Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, 41930-41956 [2011-17609]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Proposed Rules]
[Pages 41930-41956]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17609]



[[Page 41929]]

Vol. 76

Friday,

No. 136

July 15, 2011

Part III





Department of Health and Human Services





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45 CFR Part 153





Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment; Proposed Rule

Federal Register / Vol. 76 , No. 136 / Friday, July 15, 2011 / 
Proposed Rules

[[Page 41930]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 153

[CMS-9975-P]
RIN 0938-AR07


Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment

AGENCY: Department of Health and Human Services.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would implement standards for States 
related to reinsurance and risk adjustment, and for health insurance 
issuers related to reinsurance, risk corridors, and risk adjustment 
consistent with title I of the Patient Protection and Affordable Care 
Act as amended by the Health Care and Education Reconciliation Act of 
2010, referred to collectively as the Affordable Care Act. These 
programs will mitigate the impact of potential adverse selection and 
stabilize premiums in the individual and small group markets as 
insurance reforms and the Affordable Insurance Exchanges 
(``Exchanges'') are implemented, starting in 2014. The transitional 
State-based reinsurance program serves to reduce the uncertainty of 
insurance risk in the individual market by making payments for high-
cost cases. The temporary Federally-administered risk corridor program 
serves to protect against uncertainty in the Exchange by limiting the 
extent of issuer losses (and gains). On an ongoing basis, the State-
based risk adjustment program is intended to provide adequate payments 
to health insurance issuers that attract high-risk populations (such as 
individuals with chronic conditions).

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. Eastern Standard 
Time (E.S.T.) on September 28, 2011.

ADDRESSES: In commenting, please refer to file code CMS-9975-P. 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-9975-P, 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-9975-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    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 either of the following addresses:
    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 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 information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 
Sharon Arnold at (301) 492-4415 for general information.
Wakina Scott at (301) 492-4393 for matters related to reinsurance and 
risk corridors.
Kelly O'Brien at (301) 492-4399 for matters related to risk adjustment.
Grace Arnold at (301) 492-4272 for matters related to the collection of 
information requirements.
Brigid Russell at (301) 492-4421 for matters related to the summary of 
preliminary regulatory impact analysis.

Abbreviations:

Affordable Care Act--The collective term for the Patient Protection 
and Affordable Care Act (Pub. L. 111-148) and the Health Care and 
Education Reconciliation Act of 2010 (Pub. L. 111-152)
CMS Centers for Medicare & Medicaid Services
HHS U.S. Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
MLR Medical Loss Ratio
PHS Act Public Health Service Act (42 U.S.C. 201 et seq.)
QHP Qualified Health Plan

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this proposed rule to assist us in fully 
considering issues and developing policies. Comments will be most 
useful if they are organized by the section of the proposed rule to 
which they apply. You can assist us by referencing the file code [CMS-
9975-P] and the specific ``issue identifier'' that precedes the section 
on which you choose to comment.
    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 electronic 
comments received before the close of the comment period on the 
following public Web site as soon as possible after they have been 
received: https://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments. Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at 
Room 445-G, Department of Health and Human Services, Hubert H. Humphrey 
Building, 200 Independence Avenue, SW., Washington, DC 20201, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, call 1-800-743-3951.

[[Page 41931]]

Table of Contents

I. Background
    A. Legislative Overview
    B. Introduction
II. Provisions of the Proposed Regulation
    A. Subpart A--General Provisions
    B. Subpart B--State Notice of Insurance Benefits and Payment 
Parameters
    C. Subpart C--State Standards for the Transitional Reinsurance 
Program for the Individual Market
    D. Subpart D--State Standards for the Risk Adjustment Program
    E. Subpart E--Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program
    F. Subpart F--Health Insurance Issuer Standards Related to the 
Temporary Risk Corridor Program
    G. Subpart G--Health Insurance Issuer Standards Related to the 
Risk Adjustment Program
III. Collection of Information Requirements
IV. Summary of Preliminary Regulatory Impact Analysis
V. Regulatory Flexibility Act
VI. Unfunded Mandates
VII. Federalism
VIII. Regulations Text

I. Background

A. Legislative Overview

    Starting in 2014, individuals and small businesses will be able to 
purchase private health insurance through State-based competitive 
marketplaces called Affordable Insurance Exchanges, or ``Exchanges.'' 
Exchanges will offer Americans competition, choice, and clout. 
Insurance companies will compete for business on a level playing field, 
driving down costs. Consumers will have a choice of health plans to fit 
their needs. And Exchanges will give individuals and small businesses 
the same purchasing clout as big businesses. The Departments of Health 
and Human Services, Labor, and the Treasury (the Departments) are 
working in close coordination to release guidance related to Exchanges 
in several phases. The first in this series was a Request for Comment 
relating to Exchanges, published in the Federal Register on August 3, 
2010. Second, Initial Guidance to States on Exchanges was issued on 
November 18, 2010. Third, a proposed rule for the application, review, 
and reporting process for waivers for State innovation was published in 
the Federal Register on March 14, 2011. Fourth, two proposed 
regulations, including this one, are published in this issue of the 
Federal Register to implement components of the Exchange and health 
insurance premium stabilization policies in the Affordable Care Act.
    Section 1341 of the Affordable Care Act provides that each State 
must establish a transitional reinsurance program to help stabilize 
premiums for coverage in the individual market during the first three 
years of Exchange operation (2014-2016). Section 1342 provides that the 
Secretary must establish a transitional risk corridor program that will 
apply to the qualified health plans in the individual and small group 
markets for the first three years of Exchange operation (2014-2016). 
Section 1343 provides that each State may establish a program of risk 
adjustment for all non-grandfathered plans in the individual and small 
group market both inside and outside of the Exchange. These risk-
spreading mechanisms, which will be implemented by the Secretary and 
the States, are designed to mitigate the potential impact of adverse 
selection and provide stability for health insurance issuers in the 
individual and small group markets.
    Section 1321(a) also provides broad authority for the Secretary to 
establish standards and regulations to implement the statutory 
requirements related to Exchanges, reinsurance, risk adjustment, and 
other components of title I of the Affordable Care Act. Section 
1321(a)(2) requires, in issuing such regulations, the Secretary to 
engage in stakeholder consultation in a way that ensures balanced 
representation among interested parties. We describe the consultation 
activities the Secretary has undertaken later in this introduction. 
Section 1321(c)(1) authorizes the Secretary to establish Exchanges and 
implement reinsurance, risk adjustment and other components of title I 
of the Affordable Care Act in States that have not done so.

B. Introduction

    Underpinning the goals of high-quality, affordable health insurance 
coverage is the need to minimize the possible negative effects of 
adverse selection. Adverse selection occurs when each new health 
insurance purchaser understands his or her own potential health risk 
better than health insurance insurers do, and health insurance issuers 
are therefore less able to accurately price their products.
    To avoid adverse selection, issuers may set premiums higher than 
necessary in order to offset the potential expense of high-cost 
enrollees. This uncertainty could also result in an issuer being more 
cautious about offering certain plan designs in the Exchange. This risk 
will be greatest in the first years of the Exchange, and become less as 
the new market matures and issuers learn more about new enrollees.
    As experience in States has shown, offsetting the adverse selection 
from insurance reforms may be best accomplished by broadening the risk 
pool: making coverage affordable through lower premiums and targeted 
financial assistance and making coverage a responsibility so that 
people pay premiums in sickness and in health. In addition, to minimize 
the negative effects of adverse selection and foster a stable 
marketplace from year one, the Affordable Care Act establishes 
transitional reinsurance and temporary risk corridor programs, and a 
permanent risk adjustment program to provide payments to health 
insurance issuers that cover higher-risk populations and to more evenly 
spread the financial risk borne by issuers.
    The transitional reinsurance program and temporary risk corridor 
program, which begin in 2014, are designed to provide issuers with 
greater payment stability as insurance market reforms are implemented. 
The reinsurance program, which is a State-based program, will reduce 
the uncertainty of insurance risk in the individual market by making 
payments for high-cost cases. This program will attenuate individual 
market rate increases that might otherwise occur because of the 
immediate enrollment of individuals with unknown health status, 
potentially including, at the State's discretion, those currently in 
State high risk pools. The risk corridor program, which is a Federally-
administered program, will protect against uncertainty in setting rates 
in the Exchange by limiting the extent of issuer losses (and gains). 
Under the risk corridor program, an issuer of a qualified health plan 
(QHP) plan whose gains are greater than three percent of the issuer's 
projections must remit charges to HHS, while HHS must make payments to 
an issuer of a QHP plan that experiences losses greater than three 
percent of the issuer's projections. On an ongoing basis, the risk 
adjustment program is intended to provide adequate payments to health 
insurance issuers that attract high-risk populations (such as those 
with chronic conditions). Under this program, generally, funds are 
transferred from issuers with lower risk enrollees to issuers with 
higher risk enrollees. Section 1343 indicates that the Secretary may 
utilize criteria and methods similar to the criteria and methods 
utilized under part C or D of title XVIII of the Social Security Act. 
Proposed standards for these critical programs are addressed in this 
proposed rule. The chart below summarizes theses programs:

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               Program                       Reinsurance             Risk corridors          Risk adjustment
----------------------------------------------------------------------------------------------------------------
What.................................  Provides funding to      Limit issuer loss (and   Transfers funds from
                                        plans that enroll        gains).                  lowest risk plans to
                                        highest cost                                      highest risk plans.
                                        individuals.
Program Oversight....................  State or State Option    HHS....................  State Option in a State-
                                        if no State-Run                                   Run Exchange.
                                        Exchange.
Who Participates.....................  All issuers and TPAs     Qualified Health Plans   Non-grandfathered
                                        contribute funding;      (QHPs).                  individual and small
                                        non-grandfathered                                 group market plans,
                                        individual market                                 inside and outside the
                                        plans (inside and                                 Exchange.
                                        outside the Exchange)
                                        are eligible for
                                        payments.
When.................................  Throughout the year      After reinsurance and    After end of benefit
                                        2014-2016.               risk adjustment 2014-    year 2014 and
                                                                 2016.                    subsequent years.
Why..................................  Offsets high cost        Protect against          Protects against
                                        outliers.                inaccurate rate-         adverse selection.
                                                                 setting.
Time Frame...........................  3 years (2014-2016)....  3 years (2014-2016)....  Permanent.
----------------------------------------------------------------------------------------------------------------

    On August 3, 2010, HHS published a Request for Comment (RFC) 
inviting the public to provide input regarding the rules that will 
govern the Exchanges and related functions such as reinsurance and risk 
adjustment. In particular, HHS asked States, tribal representatives, 
consumer advocates, employers, issuers, and other interested 
stakeholders to comment on the types of standards Exchanges and related 
functions should be required to meet. The comment period closed on 
October 4, 2010. In this proposed rule, we do not directly respond to 
comments from the RFC; however, we generally describe the comments 
received at the beginning of each subpart and refer to them, where 
applicable, when discussing specific regulatory proposals. We intend to 
respond to comments from the RFC, along with comments received on this 
proposed rule, as part of the final rule. We also plan to disseminate 
parameters that will rely on factors that may change each year, such as 
the national reinsurance contribution rate and the Federally-certified 
risk adjustment model, in an annually updated Federal notice of benefit 
and payment parameters. In addition to the RFC, we have consulted with 
stakeholders through weekly meetings with the National Association of 
Insurance Commissioners, regular contact with States that received 
Exchange planning grants, and meetings with tribal representatives, 
health insurance issuers, trade groups, consumer advocates, employers, 
and other interested parties.

II. Provisions of the Proposed Regulation

A. Subpart A--General Provisions

1. Basis and Scope (Sec.  153.10)
    Section 153.10(a) of subpart A specifies that the general statutory 
authority for the standards proposed in part 153 are based on the 
following sections of title I of the Affordable Care Act: sections 1321 
and 1341-1343. Section 153.10(b) specifies that this part establishes 
standards for the establishment and operation of a transitional 
reinsurance program, temporary risk corridors, and a permanent risk 
adjustment program.
2. Definitions (Sec.  153.20)
    Under Sec.  153.20, we set forth definitions for terms that are 
used throughout part 153. Many of the definitions presented in Sec.  
153.20 are taken directly from the Affordable Care Act, from existing 
regulations, or from Sec.  155.20 of the notice of proposed rulemaking 
entitled ``Patient Protection and Affordable Care Act; Establishment of 
Exchanges and Qualified Health Plans,'' published in this issue of the 
Federal Register. New definitions were created for the purposes of 
carrying out regulations proposed in part 153. When a term is defined 
in part 153 other than in subpart A, the definition of the term is 
applicable only to the relevant subpart or section. The application of 
the terms defined in this section is limited to this proposed rule.
    Specifically, several terms are defined by the Affordable Care Act, 
including ``individual market'' (section 1304(a)(2)), ``qualified 
health plan'' (section 1301(a)(1)), and ``health plan'' (section 
1301(b)(1)). The definition for an ``Exchange'' is drawn from the 
statutory text in section 1311(d)(1) and 1311(d)(2)(A). The term 
``State'' is also taken directly from section 1304(d) of the Affordable 
Care Act to mean the 50 States and the District of Columbia.
    Some definitions were taken from other interim final regulations 
issued pursuant to the Affordable Care Act, including the term 
``grandfathered plan'' from Sec.  147.140. The definitions for the 
terms ``group health plan,'' ``health insurance issuer,'' and ``health 
insurance coverage'' are cross-referenced to the definitions 
established in Sec.  144.103. The definitions for the terms 
``enrollee,'' ``benefit year,'' and ``small group market'' are cross-
referenced to the definitions in the notice of proposed rulemaking 
entitled ``Patient Protection and Affordable Care Act; Establishment of 
Exchanges and Qualified Health Plans,'' published in this issue of the 
Federal Register. Other definitions used throughout this proposed rule 
are established for specific purposes. For example, the terms 
``applicable reinsurance entity,'' ``contributing entity,'' and 
``reinsurance-eligible plan'' relate to reinsurance programs, while the 
term ``risk adjustment covered plan'' relates to the risk adjustment 
program.

B. Subpart B--State Notice of Insurance Benefits and Payment Parameters

    In this subpart, we propose a process by which the States that are 
operating an Exchange or establishing a reinsurance program issue an 
annual notice to disseminate information to issuers and other 
stakeholders about specific requirements to support payment-related 
functions. This notice may also be a mechanism to address updates to 
other Exchange-related provisions proposed elsewhere that impact 
payment and benefit design. This provides a practical way to update 
certain payment and benefit factors that may change annually, such as 
reinsurance contribution rates that are based on annually changing 
thresholds.
1. Establishment of State insurance benefits and payment parameters 
(Sec.  153.100)
    In Sec.  153.100(a), we propose that a State operating an Exchange, 
as well as a State establishing a reinsurance program, issue an annual 
notice to describe the specific parameters that the State will employ 
if that State intends to utilize any reinsurance or risk adjustment 
parameters that differ from those specified in the forthcoming annual 
Federal notice of benefit and payment parameters. We believe the

[[Page 41933]]

information contained in the State notice should be provided one year 
in advance of the benefit year so that issuers may account for any 
updates in their design and review of plan benefits and in establishing 
and reviewing rates. As such, in paragraph (b), we propose specific 
deadlines for the State notice, if it intends on modifying Federally-
proposed parameters, which will be tied to a forthcoming annual Federal 
notice of benefit and payment parameters, upon which the public will 
have an opportunity to comment. Below are charts detailing the 
schedules for the forthcoming annual Federal notice of benefit and 
payment parameters for 2014 and subsequent years, with the first two 
dates occurring in the calendar year two years before the effective 
date.

         Annual Federal Notice of Benefit and Payment Parameters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
HHS publishes advance notice...........  Mid-October.
Comment period ends....................  Mid-November.
HHS publishes final notice.............  Mid-January.
------------------------------------------------------------------------

    We propose that States that plan to modify Federal parameters issue 
their notice by early March in the calendar year before the effective 
date. We understand that States may have their own timelines for public 
notice; this proposed requirement sets an outer bound for the final 
notice to be issued by a State that intends to utilize any reinsurance 
or risk adjustment parameters that differ from those specified in the 
forthcoming annual Federal notice of benefit and payment parameters. We 
seek comment on whether the proposed timing allows issuers sufficient 
time to reflect these State requirements in setting rates. In 
particular, we seek comment as to whether the schedule should be 
adjusted in the initial year to provide issuers additional time for 
setting rates for 2014.
    We also propose in paragraph (c) that if a State operating an 
Exchange or establishing a reinsurance program does not provide public 
notice of its intent to have State-specific parameters for any 
provision within the period specified in paragraph (b) of this section, 
the parameters set forth in the forthcoming annual Federal notice of 
benefits and payment parameters will serve as the State parameters.
2. Standards for the State Notice (Sec.  153.110)
    In paragraph (a)(1), we propose that content related to the 
reinsurance program include the data requirements and data collection 
frequency for health insurance issuers to receive reinsurance payment. 
In paragraph (a)(2), we propose that the State specify the attachment 
point, reinsurance cap, and coinsurance rate if the State plans to use 
different values than those set forth in the forthcoming annual Federal 
notice of benefit and payment parameters. In paragraph (a)(3), we 
propose that if a State plans to use more than one reinsurance entity, 
the State must include in the notice information related to the 
geographic boundaries of each applicable reinsurance entity and 
estimates related to the number of enrollees, payments, and premiums 
available for contributions in each region. We note that the 
forthcoming annual Federal notice of benefit and payment parameters 
will provide States with estimates for these values at the State level.
    In paragraph (b), we propose content related to the risk adjustment 
program if the State intends to modify the risk adjustment parameters 
set forth in the forthcoming annual Federal notice of benefits and 
payment parameters, including a detailed description of and rationale 
for any modification. Specifically, the State description of 
modifications should include: the methodology for determining average 
actuarial risk, including the establishment of risk pools and the 
Federally-certified risk adjustment model; and the risk adjustment data 
validation methodology.

C. Subpart C--State Standards for the Transitional Reinsurance Program 
for the Individual Market

    Section 1341 of the Affordable Care Act provides that a 
transitional reinsurance program is established in each State to help 
stabilize premiums for coverage in the individual market during the 
years 2014 through 2016. Under this provision, all health insurance 
issuers, and third-party administrators on behalf of self-insured group 
health plans, must make contributions to a not-for-profit reinsurance 
entity to support reinsurance payments to individual market issuers 
that cover high-cost individuals, except for high-cost individuals in 
grandfathered individual market health plans. As a basis for 
reinsurance payments, the law directs the Secretary to develop a list 
of 50 to 100 medical conditions to identify high-cost individuals or to 
identify alternative methods for payment in consultation with the 
American Academy of Actuaries (AAA). In this subpart, we codify section 
1341 of the Affordable Care Act as it relates to establishing a 
reinsurance program. Related standards on health insurance issuers with 
respect to reinsurance are proposed in subpart E.
    We identified three critical policy goals of the transitional 
reinsurance program. First, the transitional reinsurance program should 
offer protection to health insurance issuers against medical cost 
overruns for high-cost enrollees in the individual market, particularly 
those that are newly insured or those with previously excluded 
conditions, thereby allowing issuers to set lower premiums.
    Second, a transitional reinsurance program should permit early and 
prompt payment of reinsurance funds during the benefit year to help 
offset the potential high costs of health insurance issuers early in 
the benefit year. This objective is particularly important since the 
two other risk sharing protections against adverse selection--risk 
adjustment and risk corridors--are likely to be calculated after the 
end of the benefit year.
    Third, the transitional reinsurance program should require minimal 
administrative burden since it is a temporary program. Given the short-
term nature of the program, the costs of setting up and administering 
this program must be commensurate with its benefits over the three-year 
window.
    We received a number of comments on the transitional reinsurance 
program in response to the RFC. Multiple respondents emphasized that, 
although underlying conditions are referenced in the Affordable Care 
Act with respect to the reinsurance provisions, reinsurance programs 
typically do not consider the health status of the individual. Health 
insurance issuers seek traditional reinsurance to protect against 
unusually high medical cost of enrollees during a coverage year. 
Generally, reinsurance is not tied to underlying conditions that lead 
to high enrollee medical costs but to high claims costs beyond a 
specific dollar threshold within a coverage period, regardless of 
health condition.
    Several commenters asserted that coverage of specific conditions 
under a reinsurance program could lead to discriminatory practices 
toward certain individuals, with one commenter noting that identifying 
medical conditions as a basis for reinsurance payments requires a level 
of verification beyond that of traditional reinsurance. Another 
commenter contended that traditional reinsurance that makes payments 
based solely on incurred costs does not encourage efficient and 
effective care.
    We considered all of these comments in the development of this 
subpart, along with commenter suggestions on entities that could serve 
as the

[[Page 41934]]

applicable reinsurance entity for a State. As explained more fully 
below, we believe that States should have discretion to make a number 
of decisions within the proposed standards, including the 
appropriateness of any specific entity as an administrator of the 
reinsurance program.
1. Definitions (Sec.  153.200)
    In Sec.  153.200, we propose several definitions that are critical 
to the establishment of a properly functioning transitional reinsurance 
program. We define an ``attachment point'' as the threshold dollar 
amount of costs incurred by a health insurance issuer for payment of 
essential health benefits provided for an enrolled individual, after 
which threshold, the costs for covered essential health benefits are 
eligible for reinsurance payments. The definition of ``essential health 
benefits'' will be proposed in future rulemaking. We define 
``coinsurance rate'' as the rate at which the applicable reinsurance 
entity will reimburse the health insurance issuer for costs incurred to 
cover essential health benefits after the attachment point and before 
the reinsurance cap. We define the ``reinsurance cap'' as the threshold 
dollar amount for costs incurred by a health insurance issuer for 
payment of essential health benefits provided for an enrolled 
individual, after which threshold, the costs for covered essential 
health benefits are no longer eligible for reinsurance payments. In 
order to ensure reinsurance payments are made on a comparable set of 
benefits, we propose that payments be calculated for costs to cover the 
essential health benefits package. We solicit comments on alternatives 
to the use of the essential health benefits package.
    We define ``contribution rate'' as the rate, based on a percent of 
premium, used to determine the dollar amounts each health insurance 
issuer and third party administrator, on behalf of a self-insured group 
health plan, must contribute to a State reinsurance program. We define 
the ``percent of premium'' as the percent of total revenue, based on 
earned premiums as described in Sec.  158.130(a), in all fully-insured 
markets (inside and outside of the Exchange) or the percent of total 
medical expenses in a self-insured market. Part 158 describes standards 
for health insurance issuers implementing the medical loss ratio 
requirements under section 2718 of the PHS Act. Finally, we define 
``third party administrator'' as the claims processing entity for a 
self-insured group health plan. As such, if a self-insured group health 
plan processes its own claims, the self-insured plan will be considered 
a third-party administrator for the purpose of the reinsurance program.
2. State Establishment of a Reinsurance Program (Sec.  153.210)
    In Sec.  153.210, we describe standards for States regarding the 
establishment of a reinsurance program. We propose in paragraph (a) 
that each State that elects to operate an Exchange must also establish 
a reinsurance program as required by the law. In paragraph (a)(1), we 
codify section 1341(a) of the Affordable Care Act, which requires that 
such States must either enter into a contract with an existing 
applicable reinsurance entity or establish an applicable reinsurance 
entity to carry out the provisions for the reinsurance program 
discussed in this subpart. We believe the statute allows State 
flexibility in selecting an applicable reinsurance entity and do not 
propose more specific guidelines.
    The Affordable Care Act also allows States to set up more than one 
reinsurance entity, although this option may increase administrative 
costs. We propose in paragraph (a)(2) that, for any State that chooses 
to have more than one reinsurance entity, the State must publish in a 
State notice, described in Sec.  153.110, information regarding the 
geographic divisions between the applicable entities. We further 
interpret the statute to imply that the geographic divisions of the 
applicable reinsurance entities must be distinct and, together, cover 
the entire individual market in the State and not just certain areas or 
populations. In paragraph (a)(3), we propose to allow the State to 
permit a reinsurance entity to subcontract administrative functions, 
provided that the State reviews and approves these subcontracted 
arrangements as described in paragraph (a)(4). We interpret the statute 
to allow flexibility in the performance of administrative functions, 
with the understanding that the responsible party must be the 
applicable reinsurance entity.
    We propose in paragraph (a)(5) that the establishment of, or 
contract with, the applicable reinsurance entity must extend for a 
sufficient period to ensure that the entity can fulfill all reinsurance 
requirements for all benefit years through 2016 and any activities 
required to be undertaken in subsequent periods. Any State in which 
contributions remain to be disbursed for benefit years beyond 2016 must 
ensure that an applicable reinsurance entity is available for required 
payment activities for additional benefit years. When establishing or 
contracting with an applicable reinsurance entity, States must 
establish sufficient time to pay reinsurance claims after 2016. This 
time cannot extend past December 31, 2018 as described in section 
1341(b)(4) of the Affordable Care Act.
    We clarify in paragraph (b) that there may be situations in which 
an applicable reinsurance entity operates a reinsurance program for 
more than one State. In other words, several States may contract with 
one reinsurance entity, but that entity must maintain separate risk 
pools for each State's reinsurance programs. In such cases, we consider 
each contract to be an individual reinsurance arrangement between a 
specific State and the applicable reinsurance entity.
    We propose in paragraph (c) to allow a State that does not elect to 
establish an Exchange to operate its own reinsurance program. Under 
this circumstance, the State will be required to carry out the 
provisions of this subpart. In paragraph (d), we propose that, if a 
State does not elect to establish an Exchange and does not determine to 
operate its own reinsurance program, HHS will establish the reinsurance 
program to perform all the reinsurance functions for that State. These 
functions would include the collection of all contributions described 
in Sec.  153.220, including funds required to operate and administer 
the applicable reinsurance functions. In paragraph (e), we propose that 
each State that establishes an Exchange or operates a reinsurance 
program must ensure that each applicable reinsurance entity complies 
with all provisions of this subpart and with subpart E.
3. Collection of Reinsurance Contribution Funds (Sec.  153.220)
    In Sec.  153.220, we describe standards for how States must ensure 
that the reinsurance entity collects reinsurance contribution funds. 
Section 1341 provides for the collection of contribution funds to cover 
all reinsurance payments and also permits the collection of funds to 
cover administrative costs incurred by the applicable reinsurance 
entity. These contribution funds must be collected by the reinsurance 
entity from all health insurance issuers and third party administrators 
on behalf of self-insured plans. The aggregate contribution funds for 
purposes of making reinsurance payments are specified as $10 billion in 
2014, $6 billion in 2015, and $4 billion in 2016 as described in 
section 1341(b)(3)(B)(iii). None of these funds can be used for any 
purpose other than paying reinsurance or administering the reinsurance 
programs. The aggregate

[[Page 41935]]

contribution funds would be returned to those issuers that qualify for 
the transitional reinsurance program. In paragraph (a)(1), we codify 
the aggregate contribution amounts.
    The statute also requires that the reinsurance entity collect 
specified additional contribution funds for deposit into the general 
fund of the U.S. Treasury. The additional contribution funds to the 
general fund are set at $2 billion in calendar years 2014 and 2015, and 
$1 billion in 2016 as described in section 1341(b)(3)(B)(iv). The 
Congressional Budget Office considered the additional contributions to 
score as an offset for the costs of administering the Early Retiree 
Reinsurance Program within the 10 year budget window, however, these 
funds will not be used to directly pay for ERRP costs. In paragraph 
(a)(2), we codify these additional contribution amounts.
    Although the transitional reinsurance program is State-based, 
section 1341(b)(3) sets contribution levels for the program on a 
national basis. We considered two approaches by which to collect 
contribution funds: (1) Use of a national uniform contribution rate, 
and (2) use of a State-level allocation, both set by HHS to ensure that 
the sum of all contribution funds equals the national amounts set forth 
in statute. In paragraph (b) we propose the first approach to collect 
contribution funds for amounts listed in paragraph (a)(1) and (a)(2). 
Use of a national contribution rate is a simpler approach. Further, 
since there is significant uncertainty about Exchange enrollment, the 
overall health of the enrolled population, and the cost of care for new 
enrollees, we believe that a national contribution rate would be the 
less ambiguous approach of the two. All contribution funds collected by 
a State establishing a reinsurance program, using the national 
contribution rate, will stay in that State and be used to make 
reinsurance payments on valid claims submitted by reinsurance-eligible 
plans in that State. A State-level allocation would be more complex to 
administer. We solicit comments regarding whether to use a State-level 
allocation or a national rate.
    There are two methods we considered for determining contributions 
using a national rate: (1) A percent of premium amount applied to all 
contributing entities, and (2) a flat per capita amount applied to all 
covered enrollees of contributing entities. In paragraph (b)(1), we 
propose the percent of premium method as the fairest method by which to 
collect these contributions, as it allows States that tend to have 
higher premium and health care costs, and thus reinsurance claims, to 
collect additional funds towards reinsurance. A flat, per capita amount 
could represent an excessively high percent of premium for products 
that are designed and intended to have low premiums targeted toward a 
population such as young adults and children. HHS will establish the 
percentage through a forthcoming annual Federal notice of benefit and 
payment parameters, based on its estimate of total premiums in the 
fully insured market and medical expenses in the self-insured market. 
We invite comments regarding the preferred method for calculating 
health insurance issuer contribution funds using a national rate.
    In paragraph (b)(2), we also propose that all contribution funds 
collected for reinsurance payments must be used for reinsurance, and 
all contribution funds collected for the U.S. Treasury must be paid to 
the U.S. Treasury. In paragraph (b)(3)(i), we propose that a State may 
collect more than its amount collected in the national rate, if the 
State believes that these amounts are not sufficient to cover the 
payments it will make under the payment formula. Nothing in the 
Affordable Care Act precludes a State from supplementing this program. 
In paragraph (b)(3)(ii), we also propose that a State may collect more 
than its amount collected at the national rate to cover the 
administrative costs of the applicable reinsurance entity.
    We have also considered the frequency by which applicable 
reinsurance entities should collect contribution funds from 
contributing entities. For example, applicable reinsurance entities 
could collect contribution funds intended for reinsurance payments and 
payments to the U.S. Treasury on a monthly basis beginning in January 
2014 so that reinsurance payments could begin in February 2014. We 
invite comments on the most appropriate method and frequency to collect 
reinsurance contribution funds.
4. Calculation of Reinsurance Payments (Sec.  153.230)
    As required, in Sec.  153.230 we set the payment policy for the 
reinsurance program based upon consultation with the AAA. The 
reinsurance payment policy addresses two basic issues: (1) How to 
determine the individuals who are covered by reinsurance, and (2) how 
to determine appropriate payment amounts. Given the short-term nature 
of the program, our primary objective is to select an implementation 
approach that is administratively and operationally simple, but 
satisfies the goals of the program. Therefore, we would use reliable 
and readily accessible data sources that would allow health insurance 
issuers to receive prompt payment. We propose in paragraph (a) of this 
section that coverage be based on items and services within the 
essential health benefits for an individual enrollee that exceeds an 
attachment point. We invite comments regarding this proposed provision 
or if we should allow reinsurance payment for more generous coverage 
beyond that provided by essential health benefits.
    In paragraph (b), we propose to announce the reinsurance payment 
formula and State-specific values for the attachment point, reinsurance 
cap, and coinsurance rate in the forthcoming annual Federal notice of 
benefits and payment parameters. We believe that publishing this 
information in a Federal notice is the best approach for announcing the 
attachment point and reinsurance cap as these values may change in 
years 2015 and 2016. The Affordable Care Act does not suggest that the 
three-year reinsurance program should replace commercial reinsurance or 
internal risk mitigation strategies. There will be a continued need for 
ongoing commercial reinsurance. Therefore, we propose establishing a 
reinsurance cap set at the attachment point of traditional reinsurance. 
We seek comment on this approach.
    In paragraph (b)(1), we propose that the reinsurance payment amount 
be a percentage of those costs above an attachment point and below a 
reinsurance cap. However, we believe States may have unique situations 
and recommend allowing a State that runs the reinsurance program to 
establish its own payment formula by varying the attachment point, 
coinsurance rate, and reinsurance cap. The reasoning for the policy 
proposed in paragraph (b)(1) follows below, along with a discussion of 
some operational issues related to the timing of reinsurance payments.
    In our consultation, AAA laid out a number of different ways to 
implement the reinsurance payment provisions. A letter outlining this 
issue can be found on their Web site at https://www.actuary.org/pdf/health/Reinsurance%20Options%209%2022%202010.pdf. With respect to the 
determination of who will be covered, AAA identified four possible 
approaches:
    (1) Identification of individuals with specific conditions based on 
claims data.
    (2) Identification of individuals with specific conditions based on 
survey data.
    (3) Identification of high-risk individuals using risk adjustment 
data

[[Page 41936]]

and a condition-based risk adjustment model.
    (4) Identification of reinsurance-eligible individuals based on 
medical cost to the health insurance issuer for covered benefits.
    The last option, which we propose to adopt, focuses on all high-
cost enrollees without respect to the conditions that caused the 
increased cost. This approach would be most familiar to health 
insurance issuers and administratively less burdensome than the first 
and second options. Data will be immediately available and dependent 
only on health insurance issuers filing proof of payment for claims. 
While the third option might mitigate some of the burden and cost 
concerns, it would not eliminate the timing issues that are critical to 
effective reinsurance implementation. In 2014, we will be able to 
collect reliable condition information only for those conditions that 
are diagnosed during that benefit year. In other words, condition-based 
reinsurance will not be a predictive model until at least 2015 due to 
lack of sufficient and timely data. As a result, we found all of the 
condition-based approaches to eligibility identification to be 
considerably more burdensome in comparison to the medical cost approach 
without significant improvement in outcomes from a determination 
standpoint. We solicit comments for a suitable method for ensuring that 
issuer costs are appropriate and accurate.
    With respect to the decision on how to calculate payments, AAA 
discussed the following two principal approaches:
    (1) Payments for costs incurred above an attachment point.
    (2) Fixed payment schedule for specific conditions.
    The first option, payment for costs incurred above an attachment 
point, aligns compensation with cost by reimbursing health insurance 
issuers that have enrollees in the individual market who actually 
experience higher health costs. We propose this approach, which 
represents a more traditional view of reinsurance. It is also 
consistent with the Early Retiree Reinsurance Program. Health insurance 
issuers are eligible for reinsurance payments only when costs are in 
excess of a certain level. The proposed approach is simpler from an 
operational perspective; the only data required to implement it will be 
cost and claims data for individuals. This approach also works in 
tandem with the medical-cost method of determining eligibility.
    The fixed payment schedule option, which we are not proposing to 
adopt, has the effect of paying the same amount for all individuals who 
present with a specific condition regardless of actual enrollee cost. 
This method assumes that high-cost individuals incurring highest costs 
across plans are of equal care mix and does not make distinctions. This 
method also penalizes issuers that attract more individuals with higher 
disease burden within disease categories, and thus may be less 
effective in mitigating the actual financial impact of adverse 
selection.
    In sum, we propose using medical cost experience only to identify 
eligible enrollees for which health insurance issuers would receive 
reinsurance. Accordingly, we also propose to use the attachment point 
approach for determining payment. As described by AAA, an attachment 
method for calculating reinsurance payments considers costs only for 
high-risk individuals and may reduce incentives for health insurance 
issuers to control costs. However, use of a reinsurance cap, as well as 
the requirement for health insurance issuer coinsurance rate above the 
attachment point and below the cap, may incentivize health insurance 
issuers to control costs. We invite comment regarding the best method 
of determining payments for the reinsurance program, which can relate 
to either our criteria for selecting eligible enrollees for payment or 
the method for calculating the payment amounts.
    We propose in Sec.  153.230(b)(2) that all payments to the general 
fund of the U.S. Treasury be made in a manner specified in the 
forthcoming annual Federal notice of benefits and payment parameters. 
We have also considered the frequency for which payments should be made 
to the U.S. Treasury. For example, the applicable reinsurance entities 
could remit payment on a monthly or quarterly basis commencing February 
28, 2014, continuing through January 31, 2017 or until States have 
remitted the full amount of all payments. We invite comment as to the 
most appropriate frequency and method for applicable reinsurance 
entities to remit payment to the U.S. Treasury.
    We propose in Sec.  153.230(c) to allow some degree of State 
variation from the reinsurance parameters proposed by HHS. The 
Affordable Care Act contemplates the potential of modifications to the 
payment parameters through a statutory reference to ``model 
regulation'' as opposed to strict Federal regulation. Therefore, we 
propose in paragraph (c)(1) that the State may alter the attachment 
point, reinsurance cap, including elimination of the cap, and 
coinsurance rate. We propose in paragraph (c)(2) that States must 
publish any modification to the reinsurance payment formula and 
parameters in a State notice as described in Sec.  153.110 of this 
part. We propose in paragraph (c)(3) that the State must ensure that 
all proposed alterations to the reinsurance formulas proposed by HHS, 
including payments and contributions, result in the applicable 
reinsurance entity having sufficient contributions to meet of all of 
its obligations for payments. Such alterations to reinsurance 
parameters do not require HHS approval.
    We believe that a State may have many reasons to make adjustments 
to the HHS reinsurance payment formula. First, the State may determine 
to increase the reinsurance benefit above the level established by HHS. 
Second, the State may have additional unexpended funds from a prior 
contribution period and may seek to adjust the reinsurance formulas to 
disburse the unexpended funds. Third, the State may elect to pay the 
same amounts recommended by HHS, but may wish to make those payments 
either earlier or later in the medical cost experience. Finally, the 
State may decide to vary the annual amounts without varying the total 
across all three years.
5. Disbursement of Reinsurance Payments (Sec.  153.240)
    In Sec.  153.240, we propose parameters for the timing of 
reinsurance payments. In paragraph (a) of this section, we propose that 
States must ensure that the applicable reinsurance entity collects from 
health insurance issuers of reinsurance-eligible plans data required to 
calculate payments described in Sec.  153.230, according to the data 
requirements and data collection frequency specified by the State in 
the notice described in Sec.  153.110 or in the forthcoming annual 
Federal notice of benefit and payment parameters.
    Since we are proposing that reinsurance eligibility and payments be 
based on the health insurance issuer medical costs, we believe that a 
standard method of collecting the required information should be a 
reasonable goal and easily achievable. Further, a standard method will 
enable multi-State health insurance issuers to submit data promptly 
without causing disruption for any single-State health insurance 
issuer.
    In paragraph (b), we propose that the State must ensure that each 
applicable reinsurance entity makes payments that do not exceed 
contributions and makes payments to health insurance issuers of 
reinsurance-eligible plans according to Sec.  153.230. We also propose 
in paragraph

[[Page 41937]]

(b)(2) to allow States to reduce payments on a pro rata basis to match 
the amount of contributions received by the State in a given 
reinsurance year. Any pro rata reductions made by the State must be 
made in a fair and equitable manner for all health insurance issuers in 
the individual market.
    In paragraph (b)(3), we propose that the State must ensure that an 
applicable reinsurance entity makes payments as specified in Sec.  
153.410(b) to the issuer of a reinsurance-eligible plan after receiving 
a valid claim for payment. We invite comments as to the most 
appropriate timeframe that an applicable reinsurance entity should make 
payments for reinsurance claims submitted, particularly, since 
reinsurance claims may exceed contributions for a given month, but not 
total projected contributions for the entire year.
    We have also considered deadlines by which a health insurance 
issuer could submit a claim for a given reinsurance benefit year. For 
example, Medicare Part D has a requirement for data submission within 6 
months after the end of the coverage year, and we believe this is an 
appropriate standard. We seek comment as to whether the deadline for 
health insurance issuers for submitting reinsurance claims should be 
the same or different.
    A standard deadline would allow for an orderly completion of the 
payment processes that depend upon reinsurance, specifically the risk 
corridors program and the medical loss ratio (MLR) reporting to support 
the rebate calculations in section 2718 of the PHS Act. Health 
insurance issuers must know the value of their reinsurance payments and 
must report that value to HHS under the risk corridor and MLR reporting 
provisions. Failure to establish a standard deadline could result in 
excessive delays in the completion of the rebate calculations under 
section 2718 of the PHS Act. Such delays would in turn delay receipt of 
rebate payments by the affected enrollees. We invite comment on the use 
of a standard deadline and the most appropriate deadline considering 
the interaction of the reinsurance program with risk corridor and the 
MLR process.
    Finally, in paragraph (c), we propose that for each benefit year, 
the State maintains all records related to the reinsurance program for 
10 years, consistent with requirements for record retention under the 
False Claims Act. We solicit comments on this record retention 
requirement.
5. Coordination With High-Risk Pools (Sec.  153.250)
    In Sec.  153.250, we codify the requirement under section 1341(d) 
of the Affordable Care Act that States shall eliminate or modify high 
risk pools to the extent necessary to carry out the reinsurance 
program. As stated in the introduction to this subpart, the reinsurance 
program required under the Affordable Care Act is designed to help 
mitigate adverse selection risks in the first three years of Exchange 
operation. In paragraph (a), we codify the above-referenced section. In 
paragraph (b), we propose to allow a State that continues its high risk 
pool to coordinate its high risk pool with its reinsurance program to 
the extent it conforms to the provisions of this subpart. We seek 
comment regarding whether a high risk pool that continues operation 
after January 1, 2014 should be considered an individual market plan 
eligible for reinsurance under this provision.

D. Subpart D--State Standards Related to the Risk Adjustment Program

    In subpart D, we propose standards for States with respect to the 
risk adjustment program required under section 1343 of the Affordable 
Care Act. Parallel provisions on health plans are proposed in subpart G 
of this subpart. Section 1343 provides for a program of risk adjustment 
for all non-grandfathered plans in the individual and small group 
market both inside and outside of the Exchange. Under this provision, 
the Secretary, in consultation with the States, must establish criteria 
and methods to be used by States in determining the actuarial risk of 
plans within a State. States electing to operate an Exchange, or HHS on 
behalf of States not electing to operate an Exchange, will assess 
charges to plans that experience lower than average actuarial risk and 
use them to make payments to plans that have higher than average 
actuarial risk. Thus, the risk adjustment program is intended to reduce 
or eliminate premium differences between plans based solely on 
expectations of favorable or unfavorable risk selection or choices by 
higher risk enrollees in the individual and small group market. The 
risk adjustment program also serves to level the playing field inside 
and outside of the Exchange, reducing the potential for excessive 
premium growth or instability within the Exchange.
    We received a variety of comments on the risk adjustment process in 
response to the RFC. Many commenters expressed strong opinions about 
the extent of Federal oversight in risk adjustment and the level of 
flexibility afforded States for developing a risk adjustment model and 
how much to rely on current prospective models being used, for example, 
in Medicare Advantage or concurrent risk adjustment models being used.
    We also received comments related to data standards and the role of 
the Federal government. Commenters noted difficulties in obtaining 
certain types of data accurately and expressed concerns about audit 
requirements. Commenters discussed upcoding problems, as well as issues 
of credibility of the underlying systems to support risk adjustment. 
Commenters also raised issues related to the transition both to the 
Exchanges and the risk adjustment program, with the primary issue being 
the timing of claims data availability in the early years of the 
program. Some States indicated that they are developing ``all payer 
claims databases,'' although not all of these databases are expected to 
be complete by 2014. However, even existing ``all payer'' databases 
will not contain any data from the currently uninsured individuals, who 
are expected to comprise a segment of new individual market enrollees.
    Overall, we believe that States have discretion to make a number of 
decisions within the standards we propose herein.
1. Definitions (Sec.  153.300)
    We propose several definitions that are specifically applicable to 
this subpart in Sec.  153.300. First, we distinguish between risk 
adjustment models and risk adjustment methodologies. We define ``risk 
adjustment model'' as an actuarial tool used to predict health plan 
costs based on the relative actuarial risk of enrollees in risk 
adjustment covered plans, which we had previously defined as non-
grandfathered plans in the individual and small group market. We define 
``risk adjustment methodology'' as the specific set of procedures used 
to determine average actuarial risk.
    A ``Federally-certified risk adjustment methodology'' is a risk 
adjustment methodology that has been developed and promulgated by HHS 
or has been certified by HHS. As explained further in Sec.  153.330, 
States may use a modified methodology if it has been certified by HHS 
and deemed a Federally-certified risk adjustment methodology. An 
``alternate risk adjustment methodology'' is a risk adjustment 
methodology proposed by one or more States for use in place of the 
Federally-certified risk adjustment methodology, not yet certified by 
HHS. Additionally, we define ``risk pool'' as the population

[[Page 41938]]

across which risk is distributed in risk adjustment.
2. Risk Adjustment Administration (Sec.  153.310)
    Section 1343(a) of the Affordable Care Act establishes that States 
must assess risk adjustment charges and provide risk adjustment 
payments based on plan actuarial risk as compared to a State average. 
We interpret this provision to mean that risk pools must be aggregated 
at the State level, even if a State decides to utilize regional 
Exchanges. Furthermore, section 1343(c) indicates that risk adjustment 
applies to individual and small group market health insurance issuers 
of non-grandfathered plans within a State, both inside and outside of 
the Exchange. Accordingly, similar to our approach in reinsurance, if 
multiple States contract with a single entity to administer risk 
adjustment, risk may not be combined across State lines, but must be 
pooled at the individual State-level.
    In this section, in paragraph (a)(1), we specify that any State 
electing to establish an Exchange is eligible to establish a risk 
adjustment program. Pursuant to section 1321(a)(1)(D) of the Affordable 
Care Act, we propose in paragraph (a)(2) that for States that do not 
operate an Exchange, HHS will establish a risk adjustment program. We 
also clarify in (a)(3) that HHS will administer all of the risk 
adjustment functions for any State that elects to establish an Exchange 
but does not elect to administer risk adjustment. In paragraph (b), we 
clarify that the State may elect to have an entity other than the 
Exchange perform the risk adjustment functions of this subpart provided 
that the selected entity meets the requirements for eligibility to 
serve as the Exchange proposed in Sec.  155.110 of the notice of 
proposed rulemaking entitled, ``Patient Protection and Affordable Care 
Act; Establishment of Exchanges and Qualified Health Plans.''
    In paragraph (c), we propose timeframes for completion of the risk 
adjustment process. We propose that all payment calculations must 
commence with the 2014 benefit year. The Affordable Care Act does not 
explicitly set forth a timeframe by which risk adjustment programs must 
start. However, we believe risk adjustment must be coordinated with 
reinsurance and risk corridors to help stabilize the individual and 
small group markets and ensure the viability of the Exchanges, which 
begin in 2014. Timely completion of the risk adjustment process is 
important because risk adjustments affect calculations of both risk 
corridors and the rebates specified under section 2718 of the PHS Act. 
By law, HHS will be performing the risk corridors calculations for all 
qualified health plans (QHP) in all States. Therefore, we seek comment 
on the appropriate deadline by which risk adjustment must be completed. 
For example, HHS may require that States complete risk adjustment 
activities by June 30 of the year following the benefit year. This 
timing assumes at least a three-month lag from items and services 
furnished in a benefit year and the end of the data collection period. 
This approach is similar to the Medicare Advantage (Part C) risk 
adjustment data submission, in which the annual deadline for risk 
adjustment data submission is 2-months after the end of the 12-month 
benefit period, but may, at CMS's discretion, include a 6-month lag 
time.
    Since risk adjustment is designed as a budget neutral activity, 
States would likely need to receive remittances from issuers of low 
actuarial risk plans before making payments to issuers of high 
actuarial risk plans. We seek comment on an appropriate timeframe for 
State commencement of payments.
    To ensure the each State's risk adjustment program is functioning 
properly, we believe that States should provide HHS with a summary 
report of risk adjustment activities for each benefit year in the year 
following the calendar year covered in the report. The summary report 
should include the average actuarial risk score for each plan, 
corresponding charges or payments, and any additional information HHS 
deems necessary to support risk adjustment me