On March 1, 2013, the Department of Health and Human Services released its final Notice of Benefit and Payment Parameters for 2014 rule.  The rule addresses a grab bag of issues:  the risk-adjustment, reinsurance, and risk-corridors premium stabilization programs; advance payments of the premium tax credit; cost-sharing reductions; user fees for Federally-facilitated Exchanges; participation in the Federally-facilitated Small Business Health Option Program; and changes in the medical loss ratio program.  There will presumably be a benefit and payment parameters rule for each future year that the Affordable Care Act remains in place, but this final rule establishes policy not only for 2014 but for the future well beyond 2014.

HHS also released on March 1 an interim final amendment to the benefit and payment parameters final rule, authorizing alternative approaches to the risk-corridor and cost-sharing reduction payment methodologies adopted in the final rule.   These changes had been suggested in comments on the proposed benefit and payment parameters rule and are significant enough that HHS is seeking further comment on them, but they will go into effect along with the final rule.  HHS also released on March 1 a guidance document describing exchange functions and qualified health plan certification requirements.

The final rule versus the proposed rule.  This is the longest (483 pages) and by far the most complex rule yet issued by HHS for implementing the ACA insurance reforms.  Much of the preamble is taken up with a highly technical discussion of the methodologies applied by the risk-adjustment, reinsurance, and cost-sharing reduction programs that will hold little interest for, and indeed may not be comprehensible to, a general audience.  My post on the proposed rule explored these methodologies in some detail.  The methodologies were adopted with only technical amendments, and will not be discussed in as much detail here.

Indeed, although HHS received 420 comments on the proposed rule, most of the changes it made were fairly technical, except for the alternative approaches to cost-sharing reduction payment and risk-corridor calculations set out in the accompanying interim final rule, a change in the way reinsurance charges are handled for risk-corridor and MLR calculations, and a changes in the SHOP exchange, discussed below.

Reinsurance, Risk Corridors, and Risk Adjustment 

As already noted, much of the final rule deals with the three premium stabilization programs created by the ACA. The ACA provides for transitional reinsurance and risk-corridor programs and a permanent risk-adjustment program, all of which begin in 2014 and each of which is intended in its own way to enhance premium stability.  The reinsurance program will reduce the uncertainty insurers face in the individual market by partially offsetting the risk associated with high-cost enrollees.  It is expected to reduce the cost of individual insurance by 10 to 15 percent, partially offsetting the “rate shock” that has been widely discussed in recent days.

The risk-corridors program will protect against uncertainty in rate setting for qualified health plans in the exchange by moderating the extent of issuers’ financial losses and gains. The permanent risk-adjustment program is intended to provide increased payments to health insurance issuers that attract higher-risk populations, such as those with chronic conditions, and reduce the incentives for issuers to avoid higher-risk enrollees, thus backstopping the ACA’s prohibition against health status underwriting and preexisting-condition exclusions.  Under the risk adjustment program, funds are transferred from issuers with lower-risk enrollees to issuers with higher-risk enrollees.

The federal government will administer the risk-corridor program, as well as the risk-adjustment and reinsurance programs in states that elect not to operate those programs themselves.  States that operate their own exchanges can also establish and operate their  own risk-adjustment programs with HHS approval.  So far, only Massachusetts has elected to operate its own-risk adjustment program for 2014.  The preamble of the rule describes the Massachusetts program at tedious length.

States can also operate, or contract with non-profit entities to operate, their own reinsurance programs, although the federal government will collect reinsurance charges for all states.  So far only Connecticut and Maryland have elected to operate a reinsurance program for 2014.

A state that wishes to operate its own risk-adjustment program must ensure that the entity that administers the program has the capacity to operate the program and uses a risk-adjustment methodology certified by HHS.  The rule sets out the requirements that a state risk-adjustment entity must meet to be qualified to operate its own risk adjustment program.  In the future, state-operated risk adjustment programs will have to be certified by HHS, but given the short-time frame for 2014, HHS will instead engage in a consultative process with states that wish to run their own programs.  States must submit the benefit and payment parameters for their own risk-adjustment and reinsurance programs within 30 days of the publication of the final rule, which makes it unlikely many more will step up to the plate.

Risk-adjustment methodology.  The federal risk-adjustment methodology includes five elements.  First, it calculates a risk score for each insured individual in plans subject to risk adjustment based on that individual’s recorded diagnoses, age and gender, metal plan level, geographic rating area, and other variables to calculate a risk score — a relative measure of how expensive that individual is likely to be.  Second, it calculates a plan-average risk score based on the average of the risk scores of all individuals in the plan.

Third, it uses these scores, as well as other plan-specific cost factors, to determine the funds that must be transferred among plans as charges or payments.  Fourth, HHS will use a distributed model to obtain the data to calculate determine these transfers.  This means that HHS will not itself collect or maintain individual data, but rather will do the calculations on the insurers own servers using data in the possession of the plan.  Finally, the rule contains a schedule for risk adjustment operations.  Risk pooling will be done concurrently, that is based on actual reported risk experience, rather than prospectively, based on projected risks.

The federal government will charge a user fee in states where it operates the risk-adjustment program.  For 2014, the fee will be 8 cents per-member per-month for plans subject to the risk adjustment program.  “Risk adjustment covered plans” include health insurance plans that offer coverage in the individual or small-group market, excluding grandfathered plans, excepted benefit plans (like dental, vision, long-term care, or Medicare supplement plans), plans that begin in 2013 and are renewed in 2014, and student health plans.

Catastrophic plans will be risk adjusted in a separate risk pool.  Individual and small-group plans will also be risk pooled separately, except in states that have combined the individual and small group risk pools.  Claims used to calculate risk scores must be made available to HHS by April 30, which will inform plans of their charges or payments by June 30.

Risk scores will be calculated using the hierarchical condition categories (HCC) risk classification system, which in turn is based on ICD-9 codes.  Further information about the risk adjustment models can be found here.  A risk score will predict plan expenditures based on the HCCs, age and sex categories, and, where applicable, disease interactions.  Dollar coefficients will be estimated for these factors.  Risk scores will also be adjusted for metal level and cost-sharing reduction payment eligibility, recognizing that increased actuarial value and reduced cost sharing is likely to result in increased utilization of health services.

Risk-adjustment transfers will be calculated at the geographic rating area level and within a particular risk pool (individual, small group, or catastrophic).  The payment transfer formula is based on the difference between a premium based on a plan-specific risk selection and a premium without risk selection.  The formula starts with the average premium of all individual or small-group plans in the state weighted for each plan’s share of statewide enrollment in the risk pool.  The state average premium will then be adjusted for a plan’s risk score, taking into account the factors identified above, as well as a geographic cost factor, to derive the risk selection-based premium.  The state average premium will also be adjusted to take into account a plan’s metal level, an induced demand factor, geographic cost, and member age to derive a plan-specific premium without risk selection.

The premium without risk selection will then be subtracted from the premium with risk selection to derive the plan-specific transfer amount.  Per-member per-month transfer amounts for each of an issuer’s plans will be totaled to derive the charge or payment due a particular issuer in a particular state.  States may use their own risk-adjustment methodologies, but they must meet requirements included in the rule.

The data supplied by plans to HHS for risk adjustment will be subject to validation.  HHS will first select a sample of enrollees for payment validation.  Insurers will contract with independent auditors to audit the accuracy of the risk data submitted for these enrollees.  HHS will then contract with its own auditors to audit a subsample of this data.  Based on these audits, HHS will extrapolate the error rate for an issuer and make payment adjustments for the next year.  The issuer can appeal the findings of this process.  HHS will not make any payment adjustments for 2014 and 2015 to give issuers and auditors time to adjust to the program.  It may bring actions under the False Claims Act, however, against issuers that knowingly present false information.

How reinsurance will work.  Although states may operate their own reinsurance programs, HHS will collect reinsurance contributions uniformly across the entire country from insured and self-insured plans using a uniform per-member contribution rate and the time schedule.  HHS will also apply the same reinsurance payment parameters in all states.  Reinsurance payments will be distributed to the states as needed, not based on where the contributions were collected.

States may collect additional reinsurance contributions (or charges for administrative costs) and make additional reinsurance payments, but must publish a state notice of benefit and payment parameters if they wish to do so, and must do so within 30 days of the publication of the final rule if they plan to do so for 2014.  There is no formal approval process for state reinsurance programs as there is for state risk-adjustment programs, but programs must meet the requirements set out in the final rule and provide HHS with information quarterly on reinsurance requests.  HHS or a state operating a reinsurance program will also provide insurers with quarterly updates on their eligibility for reinsurance payments.

HHS will collect reinsurance contributions from insurers and from self-insured plans that offer major medical coverage. This does not include excepted benefit plans; prescription-drug-only coverage; expatriate plans; retiree coverage secondary to Medicare; Medicare Advantage or Part C drug plans; Medicaid or CHIP plans; health reimbursement and savings accounts; flexible spending plans; or employee assistance, disease management, or wellness programs.  It does, however, include plans insuring government employees.  HHS will normally collect contributions from third party administrators or administrative-services-only contractors for self-insured plans.  State high-risk pools are not eligible for reinsurance payments.

Under the ACA, HHS must collect $10 billion for 2014, $6 billion for 2015, and $4 billion for 2015 for the reinsurance program, plus $2 billion for 2014 and 2015 and $1 billion for 2015 for the U.S. Treasury (a payback for the $5 billion distributed already through the early retiree reinsurance program).  HHS will also collect $20.3 million for administrative expenses for 2014.  HHS calculates that this will amount to a total of $65 per year for each plan member in an insured or self-insured plan for 2014.  Half of the administrative fee will be provided to states that run their own reinsurance program.

Entities subject to the contribution requirement must inform HHS of their average number of covered lives (using one of the counting methods specified in the rule) as of November 15 of any given year based on membership for the first nine months of the year.  By the later of December 15, or 30 days after the submission of the annual enrollment count, HHS must notify each contributing entity of its contribution amount.  The contributing entity must pay this amount within 30 days of the notice.

Reinsurance payments can be made to non-grandfathered individual market insurance plans that are subject to the ACA 2014 insurance reforms.  Payments cannot be made for policies with policy years that begin in 2013, since they were presumably risk-underwritten.  For 2014, reinsurance will cover 80 percent of the cost of an enrollee’s aggregate claims within a benefit year that exceed an attachment point of $60,000, up to a reinsurance cap of  $250,000.  States can adjust these parameters if they choose to offer more generous payments with their own funds.  Issuers of capitated plans must generate claims for encounters and costs for these claims when submitting reinsurance requests.  Plans that receive reinsurance payments must reduce their premiums accordingly.

Insurers with claims subject to reinsurance must make claims to the state reinsurance entity or HHS and submit data supporting their claims no later than April 30 of the year following the applicable benefit year. HHS will use a distributed claims-data collection process for determining reinsurance claims like that it will use for collecting risk-adjustment data.  States that operate their own programs can use either a distributed data approach or collect privacy-protected data directly. HHS or the state will notify insurers or their total amount of reinsurance payments no later than June 30 of the year following the applicable benefit year.  If reinsurance claims exceed contributions, payments will be reduced pro rata; if contributions exceed claims, excess funds will be held for a future year.

Risk corridors.  The final rule’s treatment of the risk-corridor program is much briefer.  The risk-corridor program requires QHPs whose ratio of allowable costs to their target amount falls below a certain percentage to remit to HHS a contribution from which HHS can compensate QHPs whose ratio of allowable costs to their target amount exceeds a certain percentage.   Allowable costs are claims costs plus allowable quality improvement and technology expenses, reduced for reinsurance, risk-adjustment, or cost-sharing reduction payments received. The target amount for a QHP is earned premiums minus taxes and minus administrative costs and profits (the sum of which cannot exceed 20 percent).

The final rule clarifies that regulatory fees as well as taxes are subtracted from premiums before calculating risk corridor targets.  Although risk corridors are calculated under the final rule at the QHP level, the interim final rule also published on March 1, 2013, permits issuers alternatively to allocate allowable administrative costs pro-rata across their QHP business on the basis of premiums earned, recognizing that issuer-level risk-corridor calculations are more consistent with the single risk pool requirement.

As with medical loss ratios (see below), reinsurance contributions are treated as regulatory fees and allowable community benefit expenses are treated like taxes. In calculating the risk-corridor targets, profits are allowed equal to the greater of 3 percent of after-tax premiums or earned premiums minus the sum of allowable costs and administrative costs (as long as profits plus administrative costs, not including taxes, do not exceed 20 percent).  Significantly, the preamble clarifies that unlike the risk-adjustment or reinsurance programs, the risk-corridor program is not required to be budget neutral.  HHS can either make or lose money on the program.  QHP issuers must submit all risk corridor information by July 31 of the year following the applicable benefit year.

Cost-sharing and premium tax credits.  The final rule contains a number of provisions dealing with cost-sharing reduction payments and premium tax credits.  If an enrollee receiving premium tax credits reports a change of income to an exchange during the course of a year, the exchange must account for any advance premium tax credit payments already made on behalf of the enrollee in that year to minimize, to the extent possible, over- or under-payments at the end of the year.  This would not include making retroactive premium payments.

The exchange must also calculate cost-sharing reduction eligibility based on the individual’s expected annual income.  If different family members are eligible for different levels of cost-sharing reduction payments (for example, because one is an Indian), they can either obtain separate insurance policies or purchase a family policy with the lowest level of cost sharing for which all family members are eligible.  The rule also permits exchanges some flexibility in allocating advance premium tax credits when individuals in a tax household enroll in more than one policy under a QHP, more than one QHP, or a QHP and a stand-alone dental policy.

Advance premium tax credits and cost-sharing reduction payments are not available for catastrophic plans.  Advance premium tax credits only cover the essential health benefits, thus each QHP must provide annually for each metal level health plan an allocation of its expected allowed claims costs to EHB and to other benefits, accompanied by an actuarial memorandum supporting the allocation.  Stand-alone dental plans must also allocate premiums between pediatric dental care, which is included in the EHB, and adult dental care, which is not.  Stand-alone dental plans are not eligible for cost-sharing reduction payments.

The ACA provides for reduced cost sharing for households with incomes below 250 percent of the poverty level enrolled in silver plans and zero cost sharing for Indians with household incomes below 300 percent of the poverty level or for Indians with household incomes at any level for services received through the Indian Health Service or related providers.  The final rule requires QHP issuers to offer variations of their standard plans reflecting these various levels of cost-sharing.  The silver plan variations designed to accommodate reduced cost sharing may not vary more than 1 percentage point from the target reduced actuarial value. A QHP may rely on the eligibility determination of an exchange in assigning an individual to a particular cost-sharing plan variation.   Individuals eligible for reduced cost sharing must receive the reduction at the time cost-sharing is collected.  Reduced cost sharing only applies to in-network services.

The final rule provides that out-of-pocket limits will not be reduced below the statutory maximum (the health savings account high deductible policy maximum, currently about $6400 for an individual and twice that for a family) for households with incomes between 250 and 400 percent of poverty; they may only be reduced by 1/5 for households with incomes between 200 and 250 percent of poverty to avoid excessive increases in other forms of cost-sharing to achieve required actuarial values.  Households with incomes below 200 percent of poverty will see the OOP maximum reduced by 2/3.

QHPs must submit to the exchange three silver-plan variations with actuarial values of 94 percent for households with incomes between 100 and 150 percent of poverty, 87 percent for households with incomes between 150 and 200 percent of poverty, and 73 percent for households with incomes between 200 and 250 percent of poverty.  To ensure that individuals are not subjected to higher cost sharing under a plan variation that is supposed to have a higher actuarial value  QHPs may not switch between copayments and coinsurance for silver plan variations for the same benefit.

If a household’s eligibility for cost-sharing reductions changes in the course of a year, a QHP issuer must ensure that any cost sharing paid under previous plan variations of the same QHP is accounted for in calculating cost sharing under the new plan.  If the enrollee switches to a different QHP, the new QHP is not required to give credit for prior cost sharing.

HHS will provide QHP issuers with monthly advances to cover the extra cost of reduced cost sharing compared to standard cost sharing. Projected costs for reduced cost sharing will take into account increased utilization due to reduced cost sharing.  There will be a reconciliation at the end of the benefit year of advance payments made to a plan to the actual increased cost borne by the plan because of reduced cost sharing.  If the actual amounts paid by a QHP issuer for reduced cost sharing are more than the advance payment amounts, HHS will cover the shortfall; if the issuer was overpaid, it must repay HHS.  HHS can adjust the advance payments during the course of a year if a QHP issuer can show that advance payments are likely to be substantially different than initially projected.

In the interim final rule also released on March 1, HHS also authorized an alternative simplified methodology to use for the reconciliation, which calculates the value of the cost-sharing reductions provided by using a formula based on certain summary cost-sharing parameters for the standard plan, applied to total allowed costs for each policy.  This alternative simplified methodology will be available at least for the initial years of the exchange.

As proposed in the earlier notice of proposed rulemaking, HHS is setting the user fee for the federally-facilitated exchange at 3.5 percent of monthly premium charges.  HHS believes that the fee will not increase the cost of coverage because it will cover costs such as administrative services the issuer would otherwise have to perform on its own.  HHS acknowledges that this fee may not cover the full cost of the exchange, but notes that it is trying to encourage enrollment and align the cost with that of state-based exchanges.  The user fee will be spread across the entire individual or small-group risk pool of a QHP issuer.  Under HHS’ proposed preventive services rule, issuers could reduce the amount they owe for the federally facilitated exchange (FFE) user fee to cover the cost of contraceptive services they provide for enrollees in self-insured plans of religious organizations that object to contraceptive services.

The SHOP program.  Arguably the most significant changes made by the final rule are in the provisions governing the SHOP program.  One of the primary arguments for the SHOP exchange was that it would increase the choices available to employees of small businesses.  As described in an earlier post, HHS also published on March 1 a notice of proposed rulemaking proposing to delay until 2015 the requirement that SHOP exchanges offer employee choice and announcing that the federally-facilitated SHOP exchange would not offer employee choice until that date.  HHS has also decided not to allow employee choice to buy up to a higher metal level than that offered by the employer in the federally facilitated SHOP exchange (FF-SHOP) because of concerns about adverse selection, although state exchanges may permit this.

Each SHOP exchange may determine the method by which it will allow employers to contribute toward premiums to cover their employees.  In the FF-SHOP, an employer may either pay a percentage of the premiums of a reference plan or, if the employer requests it or the state requires it, a premium based on a composite premium charged all employees for a reference plan.  The proposed rule would have allowed employers to offer different contribution percentages for different categories of employees.  The final rule does not permit this, recognizing that it would violate anti-discrimination provisions of the ACA.

The final rule abandons the requirement in the proposed rule that insurers that participate in the individual exchange must also participate in the SHOP exchange.  Insurers that participate in the individual exchange will only be required to participate in the SHOP exchange if they (or a related issuer in an issuer group) already participate in the SHOP exchange or have at least a 20 percent in the small group market.  It is hard to avoid the impression that the administration is giving up on the FF-SHOP for now and concentrating its limited resources on getting the individual FFE underway.

The final rule provides that QHPs in the FFE or FF-SHOP must offer brokers the same compensation that they pay for similar plans outside the exchange.   State exchanges may, and the FFE and FF-SHOP will, only display agent and broker information for agents and brokers registered with the exchange.  The final rule allows SHOP exchanges to set minimum participation rates.  The FF-SHOP will have a default minimum participation rate of 70 percent, but this may be set higher or lower if state law sets the rate or if a higher or lower rate is customary in the state.  Employees will not be counted toward the participation rate if they are covered by another group plan (through a spouse, for example) or a government program like Medicare, Medicaid, or Tricare.

HHS will apply the policies applied under the employer responsibility rule for determining whether an employer is a large or small employer and whether an employee is full-time or not for purposes of determining SHOP exchange eligibility. For 2014 and 2015 only, state exchanges may use their own methods for counting employees or determining if they are full-time.

Medical loss ratios.  The final rule also makes a few changes in the medical loss ratio program.  The final rule requires accounting for risk-adjustment and risk-corridor payments and receipts as adjustments to the numerator (incurred claims) in calculating the MLR, but treats reinsurance payments as subtractions from the denominator.  This is clearly contrary to the language of the statute, which provides that these payment and receipts were to all be accounted for as adjustments to premium (the denominator).  HHS reiterates its position that exchange user fees are regulatory fees that can be deducted from the denominator.

The final rule delays the date for paying MLR rebates from August 1 to September 30, recognizing the added time necessary to determine premium-stability payments and receipts, but requiring consumers to make an interest-free loan to insurers for yet another two months.  And finally, the rule allows tax-exempt issuers to deduct both state premium taxes and community-benefit expenditures for purposes of calculating the MLR, since community-benefit expenses are incurred in lieu of paying federal taxes, which would otherwise be deductible.