Note: This post was slightly modified on December 7 to more accurately reflect the proposed rule.

On November 30, 2012, the Affordable Care Act moved a couple of steps closer to becoming reality with the publication of two major proposed rules.  The Department of Health and Human Services published a proposed “Notice of Benefit and Payment Parameters for 2014” rule, while the Office of Personnel Management published a proposed rule for establishing multi-state health insurance plans. HHS also issued a fact sheet on the federal exchange, although it contains no new information but rather links to existing guidance.   Finally, HHS announced a new application date of December 28, 2012, for states to apply for exchange establishment grants, presumably to help those states who might have had last-minute, post-election, conversion experiences on the state exchange establishment issue.

This post will discuss the notice of benefit and payment parameters proposed rule.  A subsequent post will discuss the OPM proposal.

The notice of benefit and payment parameters proposal is one of the longest regulatory issuances yet to emerge from the ACA implementation process — 372 pages of preamble and regulatory text.  Much of it is very technical and will be primarily of interest to insurers and regulators, although the issues it addresses will ultimately affect everyone who is touched by the ACA.  It builds on earlier rules, primarily the reinsurance, risk adjustment, and risk corridor rule and exchange establishment rule.  It also addresses in regulatory form issues discussed earlier in guidance, such as cost-sharing reduction payments, risk adjustment, and reinsurance.

As the proposed rule’s name suggests, much of it addresses the parameters that will be used for the new premium stabilization programs — the risk-adjustment, reinsurance, and risk-corridor programs — which begin in 2014.  The proposal also provides greater detail on how the advance premium tax credit and cost-sharing reduction payment programs will be operated.  Finally, it proposes a federal exchange user fee for 2014, approaches that employers may use for contributing to employee premiums in the SHOP (small employer) exchange, and changes to the medical loss ratio rule to accommodate the premium stabilization programs.

Viewed as a whole, the proposal illuminates more clearly than anything that has so far emerged from the implementation process what a monumental task Congress has set for the nation in trying to reshape a private, market-based, health insurance system to make it accessible to all but the poorest Americans, regardless of health status.  By its very nature, private insurance health must account for risk and is only accessible to those who can pay (or find an employer who will pay) premiums that have become increasingly unaffordable.  Although private health insurance is available virtually everywhere on earth, in most countries it supplements a robust social health insurance or national health service, which ensures that health care is available to all.

Only a handful of countries—notably Switzerland and the Netherlands—rely on private insurance to provide basic health coverage, and they have only been able to do so by providing substantial public subsidies and heavy government regulation.  Their health care systems are also among the most expensive in the world.  Making private insurance accessible to all is a very heavy lift.

The Federal Risk-Adjustment Program: How It Will Work

Much of the proposed rule’s preamble is dedicated to describing in detail how the federal risk-adjustment program is going to work for 2014.  Unlike the reinsurance and risk-corridor programs, which are three-year transitional programs, the risk-adjustment program is permanent.  It will transfer funds from lower-risk to higher-risk, non-grandfathered plans in the individual and small group markets, inside and outside of the exchanges.

States that operate an exchange may also operate their own risk-adjustment programs, but the state must demonstrate that its risk-adjustment entity has the capacity to operate the program and, if it uses a methodology other than the HHS methodology, its methodology must be approved by HHS.  If a state wishes to use its own methodology, it will have to, in the future, publish a notice setting it out its benefit and payment parameters no later than March 1 of the year before the year in which the program becomes effective.  Because of time constraints, for 2014 only, a state seeking to run its own program must consult with HHS, but does not need approval as such.

The federal risk-adjustment program methodology and parameters are discussed at great length and in great detail in the proposed regulation’s preamble.  They will only be summarized briefly here (although even this brief summary may be too much for most readers).

Risk pooling will only apply to non-grandfathered plans in the individual and small group market, and will not apply to plans that begin in 2013 with renewal dates in 2014 until they are actually renewed; risk pooling will also not apply to plans not subject to the ACA (such as excepted benefits) or student health plans.  Risks will be pooled within a state, and they will be pooled separately in the small-group and individual markets unless a state chose to combine those markets.  Catastrophic plans will be pooled separately from metal-level plans.

Calculating risk scores. A risk score will be computed for each enrollee in each plan—with separate models for adults, children, and infant.  HHS has developed a hierarchical condition category (HCC) classification system consisting of 100 HCCs to use for the adult and child risk-adjustment models.  The models also classify adults into 18 age/sex categories and children into 8 age/sex categories, as well as by metal tier.  A disease severity interaction factor adjustment is also included for adults.   Infants are separately classified into 25 categories by maturity and severity of condition, and further classified by gender.  Risk scores are also adjusted for cost-sharing reduction payments to reflect presumed higher use of health care by individuals with lower cost sharing.

The individual risk scores of each enrollee will be averaged to derive an enrollment-weighted average risk score for all enrollees in a covered plan.  Risk adjustment transfers will reflect the difference between A) the state’s average premium adjusted for a specific plan’s average risk score and for plan cost factors reflecting geographic rating and induced remand and B) the state average premium without an adjustment for risk but normalized for a specific plan’s geographic rating area, actuarial value, induced demand, and age of enrollees.  Plans with average risk score-adjusted state premiums that exceed average state premiums without risk adjustment will receive transfer payments, while those with whose premiums without risk adjustment exceed their risk-score adjusted premiums will make payments.  Transfer payments must equal receipts.

Risk scores will be calculated with HHS software using plan data on the insurers’ servers.  Risk scores will be subject to validation audit by plan-selected auditors, however, with those validation audits subject to a second level of audits by an auditor selected by HHS.  Payments will be adjusted prospectively for plans that are found to have committed errors, but not for 2014 and 2015, the first two years of the program, while the plans are still learning how the program works.  HHS will not have access to identifiable enrollee-specific data.  The federal government will charge insurers a user fee to fund the risk-adjustment program, which it estimates will be less than $1.00 per capita.  HHS estimates that from 2014 to 2017, $45 billion will be transferred among insurers through the risk adjustment program.

Under the proposal, states may operate their own reinsurance programs, but HHS will handle the collection of reinsurance contributions, using a national per-capita rate to collect contributions from all health insurers and self-insured group health plans in the country.  Reinsurance payments will be disbursed to plans in the individual market based on the need for reinsurance payments, irrespective of the state where contributions were collected. States that choose to operate their own reinsurance programs can collect additional contributions within their state for administrative expenses or for more generous reinsurance payments.  Reinsurance contributions will be collected and paid once a year, but reinsurance-eligible plans will receive quarterly reports of estimated payments for planning purposes.

States may maintain existing high-risk pools in parallel with the reinsurance program, but state high-risk pools will neither be required to contribute to or be eligible for payments from the reinsurance program.  Contributions will also not be required based on Medicare, Medicaid, or CHIP coverage; health reimbursement plan or health savings account coverage; excepted benefit plans, military or tribal health benefits; or other coverage that is not commercial, major medical coverage.

The Reinsurance Program

The reinsurance program will collect $10 billion in assessments in 2014, $6 billion in 2015, and $4 billion in 2016.  Additional collections must cover the program’s administrative costs ($20.3 million for 2014) and $5 billion to be paid to the Treasury.  The $5 billion essentially covers the amount paid out under the early retirement reinsurance program.  These amounts will be divided by the number of covered lives nationally to derive the per capita contribution amount.   Health insurance issuers and self-insured plans are offered several different methods of counting covered lives for the annual enrollment count.  More complex rules are provided for group plans that combine insured and self-insured coverage.

Reinsurance payments are only available for claims costs incurred for enrollees covered under the 2014 market reform rules (that is, they will not be available for enrollees who enrolled in a plan in 2013 under the pre-2014 rules but are still covered for part of 2014).  For 2014, reinsurance payments will be available to cover 80 percent of costs incurred for individual enrollees whose claims costs exceed $60,000, up to a $250,000 reinsurance cap.  Special provisions are made for managed care plans that do not pay providers on a fee-for-service basis.

If requests for reimbursement exceed contributions, payments will be revised downward.  If contributions exceed payments, excess funds will be kept for the next year. States that supplement the federal reinsurance payments can decrease the national attachment point or increase the national coinsurance rate or cap.  HHS estimates that the reinsurance program will reduce premiums for individual insurance from 10 to 15 percent.

The Risk-Corridor Program

The risk-corridor program collects contributions from qualified health plans with low allowable costs (claims and quality improvement expenses) relative to a “target amount” (premiums minus administrative costs and taxes) and pays out funds to plans with high allowable costs relative to the target amount.  Risk-corridor contributions or payments only apply if the deficit or excess of allowable costs relative to the target amount exceeds risk-corridor ratios established by the statute.  (For example, if a plan’s allowable costs are between 92 and 97 percent of the target amount, the plan pays 50 percent of the difference to the risk-corridor program, while a plan with allowable costs between 103 and 108 percent of the target amount can collect 50 percent of the difference.)

The proposed rule permits as an allowable administrative expense profits up to the greater of 3 percent or the difference between earned premiums and the sum of allowable costs and administrative costs, as long as total administrative costs, including profit, do not exceed 20 percent of premiums.  Risk corridor collections and payments are calculated only after risk adjustment and reinsurance adjustments have been applied for a benefit year.

The Advance Premium Tax Credit And Cost-Sharing Reduction Programs

The proposed rule next addresses several issues that arise under the advance premium tax credit and cost-sharing reduction programs.  If a household’s income, and thus its eligibility for premium tax credits, changes during the middle of a year, the exchange must adjust the household’s premium tax credits for the remainder of the year to minimize any projected discrepancies between the advance payments and the final tax credit amount.  This may mean that the payments will be higher or lower than they would have been had the household’s income been at the new level for the entire year.

The proposed rule also provides guidelines for allocating advance premium tax credits when members of a household enroll in more than one qualified health plan (or in a QHP and stand-alone dental plan).  Finally, it requires qualified health plans and stand-alone dental plans to notify the exchange as to the allocation of premiums for each metal level between essential health benefits and other benefits, as premium tax credits and cost-sharing reduction payments can only be used to pay for essential health benefits.

The ACA provides that an enrollee’s cost sharing must be reduced if the enrollee’s household income falls below certain levels. The actuarial value of a silver plan must be increased to 94 percent for enrollees with household incomes of from 100 to 150 percent of poverty; to 87 percent for enrollees at 150 to 200 percent of poverty; and to 73 percent for enrollees at 200 to 250 percent of poverty.  Native Americans with incomes at or below 300 percent of poverty are excused from all cost sharing.

QHPs must, therefore, develop “silver plan variations” meeting each of these actuarial value requirements, including a “zero cost-sharing variation” and “limited cost-sharing variations.”  QHPs must also develop “zero cost-sharing variations” and “limited cost-sharing variations” for all metal tiers for Native American enrollees.  These plans may not vary more than 1 percent from their target in actuarial value (in contrast to regular metal-level plans, which may vary as much as 2 percent from their target).  Silver plans with 73 percent actuarial value must also exceed the actuarial value of a normal silver plan by at least 2 percentage points. Plans must ensure that individuals are charged only the reduced cost-sharing amount at the time a service is received.

The ACA requires QHPs to reduce the general ACA out-of-pocket maximum for enrollees with household incomes not exceeding 400 percent of poverty.  The ACA out-of-pocket maximum is currently the limit that applies to high-deductible health plans accompanying tax-subsidized health savings accounts, and is estimated by HHS at $6400 for self-only coverage for 2014, $12,800 for family coverage. The reduction in the out-of-pocket maximum for subsidy-eligible households may not, however, increase the actuarial value of any plan.  HHS proposes, therefore, not to reduce the out-of-pocket maximum for households with incomes between 250 and 400 percent of poverty, as this would increase the AV of a silver plan above 70 percent or preclude other, more beneficial, forms of cost-sharing reduction.

For households with incomes between 200 and 250 percent of poverty, the out-of-pocket maximum will be set at $5200.  For families below 200 percent of poverty, the out-of-pocket maximum will be set at $2250.   QHPs must in addition reduce other cost sharing to reach the targets, but must otherwise cover the same essential health benefits and offer the same providers to enrollees with reduced cost sharing as are offered to silver plan enrollees with normal cost sharing.

If persons who are separate entities for tax purposes purchase a family policy together (like a parent and an non-dependent child), they are only eligible for the most generous cost-sharing reduction plan for which all plan members are eligible.  If eligibility for cost-sharing reductions changes over the course of a year, the QHP must ensure that the enrollee gets credit for cost sharing already incurred.

HHS will make monthly advance payment to plans to cover cost-sharing reductions.   These payments will not only cover the increased actuarial value of subsidized plans, but will include an induced utilization factor to recognize that enrollees with reduced cost sharing will use more services.  These advance payments will periodically be reconciled with actual QHP payments for reduced cost sharing, with the plan receiving or refunding the difference between estimated and actual liabilities.  Plans may not delay or terminate coverage because of a delay in payment from the federal government of an advance premium tax credit.  Cost-sharing reduction rules do not apply to catastrophic plans or stand-alone dental plans.

The Federal Exchange User Fee

The proposed rule concludes with a series of proposals addressing miscellaneous topics.  It proposes a monthly user fee for the federal exchange of 3.5 percent of monthly premiums, although it reserves the right to modify this to align with rates charged by state exchanges.  This fee would cover the services that the exchange offers, including its consumer outreach and education, consumer assistance tools, eligibility determinations, and enrollment functions.  The fee would be deducted from payments otherwise due to participating plans.  HHS is considering a policy under which the fee would be pooled with other administrative costs and applied to the entire set of health plans offered by the insurer in a particular market, that is, all individual or small group plans sold by the insurer in the state.

The SHOP (Small-Group) Exchange

The proposed rule identifies employee choice as a central feature of the SHOP exchange.  Employers will not be allowed to choose a single plan for their employees in the federal exchange, therefore, but can choose a metal level and set contribution, with the employee choosing the plan within the metal level.  HHS seeks comments on allowing employees to buy up one metal level, recognizing that this would increase choice but also the danger of adverse selection.

Under the proposal, employer contributions will be based on a percentage of the cost of a reference plan chosen by the employer.  The premium for the reference plan could either be a composite premium (all employees would face the same cost) or a premium which varies based on the age of the employee or other permissible rating factors (except in states where age rating is prohibited).  Employers will not be permitted to make a flat dollar contribution if premiums are age rated.

Insurers that participate in the individual federal exchange must also offer a silver and gold plan through the SHOP exchange if they (or an affiliated insurer) offer small-group plans in the state.  Insurers must pay similar broker compensation for plans that they sell through the federal exchange or SHOP exchange to the compensation they pay for outside plans.

The proposal sets a minimum participation rate of 70 percent for employer groups in the SHOP exchange, counting only employees not otherwise covered by another employer group plan or a public program.  This rate may vary by state.  A full-time equivalent approach is proposed for determining whether an employer is a small employer for SHOP eligibility.  A 30 hour a week standard is proposed for determining whether an employer is a “qualified employer” that makes its full-time employees eligible for SHOP coverage.

A transitional rule is proposed for 2014 and 2015, however, under which states may apply alternative approaches to determining full-time employment.  Exchanges may limit the display of agent and broker information to include only those registered with the exchange.

Modifying The Medical Loss Ratio Calculations

Finally, the proposed rule makes changes in the medical loss ratio rule.  The medical loss ratio statute requires that the formula used for calculating the MLR be changed as of 2014 to account for risk-adjustment, reinsurance, and risk-corridor payments or receipts as a reduction of or addition to premium revenue.  HHS observes that “stakeholders” had asked that premium stabilization payments and receipts be accounted for in the numerator (as an adjustment to claims) rather than, as required by the law, in the denominator (as an adjustment to premiums).  Curiously, HHS proposes to first add and then subtract premium stabilization payments and receipts from premium revenue (thereby complying with the law, sort of) but then to add or subtract them from claims (thereby satisfying “stakeholders,” presumably insurers).  This will have a real world impact on the amount of medical loss ratio rebates paid by insurers, although it will not always favor either the insurer or consumer.

Proposed changes to the MLR rule would also delay payment of rebates further for two months to allow time for the application of the premium stabilization rules, which will definitely disadvantage consumers.  Finally, the rule allows tax-exempt, non-profit insurers to deduct from premiums both state tax payments and community-benefit expenses in lieu of federal taxes up to a 3 percent limit in calculating their medical loss ratios, thus decreasing their obligation to pay rebates.