Vol. 78 Friday, 

No. 36 February 22, 2013 

Part II 

Department of Health and Human Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 422 and 423 

Medicare Program; Medical Loss Ratio Requirements for the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs; 

Proposed Rule 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
12428 Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 422 and 423 

[CMS–4173–P] 

RIN 0938–AR69 

Medicare Program; Medical Loss Ratio 

Requirements for the Medicare 

Advantage and the Medicare 

Prescription Drug Benefit Programs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement medical loss ratio (MLR) 

requirements for the Medicare 

Advantage Program and the Medicare 

Prescription Drug Benefit Program 

under the Patient Protection and 

Affordable Care Act. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. EST on April 16, 2013. 

ADDRESSES: In commenting, please refer 

to file code CMS–4173–P. Because of 

staff and resource limitations, we cannot 

accept comments by 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 ‘‘Submit a comment’’ instructions. 

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–4173–P, P.O. Box 8013, Baltimore, 

MD 21244–8013. 

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–4173–P, 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 

the 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, call 

telephone number (410) 786–1066 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. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: Ilina 

Chaudhuri, 410–786–8628 or 

Ilina.Chaudhuri@cms.hhs.gov. 

SUPPLEMENTARY INFORMATION: 

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:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

be 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 1–800–743–3951. 

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) (‘‘Reconciliation Act’’), 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 includes 

significant reforms to both the private 

health insurance industry and the 

Medicare and Medicaid programs. 

Provisions in the Affordable Care Act 

concerning the Part C Medicare 

Advantage (MA) and Part D Prescription 

Drug programs largely focus on 

beneficiary protections, MA payment 

reforms, and simplification of MA and 

Prescription Drug program processes for 

both programs. Regulations 

implementing most Affordable Care Act 

provisions pertaining to the MA and 

Prescription Drug Program provisions 

were published on April 5, 2011 (77 FR 

22072) and a correction was published 

June 1, 2012 (77 FR 32407). 

This proposed rule would implement 

section 1103 of Title I, Subpart B of the 

Reconciliation Act. This section of the 

Affordable Care Act amends section 

1857(e) of the Social Security Act (the 

Act) to add new medical loss ratio 

(MLR) requirements. An MLR is 

expressed as a percentage, generally 

representing the percentage of revenue 

used for patient care, rather than for 

such other items as administrative 

expenses or profit. Because section 

1860D–12(b)(3)(D) of the Act 

incorporates by reference the 

requirements of section 1857(e), these 

new Affordable Care Act medical loss 

ratio requirements also apply to the Part 

D program. Under these new 

requirements, MA organizations and 

Part D sponsors are required to report 

their MLR, and are subject to financial 

and other penalties for a failure to meet 

a new statutory requirement that they 

have an MLR of at least 85 percent. The 

Affordable Care Act requires several 

levels of sanctions for failure to meet the 

85 percent minimum MLR requirement, 

including remittance of funds to CMS, 

a prohibition on enrolling new 

members, and ultimately contract 

termination. This proposed rule sets 

forth CMS’ proposed approach to 

implement these new MLR 

requirements for the MA and Part D 

programs. 

II. Provisions of the Proposed 

Regulations 

A. Introduction 

The new minimum MLR requirement 

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

intended to create incentives for MA 

organizations and Part D sponsors to 

reduce administrative costs, and 

marketing, profits, and other uses of the 

funds earned by plan sponsors and help 


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to ensure that taxpayers and enrolled 

beneficiaries receive value from 

Medicare health plans. Under this 

proposed rule, an MLR would be 

determined based on the percentage of 

contract revenue spent on clinical 

services, prescription drugs, quality 

improving activities, and direct benefits 

to beneficiaries in the form of reduced 

Part B premiums. The higher the MLR, 

the more the MA organization or Part D 

sponsor is spending on claims and 

quality improving activities and the less 

they are spending on other things. MA 

organizations and Part D sponsors will 

remit payment to CMS when their 

spending on clinical services, 

prescription drugs, quality improving 

activities, and Part B premium rebates, 

in relation to their total revenue, is less 

than the 85 percent MLR requirement 

established under section 1857(e)(4) of 

the Act. We believe the payment 

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

the Act is designed to encourage the 

provision of value to policyholders by 

creating incentives for MA organizations 

and Part D sponsors to become more 

efficient in their operations. If a plan 

sponsor fails to meet MLR requirements 

for more than 3 consecutive years, they 

will also be subject to enrollment 

sanctions and, after 5 consecutive years, 

to contract termination. 

The Affordable Care Act also enacted 

a new MLR requirement under section 

2718 of the Public Health Service Act 

(PHSA) that applies to issuers of 

employer group and individual market 

private insurance. We have already 

issued regulations implementing this 

private insurance MLR. A request for 

information (RFI) relating to the PHSA 

MLR provision was published in the 

April 4, 2010 (75 FR 19297) Federal 

Register. In the December 1, 2010 

Federal Register (75 FR 74864), we 

published an interim final rule 

implementing the PHSA MLR 

requirements for health insurance 

issuers. Under this interim final rule, 

health insurance issuers must report an 

MLR and related supporting data by 

state and market (individual, small 

group or large group). If the required 

MLR threshold is not met in any one 

year, generally 85 percent in the large 

group market and 80 percent in the 

small group or individual market, health 

insurance issuers must provide a rebate 

to enrollees, which is generally done by 

providing it to the policyholder on 

behalf of the enrollees. Finally, 

enforcement of the reporting and rebate 

requirements of section 2718(a) and (b) 

of the PHSA are addressed, as 

specifically authorized in section 

2718(b)(3) of the PHSA. This interim 

final rule applies to covered private 

health insurance issuers beginning 

January 1, 2011. 

Since then, we have made several 

revisions and technical corrections to 45 

CFR part 158. On March 23, 2012, we 

also published a final rule (75 FR 

17220), entitled ‘‘Patient Protection and 

Affordable Care Act; Standards Related 

to Reinsurance, Risk Corridors, and Risk 

Adjustment,’’ that establishes standards 

for the establishment and operation of a 

transitional reinsurance program, 

temporary risk corridors program, and a 

permanent risk adjustment program. 

These programs do not go into effect 

until January 1, 2014. Therefore, the 

commercial MLR and rebate 

calculations in the December 1, 2010 

interim final rule do not take these 

programs into account. Section 2718(c) 

of the PHSA directs the National 

Association of Insurance Commissioners 

(NAIC), subject to certification by the 

Secretary, to establish uniform 

definitions and calculation 

methodologies related to MLRs. In the 

MLR IFR, we adopt the 

recommendations in the NAIC’s model 

MLR regulations. In 45 CFR 158.221(c) 

of the MLR IFR allows an issuer to 

deduct from earned premium federal 

and state taxes, and assessments, and in 

some instances, community benefit 

expenditures. We interpreted the MLR 

IFR to mean that a tax exempt not-forprofit issuer could deduct either state 

premium tax or community benefit 

expenditures, but not both. Therefore, 

on December 7, 2011, we published a 

final rule with comment period (76 FR 

76574) to revise the MLR IFR, in which 

we clarified that any issuer may deduct 

either state premium tax or community 

benefit expenditures, but not both. The 

final rule limited the community benefit 

expenditures deduction at the highest 

premium tax rate in the state. On 

December 7, 2012, we published a 

proposed rule (73 FR 73117), which 

discusses revising the policy of 

community benefit expenditures, in 

addition to discussion on the treatment 

of premium stabilization payments, 

timing of the annual commercial MLR 

reports, and distribution of rebates. We 

will call the body of rules on 

commercial MLR requirements the 

‘‘commercial MLR rules.’’ 

Section 2718 of the PHSA directed the 

NAIC to make recommendations to the 

Secretary of Health and Human Services 

(the Secretary), subject to certification 

by the Secretary. NAIC’s 

recommendations regarding definitions 

and methodologies for calculating MLRs 

were adopted in the commercial MLR 

rules. The NAIC, in making its 

recommendations, conducted a 

thorough and transparent process in 

which the views of regulators and 

stakeholders were discussed, analyzed, 

addressed and documented in 

numerous open forums held by a 

number of stakeholders, including state 

insurance departments (which includes 

the commissioner/superintendent and 

directors), the NAIC, issuers, and 

consumer representatives. The 

commercial MLR rules largely adopted 

the NAIC recommendations. 

In this proposed rule for the MA and 

Prescription Drug Benefit Programs, we 

are using the commercial MLR rules as 

a reference point for developing the 

Medicare MLR requirements. We have 

decided to do this for several reasons. 

First, the intent of the provisions to help 

ensure value for health coverage is 

comparable. Second, keeping the 

requirements similar will limit the 

burden on organizations that participate 

in both markets (the overwhelming 

majority of those offering Medicare 

products). Third, aligning the 

commercial and Medicare regulations 

will make commercial and Medicare 

MLRs as comparable as possible for 

comparison and evaluation purposes, 

including by Medicare beneficiaries. We 

recognize that some areas of the 

regulation for private health insurance 

plans needed to be revised to fit the 

unique characteristics of the MA and 

Prescription Drug plan (PDP) markets. 

For example, we propose that MA and 

Part D PDP MLRs will be reported on a 

contract basis, rather than by state and 

market. 

B. Scope, Applicability, and Definitions 

As noted previously, section 

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

requirements for a minimum MLR 

directly applies to the MA program. The 

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

Act also apply to the Medicare 

Prescription Drug Benefit Program, 

because section 1860D–12(b)(3)(D) of 

the Act requires that the contractual 

requirements at section 1857(e) of the 

Act apply to the Part D program. 

1. Scope and Applicability 

Part 422 of the Code of Federal 

Regulations (CFR) regulates the MA 

Program, and Part 423 of the CFR 

regulates the Part D program. This 

proposed rule would implement 

sections 1857(e)(4) and 1860D– 

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

Parts 422 and 423 a new Subpart X, 

‘‘Requirements for a Minimum Medical 

Loss Ratio.’’ 

The proposed Subpart X for the MA 

program has the same structure as the 

proposed Subpart X for the Part D 

program. Thus, discussion in this 


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preamble is organized by each Subpart 

X section, and both MA and Part D 

proposals are discussed within each 

section. Any differences between the 

MA and Part D proposals are described 

within the relevant section. 

Because section 1857(e) of the Act, 

where the MLR requirement appears in 

statute, does not directly apply to Cost 

HMOs/CMPs (Cost Health Maintenance 

Organizations/Competitive Medical 

Plans), HCPPs (Health Care Prepayment 

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

organizations, the proposed MLR 

requirements set forth in this rule 

generally do not apply to section 1876 

Cost HMO/CMPs, section 1833 HCPPs, 

or to PACE organizations, which are 

authorized under section 1894 of the 

Act. 

However, given the incorporation of 

section 1857(e)(4) by 1860–12(b)(3) of 

the Act, we believe that, to the extent 

Cost HMOs/CMPs offer Part D as an 

optional supplemental benefit under 

§ 417.440(b)(2)(ii), these requirements 

would apply to that Part D product. 

While an HCPP cannot offer Part D, to 

the extent an employer or union offering 

an HCPP to its members separately 

offers Part D coverage as an Employer/ 

Union Only PDP under section 1860D– 

22(b) of the Act, the MLR requirement 

does apply to these Part D programs. 

Therefore, for Cost HMOs/CMPs and 

employers or unions offering HCPPs, 

only those offering Part D are subject to 

the MLR requirements, and then only 

for the Part D portion of their benefit 

offerings. Since the MLR rule can only 

apply to the Part D portion of the 

benefits offered by Cost HMOs/CMPs 

and employers/unions offering HCPPs, 

we will treat them more like PDPs than 

MA–PDs for MLR purposes. Cost 

HMOs/CMPs and employers/unions 

offering HCPPs bid on Part D and 

receive Part D payments based on their 

bid. Thus, we propose to require 

remittances, suspend enrollment, and/or 

terminate such Part D contracts based 

on whether the cost HMOs/CMPs or 

employers/unions offering HCPPs meet 

the MLR requirement for the Part D 

benefits they offer under their contract 

with CMS. In essence, a Cost HMO/CMP 

or an HCPP that did not meet the 

minimum MLR requirement on the Part 

D portion of the benefits it provides to 

Medicare enrollees would potentially 

(after 3 consecutive years) be forced to 

stop enrolling new individuals in such 

Part D coverage and, after 5 consecutive 

years, would potentially lose the Part D 

portion of its contract. 

For PACE organizations offering Part 

D, the situation is different. Similar to 

Cost HMOs/CMPs and HCPPs, we do 

not believe that the MLR requirements 

at section 1857(e)(4) of the Act and this 

proposed rule apply to the A/B portion 

of a PACE organization’s benefit 

offering. In-so-far as section 1857(e)(4) 

of the Act does not apply to PACE 

organizations directly, its application to 

them would be only through its 

application to Part D through 

incorporation at section 1860D–12(b)(3) 

of the Act. However, unlike Cost HMOs/ 

CMPs and section 1833 HCPPs 

addressed in section 1876 of the Act, 

which are not compelled by any specific 

statutory or regulatory authority to offer 

Part D benefits, PACE organizations are 

required by both statute and regulation 

to provide drug coverage (see 

section1894(b)(1)(A)(i) of the Act and 

§ 460.92(a)). Thus, while Cost HMOs/ 

CMPs and HCPPs could continue to 

operate without offering Part D coverage 

to their enrolled members, PACE 

organizations as a practical matter could 

not, as they would likely have to absorb 

the full cost of fulfilling their obligation 

to cover drugs. To the extent that drug 

coverage other than Part D drug 

coverage could not be offered by PACE 

organizations, such a result would 

effectively terminate not only the Part D 

drug plan offered by a PACE 

organization, but the PACE organization 

itself. This result would have the effect 

of applying a Part D penalty on Part A 

benefits, Part B benefits and Medicaid 

benefits offered to dual eligibles. The 

Congress did not directly apply the MLR 

rule directly to these benefits (as MA– 

PD rules only apply to the Part D 

component of PACE plans). We believe 

this result would be inconsistent with 

the intent of the statutory authority 

establishing the PACE program at 

section 1894 of the Act as an option for 

dual eligibles. We note, however, that 

we have the authority to waive 

application of Part D requirements 

(including the new MLR requirements) 

to PACE organizations as such 

application could potentially result in 

the inability of a PACE program to 

continue, which we do not believe the 

Congress intended. Specifically, section 

1860D–21(c)(2) of the Act (incorporated 

for PACE under section 1860D–21(f)(1)) 

of the Act provides authority to waive 

provisions, such as the MLR 

requirement, to the extent such 

provisions duplicate, conflict with, or as 

may be necessary in order to improve 

coordination between Part D and PACE. 

We believe that application of the Part 

D MLR requirement to PACE 

organizations, even for only their Part D 

offering, would conflict with our 

understanding of the intent of the PACE 

statute and implementing regulations, as 

it could thwart the ability of the PACE 

plan to serve its special needs enrollees. 

Therefore, we propose not to apply the 

Part D MLR requirements to the Part D 

offerings of PACE organizations. 

2. Definitions 

In § 422.2401 and § 423.2401, we 

propose certain definitions pertaining to 

the MLR provisions. Note that there also 

are terms defined in other sections of 

the Part 422 Subpart X and Part 423 

Subpart X (for example, ‘‘incurred 

claims’’ is defined in § 422.2420(b) and 

§ 423.2420(b), and ‘‘quality improving 

activities’’ are defined in § 422.2430 and 

§ 423.2430.) 

First, we propose that the acronym 

MLR be used to refer to the medical loss 

ratio referenced in throughout Part 422, 

Subpart X and Part 423, Subpart X. 

We propose to define non-claims 

costs as those expenses for 

administrative services that are not: 

incurred claims, payments toward 

reducing the Part B premium for MA 

plan enrollees, expenditures on quality 

improving activities, licensing and 

regulatory fees, or state and federal taxes 

and assessments that cannot be 

deducted from total revenue. 

C. General Requirements for MA 

Organizations and Part D Sponsors 

Sections 1857(e)(4) and section 

1860D–12 of the Act (which 

incorporates section 1857(e)(4) of the 

Act by reference) set forth a requirement 

that MA organizations and Part D 

sponsors report MLRs, and that these 

MLRs meet the statutory standard of 85 

percent. Those organizations that do not 

meet this MLR requirement will be 

required to pay remittances. If 

organizations are unable to meet the 

minimum MLR for 3 consecutive years, 

they will also be subject to enrollment 

sanctions and for 5 consecutive years, 

contract termination. MA organizations 

and Part D sponsors will be required to 

submit data to CMS that will allow 

enrollees of health plans, consumers, 

regulators, and others to take into 

consideration MLRs as a measure of 

health insurers’ efficiency. Similar to 

the intentions of section 2718 of the 

PHSA, we believe that this provision is 

intended to provide beneficiaries both 

with information needed to better 

understand how much of plan sponsor 

revenue is used to pay for services, 

quality improving activities, and direct 

rebates for enrollees versus how much 

is used to pay for the ‘‘non-claims,’’ or 

administrative expenses, incurred by 

the plan sponsor as well as profits, and 

to provide incentives to spend more on 

the former group activities and less on 

the latter. 


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This section discusses two general 

issues regarding our proposed 

implementation of the MLR 

requirement: the level of aggregation at 

which MLRs must be reported, and the 

sanctions facing MA organizations and 

Part D sponsors when they do not meet 

the MLR requirement. 

1. Aggregation of MLR to the Contract 

Level 

Under the MA program, MA 

organizations offer MA plan benefit 

packages (MA plans, defined at § 422.2) 

under contracts with CMS. Plans offered 

under an MA contract can be MA-only 

plans (which only offer non-drug 

benefits) and/or MA–PD plans (which 

also offer Part D qualified prescription 

drug coverage). Further, under the Part 

D program, Part D sponsors, as defined 

in § 423.4, offer plan benefit packages 

(prescription drug plans or PDPs) under 

contracts with CMS. An MA 

organization or a Part D sponsor can 

have one or multiple contracts with 

CMS and, under each contract, the MA 

organization or Part D sponsor can offer 

one or multiple plans in which 

beneficiaries may enroll. 

We propose at § 422.2410(a) and 

§ 423.2410(a) that an MA organization 

and a Part D sponsor must report an 

MLR for each contract they have with 

CMS. We believe that the contract is the 

best level of aggregation for MLR 

reporting in Medicare. The contract 

provides the legal framework for our 

statutory and regulatory authority over 

MA organizations and Part D sponsors. 

For example, an MA organization is 

defined, at section 1857(a) of the Act 

and § 422.2, as a state-licensed entity 

that is certified by CMS as meeting the 

CMS contract requirements. 

Aggregating MLRs to the contract 

level is an approach that closely 

parallels the commercial MLR approach, 

which aggregates the MLR to the state 

and market level, rather than to each 

specific health plan policy or benefit 

offering. We note that MA and PDP 

contracts are also often executed at the 

state level. 

Moreover, we believe that requiring 

contract-level MLRs will promote 

program stability and the continued 

availability to beneficiaries of a variety 

of benefit structures in MA and Part D 

plans. Lastly, contract-level reporting is 

administratively less burdensome for 

MA organizations and Part D sponsors; 

for example, administrative costs will 

not need to be disaggregated by plan. 

We also considered the approach of 

requiring MLR reporting at the plan 

level, since beneficiaries enroll in a plan 

and experience their health care at the 

plan level (known as plan benefit 

package level), and since CMS’ bids and 

payments occur at this level. In 

addition, for a contract with a large 

number of plans, it arguably would be 

less disruptive to apply an enrollment 

or termination sanction at the plan level 

rather than the contract level. Plan-level 

MLRs also would be based on fewer 

enrollees and be more prone to random 

variations in claims experience. 

Contract-level MLRs would generally 

represent a more stable population and 

a larger claims base, resulting in more 

reliable and, therefore, more meaningful 

MLRs. In future years, we may 

reconsider the approach of calculating 

MLRs at the plan level. 

Finally, we considered applying the 

MLR at the organization level. Because 

many MA organizations and Part D 

sponsors are national organizations, an 

MLR at this level of aggregation would 

be less meaningful, particularly for 

beneficiaries who are comparing plans 

in a specific geographic area. Because 

resource commitments to services 

offered may differ by market, due to 

differences in labor costs, demand, and 

competition, a national MLR would 

provide less information to consumers. 

In addition, we determined that the 

application of enrollment-related and 

termination action sanctions to an MA 

organization or Part D sponsor that is 

nationally representative would have a 

much larger enrollee impact than 

contract-level sanctions. 

In short, we believe our proposal of 

contract-level aggregation for MLR 

calculation is both reasonable and in 

alignment with important goals of 

program stability and administrative 

simplification. 

We note that, while the statutory 

language at 1857(e)(4) of the Act uses 

the terms ‘‘MA plan,’’ it also uses the 

term ‘‘contract’’ six times. Further, the 

requirement that an MA ‘‘plan’’ ‘‘remit’’ 

an amount to CMS when the minimum 

MLR is not met clearly refers to the 

organization offering one or more MA 

plans, and not to a specific plan benefit 

package, which cannot take an action 

such as remitting an amount to CMS. 

We believe that the statute uses the term 

‘‘plan’’ in the generic sense in which it 

is often used to refer to an organization 

offering products, and that CMS thus 

has the discretion to apply and enforce 

the MLR requirement at the contract 

level. 

Note that the proposed requirement at 

§ 422.2410(a) and § 423.2410(a) refers to 

‘‘an MLR’’ for each contract. This 

proposal means that the MLR 

calculation for a contract that includes 

MA–PD plans must combine non-drug 

costs with prescription drug costs and 

non-drug revenues with prescription 

drug revenues, across all plans under 

the contract. We also considered the 

approach of requiring MA organizations 

to report two MLRs for each contract 

that include MA–PD plans: one for 

nondrug benefits and another for 

prescription drug benefits. We decided 

to require one MLR per MA contract, as 

this aligns better with the commercial 

MLR requirements, which require one 

MLR per issuer regardless of plan type, 

and which include prescription drug 

costs along with other expenditures on 

health care services. Further, it is not 

clear how meaningful having two 

effectively partial MLRs would be to 

consumers. 

Finally, Part C rebates often fund the 

Part D premiums for MA–PD plans and 

thus are used to provide Part D benefits. 

Since most MA contracts include MA– 

PD plans, requiring a single MLR for 

each MA contract is an administratively 

simple approach that eliminates the 

need for disaggregation of these rebates. 

2. Remittance Requirement 

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

and as set forth in proposed 

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

determine for a contract year that an MA 

organization or Part D sponsor has an 

MLR for a contract year that is less than 

0.85 (85 percent), the MLR requirement 

would not have been met and the 

sponsoring organization would be 

required to remit a payment to CMS. 

The amount of the remittance would be 

equal to the product of: (1) The total 

revenue under the contract for the 

contract year; and (2) the difference 

between 0.85 and the contract’s MLR. 

Total revenue is discussed later in 

section II.D. of this proposed rule. 

In order to support the reported MLR 

for each contract year, and in order to 

further allow comparison of MLRs 

across product lines (for example, 

Medicare and commercial), MA 

organizations and Part D sponsors 

would be required to report to CMS 

certain data concerning the MLR. 

Reporting requirements are addressed in 

section II.G. of this proposed rule. 

3. Enrollment Sanction 

As set forth in proposed § 422.2410(c) 

and § 423.2410(c), if an MA or PDP 

contract fails to have an MLR of at least 

0.85 for 3 or more consecutive contract 

years, we would not permit the 

enrollment of new enrollees in plans 

under that contract during the second 

succeeding contract year. We interpret 

this requirement to mean that, if a 

contract fails to have an MLR of 0.85 for 

3 or more consecutive years, we would 

halt all new enrollment into all plans 

covered under that contract. The year 


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for which the enrollment sanction 

would apply would be the second 

succeeding year after the third 

consecutive year in which the MA 

organization or Part D sponsor fails to 

meet the MLR requirement. For 

example, the MLRs for contract years 

2014 through 2016 would be reported in 

2015 through 2017. If a contract did not 

meet the MLR requirement for the 2014, 

2015, and 2016 contract years, we 

would not permit new enrollment in 

plans under that contract in 2018, 

which is the second succeeding contract 

year after the third consecutive year of 

failure (2016) to meet the MLR 

requirement. 

As discussed later in this section, if 

an MA or PDP contract fails to meet the 

MLR requirement for 5 consecutive 

years, we are required by statute to 

terminate the contract. Because a 

contract that fails to meet the MLR 

requirement for 4 consecutive years has 

failed to meet the requirement for 3 

consecutive years, we are thus 

proposing in § 422.2410(c) and 

§ 423.2410(c) to clarify that an 

enrollment sanction would apply to 

contracts that fail to meet the MLR for 

3 or more (that is, 4) consecutive years. 

4. Termination 

If the contract fails to have an MLR of 

at least 0.85 (85 percent) for 5 

consecutive contract years, we are 

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

the Act to terminate the contract. This 

requirement is reflected in proposed 

§ 422.2410(d) and § 423.2410(d). We 

propose to implement section 

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

the contract for the year following the 

year in which the plan sponsor is 

required to report the MLR for the fifth 

year. With respect to termination, we 

propose to implement the ‘‘second 

succeeding contract year’’ requirement 

in a manner similar to how we propose 

to implement the enrollment 

termination after 3 or more consecutive 

years of not meeting the minimum MLR 

requirement. Thus, for a contract that 

failed to meet the MLR requirement in 

2014 through 2018, we would terminate 

the contract in 2020. 

D. Calculation of Medical Loss Ratio 

1. Definition of Medical Loss Ratio 

In this section, we address the 

calculation of an MLR for MA and Part 

D contracts. Generally, our approach to 

what counts as costs and revenues 

(which are in the numerator and 

denominator, respectively) is consistent 

with the approach in the commercial 

MLR rules. Proposed § 422.2420(a) and 

§ 423.2420(a) set forth a high-level 

definition of the MLR as a ratio of the 

numerator defined in paragraph (b) to 

the denominator defined in paragraph 

(c). We propose to follow the 

commercial MLR rules by allowing MA 

organizations and Part D sponsors to 

increase the MLRs of low-enrollment 

contracts with a credibility adjustment. 

This adjustment is discussed in section 

F. 

Proposed section § 422.2410(a)(2) 

provides that the MLR for an MA 

contract not offering Part D prescription 

drug benefits would only be required to 

reflect the costs and revenues related to 

the benefits defined at § 422.100(c), 

basic benefits, mandatory supplemental 

benefits, and optional supplemental 

benefits. If the MA contract includes 

MA–PD plans, the MLR would also 

under this proposed rule be required to 

reflect costs and revenues for benefits 

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

standard coverage, alternative coverage, 

and enhanced alternative coverage. 

Proposed § 423.2410(a)(2) also specifies 

that the MLR for a PDP contract would 

be required to reflect costs and revenues 

for standard coverage, alternative 

coverage, and enhanced alternative 

coverage. 

Details about our proposal for the 

calculation of the numerator and 

denominator for MA and PDP contracts 

are discussed later in this section. For 

MA and PDP contracts, the MLR would 

be calculated using the cost and revenue 

data for a contract year, which is a 1- 

year reporting period in accordance 

with 1857(e)(4) of the Act, in contrast to 

the 3-year period (starting in 2014) for 

the commercial MLR. 

2. MLR Numerator 

In proposed § 422.2420(b) and 

§ 423.2420(b) for MA and Part D 

contracts, respectively, we identify the 

elements that we would require to be 

included in the numerator for a 

contract’s MLR. Proposed 

§ 422.2420(b)(1) and § 423.2420(b)(1) 

identify two basic elements that 

constitute the MLR numerator: incurred 

claims (as defined in paragraphs (b)(2) 

through (b)(4) for both programs) and 

expenditures under the contract for 

activities that improve health care 

quality, which are referenced at 

paragraph (b)(1)(iii) for both programs, 

and described in detail at sections 

§ 422.2430 and § 423.2430. This 

approach of including incurred claims 

and quality improving activities mirrors 

the commercial MLR rules. 

In addition, under our proposal, the 

MLR numerator for MA contracts would 

include a third element, which is 

unique to MA contracts: the amount to 

reduce the Part B premium, if any, for 

all MA plans under the contract for the 

contract year. The Part B premium 

reduction is a benefit design option 

available to MA organizations, and is 

one of five uses of Part C rebate dollars 

described at § 422.266(b) and in section 

II.D.3. of this proposed rule. Because 

this is an allowed benefit under MA, we 

are allowing the use of these dollars to 

pay for the Part B premium to be in the 

numerator. 

We propose that, under an assumptive 

or 100 percent indemnity reinsurance 

agreement, the assuming MA 

organization or Part D sponsor be 

required to report incurred claims in the 

numerator for those contracts, and that 

no incurred claims for the contracts 

under the agreement be permitted to be 

reported by the ceding MA organization 

or Part D sponsor. This clarification 

would ensure that incurred claims 

implicated in assumptive or 100 percent 

indemnity agreements are neither 

double counted by both the assuming 

and ceding MA organizations and Part 

D sponsors nor omitted by both the 

assuming and ceding organizations. 

Instead, the incurred claims would be 

counted for MLR purposes only once; by 

the assuming MA organization or Part D 

sponsor. 

a. Incurred Claims 

We propose that incurred claims 

consist of several amounts. For the MA 

program, incurred claims would include 

direct claims that the MA organization 

pays to providers (including under 

capitation contracts) for covered 

services that are provided to all 

enrollees under the contract, as 

described at § 422.2420(b)(2)(i). 

In addition, under proposed 

§ 422.2420(b)(2)(ii) and 

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

include MA–PD plans and for PDP 

contracts, respectively, incurred claims 

would be required to include only drug 

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

D sponsor. The concept of ‘‘actually 

paid’’ is defined at in § 423.308 and 

refers to Part D costs that must be 

actually incurred by the Part D sponsor, 

net of any direct or indirect 

remuneration from any source. 

Prescription drug rebates are rebates 

that pharmaceutical companies pay to 

MA organizations or Part D sponsors 

based upon the drug utilization of the 

MA organization’s or Part D sponsor’s 

enrollees and should be deducted from 

incurred claims. This approach aligns 

with the commercial MLR rules, which 

require that prescription drug rebates be 

deducted from incurred claims. In 

addition, ‘‘actually paid’’ claims refers 

to those costs for which the MA 

organization or Part D sponsor is liable, 


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through all phases of the benefit. Thus, 

the reinsurance portion of claim costs in 

the catastrophic phase of the benefit is 

also included in the numerator of the 

MLR. 

For both MA and Part D contracts, 

under proposed § 422.2420(b)(2)(iii) 

through (xi) and § 423.2420(b)(2)(ii) 

through (x), incurred claims would also 

be required to reflect the following: 

unpaid claims reserves for the current 

contract year, including claims reported 

and in the process of adjustment; 

percentage withholds from payments 

made to contracted providers; incurred 

but not reported claims based on past 

experience, and modified to reflect 

current conditions such as changes in 

exposure, claim frequency or severity 

and changes in other claims-related 

reserves; claims that are recoverable for 

anticipated coordination of benefits 

(COB); and claims payments recoveries 

received as a result of subrogation; 

reserves for contingent benefits and the 

medical or Part D claim portion of 

lawsuits. We follow the commercial 

MLR rules in proposing to allow the 

amount of claim payments recovered 

through fraud reduction efforts, not to 

exceed the amount of fraud reduction 

expenses, to be included in incurred 

claims. Fraud reduction efforts include 

fraud prevention as well as fraud 

recovery. The preamble to the 

commercial MLR rule stated and we 

continue to believe that without such an 

adjustment, the recovery of paid 

fraudulent claims would reduce an MLR 

and could create a disincentive to 

engage in fraud reduction activities. 

Thus, requiring that incurred claims 

reflect claims payments recoveries up to 

a limit would help mitigate whatever 

disincentive might occur if fraud 

reduction expenses were treated solely 

as non-claims and non-quality 

improving expenses. However, allowing 

an unlimited adjustment for fraud 

reduction expenses would undermine 

the purpose of requiring issuers to meet 

the MLR standard. 

For MA and MA–PD contracts, 

incurred claims would be required to 

reflect the amount of incentive and 

bonus payments made to providers, as 

set forth at § 422.2420(b)(2)(xi). Medical 

incentive pools are arrangements with 

providers and other risk sharing 

arrangements whereby the MA 

organization agrees to either share 

savings with or make incentive 

payments to providers. These payments 

would be required to be included under 

incurred claims and would not be 

permitted to be counted under quality 

improving expenditures. 

b. Adjustments to and Exclusions From 

Incurred Claims 

After proposing which elements 

should be included in incurred claims, 

we propose which elements would be 

deducted from incurred claims and 

which elements would not be included 

in incurred claims at all. Under 

proposed § 422.2420(b)(3) and 

§ 423.2420(b)(3), two adjustments would 

be deducted from incurred claims for 

the MA and Part D programs, both of 

which are currently required in the 

commercial MLR rules. First, 

prescription drug rebates and other 

direct or indirect remuneration as 

defined in § 423.308 that are received by 

the MA organization or Part D sponsor 

would be required to be deducted. 

Second, any amounts paid to providers 

that were recovered because they were 

overpayments would have to be 

deducted from incurred claims. 

Next, there are several expenditures 

that would not be included in incurred 

claims for MA and PDP contracts, as 

provided in proposed § 422.2420(b)(4) 

and § 423.2420(b)(4). The three types of 

administrative costs that would be 

required to be excluded from incurred 

claims reflect the provisions in the 

commercial MLR rules: (1) Amounts 

paid to third party vendors for 

secondary network savings; (2) amounts 

paid to third party vendors for network 

development, administrative fees, 

claims processing, and utilization 

management; and (3) amounts paid, 

including amounts paid to a provider, 

for professional or administrative 

services that do not represent 

compensation or reimbursement for 

covered services provided to an 

enrollee, such as medical record 

copying costs, attorneys’ fees, 

subrogation vendor fees, bona fide 

service fees, compensation to 

paraprofessionals, janitors, quality 

assurance analysts, administrative 

supervisors, secretaries to medical 

personnel and medical record clerks 

would not be permitted to be included 

in incurred claims. Regarding item (2), 

for example, if an MA organization, 

contracts with a behavioral health, 

chiropractic network, or high 

technology radiology vendor, or if an 

MA organization or Part D sponsor 

contracts with a pharmacy benefit 

manager, and the vendor reimburses the 

provider at one amount but bills the MA 

organization or Part D sponsor at a 

higher amount to cover the vendor’s 

network development, utilization 

management costs, claims processing, 

and profits, then the amount that 

exceeds the reimbursement to the 

provider would not under our proposal 

be permitted to be included in incurred 

claims. 

Finally, under proposed 

§ 422.2420(b)(4)(ii) and 

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

CMS by an MA organization or Part D 

sponsor as a remittance under 

§ 422.2410(b) or § 423.2410(b) would 

not be permitted to be included in 

incurred claims for any contract year. 

3. MLR Denominator 

We propose at § 422.2420(c) and 

§ 423.2420(c) that the MLR denominator 

would equal the total revenue under the 

contract (as described in 

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

net of deductions set forth in 

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

taking into account the exclusions 

described in § 422.2420(c)(3) and 

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

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

Total revenue for the MA program, as 

defined under proposed § 422.2420(c)(1) 

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

on a direct basis and would mean our 

payments to the MA organization for all 

enrollees under a contract, including, 

for MA plans under a contract that offer 

Part D, direct subsidy payments and 

reinsurance payments as reconciled per 

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

or on behalf of enrollees to the MA 

organization as a condition of receiving 

coverage under an MA plan; our 

payments for low income premium 

subsidies under § 423.780; all unpaid 

premium amounts that an MA 

organization or Part D sponsor could 

have collected from enrollees in the 

plan(s) under the contract; all changes 

in unearned premium reserves, and risk 

corridor payments under § 423.315(e). 

We note that MA organizations or Part 

D sponsors that volunteer to waive the 

portion of the monthly adjusted basic 

beneficiary premium that is a de 

minimis amount above the low-income 

benchmark for a subsidy eligible 

individual per section 3303(a) of the 

Affordable Care Act would not be 

permitted to consider the de minimis 

amount an unpaid premium amount 

that could have been collected from 

beneficiaries. We propose that 

calculation and reporting of total 

revenue for purposes of the Medicare 

MLR would include total risk-adjusted 

payments, and would take into account 

payments or receipts for risk corridors 

and payments under the reinsurance 

phase of the Part D benefit (adjusted for 

reconciled amounts). While this 

approach is generally consistent with 

the commercial MLR rules, it is not 

identical. We believe that the nature of 

the payment mechanisms required 

under these programs support this 


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approach. The payments which we 

make to MA organizations and Part D 

sponsors are risk-adjusted as part of the 

payment calculation to reflect the 

appropriate adjustment to revenue to 

reflect the risk profile of each enrolled 

beneficiary. Further, risk corridors and 

reinsurance, which are permanent 

features of Part D payment, are 

adjustments to plan payment. In the 

case of risk corridors, payment 

adjustments reflect the extent to which 

an MA organization or Part D sponsor 

over- or under-bid for their projected 

population. Part D reinsurance is more 

appropriately classified as a cost-based 

reimbursement methodology than 

reinsurance, per se, and as such is 

appropriately treated as revenue. 

MA organizations would also be 

required to account for Part C rebate 

payments in their total revenue. Rebates 

are paid for enrollees in plans with bids 

below the benchmark described under 

section 1853(a)(1)(E) of the Act, and 

may be allocated to one or more uses: 

reduction of A/B cost sharing and 

reduction of the premium for additional 

non-drug benefits, reduction of the Part 

B premium (mentioned previously), and 

reduction of the Part D basic premium 

and Part D supplemental premium. 

Essentially, the effect of rebates is that 

the beneficiary pays a smaller share of 

total plan premium (the total price of 

the plan benefit package) and the 

government pays a larger share. Thus, 

these funds would correctly be 

accounted for as revenue. 

Total revenue for the Part D program, 

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

CMS’ payments to the Part D sponsor for 

all enrollees under a contract, including: 

direct subsidy payments at 

§ 423.329(a)(1), reinsurance payments at 

§ 423.329(a)(2), and payment 

adjustments resulting from 

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

premiums paid by or on behalf of 

enrollees to the Part D sponsor as a 

condition of receiving coverage under a 

plan; CMS’ payments for low income 

premium subsidies under § 423.780; all 

unpaid premium amounts that a Part D 

sponsor could have collected from 

enrollees in the plan(s) under the 

contract; and risk corridor payments 

under § 423.315(e). 

Adjustments to and exclusions from 

total revenue. After proposing which 

elements should be included in total 

revenue, we propose which elements 

must be deducted from and which 

elements should not be included in total 

revenue. CMS is largely following the 

commercial MLR rule in the treatment 

of adjustments and exclusions. 

There are four categories of 

expenditures that would be required to 

be deducted from total revenue for both 

MA and PDP contracts, as provided 

under proposed § 422.2420(c)(2) and 

§ 423.2420(c)(2). Note that, unlike 

commercial issuers, MA organizations 

and Part D sponsors are exempt from 

state premium tax ‘‘or similar tax’’ on 

their Part C and D premium revenues, 

per sections 1854(g) and 1860D–12(g) of 

the Act. 

Three of these categories that would 

be deducted from total revenue for a 

contract are taxes and fees. First, federal 

taxes and assessments allocated to MA 

plans and enrollees would be deducted 

from total revenue for purposes of 

calculating the MLR. Two examples are 

the ‘‘user fee’’ described in section 

1857(e)(2) of the Act and the portion of 

the ‘‘annual fee on health insurance 

providers’’ attributable to Part C and D 

premium revenues described in section 

9010 of the Affordable Care Act. 

Second, licensing and regulatory fees, 

consisting of statutory assessments to 

defray operating expenses of any state or 

federal department and examination 

fees in lieu of premium taxes as 

specified by state law, would be 

deducted from total revenue for 

purposes of calculating the MLR. Third, 

state taxes and assessments that would 

be deducted from total revenue for 

purposes of calculating the MLR would 

include: (1) Any industry-wide (or 

subset) assessments (other than 

surcharges on specific claims) paid to 

the state directly; (2) guaranty fund 

assessments; (3) assessments of state 

industrial boards or other boards for 

operating expenses or for benefits to 

sick employed persons in connection 

with disability benefit laws or similar 

taxes levied by states; and (4) state 

income, excise, and business taxes other 

than premium taxes. 

We note that there are some taxes and 

fees that would not be permitted to be 

deducted from the MLR denominator. 

For example, we propose that the 

denominator would not include fines 

and penalties of regulatory authorities, 

and fees for examinations by any state 

or federal departments that are not 

specified in § 422.2420(c)(2)(i) and 

§ 423.2420(c)(2)(i). Fines, penalties, and 

fees that do not fall under 

§ 422.2420(c)(2)(i) and 

§ 423.2420(c)(2)(i) would be 

appropriately reported as non-claims 

costs, not as an adjustment to total 

revenue. Federal income taxes on 

investment income and capital gains 

would not be deducted from total 

revenue for purposes of calculating the 

MLR and would instead be considered 

a non-claims cost. Finally, we propose 

that state sales taxes may not be 

deducted from total revenue if the MA 

organization or Part D sponsor does not 

exercise the options of including such 

taxes with the cost of goods and services 

purchased. Examples include any 

portion of commissions or allowances 

on reinsurance assumed that represent 

specific reimbursement of premium 

taxes and any portion of commissions or 

allowances on reinsurance ceded that 

represents specific reimbursement of 

premium taxes. 

The fourth category of expenditures 

that would be deducted from total 

revenue under our proposal is 

community benefit expenditures. 

Federal income tax-exempt issuers are 

required to make community benefit 

expenditures to maintain their federal 

income tax exempt status. The 

commercial MLR rules allow a federal 

income tax-exempt issuer to deduct 

community benefit expenditures in the 

same manner that a for-profit issuer is 

allowed to deduct its federal income 

taxes. We propose to align with the 

commercial MLR regulations by 

defining community benefit 

expenditures, up to a cap, at 

§ 422.2420(c)(2)(iv) and 

§ 423.2420(c)(2)(iv) as expenditures for 

activities or programs that seek to 

achieve the objectives of improving 

access to health services, enhancing 

public health, and relief of government 

burden. 

For purposes of the commercial MLR 

rule, the NAIC determined that the 

deduction for community benefit 

expenditures should be limited to a 

reasonable amount to discourage fraud 

and abuse. We propose to follow the 

commercial MLR approach as suggested 

in the December 7, 2012 proposed rule 

(73 FR 73117) by allowing federal 

income tax-exempt MA organizations 

and Part D sponsors to deduct 

community benefit expenditures in the 

same manner that a for-profit issuer is 

allowed to deduct its federal income 

taxes, up to the limit of 3 percent of 

total revenue under this part or the 

highest premium tax rate in the state for 

which the MA organization or Part D 

sponsor is licensed. As one contract 

may span more than one state, we seek 

comment on methods to apply the limit 

in these circumstances, perhaps by 

blending the highest premium tax rates 

for the states in which the contract is 

offered. Organization-wide community 

benefit expenditures would be required 

to be allocated to a contract or multiple 

contracts as required under paragraph 

(d)(1). 

Next, amounts that would not be 

included in total revenue under our 

proposal include the amount of unpaid 

premiums that the MA organization or 

Part D sponsor can demonstrate to us 


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that it made a reasonable effort to 

collect, as required under § 422.74(d)(i), 

and § 423.44(d)(1)(i), respectively. In 

addition, HITECH, or EHR, payments 

would not be included, specifically EHR 

incentive payments for meaningful use 

of certified electronic health records by 

qualifying MAOs, MA EPs and MAaffiliated eligible hospitals (as 

administered under Part 495 subpart C), 

and EHR payment adjustments for a 

failure to meet meaningful use 

requirements (as administered under 

Part 495 subpart C). Such incentive 

payments and payment adjustments 

would not be considered for purposes of 

MLR calculations to be covered under 

this part. Finally, Coverage Gap 

Discount Program payments under 

§ 423.2320 would not be included in 

total revenue under our proposal. The 

Coverage Gap Discount amounts 

represent a 50 percent discount on the 

negotiated price of applicable 

(generally, brand) drugs for applicable 

(generally, non-low-income) 

beneficiaries, and is essentially an 

amount paid by pharmaceutical 

manufacturers and passed through to 

applicable beneficiaries and does not 

represent revenue to the MA 

organization or Part D sponsor. 

Note that we are not proposing to 

adjust total revenue for commercial 

reinsurance in this proposed rule 

because, as stated in the preamble to the 

commercial MLR rules, this largely 

would provide a tool for issuers to 

manipulate reported premiums. 

4. Projection of Net Total Revenue 

We are proposing that, when 

calculating Medicare MLRs, MA 

organization and Part D sponsors would 

be required to account for all Part C and 

D revenue that would be paid after the 

final risk adjustment reconciliation 

occurs, and all Part D revenue that 

would be paid after all reinsurance and 

risk corridor reconciliations occur. 

Risk adjustment is an adjustment to 

payment that reflects expected relative 

risk of a beneficiary. Reinsurance 

reconciliation is a cost-based adjustment 

to the Part D prospective payments 

made throughout the year, and the net 

reinsurance payments would be counted 

as total revenue. Risk corridors are risksharing arrangements around the Part D 

direct subsidy payments, and we are 

proposing to count all adjustments 

through the risk corridor process as 

adjustments to total revenue. 

We propose to require MA 

organizations and Part D sponsors to 

project revenue from all expected 

reconciliation processes, and account 

for the net adjustments from all and any 

risk adjustment reconciliations, risk 

corridor reconciliations, and 

reinsurance reconciliations as 

adjustments to total revenue. Because 

the same data underlies reconciliation 

and MLR reporting, we would not 

expect large discrepancies between data 

reported before and after reconciliation. 

We propose to validate that the data 

used in reconciliation is consistent with 

that used in MLR reporting, and make 

appropriate payment adjustments 

should there be irregularities in 

reporting. We also propose that the MLR 

would be reported once and that neither 

any reopening(s) of any reconciliation 

processes nor any risk adjustment data 

validation audits would result in a 

reopening of the MLR reported for a 

contract year. 

5. Allocation of Expenses 

MA organizations and Part D sponsors 

would, under our proposal, be required 

to properly allocate all expenses 

stemming from each contract, as 

provided under proposed § 422.2420(d) 

and § 423.2420(d). We propose that each 

expense would be required to be 

included under only one type of 

expense, unless a portion of the expense 

fits under the definition of one type of 

expense and the remainder fits into a 

different type of expense, in which case 

the expense would be required to be 

pro-rated between types of expenses. 

Expenditures that benefit multiple 

contracts, or contracts other than those 

being reported, including but not 

limited to those that are for, or benefit, 

commercial plans, would have to be 

reported on a pro rata share basis. This 

proposed approach aligns with the 

commercial MLR rules. 

There are several different methods 

for allocating costs incurred by MA 

organizations and Part D sponsors that 

would be allowable under our 

interpretation of statutory accounting 

principles. All costs reported by MA 

organizations or Part D sponsors would 

have to be allocated according to 

generally accepted accounting methods 

that yield the most accurate results and 

are well-documented. An MA 

organization’s or Part D sponsor’s 

allocation method would be required to 

illustrate the costs associated with a 

specific activity and any resulting effect 

the activity has had on its MA or Part 

D line of business. If the expense is 

related to a specific activity, the 

allocation of such expenditure would 

have to be on a direct basis. If an 

expense is not easily attributable to a 

specific activity, then the expense 

would, under our proposal, have to be 

apportioned based on pertinent factors 

or ratios, such as studies of employment 

activities, salary ratios or similar 

analyses. Any shared expenses between 

two or more affiliated entities would 

have to be ‘‘apportioned pro rata to the 

entities incurring the expense’’ even if 

the expense has been paid solely by one 

of the incurring entities. 

We are proposing that each expense 

that is allocated by an MA organization 

or Part D sponsor to a type of 

expenditure would have to be 

appropriately attributed using a 

generally accepted accounting method 

to each contract. However, all federal 

and state taxes paid by an organization 

would be required to be attributed 

proportionately and appropriately to 

each contract. While federal taxes are 

not typically allocated to contracts on a 

state-by-state basis, for purposes of 

complying with the MLR requirements 

in this subpart, all organizations would 

be required to report some percentage of 

federal taxes paid on their behalf, along 

with applicable state taxes (other than 

premium taxes, which do not apply to 

the plans offered under the MA and Part 

D programs). 

We are proposing that MA 

organizations and Part D sponsors 

would be required to allocate their nonclaims and quality improving expenses 

on a contract basis as stated in the 

commercial MLR rules. If an expense is 

attributable to a specific activity, then 

the MA organization or Part D sponsor 

would allocate the expense to that 

particular activity. However, if it is not 

feasible to allocate such expenditure to 

a specific activity, then the organization 

would, under our proposal, be required 

to apportion the costs using a generally 

accepted accounting method that yields 

the most accurate results. 

E. Activities That Improve Health Care 

Quality 

We propose to adopt a definition of 

activities that improve health care 

quality for the purposes of this MLR 

rule that would result in a uniform 

accounting of the associated costs for 

MA organizations and Part D sponsors. 

This proposed definition aligns with 

that in the commercial MLR 

requirements at 45 CFR 158.150 through 

45 CFR 158.151. We propose to align 

with the definition of activities that 

improve health care quality, also 

referred to as ‘‘quality improving 

activities,’’ in the commercial MLR rules 

so that there is a uniform definition 

across lines of business. This alignment 

would help reduce burden on plan 

sponsors that also have commercial 

business by aligning the accounting and 

tracking of quality improving activities. 

It also allows for the comparison of 

quality spending across products. We 

note that we are proposing to adopt this 


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12436 Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Proposed Rules 

definition of quality solely for the 

purposes of MLR reporting and 

calculation, and not for other purposes, 

such as Medicare star ratings that 

determine MA quality bonus payments 

as authorized under the Affordable Care 

Act or any quality activities related to 

the Medicaid program. However, we 

anticipate large areas of overlap. 

The definition of quality improving 

activities that was adopted for the 

commercial MLR, which we are 

proposing to adopt for the Medicare 

MLR, is derived from section 2717 of 

the PHSA. The PHSA has the goal of 

improving the quality of care by 

encouraging health care spending on the 

following activities that would: 

• Improve health outcomes through 

the implementation of activities such as 

quality reporting, effective case 

management, care coordination, chronic 

disease management, and medication 

and care compliance initiatives, 

including through the use of the 

medical homes model as defined for 

purposes of section 3602 of the 

Affordable Care Act, for treatment or 

services under the plan or coverage. 

• Implement activities to prevent 

hospital readmissions through a 

comprehensive program for hospital 

discharge that includes patient-centered 

education and counseling, 

comprehensive discharge planning, and 

post-discharge reinforcement by an 

appropriate health care professional. 

• Implement activities to improve 

patient safety and reduce medical errors 

through the appropriate use of best 

clinical practices, evidence-based 

medicine, and health information 

technology under the plan or coverage. 

• Implement wellness and health 

promotion activities; or 

• Enhance the use of health care data 

to improve quality, transparency, and 

outcomes and support meaningful use 

of health information technology. 

This proposed rule would allow for a 

non-claims expense incurred by an MA 

organization or Part D sponsor to be 

accounted for as a quality improving 

activity only if the activity falls into one 

of the categories described previously 

and meets all of the following 

requirements: 

• It must be designed to improve 

health quality. 

• It must be designed to increase the 

likelihood of desired health outcomes in 

ways that are capable of being 

objectively measured and of producing 

verifiable results and achievements. 

• It must be directed toward 

individual enrollees or incurred for the 

benefit of specified segments of 

enrollees or provide health 

improvements to the population beyond 

those enrolled in coverage as long as no 

additional costs are incurred due to the 

non-enrollees. 

• It must be grounded in evidencebased medicine, widely accepted best 

clinical practice, or criteria issued by 

recognized professional medical 

associations, accreditation bodies, 

government agencies or other nationally 

recognized health care quality 

organizations. 

Examples of activities that improve 

health outcomes would include those 

that increase the likelihood of desired 

outcomes compared to a baseline and 

reduce health disparities among 

specified populations, and may involve 

the direct interaction of the MA 

organization or Part D sponsor 

(including those services delegated by 

contract for which the MA organization 

or Part D sponsor retains ultimate 

responsibility under the insurance 

policy), providers and the enrollee or 

the enrollee’s representative (for 

example, face-to-face, telephonic, webbased interactions or other means of 

communication) to improve health 

outcomes. These activities would under 

our proposal include the following: 

• Effective case management, care 

coordination, chronic disease 

management, and medication and care 

compliance initiatives including 

through the use of the medical homes 

model as defined in section 3606 of the 

Affordable Care Act. 

• Identifying and addressing ethnic, 

cultural or racial disparities in 

effectiveness of identified best clinical 

practices and evidence based medicine. 

• Quality reporting and 

documentation of care in non-electronic 

format. 

• Health information technology to 

support these activities. 

• Accreditation fees directly related 

to quality of care activities. 

Examples of activities that prevent 

hospital readmissions through a 

comprehensive program for hospital 

discharge would include the following: 

• Comprehensive discharge planning 

(for example, arranging and managing 

transitions from one setting to another, 

such as hospital discharge to home or to 

a rehabilitation center) in order to help 

assure appropriate care that will, in all 

likelihood, avoid readmission to the 

hospital. 

• Patient-centered education and 

counseling. 

• Personalized post-discharge 

reinforcement and counseling by an 

appropriate health care professional. 

• Any quality reporting and related 

documentation in non-electronic form 

for activities to prevent hospital 

readmission. 

• Health information technology to 

support these activities. 

Examples of activities that improve 

patient safety, reduce medical errors, 

and lower infection and mortality rates 

would include the following: 

• The appropriate identification and 

use of best clinical practices to avoid 

harm. 

• Activities to identify and encourage 

evidence-based medicine in addressing 

independently identified and 

documented clinical errors or safety 

concerns. 

• Activities to lower the risk of 

facility-acquired infections. 

• Prospective prescription drug 

Utilization Review aimed at identifying 

potential adverse drug interactions. 

• Any quality reporting and related 

documentation in non-electronic form 

for activities that improve patient safety 

and reduce medical errors. 

• Health information technology to 

support these activities. 

Examples of activities that implement, 

promote, and increase wellness and 

health activities would include the 

following: 

• Wellness assessments. 

• Wellness/lifestyle coaching 

programs designed to achieve specific 

and measurable improvements. 

• Coaching programs designed to 

educate individuals on clinically 

effective methods for dealing with a 

specific chronic disease or condition. 

• Public health education campaigns 

that are performed in conjunction with 

state or local health departments. 

• Actual rewards, incentives, 

bonuses, reductions in copayments 

(excluding administration of such 

programs), that are not already reflected 

in premiums or claims should be 

allowed as a quality improving activity 

for the group market to the extent 

permitted by section 2705 of the PHSA. 

• Any quality reporting and related 

documentation in non-electronic form 

for wellness and health promotion 

activities. 

• Coaching or education programs 

and health promotion activities 

designed to change member behavior 

and conditions (for example, smoking or 

obesity). 

• Health information technology to 

support these activities. 

Examples of activities that enhance 

the use of health care data to improve 

quality, transparency, and outcomes and 

support meaningful use of health 

information technology would include 

activities related to health information 

technology (HIT). HIT offers providers, 

MA organizations, Part D sponsors, and 

beneficiaries the capability to share 

clinical information in a real-time 


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setting. Any HIT expenditure that is 

attributable to improving health care, 

preventing hospital readmissions, 

improving safety and reducing errors, or 

promoting health activities and wellness 

to an individual or an identified 

segment of the population, would under 

our proposal be classified as a quality 

improving activity. HIT resources that 

are designed to improve the quality of 

care received by an enrollee would 

include the provision of electronic 

health records and patient portals, as 

well as the monitoring, measuring, and 

reporting of clinical effectiveness 

measures. HIT expenses that are 

consistent with meaningful use 

requirements would be treated as 

expenditures to improve health care 

quality. 

We are proposing to follow the 

commercial MLR rules and recognize 

HIT as a category of quality improving 

activities, provided that the use of HIT 

meets the criteria discussed earlier. 

In this proposed rule, we recognize 

that some quality improving activities 

may be what are sometimes referred to 

as ‘‘population-directed’’ and may not 

involve face-to-face interaction between 

an employee or contractor of the MA 

organization or Part D sponsor and the 

enrollee. However, such activities 

would have to be directed to identified 

segments of the MA organization’s or 

Part D sponsor’s enrollees. The MA 

organization or Part D sponsor would be 

required to be able to measure the level 

of engagement with these enrollees in 

addition to tracking the effect(s) of these 

activities on health outcomes in this 

population through a process that is 

well defined, well developed, and 

utilized. 

Any quality improving activity that 

results in cost savings to a contract 

would not, by itself, cause expenditures 

on that activity to be classified as nonquality improving expenditures under 

our proposal, if they meet the criteria set 

forth in this proposed rule. However, if 

the activity is designed primarily to 

control or contain costs, then 

expenditures for it would not be 

permitted to be included as a quality 

improving activity, as provided in 

proposed § 422.2430(b) and 

§ 423.2430(b). 

As many quality improving activities 

are fluid in nature, they may properly be 

classified in more than one quality 

improving activity category. However, 

the proposed rule would not permit 

issuers to count any occurrence of a 

quality improving activity more than 

once, as explained in § 422.2420(d) and 

§ 423.2420(d). Moreover, shared 

expenses among related entities as well 

as expenses that are for lines of business 

or products other than those being 

reported, including self-funded plans, 

would have to be apportioned among 

the entities and among the lines of 

business or products. For example, a 

quality improving program that is 

developed and implemented for 

commercial plans would have to be prorated among the lines of business, and 

the portion of expenditures for the 

program that are for the commercial 

plans may not be included in quality 

improving activities reported under 

1857 of the Act. 

We propose to adopt at § 422.2430(b) 

and § 423.2430(b) the list of activities in 

its entirety that are not to be reported as 

a quality improving activity under the 

commercial MLR rules at 45 CFR 

158.150(c). These include the following: 

• Those that are designed primarily to 

control or contain costs. 

• The pro rata share of expenses that 

are for lines of business or products 

other than those being reported, 

including but not limited to, those that 

are for or benefit self-funded plans. 

• Those which otherwise meet the 

definitions for quality improving 

activities but which were paid for with 

grant money or other funding separate 

from premium revenue. 

• Those activities that can be billed or 

allocated by a provider for care delivery 

and which are, therefore, reimbursed as 

clinical services. 

• 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, and ICD–10 

implementation costs in excess of 0.3 

percent of a MA organization or Part D 

sponsor’s total revenue. 

• That portion of the activities of 

health care professional hotlines that 

does not meet the definition of activities 

that improve health quality. 

• All retrospective and concurrent 

utilization review. 

• Fraud prevention activities. 

• The cost of developing and 

executing provider or pharmacy 

contracts and fees associated with 

establishing or managing a provider or 

pharmacy network, including fees paid 

to a vendor for the same reason. 

• Provider credentialing and 

pharmacy network credentialing. 

• Marketing expenses. 

• Costs associated with calculating 

and administering individual enrollee 

or employee incentives. 

• That portion of prospective 

utilization review that does not meet the 

definition of activities that improve 

health quality. 

• Any function or activity not 

expressly permitted as a quality 

improving activity in this rule. 

This proposed rule provides a set of 

criteria in § 422.2430 and § 423.2430 

which MA organizations or Part D 

sponsors would be required to comply 

with in order for the activity in question 

to be treated as improving quality. The 

definition, or foundational criteria, of a 

quality improving activity would have 

to be specific enough so as to provide 

clear guidance without overly 

prescribing acceptable activities and 

possibly stifling future innovative 

quality improving activities. We believe 

that the definition used in the 

commercial MLR rules, which we have 

proposed to adopt, would achieve these 

goals. 

A quality improving activity would 

have to be grounded in evidence-based 

practice, widely accepted best clinical 

practice, or criteria issued by recognized 

medical associations, accreditation 

bodies, government agencies, or other 

nationally recognized health care 

quality organizations. Any proposed 

quality improving activities would be 

required to be designed to improve the 

quality of care received by an enrollee 

and capable of being objectively 

measured (taking into account the 

individual needs of the beneficiary) and 

of producing verifiable results and 

achievements. While an MA 

organization or Part D sponsor would 

not have to present initial evidence 

proving the effectiveness of a quality 

improving activity, the MA organization 

or Part D sponsor would have to show 

measurable results stemming from the 

executed quality improving activity. 

While administrative expenses such 

as network fees would not be counted 

as quality improving, some traditional 

administrative activities could under 

our proposal qualify as quality 

improving if they met the criteria set 

forth in proposed § 422.2430 and 

§ 423.2430. For example, expenses for 

prospective utilization review could 

under our proposal be classified as 

expenses for quality improving 

activities. Prospective utilization review 

would be considered a quality 

improving activity because it is 

rendered before care or services are 

delivered and can help ensure that the 

most appropriate treatment or service is 

given in the most appropriate setting. In 

contrast, the network fees associated 


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with third party provider networks do 

not stem from a quality improving 

activity and therefore would only count 

as an administrative expense. 

We also propose to limit the amount 

spent converting from International 

Classification of Disease code set ICD– 

9 to ICD–10 that may be counted as a 

quality improving activity, in line with 

the commercial rules approach. As a 

general matter, the development and 

maintenance of claims adjudication 

systems are not designed primarily to 

improve the quality of care received by 

an individual and, therefore, are not 

classified as a quality improving 

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. The difficulty is in 

parsing expenses associated with ICD– 

10 conversions that may be solely 

‘‘development and maintenance of 

claims adjudication systems’’ as 

opposed to those that are uniquely 

conversion costs. As with some other 

cost categories defined in this proposed 

rule, little public data currently exist to 

guide decision making regarding this 

distinction. For the commercial MLR 

rules, we considered the impacts 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 our Office 

of E-Health Standards and Services 

(OESS). OESS oversees ICD–10 and 

considers some of the impact of ICD–10 

to be quality improving activities, and 

supports the treatment of ICD–10 set 

forth in this proposed rule. We 

recognize that ICD–10 has some claims 

processing functions as well. 

Recognizing the dual nature of ICD–10, 

we propose to include as a quality 

improving activity those ICD–10 

conversion costs incurred in 2014 (or 

until the deadline for converting to ICD– 

10) up to 0.3 percent of an MA 

organization’s or Part D sponsor’s total 

revenue under this part in 2014, which 

would be reported on a direct basis. We 

chose this proposed cap to be consistent 

with the approach in the commercial 

MLR rules, which allows as quality 

improving activity amounts that issuers 

projected spending on ICD–10 

conversion, without permitting issuers 

to include claims adjudication systems 

costs in quality improving activities. In 

addition, ICD–10 maintenance costs are 

excluded from quality improving 

activities in this proposed rule, based on 

the industry’s collective comments on 

the commercial MLR rules, stating that 

separating conversion costs from 

maintenance costs is feasible, and based 

on their support for excluding ICD–10 

maintenance costs from quality 

improving activities. Similarly, we 

propose excluding any ICD–10 

implementation costs in excess of the 

0.3 percent limitation from quality 

improving activities in this proposed 

rule. 

We recognize that there may be 

certain quality improving activities that 

are unique to a Part D context, and we 

seek comment as to whether 

modifications to our proposed 

definition in § 423.2430 are needed. In 

particular, we are interested to consider 

whether the concepts of prospective, 

concurrent, and retrospective utilization 

review apply in a Part D context. 

Whereas beneficiaries receive medical 

services at the time they are rendered, 

a safety-related review of a beneficiary’s 

chronic or recurring use of medications, 

such as opiates or other high risk 

medications, could result in a 

prospective change to the beneficiary’s 

drug regimen and a resulting 

improvement to his or her health and 

safety. However, we hesitate to define 

all utilization review, without any 

bounds, as a quality improving activity. 

Further, we solicit comment on whether 

Medication Therapy Management 

requirements for the Part D program 

would be considered to qualify as a 

health care improving activity under 

§ 423.2430. 

F. Credibility Adjustment 

As noted in section II.A. of this 

proposed rule, we are using the 

commercial MLR rules as a reference 

point for developing the Medicare MLR. 

We propose that the methodology for 

the Medicare MLR calculation take into 

account the special circumstances of 

contracts with lower enrollment. 

Proposed § 422.2440 and § 423.2440 set 

forth a credibility adjustment that 

would be designed to meet the same 

goals as the commercial MLR 

requirements in 45 CFR 158.230. 

A credibility adjustment is a method 

that can be used to address the impact 

of claims variability on the MLR for 

smaller contracts. All MA organizations 

and Part D sponsors experience some 

random claims variability, where actual 

claims experience deviates from 

expected claims experience. In a 

contract with a large enrollment, the 

predictability of expected claims 

experience is more reliable than in a 

contract with fewer members. One 

source of variability is the impact of 

outlier claims, which can be infrequent 

and in either direction. For smaller 

contracts, these random variations in 

the claims experience for enrollees 

could cause a contract’s reported MLR 

to be considerably below or above the 

statutory requirement in any particular 

year, even though the MA organization 

or Part D sponsor estimated in good 

faith that the combination of the 

projected premium and projected claims 

would produce an MLR that meets the 

statutory requirement. The credibility 

adjustment is a method to address the 

effect of this random variation. A 

credibility adjustment serves to increase 

the MLR of a contract, thereby reducing 

the probability that a contract will fail 

to meet the statutory requirement 

simply because of random claims 

variability. 

In evaluating the desirability of 

including a credibility adjustment, it is 

important to emphasize that MA 

organizations and Part D sponsors bid 

prospectively, based on trends, 

assumptions and estimates from 

previous claims experience. When an 

actuary estimates that a plan bid will 

produce an 85 percent MLR in the 

upcoming year, whether or not that 85 

percent MLR materializes depends on 

how closely members’ actual use of 

health care services aligns with the 

assumptions the actuary has made, 

including estimates of the mix of 

enrollees the plans under the contract 

will attract, the intensity and frequency 

with which its enrollees will use health 

care services, and unit costs for 

payments to providers. All things being 

equal, it is more likely that those 

assumptions driving the level of the bid 

and estimated claims costs will align 

with actual experience when a contract 

enrolls a large number of members 

rather than a small number. 

To avoid requiring MA organizations 

and Part D sponsors to pay remittances 

due to random claim variation, rather 

than due to their underlying pricing and 

benefits structure, it is necessary to 

assess MLRs on sufficient numbers of 

member months for statistical 

credibility. Requiring MA organizations 

and Part D sponsors to pay remittances 

when random variation leads to 

surpluses (low MLRs), while requiring 

issuers to absorb losses when random 

variation leads to losses (high MLRs), 

could lead to product volatility, market 

exit, and inadequate levels of surplus to 

ensure solvency. We agree that 

remittance amounts should be based on 

the underlying premium pricing, rather 

than chance variation in claims 

experience. However, any credibility 

adjustment could also serve to deprive 

the federal government (and, thus, 

taxpayers and Medicare beneficiaries) of 

remittance amounts that they would 

otherwise be paid under the Affordable 

Care Act. 


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For the commercial MLR rules, we 

adopted a credibility adjustment 

methodology developed from statistical 

analysis conducted for the NAIC by an 

independent actuarial consulting firm, 

using historical claims data for 

commercial insurers. 

After extensive analysis and public 

discussion, the methodology that we 

adopted to adjust the commercial MLR 

in instances of partial credibility was 

designed to reduce the probability that 

an issuer with smaller enrollment had to 

pay a rebate in a given year to 25 

percent of the time or less. As discussed 

in the proposed commercial MLR rule, 

NAIC did consider setting the 

commercial base credibility adjustments 

so that such an issuer would be required 

to pay a rebate less than 10 percent of 

the time. The NAIC concluded, and we 

agreed, that setting credibility 

adjustments based on a 25 percent 

probability of paying a rebate struck a 

more equitable balance of consumer and 

issuer interests. 

For the MA and Part D prescription 

drug programs, we propose to mirror the 

commercial approach by designing 

credibility adjustment factors for 

smaller enrollment contracts that result 

in a 25 percent chance of having to pay 

a remittance for contracts priced at an 

85 percent MLR. We believe that this 

approach provides an acceptable 

balance between the interests that MA 

organizations and Part D sponsors have 

in not paying remittance when a low 

MLR is the result of ordinary variation 

in claims experience, and the interests 

of Medicare beneficiaries in having plan 

benefits at prices that provide value and 

the government receiving remittances, 

as required by the Affordable Care Act. 

One difference from the approach in the 

commercial MLR rules is that we do not 

propose to include a deductible factor, 

because Medicare deductibles are more 

confined than in the commercial 

market. Thus, the limited range of 

Medicare cost sharing does not prompt 

the need for such an adjustment. 

Our proposal for calculation of the 

probability of a remittance is based 

solely on the variability of expected 

claims, assuming plans are priced 

exactly at an 85 percent MLR. In order 

to estimate the variability of expected 

MA–PD claims, we analyzed 4 years of 

fee-for-service (FFS) claims data for 

medical claims and 4 years of 

prescription drug event claims and 

reconciliation data for the Part D benefit 

under MA–PD contracts (2008 to 2011). 

In order to estimate the variability of 

expected claims for Part D stand-alone 

contracts, we analyzed 4 years of 

prescription drug event claims and 

reconciliation data (2008 to 2011). 

Generally, Medicare claims vary less 

than commercial claims around the 

average per person claim amount (in 

statistical terms, the coefficient of 

variation of claims costs (standard 

deviation of claims costs relative to the 

mean claims cost) is lower for Medicare 

than commercial business relative to the 

mean claim cost). As a result, the 

threshold for full-credibility falls at a 

lower level of enrollment for MA–PD 

and Part D stand-alone contracts 

compared to commercial insurers. 

Further, claims for MA–PD contracts 

have a lower coefficient of less variation 

around the average than do claims for 

Part D stand-alone contracts, thus the 

full-credibility threshold for MA–PD 

contracts is lower than for Part D standalone contracts. 

The Office of the Actuary (OACT), 

Centers for Medicare and Medicaid 

Services, derived the MA–PD and Part 

D stand-alone credibility adjustments 

using the following methodology. The 

credibility adjustment is intended to 

reduce the probability that a contract 

will fail to meet the MLR requirement 

due to random variation in claims 

experience. The target failure rate is 25 

percent for contracts priced at an 85 

percent MLR. The adjustments only 

account for variation in the claim 

experience, as related to the numerator 

of the MLR. Variations due to other risks 

and other components of the MLR 

formula are not considered. This 

approach is equivalent to the approach 

used in developing the commercial MLR 

credibility adjustments. 

OACT modeled the distribution of the 

MLR using the following statistical 

formula by applying the Central Limit 

Theorem: 

Where 

Xi is the annual claim amount with mean (m) 

and variance (s2) for an individual. Xi is 

assumed to be independently and 

identically distributed for each 

individual. OACT calculated the mean 

and variance from historical claim 

experience from Medicare Parts A and B 

(as a proxy for Part C) and Medicare Part 

D. Claims were tabulated consistent with 

the definitions used to define the MLR. 

We reviewed four calendar years of 

experience from 2008 through 2011 for 

consistency and trends over time; 

n is the number of individuals in the group; 

and 

N 

denotes the Normal distribution with mean, 

0.85, and variance, 

The numerator of the formula 

represents the aggregate claims (a 

variable), and the denominator 

represents the aggregate premium. The 

denominator is modeled as a single 

point equal to the expected premium 

because we are not evaluating the 

variability in the denominator. 

The credibility adjustment equals the 

expected value of the MLR less the 25th 

percentile (25 percent target failure 

rate). This difference can be calculated 

by multiplying the z-score for the 

standard Normal distribution by the 

standard deviation for the MLR. The 

credibility adjustment equals, 

where ¥0.6745 is the z-score for the 

25th percentile of the standard normal 

distribution. 

We propose to use member months 

(instead of life years, used in the 

commercial MLR credibility adjustment) 

to describe the enrollment thresholds 

pertinent to application of the Medicare 

credibility adjustments, because 

member months are consistently and 

predominantly used in other reporting 

requirements for Medicare Advantage 

organizations and Part D sponsors. 

Member months for a contract year 

equal the sum across the 12 months of 

a year of the total number of enrollees 

for each month. This includes enrollees 

who are in ESRD and hospice status for 

a month. As with the commercial rule, 


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we intend to evaluate the credibility 

adjustments and update them, if 

necessary. 

In proposed § 422.2440(a) and 

§ 423.2440(a), we follow the commercial 

MLR rule by proposing that an MA 

organization and a Part D sponsor may 

add a credibility adjustment to a 

contract’s MLR if the contract’s 

experience (level of enrollment) is 

partially credible, as determined by us. 

In § 422.2440(b) and § 423.2440(b), we 

note that an MA organization and Part 

D sponsor would not be permitted to 

add a credibility adjustment if the 

contract’s experience is fully-credible, 

as determined by us. In § 422.2440(c) 

and § 423.2440(c), we propose that for 

contract years when a contract has noncredible experience, as determined by 

us, the sanctions specified in statute 

(and implemented at § 422.2410(b), (c), 

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

for having an MLR that does not meet 

the minimum requirement of 85 percent 

would not apply. Finally, in 

§ 422.2440(d) and § 423.2440(d), we 

state that we will propose updates to the 

credibility adjustments, solicit 

comments, and finalize any updates 

through the Advance Notice and Final 

Rate Announcement process. 

Credibility adjustments would be 

applied to contracts with partiallycredible experience. We propose to 

define partially-credible experience for 

MA contracts as enrollment that is 

greater than or equal to 2,400 member 

months and no greater than 180,000 

member months of enrollment for a 

contract year. We propose to define 

partially-credible experience for Part D 

standalone contracts as enrollment that 

is greater than or equal to 4,800 member 

months and no greater than 360,000 

member months of enrollment for a 

contract year. 

Accordingly, we propose that noncredible MA contracts would have 

annual enrollment of less than 2,400 

member months, and non-credible Part 

D ‘‘standalone’’ contracts would have 

annual enrollment of less than 4,800 

member months. Further, we propose 

that a fully-credible MA contract would 

have an enrollment greater than 180,000 

member months, and a fully-credible 

Part D ‘‘standalone’’ contract would 

have an enrollment greater than 360,000 

member months. 

Table 1a provides the proposed 

credibility adjustments for partiallycredible MA–PD contracts, and Table 1B 

provides the proposed credibility 

adjustments for partially-credible Part D 

stand-alone contracts. We propose that 

the credibility adjustments in these 

tables will be effective for 2014 and 

subsequent years. We propose that the 

credibility adjustments for the contracts 

with enrollment sizes that fall between 

the categories of member months 

displayed in Tables 1a and 1b would be 

determined using linear interpolation. 

(For example, an MA–PD contract with 

75,000 member months would have a 

credibility adjustment of 1.575, 

calculated as 1.7 × (120,000¥75,000) ÷ 

(120,000¥60,000) + 1.2 × 

(75,000¥60,000) ÷ (120,000¥60,000).) 

TABLE 1A.—PROPOSED MLR CREDIBILITY ADJUSTMENTS FOR MAPD*CONTRACTS

Member months Credibility adjustment 

≤2,400 ............................. Non-credible 

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

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

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

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

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

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

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

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

* MA-PD combined with MA-only 

TABLE 1B.—PROPOSED MLR CREDIBILITY ADJUSTMENTS FOR PART D 

STAND-ALONE CONTRACTS

Member months Credibility adjustment 

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

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

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

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

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

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

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

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

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

For years after 2014, we propose that 

any updates to the enrollment 

thresholds demarcating partial 

credibility and updates to the credibility 

adjustments be proposed in the annual 

Advance Notice of Methodological 

Changes for Medicare Advantage (MA) 

Capitation Rates and Part C and Part D 

Payment Policies, also known as the 

Advance Notice. After the comment 

period for the Advance Notice ends, the 

updates would be finalized in the 

annual Announcement of Medicare 

Advantage Capitation Rates and 

Medicare Advantage and Part D 

Payment Policies, otherwise known as 

the Final Rate Announcement. We do 

not envision that it will be necessary to 

make annual updates to the credibility 

adjustments, but should the need arise 

to make any updates in future years (for 

example, due to changes in payment 

policies that would require changes to 

the variables included in the MLR 

numerator and/or denominator), we 

propose to use the Advance Notices as 

a vehicle for additional opportunity for 

notice and comment. 

G. Reporting Requirements 

Consistent with already established 

reporting requirements in § 422.504(f)(2) 

and § 423.505(f)(2), we are proposing 

that MA organizations and Part D 

sponsors be required to submit a report 

to us. For each contract year, each MA 

organization and Part D sponsor would 

submit a report to us, in a timeframe 

and manner specified by us. We propose 

that MA organizations and Part D 

sponsors’ submissions will include 

information that includes, but is not 

limited to the data needed by the MA 

organization and Part D sponsor to 

calculate and verify the MLR and 

remittance amount, if any, for each 

contract. This information may include 

reimbursement for clinical services and 

prescription drugs, total revenue, 

expenditures on quality improving 

activities, non-claim costs, taxes, 

licensing and regulatory fees, and any 

remittance owed to us under § 422.2410 

and § 423.2410. MA organizations and 

Part D sponsors would be required to 

calculate MLRs and remittance as part 

of their submission to the Secretary. 

At a later date, we will provide 

information on the nature of this report, 

when it will be due, and how and where 

on the internet the information will be 

made available to the public, in a time 

and manner that we determine. 

We are requesting comment on when 

the MLR should be reported. While it is 

arguably preferable to set a reporting 

date after the payment reconciliations 

are complete, there are at least two 

reasons why this may not be feasible. 

First, there are occasional reopenings of 

reconciliations that occur after the year 

immediately following the contract year, 

and it seems unreasonable to wait until 

all reopenings have been completed. 

Second, we are statutorily required to 

halt new enrollment the second 

succeeding year after a contract has an 

MLR of less than the MLR required at 

§ 422.2410(b) and § 423.2410(b) for 3 or 

more consecutive years, and to 

terminate a contract after that contract 

has had an MLR of less than the 

required MLR for 5 consecutive years. 

We are proposing to apply the 

termination sanction the second 

succeeding year after the fifth 

consecutive year that a contract does not 

meet the required MLR. We must 

balance any preference for a later 

reporting date with disruption that 

beneficiaries would experience if we 

halted new enrollment or terminated a 


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contract after open enrollment has 

begun. 

We are considering several options. 

First, we are considering requiring the 

reporting of Medicare MLRs data in 

July, even before risk adjustment 

reconciliation is complete. MA 

organizations and Part D sponsors must 

submit their bids by the first Monday in 

June and the base year for the bids is the 

same year as the contract year for MLR 

reporting. We typically provide nearly 

complete risk scores to MA 

organizations and Part D sponsors to 

support this bidding process, and base 

year costs must be developed by this 

time. The cutoff for PDEs to be reported 

for reinsurance and risk corridor 

reconciliation is June 30th after the 

contract year, and MA organizations and 

Part D sponsors, which report the 

prescription drug events (PDEs) 

themselves, should be able to project 

their final risk corridor and reinsurance 

reconciled amounts by this time. A July 

31 reporting date would provide time 

for MA organizations and Part D 

sponsors to project their final costs and 

revenues for the contract year, and 

allow us time to apply new enrollment 

and termination sanctions. 

Another option we are considering is 

to require reporting of a contract year 

MLR data in September, after risk 

adjustment reconciliation, but before 

Part D reinsurance and risk corridor 

reconciliation. This would better inform 

the calculation of the total revenue for 

the contract year, and still permit us 

sufficient time to apply enrollment and 

termination sanctions, and also to adjust 

Part D reassignments for low-income 

beneficiaries. 

A further option we are considering is 

setting a reporting date in December, 

after Part D reconciliation of risk 

corridors and reinsurance. While MA 

organizations and Part D sponsors 

would still need to project any future 

reconciliations, this approach would 

provide more information for MA 

organizations’ and Part D sponsors’ total 

revenue calculations. However, we have 

concerns about this timing since it 

would mean that we would not receive 

reported MLRs data until after open 

season has started, and the enforcement 

of enrollment and termination sanctions 

would create disruptions for 

beneficiaries who are newly enrolled in 

plans under a contract (for enrollment 

sanctions) or all beneficiaries enrolled 

in plans under a contract (for 

termination sanctions). 

We reiterate that, regardless of when 

a contract’s MLR is actually reported, 

we are proposing that the MA 

organization or Part D sponsor must 

project future run-out of all payments 

and receipts as a result of the 

reconciliation of risk adjustment, 

reinsurance, or risk corridors. Because 

of the need to prevent disruption to 

beneficiaries who are choosing health 

plans for the coming year, and the 

necessity of projecting all future runout, we are proposing a July 31 

reporting date and request comment on 

this proposal. 

H. Remittances to CMS if Applicable 

MLR Requirement Is Not Met 

Proposed § 422.2470 and § 423.2470, 

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

the proposed general requirements 

regarding sanctions, the calculation of 

the amount to be remitted to us, the 

time frame for payment of any amount 

that may be due, and the treatment of 

remittances in future years’ numerator 

and denominator. In accordance with 

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

§ 422.2470(a) and § 423.2470(a) simply 

provide that if a contract is partially or 

fully-credible and does not meet the 

applicable MLR standard set forth in 

§ 422.2410(b) and § 423.2410(b), then 

the plan sponsor would remit payment 

to CMS as calculated under this 

proposed rule. As discussed earlier, 

because an MA–PD or Part D standalone contract that has fewer than 2,400 

or 4,800 member months, respectively, 

does not have sufficiently credible data 

to determine whether the minimum 

MLR standard has not been met, we are 

proposing that an MA organization or 

Part D sponsor would not be required to 

remit any payment to us for noncredible contracts. 

Proposed § 422.2470(b) and 

§ 423.2470(b) explain the amount of the 

payment that would be due to CMS. The 

Affordable Care Act provides that MA 

organizations and Part D sponsors must 

remit to CMS the amount by which the 

MLR requirement exceeds the contract’s 

actual MLR, multiplied by total revenue 

under this part. In this proposed rule, 

we specifically propose that MA 

organizations and Part D sponsors be 

required to remit to us the amount by 

which the applicable MLR requirement 

in § 422.2410(b) and § 423.2410(b) 

exceeds the contract’s actual MLR, 

multiplied by the total revenue of the 

contract, as provided under proposed 

§ 422.2420(c) and § 423.2420(c). 

Sections 422.2470(c) and 423.2470(c) 

specify that we would subtract 

remittances from plan payment amounts 

in a timely manner after the MLR is 

reported, on a schedule determined by 

us. Remittances by MA and Part D 

organizations would occur as part of 

regular monthly payments that we make 

to plan sponsors. In § 422.2470(d) and 

§ 423.2470(d), we specify that 

remittances paid in any 1 year would 

not be included in the numerator or 

denominator of the next year’s or any 

year’s MLR. 

We request comment on the specials 

circumstances of certain MA 

organizations in Puerto Rico with 

respect to the Medicare MLR 

requirement. MA organizations in 

Puerto Rico that have Platino 

agreements with the Commonwealth of 

Puerto Rico tend to have higher Part C 

profit margins than other MA 

organizations and are thus less likely to 

meet the 85 percent MLR requirement. 

I. MLR Review and Non-Compliance 

Under this proposed rule, we would 

conduct selected reviews of reports 

submitted under § 422.2460 and 

§ 423.2460 to determine that remittance 

amounts under § 422.2410(b) and 

§ 423.2410(b) and sanctions under 

§§ 422.2410(c), 422.2410(d), 

423.2410(c), and 423.2410(d) were 

accurately calculated, reported, and 

applied. 

MA organizations and Part D sponsors 

would be required to retain 

documentation relating to the data 

reported, and provide access to that data 

to CMS, HHS, the Comptroller General, 

or their designees, in accordance with 

proposed § 422.504 and § 423.505. 

These proposed provisions are intended 

to give CMS or its designees access to 

information needed to determine 

whether the reports and amounts 

submitted with respect to the MLR are 

accurate and valid. Sanctions would be 

imposed for non-compliance with the 

MLR requirements. Furthermore, under 

§ 422.2480(c) and § 423.2480(c), MA 

organizations and Part D sponsors with 

third party vendors would be required 

to have or be able to obtain and validate, 

in a timely manner, all underlying data 

associated with their services prior to 

the preparation and submission of MLR 

reporting to CMS. This includes all 

claims data paid on behalf of the MA 

organization or Part D sponsor, direct 

and indirect remuneration data and 

supporting materials, and all pricing 

components and utilization data that 

were used or rendered to substantiate 

invoices submitted to sponsors or 

financial data submitted to us. 

In addition, we propose to add a 

failure to provide accurate and timely 

MLR data to the list of items in 

§ 422.510(a) and § 423.509(a) that 

constitute grounds for termination, and 

for intermediate sanctions and civil 

money penalties, by adding a paragraph 

(15) related to MLR reporting. Such an 

addition will provide CMS authority to 

invoke the contract termination 

procedures in § 422.510(b) through (d) 


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

by an MA organization or Part D plan 

sponsor to provide timely and accurate 

MLR data. Further, intermediate 

sanctions at § 422.752(b) and (c) and 

§ 423.752(b) and (c) would also be 

available, as well as civil monetary 

penalties at § 422.760 and § 423.760. 

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements: 

A. ICRs Regarding MLR and Remittance 

Reporting Requirement (§ 422.2470 and 

§ 423.2470) 

This proposed rule describes the 

information that would be reported by 

MA organizations and Part D sponsors 

on an annual basis to the Secretary 

starting in 2014. We propose that MA 

organizations and Part D sponsors’ 

submissions will include information 

regarding reimbursement for clinical 

services, expenditures for activities that 

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

and state taxes and regulatory fees, 

among other data elements. MA 

organizations and Part D sponsors 

would be required to calculate MLRs 

and remittance as part of their 

submission to the Secretary. 

At this time, CMS has not developed 

the MLR reporting instructions and 

forms that MA organizations and Part D 

sponsors would have to complete on an 

annual basis beginning for contract 

years starting January 1, 2014. We 

expect the first year of MLR reporting 

for MA organizations and Part D 

sponsors to occur in 2015 for the 2014 

contract year, and we propose to 

continue collecting MLR data for the 

foreseeable future. We plan to publish 

the instructions and forms that issuers 

must file for all plans in future 

guidance. At that time, we will solicit 

public comments on both the forms and 

the estimated burden imposed on health 

insurance issuers for complying with 

the provisions of this proposed rule. We 

will publish the required 60-day and 30- 

day notices in the Federal Register 

notifying the public of OMB approval as 

required by the PRA. 

B. ICRs Regarding Retention of Records 

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

and (c) 

Subpart I of the proposed rule 

establishes our enforcement authority 

regarding the reporting requirements 

under section 1857(e) of the Act. MA 

organizations and Part D sponsors must 

maintain all documents and other 

evidence necessary to enable us to 

verify that the data required to be 

submitted comply with the definitions 

and criteria set forth in this proposed 

rule, and that the MLR is calculated and 

any remittances owed are calculated 

and provided in accordance with this 

proposed rule. The proposed rule at 

§ 422.2480(c) and § 423.2480(c) would 

require plan sponsors to maintain all of 

the documents and other evidence for 

10 years. 

We expect all MA organizations and 

Part D sponsors will have to retain data 

relating to the calculation of MLRs; 

those who have owed remittances 

would also have to retain information 

regarding the payment of remittances. 

We believe that the burden associated 

with our record retention requirements 

does not exceed standard record 

retention practices because MA 

organizations and Part D sponsors are 

already required to retain the records 

and information required by this 

proposed rule in order to comply with 

the legal requirements of their states’ 

departments of insurance. For that 

reason, we are assigning a lesser burden 

to these requirements as compared with 

the commercial MLR requirements. We 

estimate that about 616 contracts would 

be subject to the aforementioned 

requirements. (The 616 contracts are 

comprised of 605 contracts subject to 

the remittance requirement plus 11 noncredible contracts that are subject to 

reporting requirements). We further 

estimate that it will take MA 

organizations and Part D sponsors about 

28 hours in total to meet the record 

retention requirements, at a cost of 

about $4.00 per report. The total 

estimated annual burden associated 

with the requirements in § 422.2480(b) 

and (c) and § 423.2480(b) and (c) is 

shown in the regulatory impact analysis. 

While we have developed preliminary 

burden estimate, we are not seeking 

OMB approval at this time. We will seek 

OMB approval for the aforementioned 

recordkeeping requirements at the same 

time we seek OMB approval for the 

information collection requirements 

associated with proposed MLR 

remittance reporting requirements 

discussed in § 422.2470 and § 423.2470. 

We welcome comments regarding the 

burden associated with maintaining the 

information described in subpart I of 

this proposed rule. 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Regulations Development Group, 

Attn.: William Parham (CMS–4173– 

P), Room C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244– 

1850; and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: CMS Desk Officer, 

(CMS–4173–P), Fax (202) 395–6974. 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

V. Regulatory Impact Analysis 

A. Introduction 

This proposed rule implements 

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

forth requirements for a medical loss 

ratio (MLR) for MA organizations and 

Part D sponsors. The MLR is an 

accounting statistic that, stated simply, 

measures the percentage of total revenue 

that MA organizations and Part D 

sponsors spend on health care and 

quality initiatives (and, under this rule, 

amounts spent to reduce Part B 

premiums), versus what they spend on 

such other items as administration, 

marketing and profit. The higher the 

MLR, the more the MA organization or 

Part D sponsor is spending on claims 

and quality improving activities and the 

less they are spending on other items 


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and retaining as profit. As proposed 

earlier, MA organizations and Part D 

sponsors must submit MLR-related data 

to the Secretary on an annual basis, and 

in the event that a contract’s MLR fails 

to meet the minimum statutory 

requirement, MA organizations and Part 

D sponsors would remit a payment to 

CMS. If the contract continues to fall 

below the minimum MLR standard, the 

contract would be subject to enrollment 

sanctions and possibly termination. 

This proposed regulation also proposes 

uniform definitions and standardized 

methodologies for calculating the MLR 

and addresses enforcement of the 

reporting requirements. These 

provisions are generally effective for 

contract years beginning on or after 

January 1, 2014. 

We have examined the effects of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation 

and Regulatory Review (January 18, 

2011), the Regulatory Flexibility Act 

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

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

202 of the Unfunded Mandates Reform 

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

104–4), Executive Order 13132 on 

Federalism (August 4, 1999), and the 

Congressional Review Act (5 U.S.C. 

804(2)). 

Executive Orders 12866 (58 FR 51735) 

and 13563 direct agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 is 

supplemental to and reaffirms the 

principles, structures, and definitions 

governing regulatory review as 

established in Executive Order 12866, 

emphasizing the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

Section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule: (1) Having an annual effect on the 

economy of $100 million or more in any 

1 year, or adversely and materially 

affecting a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

state, local or tribal governments or 

communities (also referred to as 

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

a serious inconsistency or otherwise 

interfering with an action taken or 

planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raising novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive Order. 

A regulatory impact analysis (RIA) 

must be prepared for major rules with 

economically significant effects ($100 

million or more in any 1 year), and a 

‘‘significant’’ regulatory action is subject 

to review by the Office of Management 

and Budget (OMB). This proposed rule 

is likely to have economic impacts of 

$100 million or more in any 1 year, and 

therefore has been designated an 

‘‘economically significant’’ rule under 

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

Therefore, we have prepared an RIA that 

details the anticipated effects (costs, 

savings, and expected benefits), and 

alternatives considered in this proposed 

rule. Accordingly, OMB has reviewed 

this proposed rule pursuant to the 

Executive Order. 

B. Statement of Need 

Consistent with the provisions in 

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

incorporated by reference in section 

1860D–12(b)(3)(D) of the Act, this 

proposed rule requires MA 

organizations and Part D sponsors to 

meet the minimum MLR requirement of 

85 percent. If this requirement is not 

met at the contract level, which is the 

level of aggregation proposed in this 

notice, MA organizations and Part D 

sponsors are subject to penalties. 

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

MA organizations and Part D sponsors 

to ‘‘remit to the Secretary an amount 

equal to the product of the total revenue 

of the MA plan under this part for the 

contract year and the difference between 

0.85 and the medical loss ratio.’’ Section 

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

the Secretary shall not permit 

enrollment of new enrollees if the plan 

does not meet the MLR requirement of 

85 percent for 3 or more consecutive 

years and shall terminate the contract if 

the plan (contract) fails to have such a 

medical loss ratio for 5 consecutive 

contract years. 

C. Summary of Impacts 

We limited the period covered by the 

regulatory impact analysis (RIA) to 

calendar year (CY) 2014 (with the 

exception of section V.D.5. of this 

proposed rule, which presents estimates 

for ongoing annual administrative costs 

for 2014 and subsequent years). We 

anticipate that the transparency and 

standardization of MLR reporting in this 

proposed rule would help ensure that 

taxpayers, the federal government, and 

enrolled beneficiaries receive value 

from Medicare health plans. 

Additionally, including in the MLR 

calculation those costs related to 

quality-improving activities could help 

to increase the level of investment in 

and implementation of effective quality 

improving activities, which could result 

in improved quality outcomes and lead 

to a healthier beneficiary population. 

Executive Order 12866 also requires 

consideration of the ‘‘distributive 

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

described in this RIA, this regulatory 

action will help ensure that MA 

organizations and Part D sponsors spend 

at least a specified portion of total 

revenue on reimbursement for clinical 

services, prescription drugs, quality 

improving activities, and direct benefits 

to beneficiaries in the form of reduced 

Part B premiums, and will result in a 

decrease in the proportion of health 

insurance revenue spent on 

administration and profit. It will require 

MA organizations and Part D sponsors 

to remit payment to CMS if this 

standard is not met. MA organizations 

and Part D sponsors may also 

experience sanctions if this standard is 

not met over a period of 3 to 5 

consecutive years. The remittance will 

help incent MA organizations and Part 

D sponsors to price their benefit 

packages such that a specified portion of 

premium income is likely to be spent on 

reimbursement for clinical services and 

quality improving activities, resulting in 

increased value to beneficiaries enrolled 

in MA and Part D. In accordance with 

Executive Order 12866, we believe that 

the benefits of this regulatory action 

justify the costs. 

Although we are unable to quantify 

benefits, Table 2 shows that the 

estimated transfer amounts due to 

failure to meet the minimum MLR 

requirement (that is, remittances to the 

HHS Secretary) could be substantial. 

Estimates for CY 2014 remittances are 

$717 million for MA–PD contracts and 

$141 million for Part D stand-alone 

contracts. (Note that the estimates in 

Tables 2 through 5 are based on CY 

2013 bid data, which are a proxy for 

actual CY 2014 costs and revenues that 

will be used in actual MLR 

calculations.) Additional details relating 

to these estimates are discussed later in 

this regulatory impact analysis. We also 

estimate that administrative costs of the 

rule would be approximately $9.6 

million upfront and $2.8 million in 

subsequent years. 


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TABLE 2—ESTIMATED REMITTANCE FOR CY 2014 

[With Credibility Adjustment] 

Contract type 

Remittance estimates (in millions) 

Contracts with 

MLRs < 80% 

Contracts with 

MLRs from 

80% to 84.99% 

All Contracts 

Below MLR 

Requirement of 

85% 

[Total Remittance] 

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

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

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

Source: 2013 approved bids. 

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

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

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

potential plan sponsor behavioral changes. 

D. Detailed Economic Analysis 

1. Benefits 

In developing this proposed rule, we 

carefully considered its potential effects 

including both costs and benefits. We 

identify several potential benefits which 

are discussed later in this section. 

A potential benefit of this proposed 

rule is greater market transparency and 

improved ability of beneficiaries to 

make informed insurance choices. The 

uniform reporting required under this 

proposed rule, along with other 

programs such as www.Medicare.gov, a 

Web site with plan-level information, 

will mean that beneficiaries will have 

better data to inform their choices, 

enabling the market to operate more 

efficiently. 

In addition, contracts that would not 

otherwise meet the MLR minimum 

defined by this proposed rule may opt 

to increase spending on qualitypromoting activities. These programs, 

which include case management, care 

coordination, chronic disease 

management and medication 

compliance, have the potential to create 

a societal benefit by improving 

outcomes and beneficiary population 

health. 

MA organizations and Part D sponsors 

that would not otherwise meet the MLR 

minimum may also expand covered 

benefits or reduce cost sharing for 

beneficiaries. To the extent that these 

changes result in increased 

consumption of effective health 

services, the proposed rule could result 

in improved beneficiary health 

outcomes, thereby creating a societal 

benefit. 

2. Costs 

We have identified the direct costs 

associated with this proposed rule as 

the costs associated with reporting, 

recordkeeping, remittance payments, 

enrollment and termination sanctions, 

and other costs. 

a. Direct Costs 

We estimate that each MA 

organizations and Part D sponsor would 

incur approximately $16,000 one-time 

administrative costs (per report), and 

about $5,000 in annual ongoing 

administrative costs (per report) related 

to complying with the requirements of 

this proposed rule. Additional details 

relating to these costs are discussed later 

in this RIA. 

b. Other Costs 

Additionally, there are three other 

potential types of costs associated with 

this proposed rule: costs of potential 

increases in medical care use, the cost 

of additional quality-improving 

activities, and costs to beneficiaries if 

MA organizations and Part D sponsors 

decide to limit offered products as a 

result of this proposed rule. 

As discussed in the benefits section, 

there may be increases in qualityimproving activities, provision of 

medical services, and Part D covered 

items due to this proposed rule. This is 

likely have some benefit to beneficiaries 

but also potentially represents an 

additional cost to MA organizations, 

Part D sponsors, and the federal 

government. 

It is also possible that some MA 

organizations and Part D sponsors in 

particular areas or markets would not be 

able to operate profitably when required 

to comply with the proposed 

requirements. They may respond by 

changing or reducing the number of 

products they offer. MA organizations 

and Part D sponsors are likely to 

consider whether they expect to be 

successful competitors in a given 

market. Entire contracts or subsets of 

plans under contracts with low MLRs 

contracts may be withdrawn from a 

given market entirely, while MA 

organizations and Part D sponsors with 

low MLR contracts (particularly those 

that are subsidiaries of larger 

organizations) may find ways to achieve 

higher MLRs through increased 

efficiencies. 

To the extent that MA organizations 

and Part D sponsors decide to limit 

product offerings in response to this 

proposed rule, individual enrollees in 

these contracts may bear some costs 

associated with searching for and 

enrolling in a new Medicare health 

plan. For Medicare beneficiaries, this 

may also lead to reduced choice, the 

inability to purchase similar coverage, 

and higher search costs related to 

finding affordable insurance coverage. 

c. Transfers 

To the extent that MA organizations 

and Part D sponsors have contracts with 

MLRs that fall short of the minimum 

requirement, they must remit payment 

to the Secretary. These remittances 

would reflect transfers from the MA 

organizations or Part D sponsors to the 

Secretary. Using 2013 approved bid 

data, we have estimated remittances for 

CY 2014, which are presented in Table 

2. 

d. Additional Sanctions 

To the extent that MA organizations’ 

and Part D sponsors’ MLRs fall short of 

the minimum MLR requirements for a 

period of 3 or 5 consecutive years, they 

will undergo additional sanctions. If an 

MA organization’s or Part D sponsor’s 

MLR falls below 85 percent for 3 

consecutive contract years, the Secretary 

shall not permit the enrollment of new 

enrollees under the contract for 

coverage. If the MLR falls below 85 

percent for 5 consecutive contract years, 

the Secretary shall terminate the 

contract. To the extent that enrollment 

sanctions are issued, this may lead to 


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reduced choice for Medicare 

beneficiaries. To the extent that 

contracts are terminated, individual 

enrollees in these contracts may bear 

some costs associated with searching for 

and enrolling in a new Medicare health 

or drug plan. One benefit of enrollment 

sanctions would be the movement of 

beneficiaries into contracts with a more 

efficient operating cost structure. 

3. Overview of Data Sources, Methods, 

and Limitations 

The most recent data on the number 

of licensed entities offering Medicare 

coverage through MA or Part D 

prescription drug plans are the 2013 

approved bids. These bid data contain 

information on MA organizations’ and 

Part D sponsors’ projected revenues, 

expenses, and enrollment. Generally, 

these projections are based on actual 

plan experience from previous years. CY 

2013 bid data are a proxy for actual CY 

2014 costs and revenues that will be 

used in actual MLR calculations. 

We used 2013 approved plan bid data, 

aggregated to the contract level. An MA 

organization or Part D sponsor can have 

one or multiple contracts with CMS 

and, under each contract, the MA 

organization or Part D sponsor can offer 

one or multiple plans (plan benefit 

packages) in which beneficiaries may 

enroll. Although these data represent 

the most recent data source with which 

to estimate impacts of the MLR 

regulations, there are limitations that 

should be noted. For example, plan bids 

are projected estimates of per person per 

month revenue needed to offer a benefit 

package, where required revenue is the 

sum of direct medical costs or 

prescription drug costs, administrative 

costs and margin. Member month 

projections may differ from actual 

enrollment, and revenue projections in 

the bid may differ from the actual 

revenue MA organizations and Part D 

sponsors truly require given actual 

claims experience in a year. 

Moreover, we propose to follow the 

commercial MLR regulations by 

including expenditures on quality 

improving activities in the numerator of 

the MLR (and, under this rule, amounts 

spent to reduce Part B premiums), and 

allowing certain amounts to be 

subtracted from the denominator of the 

MLR, such as licensing and regulatory 

fees; federal and state taxes and 

assessments; and community benefit 

expenditures. Some data for this RIA 

was collected in the bid pricing tool for 

the first time in 2013, such as reported 

estimates by MA organizations and Part 

D sponsors of expenditures on quality 

and levels of taxes and fees. Part D 

employer-group waiver plans are not 

required to submit bids, and therefore 

they are not included in the data 

analysis. Therefore, these plans are 

excluded from the analysis of Part D 

stand-alone contracts. Employer group 

waiver plans offered under MA–PD 

contracts are included in the RIA, 

although the bid data available for these 

plans are only from the MA portions of 

the bids. 

As discussed at greater length in 

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

expect that MA organization and Part D 

sponsor behavior would change as a 

result of this proposed rule, which 

would impact the MLRs and remittances 

calculated. Because we are limited in 

our ability to predict behavioral 

changes, we do not explicitly model 

these behavioral changes in our 

estimates. We seek comment on our 

methods and limitations presented in 

this regulatory impact analysis, 

anticipated impacts of behavioral 

changes, and additional ideas for 

quantifying the costs and benefits of this 

proposed rule. 

4. Number of Affected Entities Subject 

to the MLR Provisions 

We are proposing that the MLR 

provisions will apply to all MA 

organizations and Part D sponsors 

offering Part C or D coverage (except for 

the proposed exclusion of PACE 

organizations, and the proposed 

inclusion of cost plans’ Part D coverage). 

For purposes of the RIA, we have 

estimated the total number of entities 

that would be affected by the 

requirements of this proposed rule at 

the contract level because this is the 

level at which we propose to apply the 

MLR. We believe that this is the best 

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

and that applying the MLR adjustment 

at the contract level would promote 

program stability and a variety of benefit 

structures. 

Table 3 shows the estimated 

distribution of entities offering Part C 

and D contracts subject to MLR 

remittance requirements. Note that 

section 1876 Cost HMO/CMPs and 

section 1833 Cost HCPPs (Health Care 

Prepayment Plans) are excluded from 

this MLR analysis, as they do not submit 

Part C bids and only a few Part D bids 

for 2013 were submitted for section 

1876 cost plans. 

TABLE 3—ESTIMATED NUMBER OF CONTRACTS SUBJECT TO MLR REMITTANCE REQUIREMENTS

Contract type Contract count 

Estimated number 

of beneficiaries 

(in millions) 

MA–PD* ................................................................................................................................................... 544 14.3 

Part D Stand-alone** ............................................................................................................................... 61 19.3 

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

* All MA contracts include at least one MA–PD plan, so are labeled MA–PD. Non-credible contracts, of which there are 11, are not displayed or 

included in this table as they are not subject to the remittance requirements. 

** PACE and costs contracts are excluded. 

Source: CMS administrative data on MA and Part D contracts, based on 2013 accepted bids. Beneficiary counts are bid projections. 

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

requirement, we estimate that only 14 

percent of these contracts will be 

required to pay an MLR related 

remittance to the Secretary in 2014. (see 

Table 5). This RIA provides estimates 

only for CY 2014, and, as a result, does 

not estimate the number of contracts 

that could undergo MLR-related 

enrollment suspensions or terminations 

in subsequent years. 

5. MLR Remittance Payments 

a. Data Limitations and Modeling 

Assumptions 

As described in the commercial MLR 

rules, we expect that as a result of this 

proposed rule, MA organization and 

Part D sponsor behavior would change. 

Even if the 2013 bid data were a precise 

indication of actual claims costs and 

revenue for 2013, MLRs in 2014 may 

well be different as a result of plan 

sponsor behavioral change. However, 

for purposes of this analysis, we do not 

explicitly model these behavioral 

changes in our estimates. Potential 

behavioral changes as a result of this 


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proposed rule and the anticipated 

impact on our estimates are as follows: 

• Pricing Policy—MA organizations 

and Part D sponsors would likely 

consider a number of responses in 2014 

to minimize or avoid remittance (for 

example, reducing premium increases, 

or paying providers bonuses if incurred 

claims fall short of a certain threshold). 

• Activities That Improve Quality— 

MA organizations and Part D sponsors 

may increase their quality-improving 

activities given the financial incentive 

to do so, or newly describe existing 

activities as such, and spending on 

these activities may change and vary 

significantly by MA organization or Part 

D sponsor. 

• Other Changes—MA organizations 

and Part D sponsors are expected to 

carefully scrutinize all of their 

expenditures to determine whether 

some could legitimately be categorized 

as expenditures for clinical services, 

prescription drugs, or quality improving 

activities based on the definitions 

implemented by this regulation. 

Further, it is unclear to what extent 

companies may make other behavioral 

changes that could affect MLR 

remittances (for example, expanding 

coverage to increase medical claims, 

consolidation, requesting permission to 

split contracts into smaller contracts in 

order to receive credibility adjustments, 

etc.). 

b. Methods for Estimating MLR 

Remittances 

The analysis includes estimates that 

are based on both unadjusted and 

adjusted MLRs. An ‘‘adjusted MLR’’ 

refers to the MLR for a contract to which 

a credibility adjustment has been added, 

as described in section II.F. of this 

proposed rule. Accordingly, an 

unadjusted MLR is calculated without 

any credibility adjustment. Comparisons 

of unadjusted and adjusted MLRs are 

provided to assess the impact of the 

proposed credibility adjustments on 

partially-credible contracts. All MLRs 

reported in this analysis have 

denominators net of estimated federal 

and state taxes and licensing and 

regulatory fees, using data reported by 

MA organizations and Part D sponsors 

in their 2013 bids. Because the 

definitions of these taxes and fees are 

new to this rule, the estimates from the 

2013 bid data may differ from how 

much they will actually spend on taxes 

and fees in 2014. Similarly, all 

estimated MLRs reported in this 

analysis also incorporate 2013 bid 

estimates of expenses for quality 

improving activities, as reported by MA 

organizations and Part D sponsors. 

Because the definitions of quality 

improving activities are new to this rule, 

the estimates from the 2013 bid data 

may differ from how much they will 

actually spend on these activities in 

2014. 

The adjusted MLRs reflect application 

of the credibility adjustments for 

contracts that have partially credible 

experience. As described in section II.F. 

of this proposed rule, we propose that 

an MA–PD contract be defined as 

partially-credible when the enrollment 

is greater than or equal to 2,400 member 

months and no greater than 180,000 

member months for a contract year. We 

propose that a Part D stand-alone 

contract be defined as partially-credible 

when the enrollment is greater than or 

equal to 4,800 member months and no 

greater than 360,000 member months for 

a contract year. We propose that these 

contracts receive a credibility 

adjustment to their MLRs to account for 

statistical variability in their claims 

experience that is inherent in contracts 

with smaller enrollment. We propose 

that MA–PD contracts are defined as 

fully-credible when the enrollment is 

greater than 180,000 member months 

and Part D stand-alone contracts are 

defined as fully-credible when the 

enrollment is greater than 360,000 

member months. Reported MLR values 

for fully-credible contracts would not 

reflect a credibility adjustment. Finally, 

we propose that contracts are defined as 

having non-credible experience if the 

enrollment for a year is less than 2,400 

member months for MA–PD contracts 

and less than 4,800 member months for 

Part D stand-alone contracts. Noncredible contracts would not be subject 

to the remittance requirements or other 

MLR-related sanctions specified in 

statute (and implemented in the 

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

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

II.F. of the proposed rule describes the 

rationale and method for calculating 

credibility adjustments. 

First, the unadjusted MLR for a 

contract is calculated as follows. Each 

component of the MLR numerator 

(incurred claims, expenditures for 

quality activities, Part B premium 

rebates amount, and Part D reinsurance) 

is summed across all plans under the 

contract for all projected enrollees and 

the contract-level components are then 

summed. Next, each component of the 

MLR denominator (revenue net of taxes 

and fees, and Part D reinsurance) is 

summed across all plans under the 

contract for all projected enrollees, and 

the contract-level components are then 

summed. The ratio is then calculated to 

determine the unadjusted MLR. Finally, 

for contracts that are partially-credible 

and thus eligible for a credibility 

adjustment, and have an MLR below 85 

percent prior to application of a 

credibility adjustment, we calculate an 

adjusted MLR for the contract by adding 

the applicable percentage points. 

To estimate a remittance for a contract 

whose MLR falls below the minimum 

MLR requirement of 85 percent, we 

multiply the contract’s difference 

between the minimum MLR 

requirement of 85 percent and the 

contract’s MLR by the contract’s total 

revenue (as provided at § 422.2430(c) 

and § 423.2420(c). 

c. Numbers and Enrollment of MA 

Organizations and Part D Sponsors 

Affected by the MLR Requirements and 

Associated MLR Remittance Payments 

As shown in Table 4, we estimate that 

336 MA–PD contracts and 26 Part D 

stand-alone contracts would be 

designated as ‘‘partially-credible’’ 

according to the standards of this 

proposed rule, and thus eligible for a 

credibility adjustment. That is, about 62 

percent of MA–PD contracts 

(representing about 13 percent of 

projected total MA–PD enrollment) 

would be partially-credible, and about 

43 percent of Part D stand-alone 

contracts (representing about 1 percent 

of projected total stand-alone 

enrollment) would be eligible for a 

credibility adjustment if the MLR falls 

below 85 percent. (Many MLRs for 

partially-credible contracts are 

estimated to meet the minimum MLR 

requirement, as shown in Table 5.). 

A total of 208 MA–PD contracts and 

35 Part D stand-alone contracts are 

estimated to be fully-credible, so are not 

eligible for a credibility adjustment. As 

discussed elsewhere in this proposed 

rule, contracts with non-credible 

experience during a given contract year 

that do not meet the minimum MLR 

requirement would not be required to 

provide any remittance to the Secretary 

nor be subject to enrollment or 

termination sanctions because the 

contract would not have a sufficiently 

large number of member months to 

yield a statistically valid MLR. 


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

Contract type Credibility status Contract count 

Number of 

beneficiaries 

(in millions) 

Total revenue 

(in billions) 

Avg MLR* 

percent 

MA–PD ............................................................... Partial .......................... 336 1.8 $20.8 89.6 

Full ............................... 208 12.5 135.8 88.9 

Part D Stand-alone ............................................ Partial .......................... 26 0.2 0.4 86.7 

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

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

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

analysis does not explicitly model the impact of potential plan sponsor behavioral changes. 

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

and total revenue are projections from the 2013 approved bids. 

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

Finally, Table 4 shows average MLRs 

for the subgroups of MA–PD and Part D 

stand-alone partially- and fully-credible 

contracts. (The average MLRs for 

partially-credible contracts reflect the 

MLRs after application of a credibility 

adjustment for those partially-credible 

contracts with an MLR below 85 percent 

prior to application of a credibility 

adjustment.) On average, each of these 

four subgroups of contracts is estimated 

to meet the minimum MLR requirement, 

with average MLRs ranging from 86.7 

percent to 89.6 percent. However, there 

are contracts within both subgroups of 

partially-credible and fully-credible that 

do not meet the minimum MLR 

requirement, as shown in Table 5. 

Total revenue for MA–PD contracts is 

the total MA revenue requirement + MA 

optional supplemental benefit premium 

(if any) + Part D basic bid + Part D 

reinsurance—Parts C and D taxes and 

fees. 

Total revenue for Part D stand-alone 

contracts is the sum of the basic bid and 

Part D reinsurance, minus taxes and 

fees. Low-income cost sharing (LICS) 

payments are excluded. 

Table 5 shows the number of MA–PD 

and Part D stand-alone contracts 

estimated to owe a remittance payment, 

before and after application of a 

credibility adjustment to eligible 

partially-credible contracts. The figures 

in Table 5 were determined as follows. 

First, we used enrollment projections to 

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

with the credibility adjustment added 

for those partially-credible contracts 

with MLRs below 85 percent. Finally, to 

show the overall program impact of 

credibility adjustments, we calculated 

the estimated remittances for partiallycredible and fully-credible contracts 

before and after application of 

credibility adjustments. 

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

Contract type Credibility status Number 

contracts 

Number of 

contracts 

below 85% 

MLR before 

credibility 

adjustment 

Estimated 

remittance 

without 

credibility 

adjustment 

(in millions) 

Number of 

contracts 

below 85% 

after credibility 

adjustment 

Estimated 

remittance 

with 

credibility 

adjustment 

(in millions) 

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

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

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

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

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

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

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

This analysis does not explicitly model the impact of potential plan sponsor behavioral changes. 

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

Of the 336 MA–PD contracts that 

would categorized as partially-credible, 

68 would fail to meet the MLR 

minimum requirement of 85 percent in 

the absence of a credibility adjustment. 

The average MLR for this group of 68 

contracts, prior to adding a credibility 

adjustment, is 82.6 percent. Upon 

application of the credibility 

adjustment, 34 of these 68 would pass 

the MLR requirement, and 34 would 

still have MLRs below 85 percent. The 

subset of 34 contracts that passes with 

application of the credibility adjustment 

has an average MLR of 85.7 percent. As 

a result, the credibility adjustment 

decreases the estimated remittance 

amount by about $54 million (from $771 

to $717 million). However, it should be 

noted that the majority of the estimated 

remittance of $717 million, that is, $662 

million, is owed by fully-credible 

contracts. 

For Part D stand-alone contracts, 12 of 

the 26 partially-credible contracts 

would fail to meet the MLR minimum 

requirement in the absence of a 

credibility adjustment. The average 

MLR for this group of 12 contracts, prior 

to adding a credibility adjustment, is 

80.4 percent. Upon application of the 

credibility adjustment, 3 of these 12 

contracts would pass the requirement, 

and 9 would still have MLRs below 85 

percent. The subset of 3 contracts that 

passes with application of the 

credibility adjustment has an average 

MLR of 86.8 percent. As a result, the 

credibility adjustment decreases the 

estimated remittance amount by about 

$3 million (from $144 to $141 million). 

However, it should be noted that the 

majority of the estimated remittance of 

$141 million, that is $133 million, is 

owed by fully-credible contracts. NonVerDate Mar<15>2010 18:06 Feb 21, 2013 Jkt 229001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 E:\FR\FM\22FEP2.SGM 22FEP2

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credible contracts were excluded from 

this analysis because no sanctions under 

§ 422.2410(b) through (d) would apply 

to these contracts; as these contracts 

will not have remittances, they do not 

factor into the analysis of the estimated 

impacts. 

6. Administrative Costs Related to MLR 

Provisions 

As stated previously this proposed 

rule implements the reporting 

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

Act, describing the medical loss ratio 

requirements and sanctions for not 

meeting those requirements, including a 

remittance payment of the difference to 

the Secretary and enrollment 

suspensions and contract termination 

for those who do not meet the 

requirements. Implementation of these 

requirements necessitates that a report 

be submitted to the Secretary and that 

MLR information be made available to 

the public in a time and manner that we 

determine, as well as the remittance 

calculation, payment and enforcement 

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

Act. We have quantified the primary 

sources of start-up costs that MA 

organizations and Part D sponsors will 

incur to bring themselves into 

compliance with this proposed rule, as 

well as the ongoing annual costs that 

they will incur related to these 

requirements. These costs and the 

methodology used to estimate them are 

discussed later in this section, on which 

we welcome comment. 

a. Methodology and Assumptions for 

Estimating Administrative Costs 

Many MA organizations and Part D 

sponsors already report to CMS several 

elements needed for the MLR 

calculation, for example, certain fields 

in the Part D prescription drug events 

records, and some information in the 

annual Part C and Part D Technical 

Reporting. This proposed rule includes 

requirements related to additional data 

elements. As discussed earlier in this 

impact analysis, in order to assess the 

potential administrative burden relating 

to the requirements in this proposed 

rule, we drew on the regulatory impact 

analysis from the commercial MLR rules 

to gain insight into the tasks and level 

of effort required, and modified these 

estimated impacts for Medicare. Based 

on this review, we estimate that MA 

organizations and Part D sponsors will 

incur one-time start-up costs associated 

with developing teams to review the 

requirements in this proposed rule, and 

with developing processes for capturing 

the necessary data (for example, 

automating systems, writing new 

policies for tracking expenses in the 

general ledger, and developing 

methodologies for allocating expenses 

by lines of business and by contract). 

We estimate that MA organizations and 

Part D sponsors will also incur ongoing 

annual costs relating to data collection, 

populating the MLR reporting forms, 

conducting a final internal review, 

submitting the reports to the Secretary, 

conducting internal audits, record 

retention, preparing and submitting 

remittances, suspending enrollment 

(where appropriate), modifying 

marketing, and/or terminating contracts 

(where appropriate). 

We anticipate that the level of effort 

relating to these activities will vary 

depending on the scope of an MA 

organization or Part D sponsor’s 

operations. The complexity of each MA 

organization or Part D sponsor’s 

estimated reporting burden is likely to 

be affected by a variety of factors, 

including the number of contracts it 

offers, enrollment size, the degree to 

which it currently captures relevant 

data, whether it is a subsidiary of a 

larger carrier, and whether it currently 

offers coverage in the commercial 

market (and is therefore subject to the 

commercial MLR requirements). 

b. Costs Related to MLR Reporting 

For each contract year, MA 

organizations or Part D sponsors must 

submit a report to the Secretary that 

complies with the requirements of this 

proposed rule and in a time and manner 

that the Secretary determines. For 

purposes of these impact estimates, we 

assume that this report would include 

data relating to both the amounts 

expended on reimbursement for clinical 

services and prescription drugs, 

activities that improve quality and other 

non-clinical costs, as well as 

information relating to remittance 

payments. 

The estimated total number of MLR 

data reports that MA organizations and 

Part D sponsors will be required to 

submit to the Secretary under the 

provisions of this proposed rule 

depends on the number of contracts 

held. We anticipate one report per 

contract. Our analysis here is based on 

553 MA contracts and 63 Part D standalone contracts, for a total of 616 

reports. The 616 contracts are 

comprised of 605 contracts subject to 

the remittance requirement plus 11 noncredible contracts that are subject to 

reporting requirements. We estimated 

the average cost per hour to be $94.88. 

This figure was derived by using the 

May 2011 mean hourly wage of $60.41 

for computer and information systems 

managers from the Department of 

Labor’s Bureau of Labor Statistics. This 

rate was increased by 48 percent to 

account for fringe benefits and overhead 

(36 percent for fringe benefits and 12 

percent for overhead). This figure was 

then converted to 2014 dollars using an 

average annual growth rated derived 

from the changes to the Consumer Price 

Index. This is an upper-bound estimate 

that assumes all MA organizations and 

Part D sponsors would be submitting a 

separate MLR report for each contract. 

Table 6 shows our estimates that MA 

organizations and Part D sponsors will 

incur one-time costs in 2014 and 

ongoing costs thereafter, relating to the 

MLR reporting requirements in this 

proposed rule of approximately $16,000 

per contract on average in 2014. 

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

Type of administrative cost Total number 

of contracts 

Total number 

of reports 

Estimated total 

hours 

Estimated 

average cost 

per hour 

Estimated total 

cost 

Estimated 

average cost 

per report 

One-Time Costs ....................................... 616 616 90,000 $94.88 $9,600,000 $16,000 

Ongoing Costs ......................................... 616 616 26,000 94.88 2,800,000 5,000 

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

has been modified to reflect estimated costs for MA organizations and Part D sponsors. Values may not be exact due to rounding. Estimates reflect 2011 wage data from the U.S. Department of Labor, Bureau of Labor Statistics. 


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c. Costs Related to MLR Record 

Retention Requirements 

Consistent with the assumptions 

discussed earlier, MLR record retention 

costs are assumed to be relatively 

negligible, since MA organizations and 

Part D sponsors already retain similar 

data for general MA and Prescription 

Drug audits and per the established 

requirements in § 422.504(f)(2) and 

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

estimate for MA organizations and Part 

D sponsors, we adjusted downward the 

3.5 minute-per-report estimate that 

appears in the RIA for the commercial 

MLR rule. Table 7 shows that we 

estimate that MA organizations and Part 

D sponsors would incur annual ongoing 

costs relating to the MLR reporting 

requirements in this proposed rule of 

approximately $4.00 per report on 

average. We estimated the average cost 

per hour to be $94.88. This figure was 

derived by using the May 2011 mean 

hourly wage of $60.41 for computer and 

information systems managers from the 

Department of Labor’s Bureau of Labor 

Statistics. This rate was increased by 48 

percent to account for fringe benefits 

and overhead (36 percent for fringe 

benefits and 12 percent for overhead). 

This figure was then converted to 2014 

dollars using an average annual growth 

rated derived from the changes to the 

Consumer Price Index. 

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

Description Total number 

of contracts 

Total number 

of reports 

Estimated total 

hours 

Estimated 

average cost 

per hour 

Estimated total 

cost 

Estimated 

average cost 

per report 

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

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

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

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

d. Costs Related to MLR Remittance 

Payments 

Consistent with the assumptions 

discussed earlier, costs around 

submitting remittances to the Secretary 

are expected to be relatively negligible, 

in particular because we propose to 

implement payment of remittances 

using a standard payment adjustment 

procedure in our payment system, 

which is a routine systems interface for 

the industry. 

E. Alternatives Considered 

Under the Executive Order, we are 

required to consider alternatives to 

issuing regulations and alternative 

regulatory approaches. We consider a 

variety of regulatory alternatives to the 

policies proposed thus far, and solicit 

comments on these alternatives. 

1. Credibility Adjustment 

One alternative to the credibility 

adjustment in this proposed rule would 

be to not make any adjustment for 

credibility, and to require smaller plans 

to make remittance payments on the 

same terms as larger plans. If we do not 

adopt a credibility adjustment, the 

estimated remittance in 2014 would be 

approximately $915 million for MA–PD 

and Part D stand-alone contracts, or 

approximately $57 million larger, as 

shown in Table 5. As described 

elsewhere in this preamble, we believe 

that the credibility adjustment as 

proposed would best balance the goals 

of providing value to beneficiaries and 

assuring that contracts with relatively 

low enrollment would be able to 

function effectively. 

2. Aggregation of MLR to the Contract 

Level 

We considered two alternatives to 

aggregating MLRs to the contract level. 

Determining MLRs at the level of plan 

benefit package would increase the 

burden on MA organizations and Part D 

sponsors and the size of many plan 

benefit packages is too small for an MLR 

to reasonably represent the MA 

organization’s or Part D sponsor’s 

approach to resource allocation. We also 

considered calculating MLRs at the 

parent organization level, but we believe 

that this high level of aggregation would 

obscure local variation in resource 

allocation that would be important to 

enrollees. As described elsewhere in 

this proposed rule, we believe that the 

contract-level of aggregation is closest to 

the commercial MLR regulations of 

state-level aggregation and best 

promotes program stability. 

3. Quality Improving Activities 

After considering the commercial 

MLR regulations’ approach to defining 

quality improving activities, we decided 

to propose aligning our definition of 

quality improving activities with the 

commercial MLR rule’s approach. As 

discussed elsewhere in this proposed 

rule, potential alternatives would be to 

adopt narrower or broader definitions of 

quality improving activities. These 

distinctions could be made based on the 

criteria for selecting quality improving 

activities and/or the specific types of 

activities included in the definition. 

This proposed rule defines qualityimproving activities as being grounded 

in evidence-based medicine, designed to 

improve the quality of care received by 

an enrollee, and capable of being 

objectively measured and producing 

verifiable results and achievements. A 

narrower definition might include only 

evidence-based quality improving 

initiatives, while excluding activities 

that have not been demonstrated to 

improve quality. Similarly, a narrower 

definition would not allow for inclusion 

of future innovations before data are 

available demonstrating their 

effectiveness. 

Conversely, a broader definition 

might allow additional types of 

administrative expenses to be counted 

as activities that improve quality, such 

as network fees associated with third 

party provider networks or costs 

associated with converting International 

Classification of Disease (ICD) code sets 

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

of 0.3 percent of a MA organization or 

Part D sponsor’s total revenue. As 

discussed elsewhere in this proposed 

rule, while we agree that certain 

administrative expenses should not be 

counted as expenditures on quality 

improving activities, some traditional 

administrative activities could qualify 

as expenditures on quality improving 

activities if they meet the criteria set 

forth in this proposed rule. 

We do not have data available to 

estimate the effects of alternative 

definitions of quality improving 

activities on MLRs, although it should 

be clear that if a broader definition of 

quality improving activities were 

adopted, then estimated remittances 

would be smaller, and if a narrower 

definition were adopted, estimated 

remittances would be larger. 

F. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

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


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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 Act 

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

A proprietary firm meeting the size 

standards of the Small Business 

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

in its field, or (3) a small government 

jurisdiction with a population of less 

than 50,000. (States and individuals are 

not included in the definition of ‘‘small 

entity.’’) HHS uses as its measure of 

significant economic impact on a 

substantial number of small entities a 

change in revenues of more than 3 to 5 

percent. 

As discussed earlier, in general, 

health insurance issuers offering Part C 

and D coverage, including MA 

organizations, Part D sponsors, 1876 

Cost HMO/CMPs, and section 1833 

HCPPs (Health Care Prepayment Plans), 

would be affected by the proposed rule. 

We believe that health insurers would 

be classified under the North American 

Industry Classification System (NAICS) 

Code 524114 (Direct Health and Medical 

Insurance Carriers). According to SBA 

size standards, entities with average 

annual receipts of $7 million or less 

would be considered small entities for 

this NAICS code. Health issuers could 

possibly also be classified in NAICS 

Code 621491 (HMO Medical Centers) 

and, if this is the case, the SBA size 

standard would be $10 million or less. 

As discussed in the Web Portal 

interim final rule (75 FR 24481), HHS 

examined the health insurance industry 

in depth in the RIA we prepared for the 

proposed rule on establishment of the 

Medicare Advantage program (69 FR 

46866, August 3, 2004). In that analysis 

we determined that there were few, if 

any, insurance firms underwriting 

comprehensive health insurance 

policies (in contrast, for example, to 

travel insurance policies or dental 

discount policies) that fell below the 

relevant size thresholds for ‘‘small’’ 

business established by the SBA. 

Similarly, MA organizations and Part 

D sponsors, the entities that will largely 

be affected by the provisions of this 

proposed rule, are not generally 

considered small business entities. They 

must follow minimum enrollment 

requirements (5,000 in urban areas and 

1,500 in nonurban areas) and because of 

the revenue from such enrollments, 

these entities are generally above the 

revenue threshold required for analysis 

under the RFA. While a very small rural 

plan could fall below the threshold, we 

do not believe that there are more than 

a handful of such plans. Additionally, a 

fraction of MA organizations and 

sponsors could be considered small 

businesses because of their non-profit 

status and lack of dominance in their 

field. As its measure of significant 

economic impact on a substantial 

number of small entities, HHS uses a 

change in revenue of more than 3 to 5 

percent. We do not believe that this 

threshold will be reached by the 

requirements in this proposed rule 

because very few small entities are 

subject to the provisions in this 

proposed rule, the estimated 

administrative costs associated with 

reporting MLR data to the Secretary are 

very low (see section V.D.6. of this 

proposed rule), and the credibility 

adjustment addresses the special 

circumstances of contracts with lower 

enrollment. For these reasons, we 

believe this proposed rule would have 

minimal impact on small entities. As a 

result, the Secretary has determined that 

this proposed rule would not have a 

significant impact on a substantial 

number of small entities. We welcome 

comment on the analysis described in 

this section and on HHS’ conclusion. 

G. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that includes a federal mandate that 

could result in expenditure in any 1 

year by state, local or tribal 

governments, in the aggregate, or by the 

private sector, of $100 million in 1995 

dollars, updated annually for inflation. 

In 2013, that threshold level is 

approximately $141 million. 

UMRA does not address the total cost 

of a rule. Rather, it focuses on certain 

categories of cost, mainly those ‘‘federal 

mandate’’ costs resulting from: (1) 

Imposing enforceable duties on state, 

local, or tribal governments, or on the 

private sector; or (2) increasing the 

stringency of conditions in, or 

decreasing the funding of, state, local, or 

tribal governments under entitlement 

programs. 

Consistent with policy embodied in 

UMRA, this proposed regulation has 

been designed to a low-burden 

alternative for state, local and tribal 

governments, and the private sector 

while achieving the objectives of the 

Affordable Care Act. 

This proposed rule contains reporting 

requirements and data retention 

requirements for MA organizations and 

Part D sponsors. We estimate that 

administrative costs related to MLR 

reporting requirements would be $9.6 

million in total one-time costs in 2014 

and $2.8 million per year in ongoing 

costs. We estimate that ongoing costs 

per year for record retention 

requirements will be $2,600. This 

proposed rule also contains 

requirements related to remittance 

payments paid by MA organizations and 

Part D sponsors that do not meet the 

minimum MLR standards. We estimate 

approximately $858 million in 

remittance payments to the Secretary in 

2014, contingent upon certain changes 

in bidding and payment behavior. It 

includes no mandates on state, local, or 

tribal governments. 

H. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on state and local 

governments, preempts state law, or 

otherwise has federalism implications. 

States generally regulate health 

insurance coverage. However in 2003, 

section 232(a) of the MMA amended 

section 1856 for MA plans by 

eliminating the general and specific 

preemption distinctions from section 

1856 and expanded federal preemption 

of state standards to broadly apply 

preemption to all state law or regulation 

(other than state licensing laws or state 

laws relating to plan solvency). In our 

view, while this proposed rule does not 

impose substantial direct requirement 

costs on state and local governments, 

this proposed rule has minimal 

Federalism implications due to direct 

effects on the distribution of power and 

responsibilities among the state and 

federal governments relating to 

determining and enforcing minimum 

MLR standards, reporting and 

remittance requirements relating to 

coverage that MA organizations and Part 

D sponsors offer. 

We anticipate that the federalism 

implications (if any) are substantially 

mitigated because the Affordable Care 

Act does not provide any role for the 

states in terms of receiving or analyzing 

the data or enforcing the requirements 

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

enforcement provisions of this proposed 

rule state that the Secretary has 

enforcement authority and does not 

require the states to do anything. 

As discussed earlier, in developing 

this proposed rule for the Medicare 

Advantage and the Medicare 

Prescription Drug Benefit programs, 

HHS used the commercial MLR 

regulations as a reference point for 

developing the Medicare MLR 

requirements. In compliance with the 

requirement of Executive Order 13132 

that agencies examine closely any 


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policies that may have federalism 

implications or limit the policymaking 

discretion of the states, HHS made 

efforts to consult with and work 

cooperatively with states during the 

development of the commercial MLR 

regulation, including participating in 

conference calls with and attending 

conferences of the National Association 

of Insurance Commissioners, and 

consulting with state insurance officials 

on an individual basis. Throughout the 

process of developing the commercial 

MLR regulations, to the extent feasible 

within the specific preemption 

provisions of HIPAA as it applies to the 

Affordable Care Act, the Department 

attempted to balance the states’ interests 

in regulating health insurance issuers, 

and Congress’ intent to provide uniform 

minimum protections to consumers in 

every state. 

By doing so, it is the Department’s 

view that we have complied with the 

requirements of Executive Order 13132. 

Pursuant to the requirements set forth in 

section 8(a) of Executive Order 13132, 

and by the signatures affixed to this 

regulation, the Department certifies that 

we have complied with the 

requirements of Executive Order 13132 

for the attached proposed rule in a 

meaningful and timely manner. 

I. Congressional Review Act 

This proposed rule is subject to the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

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

transmitted to the Congress and the 

Comptroller General for review. 

In accordance with the provisions of 

Executive Order 12866, this proposed 

rule was reviewed by the Office of 

Management and Budget. 

J. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/ 

circulars_a004_a-4), we have prepared 

an accounting statement in Table 8 

showing the classification of the 

transfers and costs associated with the 

provisions of this proposed rule for CY 

2014. 

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

STAND-ALONE MLR REMITTANCE PAYMENTS FOR CY 2014 

[In millions of 2013 dollars] 

Category Transfers 

Annualized monetized transfers Discount Rate Period Covered 

7% 3% CY 2014 

Primary Estimate .......................................................................................................................................... $802 $833 

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

Sponsors/To Federal Government 

Category Costs 

Annualized Costs to MA Organizations and Part D Sponsors Discount Rate Period Covered 

7% 3% CY 2014 

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

List of Subjects 

42 CFR Part 422 

Administrative practice and 

procedure, Health facilities, Health 

maintenance organizations (HMO), 

Medicare, Penalties, Privacy, Reporting 

and recordkeeping requirements. 

42 CFR Part 423 

Administrative practice and 

procedure, Emergency medical services, 

Health facilities, Health maintenance 

organizations (HMO), Health 

professionals, Medicare, Penalties, 

Privacy, Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR parts 422 and 423 as set forth 

below: 

PART 422 MEDICARE ADVANTAGE 

PROGRAM 

■ 1. The authority citation for part 422 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

■ 2. Section 422.510 is amended by 

adding paragraphs (a)(15) and (16) to 

read as follows: 

§ 422.510 Termination of contract by CMS. 

(a) * * * 

(15) Has failed to report MLR data in 

a timely and accurate manner in 

accordance with § 422.2460. 

(16) Has failed to have a minimum 

MLR per § 422.2410(d) for 5 consecutive 

contract years. 

* * * * * 

Subpart U—[Reserved] 

Subpart W—[Reserved] 

■ 3. Add reserved subparts U and W. 

■ 4. Add subpart X to read as follows: 

Subpart X—Requirement for a 

Minimum Medical Loss Ratio 

Sec. 

422.2400 Basis and scope. 

422.2401 Definitions. 

422.2410 General requirements. 

422.2420 Calculation of the medical loss 

ratio. 

422.2430 Activities that improve health 

care quality. 

422.2440 Credibility adjustment. 

422.2450 [Reserved]. 

422.2460 Reporting requirements. 

422.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

422.2480 MLR review and non-compliance. 

§ 422.2400 Basis and scope. 

This subpart is based on section 

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


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medical loss ratio requirements for 

Medicare Advantage organizations, and 

financial penalties and sanctions against 

MA organizations when minimum 

medical loss ratios are not achieved by 

MA organizations. 

§ 422.2401 Definitions. 

Non-claims costs means those 

expenses for administrative services that 

are not— 

(1) Incurred claims (as provided in 

§ 422.2420(b)(2) through (4)); 

(2) Expenditures on quality improving 

activities (as provided in § 422.2430); 

(3) Licensing and regulatory fees (as 

provided in § 422.2420(c)(2)(ii)); 

(4) State and federal taxes and 

assessments (as provided in 

§ 422.2420(c)(2)(i) and (iii)). 

§ 422.2410 General requirements. 

(a) For contracts beginning in 2014 or 

later, an MA organization (defined at 

§ 422.2) is required to report an MLR for 

each contract under this part for each 

contract year. 

(b) MLR requirement. If CMS 

determines for a contract year that an 

MA organization has an MLR for a 

contract that is less than 0.85, the MA 

organization has not met the MLR 

requirement and must remit to CMS an 

amount equal to the product of the 

following: 

(1) The total revenue of the MA 

contract for the contract year. 

(2) The difference between 0.85 and 

the MLR for the contract year. 

(c) If CMS determines that an MA 

organization has an MLR for a contract 

that is less than 0.85 for 3 or more 

consecutive contract years, CMS does 

not permit the enrollment of new 

enrollees under the contract for 

coverage during the second succeeding 

contract year. 

(d) If CMS determines that an MA 

organization has an MLR for a contract 

that is less than 0.85 for 5 consecutive 

contract years, CMS terminates the 

contract under the authority at 

§ 422.510(a)(12) and (15) effective as of 

the second succeeding contract year. 

§ 422.2420 Calculation of the medical loss 

ratio. 

(a) Determination of MLR. (1) The 

MLR for each contract under this part is 

the ratio of the numerator (as defined in 

paragraph (b) of this section) to the 

denominator (as defined in paragraph 

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

increased by a credibility adjustment 

according to the rules at § 422.2440. 

(2) The MLR for an MA contract not 

offering Medicare prescription drug 

benefits must only reflect costs and 

revenues related to the benefits defined 

at § 422.100(c). The MLR for an MA 

contract that includes MA–PD plans 

(defined at § 422.2) must also reflect 

costs and revenues for benefits 

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

(b) Determining the MLR numerator. 

(1) For a contract year, the numerator of 

the MLR for an MA contract must equal 

the sum of paragraphs (b)(1)(i) through 

(iii) of this section and be in accordance 

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

(i) Incurred claims for all enrollees, as 

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

of this section. 

(ii) The amount of the reduction, if 

any, in the Part B premium for all MA 

plan enrollees under the contract for the 

contract year. 

(iii) The expenditures under the 

contract for activities that improve 

health care quality, as defined in 

§ 422.2430. 

(iv) Incurred claims under this part 

for policies issued by one MA 

organization and later assumed by 

another MA organization under an 

assumptive or 100 percent indemnity 

reinsurance must be reported by the 

assuming organizations for the entire 

MLR reporting year during which the 

policies were assumed and no incurred 

claims under this part for that contract 

year must be reported by the ceding MA 

organization. 

(2) Incurred claims for clinical 

services and prescription drug costs. 

Incurred claims must include the 

following: 

(i) Direct claims that the MA 

organization pays to providers 

(including under capitation contracts 

with physicians) for covered services 

described at paragraph (a)(2) of this 

section provided to all enrollees under 

the contract. 

(ii) For an MA contract that includes 

MA–PD plans (described in paragraph 

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

provided to all enrollees under the 

contract, as defined at 

§ 423.2420(b)(2)(i). 

(iii) Unpaid claims reserves for the 

current contract year, including claims 

reported in the process of adjustment. 

(iv) Percentage withholds from 

payments made to contracted providers. 

(v) Incurred but not reported claims 

based on past experience, and modified 

to reflect current conditions such as 

changes in exposure, claim frequency or 

severity. 

(vi) Changes in other claims-related 

reserves. 

(vii) Claims that are recoverable for 

anticipated coordination of benefits. 

(viii) Claims payments recoveries 

received as a result of subrogation. 

(ix) Claims payments recoveries as a 

result of fraud reduction efforts not to 

exceed the amount of fraud reduction 

expenses. 

(x) Reserves for contingent benefits 

and the medical claim portion of 

lawsuits. 

(xi) The amount of incentive and 

bonus payments made to providers. 

(3) Adjustments that must be 

deducted from incurred claims include 

the following: 

(i) Prescription drug rebates and other 

direct or indirect remuneration as 

defined in § 423.308 received by the MA 

organization under the contract. 

(ii) Overpayment recoveries received 

from providers. 

(4) Exclusions from incurred claims. 

The following amounts must not be 

included in incurred claims: 

(i) Non-claims costs, as defined in 

§ 422.2401, which include the 

following: 

(A) Amounts paid to third party 

vendors for secondary network savings. 

(B) Amounts paid to third party 

vendors for all of the following: 

(1) Network development. 

(2) Administrative fees. 

(3) Claims processing. 

(4) Utilization management. 

(C) Amounts paid, including amounts 

paid to a provider, for professional or 

administrative services that do not 

represent compensation or 

reimbursement for covered services 

provided to an enrollee, such as the 

following: 

(1) Medical record copying costs. 

(2) Attorneys’ fees. 

(3) Subrogation vendor fees. 

(4) Bona fide service fees. 

(5) Compensation to any of the 

following: 

(i) Paraprofessionals. 

(ii) Janitors. 

(iii) Quality assurance analysts. 

(iv) Administrative supervisors. 

(v) Secretaries to medical personnel. 

(vi) Medical record clerks. 

(ii) Amounts paid to CMS as a 

remittance under § 422.2410(b). 

(c) Determining the MLR 

denominator. For a contract year, the 

denominator of the MLR for an MA 

contract must equal the total revenue 

under the contract, as described in 

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

deductions described in paragraph (c)(2) 

of this section, taking into account the 

exclusions described in paragraph (c)(3) 

of this section, and be in accordance 

with paragraph (c)(4) of this section. 

(1) Total revenue must be reported on 

a direct basis and means CMS’ 

payments to the MA organization for all 

enrollees under a contract, including the 

following: 

(i) Payments under § 422.304(a) 

through (3) and (c). 


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(ii) The amount applied to reduce the 

Part B premium, as provided under 

§ 422.266(b)(3). 

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

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

(iv) All premiums paid by or on 

behalf of enrollees to the MA 

organization as a condition of receiving 

coverage under an MA plan, including 

CMS’ payments for low income 

premium subsidies under 

§ 422.304(b)(2). 

(v) All unpaid premium amounts that 

an MA organization could have 

collected from enrollees in the MA 

plan(s) under the contract. 

(vi) All changes in unearned premium 

reserves. 

(vii) Payments under § 423.315(e). 

(2) The following amounts must be 

deducted from total revenue in 

calculating the MLR: 

(i) Licensing and regulatory fees. (A) 

Statutory assessments to defray 

operating expenses of any State or 

Federal department, such as the ‘‘user 

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

the Act. 

(B) Examination fees in lieu of 

premium taxes as specified by state law. 

(ii) Federal taxes and assessments. All 

federal taxes and assessments allocated 

to health insurance coverage. 

(iii) State taxes and assessments. 

State taxes and assessments such as the 

following: 

(A) Any industry-wide (or subset) 

assessments (other than surcharges on 

specific claims) paid to the state 

directly. 

(B) Guaranty fund assessments. 

(C) Assessments of state industrial 

boards or other boards for operating 

expenses or for benefits to sick 

employed persons in connection with 

disability benefit laws or similar taxes 

levied by States. 

(D) State income, excise, and business 

taxes other than premium taxes. 

(iv) Community benefit expenditures 

are payments made by a federal income 

tax-exempt MA organization for 

community benefit expenditures as 

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

section, limited to the amount defined 

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

and allocated to a contract as required 

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

(A) Community benefit expenditures 

means expenditures for activities or 

programs that seek to achieve the 

objectives of improving access to health 

services, enhancing public health and 

relief of government burden. 

(B) Such payment may be deducted 

up to the limit of either 3 percent of 

total revenue under this part or the 

highest premium tax rate in the State for 

which the Part D sponsor is licensed, 

multiplied by the Part D sponsor’s 

earned premium for the contract. 

(3) The following amounts must not 

be included in total revenue: 

(i) The amount of unpaid premiums 

for which the MA organization can 

demonstrate to CMS that it made a 

reasonable effort to collect, as required 

under § 422.74(d)(i). 

(ii) The following EHR payments and 

adjustments: 

(A) EHR incentive payments for 

meaningful use of certified electronic 

health records by qualifying MAOs, MA 

EPs and MA-affiliated eligible hospitals 

that are administered under Part 495 

subpart C. 

(B) EHR payment adjustments for a 

failure to meet meaningful use 

requirements that are administered 

under Part 495 subpart C. 

(iii) Coverage Gap Discount Program 

payments under § 423.2320. 

(4) All incurred claims under this part 

for policies issued by one MA 

organization and later assumed by 

another MA organization under an 

assumptive or 100 percent indemnity 

reinsurance must be reported by the 

assuming organizations for the entire 

MLR reporting year during which the 

policies were assumed and no incurred 

claims under this part for that contract 

year must be reported by the ceding MA 

organization. 

(d) Allocation of expenses. (1) General 

requirements. (i) Each expense must be 

included under only one type of 

expense, unless a portion of the expense 

fits under the definition of or criteria for 

one type of expense and the remainder 

fits into a different type of expense, in 

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

(ii) Expenditures that benefit multiple 

contracts, or contracts other than those 

being reported, including but not 

limited to those that are for or benefit 

self-funded plans, must be reported on 

a pro rata share. 

(2) Description of the methods used to 

allocate expenses. (i) Allocation to each 

category must be based on a generally 

accepted accounting method that is 

expected to yield the most accurate 

results. Specific identification of an 

expense with an activity that is 

represented by one of the categories in 

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

most accurate method. 

(ii) Shared expenses, including 

expenses under the terms of a 

management contract, must be 

apportioned pro rata to the contracts 

incurring the expense. 

(iii)(A) Any basis adopted to 

apportion expenses must be that which 

is expected to yield the most accurate 

results and may result from special 

studies of employee activities, salary 

ratios, premium ratios or similar 

analyses. 

(B) Expenses that relate solely to the 

operations of a reporting entity, such as 

personnel costs associated with the 

adjusting and paying of claims, must be 

borne solely by the reporting entity and 

are not to be apportioned to other 

entities within a group. 

§ 422.2430 Activities that improve health 

care quality. 

(a) Activity requirements. Activities 

conducted by an MA organization to 

improve quality must fall into one of the 

categories in paragraph (a)(1) of this 

section and meet all of the requirements 

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

(1) Categories of quality improving 

activities. The activity must be designed 

to achieve one or more of the following: 

(i) To improve health outcomes 

through the implementation of activities 

such as quality reporting, effective case 

management, care coordination, chronic 

disease management, and medication 

and care compliance initiatives, 

including through the use of the 

medical homes model as defined for 

purposes of section 3602 of the Patient 

Protection and Affordable Care Act, for 

treatment or services under the plan or 

coverage. 

(ii) To prevent hospital readmissions 

through a comprehensive program for 

hospital discharge that includes patientcentered education and counseling, 

comprehensive discharge planning, and 

post-discharge reinforcement by an 

appropriate health care professional. 

(iii) To improve patient safety and 

reduce medical errors through the 

appropriate use of best clinical 

practices, evidence-based medicine, and 

health information technology under the 

plan or coverage. 

(iv) To promote health and wellness. 

(v) To enhance the use of health care 

data to improve quality, transparency, 

and outcomes and support meaningful 

use of health information technology. 

Such activities, such as Health 

Information Technology (HIT) expenses, 

are required to accomplish the activities 

that improve health care quality and 

that are designed for use by health 

plans, health care providers, or 

enrollees for the electronic creation, 

maintenance, access, or exchange of 

health information, and are consistent 

with meaningful use requirements, and 

which may in whole or in part improve 

quality of care, or provide the 

technological infrastructure to enhance 

current quality improving activities or 

make new quality improvement 

initiatives possible. 


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(2) The activity must be designed for 

all of the following: 

(i) To improve health quality. 

(ii) To increase the likelihood of 

desired health outcomes in ways that 

are capable of being objectively 

measured and of producing verifiable 

results and achievements. 

(iii) To be directed toward individual 

enrollees or incurred for the benefit of 

specified segments of enrollees or 

provide health improvements to the 

population beyond those enrolled in 

coverage as long as no additional costs 

are incurred due to the non-enrollees. 

(iv) To be grounded in evidence-based 

medicine, widely accepted best clinical 

practice, or criteria issued by recognized 

professional medical associations, 

accreditation bodies, government 

agencies or other nationally recognized 

health care quality organizations. 

(b) Exclusions. Expenditures and 

activities that must not be included in 

quality improving activities include, but 

are not limited to, the following: 

(1) Those that are designed primarily 

to control or contain costs. 

(2) The pro rata share of expenses that 

are for lines of business or products 

other than those being reported, 

including but not limited to, those that 

are for or benefit self-funded plans. 

(3) Those which otherwise meet the 

definitions for quality improving 

activities but which were paid for with 

grant money or other funding separate 

from premium revenue. 

(4) Those activities that can be billed 

or allocated by a provider for care 

delivery and that are reimbursed as 

clinical services. 

(5) Establishing or maintaining a 

claims adjudication system, including 

costs directly related to upgrades in 

health information technology that are 

designed primarily or solely to improve 

claims payment capabilities or to meet 

regulatory requirements for processing 

claims, including ICD–10 

implementation costs in excess of 0.3 

percent of total revenue under this part, 

and maintenance of ICD–10 code sets 

adopted in accordance with to the 

Health Insurance Portability and 

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

1320d–2, as amended. 

(6) That portion of the activities of 

health care professional hotlines that 

does not meet the definition of activities 

that improve health quality. 

(7) All retrospective and concurrent 

utilization review. 

(8) Fraud prevention activities. 

(9) The cost of developing and 

executing provider contracts and fees 

associated with establishing or 

managing a provider network, including 

fees paid to a vendor for the same 

reason. 

(10) Provider credentialing. 

(11) Marketing expenses. 

(12) Costs associated with calculating 

and administering individual enrollee 

or employee incentives. 

(13) That portion of prospective 

utilization review that does not meet the 

definition of activities that improve 

health quality. 

(14) Any function or activity not 

expressly permitted by CMS under this 

part. 

§ 422.2440 Credibility adjustment. 

(a) An MA organization may add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is 

partially credible, as determined by 

CMS. 

(b) An MA organization may not add 

a credibility adjustment to a contract’s 

MLR if the contract’s experience is fully 

credible, as determined by CMS. 

(c) For those contract years for which 

a contract has non-credible experience 

for their MLR, sanctions under 

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

(d) CMS defines and publishes 

definitions of partial credibility, full 

credibility, and non-credibility and the 

credibility factors through the notice 

and comment process of publishing the 

Advance Notice and Final Rate 

Announcement. 

§ 422.2450 [Reserved]. 

§ 422.2460 Reporting requirements. 

For each contract year, each MA 

organization must submit a report to 

CMS, in a timeframe and manner 

specified by CMS, which includes but is 

not limited to the data needed by the 

MA organization to calculate and verify 

the MLR and remittance amount, if any, 

for each contract, such as incurred 

claims, total revenue, expenditures on 

quality improving activities, non-claims 

costs, taxes, licensing and regulatory 

fees, and any remittance owed to CMS 

under § 422.2410. 

§ 422.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

(a) General requirement. For each 

contract year, an MA organization must 

provide a remittance to CMS if the 

contract’s MLR does not meet the 

minimum MLR requirement required by 

§ 422.2410(b) of this subpart. 

(b) Amount of remittance. For each 

contract that does not meet the MLR 

requirement for a contract year, the MA 

organization must remit to CMS the 

amount by which the MLR requirement 

exceeds the contract’s actual MLR 

multiplied by the total revenue of the 

contract, as provided in § 422.2420(c), 

for the contract year. 

(c) Timing of remittance. CMS 

deducts the remittance from plan 

payments in a timely manner after the 

MLR is reported, on a schedule 

determined by CMS. 

(d) Treatment of remittance. Payment 

to CMS must not be included in the 

numerator or denominator of any year’s 

MLR. 

§ 422.2480 MLR review and noncompliance. 

To ensure the accuracy of MLR 

reporting, CMS conducts selected 

reviews of reports submitted under 

§ 422.2460 to determine that that the 

MLRs and remittance amounts under 

§ 422.2410(b) and sanctions under 

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

calculated, reported, and applied. 

(a) The reviews include a validation 

of amounts included in both the 

numerator and denominator of the MLR 

calculation reported to CMS. 

(b) MA organizations are required to 

maintain evidence of the amounts 

reported to CMS and to validate all data 

necessary to calculate MLRs. 

(c)(1) Documents and records must be 

maintained for 10 years from the date 

such calculations were reported to CMS 

with respect to a given MLR reporting 

year. 

(2) MA organizations must require 

any third party vendor supplying drug 

or medical cost contracting and claim 

adjudication services to the MA 

organization to provide all underlying 

data associated with MLR reporting to 

that MA organization in a timely 

manner, when requested by the MA 

organization, regardless of current 

contractual limitations, in order to 

validate the accuracy of MLR reporting. 

(d) Reports submitted under 

§ 422.2460, calculations, or any other 

MLR submission required by this 

subpart found to be materially incorrect 

or fraudulent— 

(1) Is noted by CMS; 

(2) Appropriate remittance amounts 

are recouped by CMS; and 

(3) Sanctions may be imposed by CMS 

as provided in § 422.752. 

PART 423—VOLUNTARY MEDICARE 

PRESCRIPTION DRUG BENEFIT 

■ 5. The authority for part 423 

continues to read as follows: 

Authority: Secs. Sections 1102, 1106, 

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

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

1395w–101 through 1395w–152, and 

1395hh). 

■ 6. Section 423.509 is amended by 

adding paragraphs (a)(15) and (16) to 

read as follows: 


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§ 423.509 Termination of contract by CMS. 

(a) * * * 

(15) Has failed to report MLR data in 

a timely and accurate manner in 

accordance with § 423.2460. 

(16) Has failed to have a minimum 

MLR per § 423.2410(d) for 5 consecutive 

contract years. 

* * * * * 

■ 7. Add subpart X to read as follows: 

Subpart X—Requirements for a 

Minimum Medical Loss Ratio 

Sec. 

423.2300 Basis and scope. 

423.2401 Definitions. 

423.2410 General requirements. 

423.2420 Calculation of medical loss ratio. 

423.2430 Activities that improve health 

care quality. 

423.2440 Credibility adjustment. 

422.2450 [Reserved] 

423.2460 Reporting requirements. 

423.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

423.2480 MLR review and non-compliance. 

§ 423.2400 Basis and scope. 

This subpart is based on section 

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

medical loss ratio requirements for Part 

D sponsors, and financial penalties and 

sanctions against Part D sponsors when 

minimum medical loss ratios are not 

achieved by Part D sponsors. 

§ 423.2401 Definitions. 

Non-claims costs means those 

expenses for administrative services that 

are not— 

(1) Incurred claims (as provided in 

§ 423.2420(b)(2) through (b)(4)); 

(2) Expenditures on quality improving 

activities (as provided in § 423.2430); 

(3) Licensing and regulatory fees (as 

provided in § 423.2420(c)(2)(i)); or 

(4) State and Federal taxes and 

assessments (as provided in 

§ 423.2420(c)(2)(ii) and (iii)). 

§ 423.2410 General requirements. 

(a) For contracts beginning in 2014 or 

subsequent contract years, a Part D 

sponsor (defined at § 423.4) is required 

to report an MLR for each contract 

under this part for each contract year. 

(b) If CMS determines for a contract 

year that a Part D sponsor has an MLR 

for a contract that is less than 0.85, the 

Part D sponsor must remit to CMS an 

amount equal to the product of the 

following: 

(1) The total revenue of the 

prescription drug plan for the contract 

year. 

(2) The difference between 0.85 and 

the MLR for the contract year. 

(c) If CMS determines that a Part D 

sponsor has an MLR for a contract that 

is less than 0.85 for 3 or more 

consecutive contract years, CMS does 

not permit the enrollment of new 

enrollees under the contract for 

coverage during the second succeeding 

contract year. 

(d) If CMS determines that a Part D 

sponsor has an MLR for a contract that 

is less than 0.85 for 5 consecutive 

contract years, CMS does terminate the 

contract under the authority at 

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

the second succeeding contract year. 

§ 423.2420 Calculation of medical loss 

ratio. 

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

MLR for each contract under this part is 

the ratio of the numerator (as defined in 

paragraph (b) of this section) to the 

denominator (as defined in paragraph 

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

increased by a credibility adjustment 

according to the rules at § 423.2440. 

(2) The MLR must reflect costs and 

revenues for benefits described at 

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

MA–PD plans (defined at § 422.2) must 

also reflect costs and revenues for 

benefits described at § 422.100(c). 

(b) Determining the MLR numerator. 

(1) For a contract year, the numerator of 

the MLR for a Part D prescription drug 

contract must equal the sum of 

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

section and must be in accordance with 

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

(i) Incurred claims for all enrollees, as 

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

of this section. 

(ii) The amount of the reduction, if 

any, in the Part B premium for all MA 

plan enrollees under the contract for the 

contract year. 

(iii) The expenditures under the 

contract for activities that improve 

health care quality, as defined in 

§ 423.2430; 

(iv) Incurred claims under this part 

for policies issued by one Part D 

sponsor and later assumed by another 

Part D sponsor under an assumptive or 

100 percent indemnity reinsurance must 

be reported by the assuming 

organizations for the entire MLR 

reporting year during which the policies 

were assumed and no incurred claims 

under this part for that contract year 

must be reported by the ceding Part D 

sponsor. 

(2) Incurred claims for prescription 

drug costs. Incurred claims must 

include the following: 

(i) Drug costs that are actually paid (as 

defined in § 423.308) by the Part D 

sponsor. 

(ii) Unpaid claims reserves for the 

current contract year, including claims 

reported in the process of adjustment. 

(iii) Percentage withholds from 

payments made to contracted providers. 

(iv) Claims incurred but not reported 

based on past experience, and modified 

to reflect current conditions such as 

changes in exposure, claim frequency or 

severity. 

(v) Changes in other claims-related 

reserves. 

(vi) Claims that are recoverable for 

anticipated coordination of benefits. 

(vii) Claims payments recoveries 

received as a result of subrogation. 

(viii) Claims payments recoveries 

received as a result of fraud reduction 

efforts not to exceed the amount of fraud 

reduction expenses. 

(ix) Reserves for contingent benefits 

and the Part D claim portion of lawsuits. 

(3) Adjustments that must be 

deducted from incurred claims include 

the following: 

(i) Prescription drug rebates and other 

direct or indirect remuneration as 

defined in § 423.308 received by the 

Part D sponsor under the contract. 

(ii) Overpayment recoveries received 

from providers. 

(4) Exclusions from incurred claims. 

The following amounts must not be 

included in incurred claims: 

(i) Non-claims costs, as defined in 

§ 423.2401, which include the 

following: 

(A) Amounts paid to third party 

vendors for secondary network savings. 

(B) Amounts paid to third party 

vendors for any of the following: 

(1) Network development. 

(2) Administrative fees. 

(3) Claims processing. 

(4) Utilization management. 

(C) Amounts paid, including amounts 

paid to a pharmacy, for professional or 

administrative services that do not 

represent compensation or 

reimbursement for covered services 

provided to an enrollee, such as the 

following: 

(1) Medical record copying costs. 

(2) Attorneys’ fees. 

(3) Subrogation vendor fees. 

(4) Bona fide service fees. 

(5) Compensation to any of the 

following: 

(i) Paraprofessionals. 

(ii) Janitors. 

(iii) Quality assurance analysts. 

(iv) Administrative supervisors. 

(v) Secretaries to medical personnel. 

(vi) Medical record clerks. 

(ii) Amounts paid to CMS as a 

remittance under § 423.2410(b). 

(c) Determining the MLR 

denominator. For a contract year, the 

denominator of the MLR for a Part D 

prescription drug contract must be in 

accordance with (c)(4) and equal the 

total revenue under the contract, as 

described in paragraph (c)(1) of this 

section, net of deductions described in 


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

into account the exclusions described in 

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

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

section. 

(1) Total revenue must be reported on 

a direct basis and means CMS’ 

payments to the Part D sponsor for all 

enrollees under a contract, including the 

following: 

(i) Payments under § 423.329(a)(1) 

and (2). 

(ii) Payment adjustments resulting 

from reconciliation per 

§ 423.329(c)(2)(ii). 

(iii) All premiums paid by or on 

behalf of enrollees to the Part D sponsor 

as a condition of receiving coverage 

under a Part D plan, including CMS’ 

payments for low income premium 

subsidies under § 422.304(b)(2). 

(iv) All unpaid premium amounts that 

a Part D sponsor could have collected 

from enrollees in the Part D plan(s) 

under the contract. 

(v) All changes in unearned premium 

reserves. 

(vi) Payments under § 423.315(e). 

(2) The following amounts must be 

deducted from total revenue in 

calculating the MLR: 

(i) Licensing and regulatory fees. 

Statutory assessments to defray 

operating expenses of any state or 

federal department, such as the ‘‘user 

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

the Act, and examination fees in lieu of 

premium taxes as specified by state law. 

(ii) Federal taxes and assessments. All 

federal taxes and assessments allocated 

to health insurance coverage. 

(iii) State taxes and assessments. 

State taxes and assessments such as the 

following: 

(A) Any industry-wide (or subset) 

assessments (other than surcharges on 

specific claims) paid to the state 

directly. 

(B) Guaranty fund assessments. 

(C) Assessments of state industrial 

boards or other boards for operating 

expenses or for benefits to sick 

employed persons in connection with 

disability benefit laws or similar taxes 

levied by States. 

(D) State income, excise, and business 

taxes other than premium taxes. 

(iv) Community benefit expenditures. 

Community benefit expenditures are 

payments made by a federal income taxexempt Part D sponsor for community 

benefit expenditures as defined in 

paragraph (c)(2)(iii)(A) of this section, 

limited to the amount defined in 

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

and allocated to a contract as required 

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

(A) Community benefit expenditures 

means expenditures for activities or 

programs that seek to achieve the 

objectives of improving access to health 

services, enhancing public health and 

relief of government burden. 

(B) Such payment may be deducted 

up to the limit of either 3 percent of 

total revenue under this part or the 

highest premium tax rate in the state for 

which the Part D sponsor is licensed, 

multiplied by the Part D sponsor’s 

earned premium for the contract. 

(3) The following amounts must not 

be included in total revenue: 

(i) The amount of unpaid premiums 

for which the Part D sponsor can 

demonstrate to CMS that it made a 

reasonable effort to collect, as required 

under § 423.44(d)(1)(i). 

(ii) Coverage Gap Discount Program 

payments under § 423.2320. 

(4) All incurred claims under this part 

for policies issued by one Part D 

sponsor and later assumed by another 

Part D sponsor under an assumptive or 

100 percent indemnity reinsurance must 

be reported by the assuming 

organizations for the entire MLR 

reporting year during which the policies 

were assumed and no incurred claims 

under this part for that contract year 

must be reported by the ceding Part D 

sponsor. 

(d) Allocation of expenses. (1) General 

requirements. (i) Each expense must be 

included under only one type of 

expense, unless a portion of the expense 

fits under the definition of or criteria for 

one type of expense and the remainder 

fits into a different type of expense, in 

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

(ii) Expenditures that benefit multiple 

contracts, or contracts other than those 

being reported, including but not 

limited to those that are for or benefit 

self-funded plans, must be reported on 

a pro rata share. 

(2) Description of the methods used to 

allocate expenses. (i) Allocation to each 

category must be based on a generally 

accepted accounting method that is 

expected to yield the most accurate 

results. 

(ii) Specific identification of an 

expense with an activity that is 

represented by one of the categories in 

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

most accurate method. 

(ii) Shared expenses, including 

expenses under the terms of a 

management contract, must be 

apportioned pro rata to the entities 

incurring the expense. 

(iii)(A) Any basis adopted to 

apportion expenses must be that which 

is expected to yield the most accurate 

results and may result from special 

studies of employee activities, salary 

ratios, premium ratios or similar 

analyses. 

(B) Expenses that relate solely to the 

operations of a reporting entity, such as 

personnel costs associated with the 

adjusting and paying of claims, must be 

borne solely by the reporting entity and 

are not to be apportioned to other 

entities within a group. 

§ 423.2430 Activities that improve health 

care quality. 

(a) Activity requirements. Activities 

conducted by a Part D sponsor to 

improve quality fall into one of the 

categories in paragraph (a)(1) of this 

section and meet all of the requirements 

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

(1) Categories of quality improving 

activities. The activity must be designed 

to achieve one or more of the following: 

(i) To improve health outcomes 

through the implementation of activities 

such as quality reporting, effective case 

management, care coordination, chronic 

disease management, and medication 

and care compliance initiatives, 

including through the use of the 

medical homes model as defined for 

purposes of section 3602 of the Patient 

Protection and Affordable Care Act, for 

treatment or services under the plan or 

coverage. 

(ii) To prevent hospital readmissions 

through a comprehensive program for 

hospital discharge that includes patientcentered education and counseling, 

comprehensive discharge planning, and 

post-discharge reinforcement by an 

appropriate health care professional. 

(iii) To improve patient safety and 

reduce medical errors through the 

appropriate use of best clinical 

practices, evidence-based medicine, and 

health information technology under the 

plan or coverage. 

(iv) To promote health and wellness. 

(v) To enhance the use of health care 

data to improve quality, transparency, 

and outcomes and support meaningful 

use of health information technology. 

Activities, such as Health Information 

Technology (HIT) expenses, are required 

to accomplish the activities that 

improve health care quality and that are 

designed for use by health plans, health 

care providers, or enrollees for the 

electronic creation, maintenance, 

access, or exchange of health 

information, and are consistent with 

meaningful use requirements, and 

which may in whole or in part improve 

quality of care, or provide the 

technological infrastructure to enhance 

current quality improving activities or 

make new quality improvement 

initiatives possible. 

(2) The activity must be designed for 

all of the following: 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Proposed Rules 12457 

(i) To improve health quality. 

(ii) To increase the likelihood of 

desired health outcomes in ways that 

are capable of being objectively 

measured and of producing verifiable 

results and achievements. 

(iii) To be directed toward individual 

enrollees or incurred for the benefit of 

specified segments of enrollees or 

provide health improvements to the 

population beyond those enrolled in 

coverage as long as no additional costs 

are incurred due to the non-enrollees. 

(iv) To be grounded in evidence-based 

medicine, widely accepted best clinical 

practice, or criteria issued by recognized 

professional medical associations, 

accreditation bodies, government 

agencies or other nationally recognized 

health care quality organizations. 

(b) Exclusions. Expenditures and 

activities that must not be included in 

quality improving activities include, but 

are not limited to, the following: 

(1) Those that are designed primarily 

to control or contain costs. 

(2) The pro rata share of expenses that 

are for lines of business or products 

other than those being reported, 

including but not limited to, those that 

are for or benefit self-funded plans. 

(3) Those which otherwise meet the 

definitions for quality improving 

activities but which were paid for with 

grant money or other funding separate 

from premium revenue. 

(4) Those activities that can be billed 

or allocated by a pharmacy for care 

delivery and that are reimbursed as 

clinical services. 

(5) Establishing or maintaining a 

claims adjudication system, including 

costs directly related to upgrades in 

health information technology that are 

designed primarily or solely to improve 

claims payment capabilities or to meet 

regulatory requirements for processing 

claims, including ICD–10 

implementation costs in excess of 0.3 

percent of total revenue under this part, 

and maintenance of ICD–10 code sets 

adopted in accordance with the Health 

Insurance Portability and 

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

1320d–2, as amended. 

(6) That portion of the activities of 

health care professional hotlines that 

does not meet the definition of activities 

that improve health quality. 

(7) All retrospective and concurrent 

utilization review. 

(8) Fraud prevention activities. 

(9) The cost of developing and 

executing pharmacy contracts and fees 

associated with establishing or 

managing a pharmacy network, 

including fees paid to a vendor for the 

same reason. 

(10) Pharmacy network credentialing. 

(11) Marketing expenses. 

(12) Costs associated with calculating 

and administering individual enrollee 

or employee incentives. 

(13) That portion of prospective 

utilization review that does not meet the 

definition of activities that improve 

health quality. 

(14) Any function or activity not 

expressly permitted by CMS under this 

part. 

§ 423.2440 Credibility adjustment. 

(a) A Part D sponsor may add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is 

partially credible, as determined by 

CMS. 

(b) A Part D sponsor may not add a 

credibility adjustment to a contract’s 

MLR if the contract’s experience is fully 

credible, as determined by CMS. 

(c) For those contract years for which 

a contract has non-credible experience 

for their MLR, sanctions under 

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

(d) CMS defines and publishes 

definitions of partial credibility, full 

credibility, and non-credibility and the 

credibility factors through the notice 

and comment process of publishing the 

Advance Notice and Final Rate 

Announcement. 

§ 423.2450 [Reserved]. 

§ 423.2460 Reporting requirements. 

(a) For each contract year, each Part 

D sponsor must submit a report to CMS, 

in a timeframe and manner specified by 

CMS, which includes but is not limited 

to the data needed by the Part D sponsor 

to calculate and verify the MLR and 

remittance amount, if any, for each 

contract, such as incurred claims, total 

revenue, costs for quality improving 

activities, non-claims costs, taxes, 

licensing and regulatory fees, and any 

remittance owed to CMS under 

§ 423.2410. 

(b) Total revenue reported as part of 

the MLR report must be net of all 

projected reconciliations. 

(c) The MLR will be reported once, 

and will not be reopened as a result of 

any payment reconciliation processes. 

§ 423.2470 Remittance to CMS if the 

applicable MLR requirement is not met. 

(a) General requirement. For each 

contract year, a Part D sponsor must 

provide a remittance to CMS if the 

contract’s MLR does not meet the 

minimum percentage required by 

§ 423.2410(b). 

(b) Amount of remittance. For each 

contract that does not meet MLR 

requirement for a contract year, the Part 

D sponsor must remit to CMS the 

amount by which the MLR requirement 

exceeds the contract’s actual MLR 

multiplied by the total revenue of the 

contract, as provided in § 423.2420(c), 

for the contract year. 

(c) Timing of remittance. CMS will 

deduct the remittance from plan 

payments in a timely manner after the 

MLR is reported, on a schedule 

determined by CMS. 

(d) Treatment of remittance. Payment 

to CMS must not be included in the 

numerator or denominator of any year’s 

MLR. 

§ 423.2480 MLR review and noncompliance. 

To ensure the accuracy of MLR 

reporting, CMS conducts selected 

reviews of reports submitted under 

§ 423.2460 to determine that the MLRs 

and remittance amounts under 

§ 423.2410(b) and sanctions under 

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

calculated, reported, and applied. 

(a) The reviews will include a 

validation of amounts included in both 

the numerator and denominator of the 

MLR calculation reported to CMS. 

(b) Part D sponsors are required to 

maintain evidence of the amounts 

reported to CMS and to validate all data 

necessary to calculate MLRs. 

(c)(1) Documents and records must be 

maintained for 10 years from the date 

such calculations were reported to CMS 

with respect to a given contract year. 

(2) Part D sponsors must require any 

third party vendor supplying drug cost 

contracting and claim adjudication 

services to the Part D sponsors to 

provide all underlying data associated 

with MLR reporting to that Part D 

sponsor in a timely manner, when 

requested by the Part D sponsor, 

regardless of current contractual 

limitations, in order to validate the 

accuracy of MLR reporting. 

(d) Reports submitted under 

§ 423.2460, calculations, or any other 

MLR submission required by this 

subpart found to be materially incorrect 

or fraudulent— 

(1) Are noted by CMS; 

(2) Appropriate remittance amounts 

are recouped by CMS; and 

(3) Sanctions may be imposed by CMS 

as provided in § 422.752. 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
12458 Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / Proposed Rules 

Dated: December 28, 2012. 

Marilyn Tavenner, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: February 14, 2013. 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2013–03921 Filed 2–15–13; 4:15 pm] 

BILLING CODE 4120–01–P 


srobinson on DSK4SPTVN1PROD with PROPOSALS2