiums that were paid 

with pre-tax dollars (that is, through an 

Internal Revenue Code section 125 

cafeteria plan), which is the case for a 

significant proportion of group 

enrollees, rebates paid to enrollees may 

be treated as wages, raising issues as to 

the application of employment taxes 

and the potential that an issuer may 

have to administer any applicable 

withholding obligations. 

While the above burdens and 

logistical problems could be avoided by 

simply providing for rebates to be paid 

to the policyholder (for example, 

employer), the statute directs that 

enrollees receive the benefit of rebates 

and we are committed to ensuring that 

this is the case. Having considered the 

tax and other logistical implications of 

providing rebates to enrollees in a group 

health plan, the effect on consumers, 

and the burden on issuers and 

employers, this final rule directs issuers 

in the group markets to provide rebates 

to the group policyholder but, as 

discussed below, includes protections 

designed to satisfy, in a practical way, 

the objective of benefitting subscribers 

and their related enrollees. In providing 

rebates to the group policyholder, the 

final rule maintains the definition of 

enrollee for purposes of the rebate 

provisions, found in § 158.240(b), which 

states that ‘‘enrollee’’ means the 

subscriber, policyholder, and/or 

government entity that paid the 

premium for health care coverage 

received by an individual during the 

relevant MLR reporting year. Issuers 

must provide rebates, if any, to 

policyholders covered during the MLR 

reporting year on which the rebate is 

based. 

The final rule establishes separate 

standards for ERISA-covered group 

health plans and plans that are neither 

covered by ERISA nor are governmental 

plans (for example, church plans). The 

handling of rebates by ERISA-covered 

plans and church plans are not subject 

to direct CMS regulation. Thus, the 

separate standards for such plans in the 

final rule are designed to acknowledge 

the different legal and regulatory 

frameworks that apply to those plans 

while still establishing, either directly 

or through reliance on other applicable 

legal standards, such as ERISA, a 

requirement that is consistent with the 

statutory directive that MLR rebates 

benefit enrollees. Non-Federal 

governmental plans are subject to direct 

regulation by CMS and we are issuing 


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76580 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

an interim final rule contemporaneous 

with this final rule that addresses 

rebates to such plans. 

Many group health plans are 

employee benefit plans that are subject 

to ERISA. Through consultation 

regarding this final rule, the Department 

of Labor has advised CMS that, in the 

context of ERISA-covered group health 

plan coverage, rebates paid to the 

policyholder in accordance with 

§ 158.242(b) of this final rule may have 

plan asset, fiduciary responsibility, and 

prohibited transaction implications 

under Title I of ERISA. Distributions 

from insurance companies to their 

policyholders, including employee 

benefit plans, take a variety of forms, 

including refunds, dividends, 

demutualization payments and excess 

surplus distributions. ERISA, 

Department of Labor rulings, and other 

authority currently provide guidance on 

the proper handling of such 

distributions to employee benefit plans 

covered under Title I of ERISA. To the 

extent MLR rebates constitute plan 

assets of an ERISA-covered group health 

plan, decisions regarding the handling 

and allocation of the rebate would have 

to be made by a plan fiduciary 

consistent with ERISA. The Department 

of Labor has also advised that it is 

publishing guidance on its Web site at 

http://www.dol.gov/ebsa/healthreform, 

contemporaneously with this final rule, 

regarding the duties of employers/plan 

sponsors and other fiduciaries 

responsible under sections 403, 404 and 

406 of ERISA for decisions relating to 

MLR rebates. Accordingly, rebates paid 

in connection with policies for ERISAcovered employee benefit plans may 

constitute plan assets that are required 

to be handled in accordance with the 

requirements of ERISA. 

With respect to non-Federal 

governmental plans, there currently is 

no similar legal framework set forth in 

Federal law governing distributions 

from issuers to their plan policyholders. 

Accordingly, under the authority in 

section 2792 of the PHS Act to 

promulgate regulations determined 

‘‘appropriate’’ to ‘‘carry out’’ the 

provisions of part A of title XXVII of the 

PHS Act, which include PHS Act 

section 2718, we are, in a separate 

interim final rule being published 

contemporaneously with this final rule, 

directing that the portion of rebates 

attributable to the amount of premium 

paid by subscribers of non-Federal 

governmental plans be used for the 

benefit of subscribers, which ensures 

that enrollees in such plans similarly 

receive the benefit of rebates. 

With respect to rebates paid to a 

policyholder that is a group health plan 

but is not a governmental plan and not 

subject to ERISA, for example a church 

plan, this final rule provides that an 

issuer may make rebate payment to the 

policyholder if the issuer receives 

written assurance from the policyholder 

that the rebate will be used for the 

benefit of current subscribers using one 

of the options prescribed for nonFederal governmental plans. Without 

such written assurance, the issuer must 

pay directly the policyholder’s 

subscribers covered by the policy during 

the MLR reporting year on which the 

rebate is based. 

The purpose of the MLR is to provide 

enrollees value for their premium 

dollar, and issuers must meet the 

applicable MLR standard or pay rebates 

based upon aggregated market data in 

each State. The law does not provide for 

a group health plan MLR or an 

individual enrollee MLR. Thus, rebates 

are not based upon a particular group 

health plan’s experience or a particular 

subscriber’s experience. We believe that 

distributing rebates to subscribers in the 

manner prescribed by this final rule and 

the interim final rule published 

contemporaneously with this final rule 

accomplishes the purpose of the MLR 

requirement, while streamlining the 

rebate process for consumers, 

employers, and issuers. Because the 

final rule and the interim final rule 

published contemporaneously with this 

final rule provide that rebates are to be 

distributed to the policyholder for 

subscribers of group health plans, the 

final rule modifies § 158.241(b) 

regarding rebates to former enrollees, so 

that § 158.241(b) now applies only to 

former enrollees in the individual 

market. 

The final rule also provides that 

issuers must provide notice of rebates, 

if any, to current group health plan 

subscribers as well as group 

policyholders, and to subscribers in the 

individual market. The notice of rebates 

to policyholders and subscribers of 

group health plans will be prescribed by 

the Secretary of Health and Human 

Services, in consultation with the 

Secretary of Labor. 

The notice must include information 

about the MLR and its purpose, the MLR 

standard, the issuer’s MLR, and the 

rebate being provided. In addition, the 

notice to policyholders and current 

subscribers in plans that are not subject 

to ERISA must contain an explanation 

as to how the rebate will be handled. If 

the plan is subject to ERISA, the notice 

to policyholders and subscribers must 

contain an explanation that the 

policyholder may have obligations 

under ERISA’s fiduciary responsibility 

provisions with respect to the handling 

and allocation of the rebate and contact 

information for questions concerning 

the handling and allocation of the rebate 

under their plan. As noted above, the 

Department of Labor is publishing 

guidance on its Web site 

contemporaneously with the 

publication of this final rule that 

provides guidance on the duties of 

policyholders under ERISA with respect 

to the handling and allocation of rebates 

in the case of policies that cover an 

employee benefit plan subject to ERISA. 

If the policyholder is a non-Federal 

governmental plan, the notice to the 

policyholder and subscribers must 

contain an explanation that the 

policyholder must use the portion of the 

rebate attributable to subscribers’ 

contribution to premium in certain ways 

for the benefit of current subscribers. If 

the policyholder is not a governmental 

plan and not subject to ERISA, the 

notice must contain an explanation that 

the policyholder must agree to use the 

portion of the rebate attributable to 

subscribers’ contribution to premium for 

the benefit of current subscribers or the 

issuer will pay the rebate directly to the 

policyholder’s subscribers. 

We believe that the above notice 

requirement will not only provide 

policyholders and subscribers with 

information on rebates to be paid, and 

how they will benefit from them, but 

greater transparency on how premium 

dollars are used by issuers, and how the 

issuer’s MLR compares to the standard 

set by Congress. We believe that these 

latter two purposes would also be 

served by a notice to policyholders and 

subscribers with MLR information from 

issuers that do not owe rebates. In 

addition to providing policyholders and 

subscribers with material information 

on how their premium dollars are used, 

the provision of such a notice would 

create an incentive to spend as high a 

percentage of premium dollars on care 

and quality improvement as possible, 

rather than just enough to avoid paying 

rebates. 

Because the interim final rule did not 

discuss the possibility of a notice 

requirement for issuers that do not owe 

rebates, and the public has not had an 

opportunity to comment on such a 

requirement, we have not included it in 

this final rule but intend to amend this 

rule pursuant to comments. We invite 

comment on the fact that the current 

notice requirement only applies to 

issuers that owe rebates, and that as a 

result, policyholders and subscribers of 

issuers not owing rebates would not 

receive MLR information. We also invite 

comment on the idea of the provision of 

notices to subscribers and policyholders 

not receiving rebates at the same time 


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Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 76581 

that subscribers and policyholders 

receiving notices of rebates get theirs in 

2012 and beyond. 

We also are considering whether it 

would be useful to include information 

in notices about the issuer’s prior year 

MLR, so that enrollees could see 

whether the issuer is doing a better or 

worse job than the year before of 

efficiently using premium revenue. 

Information showing a less favorable 

MLR in the current year than that from 

the year before could be useful to 

policyholders and subscribers in 

predicting what might be expected to 

happen the next year, and thus in 

making plan choices. Again, because we 

did not discuss or seek comment on 

such a requirement in the interim final 

rule, we invite public comment on 

whether we should impose a 

requirement that it be included for all 

MLR notices in 2012 and/or subsequent 

years. 

Under § 158.242(b)(4) of the final rule, 

if a group health plan, regardless of 

whether it is subject to ERISA, has been 

terminated at the time of rebate payment 

and the issuer cannot, despite 

reasonable efforts, locate the 

policyholder or employer whose 

employees were enrolled in the group 

health plan, the issuer must distribute 

the entire rebate (both the policyholder 

and subscriber’s portions of the rebate) 

to the subscribers of the group health 

plan enrolled during the MLR reporting 

year on which the rebate was calculated 

by dividing the rebate equally among all 

subscribers entitled to a rebate. Since 

issuers do not know how much of a 

group health plan premium was paid by 

the policyholder and how much each 

subscriber contributed, issuers would 

not be able to divide rebates based upon 

each subscriber’s contribution. 

The final rule also modifies the 

minimum threshold for issuer payments 

of rebates in the group market from 

$5.00 per subscriber to a total of $20.00 

for the policyholder portion and 

subscriber portion of the rebate 

combined when the rebate is paid 

directly to the policyholder. When an 

issuer pays the rebate directly to each 

subscriber in a group health plan, as 

provided in § 158.242(b)(3) and (4), or 

pays rebates in the individual market, 

the minimum rebate threshold remains 

at $5.00 per subscriber. Finally, in 

§ 158.260(c), the final rule modifies 

issuers’ rebate reporting requirements to 

conform to changes in how rebates are 

provided in group markets, which we 

believe also simplifies the reporting 

requirements. 

We request comment on the treatment 

of rebates in group markets. We request 

comments specifically on whether the 

mechanism provided in this final rule 

solves or meaningfully reduces the 

logistical challenges of providing 

rebates to group health plans and their 

subscribers and on other potential 

solutions to these challenges while 

ensuring that enrollees benefit when 

rebates are paid. 

III. Provisions of the Final Rule 

Those provisions of this final rule that 

differ from the interim final rule are: 

• Mini-med Plans. Issuers of policies 

with total annual benefit limits of 

$250,000 or less must continue for 2012, 

2013 and 2014 to report mini-med 

experience separately from other 

experience and must continue to 

aggregate it by State and by (individual, 

small group, or large group) market. 

Issuers of mini-med policies must apply 

a special circumstances adjustment to 

the numerator of their MLR by 

multiplying the total of the incurred 

claims plus expenditures for activities 

that improve health care quality by a 

factor of 1.75 for the 2012 MLR 

reporting year, 1.50 for the 2013 MLR 

reporting year and 1.25 for the 2014 

MLR reporting year. For the 2012, 2013 

and 2014 MLR reporting years, minimed experience will be reported 

annually, but not quarterly. 

• Expatriate Plans. Issuers of 

expatriate plans must continue to 

aggregate and report the experience 

from these policies on a national basis, 

separately for the large group market 

and small group market, and separately 

from other policies. Issuers of expatriate 

policies must apply a special 

circumstances adjustment to the 

numerator of their MLR by multiplying 

the total of the incurred claims plus 

expenditures for activities that improve 

health care quality by a factor of 2.0 

beginning with the 2012 MLR reporting 

year. This applies indefinitely. 

Expatriate experience will be reported 

annually, but not quarterly. The 

definition of expatriate policies is 

amended to read ‘‘group policies that 

provide coverage to employees, 

substantially all of whom are: Working 

outside their country of citizenship; 

working outside of their country of 

citizenship and outside the employer’s 

country of domicile; or non-U.S. 

citizens working in their home 

country.’’ 

• ICD–10 Conversion Expenses. 

Activities that are considered quality 

improvement activities (QIA) include, 

for each of the 2012 and 2013 MLR 

reporting years, ICD–10 conversion 

costs up to 0.3 percent of an issuer’s 

earned premium in the relevant State 

market. Comments are solicited on this 

issue. 

• Community Benefit Expenditures. 

The amount an issuer may deduct from 

earned premium is the higher of either 

the total amount paid in State premium 

tax, or actual community benefit 

expenditures up to the highest premium 

tax rate in the State. In addition, not-forprofit issuers are no longer required to 

estimate the amount of taxes they would 

have paid if they were for-profit. 

• Recipients of Rebates. The rebate 

distribution process for group markets 

provides that issuers generally 

distribute rebates to group 

policyholders. Comments are solicited 

on this issue. With respect to 

policyholders that are a group health 

plan but not a governmental plan or 

subject to ERISA, issuers must obtain 

written assurance from the policyholder 

that rebates will be used for the benefit 

of current subscribers or otherwise must 

pay the rebates directly to subscribers 

covered by the policy during the MLR 

reporting year on which the rebate is 

based. Issuers must distribute the entire 

rebate directly to subscribers if the 

group health plan has been terminated. 

In addition, the amount for a de minimis 

rebate in the group market is less than 

$20.00 per group health plan for rebates 

that are distributed to the policyholder. 

There are conforming changes made to 

the reporting requirements. Enrollees 

are required to receive a rebate 

notification. 

IV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 

60-day notice in the Federal Register 

and solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency; 

• The accuracy of our estimate of the 

information collection burden; 

• The quality, utility, and clarity of 

the information to be collected; and 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements 

(ICRs): 


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76582 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

ICRs Regarding MLR and Rebate 

Reporting and Notice Requirement 

(§ 158.101 Through § 158.170, and 

§ 158.250) 

For purposes of MLR and rebate 

reporting under Part 158, this final rule 

does not impose any new reporting 

requirements and generally conforms to 

the requirements under the interim final 

regulation. However, CMS plans to 

publish for public comment, in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

chapter 35), the annual MLR reporting 

form that issuers will be required to 

submit to CMS starting in June 2012 for 

the 2011 reporting year as well as the 

notice of rebates that issuers will be 

required to send to policyholders and 

subscribers starting in August 2012 for 

the 2011 report year, in the near future. 

One exception is that mini-med and 

expatriate issuers are no longer required 

to submit quarterly reports, beginning in 

MLR reporting year 2012. The quarterly 

report information collection 

requirements are currently approved 

under OMB control number 0938–1132. 

Due to the elimination of the quarterly 

reporting requirement for mini-med and 

expatriate issuers, it is estimated that 

annual reporting costs for such issuers 

will be reduced by a total of 

approximately $2.8 million. 

CMS has submitted a copy of these 

final regulations to OMB in accordance 

with 44 U.S.C. 3507(d) for review of the 

information collections. If you comment 

on this information collection and 

recordkeeping requirements, please do 

either of the following: 

1. Submit your comments 

electronically as specified in the 

ADDRESSES section of this final rule with 

comment period; or 

2. Submit your comments to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Attention: CMS Desk Officer, 

9998–FC, Fax: (202) 395–6974; or Email: 

OIRA_submission@omb. 

eop.gov. 

V. Response to Comments 

Because of the large number of public 

comments CMS receives on Federal 

Register documents, CMS is not able to 

acknowledge or respond to them 

individually. A discussion of the 

comments CMS received is included in 

the preamble of this document. 

VI. Regulatory Impact Statement 

A. Summary 

This final rule is designed to address 

several specific issues that have arisen 

regarding section 2718 of the PHS Act, 

which sets forth standards for reporting 

of certain medical loss ratio (MLR) 

related data to the Secretary on an 

annual basis by issuers offering coverage 

in the individual and group markets, 

and calculating and providing rebates to 

policyholders in the event that an 

issuer’s MLR fails to meet or exceed the 

statutory standard. This final rule 

establishes standardized methodologies 

designed to take into account the special 

circumstances of mini-med policies and 

expatriate policies in the methodologies 

for calculating measures of the activities 

that are used to calculate an issuer’s 

MLR. This final rule also addresses 

ICD–10 conversion costs, expenses 

related to fraud reduction activities, 

community benefit expenditures and 

the distribution of rebates in the group 

market. These provisions are generally 

effective beginning January 1, 2012. 

CMS is publishing this final rule to 

implement the protections intended by 

Congress in the most economically 

efficient manner possible. CMS has 

examined the effects of this rule as 

required by Executive Order 12866 (58 

FR 51735, September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), Executive Order 13132 on 

Federalism, and the Congressional 

Review Act (5 U.S.C. 804(2)). In 

accordance with OMB Circular A–4, 

CMS has quantified the benefits, costs 

and transfers where possible, and has 

also provided a qualitative discussion of 

some of the benefits, costs and transfers 

that may stem from this final rule. 

B. Executive Orders 12866 and 13563 

Executive Order 12866 (58 FR 51735) 

directs agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects; distributive impacts; and 

equity). Executive Order 13563 (76 FR 

3821, January 21, 2011) is supplemental 

to and reaffirms the principles, 

structures, and definitions governing 

regulatory review as established in 

Executive Order 12866. 

Section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule (1) Having an annual effect on the 

economy of $100 million or more in any 

one year, or adversely and materially 

affecting a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local or Tribal governments or 

communities (also referred to as 

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

a serious inconsistency or otherwise 

interfering with an action taken or 

planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raising novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive Order. 

A regulatory impact analysis (RIA) 

must be prepared for major rules with 

economically significant effects ($100 

million or more in any one year); and 

a ‘‘significant’’ regulatory action is 

subject to review by the Office of 

Management and Budget (OMB). As 

discussed below, CMS has concluded 

that this rule is not likely to have 

economic impacts of $100 million or 

more in any one year, and therefore 

does not meet the definition of 

‘‘economically significant rule’’ under 

Executive Order 12866. Nevertheless, 

CMS has provided an assessment of the 

potential costs, benefits, and transfers 

associated with this final regulation. 

1. Need for Regulatory Action 

Consistent with the provisions in 

Section 2718 of the PHS Act, this final 

rule establishes methodologies for 

calculating the MLR to accommodate 

the special circumstances of two 

different types of plans, mini-med 

policies and expatriate policies, and a 

mechanism for providing rebates to 

enrollees in group health plans when 

the MLR standard is not met by an 

issuer. This final rule also addresses 

ICD–10 conversion costs, expenses 

related to fraud reduction activities and 

community benefit expenditures. 

Section 2718(b) of the PHS Act 

(captioned ‘‘ensuring that consumers 

receive value for their premium 

payments’’) requires issuers to provide 

an annual rebate to each enrollee if the 

ratio of the amount of premium revenue 

expended on reimbursement for clinical 

services and activities that improve 

quality is less than the applicable 

minimum standard and specifies how 

the rebate is to be calculated. 

2. Summary of Impacts 

In accordance with OMB Circular 

A–4, Table VI.1 below depicts an 

accounting statement summarizing 

CMS’s assessment of the benefits, costs, 

and transfers associated with this 

regulatory action. Tables VI.1.1–VI.1.5 

list benefits, costs and transfers for each 

individual provision. For purposes of 

this regulatory impact analysis, CMS 

has updated relevant information that 


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was presented in the December 1, 2010 

MLR interim final rule (75 FR 74892) 

based on the provisions of this final 

rule. CMS has limited the period 

covered by this regulatory impact 

analysis (RIA) to 2012–2013. Estimates 

are not provided for subsequent years 

because there will be significant 

changes in the marketplace in 2014 

related to the offering of new individual 

and small group plans through the 

Affordable Insurance Exchanges. In 

addition, this RIA focuses only on the 

modifications to the provisions in the 

interim final rule and estimates the 

effects of those modifications relative to 

a baseline of no modifications. As 

discussed earlier, CMS anticipates that 

the adjustments to the MLR 

methodology in this final regulation will 

help ensure that consumers receive 

value for their premium dollars, have 

continued access to insurance coverage 

options, and encourage efficiency in the 

disbursement of rebates to group health 

plan enrollees. Additionally, CMS 

believes that allowing issuers of group 

health plans to distribute all rebates to 

the policyholder for the benefit of 

subscribers will avoid any increase in 

tax and administrative burdens for 

consumers and issuers. Elimination of 

quarterly reporting requirements for 

mini-med and expatriate policies will 

reduce related reporting costs for issuers 

of those policies. Allowing for inclusion 

of community benefit expenditures in 

the MLR calculation for issuers without 

requiring not-for-profit issuers to 

calculate hypothetical tax liability will 

also reduce reporting costs for issuers. 

Executive Order 12866 also requires 

consideration of the ‘‘distributive 

impacts’’ and ‘‘equity’’ of a regulation. 

As described in this RIA, the adjustment 

in the MLR methodology for mini-med 

policies will result in an increase in 

rebate payments to enrollees in those 

policies, while the adjustments in MLR 

methodology to account for costs related 

to ICD–10 conversion and community 

benefit expenditures in some States will 

result in reduced rebate payments to 

affected enrollees. Distributing group 

health plan rebates to the policyholders 

for the benefit of subscribers will also 

transfer the benefits of those rebates 

from enrollees who leave the plan to 

new enrollees in the plan. In accordance 

with Executive Order 12866, CMS 

believes that the benefits of this 

regulatory action justify the costs. The 

regulatory impact analysis does not 

include estimates related to fraud 

reduction activities since this final rule 

does not change the policy or treatment 

of fraud reduction expenses. 

TABLE VI.1—ACCOUNTING TABLE: SUMMARY

Benefits: 

Qualitative: 

* Increase in quality of medical care as a result of increased spending on quality improving activities by issuers of mini-med policies. 

* Improved health as a result of increased spending on medical care by issuers of mini-med policies. 

* Continued access to mini-med and expatriate health policies for consumers. 

* Benefits to consumers by encouraging issuers to undertake community benefit expenditures. 

Costs: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ..... ($4.2 million) ............................................. 2011 7 2012–2013 

($4.4 million) ............................................. 2011 3 2012–2013 

Annual reduction in costs for issuers of mini-med and expatriate policies due to elimination of requirement to file quarterly reports and change in 

method of disbursement of rebates for group health plans. 

Qualitative: 

* Increased spending on quality-improving activities by issuers of mini-med policies. 

* Increased spending on medical care by issuers of mini-med policies. 

* Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and report hypothetical tax liabilities. 

* Reduced tax burden for group health plan enrollees relating to the change in the method of disbursement of rebate payments. 

* Increased administrative costs for policyholders that disburse rebates to group health plan subscribers. 

Transfers: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ..... $2.4 million ............................................... 2011 7 2012–2013 

$2.6 million ............................................... 2011 3 2012–2013 

Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies, resulting from adjustment in MLR 

methodology for mini-med policies. 

Qualitative: 

* Savings for consumers and reduced profit for issuers of mini-med policies. 

* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group markets, resulting from adjustment 

in MLR methodology to account for community benefit expenditures and ICD–10 conversion costs. 

* Transfer of benefits of rebate dollars disbursed to the group health plan from enrollees who leave the group health plan to enrollees new 

to the group health plan. 

TABLE VI.1.1—ACCOUNTING TABLE: MINI-MED POLICIES

Benefits: 

Qualitative: 

* Increase in quality of medical care as a result of increased spending on quality improving activities by issuers of mini-med policies. 

* Improved health as a result of increased spending on medical care by issuers of mini-med policies. 


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TABLE VI.1.1—ACCOUNTING TABLE: MINI-MED POLICIES—Continued 

* Continued access to mini-med health policies for consumers. 

Costs: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ..... ($2.5 million) ............................................. 2011 7 2012–2013 

($2.6 million) ............................................. 2011 3 2012–2013 

Annual reduction in costs for issuers of mini-med policies due to elimination of requirement to file quarterly reports. 

Qualitative: 

* Increased spending on quality-improving activities by issuers of mini-med policies. 

* Increased spending on medical care by issuers of mini-med policies. 

Transfers: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ..... $2.4 million ............................................... 2011 7 2012–2013 

$2.6 million ............................................... 2011 3 2012–2013 

Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies, resulting from adjustment in MLR 

methodology for mini-med policies. 

Qualitative: 

* Savings for consumers and reduced profit for issuers of mini-med policies. 

TABLE VI.1.2—ACCOUNTING TABLE: EXPATRIATE POLICIES

Benefits: 

Qualitative: 

* Continued access to expatriate health policies for consumers. 

Costs: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ..... ($80,000) .................................................. 2011 7 2012–2013 

($85,000) .................................................. 2011 3 2012–2013 

Annual reduction in costs for issuers of expatriate policies due to elimination of requirement to file quarterly reports. 

TABLE VI.1.3—ACCOUNTING TABLE: ICD–10 COSTS

Transfers: 

Qualitative: 

* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group markets, resulting from adjustment 

in MLR methodology to account for ICD–10 conversion costs. 

TABLE VI.1.4—ACCOUNTING TABLE: COMMUNITY BENEFIT EXPENDITURES

Benefits: 

Qualitative: 

* Benefits to consumers by encouraging issuers to undertake community benefit expenditures. 

Costs: 

* Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and report hypothetical tax liabilities. 

Transfers: 

Qualitative: 

* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group markets resulting from adjustment in 

MLR methodology to account for community benefit expenditures. 


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TABLE VI.1.5—ACCOUNTING TABLE: DISTRIBUTION OF REBATES IN GROUP MARKETS

Costs: Estimate Year dollar Discount rate 

percent 

Period covered 

Annualized Monetized ($millions/year) ............................................ ($1.6 million) 2011 7 2012–2013 

($1.7 million) 2011 3 2012–2013 

Annual reduction in costs due to change in method of disbursement of rebates for group health plans. 

Qualitative: 

* Reduced tax burden for group health plan subscribers relating to the change in the method of disbursement of rebate payments.

* Increased administrative costs for policyholders that disburse rebates to group health plan enrollees. 

Transfers: 

Qualitative: 

* Transfer of benefits of rebate dollars disbursed to the group health plan from subscribers who leave the group health plan to subscribers 

new to the group health plan. 

3. Qualitative Discussion of Anticipated 

Benefits, Costs and Transfers 

The medical loss ratio (MLR) is a 

measurement that, stated simply, 

measures the percentage of total 

premiums that insurance companies 

spend on health care and quality 

initiatives, versus what they spend on 

administration, marketing and profit. 

The MLR interim final rule (75 FR 

74892) provided an overall discussion 

of the anticipated benefits, costs and 

transfers associated with the MLR 

provisions. In the following sections, we 

discuss some of the anticipated benefits, 

costs and transfers associated with the 

adjustment of the MLR methodology for 

mini-med and expatriate policies, 

accounting of ICD–10 conversion costs 

and community benefit expenditures in 

the MLR, and change in the process for 

disbursement of rebates for enrollees in 

group health plans. 

a. Benefits 

In developing this final rule, CMS 

carefully considered its potential effects 

including both costs and benefits. 

Because of data limitations, CMS did 

not attempt to quantify all of the 

benefits of this rule. Nonetheless, CMS 

was able to identify several potential 

qualitative benefits which are discussed 

below. 

Mini-med and expatriate policies tend 

to have relatively higher administrative 

costs compared to other types of 

policies due to their special 

circumstances. As discussed earlier in 

the preamble, commenters claimed that 

mini-med issuers have a unique cost 

structure—low premiums, high 

administrative costs (for example, as a 

result of high turnover) and low 

incurred claims (because of high 

deductibles and limited coverage)—that 

make some issuers unable to meet the 

statutory MLR without any adjustment 

to the claim reporting methodology. 

Under the interim final rule, for the 

MLR reporting year 2011, the total of the 

incurred claims and expenditures for 

activities that improve healthcare 

quality for mini-med issuers with total 

annual benefit limits of $250,000 or less 

is multiplied by a factor of 2.00. The 

level of the adjustment is changed from 

a multiplier of 2.00 under the interim 

final rule to a multiplier of 1.75 for the 

2012 MLR reporting year, 1.50 for the 

2013 MLR reporting year and 1.25 for 

the 2014 MLR reporting year under the 

final rule. We have applied a multiplier 

through the 2014 MLR reporting year to 

account for mini-med policies with a 

plan year that begins after January 1, 

2013 and ends sometime in 2014. Based 

on analysis of 2011 quarterly data 

submitted by mini-med issuers, CMS 

anticipates that with the adjustment to 

MLR methodology provided in this final 

rule, a majority of issuers in this market 

would reach the applicable MLR 

standard, and that all issuers who 

would be subject to rebates will remain 

profitable in the markets in which they 

would be paying rebates. The 

adjustment minimizes potential market 

withdrawal by issuers and preserves 

access to benefits for individuals served 

by these policies. Issuers that do not 

otherwise meet the MLR standard may 

attempt to do so by increasing quality 

promoting activities, expanding covered 

benefits or reducing cost sharing, and 

reducing administrative costs. Increased 

spending on quality improving activities 

and medical care would result in better 

quality of medical care and better health 

for enrollees in these plans. There are 25 

issuers of mini-med policies with 

approximately 932,000 enrollees 

collectively and we expect that this rule 

should not have an effect on mini-med 

issuers’ participation in the market. 

As discussed earlier in the preamble, 

expatriate policies have unique 

administrative costs, as evidenced from 

public comments and the first two 

quarterly reports submitted by issuers of 

expatriate policies. These unique costs 

arise from factors such as identifying 

and credentialing international 

providers, processing claims in different 

languages, standardizing billing 

procedures and providing translation 

and other services to enrollees. Under 

the interim final rule, for the MLR 

reporting year 2011, the total of the 

incurred claims and expenditures for 

activities that improve healthcare 

quality for expatriate experience is 

multiplied by a factor of 2.00. The level 

of the adjustment remains at a 

multiplier of 2.00 under this final rule. 

The reasons for this level of adjustment 

are discussed earlier in Section II.B., 

which include the volatility of the 

expatriate experience. Based on analysis 

of 2011 quarterly data submitted by 

issuers of expatriate policies, CMS 

anticipates that with the adjustments to 

MLR methodology provided in this final 

rule, all issuers in this market would 

reach the applicable MLR standard. 

Maintaining the multiplier of 2.00 

would not result in any change in 

rebates being paid to enrollees, but 

should help ensure that issuers of 

expatriate policies generally are able to 

meet the requirements of section 2718 

as well as help ensure that the MLR 

standard does not cause issuers to leave 

the market. There are eight issuers of 

expatriate policies that submitted 

quarterly reports, with approximately 

288,000 enrollees. 

Under the interim final rule, a not-forprofit issuer could deduct from earned 

premium community benefit 

expenditures, limited to the amount of 

State premium taxes the issuer would 

otherwise pay if it were a for-profit 

issuer. A not-for-profit issuer was also 

required to report community benefit 

expenditures up to the amount of taxes 

it would have paid if it were a for-profit 


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4 If a company’s premiums and reserve ratios for 

its health insurance products equals 95 percent or 

more of their total business for both the current and 

prior reporting years, a company files its annual 

statement using the Health Blank. Otherwise, a 

company files the annual statement associated with 

the type of license held in its domiciliary State, for 

example, the Life, Property & Casualty, or Fraternal 

Blank. 

5Comprehensive major medical coverage sold to 

associations and trusts has been included in 

individual comprehensive major medical coverage 

for purposes of the RIA. CMS’s estimates exclude 

Medigap coverage, which in the NAIC data is 

reported separately from comprehensive major 

medical coverage offered in the individual and 

group markets. The 2009 NAIC data does not allow 

us to identify mini-med policies or expatriate 

policies separately. 

issuer. As discussed earlier in the 

preamble, commenters expressed 

concern that variations in State 

premium tax rates, by State and by type 

of issuer and the fact that some States 

do not have a premium tax, created an 

uneven playing field. Commenters also 

expressed concern about the difficulties 

and burden in calculating hypothetical 

tax liability. The final rule provides that 

an issuer will be able to deduct from 

earned premium the greater of the 

amount actually spent on community 

benefit expenditures limited to the 

State’s highest premium tax rate, or the 

amount it pays in State premium tax. 

Issuers that otherwise do not meet the 

MLR standard may increase community 

benefit expenditures if their current 

expenditure levels or premium taxes are 

lower than the maximum amount they 

would be able to deduct under the final 

rule. CMS anticipates that this may 

encourage community benefit 

expenditures and allow for more 

equitable treatment of issuers and 

eliminate the reporting burden inherent 

in not-for-profit issuers calculating a 

hypothetical tax liability. 

b. Costs 

Under the final rule, the multiplier for 

the numerator of the MLR for mini-med 

policies has been lowered from 2.00 to 

1.75 for the 2012 MLR reporting year, 

1.50 for the 2013 MLR reporting year 

and 1.25 for the 2014 MLR reporting 

year. Based on analysis of 2011 

quarterly data submitted by mini-med 

issuers, CMS anticipates that most 

issuers in this market would reach the 

applicable MLR standard. Issuers that 

do not otherwise meet the MLR 

standard may attempt to do so by 

increasing spending on quality 

improving activities and by increasing 

covered benefits or lowering consumers’ 

cost-sharing, which would increase 

issuer spending on medical care. 

There are some cost savings as a result 

of this final rule. 

Issuers of mini-med and expatriate 

policies were directed to submit a report 

for each of the first three quarters of the 

2011 MLR reporting year as provided 

under § 158.110(b), in addition to the 

annual report required of all issuers. 

Beginning in MLR reporting year 2012, 

these issuers will no longer submit 

quarterly reports. The elimination of 

this requirement will reduce these 

issuers’ administrative burden related to 

reporting, approximately $2.8 million 

dollars annually. 

This final rule also provides 

standardized ways to account for 

community benefit expenditures in the 

MLR methodology. Not-for-profit issuers 

will no longer need to calculate and 

report hypothetical tax liability and this 

will reduce administrative burdens 

related to reporting for these issuers. 

Finally, this rule provides for a more 

efficient and cost effective way for 

issuers in group markets to disburse 

rebate payments to enrollees by 

allowing issuers in group markets to 

provide rebates to the policyholders for 

distribution. This provision will lower 

administrative costs related to rebate 

disbursement for issuers of group health 

plans by approximately $1.8 million 

annually, and will largely eliminate the 

tax burden on employers and consumers 

inherent in the prior rebate mechanism. 

Policyholders will experience an 

increase in administrative costs related 

to the disbursement of rebates, although 

these administrative costs will be offset 

by eliminating the administrative 

burden and tax consequences inherent 

in the prior rebate mechanism. 

c. Transfers 

To the extent that issuers’ MLR 

experience falls short of the minimum 

MLR standard, they must provide 

rebates to enrollees. These rebates 

would reflect transfer of income from 

the issuers or their shareholders to the 

policyholders. 

Under the interim final rule, for the 

2011 MLR reporting year, the total of the 

incurred claims and expenditures for 

activities that improve healthcare 

quality for mini-med experience is 

multiplied by a factor of 2.00. The level 

of the adjustment is changed from a 

multiplier of 2.00 under the interim 

final rule to a multiplier of 1.75 for the 

2012 MLR reporting year, 1.50 for the 

2013 MLR reporting year and 1.25 for 

the 2014 MLR reporting year under the 

final rule. The adjustment of the MLR 

methodology for mini-med policies will 

result in higher rebate payments to 

enrollees, estimated to be approximately 

$1.3 million in 2012 and $4.1 million in 

2013, assuming the spending patterns 

included in the 2011 quarterly data do 

not change. However, the final rule also 

allows issuers to account for ICD–10 

conversion costs and community benefit 

expenditures in the MLR, both up to a 

specified cap, which will lower rebate 

payments. In addition, issuers of minimed policies that do not otherwise meet 

the MLR standard may attempt to do so 

by increasing spending on quality 

promoting activities and medical care, 

which would result in savings for 

consumers and reduced profits for 

issuers. 

In addition, this final rule allows 

issuers in group markets to disburse 

rebate payments to enrollees by 

allowing issuers to provide rebates to 

the policyholder for distribution. This 

change in the process for disbursement 

of rebate payments for enrollees in 

group health plans may result in a 

transfer of benefits from enrollees who 

have left the group health plan to 

enrollees new to the group health plan. 

4. Overview of Data Sources, Methods, 

and Limitations 

As discussed in the MLR interim final 

regulation, the most complete source of 

data on the number of licensed entities 

offering fully insured, private 

comprehensive major medical coverage 

in the individual and group markets is 

the National Association of Insurance 

Commissioners’ (NAIC) Annual 

Financial Statements and Policy 

Experience Exhibits database. These 

data contain multiple years of 

information on issuers’ revenues, 

expenses, and enrollment, collected on 

various NAIC financial exhibits 

(commonly referred to as ‘‘Blanks’’) 

including Supplemental Health Care 

Exhibits (SHCEs) that issuers submit to 

State insurance regulators through the 

NAIC. The NAIC has four different 

Blanks for different types of issuers: 

Health; Life; Property & Casualty; and 

Fraternal issuers.4

In the interim final rule, our analysis 

relied on 2009 data from the NAIC 

database. A total of 618 issuers offering 

comprehensive major medical coverage 

filed annual financial statements in 

2009, with the Health and Life Blank 

filers accounting for approximately 99 

percent of all comprehensive major 

medical premiums earned. For this 

reason we restricted our analysis to 

Health and Life Blank companies. 

Comprehensive major medical 

coverage 5—including coverage offered 

in the individual and group markets that 

is subject to this final regulation— 

accounted for approximately 47.8 

percent of all Accident and Health 

(A&H) premiums in 2009. Although the 

NAIC data represent the best available 

data source with which to estimate 

impacts of the MLR regulation, the data 


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6The 2010 SHCE data includes data for each 

issuer by market (individual, small and large group) 

and by State. It also includes data such as QIA 

expenses, ICD–10 implementation costs, 

underwriting gain/loss and taxes and fees. 

7Not all issuers have 1,000 or more life-years and 

thus are not credible in each State in which they 

have mini-med business, but may become partially 

credible in the 2012 or 2013 reporting year when 

issuers combine two or three years of experience, 

respectively. 

contain certain limitations; we 

developed imputation methods to 

account for these limitations and we 

made several additional data edits that 

led us to exclude 176 companies from 

the analysis. We used the remaining 442 

companies to estimate the regulatory 

impacts that were discussed in the 

interim final rule, as well as the 

regulatory impacts that are discussed 

below. Please see the regulatory impact 

analysis of the interim final rule (75 FR 

74892) for additional methodological 

information. 

Although the 2009 NAIC data do not 

allow us to identify mini-med policies 

or expatriate policies separately, under 

the interim final rule, for the 2011 MLR 

reporting year issuers of mini-med and 

expatriate policies were required to 

report MLR data on a quarterly schedule 

under § 158.110(b). CMS has received, 

to date, two quarterly reports from these 

issuers. These quarterly reports are the 

best source of data for the experience of 

these policies. 

In addition, data from NAIC’s 2010 

SHCE has recently become available, 

and we are in the process of reviewing 

this information.6 We have reported 

some preliminary estimates from this 

data in this impact analysis. 

5. MLR and Rebate Estimation 

Methodology 

Consistent with the methodology that 

was used in the RIA for the interim final 

rule, the following formula has been 

used for estimating companies’ adjusted 

MLRs for the mini-med, expatriate 

markets, rounded to the nearest 

thousandth decimal place as dictated in 

the regulation: 

Adjusted MLR = (i + q/p¥t¥f) + c + u 

Where i = incurred claims 

q = expenditures on quality improving 

activities 

p = earned premiums 

t = Federal and State taxes 

f = licensing and regulatory fees 

c = credibility adjustment, if any 

u = low, medium, or high assumptions to 

account for quality improving activities, 

unknown behavioral changes and data 

measurement error. 

We then calculate rebates for a 

company whose adjusted MLR value in 

a State (or on a national basis for 

expatriate policies) falls below the 

minimum MLR standard in a given 

market using the following formulas: 

Rebates = [(m¥a) * (p ¥ t ¥ f)] 

Where m = the applicable minimum MLR 

standard for a particular market 

a = an issuer’s adjusted MLR for a particular 

State and market. 

Finally, to estimate impacts under the 

final rule, for each year, we assume that 

the number of issuers, enrollment, and 

experience are stable over time. 

6. ‘‘Mini-med’’ Policies 

The term ‘‘mini-med’’ policy is used 

here to generally refer to policies that 

often cover the same types of medical 

services as comprehensive medical 

policies, but have annual benefit limits 

at or below $250,000. We therefore have 

been using this figure as a proxy for 

capturing this type of policy. Under the 

interim final rule, for the 2011 MLR 

reporting year, HHS allowed a 

methodological change to address the 

special circumstances of mini-med 

policies. Mini-med policy issuers 

applied an adjustment to their reported 

experience to address the unusual 

expense and premium structure of these 

policies. Specifically, in the case of a 

policy with a total of $250,000 or less 

in annual limits, the total of the 

incurred claims and expenditures for 

activities that improve health care 

quality reported was multiplied by a 

factor of 2.00. Under this final rule, this 

factor will be 1.75 for the 2012 MLR 

reporting year, 1.50 for the 2013 MLR 

reporting year and 1.25 for the 2014 

MLR reporting year. A graduated 

allowance for the adjustment of 1.75 in 

2012, 1.50 in 2013 and 1.25 in 2014 will 

incentivize issuers to reduce their 

administrative expenses and operate 

more efficiently to ensure that they meet 

the MLR standard while minimizing 

issuer market withdrawal, maintaining 

access to coverage for consumers and 

ensuring that they receive greater value 

from these policies until 2014. We have 

applied a multiplier through the 2014 

MLR reporting year to account for minimed policies with a plan year that 

begins after January 1, 2013 and ends 

sometime in 2014. 

Under the interim final rule, for the 

2011 MLR reporting year, issuers of 

mini-med policies were required to 

report three quarters of MLR data on a 

schedule specified under § 158.110(b), 

in addition to the annual report required 

of all issuers. Issuers of mini-med 

policies have submitted two quarterly 

reports thus far based on 2011 data. 

Table VI.2 shows the estimated 

distribution of issuers offering coverage 

in the mini-med market. Based on the 

reports that have been submitted, there 

are 25 issuers offering mini-med 

policies in 2011, including 12 issuers in 

the individual market, four issuers in 

the small group market and 15 issuers 

in the large group market, which cover 

more than 300 life-years each in a given 

State.7 Only five mini-med issuers offer 

policies in multiple markets, and of 

those five only one issuer offers such 

policies in all three markets. In 

addition, 11 issuers offer mini-med 

policies in only one State, while 14 offer 

policies in multiple States. There are 

277 issuer/State/market combinations. 

TABLE VI.2—ESTIMATED NUMBER OF MINI-MED POLICY ISSUERS SUBJECT TO MEDICAL LOSS RATIOS BY MARKET

Description 

Number of issuers Enrollment 

Number Percentage 

of total Number Percent of total 

Total # of Issuers ................................................................................................................. 25 100 931,866 100 

By Market: 

Individual ....................................................................................................................... 12 48 234,859 25 

Small Group .................................................................................................................. 4 16 18,770 2 

Large Group ................................................................................................................. 15 60 678,237 73 

Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies, each with more than 300 lifeyears of experience. (2) Enrollment represents ‘‘life-years’’ (life-years are the total number of months of enrollees’ coverage during the MLR reporting year, divided by 12 if based upon a full year of reporting). 


emcdonald on DSK5VPTVN1PROD with RULES3
76588 Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 

8This six percent MLR is for an issuer that sells 

a policy with a $50,000 deductible and thus has 

very low claims. 

9 In the absence of any recognition of any special 

circumstances adjustment, CMS estimates that 

seven mini-med issuers would have paid rebates of 

approximately $53 million in the individual market 

and six mini-med issuers would have paid rebates 

of approximately $120 million in the large group 

market. 

Analysis of data shows that in the 

absence of any recognition of special 

circumstances, the 2011 credibilityadjusted MLRs for issuers of mini-med 

policies range from six 8 percent to 134 

percent in the individual market, with 

a mean of 67 percent and a median of 

66 percent; 62 percent to 96 percent in 

the small group market, with a mean of 

70 percent and a median of 73 percent; 

and 62 percent to 105 percent in the 

large group market, with a mean of 75 

percent and a median of 71 percent. The 

large variations in the MLRs may be 

explained by variations in products, 

deductibles and premiums. For 

example, a plan with a low premium 

but a very high deductible will have 

very few claims, resulting in a very low 

MLR, while a plan with a higher 

premium but lower deductible would 

have more claims and would have a 

higher MLR. For the 2011 MLR 

reporting year, based on multiplying 

total incurred claims and expenditures 

for activities that improve health care 

quality by a factor of 2.00 (consistent 

with the provisions in the interim final 

rule), it is estimated that three issuers of 

mini-med policies will pay rebates of 

approximately $1.1 million in the 

individual market while no mini-med 

issuers will pay rebates in the small or 

large group markets.9

We use 2011 data to estimate the 

effects of the change in MLR 

methodology and assume no changes in 

issuers’ behavior or quality 

improvement activities beyond what 

was reported in the quarterly filing. As 

shown in Table VI.3, it is estimated that 

with a multiplier of 1.75, four of the 25 

issuers will pay rebates of $2.4 million 

to 45,838 enrollees. With a multiplier of 

1.50, six of the 25 issuers would pay 

rebates of $5.2 million to 73,427 

enrollees. Therefore, a reduction in the 

multiplier from 2.00 to 1.75 in the 2012 

MLR reporting year and a further 

reduction to 1.50 in the 2013 MLR 

reporting year will result in higher 

rebates being paid to enrollees, with 

more issuers affected and more 

enrollees receiving rebates. It is 

important to note, however, that issuers 

can change their spending targets to 

adjust to meet MLR targets moving 

forward. 

TABLE VI.3—ESTIMATED ANNUAL REBATE PAYMENTS BY MINI-MED POLICY ISSUERS BY MARKET, 2011 

Market 

Multiplier = 1 (no adjustment) Multiplier = 2 Multiplier = 1.75 Multiplier = 1.50 

Number 

of 

affected 

issuers 

Number 

of 

enrollees 

receiving 

rebates 

Estimated 

rebate 

($ million) 

Number 

of 

affected 

issuers 

Number 

of 

enrollees 

receiving 

rebates 

Estimated 

rebate 

($ million) 

Number 

of 

affected 

issuers 

Number 

of 

enrollees 

receiving 

rebates 

Estimated 

rebate 

($ million) 

Number 

of 

affected 

issuers 

Number 

of 

enrollees 

receiving 

rebates 

Estimated 

rebate 

($ million) 

Individual Market 7 176,204 $53.0 3 43,463 $1.1 4 45,838 $2.4 5 62,699 $5.0 

Small Group 

Market ............ 0 0 0.0 0 0 0 0 0 0.0 0 0 0.0 

Large Group 

Market ............ 6 575,786 120.4 0 0 0.0 0 0 0.0 1 10,728 0.2 

Total ........... 13 751,990 173.4 3 43,463 1.1 4 45,838 2.4 6 73,427 5.2 

Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies with more than 300 life-years of experience in at least one 

State. 

Beginning in MLR reporting year 

2012, issuers of mini-med policies will 

only submit an annual report and will 

no longer be required to submit 

quarterly reports. Therefore, this will 

significantly reduce the annual costs 

related to MLR reporting for issuers. 

Issuers of mini-med policies were 

required to submit a report for each of 

the first three quarters of the 2011 MLR 

reporting year as provided under 

§ 158.110(b) for each large group market, 

small group market, and individual 

market within each State in which the 

issuer conducts business. Therefore, in 

addition to the annual report which is 

required of all issuers, mini-med issuers 

were required to submit a total of 277 

reports three times a year. The burden 

estimates included in the information 

collection requirement for the quarterly 

reports estimated that each quarterly 

report would require 62.4 hours with an 

hourly labor cost of $52.46; therefore the 

estimated total annual administrative 

cost for all mini-med issuers for all 

quarterly reports would be 

approximately $2.7 million. Each year, 

the cost reduction associated with 

eliminating the quarterly reporting 

requirement will be approximately $2.7 

million for all issuers of mini-med 

policies. CMS anticipates that the 

adjustment in MLR methodology and 

reduction in reporting costs will allow 

issuers to remain profitable and ensure 

continued access to coverage for 

enrollees in this market, while bringing 

increased value to consumers. 

7. Expatriate Policies 

Expatriate policies provide coverage 

for employees, substantially all of whom 

are: working outside of their country of 

citizenship; working outside of their 

country of citizenship and outside the 

employer’s country of domicile; or nonU.S. citizens working in their home 

country. As discussed earlier in the 

preamble, based on public comments 

and review of data submitted by 

expatriate policy issuers, the unique 

nature of these policies results in a 

higher percentage of administrative 

costs in relation to premiums than 

policies that provide coverage primarily 

within the United States. Under the 

interim final rule, for the 2011 MLR 

reporting year, issuers were required to 

report the experience of these expatriate 

policies separately from other coverage, 

as provided in § 158.120(d)(4), and the 

calculation of claims and quality 

improving activities for these policies 

was to be multiplied by a factor of 2.00, 

as provided in § 158.221(b). Under this 

final rule, beginning in MLR reporting 

year 2012, this factor will remain 2.00. 

Issuers of expatriate policies were 

required in 2011 to report three quarters 

of MLR data on a quarterly schedule 

specified under § 158.110(b), in addition 

to the annual report required of all 

issuers. Issuers of expatriate policies 

have submitted two quarterly reports 

thus far based on 2011 data. Table VI.4 

shows the estimated distribution of 

issuers offering coverage in the 


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Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 76589 

10 In the absence of any recognition of any special 

circumstances adjustment, CMS estimates that four 

issuers in the large group market would have paid 

rebates of approximately $145 million, while no 

issuer would have paid rebates in the small group 

market. 

expatriate market. Based on the reports 

that have been submitted, there are eight 

issuers in offering expatriate coverage in 

2011—two issuers in the small group 

market and seven issuers in the large 

group market. Only one issuer offers 

policies in both markets. There are nine 

issuer/market combinations. 

TABLE: VI.4—ESTIMATED NUMBER OF EXPATRIATE POLICY ISSUERS SUBJECT TO MEDICAL LOSS RATIOS BY MARKET

Description 

Number of issuers Enrollment 

Number Percentage 

of total Number Percent of total 

Total # of Issuers ............................................................................................................... 8 100 287,789 100 

By Market: 

Small Group ................................................................................................................ 2 25 903 0.3 

Large Group ............................................................................................................... 7 87.5 286,887 99.7 

Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of expatriate policies, each with more than 300 lifeyears of experience. (2) Enrollment represents ‘‘life-years’’. 

Analysis of data shows that in the 

2011 MLR reporting year, in the absence 

of any recognition of special 

circumstances, issuers of expatriate 

policies had adjusted MLRs that range 

from 32 percent to 61 percent in the 

small group market and from 49 percent 

to 85 percent, with a mean of 69 percent 

and median of 72 percent, in the large 

group market. For 2011, based on 

multiplying total incurred claims and 

expenditures for activities that improve 

health care quality by a factor of 2.00 

(consistent with the provisions in the 

interim final rule), it is estimated that 

no issuer of expatriate policies will pay 

any rebates.10

We use 2011 data to estimate the 

effects of maintaining the multiplier of 

2.00 and assume no changes in issuers’ 

behavior and quality improvement 

activities beyond what was reported in 

the quarterly filing. It is estimated that 

with a multiplier of 2.00, no issuer will 

likely have an MLR below the threshold 

in 2012 and 2013, consistent with the 

policy in the first year. This should help 

ensure that the MLR standard does not 

cause issuers to leave the market. 

Beginning in MLR reporting year 

2012, expatriate policy issuers will 

submit only an annual report and will 

no longer be required to submit 

quarterly reports. The interim final rule 

required issuers of mini-med policies to 

submit a report for each of the first three 

quarters of the 2011 MLR reporting year 

as provided under § 158.110(b) for each 

large group market, small group market, 

and individual market, combining data 

from all states in which the issuer 

conducts business. Therefore, in 

addition to the annual report required of 

all issuers, expatriate issuers were 

required to submit a total of nine reports 

three times a year. The burden estimates 

included in the information collection 

requirement for the quarterly reports 

estimated that each quarterly report 

would require 62.4 hours with an 

hourly labor cost of $52.46. Therefore, 

estimated total annual cost for all 

expatriate policy issuers for all quarterly 

reports would be approximately 

$88,000. The provisions in this final 

rule will reduce the annual costs related 

to MLR reporting for issuers. This cost 

reduction will be approximately 

$88,000 for all expatriate policy issuers 

per year. CMS anticipates that the 

adjustment in MLR methodology and 

reduction in reporting costs will allow 

issuers to remain viable and ensure 

continued access to coverage for 

enrollees in this market. 

8. ICD–10 Conversion Costs 

In the interim final rule, HHS adopted 

the NAIC’s recommendation to exclude 

the conversion of International 

Classification of Disease (ICD) code sets 

from ICD–9 to ICD–10 as a quality 

improvement activity. However, there is 

general recognition that the conversion 

to ICD–10 will enhance the provision of 

quality care through the collection of 

better and more refined data. As 

discussed earlier in the preamble, some 

believe that ICD–10 coding can improve 

health plans’ ability to share data among 

clinicians for quality improvement and 

care coordination activities, thereby 

allowing for a better understanding of 

diagnoses and better treatment. This 

final rule provides that for each of the 

MLR reporting years 2012 and 2013, 

issuers may account for ICD–10 

conversion costs of up to 0.3 percent of 

earned premiums in the relevant State 

market as a quality improving activity in 

their MLR calculation. In addition, ICD– 

10 maintenance costs will continue to 

be excluded from QIA in the final rule, 

based on the industry’s comments that 

separating conversion costs from 

maintenance costs is feasible. The 

industry provided a range of 

percentages using their projected 

expenditures of ICD–10 conversion 

costs on their MLRs, if allowed as a 

QIA. After reviewing the data provided 

by issuers and 2010 SHCE filings, CMS 

chose a cap that allows as QIA amounts 

that issuers projected spending on ICD– 

10 conversion, without permitting 

issuers to include claims adjudication 

systems costs in QIA. 

Preliminary analysis of 2010 SHCE 

data indicates that issuers reported ICD– 

10 conversion costs as representing less 

than 0.02 percent of earned premiums 

for individual, small group and large 

group comprehensive major medical 

coverage. However, ICD–10 conversion 

costs are expected to be higher for 2011 

through 2013 since implementation 

efforts had only begun in 2010 but 

conversion to ICD–10 must be 

completed by October 2013. As stated 

earlier in the preamble, one issuer 

estimated that ICD–10 implementation 

will cost the entire industry between 

$50–70 million each year for 2011 

through 2013. Another issuer 

anticipated spending $9.4 million in 

2011 on ICD–10 implementation. An 

industry association commented that a 

study of 20 health insurance plans 

found that the costs averaged about $12 

per member, with small health plans 

paying around $38 per member and 

large health plans paying around $11 

per member. However, none of these 

comments indicate whether these 

estimates apply to issuers subject to the 

MLR requirements, Medicare, Medicaid, 

self-insured, or other types of plans or 

the time frame spanned by these 

estimates. In the absence of data on 

actual costs related to ICD–10 

conversion that will be included in the 

2012 and 2013 MLR calculations, it is 

difficult to estimate the effect of this 

provision on issuers and rebates. Even 

so, we expect that accounting for these 

costs in MLR calculation will only have 

a small effect on MLRs and rebates. 


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9. Community Benefit Expenditures 

In the interim final rule, HHS adopted 

the NAIC’s recommendation to allow 

community benefit expenditures (as 

defined in § 158.162(c)(2)) by not-forprofit plans to be excluded from 

premium revenue up to the State 

premium tax rate, and requiring that 

not-for-profit issuers report their actual 

community benefit expenditures up to 

the amount they would have paid in 

Federal and State taxes if they had been 

for-profit. As discussed elsewhere in the 

preamble, this final rule provides that 

issuers will be able to deduct either the 

amount it paid in State premium taxes 

or the amount of its community benefit 

expenditures up to a maximum of the 

highest State premium tax rate in the 

State, whichever is greater. This creates 

a level playing field among issuers in 

States that have different premium tax 

rates for different types of plans, for 

example, PPOs and HMOs. 

In the absence of reliable data on the 

total number of not-for-profit issuers 

offering major medical coverage and on 

community benefit expenditures, we are 

unable to quantify the effect of this 

provision. Five commenters proposed a 

flat deduction limit ranging between 3 

to 5 percent of earned premium. 

Currently, 48 States have premium 

taxes, but tax rates in many States differ 

for different kinds of plans and in some 

States they differ for not-for-profit and 

for-profit issuers. Several States do not 

tax HMOs or not-for-profit issuers at all. 

State premium taxes range between 0.4 

percent and 4.265 percent, according to 

data provided by the NAIC, and these 

taxes have been accounted for in the 

MLR and rebate calculations in the 

interim final rule. It is not known how 

many issuers will include community 

benefit expenditures or State premium 

tax liability in their MLR calculation, or 

how much community benefit 

expenditures will be included in the 

MLR calculation. Rebates may be 

reduced for issuers in States with a 

higher maximum premium tax rate than 

they are required to pay (for example, an 

issuer is an HMO and the State has a 

higher premium tax rate for PPOs) and 

who have higher community benefit 

expenditures than the applicable 

premium tax rate. 

As discussed earlier in the preamble, 

CMS anticipates that this treatment will 

encourage community benefit 

expenditures. Issuers that otherwise do 

not meet the MLR standard may 

increase community benefit 

expenditures if their current 

expenditure levels or premium taxes are 

lower than the maximum amount they 

would be able to deduct under the final 

rule. This provision will also allow 

more equitable treatment of issuers, and 

reduce significantly the reporting 

burden related to community benefit 

expenditures, as not-for-profit issuers no 

longer need to calculate and report 

hypothetical tax liabilities. 

10. Distribution of Rebates to Enrollees 

in Group Markets 

Section 2718(b)(1)(A) of the PHS Act 

requires an issuer to provide ‘‘an annual 

rebate to each enrollee’’ if the issuer 

does not meet the applicable MLR 

standard. The interim final rule directs 

issuers of group coverage to provide 

rebates to the policyholder and each 

subscriber in amounts proportionate to 

the amount of premium each paid. The 

interim final rule also allows an issuer 

to delegate its rebate disbursement 

obligation to group policyholders, 

though the issuer remains liable for 

complying with all its obligations under 

the statute and for maintaining records 

that demonstrated rebates were 

provided accurately. As discussed 

elsewhere in this preamble, commenters 

expressed concern that the issuer lacks 

access to the information needed to 

distribute rebates, asserting that the 

policyholder, and not the issuer, has 

information regarding the premium 

contribution amount from the employer 

and the employee. 

This final rule provides that issuers 

will distribute rebates to the 

policyholder to be used for the benefit 

of subscribers. For policyholders that 

are a group health plan but are not a 

governmental plan or subject to ERISA, 

an issuer must obtain written assurance 

from the policyholder that rebates will 

be used for the benefit of current 

subscribers using one of the options 

permitted for non-Federal governmental 

plans as described in the interim final 

rule issued contemporaneously with 

this final rule; otherwise, the issuer 

must evenly distribute the rebate 

directly to the policyholder’s 

subscribers covered by the policy during 

the MLR reporting year on which the 

rebate is based. 

Disbursing rebates directly to 

subscribers would result in a tax burden 

for consumers and also a taxadministration burden for the issuers 

making the payment, as most premiums 

are paid with pre-tax dollars and thus 

the rebates may be wages subject to 

withholding obligations. Because 

issuers would not otherwise be paying 

wages to these individuals, the 

administrative burden of administering 

any applicable withholding obligations 

could be significant in total. If the 

rebates are disbursed to the 

policyholder (generally the employer) 

for the benefit of subscribers (generally 

the employees), they must be used in a 

way that benefits subscribers (in the 

case of ERISA plans, consistent with 

their fiduciary obligations) but 

minimizes any tax administration issues 

for employers and enrollees, while 

consumers would still receive the 

benefit of the rebates. Subscribers who 

no longer are covered under the group 

health plan, however, generally would 

not receive the benefits from the rebates 

distributed through the policyholder. 

Therefore, there would be a transfer of 

benefits from enrollees who leave the 

plan to new enrollees in the same plan. 

We expect this transfer to be small since 

persistence rates in group health plans 

tend to be high. 

Group health plan issuers will also 

experience savings due to the fact that 

rebate payments will no longer be 

required to be sent to a large number of 

individuals. In the interim final rule, the 

average cost of sending rebate payments 

was estimated to be $1 per check. For 

the years 2012 and 2013, it was 

estimated that each year 0.8 million 

enrollees in the small group market and 

1 million enrollees in the large group 

market would receive rebates and 50 

percent of these enrollees would receive 

rebate checks. Assuming that all issuers 

of group coverage distribute rebates to 

policyholders, we estimate that this will 

lead to an annual reduction in 

administrative costs of approximately 

$1.8 million for these issuers. However, 

policyholders will experience an 

increase in administrative costs related 

to the disbursement of rebates. The 

actual cost would depend on whether 

the policyholders send rebate checks or 

whether the rebates are disbursed 

through future premium reductions or 

through payroll. These costs will also be 

offset by eliminating the administrative 

burden and tax consequences inherent 

in the prior rebate mechanism. 

C. Regulatory Alternatives 

Under the Executive Order, CMS is 

required to consider alternatives to 

issuing regulations and alternative 

regulatory approaches. CMS considers a 

variety of regulatory alternatives below. 

1. Mini-Med and Expatriate Policies 

One alternative to the MLR 

methodology set forth in this final rule 

is to provide no adjustments in the MLR 

calculation for the experience of these 

policies. Without any adjustments to the 

MLR methodology for issuers of minimed policies with total annual benefit 

limits of $250,000 or less, CMS 

estimates that in 2011, seven issuers 

would have paid rebates of 

approximately $53 million in the 


emcdonald on DSK5VPTVN1PROD with RULES3
Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 / Rules and Regulations 76591 

11 ‘‘Table of Size Standards Matched to North 

American Industry Classification System Codes,’’ 

effective November 5, 2010, U.S. Small Business 

Administration, available at http://www.sba.gov. 

individual market and six issuers would 

pay approximately $120 million in the 

large group market. Without any 

adjustments to MLR methodology for 

issuers of expatriate policies, CMS 

estimates that in 2011, four issuers in 

the large group market would have paid 

rebates of approximately $145 million. 

Another alternative was to maintain 

the multiplier of 2.00 provided in the 

interim final rule, for mini-med policies 

with total annual benefit limits of 

$250,000 or less. Based on 2011 data, 

with a multiplier of 2.00, three issuers 

of mini-med policies in the individual 

market would have paid an estimated 

$1.1 million in rebates while no issuers 

in the small or large group markets 

would have paid rebates. As described 

elsewhere in this preamble, CMS has 

concluded that the MLR methodology 

set forth in the final rule will best 

balance the goals of providing value to 

consumers and ensuring that consumers 

have continued access to coverage in 

these markets. 

2. Distribution of Rebates in the Group 

Market 

One alternative to the MLR 

methodology set forth in this final rule 

is to require issuers to send rebate 

payments directly to subscribers in 

group health plans. As described 

previously, this would result in 

increased tax burden for consumers 

with group coverage and for their 

employers, as well as increased 

administrative costs for issuers 

associated with rebate payments. As 

discussed earlier, the average annual 

cost per issuer of sending rebate checks 

was estimated to be between $43,962 

and $71,467 in the interim final rule. 

3. ICD–10 Conversion Expenses and 

Community Benefit Expenditures 

With respect to ICD–10 conversion 

costs, one alternative to the MLR 

methodology set forth in this final rule 

was to exclude these costs from QIA. As 

discussed previously, this would result 

in slightly lower MLRs for issuers and 

therefore higher rebate payments for 

issuers that fail to meet the MLR 

standard. 

With respect to community benefit 

expenditures, one alternative to the 

MLR methodology set forth in this final 

rule was to allow only a not-for-profit, 

tax-exempt issuer to deduct from earned 

premium the amount of its community 

benefit expenditures, limited to the 

State premium tax rate applicable to forprofit issuers and also require a not-forprofit issuer to report community 

benefit expenditures ‘‘in lieu of taxes 

* * * but not to exceed the amount of 

taxes [it] would otherwise be required to 

pay.’’ As discussed previously, this 

would result in lower MLRs for some 

issuers and therefore higher rebate 

payments for issuers that fail to meet the 

MLR standard. 

D. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires agencies that issue a regulation 

to analyze options for regulatory relief 

of small businesses if a rule has a 

significant 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 nonprofit 

organization that is not dominant in its 

field; or (3) a small government 

jurisdiction with a population of less 

than 50,000 (States and individuals are 

not included in the definition of ‘‘small 

entity’’). HHS uses as its measure of 

significant economic impact on a 

substantial number of small entities a 

change in revenues of more than 3 to 5 

percent. 

The Regulatory Flexibility Act only 

requires an analysis to be conducted for 

those final rules for which a Notice of 

Proposed Rule Making was required. 

Accordingly, we have determined that a 

regulatory flexibility analysis is not 

required for this final rule. However, 

CMS has considered the likely impact of 

this final rule on small entities. 

As discussed in the Web Portal final 

rule published on May 5, 2010 (75 FR 

24481), HHS examined the health 

insurance industry in depth in the 

Regulatory Impact Analysis we prepared 

for the proposed rule on establishment 

of the Medicare Advantage program (69 

FR 46866, August 3, 2004). In that 

analysis the Department determined 

that there were few if any insurance 

firms underwriting comprehensive 

health insurance policies (in contrast, 

for example, to travel insurance policies 

or dental discount policies) that fell 

below the size thresholds for ‘‘small’’ 

business established by the SBA 

(currently $7 million in annual receipts 

for health issuers).11

For the MLR interim final rule, the 

Department used the data set created 

from 2009 NAIC Health and Life Blank 

annual financial statement data to 

develop an updated estimate of the 

number of small entities that offer 

comprehensive major medical coverage 

in the individual and small group 

markets, and are therefore subject to the 

MLR reporting requirements. For 

purposes of this analysis, the 

Department used total Accident and 

Health (A&H) earned premiums as a 

proxy for annual receipts. These 

estimates may overstate the actual 

number of small health insurance 

issuers that would be affected, since 

they do not include receipts from these 

companies’ other lines of business. 

In the MLR interim final rule (75 FR 

74892), the Department estimated that 

there are 28 small entities with less than 

$7 million in A&H earned premiums 

that offer individual or group 

comprehensive major medical coverage, 

and would therefore be subject to the 

requirements of this final regulation. 

These small entities accounted for 

6 percent of the estimated 442 total 

issuers that the Department estimated 

would be affected by the MLR 

requirements. The Department 

estimated that 86 percent of these small 

issuers are subsidiaries of larger carriers, 

75 percent only offer coverage in a 

single State, 68 percent only offer 

individual or group comprehensive 

coverage in a single market, 46 percent 

also offer other types of A&H coverage, 

and 29 percent are Life Blank filers. 

CMS has estimated that the provisions 

of the final rule do not impose any 

additional costs on small entities. There 

are, however, some cost savings as a 

result of this final rule. There will be an 

increase in rebates for some issuers of 

mini-med policies with total annual 

benefit limits of $250,000 or less, 

though no small entities are affected. 

The changes in MLR methodology to 

account for inclusion of ICD–10 costs 

and community benefit expenditures 

will also lead to reduction in rebates 

and will therefore, not affect any small 

entities adversely. 

CMS believes that these estimates 

overstate the number of small entities 

that will be affected by the requirements 

in this final regulation, as well as the 

relative impact of these requirements on 

these entities because the Department 

has based its analysis on issuers’ total 

A&H earned premiums (rather than their 

total annual receipts). Therefore, the 

Secretary certifies that these final 

regulations will not have significant 

impact on a substantial number of small 

entities. In addition, section 1102(b) of 

the Social Security Act requires us to 

prepare a regulatory impact analysis if 

a rule may have a significant economic 

impact on the operations of a substantial 

number of small rural hospitals. This 

analysis must conform to the provisions 

of section 604 of the RFA. This final 

rule would not affect small rural 

hospitals. Therefore, the Secretary has 

determined that this rule would not 

have a significant impact on the 


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operations of a substantial number of 

small rural hospitals. 

E. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that includes a Federal mandate 

that could result in expenditure in any 

one year by State, local or Tribal 

governments, in the aggregate, or by the 

private sector, of $100 million in 1995 

dollars, updated annually for inflation. 

In 2011, that threshold level is 

approximately $136 million. 

UMRA does not address the total cost 

of a rule. Rather, it focuses on certain 

categories of cost, mainly those ‘‘Federal 

mandate’’ costs resulting from: (1) 

Imposing enforceable duties on State, 

local, or Tribal governments, or on the 

private sector; or (2) increasing the 

stringency of conditions in, or 

decreasing the funding of, State, local, 

or Tribal governments under 

entitlement programs. 

Consistent with policy embodied in 

UMRA, this final regulation has been 

designed to be the least burdensome 

alternative for State, local and Tribal 

governments, and the private sector 

while achieving the objectives of the 

Affordable Care Act. 

This final regulation contains MLR 

methodology adjustments and rebate 

payment requirements for private sector 

firms (for example, health insurance 

issuers offering coverage in the minimed, expatriate, individual and group 

markets). CMS estimates that none of 

these provisions impose additional costs 

on consumers or private sector firms, 

and will lead to reduced administrative 

costs to issuers. There will be a 

reduction in rebates paid by issuers in 

individual, small and group markets 

due to inclusion of ICD–10 conversion 

costs and community benefit 

expenditures. Rebates paid by issuers of 

mini-med policies will increase by an 

estimated $59 million annually. It 

includes no mandates on State, local, or 

Tribal governments. 

F. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

In CMS’s view, while this final rule 

does not impose substantial direct 

requirement costs on State and local 

governments, this final regulation has 

Federalism implications due to direct 

effects on the distribution of power and 

responsibilities among the State and 

Federal governments relating to 

determining and enforcing minimum 

MLR standards and rebate requirements 

relating to coverage that State-licensed 

health insurance issuers offer in the 

individual and group markets. 

However, CMS anticipates that the 

Federalism implications (if any) are 

substantially mitigated because the 

Affordable Care Act does not provide 

any role for the States in terms of 

receiving or analyzing the data or 

enforcing the requirements of Section 

2718 of the PHS Act. 

As discussed in the MLR interim final 

rule, States may continue to apply State 

law requirements except to the extent 

that such requirements prevent the 

application of the Affordable Care Act 

requirements that are the subject of this 

rulemaking. State insurance laws that 

are more stringent than the Federal 

requirements are unlikely to ‘‘prevent 

the application of’’ the Affordable Care 

Act and to be preempted. 

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, the Department 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 regulation, to the extent 

feasible within the specific preemption 

provisions of HIPAA as it applies to the 

Affordable Care Act, the Department has 

attempted to balance the States’ 

interests in regulating health insurance 

issuers, and Congress’ intent to provide 

uniform minimum protections to 

consumers in every State. By doing so, 

it is the Department’s view that we have 

complied with the requirements of 

Executive Order 13132. Pursuant to the 

requirements set forth in section 8(a) of 

Executive Order 13132, and by the 

signatures affixed to this regulation, the 

Department certifies that the Centers for 

Medicare & Medicaid Services has 

complied with the requirements of 

Executive Order 13132 for the attached 

final regulation in a meaningful and 

timely manner. 

G. Congressional Review Act 

This final regulation is not subject to 

the Congressional Review Act 

provisions of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (5 U.S.C. 801 et seq.). 

List of Subjects in 45 CFR Part 158 

Administrative practice and 

procedure, Claims, Health care, Health 

insurance, Health plans, Penalties, 

Reporting and recordkeeping 

requirements. 

Accordingly, the interim final rule 

amending 45 CFR part 158, which was 

published at 75 FR 74864 on December 

1, 2010, and further amended by a 

correction on December 30, 2010, is 

adopted as final with the following 

changes: 

PART 158—ISSUER USE OF PREMIUM 

REVENUE: REPORTING AND REBATE 

REQUIREMENTS 

■ 1. 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. 

§ 158.110 [Amended] 

■ 2. Section 158.110 is amended by— 

■ a. Removing in paragraph (b)(1) the 

phrase ‘‘Except as provided in 

paragraph (b)(2) of this section, the’’ and 

adding ‘‘The’’ in its place. 

■ b. Removing paragraph (b)(2). 

■ c. Removing the paragraph 

designation for paragraph (b)(1). 

■ 3. Section 158.120 is amended by 

revising paragraphs (d)(3) and (4) to 

read as follows: 

§ 158.120 Aggregate reporting. 

* * * * * 

(d) * * * 

(3) An issuer with policies that have 

a total annual limit of $250,000 or less 

must report the experience from such 

policies separately from other policies. 

(4) An issuer with group policies that 

provide coverage to employees, 

substantially all of whom are: Working 

outside their country of citizenship; 

working outside of their country of 

citizenship and outside the employer’s 

country of domicile; or non-U.S. 

citizens working in their home country, 

must aggregate and report the 

experience from these policies on a 

national basis, separately for the large 

group market and small group market, 

and separately from other policies. 

■ 4. Section 158.150 is amended by— 

■ a. Adding paragraph (b)(2)(i)(A)(6). 

■ b. Revising paragraph (c)(5). 

The addition and revision read as 

follows: 

§ 158.150 Activities that improve health 

care quality. 

* * * * * 


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(b) * * * 

(2) * * * 

(i) * * * 

(A) * * * 

(6) For each of the 2012 and 2013 

MLR reporting years, implementing 

ICD–10 code sets that are designed to 

improve quality and are adopted 

pursuant to the Health Insurance 

Portability and Accountability Act 

(HIPAA), 42 U.S.C. 1320d–2, as 

amended, limited to 0.3 percent of an 

issuer’s earned premium as defined in 

§ 158.130 of this subpart. 

* * * * * 

(c) * * * 

(5) Establishing or maintaining a 

claims adjudication system, including 

costs directly related to upgrades in 

health information technology that are 

designed primarily or solely to improve 

claims payment capabilities or to meet 

regulatory requirements for processing 

claims, including maintenance of ICD– 

10 code sets adopted pursuant to the 

Health Insurance Portability and 

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

1320d–2, as amended. 

* * * * * 

■ 5. Section 158.162 is amended by— 

■ a. Revising paragraph (b)(1)(vii). 

■ b. Revising paragraph (c). 

The revisions read as follows: 

§ 158.162 Reporting of Federal and State 

taxes. 

* * * * * 

(b) * * * 

(1) * * * 

(vii) In lieu of reporting amounts 

described in paragraph (b)(1)(vi) of this 

section, an issuer 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. 

* * * * * 

(c) Community benefit expenditures. 

Community benefit expenditures means 

expenditures for activities or programs 

that seek to achieve the objectives of 

improving access to health services, 

enhancing public health and relief of 

government burden. This includes any 

of the following activities that: 

(1) Are available broadly to the public 

and serve low-income consumers; 

(2) Reduce geographic, financial, or 

cultural barriers to accessing health 

services, and if ceased to exist would 

result in access problems (for example, 

longer wait times or increased travel 

distances); 

(3) Address Federal, State or local 

public health priorities such as 

advancing health care knowledge 

through education or research that 

benefits the public; 

(4) Leverage or enhance public health 

department activities such as childhood 

immunization efforts; and 

(5) Otherwise would become the 

responsibility of government or another 

tax-exempt organization. 

■ 6. Section 158.221 is amended by 

revising paragraphs (b)(3) and (4) to read 

as follows: 

§ 158.221 Formula for calculating an 

issuer’s medical loss ratio. 

* * * * * 

(b) * * * 

(3) The numerator of the MLR for 

policies that are reported separately 

under § 158.120(d)(3) of this part must 

be the amount specified in paragraph (b) 

of this section, except that for the 2012 

MLR reporting year, the total of the 

incurred claims and expenditures for 

activities that improve health care 

quality are then multiplied by a factor 

of 1.75, for the 2013 MLR reporting year, 

the total of the incurred claims and 

expenditures for activities that improve 

health care quality are then multiplied 

by a factor of 1.50, and for the 2014 

MLR reporting year, the total of the 

incurred claims and expenditures for 

activities that improve health care 

quality are then multiplied by a factor 

of 1.25. 

(4) The numerator of the MLR for 

policies that are reported separately 

under § 158.120(d)(4) of this part must 

be the amount specified in paragraph (b) 

of this section, except that the total of 

the incurred claims and expenditures 

for activities that improve health care 

quality are then multiplied by a factor 

of 2.00. 

* * * * * 

■ 7. Section 158.241 is amended by 

revising paragraph (b) to read as follows: 

§ 158.241 Form of rebate. 

* * * * * 

(b) Former enrollees in the individual 

market. Rebates owing to former 

enrollees in the individual market must 

be paid in the form of lump-sum check 

or lump-sum reimbursement using the 

same method that was used for 

payment, such as credit card or direct 

debit. 

■ 8. Section 158.242 is amended by 

revising paragraph (b) to read as follows: 

§ 158.242 Recipients of rebates. 

* * * * * 

(b) Large group and small group 

markets. Except as provided in 

paragraphs (b)(3) and (4) of this section, 

an issuer must meet its obligation to 

provide any rebate to persons covered 

under a group health plan by providing 

it to the policyholder. 

(1) [Reserved.] 

(2) [Reserved.] 

(3) If the policyholder is a group 

health plan that is not a governmental 

plan and not subject to the Employee 

Retirement Income Security Act of 1974, 

as amended (29 U.S.C. 1001 et seq.) 

(ERISA), rebates may only be paid to the 

policyholder if the issuer receives a 

written assurance from the policyholder 

that the rebates will be used to benefit 

enrollees; otherwise, the issuer must 

distribute the rebate directly to the 

subscribers of the group health plan 

covered by the policy during the MLR 

reporting year on which the rebate is 

based by dividing the entire rebate, 

including the amount proportionate to 

the amount of premium paid by the 

policyholder, in equal amounts to all 

subscribers entitled to a rebate without 

regard to how much each subscriber 

actually paid toward premiums. 

(4) If the group health plan has been 

terminated at the time of rebate payment 

and the issuer cannot, despite 

reasonable efforts, locate the 

policyholder whose plan participants or 

employees were enrolled in the group 

health plan, the issuer must distribute 

the rebate directly to the subscribers of 

the terminated group health plan by 

dividing the entire rebate, including the 

amount proportionate to the amount of 

premium paid by the policyholder, in 

equal amounts to all subscribers entitled 

to a rebate without regard to how much 

each subscriber actually paid toward 

premiums. 

■ 9. Section 158.243 is amended by 

revising paragraph (a)(1) to read as 

follows: 

§ 158.243 De minimis rebates. 

(a) * * * 

(1) For a group policy for which the 

issuer distributes the rebate to the 

policyholder, if the total rebate owed to 

the policyholder and the subscribers 

combined is less than $20 for a given 

MLR reporting year; or for a group 

policy for which the issuer distributes 

the rebate directly to the subscribers, as 

provided in § 158.242(a)(3) and (4) of 

this subpart, if the total rebate owed to 

each subscriber is less than $5. 

* * * * * 

■ 10. Section 158.250 is revised to read 

as follows: 

§ 158.250 Notice of rebates. 

(a) Notice of rebates to policyholders 

and subscribers of group health plans. 

For each MLR reporting year, at the time 

any rebate of premium is provided to a 

policyholder of a group health plan in 

accordance with this part, an issuer 

must provide each policyholder who 

receives a rebate and subscribers whose 


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policyholder receives a rebate, or each 

subscriber who receives a rebate directly 

from an issuer, the following 

information in a form prescribed by the 

Secretary: 

(1) A general description of the 

concept of an MLR; 

(2) The purpose of setting an MLR 

standard; 

(3) The applicable MLR standard; 

(4) The issuer’s MLR, adjusted in 

accordance with the provisions of this 

subpart; 

(5) The issuer’s aggregate premium 

revenue as reported in accordance with 

§ 158.130 of this part, minus any 

Federal and State taxes and licensing 

and regulatory fees that may be 

excluded from premium revenue as 

described in § 158.162(a)(1) and (b)(1) of 

this part; 

(6) The rebate percentage and the 

amount owed to enrollees, as defined in 

section 158.240(b), based upon the 

difference between the issuer’s MLR and 

the applicable MLR standard; and 

(7) The fact that, as provided by this 

subpart, the total aggregated rebate for 

the group health plan is being provided 

to the policyholder: 

(i) If the policy provides benefits for 

a plan subject to ERISA, a statement that 

the policyholder may have additional 

obligations under ERISA’s fiduciary 

responsibility provisions with respect to 

the handling of rebates and contact 

information for questions regarding the 

rebate; 

(ii) If the policyholder is a nonFederal governmental plan, the 

proportion of the rebate attributable to 

subscribers’ contribution to premium 

must be used for the benefit of 

subscribers, using one of the methods 

set forth in § 158.242(b)(1) of this 

subpart; and 

(iii) If the policyholder is a group 

health plan that is not a governmental 

plan and is not subject to ERISA, 

(A) The policyholder has provided 

written assurance that the proportion of 

the rebate attributable to subscribers’ 

contribution to premium will be used 

for the benefit of current subscribers, 

using one of the methods set forth in 

§ 158.242(b)(1) of this subpart, or 

(B) If the policyholder did not provide 

such written assurance, the issuer must 

distribute the rebate evenly among the 

policyholder’s subscribers covered by 

the policy during the MLR reporting 

year on which the rebate is based. 

(b) Notice of rebates to subscribers in 

the individual market. For each MLR 

reporting year, at the time any rebate of 

premium is provided to a subscriber in 

the individual market in accordance 

with this part, an issuer must provide 

each subscriber that is receiving the 

rebate the following information in a 

form prescribed by the Secretary: 

(1) A general description of the 

concept of an MLR; 

(2) The purpose of setting an MLR 

standard; 

(3) The applicable MLR standard; 

(4) The issuer’s MLR, adjusted in 

accordance with the provisions of this 

subpart; 

(5) The issuer’s aggregate premium 

revenue as reported in accordance with 

§ 158.130 of this part, minus any 

Federal and State taxes and licensing 

and regulatory fees that may be 

excluded from premium revenue as 

described in § 158.162(a)(1) and (b)(1) of 

this part; and 

(6) The rebate percentage and amount 

owed to enrollees based upon the 

difference between the issuer’s MLR and 

the applicable MLR standard. 

■ 11. Section 158.260 is amended by 

revising paragraphs (c)(1) through (5) to 

read as follows: 

§ 158.260 Reporting of rebates. 

* * * * * 

(c) * * * 

(1) Number of subscribers in the 

individual, small group and large group 

markets to whom the issuer paid a 

rebate directly, and number of small 

group and large group policyholders 

receiving a rebate on behalf of enrollees; 

(2) Amount of rebates provided as 

premium credit; 

(3) Amount of rebates provided as 

lump sum payment regardless of 

whether in cash, reimbursement to an 

enrollee’s credit card, or direct payment 

to an enrollee’s bank account; 

(4) Amount of rebates that were de 

minimis as provided in § 158.243 of this 

subpart and the number of enrollees 

who did not receive a rebate because it 

was de minimis; and 

(5) Amount of unclaimed rebates, a 

description of the methods used to 

locate the applicable enrollees, and a 

description of how the unclaimed 

rebates were disbursed. 

Dated: November 2, 2011. 

Donald M. Berwick, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: November 29, 2011. 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2011–31289 Filed 12–2–11; 11:15 am] 

BILLING CODE 4120–01–P 


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