March 5, 2014 was a banner day for Affordable Care Act implementation.  The Department of Health and Human Services released its final 2015 Notice of Benefit and Payment Parameters rule (fact sheet here), as well as a bulletin extending until October 1, 2016 its transitional policy permitting the renewal of ACA non-compliant individual and small group health insurance policies. The Internal Revenue Service also issued two final rules regarding reporting by insurers of minimum essential coverage and reporting by employers on coverage under employer-sponsored health plans. (Fact sheet here.)

This post will discuss the HHS bulletin and begin consideration of the benefit and payment parameter rule.  Subsequent posts will discuss the remainder of the benefit and payment parameters rule and the IRS rules.

HHS Bulletin On ACA Non-Compliant Policies

On November 14, 2013, the Center for Medicare and Medicaid Services issued a letter to state insurance commissioners informing them that CMS would permit state regulators to allow insurers to renew non-grandfathered health insurance policies in the individual and small group market that did not comply with the 2014 market reform rules for policy years beginning by October 1, 2014.   Specifically, renewed 2013 plans did not need to comply with the guaranteed issue and guaranteed renewability requirements; limitations on health status underwriting and preexisting condition exclusions (for adults); the single risk-pool requirement; the prohibition against discrimination; the essential health benefit and clinical trial coverage requirements; and limitations on cost-sharing. (Group plans are not excluded from the preexisting condition and discrimination provisions.)   Insurance departments in 27 states allowed insurers to renew 2013 policies, while 21 states and the District of Columbia prohibited renewals.

The March 5, 2014 bulletin permits states and insurers to extend this transitional relief for another two years, that is, for policies renewed prior to October 1, 2016.  It also allows states to permit employers with 51 to 100 employees, which are currently considered large employers but will become small employers as of January 1, 2016, to renew their current policies through October 1, 2016.  States that had not earlier decided to implement the transitional policy may still do so for 2013 policies renewing in 2014. States may also opt to implement the transitional policy for fewer than two years, or only in the individual or in the small-group market, or only for large employers that become small employers.

Insurers that extend coverage under this policy must provide their enrollees with a notice attached to the bulletin informing enrollees that the policy does not comply with specific ACA reforms and that enrollees may purchase conforming coverage through or outside of the exchange and may qualify for premium tax credits for coverage through the exchange.  Individuals whose coverage is cancelled because it does not conform to ACA requirements and who cannot find other coverage options that are not more expensive may also be able to get a hardship exemption from the individual responsibility requirement and to purchase catastrophic coverage up until October 1, 2016

It is hard to avoid the impression that the motivation for this policy announcement was primarily political. Indeed, the press release lists specific senators and representatives as instigators of the policy change.  It is likely to affect a relatively small number of individuals, however.  A Rand Report on the 2014 transitional policy estimated that the policy would lead to a decline of about 500,000 enrollees in the ACA compliant plan market, while the Congressional Budget Office estimated that 1.5 million people would renew 2013 policies, leaving about a half million covered by noncompliance policies in 2015.  Turnover is high in the individual market, and the number of persons who will continue 2013 coverage is likely to diminish steadily between now and 2016.

Extension of the transitional policy is likely to skim healthier enrollees out of the exchange market, but this is unlikely to have a major effect on premiums. Rand estimated that it would increase the cost of ACA compliant policies by about 1 percent.  Some of the additional cost will also be borne by the federal government through changes in the risk corridor program discussed below.

Indeed, it is arguable that the most important negative impact of the extension will be political, as it adds credibility to the argument that the Obama administration is arbitrarily rewriting the ACA on the fly for political purposes rather than implementing the law as written.  Evidently the administration has concluded that the political consequences of political cancellations on the eve of the 2014 election are weightier than the political consequences of continuing to delay implementation of the 2014 requirements.

The Benefits And Payment Parameters Rule

The Benefits and Payment Parameters Rule is a lengthy and complicated regulation dealing with a long list of subjects, including the risk adjustment, reinsurance, and risk corridors programs; cost sharing limits; cost-sharing reduction payments; timing for states to decide whether to operate their own exchanges; user fees for Federally facilitated Exchanges (FFEs); composite premiums in the Small Business Health Options (SHOP program); privacy and security of personally identifiable information; the open enrollment period for 2015; the actuarial value calculator; the annual limitation in cost sharing for stand-alone dental plans; meaningful difference for qualified health plans (QHPs) offered through an FFE; patient safety standards for (QHPs); and other SHOP issues.  Most of its provisions are effective for 2015, but the rule also makes some changes that will be effective for 2014.  The final rule adopts most of the provisions of the proposed rule, published on December 2, 2013, but makes a number of changes, mostly technical but a few significant..

The preface to the rule curiously begins with a list of changes that CMS is considering for 2015 that are not addressed by the Rule.  These initiatives include:.

  • delineating procedures for dismissing appeals;
  • defining how to prorate premiums for partial month enrollment;
  • proposing a methodology for determining excessive premium growth;
  • changing standards for assessing civil money penalties against and decertification of QHPS;
  • delineating the distinction between plan modifications and terminations;
  • amending criteria for fixed indemnity coverage;
  • clarifying when foreign group coverage can be recognized as minimum essential coverage;
  • identifying state laws applying to navigators or other assisters or application counselors that are preempted by federal law, prohibiting certified application counselors from receiving compensation from insurers, requiring them to be recertified annually, and authorizing civil money penalties against navigators, non-navigator assisters, and certified application counselors who violate federal requirements;
  • proposing quality reporting requirements for exchanges and QHPs, including plan ratings and satisfaction survey requirements;
  • making further changes in the risk corridor program;
  • changing SHOP enrollment procedures, including perhaps allowing states to delay further implementation of employee choice; and
  • making changes in the medical loss ratio rules to recognize insurer losses due to the technical problems with the exchanges and they delay of ICD-10 implementation.

These changes will presumably be addressed by regulations released later in 2014.

The final rule begins by providing that grandfathered individual coverage and student health plans, unlike other individual coverage, do not have to be issued on a calendar year basis, but can rather cover any 12-month period.

The rule next authorizes “composite premiums” for small groups. Under the ACA, premiums for individuals and small groups must be underwritten on an individual basis, taking into account only age, tobacco use, geographic location, and family size.  Insurers may, however, calculate premiums for the individual members of a small group considering these factors (except for tobacco use), but then offer the small group an average or composite premium, charging the same premium for all members.  If premiums are charged on this basis, the per-member premium must be determined at the beginning of a policy year and cannot be changed over the course of the year as new employees are added or current employees leave.

Tobacco use surcharges must be determined on an individual basis for each employee.  Insurers that offer composite premiums must offer these policies to all employers in a state small-group market and cannot discriminate among employers, although employers may be able to pay premiums on a per-member or composite basis.  Where premiums are offered on a composite basis, two tiers of composite premiums must be offered—one for family members age 21 and older and another for family members below age 21. States can adopt, with HHS approval, other tiered rating approaches.

Much of the rule deals with the premium stabilization programs—risk adjustment, reinsurance, and risk corridors.  States may operate their own reinsurance programs, and, if they operate their own exchange, may run the risk adjustment program.  Apparently Connecticut is the only state that is offering reinsurance and Massachusetts the only state operating a risk adjustment program. States that operate these programs are supposed to publish their standards by March 1 of the year preceding the calendar or benefit year covered by the program, but since the federal rule has once again been delayed beyond March 1, states have until 30 days after the federal rule is published to publish their own standards.

The risk adjustment program moves money from insurers that have lower than average risk enrollees to insurers that have higher than average risk enrollees. The rule establishes a user fee of $.96 per member per year to be charged to individual and small group insurers covered by the risk adjustment program.  The risk adjustment program will use the same methodology in 2015 that it used in 2014, except that ICD-10 codes will be used rather than ICD-9 codes and that a new adjustment will be put in place for premium support Medicaid plans (like the Arkansas arrangement) to recognize higher utilization in those plans because of reduced cost sharing.

Renewed 2013 plans will not participate in the risk adjustment program, which means that if these transitional plans have healthier than average risk enrollees, insurers will not have to pay into the risk adjustment program for them.   If an enrollee changes plans mid-year (because of a special enrollment period), the enrollee will keep the same risk score if he or she enrolls in another plan with the same insurer, but will get a new risk score based on post-enrollment diagnosis if he or she changes insurers.  In determining whether an employer is a small employer for purposes of participation in the risk adjustment program, CMS will use the counting method used for determining employer size under the employer responsibility rules—and thus count full-time equivalents as well as full-time employees—rather than state counting rules in states that count only full-time employees.

The final rule describes in great detail the program for validating risk adjustment scores.  This is a multistep process, involving the selection of a stratified sample of 200 enrollees per insurer consisting of adult, child, and infant enrollees with low, medium and high risk scores and enrollees without high-cost conditions;  an initial validation audit performed by an independent auditor chosen by the insurer to determine whether risk scores are supported by the medical records of these enrollees; a second validation audit performed by an independent auditor chosen by HHS on a subset of the initial sample to validate the first audit; the derivation, based on these audits, of an adjustment score to apply to the initial risk scores provided by the insurer; an opportunity for the insurer to appeal; and, finally, modification of risk adjustment payments in light of audit results.  Actual adjustment of payments will not take place for the first two years to allow insurers to become familiar with the process, so the first payment changes will be made in the spring of 2018 for calendar year 2017.  The validation process is discussed in great technical detail, which will not be described here.

Insurers that do not cooperate with the validation process will be subject to civil money penalties, although here, as elsewhere, CMS proposes to work together with insurers trying in good faith to comply.  Insurers and auditors will be responsible for complying with strict data security standards, since personal medical information is at issue.  HHS will audit insurer compliance with risk adjustment program requirements.

The reinsurance program reinsures insurers in the individual market (on or off the exchange) that have high cost enrollees.  It is funded by a fee assessed against health insurers and third party administrators for self-insured plans.  The fee will be assessed against all major medical insurance, including catastrophic coverage.  Major medical coverage is insurance that covers a wide-range of medical services and meets the 60-percent minimum value test.   It includes short-term, limited duration coverage that meets this description (even though it is otherwise not subject to ACA requirements) as well as student health plans and transitional, renewed 2013 plans.  The rule includes provisions to ensure that when enrollees are covered by multiple plans, only one plan will have to contribute.  Contributions are not required for enrollees who reside in the territories.

For 2015 and 2016, reinsurance contributions will not be collected from self-administered, self-insured plans.  This description applies primarily to Taft-Hartley, employer-union plans.  Since these plans are not insured and do not use third party administrators, they are arguably not covered by the ACA contribution requirement.  A plan is “self-administered” as long as it does not use a third-party administrator for key administrative functions, including claims processing, claims adjudication, and enrollment.  A plan can be self-administered even though it leases a network, uses a third-party administrator for pharmacy benefits or excepted benefits, or uses a third-party administrator for de minimis administrative services.  This exception (which does not apply for 2014) has led to cries of union favoritism, but is a reasonable interpretation of the statue and should have a minimal effect on contributions from other parties.

The reinsurance program requires $10 billion in contributions for 2014, $6 billion for 2015, and $4 billion for 2016, the last year of the program.  In addition, the Treasury will collect $2 billion each in 2014 and 2015 and $1 billion in 2016 essentially to repay the cost of the early retiree reinsurance program that was in effect from 2010 to 2014.  Adding to this $25.4 million in administrative costs will result in a fee of $44 for each enrollee in a plan subject to contribution.  This amount will be paid in two installments, the first of which is due at the beginning of the year following the benefit year and will cover the reinsurance contribution, and the second of which is due at the end of the year following the benefit year and will cover the money due the Treasury.

If the collection of per-enrollee contributions results in a larger amount than that specified in the ACA, the excess will be spent on the reinsurance program. Excess funds will be used to increase the percentage of eligible claims covered by reinsurance, up to, but not exceeding 100 percent.  If there is a deficiency, the amount collected will be divided proportionately between reinsurance, repayment of the Treasury, and administrative costs.

Reinsurance payments are only available to individual health plans, not including student health plans, high-risk pool plans, or plans that do not comply with the 2014 market reforms (such as transitional renewed 2013 plans).  For 2015, reinsurance will attach to claims that exceed $70,000 and will cover 50 percent of the cost of those claims up to $250,000.  The original benefit and payment parameters rule for 2014 set the attachment point at $60,000, covering 80 percent of claims above that amount up to $250,000.

The 2015 rule modifies the 2014 parameters based on a reassessment of qualifying claims, lowering the attachment point to $45,000.  Amounts received by an insurer in cost-sharing reduction payments are excluded when calculating claims that qualify for reinsurance payments to avoid double payment.  HHS is authorized to audit state reinsurance programs, contributing entities, and reinsurance-eligible insurers to ensure compliance with program requirements.

The risk corridor program moves funds from health plans that have lower claims costs relative than they anticipated when they set their premiums to plans that have higher claims costs than anticipated.  Only QHPs may participate in the risk corridor program, but this includes QHPs that are not on the exchange if they are essentially the same as exchange QHPs except for features of the exchange plan required by specific federal or state requirements unique to exchange plan.   Health plans that are not subject to the market reforms, including transitional 2013 renewal plans may not participate.  Because of the single-risk pool requirement, however, insurers that offer both QHP and non-QHP plans, must submit data on all of their non-grandfathered plans that are subject to the ACA market reforms, even though only QHP plans will be subject to contributions and payments.

The risk corridor program operates in tandem with the medical loss ratio program, and data will be collected from plans using the same forms and procedures as are used for the MLR program.  HHS has not yet finalized an enforcement program for overseeing risk corridor participation, but the final rule notes that HHS has civil money penalty authority, and that the False Claims Act may apply as well.

In contrast to the risk adjustment program, where HHS will use its own counting methods to determine whether an employer is small or large, the risk corridor program will use state counting methods, even if they do not consider non-full-time employees.

Recognizing that the transitional 2013 plan renewal policy will result in higher-cost risk pool for QHP insurers than they anticipated when they set their premiums, the final rule modifies risk corridor parameters for 2014 for plans that have allowable costs of at least 80 percent in states that implement the transitional policy by increasing allowances for profits and administrative costs in calculating risk corridor payments.  Contrary to claims that the risk corridor program is a “bailout” however, HHS anticipates that the program will be revenue neutral.  The 2015 HHS budget assumes that $5.45 billion will be collected and paid out by the program.  The modification of the risk corridor program will only apply for 2014, because insurers can adjust their premiums for 2015 to fit their risk pool.  Insurers may exclude transitional relief programs they receive through the risk corridor program in calculating their MLR.

HHS intends to provide insurers that participate in the risk adjustment and reinsurance programs with interim reports based on data uploaded by insurers on a quarterly basis and a final data report after plans submit final data by April 30 of the year following the benefit year.  Insurers must review these reports and inform HHS if they believe the report is inaccurate with 30 days of receiving a quarterly report or 15 days following the final report.

Insurers will get a final notice as to payments or contributions due by June 30 of the year following the benefit year.  Insurers may request reconsideration of this determination, but payments will be assessed or made based on this report, subject to modification if the reconsideration determines that the numbers were wrong.  HHS is not able at this point to provide quarterly statements but still requires insurers to upload data on a quarterly basis to HHS.  While the quarterly statements, when they are available, will provide some information to insurers, they will not have risk adjustment data from other insurers, and thus will not be able to fully predict an insurer’s risk adjustment payments or receipts prior to the June 30 report from HHS.

Insurers that fail to submit data for the risk adjustment program will be subject to civil penalties. They will also be assessed a default risk adjustment charge, which will be equal to the product of the state’s average premium and the 75th percentile plan risk transfer amount times the number of enrollees in the plan.  HHS has stated that it will not assess civil penalties against plans that attempt in good faith to comply with premium stabilization requirements for 2014, but will expect compliance for 2015.