Rate Increase Disclosure and Review, 29964-29988 [2011-12631]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 76, Number 99 (Monday, May 23, 2011)]
[Rules and Regulations]
[Pages 29964-29988]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12631]



[[Page 29963]]

Vol. 76

Monday,

No. 99

May 23, 2011

Part IV





Department of Health and Human Services





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45 CFR Part 154



Rate Increase Disclosure and Review; Final Rule

Federal Register / Vol. 76 , No. 99 / Monday, May 23, 2011 / Rules 
and Regulations

[[Page 29964]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 154

[CMS-9999-FC]
RIN 0938-AQ68


Rate Increase Disclosure and Review

AGENCY: Center for Consumer Information and Insurance Oversight, 
Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period implements requirements 
for health insurance issuers regarding disclosure and review of 
unreasonable premium increases under section 2794 of the Public Health 
Service Act. The final rule establishes a rate review program to ensure 
that all rate increases that meet or exceed a specified threshold are 
reviewed by a State or CMS to determine whether they are unreasonable 
and that certain rate information be made public.

DATES: Effective date. This rule is effective on July 18, 2011.
    Comment date. We will consider comments on Sec.  154.102 regarding 
the definitions of ``individual market'' and ``small group market'' 
that are received at one of the addresses provided in the ADDRESSES 
section of this rule no later than 5 p.m. EST on July 18, 2011.

ADDRESSES: In commenting please refer to file code CMS-9999-FC. 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: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-9999-FC, P.O. Box 8010, 
Baltimore, MD 21244-8010.
    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: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-9999-FC, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments only to the following addresses prior to 
the close of comment period:
    a. For delivery in Washington, DC--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will be also available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4:00 p.m. To schedule an appointment to view public comments, 
phone (800) 743-3591.

FOR FURTHER INFORMATION CONTACT: Sally McCarty, (301) 492-4489 (or by 
e-mail: ratereview@hhs.gov).

SUPPLEMENTARY INFORMATION: Comment Subject Areas: We will consider 
comments on how individual and small group coverage sold through 
associations should be treated under the rate review process as 
discussed in this final rule with comment period that are received by 
the date and time indicated in the DATES section of this final rule 
with comment period.

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.
    Section 1003 of the Affordable Care Act adds a new section 2794 of 
the PHS Act which directs the Secretary of the Department of Health and 
Human Services (the Secretary), in conjunction with the States, to 
establish a process for the annual review of ``unreasonable increases 
in premiums for health insurance coverage.'' The statute provides that 
this process shall require health insurance issuers to submit to the 
Secretary and the applicable State justifications for unreasonable 
premium increases prior to the implementation of the increases.
    On December 23, 2010, we published a proposed rule entitled ``Rate 
Increase Disclosure and Review.'' Sixty comments were received by the 
end of the comment period. Commenters included several State insurance 
regulators; the National Association of Insurance Commissioners 
(``NAIC''); many consumer, retiree, and patient organizations; health 
care providers; health insurance issuers and related trade associations 
(collectively, ``industry''); an organization representing the 
actuarial profession; and others.

II. Provisions of the Proposed Rule and Responses to Comments

    In this section of the preamble, we summarize each section of the 
proposed rule, discuss the public comments received on each section (if 
any), and provide responses to the comments.

A. Subpart A--General Provisions

1. Basis and Scope (Sec.  154.101)
    Section 154.101 of the proposed rule indicated that this rule would 
implement section 2794 of the PHS Act. Specifically, the rule would 
establish

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disclosure requirements on health insurance issuers offering health 
insurance coverage in the small group or individual markets concerning 
rate increases that are above a specific threshold and designated as 
subject to review. The rule proposed to establish the process by which 
such increases are reviewed to determine whether they are unreasonable.
    Comment: One consumer commenter expressed concern that the proposed 
rule did not include authority for CMS to require an issuer to rescind 
an unreasonable rate or otherwise impose penalties on such issuer for 
proposing an unreasonable rate.
    Response: Section 2794 of the PHS Act only provides CMS with the 
authority to require justification and disclosure of proposed rate 
increases. However, if an issuer fails to comply with the requirements 
set forth in this final rule, CMS could seek a court order against the 
issuer to enforce compliance.
    Some States have the authority to deny proposed rate increases, and 
the grants awarded under section 2794(b) of the PHS Act provided 
supplemental performance funding for States that have or seek such 
authority. In addition, States receiving grants under section 2794(b) 
of the PHS Act will be required to make recommendations to State 
Exchanges regarding whether issuers should be excluded from 
participation in the Exchanges based on patterns or practices of 
excessive or unjustified premium increases. Section 1311(e)(2) of the 
Affordable Care Act requires Exchanges to take the States' 
recommendations into consideration when determining whether to make 
health plans available through the Exchanges.
2. Definitions (Sec.  154.102)
    Certain key definitions in Sec.  154.102 of the proposed rule are 
discussed below.
    a. Individual Market and Small Group Market. The proposed rule 
would have defined ``individual market'' and ``small group market'' as 
they are defined under the applicable State rate filing laws, if the 
State laws included such definitions. Under the proposed rule, if a 
State rate filing law did not include definitions for the individual 
market or the small group market, the definitions under the PHS Act 
would be used, with the exception that a small group would be defined 
to include employers with 50 or fewer employees.
    Comment: State regulators, industry, and other commenters agreed 
that CMS generally should defer to State rate filing laws concerning 
the definitions for the individual market and the small group market. 
One State regulator commenter requested clarification as to whether 
short-term limited duration coverage was required to be included in the 
proposed rule's definition of individual market, if the State excluded 
such coverage from its own definition.
    Response: The final rule continues to defer to State rate filing 
law definitions for individual market and small group market including 
in cases in which the State definition of individual market excludes 
short-term limited duration coverage. This rule, therefore, does not 
require that a State with an Effective Rate Review Program review 
proposed rate increases for short-term limited duration coverage if the 
State's rate filing law does not consider short-term limited duration 
coverage to be individual market coverage.
    Comment: Five commenters specifically expressed concern that the 
proposed rule, as drafted, would not cover association coverage sold to 
individuals and small employers in some States and recommended that the 
final rule include them in its scope.
    One State regulator commented that a large percentage of small 
employers purchase health insurance coverage through associations in 
her State. Under that State's law, small employers purchasing through 
an association are considered one large group not subject to the 
provisions of State law that apply to small group coverage. However, 
the commenter noted that rate increases are based on each small 
employer's own experience, and not that of the entire association, so 
that rate-setting for association coverage sold to small groups is not 
the same as that for large employer coverage. She recommended that 
association coverage be treated consistently for purposes of section 
2794 of the PHS Act and other PHS Act provisions. As CMS Insurance 
Standards Bulletin Transmittal Nos. 02-02 and 02-03 makes clear, PHS 
Act requirements generally apply to individual market and small group 
market coverage sold through associations in the same manner as they 
apply to other individual market and small group market coverage sold 
directly to consumers and small employers.
    Another State regulator voiced similar concerns, noting that his 
State had more small employers with association coverage than small 
employers with coverage in the traditional small group market. This 
State regulator urged that the final rule categorize individual and 
small employer coverage based on the purchasers of such coverage.
    A major trade association representing issuers found the proposed 
rule ambiguous concerning the regulation of product filings in the 
individual and small group markets offered through out-of-state 
associations and group trusts. The commenter noted that in some cases, 
a group policy is issued in one State, with certificates being issued 
to individuals or small groups in other States. Since many States only 
review rates for policies issued in their States, their rate review 
laws would not apply to coverage sold through out-of-state associations 
and group trusts.
    Similarly, one large issuer noted that CMS's deference to State 
rate filing law definitions could result in some individual market 
products sold through associations and group trusts not receiving any 
review by States or CMS. This commenter recommended that consistent 
filing requirements and rate review standards be applied to all 
products marketed to individuals, regardless of the technical insurance 
arrangement that might be involved, and that CMS review rates for 
individual market products sold through associations and group trusts 
in cases where States did not. The commenter thought this approach 
would ensure uniform consumer protection and advance competition by 
subjecting all issuers to the same rules.
    Lastly, one consumer commenter stated that all coverage marketed to 
individuals and small employers should be subject to the same review, 
regardless of whether the coverage was marketed directly to consumers 
or through associations.
    Response: Given the fact that we did not include a discussion on 
the association health plan issue in the proposed rule, we are not 
making a determination regarding this issue in this final rule, but 
instead are seeking comments and additional data on the definitions of 
``individual market'' and ``small group market'' in Sec.  154.102 of 
this final rule in relation to whether to provide that individual and 
small employer policies sold through associations are to be included in 
the rate review process, even if the State excludes such coverage from 
its definitions of individual and small group market coverage. Given 
the comments received and our policy goals with regard to rate review, 
we are inclined to amend the definitions of individual market and small 
group market in Sec.  154.102 to include coverage sold to individuals 
and small groups through associations in all cases. However, as 
indicated above, we are interested in receiving further comments on 
Sec.  154.102 for future consideration. If we were to amend the 
definitions of ``individual market'' and ``small group market'' in 
Sec.  154.102 to

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include individual coverage and small employer coverage sold through 
associations in the rate review process, the amendment will only be 
applied prospectively.
    We recognize that some States may be unable to review proposed rate 
increases for coverage sold through associations in circumstances in 
which such association coverage is viewed as large group coverage under 
State law and State law does not provide for review of rate increases 
in the large group market, or the State otherwise lacks legal authority 
to review such rates. In that case, CMS could review the proposed 
increases for those products. Whether or not a State does or may be 
unable to review rate increases for association coverage is not a 
criteria for determining whether it has an Effective Rate Review 
Program.
    In addition, we are seeking comments to address the following 
questions:
    1. Do States currently review rate increases for association and 
out-of-State trust coverage sold to individuals and small groups, 
regardless of whether the policies are sitused in or outside of their 
States?
    2. How many such rate filings do States receive for association and 
out-of-State trust coverage?
    3. How prevalent are association and out-of-State trust coverage 
arrangements? What percentage of individual market and small group 
market business is sold through associations and out-of-State trusts?
    4. In which States is association and out-of-State trust coverage 
commonly purchased by individuals and small groups? Where are out-of-
State trusts typically sitused?
    5. Why do some individuals and small employers purchase coverage 
through associations and out-of-State trusts rather than the 
traditional markets? Are there particular groups of individuals or 
types of small employers that typically purchase coverage through 
associations and out-of-State trusts? What organizations (other than 
issuers) typically sponsor, endorse, or market association and out-of-
State trust arrangements?
    6. How do rate increases for association and out-of-State trust 
coverage sold to individuals and small groups compare to rate increases 
in the traditional market? What explains the differences (if any) 
between rate increases for association and out-of-State trust coverage 
and traditional market coverage?
    Once we receive and review the comments, we will make a 
determination on whether to amend Sec.  154.102 of the rule to include 
individual and small employer health insurance coverage sold through 
associations in the rate review process. Meanwhile, nothing prohibits a 
State from reviewing rates of coverage sold through associations if it 
already does so or amends its laws in the future to do so.
    b. Product. The proposed rule would define ``product'' as a package 
of health insurance coverage benefits with a discrete set of rating and 
pricing methodologies offered in a State.
    Comment: Several industry commenters raised concerns that the 
definition of product was not consistent with State definitions and 
urged CMS to defer to such State definitions. Some commenters further 
contended that it would be administratively cumbersome to develop a new 
Federal product classification system that did not align with existing 
State classification systems.
    Response: While we have not modified the proposed rule's definition 
of product in this final rule, we believe that the definition is 
sufficiently flexible to accommodate existing State definitions, and 
that, as a practical matter, issuers will not have to reclassify their 
products to comply with the rate review process. Further, this 
definition is intended to track closely with the definition of health 
insurance product for purposes of the web portal, 45 CFR 159.110. We 
expect that in most cases issuers will be able to use their existing 
identification numbers for health insurance products under the Health 
Insurance Oversight System (HIOS) for reporting rate increases to CMS.
    c. Rate Increase. The proposed rule would define ``rate increase'' 
as an increase in the rates of a specific product in the individual or 
small group market.
    Comment: Several industry commenters supported CMS' decision to 
base the threshold standards on rates, rather than premiums. They noted 
that the distinction between premiums and rates was explained in the 
proposed rule's preamble and recommended that this discussion be 
incorporated into the final rule itself.
    Response: We do not believe it is necessary to repeat the 
discussion in the proposed rule, as we are adopting the proposal 
described in that discussion, and that discussion applies to this final 
rule.
    d. State. The proposed rule would define ``State'' using the 
definition provided in section 2791(d)(14) of the PHS Act.

    Note:  We note that the definition in 2791(d)(14) of the PHS Act 
includes the States, the District of Columbia, Puerto Rico, the 
Virgin Islands, Guam, American Samoa, and Northern Mariana Islands.

3. Applicability (Sec.  154.103)
    The proposed rule generally would be applicable to all health 
insurance issuers offering coverage in the small group or individual 
markets in a State. The proposed rule would not apply to grandfathered 
health plan coverage, as defined in 45 CFR 147.140, and to insurance 
coverage that meets the ``excepted benefits'' definition set forth in 
section 2791(c) of the PHS Act.
    Comment: State regulators, industry, and employers generally agreed 
that the large group market should not be subject to the final rule, 
noting that large employers are sophisticated purchasers, that rates 
generally are based on each large employer's own experience, and that 
the proposed rule's filing requirements were not aligned with State 
large group market practices. In contrast, some provider commenters and 
a labor organization recommended that the large group market be subject 
to the final rule, noting the rate increases that large groups have 
faced and the consolidation that has occurred in the health insurance 
industry. Lastly, one State regulator noted that rates for mid-sized 
employers (that is, those with 51 to 99 employees) are only partially 
experience-rated and that a rate review process could be warranted for 
them, as well.
    Response: We understand that many employer groups at the smaller 
end of the large group spectrum are only partially experience-rated, 
but we have not included them in the scope of the final rule because 
few States review rates for large groups. However, we will monitor rate 
increases in that market segment using a variety of sources including 
data from the rate review grant program and assess whether future 
amendments to the final rule may be warranted.
    Comment: One commenter suggested that grandfathered plans be 
included within the scope of the final rule.
    Response: Section 1251 of the Affordable Care Act provides that 
section 2794 of the PHS Act does not apply to coverage that was in 
effect on March 23, 2011 and retains grandfather status. If coverage 
loses its grandfather status, then PHS Act section 2794 of the PHS Act 
will apply.
    Comment: One provider commenter recommended that dental and vision 
plans be included within the scope of the final rule. The commenter 
stated that rates for these products have increased significantly due 
to lack of

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regulation and noted the importance of such coverage to children.
    Response: We have maintained the exclusion for excepted benefits 
(including limited scope dental and vision benefits) as defined under 
section 2791(c) of the PHS Act because we believe Federal and State 
resources are most effectively focused on increases that affect the 
affordability of basic medical coverage. We do not believe that rate 
increases for excepted benefit plans such as limited scope dental and 
vision benefits have the same impact on individuals and small employers 
as rate increases for basic medical coverage that includes benefits for 
hospital and physician services. States may review these rates if 
permitted under State law.
    Comment: One commenter recommended that retiree-only plans be 
included within the scope of the final rule when current or former 
employees pay for substantial portions of the premium increases.
    Response: While it is possible that some State filing laws may 
apply to such coverage, we have not required that health insurance 
coverage provided to retiree-only plans be subject to this rule. We 
note that many retiree-only plans are self-funded and thus would not 
constitute health insurance coverage subject to section 2794 of the PHS 
Act.

B. Subpart B--Disclosure and Review Provisions

1. Rate Increases Subject to Review (Sec.  154.200)
    Under the proposed rule, CMS or the applicable State would review 
those rate increases that meet or exceed specified thresholds to 
determine if they are unreasonable. (We understand that many States 
review all rate increases in the applicable markets; nothing in this 
rule affects State laws or practices with respect to rate increases 
below the relevant threshold.) Rate increases would be subject to 
review if they are 10 percent or more and either: (1) are filed in a 
State on or after July 1, 2011; or (2) are in a State that does not 
require rate increases to be filed, and are effective on or after July 
1, 2011. For rate increases filed in a State during calendar year 2012 
and thereafter, or effective in calendar year 2012 and thereafter in a 
State that does not require rate increases to be filed, rate increases 
that meet or exceed State-specific thresholds determined by the 
Secretary for the applicable calendar year (or 10 percent if applicable 
State-specified thresholds are not determined by the Secretary) would 
be subject to review. The State-specific thresholds would be published 
in the Federal Register no later than the September 15th prior to each 
calendar year to which they apply.
    To determine whether the specified threshold is met or exceeded, 
the weighted average increase for all enrollees subject to the rate 
increase would be used. Rate increases during the 12 month period that 
precedes the date on which a rate increase is effective are aggregated 
to determine whether the specified threshold is met or exceeded.
    Comment: Some State regulator and industry commenters believed that 
the proposed rule underestimated the number of rate increases that 
would be above the 10 percent threshold, with some commenters claiming 
that virtually all proposed rate increases would be captured under that 
threshold. Industry commenters contended that the 10 percent threshold 
did not represent a fair balance of capturing a reasonable number of 
proposed rate increases and did not track with recent rate increase 
trends. Some State regulator and industry commenters noted that section 
2794 of the PHS Act called for the review of ``unreasonable'' 
increases, and that increases above 10 percent are not necessarily 
unreasonable. Other industry commenters asserted that the threshold was 
arbitrary and low. They claimed this threshold would stigmatize 
actuarially appropriate rates, bias State review, deluge consumers with 
confusing information, and place significant administrative burdens on 
issuers. Industry commenters recommended that the threshold be based on 
a broader range of factors including medical cost inflation, adverse 
selection, deductible leveraging, and required benefit changes, among 
others.
    Consumer, provider, and some State regulator commenters, in 
contrast, argued that the 10 percent threshold was too high. Commenters 
listed numerous concerns including: (1) The threshold did not consider 
the cumulative impact of increases from multiple years and could 
encourage issuers to target just below the threshold; (2) many rate 
increases below 10 percent could be problematic from an actuarial 
perspective; and (3) a threshold designed to be above medical trend 
would not pressure issuers into taking steps to moderate growth in 
medical costs. In addition, some commenters recommended that all 
proposed increases be subject to review.
    Response: We believe that 10 percent continues to be an appropriate 
initial threshold for determining which rates will be subject to review 
based on the analysis of the trend in health care costs and rate 
increases provided in the preamble to the proposed rule. The 10 percent 
transitional threshold balances the need to provide more disclosure to 
consumers while avoiding undue administrative burdens on other 
stakeholders. This threshold should not cause consumers to be 
overwhelmed with information since they likely will only review rate 
information concerning their current plans or those which they are 
considering buying. With respect to the commenter focusing on the word 
``unreasonable'' in section 2794, we believe that to identify and 
review unreasonable rates prior to implementation, it is necessary to 
review potentially unreasonable rates to assess their reasonableness. 
Lastly, we note that the 10 percent threshold is intended to be 
transitional, until State-specific thresholds are put in place.
    Comment: Several commenters suggested that the proposed July 1, 
2011 effective date for the rate review program did not provide States 
and health insurance issuers with adequate time to come into compliance 
with a final rule. Many State regulator commenters suggested that the 
proposed effective date be delayed until January 1, 2012 and noted that 
later effective dates would allow the rate review program to begin with 
State-specific thresholds rather than the 10 percent threshold. One 
State regulator commenter suggested that the effective date be 6 months 
after promulgation of the final rule. One industry commenter proposed 
that the effective date be July 1, 2012, expressing concern that there 
would not be enough time between issuance of the final rule and a July 
1, 2011 effective date for issuers to develop and implement necessary 
system changes. Several industry commenters stated that they currently 
are in the process of developing rates for July 1, 2011 effective dates 
and recommended that the proposed rule not apply to those rates in 
States without current rate filing requirements.
    Response: In response to these comments, we have moved the 
effective date in this final rule from July 1, 2011 to September 1, 
2011 and maintained the initial, transitional 10 percent threshold. 
This effective date is intended to ensure that proposed 2012 rate 
increases meeting or exceeding the 10 percent threshold will be 
reviewed by either CMS or the applicable State. Further delay could 
mean that many rate increases for 2012 will not be subject to review. 
We do not deem further delay in starting the rate review program to be 
desirable given that stakeholders now have been able to provide us with 
valuable feedback concerning the program's design and we

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are prepared to initiate the program. We note that issuers will not be 
required to provide data beyond what the majority of States already 
require to be filed in support of proposed rate increases. We will be 
offering further guidance and training to assist issuers in complying 
with their obligations under the program.
    Comment: State regulator and industry commenters generally 
expressed support for State-specific thresholds. Some consumer 
commenters expressed concern that use of State-specific thresholds 
would reward inefficient insurance markets with higher thresholds. They 
recommended either the use of a national threshold or the lower of a 
national or State-specific threshold. Alternatively, some consumer 
commenters recommended that CMS apply downward adjustments to State-
specific thresholds in inefficient insurance markets. State regulator 
commenters recommended that States be able to establish their own 
review thresholds, or that, at a minimum, CMS consult with States in 
developing the State-specific thresholds. State regulator commenters 
also recommended that the final rule provide more detail on CMS's 
process for determining State-specific thresholds and include a process 
by which States could ask CMS to reconsider State-specific thresholds 
they considered inappropriate. Industry commenters generally were 
supportive of more State involvement in developing State-specific 
thresholds.
    Many commenters provided recommendations on the methodology for 
establishing the State-specific thresholds applicable to 2012. Industry 
commenters raised concerns that a threshold tracking loosely with 
medical trend, but not other factors, would not sufficiently account 
for expected rate increases and emphasized that the threshold's 
underlying factors should have an appropriate actuarial basis. 
Additionally, some industry commenters said that the threshold should 
take into account possible impacts from the Affordable Care Act on 
proposed increases. As noted, many consumer and provider commenters 
stated that the 10 percent threshold was too high and recommended that 
CMS use lower thresholds in 2012. Some consumer commenters stated that 
the threshold should be based solely on medical trends, while others 
recommended that it be based on multiple factors, including adjustments 
for inefficient insurance markets and issuers' medical loss ratios.
    Many commenters urged CMS to act quickly to develop the State-
specific thresholds for 2012, noting that health insurance issuers were 
already developing their proposed rates and that even if the State-
specific thresholds were released by September 15, 2011, most of the 
2012 increases would be missed. Several commenters noted the need to 
monitor State-specific thresholds closely on an ongoing basis to keep 
up with market trends and address potentially unintended consequences 
(for example, under- or over-inclusive thresholds).
    Response: As noted earlier, the 10 percent threshold is intended to 
be transitional and we believe that this initial phase of the rate 
review program will enable CMS and the States to gather information 
that will be helpful in developing the State-specific thresholds. CMS 
will immediately begin work with the States and the NAIC to develop a 
process and identify data and methodologies for setting State-specific 
thresholds, so that the first State-specific thresholds can be 
effective for the twelve-month period beginning on September 1, 2012. 
We plan to update the State-specific thresholds annually, although the 
10 percent threshold will apply in a State if a State-specific 
threshold has not been established for that State. We will publish a 
notice concerning the applicable thresholds no later than June 1 of 
each year beginning in 2012.
    Comment: Commenters offered various interpretations concerning how 
rate increases should be calculated and how the weighting concept 
should work under the proposed rule, while others asked for 
clarification on these issues. Specifically, one commenter understood 
the proposed rule to mean that rate increases would be calculated as 
the overall average percentage increase between the old premium and the 
new premium, while another believed that rate increases would be 
calculated as the percentage change between the old revenue and the new 
projected revenue. With respect to weighting, some commenters 
interpreted the proposed rule to mean that the increase percentage be 
weighted by the number of policies, arguing that a subgroup with a 
lower premium should not be treated the same as another subgroup with a 
larger premium but an equal percentage increase.
    Response: We have modified the final rule to clarify the issues 
raised by these comments. We believe that the rule's method for 
calculating a rate increase (that is, the average increase over all 
policies weighted by premium volume) is arithmetically identical to 
calculating the rate increase as the overall average percentage 
increase between the old premium and the new premium. In addition, the 
rule's method for calculating a rate increase could be applied such 
that it is the same as calculating the rate increase as the percentage 
change between the old revenue and the new projected revenue. With 
respect to weighting, we note that weighting should not be done based 
on the number of policies; rather, premium volume is the appropriate 
weighting factor.
2. Unreasonable Rate Increase (Sec.  154.205)
    The proposed rule would set three criteria that CMS would use in 
determining whether a rate increase is excessive, unjustified, or 
unfairly discriminatory, and, therefore, unreasonable. First, an 
increase would be considered excessive if it causes the premium to be 
unreasonably high in relation to benefits. In making this 
determination, CMS would consider whether: (1) The rate increase would 
result in a projected medical loss ratio below the applicable Federal 
standard; (2) one or more of the assumptions is not supported by 
substantial evidence; and (3) the choice of assumptions (or combination 
thereof) is unreasonable. Second, an increase would be considered 
unjustified if the issuer provides data or documentation that is 
incomplete, inadequate, or otherwise does not provide a basis to 
determine whether the increase is reasonable. Third, an increase would 
be considered unfairly discriminatory if it results in premium 
differences between insureds with similar risks that are not permitted 
under State law or, if there is no applicable State law, does not 
reasonably correspond to expected differences in costs.
    Comment: Commenters representing State regulators, industry, and a 
professional association expressed concern that the definition of 
``unreasonable rate increase'' in the proposed rule did not include a 
prong related to the adequacy of the proposed rates.
    Response: We acknowledge that inadequate rate increases can be 
problematic. For example, inadequate rate increases can lead to larger 
increases for consumers in subsequent years or even have a negative 
impact on an issuer's overall financial condition. Section 2794 of the 
PHS Act is not primarily concerned with rate increases that are too low 
and does not identify adequacy among the criteria to be considered when 
determining unreasonableness. Therefore, we did not include adequacy as 
a prong of the unreasonableness test that we will use when reviewing 
rates under the final

[[Page 29969]]

rule. We note that many States do explicitly consider the adequacy of 
rates during their reviews, and nothing in this regulation prevents or 
prohibits a State from continuing to consider this factor in their 
review in the future.
3. Review of Rate Increases Subject to Review by CMS or by a State 
(Sec.  154.210)
    The proposed rule sets forth the factors that would be used by CMS 
to determine whether CMS would review rate increases subject to review 
or whether CMS would adopt the determinations made by a State. To the 
extent that a State had an Effective Rate Review Program in a given 
market, as determined by CMS, and provided to CMS its final 
determinations whether an increase is unreasonable, CMS would adopt 
that State's determinations. A State's final determination would need 
to include an explanation of its analysis and be provided to CMS within 
five business days following its determination. In all other 
situations, CMS would review rate increases subject to review.
    Comment: One commenter argued that since section 2794 of the PHS 
Act requires CMS to establish a rate review process ``in conjunction 
with States,'' CMS lacked authority to review rates in those States 
that did not have Effective Rate Review Programs. In contrast, a 
commenter representing business groups expressed support for the 
proposed rule's approach to CMS establishing a rate review program in 
conjunction with the States.
    Response: We interpret the requirement that the rate review program 
be established ``in conjunction with States'' as requiring that it 
defer to rate review in the States to the extent consistent with the 
goals of the Affordable Care Act. The rate review program established 
by this rule defers to State law and provides that, for States with 
Effective Rate Review Programs, CMS will adopt their determinations as 
to whether rate increases are unreasonable. We do not view this 
requirement as barring CMS from reviewing rates or collecting any 
information in those States that do not have Effective Rate Review 
Programs.
4. Submission of Disclosure to CMS for Rate Increases Subject to Review 
(Sec.  154.215)
    The proposed rule would require health insurance issuers to submit 
a ``Preliminary Justification'' for all rate increases subject to 
review. Parts I (rate increase summary) and II (written description 
justifying the rate increase) would be provided to CMS and the 
applicable State (if the State receives such submissions). In addition, 
Part III (rate filing documentation) would be provided to CMS when it 
is reviewing the rate increase. Health insurance issuers may submit a 
combined Preliminary Justification for rate increases affecting 
multiple products if their claims experience is aggregated and the rate 
increases are the same across all of the aggregated products.
    Part I of the Preliminary Justification would be required to 
include: (1) Historical and projected claims experience; (2) trend 
projections related to utilization and service or unit cost; (3) any 
claims assumptions related to benefit changes; (4) allocation of the 
overall rate increase to claims and non-claims costs; (5) per enrollee 
per month allocation of current and projected premium; (6) current loss 
ratio and projected loss ratio; (7) three-year history of rate 
increases for the product associated with the rate increase; and (8) 
employee and executive compensation data from the health insurance 
issuer's annual financial statements.
    Part II would include a simple, brief narrative describing the data 
and assumptions used to develop the rate increase, including the rating 
methodology, the most significant factors causing the increase, and a 
brief description of the policies' overall experience.
    Part III, submitted in cases where CMS is reviewing a rate 
increase, would be required to include the following elements: (1) 
Description of the type of policy, benefits, renewability, general 
marketing method, and issue age limits; (2) scope and reason for the 
rate increase; (3) average annual premium per policy, before and after 
the rate increase; (4) past experience and any other alternative or 
additional data used; (5) a description of how the rate increase was 
determined, including the general description and source of each 
assumption used; (6) the cumulative loss ratio and a description of how 
it was calculated; (7) the projected future loss ratio and a 
description of how it was calculated; (8) the projected lifetime loss 
ratio that combines cumulative and future experience and a description 
of how it was calculated; (9) the Federal medical loss ratio standard 
in the applicable market to which the rate increase applies, accounting 
for any adjustments allowable under Federal law; and (10) if the 
projected future loss ratio is less than the applicable Federal medical 
loss ratio, a justification for this outcome. CMS would accept a copy 
of a rate filing submitted to a State that included each of these 
elements. CMS would request additional information from health 
insurance issuers if their Part III submissions lacked sufficient 
information for CMS to determine whether rate increases were 
unreasonable. Issuers would have five business days to supply the 
additional information. The data which issuers are required to provide 
in the Preliminary Justification contains less detail and therefore 
will be less burdensome for issuers than what is called for in the NAIC 
Model for Individual Health Insurance Rate Filings. This data is 
readily available to issuers and is generally included in rate filings 
which they make today.
    CMS would promptly make Parts I and II of the Preliminary 
Justifications available through the healthcare.gov Web site. In 
addition, in cases where CMS receives Part III, CMS would post on the 
CCIIO Web site any information not designated as ``confidential,'' as 
defined under CMS's Freedom of Information Act regulations, 45 CFR 
5.65. CMS would review information designated as ``confidential'' and 
would post it only if CMS determined that such information was, in 
fact, subject to disclosure under 45 CFR 5.65. Lastly, the 
healthcare.gov Web site would include a prominent disclaimer that 
stated: ``The Preliminary Justification is the initial summary 
information regarding the rate increase subject to review and does not 
represent a determination that the rate increase subject to review is 
an unreasonable rate increase.''
    Comment: Consumer commenters recommended strengthening the proposed 
rule's disclosure requirements by requiring additional information in 
Part I, II, and III of the Preliminary Justifications concerning 
average rate increases, historical rate increases, medical price and 
utilization changes, provider reimbursement and contracts, 
administrative costs (including costs related to medical management, 
marketing, lobbying, travel and association dues), and transfers of 
funds to affiliated companies. Provider commenters recommended similar 
disclosures concerning rate increases and administrative costs. One 
consumer commenter also suggested that sample rates be provided for 
persons with the same ages and family composition so that consumers 
could see how rate increases compared between health insurance issuers. 
Some State regulator commenters recommended that certain elements of 
the Preliminary Justification be revised or omitted to conform more 
closely to current reporting requirements imposed on issuers. One State 
regulator commenter recommended that executive compensation information 
not be

[[Page 29970]]

included in the Preliminary Justification, or, alternatively, that CMS 
explain how this information would help States evaluate a proposed 
increase.
    Many industry commenters argued that much of the information 
required in the Preliminary Justification would not be useful to 
consumers and could cause them unfairly to view the proposed rates as 
unreasonable. For example, they asserted that rate increase history and 
employee compensation generally were not taken into account during 
actuarial reviews. They also expressed concern that a large proportion 
of consumers would receive a confusing deluge of information concerning 
rates subject to review, given their estimates on the volume of 
proposed increases that would exceed the thresholds.
    Response: We generally believe that Parts I and II of the 
Preliminary Justification will provide consumers with sufficient detail 
concerning the factors influencing proposed rate increases, without 
being unduly confusing to consumers. Accordingly, the final rule 
continues to provide that Part I and II will be publicly posted. We 
have modified or eliminated certain reporting elements in the final 
rule as recommended by State regulator commenters. In Part I, medical 
loss ratio data has been removed because it can be computed from 
remaining Part I elements and therefore was redundant. (We note that 
medical loss ratio data continues to be a distinct reporting 
requirement for Part III.) The requirement to report executive and 
employee compensation data was also removed because these amounts would 
represent only a very small proportion of an overall rate increase when 
allocated by product and member month, and, consequently, would not be 
helpful to consumers in showing the primary rate increase drivers. We 
also added the phrase ``as determined by the Secretary'' in Sec.  
154.215(e) to allow HHS discretion in the future to respond to changes 
in the market and input from stakeholders as to what elements in Part I 
are most helpful to consumers. Finally, we removed the explanation of 
the rating methodology from Part II in order to keep Part II brief, 
non-technical, and understandable to consumers.
    Comment: Some industry commenters recommended that CMS allow 
issuers to aggregate and report multiple products at the same level of 
aggregation as permitted under State law, without requiring that the 
same rate increase be applied to all of the aggregated products. These 
commenters stated it would be administratively burdensome for CMS to 
adopt an aggregation standard that differed from current State 
requirements. Many consumer and provider commenters expressed concern 
that allowing aggregated filings for products would mask rate increase 
variations between different products.
    Response: Our understanding is that some States review rate filings 
at a product level, while other States review rate filings on an 
aggregated product basis, particularly in community-rated environments. 
The final rule maintains the proposed rule's standard, which 
accommodates both State approaches. Where filings are made on an 
aggregated product basis, the same claim experience must have been used 
to develop the increases and the proposed increases must be the same 
for each of the different products to ensure that issuers cannot mask 
high increases for certain products within the combined filings. To the 
extent that this approach represents a change for some issuers, the 
burden should be minimal since the rule merely requires that they 
report existing information in a different fashion. We believe that 
this aggregation standard appropriately balances the need for increased 
transparency with current State rate filing requirements and actuarial 
practices.
    Comment: Many consumer commenters urged that Part III of the 
Preliminary Justification not be given confidential treatment, 
reasoning that the public's right to information concerning rate 
increases outweighed issuers' proprietary interests in such 
information. One commenter noted that, for example, issuers potentially 
could designate actuarial memoranda and risk-based capital information 
as confidential, thereby leaving consumers without important 
information needed to scrutinize proposed rate increases. Another 
consumer commenter recommended that issuers be required to submit data 
on provider reimbursement and contracts and that issuers not be 
permitted to designate such data as confidential. While provider 
commenters generally recommended that as much information as possible 
from the Preliminary Justification be publicly released, they expressed 
concern about maintaining the confidentiality of provider reimbursement 
rates. Industry commenters were concerned about the impact of 
disclosing market sensitive information and generally recommended that 
the information in Part III be kept confidential and not disclosed. 
Industry commenters requested that CMS provide additional information 
on how the ``confidential'' information exemption under the Freedom of 
Information Act (FOIA), 5 U.S.C. section 552, would apply so that they 
could designate information in Part III of the Preliminary 
Justification appropriately. They also requested more guidance on CMS's 
review and appeal process for FOIA requests and disclosures.
    Response: The final rule essentially adopts the confidentiality 
approach taken in the proposed rule; that is, information contained in 
Part III of a Preliminary Justification will be posted on our Web site 
unless the FOIA exemption for trade secrets and confidential commercial 
or financial information applies. As a Federal agency, we generally are 
required to utilize the FOIA standard in determining confidentiality. 
As discussed in more detail in the preamble to the proposed rule, CMS's 
FOIA rule, 45 CFR Part 5, establishes the process and standards that 
generally apply to determining whether information designated as 
confidential is subject to disclosure. Issuers will be able to 
designate the information that they believe is protected by the 
exemption and we will determine whether the exemption applies.
    We reviewed the approaches currently taken by States concerning the 
public disclosure of rate filings. Some States make all parts of a rate 
filing public; some States provide standards for which parts of a rate 
filing will be made public; and other States follow a freedom of 
information process and standard under State law that is similar to 
FOIA. Based on a review of State filing guidelines and State Web sites, 
it appears at least 12 states do not redact any information when making 
rate filings available to the public. Given that Part III is based on 
State rate filing requirements, this means that many States do not 
regard the types of information found in Part III to be confidential or 
protected from disclosure. Based on the fact that the information 
contained in Part III appears to be widely available across the country 
and that many States already are making this information available, it 
may be difficult for an issuer to assert that the information in Part 
III is confidential or protected from disclosure under Federal law.
    Comment: Industry commenters recommended that issuers be provided 
additional time beyond five business days to respond to an inquiry from 
CMS regarding an incomplete Part III of the Preliminary Justification. 
Commenters noted that, for example, a more complex request might 
require an issuer to gather and organize information from different 
internal departments, which could take longer than five business days.

[[Page 29971]]

    Response: We have modified the final rule so that, after receiving 
a request from CMS, an issuer will have 10 business days to respond to 
provide additional Part III information.
    Comment: Several State regulator, consumer, and industry commenters 
expressed concerns that the proposed rule's disclaimer language would 
be misleading to consumers and that a clearer description of both the 
purpose of the Preliminary Justification and the rate review process 
was needed. State regulator and industry commenters requested an 
explicit statement that rates subject to review had not yet been 
determined to be unreasonable by a State or CMS. Commenters also 
recommended including statements regarding: (1) The availability of 
additional information if a rate was determined to be unreasonable; (2) 
the actuarial factors that impact the reasonableness of rates; (3) the 
possibility that a proposed increase might change prior to 
implementation; and (4) whether a product was available for purchase 
notwithstanding review of its proposed rates.
    Response: We have modified the final rule to state more generally 
that a disclaimer will accompany the Preliminary Justifications posted 
on our Web site. Guidance concerning this disclaimer will be provided 
at a later date and the commenters' concerns will be considered when 
that guidance is developed.
5. Timing of Preliminary Justification (Sec.  154.220)
    The proposed rule provides that if a State requires a proposed rate 
increase to be filed with the State prior to implementation of the 
increase, the health insurance issuer must send CMS and the applicable 
State the Preliminary Justification on the date the issuer submits the 
proposed increase to the State. For all other States, the health 
insurance issuer must send CMS and the applicable State the Preliminary 
Justification prior to the implementation of the rate increase.
    Comment: A few State regulator commenters suggested that 
Preliminary Justifications should not be posted unless a rate was found 
to be unreasonable. These commenters expressed concern that posting 
Preliminary Justifications prior to the proposed increases' evaluation 
would cause consumer confusion, lead to unsuitable replacements of 
coverage, and provide opportunities for misuse of information. In 
addition, commenters noted that some States did not allow disclosures 
concerning rate filing information until rates are approved. In 
contrast, other State regulator commenters supported the requirement 
that the Preliminary Justification be posted immediately upon receipt. 
Several consumer commenters recommended that policyholders and the 
public be given adequate notice of proposed rate increases prior to 
increases going into effect. These commenters generally suggested that 
issuers file proposed rates with the States and give consumers notice 
of the proposed increases 60 or 90 days before they go into effect. One 
commenter suggested that patient advocacy groups be given specific 
notice concerning proposed increases that were higher than medical 
inflation.
    Response: Section 2794 of the Act requires that issuers submit to 
the Secretary and the relevant State a justification for an 
unreasonable rate increase before the rate is implemented. We 
considered two alternatives to implement that provision. The first 
would be to establish a federal regulatory requirement that a rate 
cannot go into effect until it has been reviewed and determined to be 
reasonable or unreasonable. At that point, justifications could be 
submitted only for those rates that were determined to be unreasonable, 
prior to their being implemented. Such a federal requirement would be 
inconsistent with the ``file and use'' laws in many States, which 
provide that a rate may go into effect as soon as it is filed. We 
concluded that overriding State law in this respect was not the best 
approach.
    Alternatively, the approach taken in the proposed rule, which 
requires a Preliminary Justification to be submitted at the time a rate 
increase subject to review is filed, assures that there will be a 
justification for increases for all rate increases that ultimately are 
determined to be unreasonable, without requiring any change in current 
State law or practice for reviewing rates. We believe that requiring 
the posting of the Preliminary Justification before a final 
determination is made both satisfies the requirements of the Affordable 
Care Act and assures that consumers will better understand why their 
issuers are proposing rate increases that meet or exceed the subject to 
review threshold.
    In addition, the disclaimer language on our Web site will be 
modified to better inform consumers of the purpose of the Preliminary 
Justification and to make clear that its posting is not a determination 
that the proposed rate increase is unreasonable.
6. Determination by CMS or a State of an Unreasonable Rate Increase 
(Sec.  154.225)
    When CMS reviews a rate increase subject to review, it will post on 
its Web site a final determination and a brief explanation of its 
analysis within five business days following the determination. If the 
rate increase is determined to be unreasonable, CMS will also provide 
this information to the health insurance issuer.
    When a State reviews an increase subject to review, CMS will adopt 
the State's final determination and post it on the CMS Web site. If a 
State determines that the rate increase is unreasonable, but the health 
insurance issuer is legally permitted to implement the increase under 
State law, CMS will provide the State's final determination and 
explanation to the issuer within five business days of CMS receiving 
the information from the State.
    Comment: One State commenter suggested that States with Effective 
Rate Review Programs not be required to post brief explanations and 
analyses that were more in-depth than those posted by CMS in cases 
where it reviews rates.
    Response: We have modified the final rule to clarify that the brief 
explanations and analyses posted by CMS and States are intended to be 
consistent in format and content.
    Comment: Numerous industry commenters suggested that CMS establish 
safe harbors or expedited rate review procedures. For example, some 
commenters suggested that if a health insurance issuer's proposed rate 
increases were expected to satisfy the Federal medical loss ratio 
standard, the increases should be exempt from review. Another commenter 
suggested that proposed rates in insurance markets that were determined 
to be competitive should either be exempt from review or subject to an 
expedited process. One commenter stated generally that the review 
process applied should vary based on the circumstances of the proposed 
increase.
    Response: We have not modified the final rule to provide safe 
harbors or expedited rate review procedures given that many factors are 
relevant in determining whether a particular proposed rate increase is 
unreasonable, thus supporting the need for a more detailed review 
process.
7. Submission and Posting of Final Justifications for Unreasonable Rate 
Increases (Sec.  154.230)
    If a health insurance issuer declines to implement a rate increase 
that has been determined to be unreasonable, or

[[Page 29972]]

chooses to implement a lower increase, under the proposed rule, the 
issuer would be required to provide CMS timely notice of its decision. 
A lower increase that meets or exceeds the applicable thresholds for 
review would require a new Preliminary Justification. However, if an 
issuer chooses to lower its request for a proposed increase while the 
increase is under review and before a determination or unreasonableness 
has been made, the issuer can do so by filing a modification to the 
filing under review. If the revised rate falls below the review 
threshold, the review will cease and the revised rate will be displayed 
on the posting.
    If a health insurance issuer implements an unreasonable rate 
increase, it must, within 10 days of the later of implementing the 
increase or receiving the final determination, provide CMS with a 
``Final Justification'' responding to CMS's or the State's 
determination, using information consistent with that provided by the 
issuer in the Preliminary Justification. The health insurance issuer 
must prominently post on its Web site: (1) the portions of the 
Preliminary Justification posted on the CMS Web site; (2) CMS's or the 
State's final determination; and (3) the issuer's Final Justification. 
This information must be made available on the issuer's Web site for at 
least three years. In addition, CMS will make an issuer's Final 
Justification available through the healthcare.gov Web site for three 
years.

    Note:  We did not receive any major comments on this section.

C. Subpart C--Effective Rate Review Programs

CMS's Determination of Effective Rate Review Programs (Sec.  154.301)
    Under the proposed rule, CMS would apply the following criteria in 
evaluating whether a State has an Effective Rate Review Program for the 
individual market and small group market, including different types of 
products within those markets. CMS will examine information publicly 
available concerning each States' authority to receive the data needed 
in order to review a proposed rate increase. This includes State 
statutes, regulations, bulletins, filing guidance, and so forth. CMS 
will also review available information that describes each State's 
practices in conducting rate reviews. This information primarily 
consists of State applications for rate review grants, quarterly 
reports of activity undertaken with grant funds, and conversations 
between CMS staff and state regulators relating to grant activities.
    CMS will then conduct a phone call with each State insurance 
regulator to confirm the information CMS has gathered and to ask for 
any additional information the State believes is relevant to the 
determination of whether it has an Effective Rate Review Program.
    CMS will notify States of its determinations by July 1, 2011, two 
months in advance of the date filings are first due pursuant to this 
regulation. States will have the right to bring any new information 
bearing on this decision to CMS at any time, and CMS will consider 
whether based on this new information the State should be determined to 
have an Effective Rate Review Program. CMS will also monitor States 
that have determined to be effective in order to ascertain that their 
processes continue to satisfy the requirements of the regulation.
    CMS would consider whether the State receives data and 
documentation from issuers concerning rate increases sufficient to 
conduct an examination of the reasonableness of the assumptions used to 
develop proposed rate increases, the validity of the historical data 
underlying the assumptions, and the issuers' data related to past 
projections and actual experience. CMS also would consider whether the 
State conducts effective and timely reviews of the information 
submitted by issuers in support of proposed rate increases. The 
examination would need to include an analysis of: (1) Medical trend 
changes by major service categories; (2) utilization changes by major 
service categories; (3) cost-sharing changes by major service 
categories; (4) benefit changes; (5) changes in enrollee risk profile; 
(6) impact of over- or under-estimate of medical trend in previous 
years on the current rate; (7) reserve needs; (8) administrative costs 
related to programs that improve health care quality; (9) other 
administrative costs; (10) applicable taxes and licensing or regulatory 
fees; (11) medical loss ratio; and (12) the health insurance issuer's 
risk-based capital status relative to n