Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2015

Federal RegisterDec 2, 2013

Ask Donna

What actually matters in this document.

Text

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 144, 147, 153, 155, and 156

[CMS-9954-P]

RIN 0938-AR89

Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2015

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule sets forth payment parameters and oversight provisions related to the risk adjustment, reinsurance, and risk corridors programs; cost-sharing parameters and cost-sharing reductions; and user fees for Federally-facilitated Exchanges. It also proposes additional standards with respect to composite rating, privacy and security of personally identifiable information, the annual open enrollment period for 2015, the actuarial value calculator, the annual limitation in cost sharing for stand-alone dental plans, the meaningful difference standard for qualified health plans offered through a Federally-facilitated Exchange, patient safety standards for issuers of qualified health plans, and the Small Business Health Options Program.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on December 26, 2013.

ADDRESSES:

In commenting, please refer to file code CMS-9954-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):

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov

. Follow the “Submit a comment” instructions.

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-9954-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

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-9954-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

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) 786-7195 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:

For general information: Sharon Arnold, (301) 492-4286; Laurie McWright, (301) 492-4311; or Jeff Wu, (301) 492-4305.

For matters related to student health insurance coverage and composite rating: Jacob Ackerman, (301) 492-4179.

For matters related to the risk adjustment program generally, the small group counting requirements, the risk adjustment methodology, and the methodology for determining the reinsurance contribution rate and payment parameters: Kelly Horney, (410) 786-0558.

For matters related to reinsurance generally, oversight of the premium stabilization programs, distributed data collection, and administrative appeals: Adrianne Glasgow, (410) 786-0686.

For matters related to reinsurance contributions: Adam Shaw, (410) 786-1019.

For matters related to risk corridors: Jaya Ghildiyal, (301) 492-5149.

For matters related to cost-sharing reductions, the premium adjustment percentage, and Federally-facilitated Exchange user fees: Johanna Lauer, (301) 492-4397.

For matters related to the annual limitation on cost sharing for stand-alone dental plans, privacy and security of personally identifiable information, the annual open enrollment period for the 2015 benefit year, and the meaningful difference standard: Leigha Basini, (301) 492-4380.

For matters related to the Small Business Health Options Program: Scott Dafflitto, (301) 492-4198.

For matters related to the actuarial value calculator: Allison Wiley at (410)786-1740.

For matters related to patient safety standards for issuers of qualified health plans: Nidhi Singh Shah, (301) 492-5110.

For matters related to netting of payments and charges: Pat Meisol, (410) 786-1917.

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.

Table of Contents

I. Executive Summary

II. Background

A. Legislative Authority

B. Stakeholder Consultation and Input

C. Structure of Proposed Rule

III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 2015

A. Part 144—Requirements Relating to Health Insurance Coverage

B. Part 147—Health Insurance Reform Requirements for the Group and Individual Health Insurance Markets

1. Composite Rating

2. Student Health Insurance Coverage

C. Part 153—Standards Related to Reinsurance, Risk Corridors, and Risk Adjustment under the Affordable Care Act

1. Provisions and Parameters for the Permanent Risk Adjustment Program

a. Risk adjustment user fees

b. HHS risk adjustment methodology considerations

c. Small group determination for risk adjustment

d. Risk adjustment data validation

e. HHS audits of issuers of risk adjustment covered plans

2. Provisions and Parameters for the Transitional Reinsurance Program

a. Major medical coverage

b. Self-insured plans without third party administrators

c. Uniform reinsurance contribution rate

d. Uniform reinsurance payment parameters

e. Adjustment options

f. Deducting cost-sharing reduction amounts from reinsurance payments

g. Audits

h. Same covered life

i. Reinsurance contributions and enrollees residing in the territories

j. Form 5500 counting method

3. Provisions for the Temporary Risk Corridors Program

a. Definitions

b. Compliance with risk corridors standards

c. Participation in the risk corridors program

e. Adjustment options for transitional policy

4. Distributed Data Collection for the HHS-operated Risk Adjustment and Reinsurance Programs

a. Discrepancy resolution process

b. Default risk adjustment charge

D. Part 155—Exchange Establishment Standards and Other Related Standards under the Affordable Care Act

1. Election to Operate an Exchange after 2014

2. Ability of States to Permit Agents and Brokers to Assist Qualified Individuals, Qualified Employers, or Qualified Employees Enrolling in Qualified Health Plans

3. Privacy and Security of Personally Identifiable Information

4. Annual Open Enrollment Period for 2015

5. Functions of a Small Business Health Options Program

6. Eligibility Determination Process for SHOP

7. Application Standards for SHOP

E. Part 156—Health Insurance Issuer Standards under the Affordable Care Act, Including Standards Related to Exchanges

1. Provisions Related to Cost Sharing

a. Premium adjustment percentage

b. Reduced maximum annual limitation on cost sharing

c. Design of cost-sharing reduction plan variations

d. Advance payments of cost-sharing reductions

2. Provisions on User Fees for a Federally-facilitated Exchange

a. FFE user fee for the 2015 benefit year

b. Adjustment of FFE user fee

3. Actuarial Value Calculation for Determining Level of Coverage

4. National Annual Limit on Cost Sharing for Stand-alone Dental Plans in an Exchange

5. Additional Standards Specific to SHOP

6. Meaningful Difference Standard for Qualified Health Plans in the FFEs

7. Quality Standards: Establishment of Patient Safety Standards for QHPs Issuers

8. Financial Programs

a. Netting of payments and charges

b. Confirmation of HHS payment and collections reports

c. Administrative appeals

IV. Collection of Information Requirements

V. Response to Comments

VI. Regulatory Impact Analysis

A. Statement of Need

B. Overall Impact

C. Impact Estimates of the Payment Notice Provisions

D. Regulatory Flexibility Act

E. Unfunded Mandates

F. Federalism

G. Congressional Review Act

VII. Regulations Text

Acronyms

Affordable Care Act—The collective term for the Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152)

AV—Actuarial Value

CFR—Code of Federal Regulations

CMS—Centers for Medicare & Medicaid Services

EHB—Essential Health Benefits

ERISA—Employee Retirement Income Security Act of 1974 (Pub. L. 93-406)

FFE—Federally-facilitated Exchange

FF-SHOP—Federally-facilitated Small Business Health Options Program

FPL—Federal poverty level

HCC—Hierarchical condition category

HHS—United States Department of Health and Human Services

HIPAA—Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191)

IRS—Internal Revenue Service

MLR—Medical Loss Ratio

NAIC—National Association of Insurance Commissioners

OMB—Office of Management and Budget

OPM—United States Office of Personnel Management

PHS Act—Public Health Service Act

PII—Personally identifiable information

PSO—Patient Safety Organization

PRA—Paperwork Reduction Act of 1985

PSES—Patient safety evaluation system

QHP—Qualified health plan

SHOP—Small Business Health Options Program

The Code Internal Revenue Code of 1986

I. Executive Summary

Qualified individuals and qualified employers are now able to purchase private health insurance coverage that begins as early as January 1, 2014, through competitive marketplaces called Affordable Insurance Exchanges, or “Exchanges” (also called Health Insurance Marketplaces, or “Marketplaces”).

Individuals who enroll in qualified health plans (QHPs) through individual market Exchanges may receive premium tax credits to make health insurance more affordable and financial assistance to reduce cost sharing for health care services. In 2014, HHS will also operationalize the premium stabilization programs established by the Affordable Care Act—the risk adjustment, reinsurance, and risk corridors programs—which are intended to mitigate the impact of possible adverse selection and stabilize the price of health insurance in the individual and small group markets. We believe that these programs, together with other reforms of the Affordable Care Act, will make high-quality health insurance affordable and accessible to millions of Americans.

The word “Exchanges” refers to both State Exchanges, also called State-based Exchanges, and Federally-facilitated Exchanges (FFEs). In this proposed rule, we use the terms “State Exchange” or “FFE” when we are referring to a particular type of Exchange. When we refer to “FFEs,” we are also referring to State Partnership Exchanges, which are a form of FFE.

HHS has previously outlined the major provisions and parameters related to the advance payments of the premium tax credit, cost-sharing reductions, and premium stabilization programs. This proposed rule proposes additional provisions related to the implementation of these programs. Specifically, we propose certain oversight provisions for the premium stabilization programs, as well as key payment parameters for the 2015 benefit year.

The Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014 final rule (78 FR 15410) (2014 Payment Notice) finalized the risk adjustment methodology that HHS will use when it operates risk adjustment on behalf of a State. This proposed rule proposes minor updates to this risk adjustment methodology for 2014 to account for certain private market Medicaid expansion plans, and seeks comment on how to adjust the geographic cost factor in the payment transfer formula to account for less populous rating areas in future benefit years. In this proposed rule, we also propose to clarify the counting methods for determining small

group size for participation in the risk adjustment and risk corridors programs.

Using the methodology set forth in the 2014 Payment Notice for determining the uniform reinsurance contribution rate and uniform reinsurance payment parameters, we propose in this rule a 2015 uniform reinsurance contribution rate of $44 annually per capita, and the 2015 uniform reinsurance payment parameters—a $70,000 attachment point, a $250,000 reinsurance cap, and a 50 percent coinsurance rate. We also propose to decrease the attachment point for 2014 from $60,000 to $45,000. Additionally, in order to maximize the financial effect of the transitional reinsurance program, we propose that if reinsurance contributions collected for a benefit year exceed the requests for reinsurance payments for the benefit year, we would increase the coinsurance rate on our reinsurance payments, ensuring that all of the contributions collected for a benefit year are expended for claims for that benefit year.

We also propose several provisions related to cost sharing. First, we propose a methodology for estimating average per capita premium and for calculating the premium adjustment percentage for 2015 which is used to set the rate of increase for several parameters detailed in the Affordable Care Act, including the maximum annual limitation on cost sharing and the maximum annual limitation on deductibles for health plans in the small group market for 2015. We also propose to set the same reduced maximum annual limitations on cost sharing for the 2015 benefit year as we established for the 2014 benefit year for cost-sharing reduction plan variations. Additionally, we are proposing certain modifications to the methodology for calculating advance payments for cost-sharing reductions for the 2015 benefit year. We also propose standards for updating the actuarial value (AV) calculator.

This proposed rule provides for a 2015 Federally-facilitated Exchange (FFE) user fee rate of 3.5 percent of premium. Additionally, we propose a user fee adjustment allowance for administrative costs in the 2015 benefit year to reimburse third party administrators that provide payment for contraceptive services for enrollees in certain self-insured group health plans that receive an accommodation from the obligation to cover these services in 2014.

On November 14, 2013, the Federal government announced a policy under which it will not consider certain non-grandfathered health insurance coverage in the individual or small group market renewed between January 1, 2014, and October 1, 2014, under certain conditions to be out of compliance with specified 2014 market rules, and requested that States adopt a similar non-enforcement policy.

Letter to Insurance Commissioners, Center for Consumer Information and Insurance Oversight, November 14, 2013.

See

http://www.cms.gov/CCIIO/Resources/Letters/Downloads/commissioner-letter-11-14-2013.PDF

Issuers have set their 2014 premiums for individual and small group market plans by estimating the health risk of enrollees across all of their plans in the respective markets, in accordance with the single risk pool requirement at 45 CFR 156.80. These estimates assumed that individuals currently enrolled in the transitional plans described above would participate in the single risk pools applicable to all non-grandfathered individual and small group plans, respectively (or a merged risk pool, if required by the State). Individuals who elect to continue coverage in a transitional plan (forgoing premium tax credits and cost-sharing reductions that might be available through an Exchange plan, and the essential health benefits package offered by plans compliant with the 2014 market rules, and perhaps taking advantage of the underwritten premiums offered by the transitional plan) may have lower health risk, on average, than enrollees in individual and small group plans subject to the 2014 market rules.

If lower health risk individuals remain in a separate risk pool, the transitional policy could increase an issuer's average expected claims cost for plans that comply with the 2014 market rules. Because issuers would have set premiums for QHPs in accordance with 45 CFR 156.80 based on a risk pool assumed to include the potentially lower health risk individuals that enroll in the transitional plans, an increase in expected claims costs could lead to unexpected losses.

To help address the effects of this transitional policy on the risk pool, we are exploring modifications to a number of programs. We have outlined various options under consideration throughout this proposed rule, including adjustments to the reinsurance and risk corridors programs. We are seeking comment on these proposals, as well as soliciting suggestions for alternate proposals. As the impact of the transitional policy becomes clearer, we will determine what, if any, adjustments are appropriate.

The success of the premium stabilization programs depends on a robust oversight program. This proposed rule expands on provisions of the Premium Stabilization Rule (77 FR 17220), the 2014 Payment Notice (78 FR 15410), and the first and second final Program Integrity Rules (78 FR 54070 and 78 FR 65046). In this proposed rule, we propose that HHS may audit State-operated reinsurance programs, contributing entities, and issuers of risk adjustment covered plans and reinsurance eligible-plans. We also clarify participation standards for the risk corridors program, and outline a proposed process for validating risk corridors data submissions and enforcing compliance with the provisions of the risk corridors program.

We also propose several provisions regarding the HHS-operated risk adjustment data validation process. On June 22, 2013, we issued “The Affordable Care Act HHS-operated Risk Adjustment Data Validation Process White Paper”

and on June 25, 2013, we held a public meeting to discuss how to best ensure the accuracy and consistency of the data we will use when operating the risk adjustment program on behalf of a State. In this proposed rule, we propose standards for risk adjustment data validation, including a sampling methodology for the initial validation audit and detailed audit standards. These proposed standards would be tested for 2 years before they are used as a basis for payment adjustments. This proposed rule also includes a proposal to implement, over time, the requirements related to patient safety standards that QHP issuers must meet, and proposes reducing the time period for which a State electing to operate an Exchange after 2014 must have in effect an approved, or conditionally approved, Exchange Blueprint and operational readiness assessment from at least 12 months to 6.5 months prior to the Exchange's first effective date of coverage. We also propose provisions related to the privacy and security of personally identifiable information (PII), the annual open enrollment period for 2015, the annual limitation on cost sharing for stand-alone dental plans, and the meaningful difference standards for QHPs offered through an FFE. We also propose certain standards for the Small Business Health Options Program (SHOP) and for composite rating in the small group market.

Available at:

https://www.regtap.info/uploads/library/ACA_HHS_OperatedRADVWhitePaper_062213_5CR_062213.pdf

II. Background

A. Legislative and Regulatory Overview

The Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted

on March 23, 2010. The Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), which amended and revised several provisions of the Patient Protection and Affordable Care Act, was enacted on March 30, 2010. In this proposed rule, we refer to the two statutes collectively as the “Affordable Care Act.”

Section 1302 of the Affordable Care Act directs the Secretary of Health and Human Services (referred to throughout this rule as the Secretary) to define EHBs and provides for cost-sharing limits and AV requirements. Sections 1302(d)(1) and (d)(2) of the Affordable Care Act describe the determination of the levels of coverage based on AV. Consistent with section 1302(d)(2)(A) of the Affordable Care Act, AV is calculated based on the provision of EHB to a standard population. Section 1302(d)(3) of the Affordable Care Act directs the Secretary to develop guidelines that allow for de minimis variation in AV calculations.

Section 1311(b)(1)(B) of the Affordable Care Act directs that the SHOP assist qualified small employers in facilitating the enrollment of their employees in QHPs offered in the small group market. Under section 1312(f)(2)(B) of the Affordable Care Act, beginning in 2017, States will have the option to allow issuers to offer QHPs in the large group market through the SHOP.

Section 1311(c)(6)(B) of the Affordable Care Act states that the Secretary is to require an Exchange to provide for annual open enrollment periods for calendar years after the initial enrollment period.

Section 1311(h)(1) of the Affordable Care Act specifies that a QHP may contract with health care providers and hospitals with more than 50 beds only if they meet certain patient safety standards, including use of a patient safety evaluation system, a comprehensive hospital discharge program, and implementation of health care quality improvement activities. Section 1311(h)(2) of the Affordable Care Act also provides the Secretary flexibility to establish reasonable exceptions to these patient safety requirements and section 1311(h)(3) of the Affordable Care Act allows the Secretary flexibility to issue regulations to modify the number of beds described in section 1311(h)(1)(A) of the Affordable Care Act.

Section 1313 of the Affordable Care Act, combined with section 1321 of the Affordable Care Act, provides the Secretary with the authority to oversee the financial integrity of State Exchanges, their compliance with HHS standards, and the efficient and non-discriminatory administration of State Exchange activities. Section 1321(a) of the Affordable Care Act provides general authority for the Secretary to establish standards and regulations to implement the statutory requirements related to Exchanges, QHPs, and other components of Title I of the Affordable Care Act.

When operating an FFE under section 1321(c)(1) of the Affordable Care Act, HHS has the authority under sections 1321(c)(1) and 1311(d)(5)(A) of the Affordable Care Act to collect and spend user fees. In addition, 31 U.S.C. 9701 permits a Federal agency to establish a charge for a service provided by the agency. Office of Management and Budget (OMB) Circular A-25 Revised establishes Federal policy regarding user fees and specifies that a user charge will be assessed against each identifiable recipient for special benefits derived from Federal activities beyond those received by the general public.

Section 1341 of the Affordable Care Act requires the establishment of a transitional reinsurance program in each State to help pay the cost of treating high-cost enrollees in the individual market from 2014 through 2016. Section 1342 of the Affordable Care Act directs the Secretary to establish a temporary risk corridors program that provides for the sharing in gains or losses resulting from inaccurate rate setting from 2014 through 2016 between the Federal government and certain participating plans. Section 1343 of the Affordable Care Act establishes a permanent risk adjustment program that is intended to provide increased payments to health insurance issuers that attract higher-risk populations, such as those with chronic conditions, and thereby reduce incentives for issuers to avoid higher-risk enrollees. Sections 1402 and 1412 of the Affordable Care Act establish a program for reducing cost sharing for individuals with lower household income and Indians.

Section 1411(g) of the Affordable Care Act provides that any person who receives information specified in section 1411(b) provided by an applicant or information specified in section 1411(c), (d), or (e) from a Federal agency must use the information only for the purpose of and to the extent necessary to ensure the efficient operation of the Exchange, and may not disclose the information to any other person except as provided in that section. Section 6103(l)(21)(C) of the Code additionally provides that return information disclosed under section 6103(l)(21)(A) or (B) may be used only for the purpose of and to the extent necessary in establishing eligibility for participation in the Exchange, verifying the appropriate amount of any premium tax credit or cost-sharing reduction, or determining eligibility for participation in a health insurance affordability program as described in that section.

1. Premium Stabilization Programs

In the July 15, 2011

Federal Register

(76 FR 41930), we published a proposed rule outlining the premium stabilization programs. We implemented the premium stabilization programs in a final rule, published in the March 23, 2012

Federal Register

(77 FR 17220) (Premium Stabilization Rule). In the December 7, 2012

Federal Register

(77 FR 73118), we published a proposed rule outlining the benefit and payment parameters for 2014 to expand the provisions related to the premium stabilization programs and set forth payment parameters in those programs (proposed 2014 Payment Notice). We published the 2014 Payment Notice in the March 11, 2013

Federal Register

(78 FR 153410).

As discussed above, we published a white paper on risk adjustment data validation on June 22, 2013, and hosted a public meeting on June 25, 2013, to discuss the white paper.

2. Program Integrity

In the June 19, 2013

Federal Register

(78 FR 37032), we published a proposed rule that proposed certain program integrity standards related to Exchanges and the premium stabilization programs (proposed Program Integrity Rule). The provisions of that proposed rule were finalized in two rules, the “first final Program Integrity Rule” published in the August 30, 2013

Federal Register

(78 FR 54070) and the “second final Program Integrity Rule” published in the October 30, 2013

Federal Register

(78 FR 65046).

3. Exchanges, Essential Health Benefits, Actuarial Value

A proposed rule relating to EHBs and AV was published in the November 26, 2012

Federal Register

(77 FR 70644). We proposed standards related to the premium adjustment percentage in the Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation Final Rule, published in the February 25, 2013

Federal Register

(78 FR 12834) (EHB Rule). We established standards for the administration and payment of cost-sharing reductions and the SHOP in the 2014 Payment Notice and in the Amendments to the HHS Notice of Benefit and Payment Parameters for 2014 interim final rule, published in the

March 11, 2013

Federal Register

(78 FR 15541). The provisions established in the interim final rule were finalized in the second final Program Integrity Rule.

We set forth standards related to Exchange user fees in the 2014 Payment Notice. We also established an adjustment to the FFE user fee in the Coverage of Certain Preventive Services Under the Affordable Care Act final rule, published in the July 2, 2013

Federal Register

(78 FR 39870) (Preventive Services Rule).

A Request for Comment relating to Exchanges was published in the August 3, 2010

Federal Register

(75 FR 45584). An Initial Guidance to States on Exchanges was issued on November 18, 2010. A proposed rule was published in the July 15, 2011

Federal Register

(76 FR 41866) to implement components of the Exchange. A proposed rule regarding Exchange functions in the individual market, eligibility determinations, and Exchange standards for employers was published in the August 17, 2011

Federal Register

(76 FR 51202). A final rule implementing components of the Exchanges and setting forth standards for eligibility for Exchanges was published in the March 27, 2012

Federal Register

(77 FR 18310) (Exchange Establishment Rule).

4. Market Rules

Provisions relating to the 2014 market reforms and rate review were published in Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review proposed rule in the November 26, 2012

Federal Register

(77 FR 70584). A final rule implementing these provisions was published in the February 27, 2013

Federal Register

(78 FR 13406) (Market Reform Rule).

5. Medical Loss Ratio

We published a request for comment on PHS Act section 2718 in the April 14, 2010

Federal Register

(75 FR 19297), and published an interim final rule with a 60-day comment period relating to the medical loss ratio (MLR) program on December 1, 2010 (75 FR 74864). A final rule with a 30-day comment period was published in the December 7, 2011

Federal Register

(76 FR 76574).

B. Stakeholder Consultation and Input

In addition to seeking advice from the public on risk adjustment data validation, HHS has consulted with stakeholders on policies related to the operation of Exchanges, including the SHOP and the premium stabilization programs. HHS has held a number of listening sessions with consumers, providers, employers, health plans, the actuarial community, and State representatives to gather public input. HHS consulted with stakeholders through regular meetings with the National Association of Insurance Commissioners (NAIC), regular contact with States through the Exchange Establishment grant and Exchange Blueprint approval processes, and meetings with Tribal leaders and representatives, health insurance issuers, trade groups, consumer advocates, employers, and other interested parties. We considered all of the public input as we developed the policies in this proposed rule.

C. Structure of Proposed Rule

The regulations outlined in this proposed rule would be codified in 45 CFR parts 144, 147, 153, 155 and 156. The proposed regulations in parts 144 and 147 propose amendments relating to student health insurance coverage. The proposed regulations in part 147 also outline market-wide provisions regarding composite rating. The proposed regulations in part 153 outline the 2015 uniform contribution rate and uniform reinsurance payment parameters for the 2015 benefit year and oversight provisions related to the premium stabilization programs, such as provisions related to risk adjustment data validation, risk corridors data validation, and HHS's authority to audit entities participating in these programs. The proposed regulations in part 153 propose that excess reinsurance contributions collected for a benefit year be used for claims for that benefit year.

The proposed regulations in part 155 propose to reduce the time that States that elect to establish and operate an Exchange after 2014 must have in effect an approved or conditionally approved Exchange Blueprint and readiness assessment from 12 months to 6.5 months prior to the Exchange's first effective date of coverage. The proposed regulations also include a change to the annual open enrollment period for the 2015 benefit year and certain proposals related to the SHOP Exchanges, which we discuss in greater detail below. We also propose in part 155 to amend § 155.260 to allow the Secretary to determine that additional uses or disclosures of PII not specifically permitted by § 155.260 ensure the efficient operation of the Exchange. In addition, we propose to establish a process under which Exchanges may seek the Secretary's approval for other uses of applicant PII not specifically permitted by § 155.260. We also propose to amend § 155.260 to more specifically define the term “non-Exchange entity” and to provide a baseline for the privacy and security standards to which Exchanges must bind non-Exchange entities through written contracts or agreements.

The proposed regulations in part 156 set forth provisions related to cost sharing, including the premium adjustment percentage, the maximum annual limitation on cost sharing, the maximum annual limitation on deductibles for health plans in the small group market, the reductions in the maximum annual limitation for cost sharing plan variations, and the methodology to calculate advance payments of cost-sharing reductions for 2015. They also outline the 2015 FFE user fee rate and propose a user fee adjustment to reimburse third party administrators that pay for contraceptive services for enrollees in certain self-insured group health plans that receive an accommodation from the obligation to cover these services. They also include provisions related to parameters for making updates to the AV calculator in future plan years. The proposed 2015 AV Calculator and a proposed 2015 AV Calculator methodology, which would supersede the 2014 versions of these documents incorporated by reference in the EHB Rule, are being incorporated by reference in this proposed rule. In part 156 we also propose a meaningful difference standard for QHPs offered through an FFE and patient safety standards for issuers of QHPs. Finally, we propose an administrative appeals process applicable to the premium stabilization, cost-sharing reduction, advance payments of the premium tax credit, and FFE user fee programs.

In parts 155 and 156, we also propose the following provisions related to the SHOP:

• We propose to permit all SHOPs performing premium aggregation to establish one or more standard processes for premium calculation, payment, and collection.

• We propose that in the FF-SHOPs, for plan years when premium aggregation is available, employers be required to make premium payments to the FF-SHOP according to a timeline and process established by HHS. We further propose that for plan years beginning on or after January 1, 2015, unless the QHP issuer receives a cancellation notice from the FF-SHOP, the issuer would be required to effectuate coverage.

• We propose a standard premium pro-rating methodology for the FF-SHOPs, for plan years when premium aggregation is available, providing that groups will be charged for the portion

of the month for which an enrollee is enrolled.

• We propose to make explicit our interpretation of current regulations that no SHOPs would be permitted to collect information on a SHOP application unless that information is necessary to determine SHOP eligibility or effectuate enrollment through the SHOP.

• We propose that no SHOPs would be permitted to perform individual market Exchange eligibility determinations or verifications.

• We propose that a qualified employer that becomes a large employer but continues to purchase coverage through a SHOP would continue to be rated as a small employer.

• We propose to limit the employer and employee eligibility adjustment periods to circumstances when the SHOP has an optional verification process, and collects information through that verification process that is inconsistent with the information provided by an employer or employee on a SHOP application.

• We propose for plan years beginning on or after January 1, 2015 to give SHOPs in States that permit this activity under State law, the option of permitting enrollment in a SHOP through the Internet Web site of an agent or broker.

• We propose to limit the availability of composite premiums in the FF-SHOPs after employee choice and premium aggregation become available.

• We propose methods for employers in the FF-SHOPs to offer stand-alone dental coverage after employee choice becomes available in those SHOPs.

• We propose for plan years beginning on or after January 1, 2015 to permit FF-SHOPs to give employers the flexibility to define different premium percentage contributions for full-time employees and non-full-time employees.

We note that nothing in these proposed regulations would limit the authority of the Office of the Inspector General (OIG) as set forth by the Inspector General Act of 1978 or other applicable law.

III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 2015

A. Part 144—Requirements Relating to Health Insurance Coverage

In § 144.103, the term “policy year,” as amended by the second final Program Integrity Rule, is defined as: (1) With respect to a grandfathered health plan offered in the individual health insurance market, the 12-month period that is designated as the policy year in the policy documents of the individual health insurance coverage. If there is no designation of a policy year in the policy document (or no such policy document is available), then the policy year is the deductible or limit year used under the coverage. If deductibles or other limits are not imposed on a yearly basis, the policy year is the calendar year; and (2) with respect to a non-grandfathered health plan offered in the individual health insurance market, or in a market in which the State has merged the individual and small group risk pools (merged market), for coverage issued or renewed beginning January 1, 2014, a calendar year for which health insurance coverage provides coverage for health benefits. Further, § 147.104, as amended by the second final Program Integrity Rule, establishes individual market open enrollment periods based on a calendar policy year and provides that non-grandfathered coverage in the individual or merged markets must be offered on a calendar year basis, with a policy year beginning on January 1 and ending on December 31 of each year.

Under regulations at § 147.145(a), student health insurance coverage is defined as individual health insurance coverage. Section 147.145(b), however, exempts student health insurance coverage from certain PHS Act and Affordable Care Act requirements that apply to individual health insurance coverage, including certain guaranteed availability provisions of section 2702 of the PHS Act, implemented at § 147.104. As discussed below, because student health insurance coverage is traditionally offered on a school year basis (for example, a policy year beginning on September 1 of each year and ending on August 30 of the following year), we are proposing to modify § 147.145 to exempt student health insurance coverage from the requirement under section 2702 to establish open enrollment periods and coverage effective dates that are based on a calendar policy year, including the requirement that non-grandfathered coverage in the individual and merged markets be offered on a calendar year basis. We are also proposing conforming amendments to the definition of “policy year” to reflect that student health insurance coverage would not be required to be offered on a calendar year basis. We seek comment on this proposal.

B. Part 147—Health Insurance Reform Requirements for the Group and Individual Health Insurance Markets

1. Composite Rating

Section 2701 of the PHS Act, as added by section 1201 of the Affordable Care Act, establishes permissible rating factors that may be used to vary the premium rate charged by a health insurance issuer for non-grandfathered health insurance coverage (including QHPs) in the individual and small group markets beginning in 2014.

The factors are: family size, rating area, age, and tobacco use (within limits). Section 2701(a)(4) of the PHS Act provides that with respect to family coverage under a group health plan or health insurance coverage, any rating variation for age or tobacco use must be applied based on the proportion of the premium attributable to each family member covered under the plan or coverage.

Beginning in 2017, States will have the option to allow issuers to offer QHPs in the large group market through the SHOP. If a State elects this option, the rating rules in section 2701 and its implementing regulations will apply to all coverage offered in such State's large group market (except for self-insured group health plans) under to section 2701(a)(5) of the PHS Act.

In the Market Reform Rule, we applied the per-member rating requirement of PHS Act section 2701(a)(4) in both the individual and small group markets. Thus, at § 147.102(c), we generally directed that issuers calculate a separate premium for each individual covered under the plan or coverage based on allowable rating factors including age and tobacco use, and sum the individual rates to determine the total premium charged by the issuer to a family or to a group health plan.

States that do not permit rating for age or tobacco use may require health insurance issuers in the individual and small group markets to use uniform family tiers and corresponding multipliers established by the State. § 147.102(c)(2).

We recognized that in the small group market it is common industry billing practice to charge an employer a uniform premium for a given family composition by adding the per-member rates and dividing by the total number of employees covered under the employer's health insurance plan. We indicated that nothing prevents an issuer from converting per-member rates into average enrollee premium amounts (calculated composite premiums), provided that the total group premium is the same total amount derived in accordance with the process established by the regulations.

Because calculated composite premiums are average rates for a particular group, changes in employee

census would typically cause a change in the average rate. For example, a new average rate per enrollee would typically result from employees adding or dropping coverage during the course of the plan year, causing employer and employee contributions to change as well. We have been asked about such mid-year changes in group composition and how issuers should address the resulting changes in the calculated composite premium for the group.

In this proposed rule, we propose to add a provision at § 147.102(c)(3) clarifying that if an issuer offers a composite premium calculated when the employer obtains or renews coverage, the issuer must ensure that such amount does not vary for any plan participant or beneficiary during the plan year with respect to the particular plan involved. Under this approach, an issuer would be required to accept the group's composite premium, calculated based on applicable employee enrollment at the beginning of the plan year, as the applicable premium rate for any new individual who enrolls in the plan during the plan year.

Terminations of coverage during the plan year also would not change the composite premium. At the time of renewal, the issuer would recalculate a group's composite premium based on plan enrollment at that time for subsequent coverage. This will allow calculated composite premiums, and thus employer and employee contributions to coverage, to remain stable during the plan year, regardless of changes in the group's composition.

In cases where the composite premium does not incorporate the age or tobacco use rating factor, an issuer would be required to accept the group's composite premium, calculated based on applicable employee enrollment at the beginning of the plan year, multiplied by any applicable age or tobacco rating factor, as the applicable premium for any new individual who enrolls in the plan during the plan year. Under § 147.102(a)(1)(iv), rating for tobacco use is subject to the nondiscrimination and wellness provisions under section 2705 of the PHS Act and its implementing regulations, regardless of whether the composite premium incorporates the tobacco use rating factor.

This proposed policy would generally apply to health insurance issuers offering non-grandfathered health insurance coverage in the small group market, through a SHOP or outside of a SHOP, for plan years beginning on or after January 1, 2015. However, we encourage issuers to voluntarily adopt this approach for plan years beginning in 2014. As discussed in more detail below, we propose a limited exception to this policy in § 155.705(b)(11)(ii)(D) and § 156.285(a)(4)(ii) of this proposed rule, under which composite rating would not be available when an employer participating in a Federally-facilitated SHOP elects to offer its employees all QHPs within a single level of coverage under § 155.705(b)(3)(iv)(A).

We are considering establishing a uniform tiered-composite rating structure that would apply market wide unless a State requires and HHS approves an alternate tiered-composite rating methodology. Under the approach we are considering, a small group market issuer offering composite rating would calculate the composite premium for different tiers of enrollees covered under the employer's plan. For example, in a two-tier structure, one composite premium would be calculated for covered adults (employees and adult dependents) and another composite premium would be calculated for covered children. Alternatively, in a three-tier structure, there would be one composite premium for covered employees, a second composite premium for covered adult dependents, and a third composite premium for covered children. The premium for a given family composition would simply be determined by summing the applicable tiered-composite rates. We believe a tiered-composite approach would promote simplicity for issuers and employers, and ensure that premiums for family coverage appropriately reflect the lower rates for children.

We seek comments on all aspects of this approach to composite rating. We also seek comments on whether to establish a default uniform tiered-composite rating structure, including the appropriate number and types of enrollee tiers (for example, an employee-only tier, an adult dependent tier, and a child dependent tier).

2. Student Health Insurance Coverage

As discussed above, under § 147.145(a), student health insurance coverage is defined as a type of individual health insurance coverage. However, § 147.145(b) provides that for purposes of the guaranteed availability requirements of section 2702 of the PHS Act, a health insurance issuer that offers student health insurance coverage is not required to accept individuals who are not students or dependents of student in such coverage. Because student health insurance coverage is traditionally offered on a school year basis that does not align with the calendar year, we do not believe student health insurance should be required to establish open enrollment periods and coverage effective dates under § 147.104(b)(1) and (2) that are based on a calendar policy year, including the requirement that non-grandfathered coverage in the individual and merged markets be offered on a calendar year basis. Accordingly, we are proposing to amend § 147.145(b)(1)(ii) to exempt student health insurance coverage from these guaranteed availability requirements. We seek comments on this proposal and whether other modifications are necessary for student health insurance coverage.

C. Part 153—Standards Related to Reinsurance, Risk Corridors, and Risk Adjustment under the Affordable Care Act

1. Provisions and Parameters for the Permanent Risk Adjustment Program

The risk adjustment program is a permanent program created by section 1343 of the Affordable Care Act that transfers funds from lower risk, non-grandfathered plans to higher risk, non-grandfathered plans in the individual and small group markets, inside and outside the Exchanges. In subparts D and G of the Premium Stabilization Rule, we established standards for the administration of the risk adjustment program. A State that is approved or conditionally approved by the Secretary to operate an Exchange may establish a risk adjustment program, or have HHS do so on its behalf.

a. Risk Adjustment User Fees

If a State is not approved to operate or chooses to forgo operating its own risk adjustment program, HHS will operate risk adjustment on the State's behalf. As described in the 2014 Payment Notice, HHS's operation of risk adjustment on behalf of States is funded through a risk adjustment user fee. Section 153.610(f)(2) provides that an issuer of a risk adjustment covered plan must remit a user fee to HHS for each month equal to the product of its monthly enrollment in the plan and the per-enrollee-per-month risk adjustment user fee specified in the annual HHS notice of benefit and payment parameters for the applicable benefit year.

OMB Circular No. A-25R establishes Federal policy regarding user fees, and specifies that a user charge will be assessed against each identifiable recipient for special benefits derived from Federal activities beyond those received by the general public. The risk adjustment program will provide special benefits as defined in section 6(a)(1)(b) of Circular No. A-25R to an issuer of a risk adjustment covered plan because it will mitigate the financial instability associated with risk selection as other market reforms go into effect. The risk

adjustment program also will contribute to consumer confidence in the health insurance industry by helping to stabilize premiums across the individual and small group health insurance markets.

In the 2014 Payment Notice, we estimated Federal administrative expenses of operating the risk adjustment program to be $0.96 per enrollee per year, based on our estimated contract costs for risk adjustment operations. For the 2015 benefit year, we propose to use the same methodology to estimate our administrative expenses to operate the program. These contracts cover development of the model and methodology, collections, payments, account management, data collection, data validation, program integrity and audit functions, operational and fraud analytics, stakeholder training, and operational support. We do not propose to set the user fee to cover costs associated with Federal personnel. To calculate the user fee, we would divide HHS's projected total costs for administering the risk adjustment programs on behalf of States by the expected number of enrollees in risk adjustment covered plans (other than plans not subject to market reforms and student health plans, which are not subject to payments and charges under the risk adjustment methodology HHS uses when it operates risk adjustment on behalf of a State) in HHS-operated risk adjustment programs for the benefit year.

We estimate that the total cost for HHS to operate the risk adjustment program on behalf of States for 2015 will be approximately $27.3 million, and that the per capita risk adjustment user fee would be no more than $1.00 per enrollee per year. We seek comment on this proposed assessment of user fees to support HHS-operated risk adjustment programs.

b. HHS Risk Adjustment Methodology Considerations

In the 2014 Payment Notice, we finalized the methodology that HHS will use when operating a risk adjustment program on behalf of a State in 2014. We propose to use the same methodology in 2015. In this proposed rule, we propose to clarify the treatment of premium assistance Medicaid alternative plans in this risk adjustment methodology, and seek comment on potential adjustments to the geographic cost factor in the HHS risk adjustment model for future years.

(i) Incorporation of Premium Assistance Medicaid Alternative Plans in the HHS Risk Adjustment Methodology

Section 1343(c) of the Affordable Care Act provides that risk adjustment applies to non-grandfathered health insurance coverage offered in the individual and small group markets. In some States, expansion of Medicaid benefits under section 2001(a) of the Affordable Care Act may take the form of enrolling newly Medicaid-eligible enrollees into individual market plans. For example, these enrollees could be placed into silver plan variations—either the 94 percent silver plan variation or the zero cost sharing plan variation—with a portion of the premiums and cost sharing paid for by Medicaid on their behalf. Because individuals in these types of Medicaid expansion plans receive significant cost-sharing assistance, they may utilize medical services at a higher rate. To address this induced utilization in the context of cost-sharing reduction plan variations in the HHS risk adjustment methodology, we increase the risk score for individuals in plan variations by a certain factor. We propose to use the same factor for individuals enrolled in the corresponding Medicaid expansion plan variations. Table 1 shows the cost-sharing adjustments for both 94 percent silver plan variation enrollees and zero cost-sharing plan variation enrollees for silver QHPs as finalized in the 2014 Payment Notice. We propose to implement these adjustments for 2014. We plan to evaluate these adjustments in the future, after data from the initial years of risk adjustment is available. We seek comment on this approach.

Table 1—Cost-Sharing Reduction Adjustments

Plan variation

Induced utilization factor

94 percent Plan Variation

1.12

Zero Cost-Sharing Plan Variation of Silver QHP

1.12

(ii) Adjustment to the Geographic Cost Factor

As finalized in the 2014 Payment Notice, the geographic cost factor is an adjustment in the payment transfer formula to account for plan costs such as input prices that vary geographically and are likely to affect plan premiums. For the metal-level risk pool, it is calculated based on the observed average silver plan premium in a geographic area relative to the statewide average silver plan premium. It is separately calculated for catastrophic plans in a geographic area relative to the statewide catastrophic pool. However, several States have defined a large number of rating areas. Less populous rating areas raise concerns about the accuracy and stability of the calculation of the geographic cost factor because in less populous rating areas the geographic cost factor might be calculated based on a small number of plans. Inaccurate or unstable geographic cost factors could distort premiums and the stability of the risk adjustment model.

We seek comment on how to best adjust the geographic cost factors or geographic rating areas in future years to address these potential premium distortions. We also seek comments on how this adjustment should be implemented for a separately risk adjusted pool of catastrophic plans. We do not intend to make this adjustment for 2014.

c. Small Group Determination for Risk Adjustment

For a plan to be subject to risk adjustment, according to section 1343(c) of the Affordable Care Act and the definition of a “risk adjustment covered plan” in § 153.20, a plan must be offered in the “individual or small group market.” The definition of small group market in § 153.20 references the definition at section 1304(a)(3) of the Affordable Care Act.

Section 1304(a)(3) of the Affordable Care Act, in defining “small group market,” references the definition of a “small employer” in section 1304(b)(2) of the Affordable Care Act. That definition provides that an employer with an average of at least 1 but not more than 100 employees on business days during the preceding calendar year and who employs at least 1 employee on the first day of the plan year will be considered a “small employer.” However, section 1304(b)(3) of the Affordable Care Act provides that, for plan years beginning before January 1, 2016, a State may elect to limit “small employer” to mean an employer with at least 1 but not more than 50 employees.

In the 2014 Payment Notice, we stated that we believe that the Affordable Care Act requires the use of a counting method that accounts for part-time employees, and that the full-time equivalent method described in section 4980H(c)(2)(E) of the Code is a reasonable method to apply. Thus, we believe that the risk adjustment program must also use a counting method that takes employees that are not full-time into account when determining whether

a group health plan must participate in that program.

However, we also recognize that, because risk adjustment is intended to stabilize premiums by mitigating the effects of the rating rules, it is important that the program be available to plans that are subject to the rating rules, to the extent permissible under the Affordable Care Act. We recognize that a number of States, which have primary enforcement jurisdiction over the market rules, may use counting methods that do not take non-full-time employees into account.

Thus, we propose to clarify that in determining which group health plans participate as small group plans in the risk adjustment program, we would apply the applicable State counting method, unless the State counting method does not take into account employees that are not full-time. In that circumstance, we would apply the full-time equivalent method described in section 4980H(c)(2)(E) of the Code.

We believe that this approach defers to State counting methods and aligns with State enforcement of rating rules, within the bounds of what is permissible under the Affordable Care Act. We seek comment on our interpretation of the permissible counting rules for purposes of risk adjustment, the approach described above, and on alternate counting methods that may be preferable. We also seek comment on whether we should codify these risk adjustment counting rules in regulation text.

We note that the IRS has published a proposed regulation that contains further details that would apply to this calculation (54.4980H-2(c)).

d. Risk Adjustment Data Validation

The 2014 Payment Notice established a risk adjustment data validation program that HHS will use when operating risk adjustment on behalf of a State. In the 2014 Payment Notice, we specified a framework for this program that includes six stages: (1) Sample selection; (2) initial validation audit; (3) second validation audit; (4) error estimation; (5) appeals; and (6) payment adjustments.

To develop the details of the program, we sought the input of issuers, consumer advocates, providers, and other stakeholders. We issued the “Affordable Care Act HHS-Operated Risk Adjustment Data Validation Process White Paper” on June 22, 2013. That white paper discussed and sought comments on a number of potential considerations for the development of the risk adjustment data validation methodology. On June 25, 2013, we held a public meeting to discuss the topics considered in the white paper. We received submissions from 53 commenters, including issuers, issuer trade groups, advocacy groups, and consultants. As we noted in the white paper, our overall goals are to promote consistency and a level playing field by establishing uniform audit requirements, and to protect private information by limiting data transfers during the data validation process.

In this proposed rule, we propose provisions for the risk adjustment data validation process and methodology that reflect our analysis of the white paper comments and our discussions with stakeholders. We note that a State operating a risk adjustment program is not required to adopt these standards. These proposed rules are consistent with the white paper and lessons drawn from our experience with Medicare Advantage risk adjustment data validation and thus should be familiar to issuers.

(i) Sample Selection

The first stage in the HHS-operated risk adjustment data validation process is the selection of a sample of an issuer's enrollees whose risk adjustment data will be validated. In the proposed 2014 Payment Notice, we stated that HHS would choose a sample size of enrollees such that the estimated risk score errors would be statistically sound and the enrollee-level risk score distributions would reflect enrollee characteristics for each issuer. We stated that in determining the appropriate sample size for data validation, we recognized the importance of striking a balance between ensuring statistical soundness of the sample and minimizing the operational burden on issuers, providers, and HHS. Additionally, we stated that we would ensure that the sample would cover critical subpopulations of enrollees for each risk adjustment covered plan, such as enrollees with and without hierarchical condition categories (HCCs). To develop a proposed sample size for the first year of the HHS risk adjustment data validation program, we propose to use the methodology outlined in the white paper. Our goal in determining the enrollee sample size for the initial 2 years of risk adjustment data validation is to propose a statistically valid sample large enough to inform us to the dynamics of the risk adjustment data validation process in operation and estimation of risk score accuracy. As we established in the 2014 Payment Notice, for HHS to observe and optimize the risk adjustment data validation process, no payment adjustments will be made based on the risk adjustment data validation process for the initial 2 years of HHS-operated risk adjustment.

In general, we propose to select the initial validation audit sample for a given benefit year by dividing the relevant population into a number of “strata,” representing different demographic and risk score bands. We are proposing that, for the initial 2 years of the risk adjustment data validation program, the initial validation audit sample will consist of 200 enrollees from each issuer. We stated in the 2014 Payment Notice that the overall sample will reflect a disproportionate selection of enrollees with HCCs. Here, we discuss in detail our proposed sampling methodology, including our proposal to group enrollees to account for age characteristics and health status. Some commenters on the white paper suggested that we also consider sampling based on plan types and other characteristics. We will consider other sampling strategies in the future, but believe that we do not yet have enough experience with the risk adjustment process to determine the most appropriate sampling groups at this time.

Therefore, we are proposing a simple age and risk score stratification for at least the initial 2 years of the program. Following the division of the relevant population into strata, we propose to use the following formulas to calculate a proposed sample size for the initial validation audit each year. In general, the proposed formula for the overall sample size for an issuer (

) is:

ep02de13.008

Where:

is the number of strata;

is the population size of the

hth

stratum;

is the average risk score of the population, adjusted based upon the estimated risk score error;

represents the standard deviation of risk score error for the

hth

stratum;

Prec

represents the desired precision level (for example, 10 percent, meaning a 10 percent margin of error in the estimated risk score); and

z-value

is the z-value associated with the desired confidence level (for example, 1.96 for a two-sided 95 percent confidence level).

As noted above, we propose a sample size of 200 enrollees from each issuer for the initial 2 years of the program. The formula above would be used after this initial 2-year period to calculate a more precise, issuer-specific sample size for each issuer.

The proposed formula for calculating the sample size for each stratum is:

ep02de13.009

Where:

is the population size of the

stratum;

is the overall sample size; and

represents the standard deviation of risk score error for the

stratum.

For the 2014 benefit year, the parameters listed above were developed using data from two principal sources: Medicare Advantage risk adjustment data validation net error rates and variances; and expenditures data from the Truven Health Analytics 2010 MarketScan® Commercial Claims and Encounters database (MarketScan®). We chose to use Medicare Advantage error rates because Medicare Advantage utilizes an HCC-based methodology similar to the one used for HHS risk adjustment, and because it uses a similar risk adjustment data validation process to determine payment error rates.

We also chose to use the MarketScan® expenditure database because of the comprehensiveness of the database, which was the primary source for calibration for the HHS risk adjustment models. The database contains enrollee-specific claims utilization, expenditures, and enrollment across inpatient, outpatient, and prescription drug services from a selection of large employers and health plans. The database includes de-identified data from approximately 100 payers, and contains more than 500 million claims from insured employees, spouses, and dependents.

We used enrollee predicted expenditure results from our risk adjustment model calibration, which was based on the MarketScan® data, to stratify the population (by age group for enrollees with HCCs, and within a single group for enrollees with no HCCs), then calculated risk scores for the predicted expenditures to relate them to the average expenditures. To estimate a sample size for each issuer, an average issuer size was estimated based on the total expected insured population and the total expected number of issuers. The average issuer population containing enrollees with and without HCCs was assumed to be split 20 percent with HCCs and 80 percent without HCCs, consistent with the MarketScan® data.

We propose to group each issuer's enrollee population into 10 strata based on age group, risk level, and presence of HCCs, as follows:

• Strata 1-3 would include low, medium, and high risk adults with the presence of at least one HCC.

• Strata 4-6 would include low, medium, and high risk children with the presence of at least one HCC.

• Strata 7-9 would include low, medium, and high risk infants with the presence of at least one HCC.

• Stratum 10 will include the No-HCC population, which will not be further stratified by age or risk level, because we assume this stratum has a uniformly low error rate.

We calculated a predicted risk score for each individual in each stratum by dividing the predicted expenditures for that individual by the average predicted expenditures for the entire population. Using these individual predicted risk scores, we calculated the overall average risk score for all individuals in each risk-based stratum. This calculation was performed nine times for the HCC population—once for each of the three risk-based strata within each of the three age groups. We set the minimum risk score for enrollees without HCCs in the tenth stratum.

This method of stratification is similar to that used in the Medicare Advantage risk adjustment data validation program. That program divides enrollees into three strata, representing low, medium, and high risk expenditures. Error rates and variances are calculated for each of these strata. In the initial year, before error rate and standard deviation data for the population subject to the HHS-operated risk adjustment program are available, we propose to use the Medicare Advantage error rates and variances to calculate sample sizes. After the initial year, we will evaluate whether sufficient HHS-operated risk adjustment error rate and standard deviation data are available to calculate sample sizes.

We propose to use the lowest error rate across all HCC strata as the error rate for the stratum of enrollees without HCCs, and we propose to use the variance associated with that error rate to calculate the standard deviation of the error for the stratum of enrollees without HCCs. If error rates and variances are smaller than assumed for this stratum, the resulting sampling precision may increase.

Because the Medicare Advantage error rates and variances are not calculated for different age bands, and therefore are available only for three risk-score differentiated subgroups, we used the same risk score error rates and standard

deviation for the age bands for a risk category. Thus, we used the same risk score error rate and standard deviation assumptions for the adult, child, and infant strata associated with each risk score band. We do not anticipate the expected risk score error rate and variance to be uniform for all age groups; however, in the absence of data, we made this simplifying assumption. In general, we believe the Medicare Advantage error rates and variances likely overstate the corresponding error rates and assumptions for the HHS risk adjusted population, and therefore, the estimated precision of our error estimates may be understated.

The formulas identified above require data on error rates and standard deviations for the strata, and also a target confidence interval and sampling precision level (or margin of error). For the initial year, we propose to use a 10 percent relative sampling precision at a two-sided 95 percent confidence level. That is, we wish to obtain a sample size such that 1.96

multiplied by the standard error, divided by the estimated adjusted risk score, equals 10 percent or less. After actual data are collected from the initial year, we will test and evaluate the data for use in determining the sample size in future years.

Critical value for the two-sided 95 percent confidence level.

Once the proposed overall sample size is calculated, the enrollee count will be distributed among the population based on the second formula above for calculating the sample size of each stratum. Because strata with enrollees with HCCs have a higher standard deviation of risk score error, the overall sample will be disproportionately allocated to enrollees with HCCs (Strata 1-9), helping to ensure adequate coverage of the higher risk portion of the enrollee population.

In the proposed rule for the 2014 Payment Notice, we suggested that an issuer's initial validation audit sample for risk adjustment data validation would consist of approximately 300 enrollees. After conducting the calculations described above, we believe that we can achieve acceptable sampling precision with a sample size of 200 enrollees for the initial years of HHS-operated risk adjustment data validation. Therefore, we are proposing a sample size of 200 enrollees in the initial 2 years of the program. As noted above, we may provide for different, or issuer-specific, sample sizes in future years.

When data becomes available from the program's first year, we expect to examine our sampling assumptions using actual enrollee data. We anticipate that at least in the initial years of the risk adjustment data validation program, the stratification design will remain consistent with the design outlined above—nine HCC strata and one No-HCC stratum. However, the specific size and allocation of the sample to each stratum may be refined based on average issuer enrollee risk score distributions. For example, in future years, we are considering using larger sample sizes for larger issuers or issuers with higher variability in their enrollee risk scores, and smaller sample sizes for smaller issuers or issuers with lower variability in their enrollee risk scores. The sampling design may also consist of a minimum and maximum sample size per stratum for each average issuer (large, medium, small) to follow when selecting the sample.

We seek comments on this approach, including our proposed sample size of 200 enrollees for the initial 2 years of HHS-operated risk adjustment data validation.

(ii) Initial Validation Audit

The second stage of the HHS-operated risk adjustment data validation process is the initial validation audit. In § 153.630(b)(1), we require an issuer of a risk adjustment covered plan to engage one or more independent auditors to perform an initial validation audit of a sample of its risk adjustment data selected by HHS, which will include individually identifiable health information subject to HIPAA.

In this section of this proposed rule, we discuss proposed standards and guidelines regarding the qualifications of the initial validation auditor, including conflict of interest standards, standards for the initial validation audit, rater consistency and reliability, and confirmation of risk adjustment errors. As discussed in the white paper, we considered existing best practices and standards for independent auditors, such as those of Medicare Quality Improvement Organizations and the National Committee for Quality Assurance, when establishing our standards for initial validation auditors.

Whether any given organization is a HIPAA business associate is a fact-specific inquiry. We expect that most independent auditors operating on behalf of an issuer of a health plan would be performing activities that would render them a business associate of the covered plan, and would be required to enter into and maintain a business associate agreement with the health plan.

(1) Initial Validation Auditor

The 2014 Payment Notice established certain standards for the initial validation auditor. In § 153.630(b)(2) and (b)(3), we direct the issuer to ensure that the initial validation auditor is reasonably capable of performing an initial validation audit, and is reasonably free of conflicts of interest, such that it is able to conduct the initial validation audit in an impartial manner with its impartiality not reasonably open to question.

In the white paper, we elaborated on options for ensuring that an initial validation auditor meets these criteria, including standardized auditor certification processes and promulgation of best practices. Many commenters sought additional information and guidance regarding initial validation auditor selection and requested that HHS define conflicts of interest between an issuer and the initial validation auditor. We propose certain guidance on these topics here.

We are considering the following criteria for assessing conflicts of interest between the issuer and the initial validation auditor:

• Neither the issuer nor any member of its management team (or any member of the immediate family of such a member) may have any material financial or ownership interest in the initial validation auditor, such that the financial success of the initial validation auditor could be seen as materially affecting the financial success of the issuer or management team member (or immediate family member) and the impartiality of the initial validation audit process could reasonably be called into question, or such that the issuer or management team member (or immediate family member) could be reasonably seen as having the ability to influence the decision-making of the initial validation auditor;

• Neither the initial validation auditor nor any member of its management team or data validation audit team (or any member of the immediate family of such a member) may have any material financial or ownership interest in the issuer, such that the financial success of the issuer could be reasonably seen as materially affecting the financial success of the initial validation auditor or management team or audit team member (or immediate family member) and the impartiality of the initial validation audit process could reasonably be called into question, or such that the initial validation auditor or management or audit team member (or immediate family member) could be seen as having the ability to influence the decision-making of the issuer;

• Owners, directors and officers of the issuer may not be owners, directors

or officers of the initial validation auditor, and vice versa;

• Members of the data validation audit team of the initial validation auditor may not be married to, in a domestic partnership with, or otherwise be in the same immediate family as an owner, director, officer, or employee of the issuer; and

• The initial validation auditor may not have had a role in establishing any relevant internal controls of the issuer related to the risk adjustment data validation process when HHS is operating risk adjustment on behalf of a State, or serve in any capacity as an advisor to the issuer regarding the initial validation audit. In addition, we are considering standards under which issuers would verify that no key individuals involved in supervising or performing the initial validation audit have been excluded from working with either the Medicare or Medicaid program, are on the Office of the Inspector General exclusion list, or are under investigation with respect to any HHS programs.

We note that we intend to review the initial validation auditor's qualifications and relationship to the issuer to verify that the initial validation auditor is qualified to perform the audit, and that the issuer and initial validation auditor are free of actual or apparent conflicts of interest, including those stated above. We note that HHS could gather information through external reporting to support that review. Although we are confident that most issuers will exercise diligence in selecting an initial validation auditor that will be able to comply with HHS audit standards, we intend to monitor the performance of initial validation auditors to determine whether certification or additional safeguards are necessary.

We propose to amend § 153.630(b)(1) to specify that the issuer of a risk adjustment covered plan must provide HHS with the identity of the initial validation auditor, and must attest to the absence of conflicts of interest between the initial validation auditor (or the members of its audit team, owners, directors, officers, or employees) and the issuer (or its owners, directors, officers, or employees). We propose to consider any individual with a significant ownership stake in an entity such that the individual could reasonably be seen to have the ability to influence the decision making of the entity to be an “owner,” and propose to consider any individual that serves on the governing board of an entity to be a director of the entity. We are contemplating beginning the initial validation process at the end of the first quarter of the year following the benefit year, with the issuer's submission of the initial validation auditor's identity. We expect to identify the enrollee sample for the initial validation audit in the summer of the year following the benefit year. We are contemplating requiring delivery of the initial validation audit findings to HHS in the fourth quarter of that year. We include a proposed schedule of the risk adjustment data validation process at the end of this section.

Once the audit sample is selected by HHS, we expect issuers would ensure that the initial validation audit is conducted in the following manner:

• The issuer would provide the initial validation auditor with source enrollment and source medical record documentation to validate issuer-submitted risk adjustment data for each sampled enrollee;

• The issuer and initial validation auditor would determine a timeline and information-transfer methodology that satisfies data security and privacy requirements, including the applicable provisions of HIPAA, and enables the initial validation auditor to meet HHS established timelines;

• The initial validation auditor would analyze the enrollment and medical record data to validate the demographic information, plan or plan variation enrollment, and health status of each enrollee in the sample in accordance with the standards established by HHS; and

• The initial validation auditor would provide HHS with the final results from the initial validation audit and all requested information for the second validation audit.

We note that § 153.630(f)(2) is not changed by this proposal, and that the issuer would be required to ensure that its initial validation auditor comply with the security standards described at 45 CFR 164.308, 164.310, and 164.312 in connection with the initial validation audit. We seek comments on these proposals.

(2) Standards for the Initial Validation Audit

We propose to add a new paragraph (b)(5) to § 153.630, in which we propose that an initial validation audit review of enrollee health status be conducted by medical coders certified after examination by a nationally recognized accrediting agency for medical coding, such as the American Health Information Management Association (AHIMA) or the American Academy of Professional Coders (AAPC). We seek comment on other nationally recognized accrediting agencies that may be appropriate to certify medical coders who are performing the initial validation audit review of enrollee health status.

(3) Validation of Enrollees' Risk Scores

An enrollee's risk score is derived from demographic and health status factors, which requires the use of enrollee identifiable information. Thus, we propose to add paragraph (b)(6) to § 153.630, to require an issuer to provide the initial validation auditor and the second validation auditor with all relevant information on each sampled enrollee, including source enrollment documentation, claims and encounter data, and medical record documentation (defined below) from providers of services to enrollees in the applicable sample without unreasonable delay and in a manner that reasonably assures confidentiality and security of data in transmission (“data in transit”). We note that existing privacy and security standards, such as standards under HIPAA and those detailed at § 153.630(f)(2), would apply. This information will be used to validate the enrollment, demographic, and health status data of each enrollee. Only source documentation for encounters with dates of services within the applicable benefit year would be considered relevant. This would require issuers to collect the appropriate enrollment and claims information from their own systems, as well as from all relevant providers (particularly with respect to medical record documentation). We note that only a very small percentage of an issuer's records containing personally identifiable information would be made available to auditors as part of the risk adjustment data validation process, and that similar transmissions are required today for data validation for the Medicare Advantage program. As we describe in this section at (viii), regarding data security standards, we are seeking comment on the applicability and effectiveness of current standards, as well as what other standards HHS should promulgate to ensure data security and privacy protections.

We also propose to add paragraph (b)(7) to § 153.630 to describe the standards for validating each factor of an enrollee's risk score. In paragraph (b)(7)(i), we propose that the initial validation auditor must validate demographic data and enrollment information by reviewing plan source enrollment documentation, such as the

834 transaction,

which is the HIPAA-standard form used for plan benefit enrollment and maintenance transactions. These enrollment transactions reflect the data the issuer captured for an enrollee's age, name, sex, plan of enrollment, and enrollment periods in the plan. We note that certain identifying information from these enrollment transactions, such as the enrollee's name, would be used to ensure that the appropriate medical documentation has been provided.

Issuers and State Exchanges use the ASC X12 Standards for Electronic Data Interchange Technical Report Type 3—Benefit Enrollment and Maintenance (834), August 2006, ASC X12N/005010X220, as referenced in § 162.1502, or “834 form” to transmit and update enrollment and eligibility to HHS as often as daily but at least monthly. In Federal operations, HHS and the issuer exchange and update data via this same form.

The sample audit pool will consist of enrollees with and without risk adjustment-eligible diagnoses within eligible dates of service. For each enrollee in the sample with risk adjustment HCC scores, the initial validation auditor would validate diagnoses through a review of the relevant risk adjustment-eligible medical records. We consider medical record documentation generated with respect to dates of service that occurred during the benefit year at issue to be relevant for these purposes. For enrollees without risk adjustment HCCs for whom the issuer has submitted a risk adjustment-eligible claim or encounter, we would require the initial validation auditor to review all medical record documentation for those risk adjustment-eligible claims or encounters, as provided by the issuer, to determine if HCC diagnoses should be assigned for risk score calculation, provided that the documentation meets the requirements for the risk adjustment data validation audits. Documents used to validate all components of the risk score must reflect dates of service during the applicable benefit year. In the initial years of the data validation program, we plan to accept certain supplemental documentation, such as health assessments, to support the risk adjustment diagnosis. We expect to provide additional details on acceptable supplemental documentation in future guidance.

See

“HHS-Operated Data Collection Policy FAQ” for a discussion of chart review as an acceptable source of supplemental diagnosis codes. Additional detail will be provided in future guidance.

https://www.regtap.info/uploads/library/HHS_OperatedDataCollectionPolicyFAQs_062613

Therefore, in § 153.630(b)(7)(ii), we propose that the validation of enrollee health status (that is, the medical diagnoses) occur through medical record review, that the validation of medical records include a check that the records originate from the provider of the medical services, that they align with the dates of service for the medical diagnosis, and that they reflect permitted providers and services. In this paragraph, we also propose, for purposes of § 153.630, that “medical record documentation” mean: “clinical documentation of hospital inpatient or outpatient treatment or professional medical treatment from which enrollee health status is documented and related to accepted risk adjustment services that occurred during a specified period of time.” Medical record documentation must be generated in the course of a face-to-face or telehealth visit documented and authenticated by a permitted provider. We expect to provide additional guidance on telehealth services in future guidance.

In § 153.630(b)(7)(iii), we propose that medical record review and abstraction be performed in accordance with industry standards for coding and reporting. Current industry standards are set forth in the

International Classification of Diseases, Ninth Revision, Clinical Modification

(ICD-9-CM), or the

International Statistical Classification of Diseases and Related Health Problems, Tenth Revision, 4th Edition

(ICD-10-CM) guidelines for coding and reporting.

(4) Confirmation of Risk Adjustment Errors

We note that the data validation audit processes may identify various discrepancies, many of which will have no impact on an enrollee's risk score. For example, if a medical diagnosis underlying an enrollee's HCC was present on a claim but was not supported by medical record documentation, but the same HCC was supported by the medical record for a different diagnosis, we propose that no risk adjustment error be assessed for the enrollee's HCC. However, if none of the medical record documentation supports a particular HCC diagnosis for an enrollee, we propose that a risk adjustment error be assessed.

We consider a risk adjustment error to occur when a discrepancy uncovered in the data validation audit process results in a change to the enrollee's risk score. A risk adjustment error may result from incorrect demographic data, an unsupported HCC diagnosis, or a new HCC diagnosis identified during the medical record review. An unsupported HCC diagnosis could be the result of missing medical record documentation, medical record documentation that does not reflect the diagnosis, or invalid medical record documentation (such as an unauthenticated record or a record that does not meet risk adjustment data collection standards for the applicable benefit year).

We propose in § 153.630(b)(7)(iv) that a senior reviewer must confirm any finding of a risk adjustment error. We believe that a senior reviewer is a reviewer with substantial expertise in medical record coding such that the initial validation auditor would consider the senior reviewer to be the standard against which to measure inter-rater reliability and coding consistency. As such, we propose to define a senior reviewer as a medical coder certified by a nationally recognized accrediting agency who possesses at least 5 years of experience in medical coding. We seek comment on the credentials and expertise that should be required of a senior reviewer.

(5) Review Consistency and Reliability

Validation audits typically include methods of evaluating review consistency and reliability. We believe such processes help to ensure the integrity of the data validation process and strengthen the validity of audit results. In § 153.630(b)(8), we propose that the initial validation auditor measure and report to the issuer and HHS its inter-rater reliability rates among its reviewers. Such processes measure the degree of agreement among reviewers. We propose to set the threshold for the acceptable level of consistency among reviewers at 95 percent for both demographic and enrollment data review, and health status data review outcome. Reviews should be performed using rater-to-standard procedures whereby reviews conducted by reviewers with extensive qualifications and credentials are used to establish testing thresholds or standards for consistency.

(iii) Second Validation Audit

The initial validation audit will be followed by a second validation audit, which will be conducted by an auditor retained by HHS to verify the accuracy of the findings of the initial validation audit.

We propose to select a subsample of the initial validation audit sample enrollees for review by the second validation auditor. The second validation auditor would perform the data validation audit of the enrollee subsample, adhering to the same audit standards applicable to the initial validation audit described above, but would only review enrollee information that was originally presented during the initial validation audit. In § 153.630(c),

we established standards for issuers of risk adjustment covered plans related to HHS's second validation audit. In § 153.630(b)(4), we established that issuers must submit (or ensure that their initial validation auditor submits) data validation information, as specified by HHS, from their initial validation audit for each enrollee included in the initial validation sample. Issuers must transmit all information to HHS or its second validation auditor in a timeframe and manner to be determined by HHS. The second validation auditor would inform the issuer of error findings based on its review of enrollees in the second validation audit subsample. We will provide additional guidance on the manner and timeframe of these submissions in the future.

As discussed in the white paper, we are considering selecting the second validation audit subsample using a sampling methodology that will allow for pair-wise means testing to establish statistical difference between the initial and second validation audit results. If the pair-wise means test results suggest that the difference in enrollee results between the initial validation audit and second validation audit is not statistically significant, the initial validation audit error results would be used for error estimation and calculation of adjustments for plan average risk score. If the test results suggest a statistical difference, the second validation auditor would perform another validation audit on a larger subsample of the enrollees previously subject to the initial validation audit. The results from the second validation audit of the larger subsample would again be compared to the results of the initial validation audit using the pair-wise means test. Again, if no statistical difference is found between the initial validation audit and the second validation audit conducted on the larger subsample, HHS would apply the initial validation audit error results for error estimation using all enrollees selected for the initial validation audit sample. However, if a statistical difference is found based on the second validation audit on the larger subsample, HHS would apply the second validation audit error results to modify the risk scores of the issuer's enrollees, as discussed below. We are considering using a 95 percent confidence interval, but seek comment on the appropriate confidence interval to use with respect to these pair-wise means tests.

As discussed in the white paper, we are considering a number of ways to expedite the second validation audit and the subsequent appeals processes. One possibility would be to begin the second validation audit on those enrollees for which the initial validation audit is complete, even if the entire initial validation audit has not been completed. For example, an issuer could allow its initial validation auditor to submit data validation documentation and results a number of months in advance of the HHS established deadline for submission of initial validation audit results. The second validation auditor would thus be able to begin its review earlier, permitting more time to provide feedback to the issuer on the results of that review and allowing for more opportunity for discussion prior to finalizing the second validation audit findings. Prior to finalizing the risk score adjustment based on the second validation audit findings, the second validation auditor may request discussions with the initial validation auditor to identify the source of the differences, or may review the initial validation auditor's processes. If the initial validation audits are substantiated, the second validation auditor may adjust its risk scores accordingly. This process would not allow for any additional documentation to be submitted on those enrollees for which the second validation audit began early. The appeals decision from the expedited, concurrent process would be final and binding, but would provide issuers the opportunity to begin the process earlier. If HHS establishes a concurrent second validation audit and appeals process, we would need to develop intermediate timelines for initial validation auditor submission of audit documentation and data to the second validation auditor. We seek comments on this approach for establishing a concurrent second validation audit and appeals process.

(iv) Error Estimation

The fourth stage in the HHS risk adjustment data validation process is error estimation. Upon completion of the initial and second validation audits, HHS will derive an issuer-level risk score adjustment and confidence interval. This adjustment would be used to adjust the average risk score for each risk adjustment eligible plan offered by the issuer. HHS intends to provide each issuer with enrollee-level audit results and the error estimates.

We are proposing a two-phase procedure to accept or correct the results of the initial validation audit based on the results of the second validation audit. In phase one, as described above, we conduct a pair-wise statistical test for consistency between the initial validation and second validation audit results (as described above for second validation audits). In phase two, if we determine that the results of the two audits are inconsistent, we would adjust the initial validation audit results based on the second validation audit results. For phase two, we describe two options for using second validation audit results to derive an estimate of an overall corrected risk score for each issuer.

Phase One: Consistency Test between Initial and Second Validation Audit

In phase one, a pair-wise statistical test would be performed to determine if the initial validation audit sample results should be adjusted using the results of the second validation audit. To illustrate the underlying statistical test, consider the following notations:

is the

th initial validation audit risk score observation in the second validation audit sample of

observations;

is the

th second validation audit risk score observation in the second validation audit sample of

observations;

is the difference between

and

within the second validation audit sample;

is the mean of all

observations within the second validation audit sample; and

is standard deviation of all

observations within the second validation audit sample.

Assume an issuer submits enrollment and claims data to its dedicated distributed data environment that are used to compute a set of “original” risk scores. As required by the risk adjustment data validation process, the issuer engages an independent validation auditor, who reviews

enrollee records, as sampled by HHS, and validates the original enrollee risk scores.

From the

enrollees in the initial validation audit sample, HHS selects a smaller second validation audit subsample of

enrollees. For each second validation audit selected record, HHS calculates the difference,

−

. HHS then conducts a pair-wise means test to determine whether the mean difference,

, is statistically significant (that is, unlikely to be zero). Specifically, HHS would conduct a statistical test to determine if zero (0) is contained within the range,

EP02DE13.010

If so, HHS would conclude that there is no statistically significant difference between risk scores determined by the initial and second validation audit

processes, and would accept the results of the initial validation audit.

However, if zero (0) is not contained within this range (that is, the difference between

and zero is statistically significant), HHS would expand the second validation audit subsample to select a larger subset of

, have the second validation auditor review the enrollee files, and again conduct a pair-wise means test using this larger subsample. If the statistical test shows no statistically significant difference, HHS would accept the results of the initial validation audit. If the statistical test shows a statistically significant difference between the initial and larger subsample second validation audit findings, HHS would conduct phase two to adjust the full initial validation audit sample based on the larger subsample second validation audit findings.

Phase Two: Adjustment to the Initial Validation Audit Sample

In phase two, we propose that if the difference between the initial and second validation audits is found to be statistically significant, then HHS would utilize the risk score error rate calculated from the larger second validation audit subsample to adjust the full initial validation audit sample, which could in turn be used to adjust the average risk scores for each plan. This approach would adjust the entire initial validation audit sample using a one-for-one replacement for the enrollees reviewed by the second validation audit, and a uniform adjustment for the enrollees that were not. We also considered another option, as discussed in the white paper and below. Under this alternate approach, we would use the error rate from the larger second validation audit subsample directly in our determination of whether and by how much to adjust the risk scores of all enrollees in the issuer's risk adjustment covered plans. This approach would disregard all enrollees in the initial validation audit sample that were not reviewed as part of the larger second validation audit subsample.

To illustrate these two options under the phase two adjustment process, consider the following notations:

is the total number of enrollees in the risk adjustment covered plan;

is the initial validation audit sample size;

is the size of the larger second validation audit subsample;

is the mean of the initial validation audit-adjusted risk scores in the initial validation audit sample

is the mean of the second validation audit-adjusted risk scores in the second validation audit sample

is the mean of the original risk scores in the initial validation audit sample

is the mean of the original risk scores in the second validation audit sample

is the original risk score total across all

records;

is the projected correct risk score across all

records using the initial validation error rate; and

EP02DE13.011

is the projected correct risk score across all

records using the error rate from the larger second validation audit subsample.

EP02DE13.012

Under this proposed approach, we would undertake the following steps to adjust the risk scores in the initial validation audit samples:

(1) Replace the initial validation audit-adjusted risk scores with the second validation audit-adjusted risk scores in the

records that were sampled from

(one-for-one risk score adjustment).

(2) Apply a uniform adjustment factor,

EP02DE13.013

to the initial validation audit-adjusted risk scores in the (

) records not reviewed by the second validation audit.

Under the alternate approach, the second validation audit-adjusted risk scores in the

records in the larger second validation audit subsample would be used as the basis for adjustment of plan-level average risk scores.

Considering the comments in response to the white paper, and in order to estimate error using a narrower confidence interval, we are proposing to use the larger second validation audit subsample to adjust the initial validation audit sample (by direct replacement for enrollees reviewed by the second validation audit, and by proportional adjustment for the other enrollees), whose adjusted error rate could be used as a basis to adjust plan average risk scores for all risk adjustment covered plans of the issuer. We seek comment on our proposed approach.

Adjusted Risk Score Projections

Based on the proposals described above, the results of the initial or second validation audits could be used as the basis for projecting a corrected risk score for each issuer's population. The projections described above would be performed on a stratum-by-stratum level and weighted accordingly to achieve an estimate of the corrected risk score for each issuer. As described in the white paper, a stratified separate ratio estimator

would be used to estimate the corrected average risk score for each issuer. To compute the stratified separate ratio estimator, HHS would first extrapolate the total correct risk score within each stratum, then sum the stratum-specific projected correct risk scores for all strata, with the total sum divided by the total enrollee count to arrive at the corrected average risk score. The projected risk score error could then be calculated as the difference between the recorded average risk score across the entire population and the point estimate.

For a discussion of stratified separate ratio estimators,

see

Cochran, William G.,

Sampling Techniques,

third edition, John Wiley & Sons, 1977, at 164.

The stratified separate ratio estimator of the total correct risk score is calculated using the following equation:

EP02DE13.014

Where:

is used to estimate the correct risk score;

is the sample mean of the correct risk score in stratum

is the sample mean of the original risk score in stratum

is the total sum of the original risk score in stratum

and

is the total number of strata.

would then be normalized by the enrollment count to derive a corrected average risk score for the issuer.

To estimate the variance of the point estimate, HHS will first estimate the variance within each stratum and then sum the stratum-specific variances for all strata. The estimated variance of the stratified separate ratio estimate for the correct risk score is calculated as follows:

EP02DE13.015

Where:

is the number of enrollees sampled in stratum

is the population frequency in stratum

is the corrected risk score for the

th sampled enrollee in stratum

is the original risk score for the

th sampled enrollee in stratum

and

EP02DE13.016

The square root of the estimated variance is the standard error (SE).

We are proposing to use the issuer's corrected average risk score to compute an adjustment factor, based on the ratio between the corrected average risk score and the original average risk score that could be applied to adjust plan average risk for all risk adjustment eligible plans within the issuer. We are considering two options for applying the adjustment factor. Under the first option, we are considering directly applying an adjustment factor to all of the issuer's risk adjustment covered plans. Under the second option, we are considering applying this adjustment only if the corrected average risk score and the recorded average risk score are statistically different.

Were we to implement the second option, a critical parameter of the statistical test would be the target confidence interval, which would determine the stringency of the test. For example, we could perform the statistical test at the 90, 95, or 99 percent confidence interval. We note that the HHS Office of the Inspector General performs certain similar data validation tests using a 90 percent confidence interval, while the Medicare Advantage risk adjustment data validation program uses a 99 percent confidence interval. We also note that even if the statistical test finds the two risk scores to be statistically different, we could apply the adjustment factor to adjust plan average risk scores based upon using the point estimate of the adjusted average risk score, or some other value within an interval around the point estimate, such as the upper or lower bound of a 95 percent confidence interval around the point estimate.

The choice among these options poses a tradeoff between reducing issuers' incentives to aggressively report or code diagnoses, and increasing the variability of issuers' risk adjustment payments. Under the first option, an issuer that reports data that systematically overstates its risk score would, on average, assuming the corrected risk scores are unbiased estimates of the true risk scores, receive a downward adjustment to its reported risk score equal in magnitude to the degree of overstatement. As a result, this option could eliminate an issuer's incentive to overstate its risk score. On the other hand, due to sampling variation, the first option would routinely introduce significant variability in issuers' risk scores (both up and down), even if the issuer was making no attempt to manipulate its risk scores. While these adjustments would make such an issuer's risk adjustment payments less predictable in any given year, they would not introduce systematic bias in risk scores (assuming the corrected risk scores are unbiased estimates of the true risk scores).

The second option, in contrast, would only adjust an issuer's risk scores when it is very likely that the reported risk scores deviated from the true values, so issuers' risk adjustment payments would be more predictable. However, particularly if the confidence level of the statistical test were set at a high threshold, this approach would often fail to make adjustments when an issuer does in fact overstate its risk score.

Based on commenters' feedback on the white paper, we are proposing to use the second approach described above—we would adjust the plan average risk scores of an issuer based upon the ratio between the correct average risk score estimate and recorded average risk score only if the difference between the estimated and recorded average risk scores were determined to be statistically significant. We are proposing to use a 95 percent confidence interval to determine if the adjusted average risk score and the recorded average risk score are statistically different. Nevertheless, we welcome comments on both options discussed above and on the appropriate tradeoff between reducing issuers' incentive to aggressively report or code diagnoses and increasing the variability of issuers' risk adjustment payments. In addition, regarding the proposed approach in particular, we seek comments on the appropriate confidence interval to apply when determining whether an adjustment to an issuer's plan average risk score is necessary.

Error Estimation Example

To illustrate the corrected average risk score and error estimation process described above, assume that a sample of 200 enrollees is selected for initial validation audit review for a particular issuer. From this sample, assume that a subsample of 20 enrollees is selected for second validation audit review. Assume the issuer's average recorded population risk score is 1.60 and the projected correct population risk score from the sample of 200 is 1.40, with a two-sided 95 percent confidence interval of 1.30 to 1.50.

The first step in the error estimation process will determine if the initial validation audit results should be corrected based on the second validation audit review or accepted without adjustment. We would perform a pair-wise means test to compare the projected risk scores for the sample of 200 enrollees and the subsample of 20 enrollees.

For this example, assume that the statistical test fails (that is, there is a statistically significant difference between the projected risk scores in the sample of 200 and the subsample of 20).

We would then select an expanded subsample from the original sample of 200 enrollees. Assume that the larger sample is a sample of 100 enrollees. Following completion of the larger second validation audit, we would perform the pair-wise means test again. Assume the test fails again (that is, there is a statistically significant difference in the projected risk scores between the sample of 200 and the larger subsample of 100). We would conclude that the risk scores in the sample of 200 enrollees need to be adjusted.

If the test passes, then no adjustments would be made to the sample of 200 and the projected results from this sample would be used to adjust average plan liability risk scores.

In the second step of error estimation, HHS would adjust the risk scores in the sample of 200 using a one-for-one replacement for the risk scores of the enrollees reviewed by the second validation auditor, and a uniform adjustment for the other enrollees in the initial validation audit sample. The one-for-one replacement will replace the risk scores calculated based on initial validation audit findings, with the risk scores calculated based on the second validation audit findings for the larger subsample of 100. The remaining 100 enrollees that were not included in the second validation audit subsample would be adjusted based on the ratio of two projections: (1) the projected correct population risk score using the second validation audit findings in the subsample of 100 (assume this projected risk score is 1.50, with a two-sided 95 percent confidence interval of 1.30 to 1.70); divided by (2) the projected correct population risk score using the initial validation audit findings in the sample of 200 (equal to 1.40 based on the assumption noted above). The adjustment ratio is equal to 1.07 = 1.50/1.40. Therefore, the risk scores of the remaining 100 enrollees not included in the second validation audit subsample would be increased by 7 percent.

The projected correct population risk score from the revised sample of 200 would therefore be 1.45, with a two-sided 95 percent confidence interval of 1.35 to 1.55.

(v) Appeals

We anticipate that the risk adjustment data validation appeals process would occur annually, beginning in the spring of the year in which the error rate will be applied to adjust risk scores and affect risk adjustment payments and charges. Because we are not applying error rates to adjust payments and charges for the initial 2 years of the risk adjustment program, the first year for which payments and charges would apply would be 2016. Risk scores and initial payments and charges would be calculated in the spring of 2017 for that payment cycle. We anticipate the appeals process will begin in the spring of 2018, prior to the 2017 payment transfers. We will provide additional guidance on the appeals process and schedule in future rulemaking.

(vi) Payment Transfer Adjustments

Risk adjustment payment transfer amounts will be based on adjusted plan average risk scores. The data validation audits would be used to develop a risk score error adjustment for each issuer, as described above. Each issuer's risk score adjustment would be applied to adjust the plan average risk score for each of the issuer's risk adjustment covered plans. This adjustment would be applied on a prospective basis beginning with the risk adjustment data for benefit year 2016 (that is, the adjustments would take effect in 2018, during payment transfers for 2017). Because an issuer's adjusted plan average risk score is normalized as part of the risk adjustment payment calculation, the effect of an issuer's risk score error adjustment will depend upon its magnitude and direction compared to the average risk score error adjustment and direction for the entire market.

We are considering reporting the following summary findings to issuers for the initial 2 years of the program:

• State- or market-wide error rates.

• Issuer error rates.

• Initial validation audit or error rates.

• Projected financial impact of the proposed risk adjustments, as determined by the initial and second validation auditors.

• The 2-year interval before risk adjustment data validation adjustments are applied to risk scores and affect payments and charges will provide initial validation auditors and issuers the opportunity to reform existing processes prior to the implementation of HHS payment transfer adjustments for the 2016 benefit year. We believe that the reports described above will help issuers and initial validation auditors better understand the likely effects of the risk adjustment data validation program in States where HHS operates risk adjustment. We seek comment on considerations for reporting error rates and any additional information that could improve transparency in the markets.

(vii) Oversight

The second final Program Integrity Rule outlined selected oversight provisions related to the premium stabilization programs, such as maintenance of records, sanctions for failing to establish a dedicated distributed data environment, and the application of a default risk adjustment charge to issuers in the individual and small group market that fail to provide data necessary for risk adjustment. We are proposing to expand on these provisions to include oversight related to risk adjustment data validation when HHS operates risk adjustment on behalf of a State.

Section 153.620 provides that an issuer that offers risk adjustment covered plans must comply with any data validation requests by the State or HHS on behalf of the State, and that an issuer that offers risk adjustment covered plans must also maintain documents and records, whether paper, electronic, or in other media, sufficient to enable the evaluation of the issuer's compliance with applicable risk adjustment standards, and must make that evidence available upon request to HHS, OIG, the Comptroller General, or their designee, or in a State where the State is operating risk adjustment, the State or its designee to any such entity.

Based on our authority under section 1321(c)(2) of the Affordable Care Act, we are proposing in § 153.630(b)(9) that, when HHS operates risk adjustment on behalf of a State, an issuer of a risk adjustment covered plan that does not engage an initial validation auditor within the timeframe specified by HHS of the year following the benefit year, or that otherwise does not arrange for a risk adjustment initial validation audit that complies with applicable regulations, may be subject to civil money penalties. We note that we intend to apply the proposed sanction so that the level of the enforcement action would be proportional to the level of the violation. While we would reserve the right to impose penalties up to the maximum amounts proposed in § 156.805(c), as a general principle, we intend to work collaboratively with issuers to address problems in conducting the risk adjustment data validation process. In our application of the proposed sanction, we would take into account the totality of the issuer's circumstances, including such factors as an issuer's previous record (if any), the frequency and level of the violation, and any aggravating or mitigating circumstances. Our intent is to encourage issuers to address non-compliance and not to severely affect their business, especially where the issuer demonstrates good faith in monitoring compliance with applicable standards, identifies any suspected occurrences of non-compliance, and attempts to remedy any non-compliance.

We also note that HHS will not perform the initial validation audit for an issuer that does not hire an initial validation auditor or otherwise does not submit initial validation audit results that comply with the regulations in subpart G and subpart H of part 153. For these issuers, we propose in § 153.630(b)(10) to assign a default risk adjustment charge. We are considering whether this charge should be the same charge as contemplated in § 153.740(b), should be based on a default error rate, or should be calculated based on some other methodology. We will propose a

methodology for computing the default error rate or default charge in future rulemaking.

Issuers may request technical assistance from HHS at any stage of the risk adjustment data validation process. HHS may also offer such assistance directly if we become aware of technical issues arising at any time during the risk adjustment data validation process. We plan to provide further assistance and clarification around the risk adjustment data validation process through a range of vehicles, including additional guidance, training materials, webinars, and user group calls. We welcome comment on these proposals.

(viii) Data Security

We recognize that the risk adjustment data validation process outlined here will require the transmission of sensitive data and documents between the issuer and the initial and second validation auditors. HHS takes seriously the importance of safeguarding protected health information and personally identifiable information. As outlined in the white paper, we believe that it will be necessary to specify standards for safeguarding this information through proper information storage and transmission methods.

We note that § 153.630(f)(2) requires issuers to ensure that it and its initial validation auditor comply with the security standards described at 45 CFR 164.308, 164.310, and 164.312 in connection with the initial validation audit, the second validation audit, and any appeal. In addition to these requirements, we are considering defining standards and expectations that would apply to issuers and initial and second validation auditors pertaining to data security, management, and transmission. These standards could require systems to safeguard and encrypt data “at rest” and “in transit,” and to authenticate identities of users. They could also prohibit the auditors from using or disclosing the information they receive for any purpose other than the audit and oversight. Similar standards have been implemented under the Medicare Advantage risk adjustment data validation process. We intend to address these issues and the treatment of initial and second validation auditors under HIPAA in future rulemaking or guidance, and seek comment on the applicability and effectiveness of current standards, as well as what other standards HHS should promulgate to ensure data security and privacy protections.

(ix) Implementation Timeline

For the 2014 benefit year, we expect to implement risk adjustment data validation activities in early 2015. Implementation activities would begin with issuers submitting the identity of their initial validation auditor to HHS in accordance with § 153.630(b)(1). In the spring of 2015, we would utilize the data submitted by issuers for risk adjustment payments and charges and apply the sampling methodology described above to select the audit sample for each issuer for the initial validation audit. During the same timeframe, we would train issuers and initial validation auditors on the risk adjustment data validation process and the applicable standards for performing the initial validation audit, which would begin in the summer of 2015. Once the initial validation audit has concluded in the fall of 2015, HHS would begin the second validation audit process, which would continue into 2016. Risk adjustment data validation implementation activities for the 2014 benefit year data would conclude in 2016 after distribution of HHS findings to issuers, processing of appeals, and estimation and reporting of final risk scores. Since the 2014 benefit year is the first year of implementation of risk adjustment data validation, we expect to report on lessons learned from these activities, and to use this information to improve the risk adjustment data validation process.

We expect that the risk adjustment data validation implementation activities would follow a similar schedule for each subsequent benefit year. The 2016 benefit year would be the first year when payments and charges are adjusted. Those adjustments would occur after the conclusion of risk adjustment data validation activities for the 2016 benefit year, in the summer of 2018.

e. HHS Audits of Issuers of Risk Adjustment Covered Plans

In order to safeguard Federal funds, we propose in § 153.620(c) that HHS or its designee may audit an issuer of a risk adjustment covered plan, when HHS operates risk adjustment on behalf of a State, to assess the issuer's compliance with the requirements of subparts G and H of 45 CFR part 153. The issuer must also ensure that its relevant contractors, subcontractors, or agents cooperate with the audit. We anticipate conducting targeted audits of issuers of risk adjustment covered plans informed by, among other criteria and sources, the data provided to HHS through the dedicated distributed data environment and any previous history of noncompliance with these standards. We will provide further details on this audit program, including timelines, procedures, and substantive requirements, in future rulemaking and guidance. This audit will focus on those aspects of the risk adjustment program that are not validated through the risk adjustment data validation program, described above in this proposed rule. In particular, we anticipate that the audit will focus on records documenting that the plan was a risk adjustment covered plan. For example, the audit might seek to review records evidencing the type of plan at issue (for example, an individual market metal level plan versus a catastrophic plan), the plan renewal date (to ensure the plan was subject to the market reform rules during the time periods for which data was submitted to the dedicated distributed data environment), and, in the case of an insured group health plan, the plan size (to ensure the plan was a small employer plan).

We also propose that if an audit results in a finding of material weakness or significant deficiency (as these terms are defined in GAAS issued by the American Institute of Certified Public Accountants, and Government Auditing Standards issued by the Government Accountability Office (GAO)

) for compliance with any requirement of subpart G or H of 45 CFR part 153, the issuer: (i) Within 30 calendar days of the issuance of the final audit report, must provide a written corrective action plan to HHS for approval; (ii) implement that corrective action plan; and (iii) provide to HHS written documentation of the corrective actions once taken. If HHS determines as the result of an audit that the issuer of the risk adjustment covered plan was required to pay additional risk adjustment charges or has received risk adjustment payments to which it was not entitled, it may require the issuer to pay such amounts to the Federal government.

See

Government Auditing Standards (2011 Revision), available at:

http://www.gao.gov/yellowbook

. For public companies, the Public Company Accounting Oversight Board (PCAOB) sets audit standards.

See http://pcaobus.org/Standards/Auditing/Pages/default.aspx

. For non-public companies, the AICPA sets audit standards.

See http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx

To reduce the burden on issuers and HHS, to the extent practical, we intend to coordinate any audits of issuers of risk adjustment covered plans with related audits of Exchange financial programs and premium stabilization programs, such as reinsurance. We seek comment on this proposal, including

the standards that should govern these audits.

2. Provisions and Parameters for the Transitional Reinsurance Program

The Affordable Care Act directs that a transitional reinsurance program be established in each State to help stabilize premiums for coverage in the individual market from 2014 through 2016. In the 2014 Payment Notice, we expanded on the standards set forth in subparts C and E of the Premium Stabilization Rule and established the reinsurance payment parameters and uniform reinsurance contribution rate for the 2014 benefit year. In this proposed rule, we propose the reinsurance payment parameters and uniform reinsurance contribution rate for the 2015 benefit year and certain oversight provisions related to the operation of the reinsurance program.

a. Major Medical Coverage

Section 1341(b)(3)(B)(i) of the Affordable Care Act states that “the contribution amount for each issuer [must] proportionally reflect each issuer's fully insured commercial book of business for all major medical products . . .” In the preamble to the 2014 Payment Notice (78 FR 15456), we included a general description of major medical coverage for reinsurance purposes based on the comprehensiveness of the coverage provided (for example, a range of medical, surgical, and preventive services) and the settings in which the coverage is provided (for example, inpatient and outpatient settings). Commenters requested that HHS codify a definition of major medical coverage for purposes of reinsurance contributions in regulation text.

Codification in regulation text of a more specific definition of major medical coverage for reinsurance contributions purposes would provide additional clarification for some contributing entities. Therefore, we propose to add a definition of major medical coverage in § 153.20 to mean health coverage for a broad range of services and treatments provided in various settings that provides minimum value in accordance with § 156.145.

We believe that because minimum value is calculated on a broad set of services—comparable to the essential health benefits applicable to individual and small group coverage—it is a reasonable measure of comprehensiveness of coverage. Minimum essential coverage under an employer-sponsored plan generally will provide minimum value if the plan's share of total allowed costs of benefits provided under the plan exceeds 60 percent of such costs (see section 36B(c)(2)(C)(II) of the Code). The minimum value standards established under § 156.145 also deem coverage that meets any of the levels of coverage requirements described in § 156.140 to satisfy this requirement. Because the calculation of minimum value is an objective process, we believe that the use of the concept of minimum value is a reasonable way to clarify the definition of major medical coverage and reduce uncertainty as to whether reinsurance contributions are required of certain unique plan arrangements. In addition, we believe that the concept of minimum value will be familiar to stakeholders, and will not add undue burden to the determination of whether a plan offers major medical coverage for reinsurance purposes. It is important to note that this definition of major medical coverage only applies for determining reinsurance contributions under section 1341 of the Affordable Care Act. We seek comment on this proposed definition.

b. Self-insured Plans Without Third Party Administrators

Section 1341(b)(1)(A) of the Affordable Care Act provides that “health insurance issuers and third party administrators on behalf of group health plans” must make reinsurance contributions. We recognize that some self-insured group health plans self-administer the benefits and services provided under the plan, and do not use the services of a third party administrator. We believe that section 1341(b)(1)(A) of the Affordable Care Act clearly applies to both issuers of insured plans as well as to self-insured plans that use third party administrators. However, our continued study of this issue leads us to believe that this provision may reasonably be interpreted in one of two ways—it may be interpreted to mean that self-insured, self-administered plans must make reinsurance contributions, or it may be interpreted to mean that such plans are excluded from the obligation to make reinsurance contributions. For the reasons discussed below, we propose to modify the definition of a “contributing entity” for the 2015 and 2016 benefit years to exclude self-insured group health plans that do not use a third party administrator in connection with claims processing or adjudication (including the management of appeals) or plan enrollment.

Following consideration of the comments submitted with respect to the 2014 Payment Notice and the proposed Program Integrity Rule, we propose that for the 2015 and 2016 benefit years, the phrase “third party administrators on behalf of group health plans” not include self-insured, self-administered group health plans. An insured plan and a self-insured plan administered by a third party administrator are similar in that each arrangement involves an employer and an outside commercial entity—an issuer or a third party administrator (which is often an insurance company or an affiliate)—for the administration of the core health insurance functions of claims processing and plan enrollment. We note that under section 1341(b)(3)(B) of the Affordable Care Act and § 153.400(a)(1)(ii), reinsurance contribution amounts are to reflect a “commercial book of business.” Our consideration of these comments leads us to believe that a group health plan administered by a third party administrator would normally be viewed as part of the third party administrator's “commercial book of business,” but that a self-insured, self-administered plan would not normally be viewed as part of any entity's “commercial book of business.”

Therefore, we propose that for the 2015 and 2016 benefit years, a “contributing entity” would mean: (a) A health insurance issuer; or (b) a self-insured group health plan (including a group health plan that is partially self-insured and partially insured, where the health insurance coverage does not constitute major medical coverage) that uses a third party administrator in connection with claims processing or adjudication (including the management of appeals) or plan enrollment. The proposed modification for the 2015 and 2016 benefit years would exclude from the obligation to make reinsurance contributions those self-insured plans that do not use a third party administrator for their core administrative processing functions—adjudicating, adjusting, and settling claims (including the management of appeals), and processing and communicating enrollment information to plan participants and beneficiaries. This proposed amendment would recognize that some self-insured group health plans, which we believe would generally not be considered to be using the core services of a third party administrator, may use third parties for ancillary administrative support, and we would consider these plans to be self-administered for purposes of the reinsurance program.

For purposes of the definition of “contributing entity,” we propose to consider a third party administrator to be, with respect to a self-insured group

health plan, an entity that is not under common ownership or control with the self-insured group health plan or its sponsor that provides administrative services to the self-insured group health plan in connection with claims processing or adjudication (including the management of appeals) or plan enrollment. We seek comment on this definition, and whether certain types of service providers, such as an attorney providing legal advice in connection with claims adjudication, or an issuer administering an insured component of a group health plan that is partially self-insured and partially insured should be considered a third party administrator for these purposes.

In addition, we seek comment on whether the core administrative functions that we have described above—claims processing or adjudication (including the management of appeals) and plan enrollment—are the appropriate criteria for this revised definition, and what other administrative functions, such as medical management services, provider network development, or other support tasks, should be considered in determining whether a self-insured group health plan uses a third party administrator. We also seek comment on whether a self-insured plan must perform these core administrative functions for all healthcare benefits and services provided to enrollees under the plan in order not to be considered to be using a third party administrator, or whether certain benefits or services, such as pharmaceutical benefits or behavioral health benefits, or a de minimis or small percentage of all benefits and services may be performed by an unaffiliated service provider. If so, we seek comment on which benefits or services should be excluded from this criterion, or how such a de minimis amount or small percentage should be measured.

While, upon further consideration of the issue, we believe the statutory language can reasonably be read to support the proposition that self-insured group health plans that do not use third party administrators for the functions described above should not be obligated to make reinsurance contributions, we also recognize, as a public policy matter, that it would be disruptive to plans and issuers to modify the definition of “contributing entity” for the 2014 benefit year at this late date. Health insurance issuers have already set premiums and developed operational processes based on the definition of “contributing entity” that was previously finalized in the 2014 Payment Notice. To prevent lower reinsurance payments, the contribution rate would have to be raised for other contributing entities, many of whom have already set their 2014 premiums based on the contribution rate finalized in March 2013. Excluding self-insured, self-administered group health plans from the set of entities that must provide reinsurance contributions for the 2014 benefit year, without raising the rate on other entities, would decrease the funds available for reinsurance payments for that benefit year, and thus upset settled estimates with respect to expected reinsurance payments that were used to establish premiums.

Therefore, we do not propose to change the definition of a “contributing entity” for the 2014 benefit year. That definition will remain as provided for in the second final Program Integrity Rule—a health insurance issuer or a self-insured group health plan (including a group health plan that is partially self-insured and partially insured, where the health insurance coverage does not constitute major medical coverage), regardless of whether the group health plan uses a third party administrator. The modification to the definition of “contributing entity” described above would be effective only for the 2015 and 2016 benefit years.

Finally, we note that our proposed change to the definition of a contributing entity may have implications for our plan aggregation rules at § 153.405(g), and seek comment on whether a plan sponsor that maintains two or more group health plans covering the same covered lives, where one or more group health plans are insured and one or more are self-insured and do not use a third party administrator for core administrative functions, should be required to treat the multiple plans as a single group health plan for purposes of calculating any reinsurance contribution amount due.

c. Uniform Reinsurance Contribution Rate

(i) Uniform Reinsurance Contribution Rate for the 2015 Benefit Year

Section 153.220(c) provides that HHS is to publish in the annual HHS notice of benefit and payment parameters the uniform reinsurance contribution rate for the upcoming benefit year. Section 1341(b)(3)(B)(iii) of the Affordable Care Act specifies that $10 billion for reinsurance contributions are to be collected from contributing entities in 2014 (the reinsurance payment pool), $6 billion in 2015, and $4 billion in 2016. Additionally, sections 1341(b)(3)(B)(iv) and 1341(b)(4) of the Affordable Care Act direct that $2 billion in funds are to be collected for contribution to the U.S. Treasury in 2014, $2 billion in 2015, and $1 billion in 2016. Finally, section 1341(b)(3)(B)(ii) of the Affordable Care Act allows for the collection of additional amounts for administrative expenses. Taken together, these three components make up the total dollar amount to be collected from contributing entities for each of the 3 years of the reinsurance program under the uniform reinsurance contribution rate.

As discussed in the 2014 Payment Notice, each year, the uniform reinsurance contribution rate will be calculated by dividing the sum of the three amounts (the reinsurance payment pool, the U.S. Treasury contribution, and administrative costs) by the estimated number of enrollees in plans that must make reinsurance contributions:

EP02DE13.017

As discussed in greater detail below, we are proposing to collect $25.4 million for administrative expenses for the 2015 benefit year (or 0.4 percent of the $6 billion to be dispersed). Therefore, the total amount to be collected would be approximately $8.025 billion. Our estimate of the number of enrollees in plans that must make reinsurance contributions yields an annual per capita contribution rate of $44 for the 2015 benefit year.

(ii) Timing of Collection of Reinsurance Contributions

As set forth in the 2014 Payment Notice, under § 153.405(b), no later than November 15 of the 2014, 2015, and 2016 benefit years, as applicable, a contributing entity must submit an annual enrollment count of the number of covered lives of reinsurance contribution enrollees for the applicable benefit year to HHS. Under § 153.405(c)(1), HHS is to notify the contributing entity of the reinsurance contribution amount to be paid for the applicable benefit year within 30 days of the submission of the annual enrollment count, or by December 15 of the applicable benefit year. Under § 153.405(c)(2), a contributing entity is to remit reinsurance contributions to HHS within 30 days after the date of the notification.

We recognize that the reinsurance collections provided for in the Affordable Care Act—$12 billion for 2014, $8 billion for 2015, and $5 billion for 2016—will result in substantial up-front payments from contributing entities for the reinsurance program. Therefore, we are proposing to modify our collection schedule for the program, so that we would collect the reinsurance contribution amounts for reinsurance payments and for administrative expenses earlier in the calendar year following the applicable benefit year, approximately in accordance with the schedule currently described in § 153.405(c), but collect the reinsurance contribution amounts for payments to the U.S. Treasury in the last quarter of the calendar year following the applicable benefit year. Therefore, we propose to modify § 153.405(c) so that a contributing entity would make reinsurance contributions in two installments to HHS—one at the beginning of the calendar year following the applicable benefit year, and one at the end. As noted in the second final Program Integrity Rule, the proposed policy is designed to alleviate the upfront burden of the reinsurance contribution, allowing contributing entities additional time to make the payment. We note that the proposed change in the collection schedule would not affect the amount of funds collected for reinsurance payments. Additionally, the amounts allocated to reinsurance payments and administrative expenses are needed to operate the reinsurance program, while the amounts allocated for payments to the U.S. Treasury are not needed for the operation of the transitional reinsurance program. Therefore, collecting the amounts allocated to payments to the U.S. Treasury later in the calendar year following the applicable benefit year will not affect the reinsurance program, and will alleviate a contributing entity's upfront financial burden.

Under this proposal, the first of the two installments each year would include the reinsurance contribution amounts allocated to reinsurance payments and administrative expenses. We propose in § 153.405(c)(1) that following submission of the annual enrollment count, HHS would notify a contributing entity of the reinsurance contribution amount allocated to reinsurance payments and administrative expenses to be paid for the applicable benefit year. If the enrollment count is timely submitted, HHS intends to notify the contributing entity by December of benefit year 2014, 2015, or 2016, as applicable. We note that, due to our desire to align the notification of reinsurance contributions due with our monthly payment and collections cycle, this schedule differs slightly from the schedule currently set forth in § 153.405(c)(3), which provides for notification by the later of 30 days of the submission of the annual enrollment count or by December 15. We propose in § 153.405(c)(3) that the contributing entity remit this amount within 30 days after the date of the first notification.

The second installment would cover the portion of the reinsurance contribution amount allocated to the payments for the U.S. Treasury to be paid for a benefit year. We propose in § 153.405(c)(2), that in the fourth quarter of the calendar year following the applicable benefit year, HHS would notify the contributing entity of the portion of the reinsurance contribution amount allocated for payments to the U.S. Treasury for the applicable benefit year. Again, under proposed § 153.405(c)(3), a contributing entity would remit this amount within 30 days after the date of this second notification. We note that the contributing entity would be required to submit an annual enrollment count only once for each benefit year under § 153.405(b).

For example, for the 2014 benefit year, of the $63.00 annual per capita contribution rate, $52.50 would be allocated towards reinsurance payments and administrative expenses, and $10.50 towards payments to the U.S. Treasury. Thus, we contemplate that if a contributing entity submits its enrollment count for the 2014 benefit year in a timely manner (by November 15, 2014), a reinsurance contribution payment of $52.50 per covered life would be invoiced in December 2014, and payable in January, 2015. Another reinsurance contribution payment of $10.50 per covered life would be invoiced in the fourth quarter of 2015, and payable late in the fourth quarter of 2015.

We propose that for the 2015 benefit year, the proposed $44 annual per capita contribution rate be allocated $33 towards reinsurance payments and administrative expenses, and $11 towards payments to the U.S. Treasury. These amounts would similarly be payable in January 2016 and late in the fourth quarter of 2016, respectively.

We plan to establish the uniform reinsurance contribution rate for the 2016 benefit year in the HHS notice of benefit and payment parameters for 2016.

We seek comment on this proposal. We note that we are considering a variation of this proposal under which contributing entities would be provided the option of paying the entire reinsurance contribution amount with the first installment, at the beginning of the calendar year following the applicable benefit year. We also clarify that the two installment payments (or one, should a contributing entity be permitted and elect to make the entire payment with the first installment) would be reported with 2014 data for purposes of the risk corridors and MLR calculations due July 31, 2015, despite the fact that the later installment would not have been paid at that time. This has the effect of leaving the MLR and risk corridors calculations unchanged.

(iii) Allocation of Uniform Reinsurance Contribution Rate

Section 153.220(c) provides that HHS is to set in the annual HHS notice of benefit and payment parameters for the applicable benefit year the proportion of contributions collected under the uniform reinsurance contribution rate to be allocated to reinsurance payments, payments to the U.S. Treasury, and administrative expenses. In the 2014 Payment Notice, we stated that reinsurance contributions collected for 2014 will be allocated pro rata to the reinsurance pool, administrative expenses, and the U.S. Treasury, up to $12.02 billion. In Table 2, we specify these proportions (or amounts, as applicable):

Table 2—Proportion of Reinsurance Contributions Collected Under the Uniform Reinsurance Contribution Rate for the 2015 Benefit Year for Reinsurance Payments, Payments to the U.S. Treasury, and Administrative Expenses

Proportion or amount for:

If total contribution collections under the uniform reinsurance contribution rate are less than or equal to $8.025 billion

If total contribution collections under the uniform reinsurance contribution rate are more than $8.025 billion.

Reinsurance payments

74.8 percent ($6 billion/$8.025 billion)

The difference between total collections and those contributions allocated to the U.S. Treasury and administrative expenses.

Payments to the U.S. Treasury

24.9 percent ($2 billion/$8.025 billion)

$2 billion.

Administrative expenses

0.3 percent ($25.4 million/$8.025 billion)

$25.4 million.

As shown in Table 2, if the total amount of contributions collected is less than or equal to $8.025 billion, we propose to allocate approximately 74.8 percent of the reinsurance contributions collected to reinsurance payments, 24.9 percent of the reinsurance contributions collected to the U.S. Treasury, and 0.3 percent of the reinsurance contributions collected to administrative expenses. We note that the proposed method of collection would not affect the allocation to reinsurance payments, administrative expenses, and payments to the U.S. Treasury.

To provide that all reinsurance contributions collected for a benefit year are paid out for claims for that benefit year, we propose to amend § 153.230(d) to provide that if HHS determines that the amount of all reinsurance payments requested under the national payment parameters from all reinsurance-eligible plans in all States for a benefit year will not be equal to the amount of all reinsurance contributions collected for reinsurance payments under the national contribution rate in all States for an applicable benefit year, HHS will determine a uniform pro rata adjustment (up or down) to be applied to all such requests for reinsurance payments for all States. We propose that each applicable reinsurance entity, or HHS on behalf of a State, must reduce or increase the reinsurance payment amounts for the applicable benefit year by any adjustment required under that paragraph.

For example, for 2014, if HHS collects $9 billion for the reinsurance payments pool and $10 billion in reinsurance payments are requested, HHS and each applicable reinsurance entity would reduce all reinsurance payments by 10 percent (effectively decreasing the coinsurance rate). If HHS collects $11 billion for the reinsurance payments pool and $10 billion in reinsurance payments are requested, HHS and each applicable reinsurance entity would increase all reinsurance payments by 10 percent (effectively increasing the coinsurance rate).

We seek comment on this payment proposal, including on whether any excess collections should be allocated to increasing coinsurance rates above 100 percent, or whether such funds should be used instead to change other reinsurance parameters or used for future benefit years.

Because our proposal above would provide that all reinsurance contributions collected for a benefit year are paid out for claims for that benefit year, we propose to delete and reserve § 153.235(b), which currently provides that any excess reinsurance contributions collected from contributing entities for any benefit year but unused for the applicable benefit year

must

be used for reinsurance payments in subsequent benefit years. For years beyond the 2014 benefit year (for which we propose to pay out all reinsurance contributions collected, as described above), we seek comment on whether we should have the flexibility to use excess contributions collected in the applicable benefit year for that benefit year or in a subsequent benefit year.

(iv) Administrative Expenses

In the 2014 Payment Notice, we estimated that the Federal administrative expenses of operating the reinsurance program would be $20.3 million, based on our estimated contract and operational costs. We propose to use the same methodology to estimate the administrative expenses for the 2015 benefit year. These estimated costs would cover the costs related to contracts for developing the uniform reinsurance payment parameters and the uniform reinsurance contribution rate, collecting reinsurance contributions, making reinsurance payments, and conducting account management, data collection, program integrity and audit functions, operational and fraud analytics, training for entities involved in the reinsurance program, and general operational support. We propose to exclude from these administrative expenses the costs associated with work performed by Federal personnel. To calculate our proposed reinsurance administrative expenses for 2015, we divided HHS's projected total costs for administering the reinsurance programs on behalf of States by the expected number of enrollees in reinsurance-eligible plans for the benefit year.

We estimate this amount to be approximately $25.4 million for the 2015 benefit year. This estimate has increased for the 2015 benefit year because we will be making reinsurance payments in the 2015 benefit year for the 2014 benefit year, and as discussed below, will engage in program integrity and audit-related activity in 2015 to oversee the reinsurance program. We believe that this figure reflects the Federal government's significant economies of scale, which helps to decrease the costs associated with operating the reinsurance program. Based on our estimate of covered lives for which reinsurance contributions are to be made for 2015, we are proposing a uniform reinsurance contribution rate of $0.14 annually per capita for HHS administrative expenses. We provide details below on the methodology we used to develop the 2015 enrollment estimates.

For the 2014 benefit year, we allocated the administrative expenses equally between contribution and payment-related activities. Because we anticipate that our additional activities in the 2015 benefit year, including our program integrity and audit activities, will also be divided approximately equally between contribution and payment-related activities, we again propose to allocate the total administrative expenses equally between these two functions. Therefore, as shown in Table 3, we expect to apportion the annual per capita amount of $0.14 of administrative expenses as follows: (a) $0.07 of the total amount collected per capita for administrative expenses for the collection of contributions from health insurance issuers and group health plans; and (b) $0.07 of the total amount collected per capita for administrative expenses for

reinsurance payment activities, supporting the administration of payments to issuers of reinsurance-eligible plans.

TABLE 3—Breakdown of Administrative Expenses (annual, per capita)

Activities

Estimated

expenses

Collecting reinsurance contributions from health insurance issuers and group health plans

$0.07

Calculation and disbursement of reinsurance payments

0.07

Total annual per capita expenses for HHS to perform all reinsurance functions

0.14

If HHS operates the reinsurance program on behalf of a State, HHS would retain the annual per capita fee to fund HHS's performance of all reinsurance functions, which would be $0.14. If a State establishes its own reinsurance program, HHS would transfer $0.07 of the per capita administrative fee to the State for purposes of administrative expenses incurred in making reinsurance payments, and retain the remaining $0.07 to offset the costs of collecting contributions. We note that the administrative expenses for reinsurance payments will be distributed to those States that operate their own reinsurance program in proportion to the State-by-State total requests for reinsurance payments made under the uniform reinsurance payment parameters.

d. Uniform Reinsurance Payment Parameters

Our goal in setting the reinsurance payment parameters is to achieve the greatest impact on rate setting, and therefore premiums, through reductions in plan risk, while complementing the current commercial reinsurance market. Section 1341(b)(2)(B) of the Affordable Care Act directs the Secretary, in establishing standards for the transitional reinsurance program, to include a formula for determining the amount of reinsurance payments to be made to issuers for high-risk individuals that provides for the equitable allocation of funds. In the Premium Stabilization Rule, we provided that reinsurance payments to eligible issuers will be made for a portion of an enrollee's claims costs paid by the issuer (the coinsurance rate, meant to reimburse a proportion of claims while giving issuers an incentive to contain costs) that exceeds an attachment point (when reinsurance would begin), subject to a reinsurance cap (when the reinsurance program stops paying claims for a high-cost individual). The coinsurance rate, attachment point, and reinsurance cap together constitute the uniform reinsurance payment parameters.

Given the smaller pool of reinsurance contributions to be collected for the 2015 benefit year, we are proposing that the uniform reinsurance payment parameters for the 2015 benefit year be established at an attachment point of $70,000, a reinsurance cap of $250,000, and a coinsurance rate of 50 percent. We estimate that these uniform reinsurance payment parameters will result in total requests for reinsurance payments of approximately $6 billion for the 2015 benefit year. We believe setting the coinsurance rate at 50 percent and increasing the attachment point allows for the reinsurance program to help pay for nearly the same group of high-cost enrollees as was the case for the 2014 benefit year, while still encouraging issuers to contain costs. We believe that maintaining the reinsurance cap for the 2015 benefit year while ensuring that the coinsurance rate sufficiently compensates issuers for high risk individuals will make it easier for issuers to estimate the effects of reinsurance. We believe that these uniform reinsurance payment parameters will support the reinsurance program's goals of promoting nationwide premium stabilization and market stability while providing issuers incentives to continue to effectively manage enrollee costs. We intend to continue to monitor individual market enrollment and claims patterns to appropriately disburse reinsurance payments throughout each of the benefit years of the transitional reinsurance program.

As discussed in the 2014 Payment Notice, to assist with the development of the uniform reinsurance payment parameters and the premium adjustment percentage index, HHS developed the Affordable Care Act Health Insurance Model (ACAHIM). The ACAHIM estimates market enrollment, incorporating the effects of State and Federal policy choices, and accounting for the behavior of individuals and employers. The outputs of the ACAHIM, especially the estimated enrollment and expenditure distributions, were used to analyze a number of policy choices relating to the uniform reinsurance contribution rate and uniform reinsurance payment parameters proposed in this rule.

The ACAHIM generates a range of national and State-level outputs for 2015, including the level and composition of enrollment across markets given the eligible population in each State. The ACAHIM is described below in two sections: (1) the approach for estimating 2015 enrollment; and (2) the approach for estimating 2015 expenditures. The

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.