Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act, 74864-74934 [2010-29596]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Rules and Regulations]
[Pages 74864-74934]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29596]



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Part III





Department of Health and Human Services





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45 CFR Part 158



Health Insurance Issuers Implementing Medical Loss Ratio (MLR) 
Requirements Under the Patient Protection and Affordable Care Act; 
Interim Final Rule

Federal Register / Vol. 75 , No. 230 / Wednesday, December 1, 2010 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 158

[OCIIO-9998-IFC]
RIN 0950-AA06


Health Insurance Issuers Implementing Medical Loss Ratio (MLR) 
Requirements Under the Patient Protection and Affordable Care Act

AGENCY: Office of Consumer Information and Insurance Oversight, 
Department of Health and Human Services.

ACTION: Interim final rule with request for comments.

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SUMMARY: This document contains the interim final regulation 
implementing medical loss ratio (MLR) requirements for health insurance 
issuers under the Public Health Service Act, as added by the Patient 
Protection and Affordable Care Act (Affordable Care Act).

DATES: Effective date: This interim final regulation is effective 
January 1, 2011.
    Comment date: Comments are due on or before January 31, 2011.
    Applicability dates: This interim final regulation generally 
applies beginning January 1, 2011, to health insurance issuers offering 
group or individual health insurance coverage.

ADDRESSES: Written comments may be submitted to the address specified 
below.
    All comments will be made available to the public. Warning: Do not 
include any personally identifiable information (such as name, address, 
or other contact information) or confidential business information that 
you do not want publicly disclosed. All comments are posted on the 
Internet exactly as received, and can be retrieved by most Internet 
search engines. No deletions, modifications, or redactions will be made 
to the comments received, as they are public records. Comments may be 
submitted anonymously.
    In commenting, please refer to file code OCIIO-9998-IFC. Because of 
staff and resource limitations, we cannot accept comments by facsimile 
(FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address only: Office of Consumer Information and Insurance Oversight, 
Department of Health and Human Services, Attention: OCIIO-9998-IFC, 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address only: Office of Consumer Information and 
Insurance Oversight, Department of Health and Human Services, 
Attention: OCIIO-9998-IFC, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue, SW., Washington, DC 20201.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to the following address: Office of Consumer Information and Insurance 
Oversight, Department of Health and Human Services, Attention: OCIIO-
9998-IFC, 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 OCIIO 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.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.

FOR FURTHER INFORMATION CONTACT: Carol Jimenez, Office of Consumer 
Information and Insurance Oversight, Department of Health and Human 
Services, at (301) 492-4457.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will also be available for public inspection as they 
are received, generally beginning approximately three 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.
    Customer Service Information: Individuals interested in obtaining 
information on health reform can be found https://www.healthcare.gov.

Table of Contents

I. Background
II. Provisions of the Interim Final Rule
    A. Introduction and Overview
    B. Scope, Applicability and Definitions
    1. Scope and Applicability (Sec. Sec.  158.101-158.102)
    2. Definitions (Sec.  158.103)
    C. Subpart A--Disclosure and Reporting
    1. Reporting Requirements (Sec.  158.110)
    2. Aggregate Reporting (Sec.  158.120)
    a. Attribution of State-of-Issue
    b. Attribution to Health Insurance Markets Within States
    c. Associations or Trusts
    d. Expatriate Plans
    e. ``Mini-med'' Plans
    3. Newer Experience (Sec.  158.121)
    4. Premium Revenue (Sec.  158.130)
    5. Reimbursement for Clinical Services Provided to Enrollees 
(Sec.  158.140)
    6. Expenditures on Activities To Improve Quality (Sec. Sec.  
158.150-158.151)
    7. Other Non-Claims Activities (Sec.  158.160)
    8. Federal and State Taxes and Licensing and Regulatory Fees 
(Sec. Sec.  158.161-158.162)
    9. Allocation of Expenses (Sec.  158.170)
    D. Subpart B--Calculating and Providing the Rebate
    1. Applicable MLR and States With Higher MLR (Sec. Sec.  
158.210-158.211)
    2. Calculating an Issuer's MLR (Sec. Sec.  158.220-158.221)
    3. Credibility Adjustment (Sec. Sec.  158.230-158.232)
    4. Rebating Premium if MLR Standard Not Met (Sec.  158.240)
    5. Form of Rebate (Sec.  158.241)
    6. Recipients of Rebates (Sec.  158.242)
    7. De Minimis Rebates (Sec.  158.243)
    8. Unclaimed Rebates (Sec.  158.244)
    9. Notice of Rebates to Enrollees (Sec.  158.250)
    10. Reporting Rebates to the Secretary (Sec.  158.260)
    11. Effect of Rebate Payments on Solvency (Sec.  158.270)
    E. Subpart C--Potential Adjustment to the Medical Loss Ratio for 
a State's Individual Market
    1. Introduction
    2. Subpart C's Approach and Framework
    3. Who May Request Adjustment to the MLR (Sec. Sec.  158.310-
158.311)
    4. Required Information (Sec. Sec.  158.320-158.323)
    5. Assessment Criteria (158.330)
    6. Process (Sec. Sec.  158.340-158.350)
    7. Public Comments
    F. Subparts D-F--HHS Enforcement, Additional Requirements on 
Issuers, and Federal Civil Penalties
III. Response to Comments
IV. Waiver of Proposed Rulemaking
V. Collection of Information Requirements
    A. ICRs Regarding MLR and Rebate Reporting Requirement 
(Sec. Sec.  158.101-158.170)
    B. ICRs Regarding Notice to Enrollees (Sec.  158.250)

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    C. ICRs Regarding Retention of Records (Sec. Sec.  158.501-
158.502)
    D. ICRs Regarding State Request for MLR Adjustment (Sec. Sec.  
158.301-158.350)
VI. Regulatory Impact Analysis
    A. Summary
    B. Executive Order 12866
    1. Need for Regulatory Action
    2. Summary of Impacts
    3. Qualitative Discussion of Anticipated Benefits, Costs, and 
Transfers
    a. Benefits
    b. Costs
    c. Transfers
    4. Overview of Data Sources, Methods, and Limitations
    5. Estimated Number of Affected Entities Subject to the MLR 
Provisions
    6. Estimated Transfers Related to MLR Rebate Payments
    a. Data Limitations and Modeling Assumptions
    b. Methods for Estimating MLR Rebates
    c. Estimated Number of Issuers and Individuals Affected by the 
MLR Rebate Requirements
    d. Impact of Adjustments on MLRs
    e. Estimated Range of MLR Rebates
    f. Potential Impact of Destabilization Adjustment Requests on 
MLR Rebates
    7. Estimated Costs
    a. Methodology and Assumptions for Estimating Administrative 
Costs
    b. Estimated Costs Related to MLR Reporting
    c. Estimated Costs Related to MLR Record Retention
    d. Estimated Costs Related to MLR Rebate Notifications and 
Payments
    C. Regulatory Alternatives
    1. Credibility Adjustment
    2. Federal Taxes
    3. Activities That Improve Quality
    4. Level of Aggregation
    D. Regulatory Flexibility Act
    E. Unfunded Mandates Reform Act
    F. Federalism
    G. Congressional Review Act

I. Background

    The Patient Protection and Affordable Care Act (Pub. L. 111-148, 
was enacted on March 23, 2010); the Health Care and Education 
Reconciliation Act (Pub. L. 111-152, was enacted on March 30, 2010). In 
this preamble we refer to the two statutes collectively as the 
Affordable Care Act. The Affordable Care Act reorganizes, amends, and 
adds to the provisions of Part A of title XXVII of the Public Health 
Service Act (PHS Act) relating to group health plans and health 
insurance issuers in the group and individual markets.
    The Department of Health and Human Services (HHS, or the 
Department) is issuing regulations in several phases in order to 
implement revisions to the PHS Act made by the Affordable Care Act. All 
of the previous regulations were issued jointly with the Departments of 
Labor and the Treasury. A request for information relating to the 
medical loss ratio (MLR) provisions of PHS Act section 2718 was 
published in the Federal Register on April 14, 2010 (75 FR 19297) 
(notice, or request for information). Additionally, a series of interim 
final regulations were published earlier this year implementing PHS Act 
provisions added by the Affordable Care Act. Specifically, interim 
final rules were published implementing (1) section 2714 (requiring 
dependent coverage of children to age 26) (75 FR 27122 (May 13, 2010)); 
(2) section 1251 of the Affordable Care Act (relating to status as a 
grandfathered health plan) (75 FR 34538 (June 17, 2010)); (3) sections 
2704 (prohibiting preexisting condition exclusions), 2711 (regarding 
lifetime and annual dollar limits on benefits), 2712 (regarding 
restrictions on rescissions), and 2719A (regarding patient protections) 
(75 FR 37188 (June 28, 2010)); (4) section 2713 (regarding preventive 
health services) (75 FR 41726 (July 19, 2010)); and (5) section 2719 
(regarding internal claims and appeals and external review processes) 
(75 FR 43330 (July 23, 2010)). Most recently, HHS, Department of Labor, 
and Department of the Treasury published an amendment to the interim 
final regulations relating to status as a grandfathered health plan 
(regarding change in health insurance issuers) in the Federal Register 
on November 17, 2010 (75 FR 70114). The Departments have also published 
sub-regulatory guidance regarding various issues related to the 
implementation of the Affordable Care Act, available at https://www.dol.gov/ebsa and https://www.hhs.gov/ociio.
    This interim final regulation adopts and certifies in full all of 
the recommendations in the model regulation of the National Association 
of Insurance Commissioners (NAIC) regarding MLRs. It is being published 
to implement section 2718(a) through (c) of the PHS Act, relating to 
bringing down the cost of health care coverage through a new MLR 
standard. Subpart A implements the requirements for reporting the data 
to be considered in determining that ratio. Subpart B addresses the 
requirements for health insurance issuers (issuers) in the group or 
individual market, including grandfathered health plans, to provide an 
annual rebate to enrollees, if the issuer's MLR fails to meet minimum 
requirements: Generally, 85 percent in the large group market and 80 
percent in the small group or individual market. In Subpart C, this 
interim final regulation provides a process and criteria for the 
Secretary of Health and Human Services (the Secretary) to determine 
whether application of the 80 percent MLR in the individual market in a 
State may destabilize that individual market. Finally, enforcement of 
the reporting and rebate requirements of section 2718(a) and (b) are 
addressed in Subparts D-F, as specifically authorized in section 
2718(b)(3). This interim final regulation is generally applicable for 
plan years beginning on or after January 1, 2011. Self-insured plans 
are not a health insurance issuer, as defined by section 2791(b)(2) of 
the PHS Act, and thus are not subject to this interim final regulation.

II. Provisions of the Interim Final Rule

A. Introduction and Overview

    Section 2718 of the PHS Act includes two provisions designed to 
achieve the objective in the section title: ``Bringing down the cost of 
health care coverage.'' The first is the establishment of greater 
transparency and accountability around the expenditures made by health 
insurance issuers. The law requires that issuers publicly report on 
major categories of spending of policyholder premium dollars, such as 
clinical services provided to enrollees and activities that will 
improve health care quality. The second is the establishment of MLR 
standards for issuers, which are intended to help ensure policyholders 
receive value for their premium dollars. Issuers will provide rebates 
to enrollees when their spending for the benefit of policyholders on 
reimbursement for clinical services and quality improving activities, 
in relation to the premiums charged, is less than the MLR standards 
established pursuant to the statute. The rebate provisions of section 
2718 are designed not just to provide value to policyholders, but also 
to create incentives for issuers to become more efficient in their 
operations. Section 2718 also contains provisions which allow for 
modifications to the standards under certain circumstances, which are 
described in this regulation. To inform decisions about definitions and 
methodologies for calculating MLRs, the Affordable Care Act directed 
the NAIC to make recommendations to the Secretary, subject to 
certification by the Secretary. As described below, this interim final 
regulation adopts to these recommendations.
    As to the reporting provisions, section 2718(a) requires health 
insurance issuers to ``submit to the Secretary a report concerning the 
ratio of the incurred loss (or incurred claims) plus the loss 
adjustment expense (or change in contract reserves) to earned 
premiums.'' The statute, as implemented by this interim final 
regulation, requires health insurance issuers to submit data

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to the Secretary that will allow enrollees of health plans, consumers, 
regulators, and others to take into consideration MLRs as a measure of 
health insurance performance as described in section 2718 of the PHS 
Act. More specifically, this interim final regulation is intended to 
provide consumers with information needed to better understand how much 
of the premium paid to the issuer is used to reimburse providers for 
covered services, to improve health care quality, and to pay for the 
``non-claims,'' or administrative expenses, incurred by the issuer. The 
caption of subsection (a) reflects this purpose, which is to provide 
the Secretary and other parties with a ``clear accounting for costs.''
    As quoted above, the statute requires issuers to submit a report 
that ``concerns'' the ratio of the ``incurred loss'' to ``earned 
premium.'' The statute does not simply require the issuer to report the 
numeric ratio of the incurred loss to earned premium. In addition, 
subsection (a)(3) requires issuers to provide an explanation of the 
``nature'' of ``non-claims costs.'' This interim final regulation 
accordingly describes the type of information that is to be included in 
the report to the Secretary and made available to consumers, in 
addition to the numerical ratio. To increase transparency and avoid 
confusion, this interim final regulation provides that the data to be 
reported according to section 2718(a) of the PHS Act will include all 
of the elements of revenue and expenditures that will be needed to 
calculate the amount of rebates under subsection 2718(b).
    For this information to be meaningful to consumers, the report 
provided to the Secretary and made available to the public must include 
the amount of premium revenue received as well as the amount expended 
on each of the types of activity identified in subparagraphs (1), (2), 
and (3) of section 2718(a) of the PHS Act:
    (1) Reimbursement for clinical services provided to enrollees under 
the health insurance plan (subparagraph (1));
    (2) Activities that improve health care quality for enrollees 
(subparagraph (2));
    (3) All other ``non-claims'' costs (subparagraph (3)); and
    (4) Federal and State taxes and licensing or regulatory fees 
(subparagraph (3)).
    In addition, the rebate requirements established by section 2718(b) 
allow for a State to provide for higher ratios than those required by 
section 2718(b)(1)(A)(i) and (ii) of the PHS Act. In order to allow a 
State to do so, the reporting required of health insurance issuers 
under subsection (a) must be done on a State level. Section 2718(b) 
also requires a separate calculation of the MLR for the large group 
market, the small group market, and the individual market. 
Consequently, the data required under subsection (a) must be reported 
for the large group market, the small group market, and the individual 
market within each State.
    NAIC model regulation and recommendations. Section 2718(c) of the 
PHS Act directs the NAIC, subject to certification by the Secretary, to 
establish:
    (1) Uniform definitions of the activities reported under section 
2718(a);
    (2) standardized methodologies for calculating measures of the 
activities reported under section 2718(a); and
    (3) definitions of which activities and in what regard such 
activities constitute activities that improve health care quality.
    Section 2718(c) also directs that the standardized methodologies 
for calculating measures of the activities reported under section 
2718(a) ``shall be designed to take into account the special 
circumstances of smaller plans, different types of plans, and newer 
plans.''
    The NAIC provided its recommendations to the Secretary on October 
27, 2010 regarding the above three areas, and made additional 
recommendations regarding other aspects of section 2718, in the form of 
a model regulation entitled Regulation for Uniform Definitions and 
Standardized Methodologies for Calculation of the Medical Loss Ratio 
for Plan Years 2011, 2012 and 2013 per Section 2718(b) of the Public 
Health Service Act (hereinafter ``NAIC model regulation'') (https://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf). The 
NAIC model regulation is discussed in more detail in connection with 
the specific provisions of this interim final regulation. The NAIC, in 
discharging its statutory obligations, conducted a thorough and 
transparent process in which the views of regulators and stakeholders 
were discussed, analyzed, addressed and documented in numerous open 
forums held by staff from State insurance departments, by NAIC staff, 
and by the commissioners, directors, and superintendents of insurance 
from the States. This interim final regulation certifies and adopts the 
NAIC's model regulation in full.
    The NAIC model regulation includes definitions to be used for 
purposes of reporting the types of activities mandated by section 
2718(a), and standardized methodologies for calculating measures of 
such activities including those that improve health care quality. This 
interim final regulation certifies and adopts these definitions in the 
NAIC model regulation. Consistent with the mandate of section 2718(b), 
the NAIC and this interim final regulation require that health 
insurance issuers aggregate data at the State level by the large group 
market, small group market, and individual market, and define these 
markets. The reporting requirements, which follow NAIC's 
recommendations, are discussed in connection with Subpart A.
    The NAIC model regulation addresses in several different ways, as 
does this interim final regulation, the statutory requirement that the 
methodologies used to calculate the measures of the activities reported 
``shall be designed to take into account the special circumstances of 
smaller plans, different types of plans, and newer plans.'' The NAIC 
recommendations address the special circumstance of newer plans and 
smaller plans. They address newer plans by adjusting when newer plans' 
experience is to be reported, which is addressed in Subpart A. The 
special circumstance of smaller plans, which do not have sufficient 
experience to be statistically valid for purposes of the rebate 
provisions, are addressed by the NAIC through credibility adjustments 
to the calculation of the MLR. Because credibility adjustments are 
necessary to calculate the rebates under section 2718(b), they are 
addressed in Subpart B of this interim final regulation. The NAIC model 
regulation does not address the special circumstances of different 
types of plans such as so-called mini-med plans or expatriate plans, 
although it does address expatriate plans in a letter to the Secretary. 
HHS addresses both mini-med plans and expatriate plans in this interim 
final regulation, and discusses them in connection with Subpart A.
    The NAIC model regulation details the MLR rebate calculation for 
each of the next three MLR reporting years and notes the incurred 
claims and expenses related to improving health care quality that may 
be included. HHS has adopted these provisions in Subpart B.
    As noted above, the statute directs the NAIC, subject to 
certification by the Secretary, to establish uniform definitions and 
methodologies for calculating measures of activities that are used to 
calculate an issuer's MLR. HHS has reviewed these recommended 
definitions and methodologies and has decided to certify and adopt the 
NAIC recommendations in its October 27 model regulation. The NAIC held 
public, weekly meetings for several months during which interested 
parties

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were encouraged to provide both written and oral comments, and the 
details surrounding the reporting requirements were thoroughly 
analyzed. In making the determination to certify the NAIC's 
recommendations, HHS also considered the NAIC's Issue Resolution 
Documents, which were produced as a result of the NAIC's process and 
which contain the NAIC's position regarding numerous related issues. In 
addition, HHS considered the public comments received by the NAIC as 
well as comments submitted to HHS in response to its request for 
information published on April 14, 2010 in the Federal Register. HHS 
also considered the letters submitted by the NAIC to the Secretary with 
respect to MLR issues, which are also public records.
    Organization of this regulation. The basis, scope, applicability, 
and definitions for this interim final regulation are set forth in 
Sec. Sec.  158.101 through 158.103. The structure of Subpart A of this 
interim final regulation follows the organization of section 2718(a). 
The obligation to report is established in Sec.  158.110. The way in 
which issuers are to aggregate data in the required reports is 
explained in Sec.  158.120. The special circumstances of mini-med plans 
and expatriate plans are also included in Sec.  158.120. Newer 
experience is addressed in Sec.  158.121. Section 158.130 addresses 
provisions that relate to premium revenue. Section 158.140 clarifies 
what may be reported as reimbursement for clinical services provided to 
enrollees, also known as incurred claims. Sections 158.150 through 
158.151 explain the criteria for determining whether expenditures are 
for activities that improve health care quality, allocation of such 
expenses, and treatment of health information technology (HIT) expenses 
required to accomplish such activities. Section 158.160 clarifies 
reporting of non-claims costs. Sections 158.161 and 158.162 address the 
Federal and State taxes and licensing or regulatory fees that may be 
excluded from non-claims costs pursuant to PHS Act section 2718(a)(3). 
Section 158.170 addresses allocation of expenses among categories 
reported as well as an issuer's lines of business.
    Similarly, the structure of Subpart B of this interim final 
regulation follows the organization of section 2718(b). The applicable 
MLR standards for the large group, small group and individual markets 
are addressed in Sec.  158.210. States are permitted to establish a 
higher MLR standard than provided by the Affordable Care Act, and if a 
State has done so, the State's standard applies, as stated in Sec.  
158.211. Section 158.220 explains which MLR reporting year's data is to 
be used to calculate an issuer's MLR, and Sec.  158.221 directs which 
data elements should be in the ratio's numerator and which should be in 
the denominator. Credibility adjustments are delineated in Sec.  
158.230, and the details as to how to calculate them are addressed in 
Sec.  158.231 and Sec.  158.232. Sections 158.240 through 158.242 
provide that enrollees must receive a rebate if the applicable MLR 
standard is not met, and establish who receives the rebate in certain 
circumstances, and the manner in which the rebate must be made. The de 
minimis amount below which a rebate need not be provided and how to 
handle de minimis rebates are addressed in Sec.  158.243. Section 
158.250 establishes a requirement for issuers to provide rebate 
recipients with an explanatory notice, while Sec.  158.260 establishes 
a requirement for issuers to report to the Secretary data regarding 
rebate payments.
    Subpart C of this interim final regulation addresses the 
Secretary's discretion in section 2718(b)(A)(ii) to adjust the MLR 
percentage for the individual market in a State if the Secretary 
determines that application of an 80 percent MLR standard may 
destabilize the individual market in such State. This interim final 
regulation provides that such determinations will be made pursuant to a 
State request and based on standards that include recommendations made 
to HHS in a letter from the NAIC on October 13, 2010.
    Subparts D, E and F of this interim final regulation implement 
section 2718(b)(3), Enforcement, which directs the Secretary to 
promulgate regulations for enforcing section 2718, and allows for 
providing appropriate penalties as part of the enforcement scheme. 
Subpart D addresses the enforcement scheme. Subpart E sets forth the 
requirements for maintaining records and information. Subpart F, 
Federal Civil Penalties, details the basis for imposing civil 
penalties, factors that HHS will consider in assessing civil penalties, 
the amount of the penalties, and the process for assessing them.

B. Scope, Applicability and Definitions

1. Scope and Applicability (Sec. Sec.  158.101 Through 158.102)
    Section 158.101 sets forth the topics and issues covered in Part 
158 of this interim final regulation.
    Section 158.102 provides that Part 158 applies to health insurance 
issuers offering group or individual health insurance coverage. Section 
2718(a) of the PHS Act expressly provides that this includes 
grandfathered health plans. Grandfathered health plans are defined in 
26 CFR 54.9815-1251T, 29 CFR Sec. Sec.  2590.715 through 1251, and 45 
CFR 147.140, which implements the provisions in the Affordable Care Act 
regarding status as a grandfathered health plan (see Interim Final 
Rules for Group Health Plans and Health Insurance Coverage Relating to 
Status as a Grandfathered Health Plan Under the Affordable Care Act, 75 
FR 34538 (June 17, 2010), as amended, 75 FR 70114 (November 17, 2010)).
    Although Section 2718(a) of the PHS Act does not exempt specific 
categories of plans from its requirements, subparagraph (c) requires 
that the reporting requirements and methodologies for calculating 
measures of the activities reported ``be designed to take into account 
the special circumstances of smaller plans, different types of plans, 
and newer plans.'' Smaller plans, different types of plans, and newer 
plans are subject to this interim final rule, and their special 
circumstances are addressed through the reporting requirements and 
calculation of the MLR provisions in Subparts A and B.
2. Definitions (Sec.  158.103)
    Section 2718(c) of the PHS Act directs the NAIC, subject to 
certification by the Secretary, to ``establish uniform definitions of 
the activities reported under subsection (a) and standardized 
methodologies for calculating measures of such activities, including 
definitions of which activities, and in what regard such activities, 
constitute activities described in section (a)(2).''
    The NAIC model regulation includes definitions of the activities 
reportable under section 2718(a) of the PHS Act and this interim final 
regulation adopts those definitions. Many of the terms defined in the 
NAIC model regulation refer to specific lines on NAIC financial 
reporting forms that are broader than the reporting required for the 
PHS Act MLR provisions.
    Any defined term that is used in only one section of this Subpart 
is defined in that section and is not also contained in the 
``Definitions'' section of the regulation. Such terms include 
``aggregation,'' ``incurred claims,'' and ``quality improving 
activities.'' Thus, these terms are discussed in the preamble section 
regarding that topic, rather than here. For example, ``aggregation'' is 
addressed in Sec.  158.120, ``incurred claims'' is defined in Sec.  
158.140, and ``quality improving activities'' is defined in Sec.  
158.150. Each of these terms is discussed in the section of the 
preamble regarding the regulation pertaining to it.

[[Page 74868]]

    Definitions that are used in the regulation as commonly used in the 
health care industry are not of particular note and therefore are not 
discussed here. We do discuss several definitions that are unique to 
this regulation or that may be of particular interest to enrollees, 
health plans, consumers, regulators and others. The definitions in 
Sec.  158.103 apply to all of Part 158. Also, in the public comments 
regarding uniform definitions for activities reported on under section 
2718(a) of the PHS Act, the only definition we received any significant 
amount of comments on is ``plan year.'' Those comments are discussed 
below with regard to MLR reporting year. Finally, we note that the 
interim final regulation uses the term ``market'' as it is used in the 
statute, to differentiate the small group, large group, and individual 
market, even if in some contexts these are also referred to as ``market 
segments.''
    ``MLR reporting year.'' Section 2718(a) requires each health 
insurance issuer to submit a report to the Secretary ``with respect to 
each plan year.'' The NAIC has recommended, and HHS concurs, that for 
purposes of MLR reporting and calculation, the term ``plan year'' in 
section 2718 should be interpreted to refer to the calendar year for 
that plan, and not necessarily the plan year that applies for other 
purposes. In adopting the NAIC's definition, HHS uses the term ``MLR 
reporting year.'' Accordingly, this regulation interprets ``plan 
year,'' as used in section 2718(a), as referring to the ``MLR reporting 
year,'' and defines the MLR reporting year as the calendar year. We 
recognize that this definition is different than the definition of the 
term ``plan year'' currently in the regulations implementing the PHS 
Act. This current regulatory definition of ``plan year'' would continue 
to apply for all purposes other than the period to be used for MLR 
reporting and rebate calculation. Specifically, for purposes other than 
the period for MLR reporting and rebate calculation, the term plan year 
is defined as ``the year that is designated as the plan year in the 
plan document of a group health plan,'' although the plan year may 
under certain conditions be the deductible year, the policy year, the 
employer's tax year, or the calendar year. We also note that, in the 
case of individual health insurance coverage, a similar term--``policy 
year''--is defined. Under these definitions, the ``plan year'' or 
``policy year'' is specific to the group or individual policy, and can 
be determined by the issuer. The NAIC recognized that requiring 
reporting of MLR data for each plan year under this generally 
applicable definition would be problematic. Meaningful reporting of the 
data required by section 2718 of the PHS Act requires aggregation of an 
issuer's experience across health insurance policies and policy forms 
in each State's large group, small group, and individual markets.
    As stated above, the NAIC recommends and requires calendar-year 
reporting and we adopt this recommendation and require reporting on a 
calendar-year basis. Issuers will report the premium earned, claims, 
quality improvement expenses and other non-claims costs incurred under 
health insurance that is in force during the calendar year. Calendar 
year reporting will increase the reliability of the experience data 
that will be reported and that will be used as the basis for rebate 
calculations. It will reduce the reporting burden on issuers, as they 
will be required to prepare and file a single loss ratio report and to 
calculate and pay rebates only once each calendar year. All enrollees 
under any of the health insurance coverage whose experience is 
reflected in the report to the Secretary will be eligible for rebates 
on the premiums paid during that calendar year. To avoid confusion with 
other uses of the term ``plan year,'' and to make for a clearer 
presentation and discussion of the MLR reporting requirements, we have 
adopted the term ``MLR reporting year'' to refer to the ``plan year'' 
referenced in section 2718 for use in the regulation.
    The Secretary invited the public to comment on uniform definitions 
for activities to be reported to the Secretary pursuant to section 
2718(a). The only comments received regarding the terms defined in 
Sec.  158.103 were with respect to ``plan year.''
    Since section 2718 of the PHS Act uses the term ``plan year'' 
without specifying whether it means a plan-specific year or a generally 
applicable reporting period, several commenters requested that we 
simply clarify its meaning. As explained above, we have done so. A 
minority of commenters preferred reporting to correspond to the 
effective dates of each health plan, arguing that non-calendar year 
plans may have difficulty gathering data on a calendar year basis as 
health plans are issued at various times throughout the calendar year. 
However, the calendar year reporting method used in this regulation was 
supported by several State regulators, health insurance issuers and 
others because it allows issuers to combine experiences across all 
policies and will therefore produce more uniform and reliable premium, 
claims and cost data. They also supported such a calendar-year based 
reporting period because it is consistent with current industry 
financial reporting practices, is simpler for consumers to comprehend, 
and allows States to get the data at one time.
    ``Enrollee.'' Section 158.103 defines the term ``enrollee'' as ``an 
individual who is enrolled, within the meaning of 45 CFR 144.103, in 
group health insurance coverage, or an individual who is covered by 
individual insurance coverage, at any time during an MLR reporting 
year.'' The NAIC does not define the term ``enrollee.'' However, we 
believe it is important to clarify that, for reporting purposes, 
``enrollee'' refers to anyone covered by a group plan, including 
dependents of the subscriber or employee, as well as anyone covered by 
an individual policy, despite the fact that this term is not ordinarily 
used in the individual market.
    ``Small group market'' and ``Large group market.'' The reporting 
regulations require in general that issuers report data for the large 
group market, small group market, and individual market, as that 
separation of data will be required in order to calculate the ratios 
and rebates provided for in PHS Act section 2718(b). There is currently 
more than one option for how to distinguish the small group market and 
the large group market. The small and large group markets, 
respectively, refer to coverage sold to a ``small employer'' or a 
``large employer.'' The determination of whether an employer is large 
or small depends on how many employees it has at particular times. 
Prior to the Affordable Care Act, the PHS Act defined a small group in 
terms of 2-50 employees, and a large group in terms of 51 or more 
employees, while a group with only one employee was considered to be in 
the individual market. However, the States were permitted to regulate 
very small groups (``groups of one'') in the small group market rather 
than the individual market. While most States used the statutory 
definition, several States have chosen to regulate these very small 
groups in the small group market.
    Section 1304(b) of the Affordable Care Act amended the definitions 
of large and small employer in the PHS Act, defining a small employer 
as 1-100 employees and a large employer as 101 or more employees. 
However, section 1304(b)(3) of the Affordable Care Act also allows 
States to continue to define an employer with up to 50 employees as a 
``small employer'' until 2016.
    This interim final regulation provides that for purposes of section 
2718 of the PHS Act, consistent with the provisions

[[Page 74869]]

in the Affordable Care Act, until 2016 a State may continue to provide 
a definition of small group as having a maximum of 50 members, and that 
for States that do so, that definition shall apply to the MLR reporting 
and rebate requirements set forth in section 2718. This regulation does 
not address the definition of the term ``small employer'' as used in 
ERISA or the Internal Revenue Code, or how the definition in these 
statutes interact with the definition in the PHS Act for purposes other 
than the MLR provisions in section 2718. We anticipate that these 
provisions will be addressed in future guidance.

C. Subpart A--Disclosure and Reporting

1. Reporting Requirements (Sec.  158.110)
    Section 2718(a) of the statute requires issuers to submit a report 
to the Secretary for each plan year concerning information related to 
earned premiums and expenditures in various categories, including 
reimbursement for clinical services provided to enrollees, activities 
that improve health care quality, and all other non-claims costs. In 
Sec.  158.110 of this interim final regulation, HHS requires that the 
report be submitted to the Secretary by June 1 of the year following 
the end of an MLR reporting year. This allows issuers to include in the 
report claims for services provided during the MLR reporting year that 
are processed and paid in the three months following the end of the MLR 
reporting year, as provided in Sec.  158.140(a)(1), and gives issuers 
another two months to compile and submit the required data. As 
discussed in sections 4. and 5. below, mini-med plans and expatriate 
plans wishing to receive the ``special circumstances'' adjustment 
discussed in those sections would be required under Sec.  158.110(b)(1) 
to submit data on an accelerated schedule.
    The precise form and content of the data that issuers must report 
to the Secretary will be announced in a subsequent Federal Register 
notice. It is anticipated that the data to be submitted will be closely 
coordinated with the data included on the Supplemental MLR Exhibit that 
is filed by issuers with State departments of insurance as part of 
their Annual Statement.
    A common practice in insurance is the sale or transfer of blocks of 
policies between issuers. This practice creates two issues for the 
reporting requirements under section 2718 of the PHS Act. Consistent 
with the NAIC's recommendation, Sec.  158.110(c) requires an issuer 
that has ceded all of the risk associated with a block of policies to 
another issuer to exclude any experience under those policies from its 
report. As specified in Sec.  158.110(c), the issuer acquiring the 
policies must report all of the claims, premium and expenses associated 
with the acquired policies, including claims and costs incurred and 
premiums earned during the MLR reporting year by the ceding issuer 
prior to the effective date of the agreement to transfer responsibility 
for the policies. The ceding issuer must not include experience under 
these policies in its report to the Secretary. A second practice in 
insurance with implications for the reporting requirements under 
section 2718 of the PHS Act is the use of so-called ``assumption 
reinsurance'' to transfer a block of business or group of insurance 
policies from one issuer to another.
2. Aggregate Reporting (Sec.  158.120)
    Section 158.120 of this interim final regulation requires issuers 
to report premium, claims and other expenses for all group and 
individual health insurance coverage (as defined above) on an aggregate 
basis by State and health insurance market. This follows the approach 
recommended by the NAIC. That is, a health insurance issuer will 
submit, for each State in which it writes coverage, data on the 
aggregate premiums, claims experience, quality-improvement 
expenditures, and non-claims costs it incurs in connection with the 
policies it issues in the large group, small group, and individual 
markets. HHS believes that reporting by State is clearly intended in 
section 2718 of the PHS Act, which allows a State to set a higher MLR 
standard than the 80 or 85 percent required by the statute. Reporting 
by health insurance market--i.e., by large group, small group, and 
individual markets--is also required by section 2718 of the PHS Act, 
which requires that MLR standards be met for each such market. The 
experience for group coverage issued by a single issuer that covers 
employees in multiple States must be attributed to the State that 
regulates the insurance contract between the employer and the issuer, 
as stated in Sec.  158.120(b) of this interim final regulation. Section 
158.120(d) also (1) specifies how to attribute experience related to 
policies sold through associations and trusts, (2) establishes special 
rules that should be followed in reporting experience under group 
health insurance coverage offered by multiple affiliated issuers in 
connection with a single group health plan that gives participants a 
choice of coverage options, and (3) provides for separate reporting in 
2011 for mini-med plans that have a total annual limit of $250,000 or 
less and for expatriate plans.
    The aggregation rules adopted in the regulation are designed to 
accomplish several objectives. First, the data that are reported and 
subsequently used to calculate MLRs and rebates should be based on 
sufficient experience to provide a reliable estimate of the issuer's 
administrative performance and pricing strategy. To the extent 
possible, the data used to calculate the MLRs and rebates should not 
simply represent unpredictable fluctuations in use of services by those 
covered by the issuer. Second, the reported data should reflect the 
responsibility of State insurance departments to (1) license issuers to 
sell insurance within a State (and, where applicable, to approve the 
products that can be offered in the State by the issuer), and (2) 
exercise oversight over the premium amounts that are charged for 
coverage. Third, HHS sought to minimize the burden associated with 
reporting MLR data, including the quality-improvement expense and non-
claims costs that would be reported in connection with each 
``aggregation.''
    In developing the regulation, a rule was considered that would 
disaggregate products by type of coverage--for example, HMO, PPO, and 
high-deductible coverage--even if offered by the same licensed issuer. 
The purpose of such a disaggregation would be to have the reported MLRs 
and rebates reflect experience under more uniform product designs, and 
to reduce possible inequities in the treatment of different types of 
plans. However, disaggregation would increase the number of reporting 
aggregations since one licensed issuer could have to report multiple 
aggregations, thus reducing the reliability of reported experience and 
rebates. HHS agrees with the NAIC and has decided against this type of 
disaggregation. In response to the Request for Comments, commenters 
generally supported aggregation by State and, within State, by the 
three market segments identified in the statute: The large group 
market, the small group market, and the individual market. Consumer 
advocacy groups generally noted that aggregation would tend to mask 
variations in MLRs across products. However, other commenters noted 
that aggregation across policies is needed to calculate reliable MLRs 
and to reflect the pooling of risk across policies or policy forms. 
After considering the arguments presented by the commenters, as well as 
public comments submitted to the NAIC, HHS decided to follow the 
recommendations submitted to the Secretary by the NAIC

[[Page 74870]]

and aggregate at the market level within each State, for reasons 
described below.
a. Attribution to State-of-Issue
    The regulation requires issuers to report experience based on the 
State-of-issue for each policy that it writes. This requirement is 
intended to result in a report that describes experience under policies 
whose benefits and premiums either are regulated, or could be 
regulated, by a State, since it is at the State level that insurance 
regulation occurs. The regulation generally defines the State-of-issue 
based on the ``situs'' of the insurance contract between the issuer and 
the policyholder. HHS defines ``situs'' as the State in which the 
contract is issued or delivered as stated in the contract. Consistent 
with NAIC guidance, HHS interprets this as the State that has primary 
jurisdiction over, or governs, the policy. Special rules that apply to 
determining the ``situs'' of a policy marketed to individuals and 
employers through associations or trusts are discussed below.
    The NAIC concluded, and the Department agrees with its conclusion, 
that the State is the appropriate level of geographic aggregation. 
Regulation of insurance has been and continues to be primarily the 
responsibility of States. Benefits offered, premiums, and marketing 
activities are all regulated under State law. It is the States that 
review and approve rates, and oversee solvency, and rebates are 
essentially a retrospective adjustment or correction to premiums. In 
addition, the statute specifically provides an opportunity for 
individual States to adopt loss ratio standards that are higher than 
those required by section 2718(b). It also allows for State-by-State 
adjustments to the medical loss ratio standard when justified by 
potential destabilization in the individual market. Applying State-
level and State-specific MLR standards would be difficult if experience 
were aggregated across States that may have different MLR standards. 
Adopting the State as the basic unit of geographic aggregation will 
make the reports submitted under section 2718 more meaningful to the 
exchanges. The Department agrees with the NAIC determination and has 
decided not to aggregate the experience of a single issuer across 
States. A rule that would permit aggregation of experience across 
issuers with common ownership was also considered. Under such a rule, 
the experience of all issuers owned by a common holding company or 
corporate group would be combined. Aggregation across such affiliated 
issuers would have two possible advantages: It would increase the total 
experience used to prepare the report, thereby increasing the 
reliability of the data for smaller issuers; and it would combine 
similar coverage provided in the same market by two related companies. 
However, aggregation across affiliated issuers might also combine the 
experience of issuers offering dissimilar coverage or that use 
different pricing policies. HHS has concluded, as did the NAIC, that 
reporting should not be done at the level of the holding company in 
this interim final regulation.
    In response to both the April request for information notice and 
the NAIC's solicitation of comments, extensive comments were received 
from issuers, regulators, and consumers. In general, comments received 
from regulators and consumers supported aggregation at no higher than 
the State level. The reasons given for State aggregation included 
consistency with the statute, greater meaningfulness of State-level 
information to consumers and purchasers, consistency with the 
responsibility of the States for regulation of issuers and oversight of 
insurance premiums, and the calculation of rebates that appropriately 
reflect the relationship between premium and claims experience. Many 
health issuers also recommended aggregation at the State level, 
although some recommended aggregation at the national level for 
coverage sold to large employers. Advocates of aggregation at a 
national level pointed to the greater reliability of reported loss 
ratios when based on the experience of the combined national enrollment 
of an issuer and, in the case of large group coverage, the use of 
experience rating for national or regional employers, and the 
complexity of allocating certain expenses, particularly Federal taxes, 
to experience within a single State. Several comments addressed 
aggregation at a geographic region smaller than a State. Reasons 
identified for regional aggregation within a State included claims of 
geographic variations within States of utilization and expenditure 
patterns and differences across issuers in geographic adjustments that 
are used to set premiums.
    The NAIC considered the arguments made for different approaches to 
geographic aggregation, including the issues related to multi-State 
level employers, and decided that aggregation should be at the State 
level. HHS agrees with and adopts the NAIC's approach. As discussed 
previously, particularly as to the individual and small group markets, 
State aggregation is most consistent with the requirements of the 
statute, particularly provisions permitting State-level exceptions to 
the minimum loss ratio, and will result in information that is more 
meaningful to consumers. In addition, aggregation at a national level 
would preclude States' flexibility to set higher MLR standards as 
prescribed in the Affordable Care Act. Aggregation at the State level 
will also ensure value for their health care dollars for consumers in 
every State.
    Some issuers have expressed concern that the reporting and rebate 
requirements recommended by the NAIC, and adopted in this regulation, 
would disadvantage large or multi-state employers, including those with 
a small number of employees in one State and a larger presence in 
another. This regulation does not require these businesses to change 
the manner in which they operate, and accommodates issuers that provide 
coverage to such employers in a number of ways.
    First, where an issuer insures employees of a business located in 
multiple States, the NAIC recommended and HHS agrees that MLR reporting 
should be based on the ``situs of the contract.'' Under this approach, 
incorporated in this regulation, the premiums and claims experience 
attributable to employees in multiple States are combined and reported 
by the issuer in the MLR report for the State identified in the 
insurance policy or certificate as having primary jurisdiction over the 
policy--often the headquarters of the company. This avoids separating 
the experience of employees from a single company in multiple States.
    Second, the NAIC recommended, and HHS adopts, combined reporting 
across affiliates for ``dual contracts.'' Under these types of 
insurance contracts, a single group health plan obtains coverage from 
two affiliated issuers, one providing in-network coverage, and a second 
affiliate providing out-of-network benefits to the plan. The experience 
of these two affiliated issuers providing coverage to a single employer 
can be combined and reported on a consolidated basis as if it were 
entirely provided by the in-network issuer. This maintains the 
experience of employees in a single reporting entity.
    Thirdly, where affiliated issuers offer blended insurance rates to 
an employer--rates based on the combined experience of the affiliates 
serving the employer--the NAIC recommended and HHS agrees that the 
incurred claims and expenses for quality improving activities can be 
adjusted among affiliates to reflect the experience of the employer as 
a whole.
    Taken together, these provisions recommended by the NAIC and 
adopted by HHS are a reasonable

[[Page 74871]]

accommodation of the needs of affiliated issuers and the multi-state 
employers for which the issuers provide coverage.
b. Attribution to Health Insurance Markets Within States
    The interim final regulation requires issuers to report experience 
within a State for each of the three markets referenced by the statute: 
The individual market, the small group market and the large group 
market. Experience under a health insurance policy or certificate is to 
be attributed to the individual market if the policy is not offered in 
connection with a group health plan, as defined by the PHS Act.
    In response to the April request for information notice, HHS 
received extensive comments on a separate aggregation question: Whether 
to combine the small group and individual markets. In general, comments 
supported separate reporting for the individual, small group, and large 
group markets. Concern was expressed that merging any of these markets 
would tend to conceal differences in medical loss ratios and perpetuate 
the pricing of individual or small group policies to achieve a medical 
loss ratio substantially below the minimums specified in the statue. On 
the other hand, HHS received comments from both regulators and industry 
supporting the consolidation of the individual and small group markets, 
and some comments recommended giving issuers the option of combining or 
not combining the individual and small group markets. Consolidated 
reporting could increase the reliability of reported loss ratios by 
reflecting a larger base of experience. However, it could also deprive 
consumers in one of these markets of the value of the statutory MLR 
standard.
    The NAIC, in its model regulation, permits an issuer to combine the 
individual and small group markets for purposes of calculating the MLR 
rebate if the State in which the coverage is issued requires that the 
two markets be combined for rating purposes. HHS adopts this approach. 
This exception is consistent with section 1312(c)(3) of the Affordable 
Care Act, which allows a State to require the merger of the individual 
and small group markets. Under such a merger, risk is pooled between 
individuals and small groups, and it would be appropriate to base 
rebates on the combined experience in the two markets. While we agree 
with this approach, it is important that the experience of the small 
group and individual markets be reported separately even if experience 
is combined for purposes of calculating the MLR, for a number of 
reasons. The statute allows the Secretary to adjust the MLR percentage 
in the individual market of a State if the Secretary determines that 
the application of the 80 percent MLR may destabilize the individual 
market in that State. Also, the law states that the Secretary may 
adjust the MLR ``if the Secretary determines appropriate on account of 
the volatility of the individual market due to the establishment of 
State Exchanges.'' In order for the Secretary to make these 
determinations, reporting of data for the individual market is needed. 
Separately reported data will also enable HHS to evaluate the impact of 
the MLR standards on the market, consumers, and the industry, and to 
consider making changes to the interim final regulation as appropriate 
based on actual experience.
    HHS has considered the arguments made for different approaches to 
aggregation across markets. It has decided to follow the recommendation 
to the Secretary submitted by the NAIC and require separate reporting 
of experience by the three markets.
c. Associations or Trusts
    The aggregation rules, in Sec.  158.120(d), adopts the NAIC's 
approach and also provide guidance for insurance coverage offered 
through associations or trusts. Under the definition of ``group health 
insurance coverage,'' only coverage offered to individuals through 
associations or trusts that are offered in connection with a group 
health plan should be attributed to the group market. Coverage obtained 
through an association or trust that is not offered in connection with 
a group health plan should be attributed to the individual market. 
Although such coverage is generally considered to be ``group'' coverage 
under the conventions of statutory accounting, it is to be reported as 
individual coverage consistent with the requirements of the PHS Act. 
This is consistent with ERISA's definition of group health plan, as 
incorporated in title XXVII of the PHS Act, as well as the NAIC's 
recommended approach. Although such coverage is generally considered to 
be ``group'' coverage for other purposes (for example, the conventions 
of statutory accounting), this interim final regulation requires non-
employment based coverage to be reported as individual coverage 
consistent with the requirements of the PHS Act. As noted earlier, this 
interim final regulation does not apply to self-insured plans, 
including self-insured plans offered through an association or trust.
d. Expatriate Plans
    The NAIC model regulation does not address the special 
circumstances of different types of plans, such as expatriate plans and 
plans with low annual limits, commonly called ``mini-med'' plans. 
However, in a letter dated October 13, 2010 to the Secretary of Health 
and Human Services, the NAIC expressed its opinion that expatriate 
plans should be excluded from the requirements of section 2718. HHS has 
considered the NAIC's views, as well as the public comments received by 
HHS and by the NAIC regarding these types of plans. Expatriate policies 
generally cover: Employees working outside their country of 
citizenship; employees working outside of their country of citizenship 
and outside the employer's country of domicile; and citizens working in 
their home country. Their unique nature results in a higher percentage 
of administrative costs in relation to premiums than plans that provide 
coverage primarily within the United States, for two reasons. One, 
administrative costs are related to identifying and credentialing 
providers worldwide in countries with different licensing and other 
requirements from those found in the United States, processing claims 
submitted in various languages that follow various billing procedures 
and standards, providing translation and other services to enrollees, 
and helping subscribers locate qualified providers in different 
countries. Two, because these plans primarily cover care in other 
countries, issuers are less able to provide quality improving 
activities.
    We note initially that some expatriate plans are not subject to the 
provisions of the Affordable Care Act, including the MLR reporting and 
rebate provisions of section 2718. Policies issued by non-U.S. issuers 
for services rendered outside of the U.S. are not subject to the 
Affordable Care Act. Therefore, if an expatriate policy is written on a 
form that was not filed and approved by any State insurance department, 
or its equivalent, experience under that policy would not be reported 
for purposes of calculating an issuer's MLR.
    HHS agrees with the NAIC that expatriate policies that are issued 
by U.S. domestic issuers on forms approved by a State insurance 
department have special circumstances that should be addressed in this 
interim final regulation. Therefore, the experience of these expatriate 
policies is to be reported separately from other coverage, as provided 
in Sec.  158.120(d)(4), and the calculation of claims and quality 
improving activities is to be

[[Page 74872]]

multiplied by a factor of two, as provided in Sec.  158.221(b). HHS 
believes that this factor is sufficient to account for the special 
circumstances of expatriate plans, while still requiring that they meet 
the statutory MLR standards. However, because HHS thinks additional 
data is necessary to inform this adjustment, this special circumstance 
adjustment applies for 2011 only. Also, in order to determine whether, 
and if so what type of, an adjustment may be appropriate for 2012, 
expatriate plans that wish to avail themselves of this special 
circumstances adjustment in Sec.  158.221(b)(4) for 2011 will be 
required to report MLR data on a quarterly schedule under Sec.  
158.110(b). We will revisit the special filing circumstances for 
expatriate plans after reviewing the quarterly filings.
e. ``Mini-med'' Plans
    HHS has received requests from issuers of so-called mini-med plans 
to be exempted entirely from the MLR and rebate provisions of section 
2718. The term ``mini-med'' plan does not have a statutory basis, and 
we use it here to generally refer to policies that often cover the same 
types of medical services as comprehensive medical plans but have 
unusually low annual benefit limits, often capping coverage on an 
annual basis for one or more benefits at $5,000 or $10,000, although 
some have limits above $50,000 or even $250,000. Our analysis of this 
segment of the insurance market suggests that a large majority of such 
plans have limits at or below $250,000. As discussed below, we 
therefore are using this figure as a proxy for capturing this type of 
plan.
    Issuers of mini-med plans assert that their administrative costs 
are higher as a percentage of the premium collected than is the case 
for plans having higher annual limits and thus a higher premium base. 
They assert that they have special administrative burdens because the 
populations they serve generally have high turnover rates. This high 
turnover rate may also result in lower claims costs. Mini-med plans are 
also less likely to spend as much on quality improving activities 
because of their lower annual limits. Both of these factors would 
result in administrative costs being a higher percentage of premium 
dollars than for plans with higher amounts of coverage. These issuers 
therefore ask that mini-med coverage be exempted entirely from the 
requirements of section 2718, and have indicated that in the absence of 
an exemption some may no longer be able to offer coverage. Some 
consumer groups have disagreed, suggesting that mini-med plans have 
higher profit margins than do traditional plans with significantly 
higher limits and should not be exempt from the MLR standards. The Blue 
Cross and Blue Shield Association sent a letter to Secretary Sebelius 
on November 1, 2010 in which it urged that HHS not grant ``any MLR 
exceptions for particular companies or product types.'' However, an 
issuer, which according to company materials has a relationship with 
the Blue Cross and Blue Shield system and provides coverage to at least 
one large employer, asserted that the company would be forced to drop 
this coverage without an exemption.
    The application of the Affordable Care Act to mini-med plan