Patient Protection and Affordable Care Act; Adoption of the Methodology for the HHS-Operated Permanent Risk Adjustment Program for the 2018 Benefit Year Final Rule, 63419-63428 [2018-26591]
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Federal Register / Vol. 83, No. 236 / Monday, December 10, 2018 / Rules and Regulations
Final rule
§ 380.10
[Corrected]
2. On page 61125, in the third column,
in § 380.10, in paragraph (a)(2),
‘‘$0.0019’’ is corrected to read
‘‘$0.0018’’.
■
Dated: December 3, 2018.
David R. Strickler,
Copyright Royalty Judge.
[FR Doc. 2018–26606 Filed 12–7–18; 8:45 am]
BILLING CODE 1410–72–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
45 CFR Part 153
[CMS–9919–F]
RIN 0938–AT66
Patient Protection and Affordable Care
Act; Adoption of the Methodology for
the HHS-Operated Permanent Risk
Adjustment Program for the 2018
Benefit Year Final Rule
Centers for Medicare &
Medicaid Services (CMS), Department
of Health and Human Services (HHS).
ACTION: Final rule.
AGENCY:
This final rule adopts the
HHS-operated risk adjustment
methodology for the 2018 benefit year.
In February 2018, a district court
vacated the use of statewide average
premium in the HHS-operated risk
adjustment methodology for the 2014
through 2018 benefit years. Following
review of all submitted comments to the
proposed rule, HHS is adopting for the
2018 benefit year an HHS-operated risk
adjustment methodology that utilizes
the statewide average premium and is
operated in a budget-neutral manner, as
established in the final rules published
in the March 23, 2012 and the December
22, 2016 editions of the Federal
Register.
SUMMARY:
The provisions of this final rule
are effective on February 8, 2019.
FOR FURTHER INFORMATION CONTACT:
Abigail Walker, (410) 786–1725; Adam
Shaw, (410) 786–1091; Jaya Ghildiyal,
(301) 492–5149; or Adrianne Patterson,
(410) 786–0686.
SUPPLEMENTARY INFORMATION:
DATES:
I. Background
A. Legislative and Regulatory Overview
The Patient Protection and Affordable
Care Act (Pub. L. 111–148) was enacted
on March 23, 2010; the Health Care and
Education Reconciliation Act of 2010
(Pub. L. 111–152) was enacted on March
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30, 2010. These statutes are collectively
referred to as ‘‘PPACA’’ in this final
rule. Section 1343 of the PPACA
established an annual permanent risk
adjustment program under which
payments are collected from health
insurance issuers that enroll relatively
low-risk populations, and payments are
made to health insurance issuers that
enroll relatively higher-risk populations.
Consistent with section 1321(c)(1) of the
PPACA, the Secretary is responsible for
operating the risk adjustment program
on behalf of any state that elects not to
do so. For the 2018 benefit year, HHS
is responsible for operation of the risk
adjustment program in all 50 states and
the District of Columbia.
HHS sets the risk adjustment
methodology that it uses in states that
elect not to operate risk adjustment in
advance of each benefit year through a
notice-and-comment rulemaking
process with the intention that issuers
will be able to rely on the methodology
to price their plans appropriately (see 45
CFR 153.320; 76 FR 41930, 41932
through 41933; 81 FR 94058, 94702
(explaining the importance of setting
rules ahead of time and describing
comments supporting that practice)).
In the July 15, 2011 Federal Register
(76 FR 41929), we published a proposed
rule outlining the framework for the risk
adjustment program. We implemented
the risk adjustment program in a final
rule, published in the March 23, 2012
Federal Register (77 FR 17219)
(Premium Stabilization Rule). In the
December 7, 2012 Federal Register (77
FR 73117), we published a proposed
rule outlining the proposed Federally
certified risk adjustment methodologies
for the 2014 benefit year and other
parameters related to the risk
adjustment program (proposed 2014
Payment Notice). We published the
2014 Payment Notice final rule in the
March 11, 2013 Federal Register (78 FR
15409). In the June 19, 2013 Federal
Register (78 FR 37032), we proposed a
modification to the HHS-operated risk
adjustment methodology related to
community rating states. In the October
30, 2013 Federal Register (78 FR
65046), we finalized this proposed
modification related to community
rating states. We published a correcting
amendment to the 2014 Payment Notice
final rule in the November 6, 2013
Federal Register (78 FR 66653) to
address how an enrollee’s age for the
risk score calculation would be
determined under the HHS-operated
risk adjustment methodology.
In the December 2, 2013 Federal
Register (78 FR 72321), we published a
proposed rule outlining the Federally
certified risk adjustment methodologies
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63419
for the 2015 benefit year and other
parameters related to the risk
adjustment program (proposed 2015
Payment Notice). We published the
2015 Payment Notice final rule in the
March 11, 2014 Federal Register (79 FR
13743). In the May 27, 2014 Federal
Register (79 FR 30240), the 2015 fiscal
year sequestration rate for the risk
adjustment program was announced.
In the November 26, 2014 Federal
Register (79 FR 70673), we published a
proposed rule outlining the proposed
Federally certified risk adjustment
methodologies for the 2016 benefit year
and other parameters related to the risk
adjustment program (proposed 2016
Payment Notice). We published the
2016 Payment Notice final rule in the
February 27, 2015 Federal Register (80
FR 10749).
In the December 2, 2015 Federal
Register (80 FR 75487), we published a
proposed rule outlining the Federally
certified risk adjustment methodology
for the 2017 benefit year and other
parameters related to the risk
adjustment program (proposed 2017
Payment Notice). We published the
2017 Payment Notice final rule in the
March 8, 2016 Federal Register (81 FR
12204).
In the September 6, 2016 Federal
Register (81 FR 61455), we published a
proposed rule outlining the Federally
certified risk adjustment methodology
for the 2018 benefit year and other
parameters related to the risk
adjustment program (proposed 2018
Payment Notice). We published the
2018 Payment Notice final rule in the
December 22, 2016 Federal Register (81
FR 94058).
In the November 2, 2017 Federal
Register (82 FR 51042), we published a
proposed rule outlining the federally
certified risk adjustment methodology
for the 2019 benefit year. In that
proposed rule, we proposed updates to
the risk adjustment methodology and
amendments to the risk adjustment data
validation process (proposed 2019
Payment Notice). We published the
2019 Payment Notice final rule in the
April 17, 2018 Federal Register (83 FR
16930). We published a correction to the
2019 risk adjustment coefficients in the
2019 Payment Notice final rule in the
May 11, 2018 Federal Register (83 FR
21925). On July 27, 2018, consistent
with § 153.320(b)(1)(i), we updated the
2019 benefit year final risk adjustment
model coefficients to reflect an
additional recalibration related to an
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update to the 2016 enrollee-level EDGE
dataset.1
In the July 30, 2018 Federal Register
(83 FR 36456), we published a final rule
that adopted the 2017 benefit year HHSoperated risk adjustment methodology
set forth in the March 23, 2012 Federal
Register (77 FR 17220 through 17252)
and in the March 8, 2016 Federal
Register (81 FR 12204 through 12352).
The final rule provided an additional
explanation of the rationale for use of
statewide average premium in the HHSoperated risk adjustment state payment
transfer formula for the 2017 benefit
year, including why the program is
operated in a budget-neutral manner.
That final rule permitted HHS to resume
2017 benefit year program operations,
including collection of risk adjustment
charges and distribution of risk
adjustment payments. HHS also
provided guidance as to the operation of
the HHS-operated risk adjustment
program for the 2017 benefit year in
light of publication of the final rule.2
In the August 10, 2018 Federal
Register (83 FR 39644), we published
the proposed rule concerning the
adoption of the 2018 benefit year HHSoperated risk adjustment methodology
set forth in the March 23, 2012 Federal
Register (77 FR 17220 through 17252)
and in the December 22, 2016 Federal
Register (81 FR 94058 through 94183).
B. The New Mexico Health Connections
Court’s Order
On February 28, 2018, in a suit
brought by the health insurance issuer
New Mexico Health Connections, the
United States District Court for the
District of New Mexico (the district
court) vacated the use of statewide
average premium in the HHS-operated
risk adjustment methodology for the
2014, 2015, 2016, 2017, and 2018
benefit years. The district court
reasoned that HHS had not adequately
explained its decision to adopt a
methodology that used statewide
average premium as the cost-scaling
factor to ensure that the amount
collected from issuers equals the
amount of payments made to issuers for
the applicable benefit year, that is, a
methodology that maintains the budget
neutrality of the HHS-operated risk
adjustment program for the applicable
benefit year.3 The district court
1 See Updated 2019 Benefit Year Final HHS Risk
Adjustment Model Coefficients. July 27, 2018.
Available at https://www.cms.gov/CCIIO/Resources/
Regulations-and-Guidance/Downloads/2019Updtd-Final-HHS-RA-Model-Coefficients.pdf.
2 See https://www.cms.gov/CCIIO/Resources/
Regulations-and-Guidance/Downloads/2017-RAFinal-Rule-Resumption-RAOps.pdf.
3 New Mexico Health Connections v. United
States Department of Health and Human Services
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otherwise rejected New Mexico Health
Connections’ arguments.
C. The PPACA Risk Adjustment
Program
The risk adjustment program provides
payments to health insurance plans that
enroll populations with higher-thanaverage risk and collects charges from
plans that enroll populations with
lower-than-average risk. The program is
intended to reduce incentives for issuers
to structure their plan benefit designs or
marketing strategies to avoid higher-risk
enrollees and lessen the potential
influence of risk selection on the
premiums that plans charge. Instead,
issuers are expected to set rates based
on average risk and compete based on
plan features rather than selection of
healthier enrollees. The program applies
to any health insurance issuer offering
plans in the individual, small group and
merged markets, with the exception of
grandfathered health plans, group
health insurance coverage described in
45 CFR 146.145(c), individual health
insurance coverage described in 45 CFR
148.220, and any plan determined not to
be a risk adjustment covered plan in the
applicable Federally certified risk
adjustment methodology.4 In 45 CFR
part 153, subparts A, B, D, G, and H,
HHS established standards for the
administration of the permanent risk
adjustment program. In accordance with
§ 153.320, any risk adjustment
methodology used by a state, or by HHS
on behalf of the state, must be a
federally certified risk adjustment
methodology.
As stated in the 2014 Payment Notice
final rule, the federally certified risk
adjustment methodology developed and
used by HHS in states that elect not to
operate a risk adjustment program is
based on the premise that premiums for
that state market should reflect the
differences in plan benefits and
efficiency—not the health status of the
enrolled population.5 HHS developed
the risk adjustment state payment
transfer formula that calculates the
difference between the revenues
required by a plan based on the
projected health risk of the plan’s
enrollees and the revenues that the plan
et al., No. CIV 16–0878 JB/JHR (D.N.M. Feb. 28,
2018). On March 28, 2018, HHS filed a motion
requesting that the district court reconsider its
decision. A hearing on the motion for
reconsideration was held on June 21, 2018. On
October 19, 2018, the court denied HHS’s motion
for reconsideration. See New Mexico Health
Connections v. United States Department of Health
and Human Services et al., No. CIV 16–0878 JB/JHR
(D.N.M. Oct. 19, 2018).
4 See the definition for ‘‘risk adjustment covered
plan’’ at § 153.20.
5 See 78 FR at 15417.
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can generate for those enrollees. These
differences are then compared across
plans in the state market risk pool and
converted to a dollar amount based on
the statewide average premium. HHS
chose to use statewide average premium
and normalize the risk adjustment state
payment transfer formula to reflect state
average factors so that each plan’s
enrollment characteristics are compared
to the state average and the total
calculated payment amounts equal total
calculated charges in each state market
risk pool. Thus, each plan in the state
market risk pool receives a risk
adjustment payment or charge designed
to compensate for risk for a plan with
average risk in a budget-neutral manner.
This approach supports the overall goal
of the risk adjustment program to
encourage issuers to rate for the average
risk in the applicable state market risk
pool, and mitigates incentives for
issuers to operate less efficiently, set
higher prices, or develop benefit designs
or create marketing strategies to avoid
high-risk enrollees. Such incentives
could arise if HHS used each issuer’s
plan’s own premium in the state
payment transfer formula, instead of
statewide average premium.
II. Provisions of the Proposed Rule and
Analysis of and Responses to Public
Comments
In the August 10, 2018 Federal
Register (83 FR 39644), we published a
proposed rule that proposed to adopt
the HHS-operated risk adjustment
methodology as previously established
in the March 23, 2012 Federal Register
(77 FR 17220 through 17252) and the
December 22, 2016 Federal Register (81
FR 94058 through 94183) for the 2018
benefit year, with an additional
explanation regarding the use of
statewide average premium and the
budget-neutral nature of the HHSoperated risk adjustment program. We
did not propose to make any changes to
the previously published HHS-operated
risk adjustment methodology for the
2018 benefit year.
As explained above, the district court
vacated the use of statewide average
premium in the HHS-operated risk
adjustment methodology for the 2014
through 2018 benefit years on the
grounds that HHS did not adequately
explain its decision to adopt that aspect
of the risk adjustment methodology. The
district court recognized that use of
statewide average premium maintained
the budget neutrality of the program, but
concluded that HHS had not adequately
explained the underlying decision to
adopt a methodology that kept the
program budget neutral, that is, a
methodology that ensured that amounts
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collected from issuers would equal
payments made to issuers for the
applicable benefit year. Accordingly,
HHS provided the additional
explanation in the proposed rule.
As explained in the proposed rule,
Congress designed the risk adjustment
program to be implemented and
operated by states if they chose to do so.
Nothing in section 1343 of the PPACA
requires a state to spend its own funds
on risk adjustment payments, or allows
HHS to impose such a requirement.
Thus, while section 1343 may have
provided leeway for states to spend
additional funds on their programs if
they voluntarily chose to do so, HHS
could not have required such additional
funding.
We also explained that while the
PPACA did not include an explicit
requirement that the risk adjustment
program be operated in a budget-neutral
manner, HHS was constrained by
appropriations law to devise a risk
adjustment methodology that could be
implemented in a budget-neutral
fashion. In fact, although the statutory
provisions for many other PPACA
programs appropriated or authorized
amounts to be appropriated from the
U.S. Treasury, or provided budget
authority in advance of appropriations,6
the PPACA neither authorized nor
appropriated additional funding for risk
adjustment payments beyond the
amount of charges paid in, and did not
authorize HHS to obligate itself for risk
adjustment payments in excess of
charges collected.7 Indeed, unlike the
Medicare Part D statute, which
expressly authorized the appropriation
of funds and provided budget authority
in advance of appropriations to make
Part D risk-adjusted payments, the
PPACA’s risk adjustment statute made
no reference to additional
appropriations.8 Because Congress
omitted from the PPACA any provision
appropriating independent funding or
6 For examples of PPACA provisions
appropriating funds, see PPACA secs. 1101(g)(1),
1311(a)(1), 1322(g), and 1323(c). For examples of
PPACA provisions authorizing the appropriation of
funds, see PPACA secs. 1002, 2705(f), 2706(e),
3013(c), 3015, 3504(b), 3505(a)(5), 3505(b), 3506,
3509(a)(1), 3509(b), 3509(e), 3509(f), 3509(g), 3511,
4003(a), 4003(b), 4004(j), 4101(b), 4102(a), 4102(c),
4102(d)(1)(C), 4102(d)(4), 4201(f), 4202(a)(5),
4204(b), 4206, 4302(a), 4304, 4305(a), 4305(c),
5101(h), 5102(e), 5103(a)(3), 5203, 5204, 5206(b),
5207, 5208(b), 5210, 5301, 5302, 5303, 5304,
5305(a), 5306(a), 5307(a), and 5309(b).
7 See 42 U.S.C. 18063.
8 Compare 42 U.S.C. 18063 (failing to specify
source of funding other than risk adjustment
charges), with 42 U.S.C. 1395w–116(c)(3)
(authorizing appropriations for Medicare Part D risk
adjusted payments); 42 U.S.C. 1395w–115(a)
(establishing ‘‘budget authority in advance of
appropriations Acts’’ for Medicare Part D risk
adjusted payments).
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creating budget authority in advance of
an appropriation for the risk adjustment
program, we explained that HHS could
not—absent another source of
appropriations—have designed the
program in a way that required
payments in excess of collections
consistent with binding appropriations
law. Thus, Congress did not give HHS
discretion to implement a risk
adjustment program that was not budget
neutral.
Furthermore, the proposed rule
explained that if HHS elected to adopt
a risk adjustment methodology that was
contingent on appropriations from
Congress through the annual
appropriations process, that would have
created uncertainty for issuers regarding
the amount of risk adjustment payments
they could expect for a given benefit
year. That uncertainty would have
undermined one of the central
objectives of the risk adjustment
program, which is to stabilize premiums
by assuring issuers in advance that they
will receive risk adjustment payments
if, for the applicable benefit year, they
enroll a higher-risk population
compared to other issuers in the state
market risk pool. The budget-neutral
framework spreads the costs of covering
higher-risk enrollees across issuers
throughout a given state market risk
pool, thereby reducing incentives for
issuers to engage in risk-avoidance
techniques such as designing or
marketing their plans in ways that tend
to attract healthier individuals, who cost
less to insure.
Moreover, the proposed rule noted
that relying on each year’s budget
process for appropriation of additional
funds to HHS that could be used to
supplement risk adjustment transfers
would have required HHS to delay
setting the parameters for any risk
adjustment payment proration rates
until well after the plans were in effect
for the applicable benefit year. The
proposed rule also explained that any
later-authorized program management
appropriations made to CMS were not
intended to be used for supplementing
risk adjustment payments, and were
allocated by the agency for other,
primarily administrative, purposes.
Specifically, it has been suggested that
the annual lump sum appropriation to
CMS for program management (CMS
Program Management account) was
potentially available for risk adjustment
payments. The lump sum appropriation
for each year was not enacted until after
the applicable rule announcing the
HHS-operated methodology for the
applicable benefit year, and therefore
could not have been relied upon in
promulgating that rule. Additionally, as
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63421
the underlying budget requests reflect,
the CMS Program Management account
was intended for program management
expenses, such as administrative costs
for various CMS programs such as
Medicaid, Medicare, the Children’s
Health Insurance Program, and the
PPACA’s insurance market reforms—not
for the program payments under those
programs. CMS would have elected to
use the CMS Program Management
account for these important program
management expenses, rather than
program payments for risk adjustment,
even if CMS had discretion to use all or
part of the lump sum for such program
payments. Without the adoption of a
budget-neutral framework, we explained
that HHS would have needed to assess
a charge or otherwise collect additional
funds, or prorate risk adjustment
payments to balance the calculated risk
adjustment transfer amounts. The
resulting uncertainty would have
conflicted with the overall goals of the
risk adjustment program—to stabilize
premiums and to reduce incentives for
issuers to avoid enrolling individuals
with higher-than-average actuarial risk.
In light of the budget-neutral
framework discussed above, the
proposed rule explained that we also
chose not to use a different parameter
for the state payment transfer formula
under the HHS-operated methodology,
such as each plan’s own premium, that
would not have automatically achieved
equality between risk adjustment
payments and charges in each benefit
year. As set forth in prior discussions,9
use of the plan’s own premium or a
similar parameter would have required
the application of a balancing
adjustment in light of the program’s
budget neutrality—either reducing
payments to issuers owed a payment,
increasing charges on issuers due a
charge, or splitting the difference in
some fashion between issuers owed
payments and issuers assessed charges.
Using a plan’s own premium would
have frustrated the risk adjustment
program’s goals, as discussed above, of
encouraging issuers to rate for the
average risk in the applicable state
market risk pool, and avoiding the
creation of incentives for issuers to
operate less efficiently, set higher
prices, or develop benefit designs or
create marketing strategies to avoid
high-risk enrollees. Use of an after-thefact balancing adjustment is also less
predictable for issuers than a
9 See for example, September 12, 2011, Risk
Adjustment Implementation Issues White Paper,
available at https://www.cms.gov/CCIIO/Resources/
Files/Downloads/riskadjustment_whitepaper_
web.pdf.
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methodology that is established before
the benefit year. We explained that such
predictability is important to serving the
risk adjustment program’s goals of
premium stabilization and reducing
issuer incentives to avoid enrolling
higher-risk populations.
Additionally, the proposed rule noted
that using a plan’s own premium to
scale transfers may provide additional
incentives for plans with high-risk
enrollees to increase premiums in order
to receive higher risk adjustment
payments. As noted by commenters to
the 2014 Payment Notice proposed rule,
transfers also may be more volatile from
year to year and sensitive to anomalous
premiums if they were scaled to a plan’s
own premium instead of the statewide
average premium. In the 2014 Payment
Notice final rule, we noted that we
received a number of comments in
support of our proposal to use statewide
average premium as the basis for risk
adjustment transfers, while some
commenters expressed a desire for HHS
to use a plan’s own premium.10 HHS
addressed those comments by
reiterating that we had considered the
use of a plan’s own premium, but chose
to use statewide average premium, as
this approach supports the overall goals
of the risk adjustment program to
encourage issuers to rate for the average
risk in the applicable state market risk
pool, and avoids the creation of
incentives for issuers to employ riskavoidance techniques.11
The proposed rule also explained that
although HHS has not yet calculated
risk adjustment payments and charges
for the 2018 benefit year, immediate
administrative action was imperative to
maintain stability and predictability in
the individual, small group and merged
insurance markets. Without
administrative action, the uncertainty
related to the HHS-operated risk
adjustment methodology for the 2018
benefit year could add uncertainty to
the individual, small group and merged
markets, as issuers determine the extent
of their market participation and the
rates and benefit designs for plans they
will offer in future benefit years.
Without certainty regarding the 2018
benefit year HHS-operated risk
adjustment methodology, there was a
serious risk that issuers would
substantially increase future premiums
to account for the potential of
uncompensated risk associated with
high-risk enrollees. Consumers enrolled
in certain plans with benefit and
network structures that appeal to higher
risk enrollees could see a significant
10 78
premium increase, which could make
coverage in those plans particularly
unaffordable for unsubsidized enrollees.
In states with limited Exchange options,
a qualified health plan issuer exit would
restrict consumer choice, and could put
additional upward pressure on
premiums, thereby increasing the cost of
coverage for unsubsidized individuals
and federal spending for premium tax
credits. The combination of these effects
could lead to involuntary coverage
losses in certain state market risk pools.
Additionally, the proposed rule
explained that HHS’s failure to make
timely risk adjustment payments could
impact the solvency of issuers providing
coverage to sicker (and costlier) than
average enrollees that require the influx
of risk adjustment payments to continue
operations. When state regulators
evaluate issuer solvency, any
uncertainty surrounding risk adjustment
transfers hampers their ability to make
decisions that protect consumers and
support the long-term health of
insurance markets.
In response to the district court’s
February 2018 decision that vacated the
use of statewide average premium in the
risk adjustment methodology on the
grounds that HHS did not adequately
explain its decision to adopt that aspect
of the methodology, we offered the
additional explanation outlined above
in the proposed rule, and proposed to
maintain the use of statewide average
premium in the applicable state market
risk pool for the state payment transfer
formula under the HHS-operated risk
adjustment methodology for the 2018
benefit year. HHS proposed to adopt the
methodology previously established for
the 2018 benefit year in the Federal
Register publications cited above that
apply to the calculation, collection, and
payment of risk adjustment transfers
under the HHS-operated methodology
for the 2018 benefit year. This included
the adjustment to the statewide average
premium, reducing it by 14 percent, to
account for an estimated proportion of
administrative costs that do not vary
with claims.12 We sought comment on
the proposal to use statewide average
premium. However, in order to protect
the settled expectations of issuers that
structured their pricing, offering, and
market participation decisions in
reliance on the previously issued 2018
benefit year methodology, all other
aspects of the risk adjustment
methodology were outside of the scope
of the proposed rule, and HHS did not
seek comment on those finalized
aspects.
FR 15410, 15432.
11 Id.
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12 See
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We summarize and respond to the
comments received to the proposed rule
below. Given the volume of exhibits,
court filings, white papers (including all
corresponding exhibits), and comments
on other rulemakings incorporated by
reference in one commenter’s letter, we
are not able to separately address each
of those documents. Instead, we
summarize and respond to the
significant comments and issues raised
by the commenter that are within the
scope of this rulemaking.
Comment: One commenter expressed
general concerns about policymaking
and implementation of the PPACA
related to enrollment activity changes,
cost-sharing reductions, and short-term,
limited-duration plans.
Response: The use of statewide
average premium in the HHS-operated
risk adjustment methodology, including
the operation of the program in a
budget-neutral manner, which was the
limited subject of the proposed
rulemaking, was not addressed by this
commenter. In fact, the commenter did
not specifically address the risk
adjustment program at all. Therefore,
the concerns raised by this commenter
are outside the scope of the proposed
rule, and are not addressed in this final
rule.
Comment: Commenters were
overwhelmingly in favor of HHS
finalizing the rule as proposed, and
many encouraged HHS to do so as soon
as possible. Many commenters stated
that by finalizing this rule as proposed,
HHS is providing an additional
explanation regarding the operation of
the program in a budget-neutral manner
and the use of statewide average
premium for the 2018 benefit year
consistent with the decision of the
district court, and is reducing the risk of
substantial instability to the Exchanges
and individual and small group and
merged market risk pools. Many
commenters stated that no changes
should be made to the risk adjustment
methodology for the 2018 benefit year
because issuers’ rates for the 2018
benefit year were set based on the
previously finalized methodology.
Response: We agree that a prompt
finalization of this rule is important to
ensure the ongoing stability of the
individual and small group and merged
markets, and the ability of HHS to
continue operations of the risk
adjustment program normally for the
2018 benefit year. We also agree that
finalizing the rule as proposed would
maintain stability and ensure
predictability of pricing in a budgetneutral framework because issuers
relied on the 2018 HHS-operated risk
adjustment methodology that used
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statewide average premium during rate
setting and when deciding in calendar
year 2017 whether to participate in the
market(s) during the 2018 benefit year.
Comment: Several commenters agreed
with HHS’s interpretation of the statute
as requiring the operation of the risk
adjustment program in a budget-neutral
manner; several cited the absence of
additional funding which would cover
any possible shortfall between risk
adjustment transfers as supporting the
operation of the program in a budgetneutral manner. One commenter
highlighted that appropriations can vary
from year to year, adding uncertainty
and instability to the market(s) if the
program relied on additional funding to
cover potential shortfalls and was not
operated in a budget-neutral manner,
which in turn would affect issuer
pricing decisions. These commenters
noted that any uncertainty about
whether Congress would fund risk
adjustment payments would deprive
issuers of the ability to make pricing
and market participation decisions
based on a legitimate expectation that
risk adjustment transfers would occur as
required in HHS regulations. Other
commenters noted that without
certainty of risk adjustment transfers,
issuers would likely seek rate increases
to account for this further uncertainty
and the risk of enrolling a greater share
of high-cost individuals. Alternatively,
issuers seeking to avoid significant
premium increases would be compelled
to develop alternative coverage
arrangements that fail to provide
adequate coverage to people with
chronic conditions or high health care
costs (for example, narrow networks or
formulary design changes). Another
commenter pointed to the fact that risk
adjustment was envisioned by Congress
as being run by the states, and that if
HHS were to require those states that
run their own program to cover any
shortfall between what they collect and
what they must pay out, HHS would
effectively be imposing an unfunded
mandate on states. The commenter
noted there is no indication that
Congress intended risk adjustment to
impose such an unfunded mandate.
Another commenter expressed that a
budget-neutral framework was the most
natural reading of the PPACA, with a
different commenter stating this
framework is implied in the statute.
However, one commenter stated that
risk adjustment does not need to operate
as budget neutral, as section 1343 of the
PPACA does not require that the
program be budget neutral, and funds
are available to HHS for the risk
adjustment program from the CMS
Program Management account to offset
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any potential shortfalls. The commenter
also stated that the rationale for using
statewide average premium to achieve
budget neutrality is incorrect, and that
even if budget neutrality is required,
any risk adjustment payment shortfalls
that may result from using a plan’s own
premium in the risk adjustment transfer
formula could be addressed through pro
rata adjustments to risk adjustment
transfers. This commenter also stated
that the use of statewide average
premium is not predictable for issuers
trying to set rates, especially for small
issuers which do not have a large
market share, as they do not have
information about other issuers’ rates at
the time of rate setting. Conversely,
many commenters noted that, absent an
appropriation for risk adjustment
payments, the prorated payments that
would result from the use of a plan’s
own premium in the risk adjustment
methodology would add an unnecessary
layer of complexity for issuers when
pricing and would reduce predictability,
resulting in uncertainty and instability
in the market(s).
Response: We acknowledged in the
proposed rule that the PPACA did not
include a provision that explicitly
required the risk adjustment program be
operated in a budget-neutral manner;
however, HHS was constrained by
appropriations law to devise a risk
adjustment methodology that could be
implemented in a budget-neutral
fashion. In fact, Congress did not
authorize or appropriate additional
funding for risk adjustment beyond the
amount of charges paid in, and did not
authorize HHS to obligate itself for risk
adjustment payments in excess of
charges collected. In the absence of
additional, independent funding or the
creation of budget authority in advance
of an appropriation, HHS could not
make payments in excess of charges
collected consistent with binding
appropriations law. Furthermore, we
agree with commenters that the creation
of a methodology that was contingent on
Congress agreeing to appropriate
supplemental funding of unknown
amounts through the annual
appropriations process would create
uncertainty. It would also delay the
process for setting the parameters for
any potential risk adjustment proration
until well after rates were set and the
plans were in effect for the applicable
benefit year. In addition to proration of
risk adjustment payments to balance
risk adjustment transfer amounts, we
considered the impact of assessing
additional charges or otherwise
collecting additional funds from issuers
of risk adjustment covered plans as
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63423
alternatives to the establishment of a
budget-neutral framework. All of these
after-the-fact balancing adjustments
were ultimately rejected because they
are less predictable for issuers than a
budget-neutral methodology which does
not require after-the-fact balancing
adjustments, a conclusion supported by
the vast majority of comments received.
As detailed in the proposed rule, HHS
determined it would not be appropriate
to rely on the CMS Program
Management account because those
amounts are designated for
administration and operational
expenses, not program payments, nor
would the CMS Program Management
account be sufficient to fund both the
payments under the risk adjustment
program and those administrative and
operational expenses. Furthermore, use
of such funds would create the same
uncertainty and other challenges
described above, as it would require
reliance on the annual appropriations
process and would require after-the-fact
balancing adjustments to address
shortfalls. After extensive analysis and
evaluation of alternatives, we
determined that the best method
consistent with legal requirements is to
operate the risk adjustment program in
a budget-neutral manner, using
statewide average premium as the cost
scaling factor and normalizing the risk
adjustment payment transfer formula to
reflect state average factors.
We agree with the commenters that
calculating transfers based on a plan’s
own premium without an additional
funding source to ensure full payment
of risk adjustment payment amounts
would create premium instability. If
HHS implemented an approach based
on a plan’s own premium without an
additional funding source, after-the-fact
payment adjustments would be
required. As explained above, the
amount of these payment adjustments
would vary from year to year, would
delay the publication of final risk
adjustment amounts, and would compel
issuers with risk that is higher than the
state average to speculate on the
premium increase that would be
necessary to cover an unknown risk
adjustment payment shortfall amount.
We considered and ultimately declined
to adopt a methodology that required an
after-the-fact balancing adjustment
because such an approach is less
predictable for issuers than a budgetneutral methodology that can be
calculated in advance of a benefit year.
This included consideration of a nonbudget neutral HHS-operated risk
adjustment methodology that used a
plan’s own premiums as the cost-scaling
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factor, which we discuss in detail later
in this preamble. Modifying the 2018
benefit year risk adjustment
methodology to use a plan’s own
premium would reduce the
predictability of risk adjustment
payments and charges significantly. As
commenters stated, the use of a plan’s
own premium would add an extra layer
of complexity in estimating risk
adjustment transfers because payments
and charges would need to be prorated
retrospectively based on the outcome of
risk adjustment transfer calculations,
but would need to be anticipated in
advance of the applicable benefit year
for use in issuers’ pricing calculations.
We do not agree with the commenter
that statewide average premium is less
predictable than a plan’s own premium,
as the use of statewide average premium
under a budget-neutral framework
makes risk adjustment transfers selfbalancing, and provides payment
certainty for issuers with higher-thanaverage risk.
After considering the comments
submitted, we are finalizing a
methodology that operates risk
adjustment in a budget-neutral manner
using statewide average premium as the
cost scaling factor and normalizing the
risk adjustment payment transfer
formula to reflect state average factors
for the 2018 benefit year.
Comment: The majority of the
comments supported the use of
statewide average premium in the HHSoperated risk adjustment methodology
for the 2018 benefit year. Some
commenters stated that the risk
adjustment program is working as
intended, by compensating issuers
based on their enrollees’ health status,
that is, transferring funds from issuers
with predominately low-risk enrollees
to those with a higher-than-average
share of high-risk enrollees. One
commenter stated that the program has
been highly effective at reducing lossratios and ensuring that issuers can
operate efficiently, without concern for
significant swings in risk from year to
year. Although some commenters
requested refinements to ensure that the
methodology does not unintentionally
harm smaller, newer, or innovative
issuers, a different commenter noted
that the results for all prior benefit years
of the risk adjustment program do not
support the assertion that the risk
adjustment methodology undermines
small health plans. This commenter
noted that the July 9, 2018 ‘‘Summary
Report on Permanent Risk Adjustment
Transfers for the 2017 Benefit Year’’
found a very strong correlation between
the amount of paid claims and the
direction and scale of risk adjustment
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transfers.13 It also pointed to the
American Academy of Actuaries’
analysis of 2014 benefit year risk
adjustment results, in which 103 of 163
small health plans (those with less than
10 percent of market share) received risk
adjustment payments and the average
payment was 27 percent of premium.14
This commenter cited these points as
evidence that risk adjustment is working
as intended for small issuers. This
commenter also cited an Oliver Wyman
study that analyzed risk adjustment
receipts by health plan member months
(that is, issuer size) and found no
systematic bias in the 2014 risk
adjustment model.15
A few commenters stated that use of
statewide average premium to scale risk
adjustment transfers tends to penalize
issuers with efficient care management
and lower premiums and rewards
issuers for raising rates. One of the
commenters also stated that the HHSoperated risk adjustment methodology
does not reflect relative actuarial risk,
that statewide average premium harms
issuers that price below the statewide
average, and that the program does not
differentiate between an issuer that has
lower premiums because of medical cost
savings from better care coordination
and an issuer that has lower premiums
because of healthier-than-average
enrollees. The commenter suggested
that HHS add a Care Management
Effectiveness index into the risk
adjustment formula. This commenter
also stated that use of a plan’s own
premium rather than statewide average
premium could improve the risk
adjustment formula, stating that issuers
would not be able to inflate their
premiums to ‘‘game’’ the risk
adjustment system due to other PPACA
requirements such as medical loss ratio,
rate review, and essential health
benefits, as well as state insurance
regulations, including oversight of
marketing practices intended to avoid
sicker enrollees.
However, other commenters opposed
the use of a plan’s own premium in the
risk adjustment formula based on a
concern that it would undermine the
risk adjustment program and create
incentives for issuers to avoid enrolling
high-cost individuals. Some
commenters noted the difficulty of
13 Available at https://downloads.cms.gov/cciio/
Summary-Report-Risk-Adjustment-2017.pdf.
14 American Academy of Actuaries, ‘‘Insights on
the ACA Risk Adjustment Program,’’ April 2016.
Available at https://actuary.org/files/imce/Insights_
on_the_ACA_Risk_Adjustment_Program.pdf.
15 Oliver Wyman, ‘‘A Story in 4 Charts, Risk
Adjustment in the Non-Group Market in 2014,’’
February 24, 2016. Available at https://
health.oliverwyman.com/2016/02/a_story_in_four_
char.html.
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determining whether an issuer’s low
premium was the result of efficiency,
mispricing, or a strategy to gain market
share, and that the advantages of using
statewide average premium outweigh
the possibility that use of a plan’s own
premium could result in better
reflection of cost management. One
commenter noted that encouraging
issuers to set premiums based on market
averages in a state (that is, using
statewide average premium) promotes
market competition based on value,
quality of care provided, and effective
care management, not on the basis of
risk selection. Other commenters
strongly opposed the use of a plan’s
own premium, as doing so would
introduce incentives for issuers to
attract lower-risk enrollees because they
would no longer have to pay their fair
share, or because issuers that
traditionally attract high-risk enrollees
would be incentivized to increase
premiums in order to receive larger risk
adjustment payments. Others stated that
the use of a plan’s own premium would
add an extra layer of complexity in
estimating risk adjustment transfers, and
therefore in premium rate setting,
because payments and charges would
need to be prorated retrospectively
based on the outcome of risk adjustment
transfer calculations, but would need to
be anticipated prospectively as part of
issuers’ pricing calculations.
One commenter expressed concern
that the risk adjustment payment
transfer formula exaggerates plan
differences in risk because it does not
address plan coding differences.
Response: We agree with the majority
of commenters that use of statewide
average premium will maintain the
integrity of the risk adjustment program
by discouraging the creation of benefit
designs and marketing strategies to
avoid high-risk enrollees and promoting
market stability and predictability. The
benefits of using statewide average
premium as the cost scaling factor in the
risk adjustment state payment transfer
formula extend beyond its role in
maintaining the budget neutrality of the
program. Consistent with the statute,
under the HHS-operated risk adjustment
program, each plan in the risk pool
receives a risk adjustment payment or
charge designed to take into account the
plan’s risk compared to a plan with
average risk. The statewide average
premium reflects the statewide average
cost and efficiency level and acts as the
cost scaling factor in the state payment
transfer formula under the HHSoperated risk adjustment methodology.
HHS chose to use statewide average
premium to encourage issuers to rate for
the average risk, to automatically
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achieve equality between risk
adjustment payments and charges in
each benefit year, and to avoid the
creation of incentives for issuers to
operate less efficiently, set higher
prices, or develop benefits designs or
create marketing strategies to avoid
high-risk enrollees.
HHS considered and again declined
in the 2018 Payment Notice to adopt the
use of each plan’s own premium in the
state payment transfer formula.16 As we
noted in the 2018 Payment Notice, use
of a plan’s own premium would likely
lead to substantial volatility in transfer
results and could result in even higher
transfer charges for low-risk, lowpremium plans because of the program’s
budget neutrality. Under such an
approach, high-risk, high-premium
plans would require even greater
transfer payments. If HHS applied a
balancing adjustment in favor of these
plans to maintain the budget-neutral
nature of the program after transfers
have been calculated using a plan’s own
premium, low-risk, low-premium plans
would be required to pay in an even
higher percentage of their plan-specific
premiums in risk adjustment transfer
charges due to the need to maintain
budget neutrality. Furthermore,
payments to high-risk, low-premium
plans that are presumably more efficient
than high-risk, high-premium plans
would be reduced, incentivizing such
plans to inflate premiums. In other
words, the use of a plan’s own premium
in this scenario would neither reduce
risk adjustment charges for low-cost and
low-risk issuers, nor would it
incentivize issuers to operate at the
average efficiency. Alternatively,
application of a balancing adjustment in
favor of low-risk, low-premium plans
could have the effect of undercompensating high-risk plans,
increasing the likelihood that such
plans would raise premiums. In
addition, if the application of a
balancing adjustment was split equally
between high-risk and low-risk plans,
such an after-the-fact adjustment, would
create uncertainty and instability in the
market(s), and would incentivize issuers
to increase premiums to receive
additional risk adjustment payments or
to employ risk-avoidance techniques. As
such, we agree with the commenters
that challenges associated with pricing
for transfers based on a plan’s own
premium would create pricing
instability in the market, and introduce
incentives for issuers to attract lowerrisk enrollees to avoid paying their fair
share. We also agree that it is very
difficult to determine the reason an
16 81
FR 94100.
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issuer has lower premiums than the
average, since an issuer’s low premium
could be the result of efficiency,
mispricing, or a strategy to gain market
share. In all, the advantages of using
statewide average premium outweigh
the possibility that the use of a plan’s
own premium could result in better
reflection of care or cost management,
given the overall disadvantages,
outlined above, of using a plan’s own
premium. HHS does not agree that use
of statewide average premium penalizes
efficient issuers or that it rewards
issuers for raising rates.
Consistent with the 2018 Payment
Notice,17 beginning with the 2018
benefit year, this final rule adopts the 14
percent reduction to the statewide
average premium to account for
administrative costs that are unrelated
to the claims risk of the enrollee
population. While low cost plans are
not necessarily efficient plans,18 we
believe this adjustment differentiates
between premiums that reflect savings
resulting from administrative efficiency
from premiums that reflect healthierthan-average enrollees. As detailed in
the 2018 Payment Notice,19 to derive
this parameter, we analyzed
administrative and other non-claims
expenses in the Medical Loss Ratio
(MLR) Annual Reporting Form and
estimated, by category, the extent to
which the expenses varied with claims.
We compared those expenses to the
total costs that issuers finance through
premiums, including claims,
administrative expenses, and taxes, and
determined that the mean
administrative cost percentage in the
individual, small group and merged
markets is approximately 14 percent.
We believe this amount represents a
reasonable percentage of administrative
costs on which risk adjustment should
not be calculated.
We disagree that the HHS-operated
risk adjustment methodology does not
reflect relative actuarial risk or that the
use of statewide average premium
indicates otherwise. In fact, the risk
adjustment models estimate a plan’s
relative actuarial risk across actuarial
value metal levels, also referred to as
‘‘simulated plan liability,’’ by estimating
the total costs a plan is expected to be
liable for based on its enrollees’ age, sex,
hierarchical condition categories
(HCCs), actuarial value, and cost-sharing
structure. Therefore, this ‘‘simulated
plan liability’’ reflects the actuarial risk
17 81
FR 94099.
a plan is a low-cost plan with low claims
costs, it could be an indication of mispricing, as the
issuer should be pricing for average risk.
19 81 FR 94100.
18 If
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63425
relative to the average that can be
assigned to each enrollee. We then use
an enrollee’s plan selection and
diagnoses during the benefit year to
assign a risk score. Although the HHS
risk adjustment models are calibrated on
national data, and average costs can
vary between geographic areas, relative
actuarial risk differences are generally
similar nationally. The solved
coefficients from the risk adjustment
models are then used to evaluate
actuarial risk differences between plans.
The risk adjustment state payment
transfer formula then further evaluates
the plan’s actuarial risk based on
enrollees’ health risk, after accounting
for factors a plan could have rated for,
including metal level, the prevailing
level of expenditures in the geographic
areas in which the enrollees live, the
effect of coverage on utilization
(induced demand), and the age and
family structure of the subscribers. This
relative plan actuarial risk difference
compared to the state market risk pool
average is then scaled to the statewide
average premium. The use of statewide
average premium as a cost-scaling factor
requires plans to assess actuarial risk,
and therefore scales transfers to
actuarial differences between plans in
state market risk pool(s), rather than
differences in premium.
We have been continuously
evaluating whether improvements are
needed to the risk adjustment
methodology, and will continue to do so
as additional years’ data become
available. We decline to amend the risk
adjustment methodology to include the
Care Management Effectiveness index or
a similar adjustment at this time. Doing
so would be beyond the scope of this
rulemaking, which addresses the use of
statewide average premium and the
operation of the risk adjustment
program in a budget-neutral manner. A
change of this magnitude would require
significant study and evaluation.
Although this type of change is not
feasible at present, we will examine the
feasibility, specificity, and sensitivity of
measuring care management
effectiveness through enrollee-level
EDGE data for the individual, small
group and merged markets, and the
benefits of incorporating such measures
in the risk adjustment methodology in
future benefit years, either through
rulemaking or other opportunities in
which the public can submit comments.
We believe that a robust risk adjustment
program encourages issuers to adopt
incentives to improve care management
effectiveness, as doing so would reduce
plans’ medical costs. As we stated
above, use of statewide average
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premium in the risk adjustment state
payment transfer formula incentivizes
plans to apply effective care
management techniques to reduce
losses, whereas use of a plan’s own
premium could be inflationary as it
benefits plans with higher-than-average
costs and higher-than-average
premiums.
We are sympathetic to commenters’
concerns about plan coding differences,
and recognize that there is substantial
variation in provider coding practices.
We are continuing to strengthen the risk
adjustment data validation program to
ensure that conditions reported for risk
adjustment are accurately coded and
supported by medical records, and will
adjust risk scores (and subsequently,
risk adjustment transfers) beginning
with 2017 benefit year data validation
results to encourage issuers to continue
to improve the accuracy of data used to
compile risk scores and preserve
confidence in the HHS-operated risk
adjustment program.
Comment: Some commenters
provided suggestions to improve the
risk adjustment methodology, such as
different weights for metal tiers,
multiple mandatory data submission
deadlines, reducing the magnitude of
risk scores across the board, and fully
removing administrative expenses from
the statewide average premium. One
commenter stated that, while it did not
conceptually take issue with the use of
statewide average premium, the
payment transfer formula under the
HHS-operated risk adjustment
methodology creates market distortions
and causes overstatement of relative risk
differences among issuers. This
commenter cited concerns with the use
of the Truven MarketScan® data to
calculate plan risk scores under the
HHS risk adjustment models, and
suggested incorporating an adjustment
to the calculation of plan risk scores
until the MarketScan® data is no longer
used.
A few commenters stressed the
importance of making changes
thoughtfully and over time, and one
encouraged HHS to actively seek
improvements to avoid unnecessary
litigation. Several commenters, while
supportive of the proposed rule and its
use for the 2018 benefit year, generally
stated that the risk adjustment
methodology should continue to be
improved prospectively. Another
commenter stated that the proposed rule
did not do enough to improve the risk
adjustment program, and encouraged
HHS to review and consider suggestions
to improve the risk adjustment
methodology in order to promote
stability and address the concerns raised
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in lawsuits other than the New Mexico
case. One commenter further requested
that HHS reopen rulemaking
proceedings, reconsider, and revise the
Payment Notices for the 2017 and 2019
benefit years under section 553(e) of the
Administrative Procedure Act.
Response: We appreciate the feedback
on potential improvements to the risk
adjustment program, and will continue
to consider the suggestions, analysis,
and comments received from
commenters for potential changes to
future benefit years. This rulemaking is
intended to provide additional
explanation regarding the operation of
the program in a budget-neutral manner
and the use of statewide average
premium for the 2018 benefit year,
consistent with the February 2018
decision of the district court. It also
requires an expedited timeframe to
maintain stability in the health
insurance markets following the district
court’s vacatur of the use of statewide
average premium in the HHS-operated
risk adjustment methodology for the
2018 benefit year. We intend to
continue to evaluate approaches to
improve the risk adjustment models’
calibration to reflect the individual,
small group and merged markets
actuarial risk and review additional
years’ data as they become available to
evaluate all aspects of the HHS-operated
risk adjustment methodology. We also
continue to encourage issuers to submit
EDGE server data earlier and more
completely for future benefit years.
However, the scope of the proposed rule
was limited to the use of statewide
average premium and the budget-neutral
nature of the risk adjustment program
for the 2018 benefit year, and
consequently, we decline to adopt the
various suggestions offered by
commenters regarding potential
improvements to the 2018 benefit year
HHS-operated risk adjustment
methodology as to other issues because
they are outside the scope of this rule.
We reiterate that HHS is always
considering possible ways to improve
the risk adjustment methodology for
future benefit years. For example, in the
2018 Payment Notice, based on
comments received for the 2017
Payment Notice and the March 31, 2016,
HHS-Operated Risk Adjustment
Methodology Meeting Discussion
Paper,20 HHS made multiple
adjustments to the risk adjustment
models and state payment transfer
formula, including reducing the
statewide average premium by 14
percent to account for the proportion of
administrative costs that do not vary
with claims, beginning with the 2018
benefit year.21 HHS also modified the
risk adjustment methodology by
incorporating a high-cost risk pool
calculation to mitigate residual
incentive for risk selection to avoid
high-cost enrollees, to better account for
the average risk associated with the
factors used in the HHS risk adjustment
models, and to ensure that the actuarial
risk of a plan with high-cost enrollees is
better reflected in risk adjustment
transfers to issuers with high actuarial
risk.22 Other recent changes made to the
HHS-operated risk adjustment
methodology include the incorporation
of a partial year adjustment factor and
prescription drug utilization factors.23
Furthermore, as outlined above, HHS
stated in the 2019 Payment Notice that
it would recalibrate the risk adjustment
model using 2016 enrollee-level EDGE
data to better reflect individual, small
group and merged market
populations.24 We also consistently seek
methods to support states’ authority and
provide states with flexible options,
while ensuring the success of the risk
adjustment program.25 We respond to
comments regarding options available to
states with respect to the risk
adjustment program below. We
appreciate the commenters’ input and
will continue to examine options for
potential changes to the HHS-operated
risk adjustment methodology in future
notice with comment rulemaking.
The requests related to the 2017 and
2019 benefit year rulemakings are
outside the scope of the proposed rule
and this final rule, which is limited to
the 2018 benefit year.
Comment: One commenter suggested
that states should have broad authority
to cap and limit risk adjustment
transfers and charges as necessary,
stating that the requirements associated
with the flexibility HHS granted to
states to request a reduction to risk
adjustment transfers beginning in 2020
are too onerous and unclear. The
commenter noted that state regulators
know their markets best and should
have the discretion and authority to
implement their own remedial measures
without seeking HHS’s permission.
Conversely, one commenter specifically
supported the state flexibility policy set
forth in § 153.320(d). A few commenters
requested that states be allowed to
establish alternatives to statewide
21 See
81 FR 94100.
81 FR 94080.
23 See 81 FR at 94071 and 94074.
24 See 83 FR 16940.
25 Id. and 81 FR 29146.
22 See
20 https://www.cms.gov/CCIIO/Resources/FormsReports-and-Other-Resources/Downloads/RAMarch-31-White-Paper-032416.pdf.
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average premium, with one suggesting
that this change begin with the 2020
benefit year, and providing as an
example the idea that HHS could permit
states to aggregate the average premiums
of two or more distinct geographic
markets within a state.
Response: HHS continually seeks to
provide states with flexibility to
determine what is best for their state
markets. Section 1343 of the PPACA
provides states authority to operate their
own state risk adjustment programs.
Under this authority, a state remains
free to elect to operate the risk
adjustment program and tailor it to its
markets, which could include
establishing alternatives to the statewide
average premium methodology or
aggregating the average premiums of
two or more distinct geographic markets
within a state. If a state does not elect
to operate the risk adjustment program,
HHS is required to do so.26 No state
elected to operate the risk adjustment
program for the 2018 benefit year;
therefore, HHS is responsible for
operating the program in all 50 states
and the District of Columbia.
In the 2019 Payment Notice, HHS
adopted § 153.320(d) to provide states
the flexibility, when HHS is operating
the risk adjustment program, to request
a reduction to the otherwise applicable
risk adjustment transfers in the
individual, small group, or merged
markets by up to 50 percent.27 This
flexibility was established to provide
states the opportunity to seek statespecific adjustments to the HHSoperated risk adjustment methodology
without the necessity of operating their
own risk adjustment programs. It is
offered beginning with the 2020 benefit
year risk adjustment transfers and, since
it involves an adjustment to the
transfers calculated by HHS, it will
require review and approval by HHS.
States requesting such reductions must
substantiate the transfer reduction
requested and demonstrate that the
actuarial risk differences in plans in the
applicable state market risk pool are
attributable to factors other than
systematic risk selection.28 The process
will give HHS the necessary information
to evaluate the flexibility requests. We
appreciate the comments offered on this
flexibility, but note that they are outside
the scope of the proposed rule, which
was limited to the 2018 benefit year and
did not propose any changes to the
process established in § 153.320(d).
However, we will continue to consider
commenter feedback on the process,
26 See
section 1321(c) of the PPACA.
27 See 83 FR 16955.
28 See § 153.320(d) and 83 FR 16960.
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16:14 Dec 07, 2018
Jkt 247001
along with any lessons learned from
2020 benefit year requests.
HHS has consistently acknowledged
the role of states as primary regulators 29
of their insurance markets, and we
continue to encourage states to examine
local approaches under state legal
authority as they deem appropriate.
Comment: One commenter detailed
the impact of the HHS-operated risk
adjustment methodology on the
commenter, the CO–OP program’s
general struggles, and the challenges
faced by some non-CO–OP issuers,
stating that this is evidence that the
HHS-operated risk adjustment
methodology is flawed. The commenter
urged HHS to make changes discussed
above to the methodology to address
what it maintains are unintended
financial impacts on small issuers that
are required to pay large risk adjustment
charges, and also challenged the
assertion that the current risk
adjustment methodology is predictable.
Response: HHS previously recognized
and acknowledged that certain issuers,
including a limited number of newer,
rapidly growing, or smaller issuers,
owed substantial risk adjustment
charges that they did not anticipate in
the initial years of the program. HHS
has regularly discussed with issuers and
state regulators ways to encourage new
participation in the health insurance
markets and to mitigate the effects of
substantial risk adjustment charges.
Program results discussed earlier have
shown that the risk adjustment
methodology has worked as intended,
that risk adjustment transfers correlate
with the amount of paid claims rather
than issuer size, and that no systemic
bias is found when risk adjustment
receipts are analyzed by health plan
member months. We created an interim
risk adjustment reporting process,
beginning with the 2015 benefit year, to
provide issuers and states with
preliminary information about the
applicable benefit year’s geographic cost
factor, billable member months, and
state averages such as monthly
premiums, plan liability risk score,
allowable rating factor, actuarial value,
and induced demand factors by market.
States may pursue local approaches
under state legal authority to address
concerns related to insolvencies and
competition, including in instances
where certain state laws or regulations
differentially affect smaller or newer
issuers. In addition, as detailed above,
beginning with the 2020 benefit year,
29 See 83 FR 16955. Also see 81 FR 29146 at
29152 (May 11, 2016), available at https://
www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/201611017.pdf.
PO 00000
Frm 00045
Fmt 4700
Sfmt 4700
63427
states may request a reduction in the
transfer amounts calculated under the
HHS-operated methodology to address
state-specific rules or market dynamics
to more precisely account for the
expected cost of relative risk differences
in the state’s market risk pool(s).
Finally, HHS has consistently sought
to increase the predictability and
certainty of transfer amounts in order to
promote the premium stabilization goal
of the risk adjustment program.
Statewide average premium provides
greater predictability of an issuer’s final
risk adjustment receivables than use of
a plan’s own premium, and we disagree
with comments stating that the use of a
plan’s own premium in the risk
adjustment transfer formula would
result in greater predictability in
pricing. As discussed previously, if a
plan’s own premium is used as a scaling
factor, risk adjustment transfers would
not be budget neutral. After-the-fact
adjustments would be necessary in
order for issuers to receive the full
amount of calculated payments, creating
uncertainty and lack of predictability.
III. Provisions of the Final Regulations
After consideration of the comments
received, this final rule adopts the HHSoperated risk adjustment methodology
for the 2018 benefit year which utilizes
statewide average premium and
operates the program in a budget-neutral
manner, as established in the final rules
published in the March 23, 2012 and the
December 22, 2016 editions of the
Federal Register.
IV. Collection of Information
Requirements
This document does not impose
information collection requirements,
that is, reporting, recordkeeping, or
third-party disclosure requirements.
Consequently, there is no need for
review by the Office of Management and
Budget under the authority of the
Paperwork Reduction Act of 1995 (44
U.S.C. 3501, et seq.).
V. Regulatory Impact Analysis
A. Statement of Need
The proposed rule and this final rule
were published in light of the February
2018 district court decision described
above that vacated the use of statewide
average premium in the HHS-operated
risk adjustment methodology for the
2014–2018 benefit years. This final rule
adopts the HHS-operated risk
adjustment methodology for the 2018
benefit year, maintaining the use of
statewide average premium as the costscaling factor in the HHS-operated risk
adjustment methodology and the
E:\FR\FM\10DER1.SGM
10DER1
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Federal Register / Vol. 83, No. 236 / Monday, December 10, 2018 / Rules and Regulations
continued operation of the program in a
budget-neutral manner, to protect
consumers from the effects of adverse
selection and premium increases that
would result from issuer uncertainty.
The Premium Stabilization Rule,
previous Payment Notices, and other
rulemakings noted above provided
detail on the implementation of the risk
adjustment program, including the
specific parameters applicable for the
2018 benefit year.
B. Overall Impact
We have examined the impact of this
rule as required by Executive Order
12866 on Regulatory Planning and
Review (September 30, 1993), Executive
Order 13563 on Improving Regulation
and Regulatory Review (January 18,
2011), the Regulatory Flexibility Act
(RFA) (September 19, 1980, Pub. L. 96–
354), section 1102(b) of the Social
Security Act, section 202 of the
Unfunded Mandates Reform Act of 1995
(March 22, 1995; Pub. L. 104–4),
Executive Order 13132 on Federalism
(August 4, 1999), the Congressional
Review Act (5 U.S.C. 804(2)), and
Executive Order 13771 on Reducing
Regulation and Controlling Regulatory
Costs. Executive Orders 12866 and
13563 direct agencies to assess all costs
and benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). A regulatory impact analysis
(RIA) must be prepared for major rules
with economically significant effects
($100 million or more in any one year).
OMB has determined that this final
rule is ‘‘economically significant’’
within the meaning of section 3(f)(1) of
Executive Order 12866, because it is
likely to have an annual effect of $100
million in any 1 year. In addition, for
the reasons noted above, OMB has
determined that this final rule is a major
rule under the Congressional Review
Act.
This final rule offers further
explanation of budget neutrality and the
use of statewide average premium in the
risk adjustment state payment transfer
formula when HHS is operating the
permanent risk adjustment program
established by section 1343 of the
PPACA on behalf of a state for the 2018
benefit year. We note that we previously
estimated transfers associated with the
risk adjustment program in the Premium
Stabilization Rule and the 2018
Payment Notice, and that the provisions
of this final rule do not change the risk
adjustment transfers previously
VerDate Sep<11>2014
16:14 Dec 07, 2018
Jkt 247001
estimated under the HHS-operated risk
adjustment methodology established in
those final rules. The approximate
estimated risk adjustment transfers for
the 2018 benefit year are $4.8 billion. As
such, we also incorporate into this final
rule the RIA in the 2018 Payment Notice
proposed and final rules.30 This final
rule is not subject to the requirements
of Executive Order 13771 (82 FR 9339,
February 3, 2017) because it is expected
to result in no more than de minimis
costs.
Dated: November 16, 2018.
Seema Verma,
Administrator, Centers for Medicare &
Medicaid Services.
Dated: November 19, 2018.
Alex M. Azar II,
Secretary, Department of Health and Human
Services.
[FR Doc. 2018–26591 Filed 12–7–18; 8:45 am]
BILLING CODE 4120–01–P
DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric
Administration
50 CFR Part 665
RIN 0648–XG025
Pacific Island Pelagic Fisheries; 2018
U.S. Territorial Longline Bigeye Tuna
Catch Limits for American Samoa
National Marine Fisheries
Service (NMFS), National Oceanic and
Atmospheric Administration (NOAA),
Commerce.
ACTION: Announcement of a valid
specified fishing agreement.
AGENCY:
NMFS announces a valid
specified fishing agreement that
allocates up to 1,000 metric tons (t) of
the 2018 bigeye tuna limit for the
Territory of American Samoa to
identified U.S. longline fishing vessels.
The agreement supports the long-term
sustainability of fishery resources of the
U.S. Pacific Islands, and fisheries
development in American Samoa.
DATES: December 7, 2018.
ADDRESSES: NMFS prepared
environmental analyses that describe
the potential impacts on the human
environment that would result from the
action. The analyses, identified by
NOAA–NMFS–2018–0026, are available
from https://www.regulations.gov/
docket?D=NOAA-NMFS-2018-0026, or
from Michael D. Tosatto, Regional
Administrator, NMFS Pacific Islands
SUMMARY:
30 81
PO 00000
FR 61455 and 81 FR 94058.
Frm 00046
Fmt 4700
Sfmt 4700
Region (PIR), 1845 Wasp Blvd., Bldg.
176, Honolulu, HI 96818.
The Fishery Ecosystem Plan for
Pelagic Fisheries of the Western Pacific
(Pelagic FEP) is available from the
Western Pacific Fishery Management
Council (Council), 1164 Bishop St.,
Suite 1400, Honolulu, HI 96813, tel
808–522–8220, fax 808–522–8226, or
https://www.wpcouncil.org.
FOR FURTHER INFORMATION CONTACT:
Rebecca Walker, NMFS PIRO
Sustainable Fisheries, 808–725–5184.
In a final
rule published on October 23, 2018,
NMFS specified a 2018 limit of 2,000 t
of longline-caught bigeye tuna for the
U.S. Pacific Island territories of
American Samoa, Guam, and the CNMI
(83 FR 53399). NMFS allows each
territory to allocate up to 1,000 t of the
2,000 t limit to U.S. longline fishing
vessels identified in a valid specified
fishing agreement.
On November 19, 2018, NMFS
received from the Council a specified
fishing agreement between the
government of American Samoa and
Quota Management, Inc. (QMI). The
Council’s Executive Director advised
that the specified fishing agreement was
consistent with the criteria set forth in
50 CFR 665.819(c)(1). NMFS reviewed
the agreement and determined that it is
consistent with the Pelagic FEP, the
Magnuson-Stevens Fishery
Conservation and Management Act,
implementing regulations, and other
applicable laws.
In accordance with 50 CFR 300.224(d)
and 50 CFR 665.819(c)(9), vessels
identified in the agreement may retain
and land bigeye tuna in the western and
central Pacific Ocean under the
American Samoa limit. NMFS will
begin attributing bigeye tuna caught by
vessels identified in the agreement to
American Samoa starting on December
10, 2018. This is seven days before
December 17, 2018, which is the date
NMFS forecasted the fishery would
reach the CNMI bigeye tuna allocation
limit. If NMFS determines that the
fishery will reach the American Samoa
1,000-t attribution, we would restrict the
retention of bigeye tuna caught by
vessels identified in the agreement,
unless the vessels are included in a
subsequent specified fishing agreement
with another U.S. territory, and we
would publish a notice to that effect in
the Federal Register.
SUPPLEMENTARY INFORMATION:
Authority: 16 U.S.C. 1801 et seq.
E:\FR\FM\10DER1.SGM
10DER1
]]>Agencies
[Federal Register Volume 83, Number 236 (Monday, December 10, 2018)]
[Rules and Regulations]
[Pages 63419-63428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26591]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF HEALTH AND HUMAN SERVICES
45 CFR Part 153
[CMS-9919-F]
RIN 0938-AT66
Patient Protection and Affordable Care Act; Adoption of the
Methodology for the HHS-Operated Permanent Risk Adjustment Program for
the 2018 Benefit Year Final Rule
AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of
Health and Human Services (HHS).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule adopts the HHS-operated risk adjustment
methodology for the 2018 benefit year. In February 2018, a district
court vacated the use of statewide average premium in the HHS-operated
risk adjustment methodology for the 2014 through 2018 benefit years.
Following review of all submitted comments to the proposed rule, HHS is
adopting for the 2018 benefit year an HHS-operated risk adjustment
methodology that utilizes the statewide average premium and is operated
in a budget-neutral manner, as established in the final rules published
in the March 23, 2012 and the December 22, 2016 editions of the Federal
Register.
DATES: The provisions of this final rule are effective on February 8,
2019.
FOR FURTHER INFORMATION CONTACT: Abigail Walker, (410) 786-1725; Adam
Shaw, (410) 786-1091; Jaya Ghildiyal, (301) 492-5149; or Adrianne
Patterson, (410) 786-0686.
SUPPLEMENTARY INFORMATION:
I. Background
A. Legislative and Regulatory Overview
The Patient Protection and Affordable Care Act (Pub. L. 111-148)
was enacted on March 23, 2010; the Health Care and Education
Reconciliation Act of 2010 (Pub. L. 111-152) was enacted on March 30,
2010. These statutes are collectively referred to as ``PPACA'' in this
final rule. Section 1343 of the PPACA established an annual permanent
risk adjustment program under which payments are collected from health
insurance issuers that enroll relatively low-risk populations, and
payments are made to health insurance issuers that enroll relatively
higher-risk populations. Consistent with section 1321(c)(1) of the
PPACA, the Secretary is responsible for operating the risk adjustment
program on behalf of any state that elects not to do so. For the 2018
benefit year, HHS is responsible for operation of the risk adjustment
program in all 50 states and the District of Columbia.
HHS sets the risk adjustment methodology that it uses in states
that elect not to operate risk adjustment in advance of each benefit
year through a notice-and-comment rulemaking process with the intention
that issuers will be able to rely on the methodology to price their
plans appropriately (see 45 CFR 153.320; 76 FR 41930, 41932 through
41933; 81 FR 94058, 94702 (explaining the importance of setting rules
ahead of time and describing comments supporting that practice)).
In the July 15, 2011 Federal Register (76 FR 41929), we published a
proposed rule outlining the framework for the risk adjustment program.
We implemented the risk adjustment program in a final rule, published
in the March 23, 2012 Federal Register (77 FR 17219) (Premium
Stabilization Rule). In the December 7, 2012 Federal Register (77 FR
73117), we published a proposed rule outlining the proposed Federally
certified risk adjustment methodologies for the 2014 benefit year and
other parameters related to the risk adjustment program (proposed 2014
Payment Notice). We published the 2014 Payment Notice final rule in the
March 11, 2013 Federal Register (78 FR 15409). In the June 19, 2013
Federal Register (78 FR 37032), we proposed a modification to the HHS-
operated risk adjustment methodology related to community rating
states. In the October 30, 2013 Federal Register (78 FR 65046), we
finalized this proposed modification related to community rating
states. We published a correcting amendment to the 2014 Payment Notice
final rule in the November 6, 2013 Federal Register (78 FR 66653) to
address how an enrollee's age for the risk score calculation would be
determined under the HHS-operated risk adjustment methodology.
In the December 2, 2013 Federal Register (78 FR 72321), we
published a proposed rule outlining the Federally certified risk
adjustment methodologies for the 2015 benefit year and other parameters
related to the risk adjustment program (proposed 2015 Payment Notice).
We published the 2015 Payment Notice final rule in the March 11, 2014
Federal Register (79 FR 13743). In the May 27, 2014 Federal Register
(79 FR 30240), the 2015 fiscal year sequestration rate for the risk
adjustment program was announced.
In the November 26, 2014 Federal Register (79 FR 70673), we
published a proposed rule outlining the proposed Federally certified
risk adjustment methodologies for the 2016 benefit year and other
parameters related to the risk adjustment program (proposed 2016
Payment Notice). We published the 2016 Payment Notice final rule in the
February 27, 2015 Federal Register (80 FR 10749).
In the December 2, 2015 Federal Register (80 FR 75487), we
published a proposed rule outlining the Federally certified risk
adjustment methodology for the 2017 benefit year and other parameters
related to the risk adjustment program (proposed 2017 Payment Notice).
We published the 2017 Payment Notice final rule in the March 8, 2016
Federal Register (81 FR 12204).
In the September 6, 2016 Federal Register (81 FR 61455), we
published a proposed rule outlining the Federally certified risk
adjustment methodology for the 2018 benefit year and other parameters
related to the risk adjustment program (proposed 2018 Payment Notice).
We published the 2018 Payment Notice final rule in the December 22,
2016 Federal Register (81 FR 94058).
In the November 2, 2017 Federal Register (82 FR 51042), we
published a proposed rule outlining the federally certified risk
adjustment methodology for the 2019 benefit year. In that proposed
rule, we proposed updates to the risk adjustment methodology and
amendments to the risk adjustment data validation process (proposed
2019 Payment Notice). We published the 2019 Payment Notice final rule
in the April 17, 2018 Federal Register (83 FR 16930). We published a
correction to the 2019 risk adjustment coefficients in the 2019 Payment
Notice final rule in the May 11, 2018 Federal Register (83 FR 21925).
On July 27, 2018, consistent with Sec. 153.320(b)(1)(i), we updated
the 2019 benefit year final risk adjustment model coefficients to
reflect an additional recalibration related to an
[[Page 63420]]
update to the 2016 enrollee-level EDGE dataset.\1\
---------------------------------------------------------------------------
\1\ See Updated 2019 Benefit Year Final HHS Risk Adjustment
Model Coefficients. July 27, 2018. Available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2019-Updtd-Final-HHS-RA-Model-Coefficients.pdf.
---------------------------------------------------------------------------
In the July 30, 2018 Federal Register (83 FR 36456), we published a
final rule that adopted the 2017 benefit year HHS-operated risk
adjustment methodology set forth in the March 23, 2012 Federal Register
(77 FR 17220 through 17252) and in the March 8, 2016 Federal Register
(81 FR 12204 through 12352). The final rule provided an additional
explanation of the rationale for use of statewide average premium in
the HHS-operated risk adjustment state payment transfer formula for the
2017 benefit year, including why the program is operated in a budget-
neutral manner. That final rule permitted HHS to resume 2017 benefit
year program operations, including collection of risk adjustment
charges and distribution of risk adjustment payments. HHS also provided
guidance as to the operation of the HHS-operated risk adjustment
program for the 2017 benefit year in light of publication of the final
rule.\2\
---------------------------------------------------------------------------
\2\ See https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2017-RA-Final-Rule-Resumption-RAOps.pdf.
---------------------------------------------------------------------------
In the August 10, 2018 Federal Register (83 FR 39644), we published
the proposed rule concerning the adoption of the 2018 benefit year HHS-
operated risk adjustment methodology set forth in the March 23, 2012
Federal Register (77 FR 17220 through 17252) and in the December 22,
2016 Federal Register (81 FR 94058 through 94183).
B. The New Mexico Health Connections Court's Order
On February 28, 2018, in a suit brought by the health insurance
issuer New Mexico Health Connections, the United States District Court
for the District of New Mexico (the district court) vacated the use of
statewide average premium in the HHS-operated risk adjustment
methodology for the 2014, 2015, 2016, 2017, and 2018 benefit years. The
district court reasoned that HHS had not adequately explained its
decision to adopt a methodology that used statewide average premium as
the cost-scaling factor to ensure that the amount collected from
issuers equals the amount of payments made to issuers for the
applicable benefit year, that is, a methodology that maintains the
budget neutrality of the HHS-operated risk adjustment program for the
applicable benefit year.\3\ The district court otherwise rejected New
Mexico Health Connections' arguments.
---------------------------------------------------------------------------
\3\ New Mexico Health Connections v. United States Department of
Health and Human Services et al., No. CIV 16-0878 JB/JHR (D.N.M.
Feb. 28, 2018). On March 28, 2018, HHS filed a motion requesting
that the district court reconsider its decision. A hearing on the
motion for reconsideration was held on June 21, 2018. On October 19,
2018, the court denied HHS's motion for reconsideration. See New
Mexico Health Connections v. United States Department of Health and
Human Services et al., No. CIV 16-0878 JB/JHR (D.N.M. Oct. 19,
2018).
---------------------------------------------------------------------------
C. The PPACA Risk Adjustment Program
The risk adjustment program provides payments to health insurance
plans that enroll populations with higher-than-average risk and
collects charges from plans that enroll populations with lower-than-
average risk. The program is intended to reduce incentives for issuers
to structure their plan benefit designs or marketing strategies to
avoid higher-risk enrollees and lessen the potential influence of risk
selection on the premiums that plans charge. Instead, issuers are
expected to set rates based on average risk and compete based on plan
features rather than selection of healthier enrollees. The program
applies to any health insurance issuer offering plans in the
individual, small group and merged markets, with the exception of
grandfathered health plans, group health insurance coverage described
in 45 CFR 146.145(c), individual health insurance coverage described in
45 CFR 148.220, and any plan determined not to be a risk adjustment
covered plan in the applicable Federally certified risk adjustment
methodology.\4\ In 45 CFR part 153, subparts A, B, D, G, and H, HHS
established standards for the administration of the permanent risk
adjustment program. In accordance with Sec. 153.320, any risk
adjustment methodology used by a state, or by HHS on behalf of the
state, must be a federally certified risk adjustment methodology.
---------------------------------------------------------------------------
\4\ See the definition for ``risk adjustment covered plan'' at
Sec. 153.20.
---------------------------------------------------------------------------
As stated in the 2014 Payment Notice final rule, the federally
certified risk adjustment methodology developed and used by HHS in
states that elect not to operate a risk adjustment program is based on
the premise that premiums for that state market should reflect the
differences in plan benefits and efficiency--not the health status of
the enrolled population.\5\ HHS developed the risk adjustment state
payment transfer formula that calculates the difference between the
revenues required by a plan based on the projected health risk of the
plan's enrollees and the revenues that the plan can generate for those
enrollees. These differences are then compared across plans in the
state market risk pool and converted to a dollar amount based on the
statewide average premium. HHS chose to use statewide average premium
and normalize the risk adjustment state payment transfer formula to
reflect state average factors so that each plan's enrollment
characteristics are compared to the state average and the total
calculated payment amounts equal total calculated charges in each state
market risk pool. Thus, each plan in the state market risk pool
receives a risk adjustment payment or charge designed to compensate for
risk for a plan with average risk in a budget-neutral manner. This
approach supports the overall goal of the risk adjustment program to
encourage issuers to rate for the average risk in the applicable state
market risk pool, and mitigates incentives for issuers to operate less
efficiently, set higher prices, or develop benefit designs or create
marketing strategies to avoid high-risk enrollees. Such incentives
could arise if HHS used each issuer's plan's own premium in the state
payment transfer formula, instead of statewide average premium.
---------------------------------------------------------------------------
\5\ See 78 FR at 15417.
---------------------------------------------------------------------------
II. Provisions of the Proposed Rule and Analysis of and Responses to
Public Comments
In the August 10, 2018 Federal Register (83 FR 39644), we published
a proposed rule that proposed to adopt the HHS-operated risk adjustment
methodology as previously established in the March 23, 2012 Federal
Register (77 FR 17220 through 17252) and the December 22, 2016 Federal
Register (81 FR 94058 through 94183) for the 2018 benefit year, with an
additional explanation regarding the use of statewide average premium
and the budget-neutral nature of the HHS-operated risk adjustment
program. We did not propose to make any changes to the previously
published HHS-operated risk adjustment methodology for the 2018 benefit
year.
As explained above, the district court vacated the use of statewide
average premium in the HHS-operated risk adjustment methodology for the
2014 through 2018 benefit years on the grounds that HHS did not
adequately explain its decision to adopt that aspect of the risk
adjustment methodology. The district court recognized that use of
statewide average premium maintained the budget neutrality of the
program, but concluded that HHS had not adequately explained the
underlying decision to adopt a methodology that kept the program budget
neutral, that is, a methodology that ensured that amounts
[[Page 63421]]
collected from issuers would equal payments made to issuers for the
applicable benefit year. Accordingly, HHS provided the additional
explanation in the proposed rule.
As explained in the proposed rule, Congress designed the risk
adjustment program to be implemented and operated by states if they
chose to do so. Nothing in section 1343 of the PPACA requires a state
to spend its own funds on risk adjustment payments, or allows HHS to
impose such a requirement. Thus, while section 1343 may have provided
leeway for states to spend additional funds on their programs if they
voluntarily chose to do so, HHS could not have required such additional
funding.
We also explained that while the PPACA did not include an explicit
requirement that the risk adjustment program be operated in a budget-
neutral manner, HHS was constrained by appropriations law to devise a
risk adjustment methodology that could be implemented in a budget-
neutral fashion. In fact, although the statutory provisions for many
other PPACA programs appropriated or authorized amounts to be
appropriated from the U.S. Treasury, or provided budget authority in
advance of appropriations,\6\ the PPACA neither authorized nor
appropriated additional funding for risk adjustment payments beyond the
amount of charges paid in, and did not authorize HHS to obligate itself
for risk adjustment payments in excess of charges collected.\7\ Indeed,
unlike the Medicare Part D statute, which expressly authorized the
appropriation of funds and provided budget authority in advance of
appropriations to make Part D risk-adjusted payments, the PPACA's risk
adjustment statute made no reference to additional appropriations.\8\
Because Congress omitted from the PPACA any provision appropriating
independent funding or creating budget authority in advance of an
appropriation for the risk adjustment program, we explained that HHS
could not--absent another source of appropriations--have designed the
program in a way that required payments in excess of collections
consistent with binding appropriations law. Thus, Congress did not give
HHS discretion to implement a risk adjustment program that was not
budget neutral.
---------------------------------------------------------------------------
\6\ For examples of PPACA provisions appropriating funds, see
PPACA secs. 1101(g)(1), 1311(a)(1), 1322(g), and 1323(c). For
examples of PPACA provisions authorizing the appropriation of funds,
see PPACA secs. 1002, 2705(f), 2706(e), 3013(c), 3015, 3504(b),
3505(a)(5), 3505(b), 3506, 3509(a)(1), 3509(b), 3509(e), 3509(f),
3509(g), 3511, 4003(a), 4003(b), 4004(j), 4101(b), 4102(a), 4102(c),
4102(d)(1)(C), 4102(d)(4), 4201(f), 4202(a)(5), 4204(b), 4206,
4302(a), 4304, 4305(a), 4305(c), 5101(h), 5102(e), 5103(a)(3), 5203,
5204, 5206(b), 5207, 5208(b), 5210, 5301, 5302, 5303, 5304, 5305(a),
5306(a), 5307(a), and 5309(b).
\7\ See 42 U.S.C. 18063.
\8\ Compare 42 U.S.C. 18063 (failing to specify source of
funding other than risk adjustment charges), with 42 U.S.C. 1395w-
116(c)(3) (authorizing appropriations for Medicare Part D risk
adjusted payments); 42 U.S.C. 1395w-115(a) (establishing ``budget
authority in advance of appropriations Acts'' for Medicare Part D
risk adjusted payments).
---------------------------------------------------------------------------
Furthermore, the proposed rule explained that if HHS elected to
adopt a risk adjustment methodology that was contingent on
appropriations from Congress through the annual appropriations process,
that would have created uncertainty for issuers regarding the amount of
risk adjustment payments they could expect for a given benefit year.
That uncertainty would have undermined one of the central objectives of
the risk adjustment program, which is to stabilize premiums by assuring
issuers in advance that they will receive risk adjustment payments if,
for the applicable benefit year, they enroll a higher-risk population
compared to other issuers in the state market risk pool. The budget-
neutral framework spreads the costs of covering higher-risk enrollees
across issuers throughout a given state market risk pool, thereby
reducing incentives for issuers to engage in risk-avoidance techniques
such as designing or marketing their plans in ways that tend to attract
healthier individuals, who cost less to insure.
Moreover, the proposed rule noted that relying on each year's
budget process for appropriation of additional funds to HHS that could
be used to supplement risk adjustment transfers would have required HHS
to delay setting the parameters for any risk adjustment payment
proration rates until well after the plans were in effect for the
applicable benefit year. The proposed rule also explained that any
later-authorized program management appropriations made to CMS were not
intended to be used for supplementing risk adjustment payments, and
were allocated by the agency for other, primarily administrative,
purposes. Specifically, it has been suggested that the annual lump sum
appropriation to CMS for program management (CMS Program Management
account) was potentially available for risk adjustment payments. The
lump sum appropriation for each year was not enacted until after the
applicable rule announcing the HHS-operated methodology for the
applicable benefit year, and therefore could not have been relied upon
in promulgating that rule. Additionally, as the underlying budget
requests reflect, the CMS Program Management account was intended for
program management expenses, such as administrative costs for various
CMS programs such as Medicaid, Medicare, the Children's Health
Insurance Program, and the PPACA's insurance market reforms--not for
the program payments under those programs. CMS would have elected to
use the CMS Program Management account for these important program
management expenses, rather than program payments for risk adjustment,
even if CMS had discretion to use all or part of the lump sum for such
program payments. Without the adoption of a budget-neutral framework,
we explained that HHS would have needed to assess a charge or otherwise
collect additional funds, or prorate risk adjustment payments to
balance the calculated risk adjustment transfer amounts. The resulting
uncertainty would have conflicted with the overall goals of the risk
adjustment program--to stabilize premiums and to reduce incentives for
issuers to avoid enrolling individuals with higher-than-average
actuarial risk.
In light of the budget-neutral framework discussed above, the
proposed rule explained that we also chose not to use a different
parameter for the state payment transfer formula under the HHS-operated
methodology, such as each plan's own premium, that would not have
automatically achieved equality between risk adjustment payments and
charges in each benefit year. As set forth in prior discussions,\9\ use
of the plan's own premium or a similar parameter would have required
the application of a balancing adjustment in light of the program's
budget neutrality--either reducing payments to issuers owed a payment,
increasing charges on issuers due a charge, or splitting the difference
in some fashion between issuers owed payments and issuers assessed
charges. Using a plan's own premium would have frustrated the risk
adjustment program's goals, as discussed above, of encouraging issuers
to rate for the average risk in the applicable state market risk pool,
and avoiding the creation of incentives for issuers to operate less
efficiently, set higher prices, or develop benefit designs or create
marketing strategies to avoid high-risk enrollees. Use of an after-the-
fact balancing adjustment is also less predictable for issuers than a
[[Page 63422]]
methodology that is established before the benefit year. We explained
that such predictability is important to serving the risk adjustment
program's goals of premium stabilization and reducing issuer incentives
to avoid enrolling higher-risk populations.
---------------------------------------------------------------------------
\9\ See for example, September 12, 2011, Risk Adjustment
Implementation Issues White Paper, available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/riskadjustment_whitepaper_web.pdf.
---------------------------------------------------------------------------
Additionally, the proposed rule noted that using a plan's own
premium to scale transfers may provide additional incentives for plans
with high-risk enrollees to increase premiums in order to receive
higher risk adjustment payments. As noted by commenters to the 2014
Payment Notice proposed rule, transfers also may be more volatile from
year to year and sensitive to anomalous premiums if they were scaled to
a plan's own premium instead of the statewide average premium. In the
2014 Payment Notice final rule, we noted that we received a number of
comments in support of our proposal to use statewide average premium as
the basis for risk adjustment transfers, while some commenters
expressed a desire for HHS to use a plan's own premium.\10\ HHS
addressed those comments by reiterating that we had considered the use
of a plan's own premium, but chose to use statewide average premium, as
this approach supports the overall goals of the risk adjustment program
to encourage issuers to rate for the average risk in the applicable
state market risk pool, and avoids the creation of incentives for
issuers to employ risk-avoidance techniques.\11\
---------------------------------------------------------------------------
\10\ 78 FR 15410, 15432.
\11\ Id.
---------------------------------------------------------------------------
The proposed rule also explained that although HHS has not yet
calculated risk adjustment payments and charges for the 2018 benefit
year, immediate administrative action was imperative to maintain
stability and predictability in the individual, small group and merged
insurance markets. Without administrative action, the uncertainty
related to the HHS-operated risk adjustment methodology for the 2018
benefit year could add uncertainty to the individual, small group and
merged markets, as issuers determine the extent of their market
participation and the rates and benefit designs for plans they will
offer in future benefit years. Without certainty regarding the 2018
benefit year HHS-operated risk adjustment methodology, there was a
serious risk that issuers would substantially increase future premiums
to account for the potential of uncompensated risk associated with
high-risk enrollees. Consumers enrolled in certain plans with benefit
and network structures that appeal to higher risk enrollees could see a
significant premium increase, which could make coverage in those plans
particularly unaffordable for unsubsidized enrollees. In states with
limited Exchange options, a qualified health plan issuer exit would
restrict consumer choice, and could put additional upward pressure on
premiums, thereby increasing the cost of coverage for unsubsidized
individuals and federal spending for premium tax credits. The
combination of these effects could lead to involuntary coverage losses
in certain state market risk pools.
Additionally, the proposed rule explained that HHS's failure to
make timely risk adjustment payments could impact the solvency of
issuers providing coverage to sicker (and costlier) than average
enrollees that require the influx of risk adjustment payments to
continue operations. When state regulators evaluate issuer solvency,
any uncertainty surrounding risk adjustment transfers hampers their
ability to make decisions that protect consumers and support the long-
term health of insurance markets.
In response to the district court's February 2018 decision that
vacated the use of statewide average premium in the risk adjustment
methodology on the grounds that HHS did not adequately explain its
decision to adopt that aspect of the methodology, we offered the
additional explanation outlined above in the proposed rule, and
proposed to maintain the use of statewide average premium in the
applicable state market risk pool for the state payment transfer
formula under the HHS-operated risk adjustment methodology for the 2018
benefit year. HHS proposed to adopt the methodology previously
established for the 2018 benefit year in the Federal Register
publications cited above that apply to the calculation, collection, and
payment of risk adjustment transfers under the HHS-operated methodology
for the 2018 benefit year. This included the adjustment to the
statewide average premium, reducing it by 14 percent, to account for an
estimated proportion of administrative costs that do not vary with
claims.\12\ We sought comment on the proposal to use statewide average
premium. However, in order to protect the settled expectations of
issuers that structured their pricing, offering, and market
participation decisions in reliance on the previously issued 2018
benefit year methodology, all other aspects of the risk adjustment
methodology were outside of the scope of the proposed rule, and HHS did
not seek comment on those finalized aspects.
---------------------------------------------------------------------------
\12\ See 81 FR 94058 at 94099.
---------------------------------------------------------------------------
We summarize and respond to the comments received to the proposed
rule below. Given the volume of exhibits, court filings, white papers
(including all corresponding exhibits), and comments on other
rulemakings incorporated by reference in one commenter's letter, we are
not able to separately address each of those documents. Instead, we
summarize and respond to the significant comments and issues raised by
the commenter that are within the scope of this rulemaking.
Comment: One commenter expressed general concerns about
policymaking and implementation of the PPACA related to enrollment
activity changes, cost-sharing reductions, and short-term, limited-
duration plans.
Response: The use of statewide average premium in the HHS-operated
risk adjustment methodology, including the operation of the program in
a budget-neutral manner, which was the limited subject of the proposed
rulemaking, was not addressed by this commenter. In fact, the commenter
did not specifically address the risk adjustment program at all.
Therefore, the concerns raised by this commenter are outside the scope
of the proposed rule, and are not addressed in this final rule.
Comment: Commenters were overwhelmingly in favor of HHS finalizing
the rule as proposed, and many encouraged HHS to do so as soon as
possible. Many commenters stated that by finalizing this rule as
proposed, HHS is providing an additional explanation regarding the
operation of the program in a budget-neutral manner and the use of
statewide average premium for the 2018 benefit year consistent with the
decision of the district court, and is reducing the risk of substantial
instability to the Exchanges and individual and small group and merged
market risk pools. Many commenters stated that no changes should be
made to the risk adjustment methodology for the 2018 benefit year
because issuers' rates for the 2018 benefit year were set based on the
previously finalized methodology.
Response: We agree that a prompt finalization of this rule is
important to ensure the ongoing stability of the individual and small
group and merged markets, and the ability of HHS to continue operations
of the risk adjustment program normally for the 2018 benefit year. We
also agree that finalizing the rule as proposed would maintain
stability and ensure predictability of pricing in a budget-neutral
framework because issuers relied on the 2018 HHS-operated risk
adjustment methodology that used
[[Page 63423]]
statewide average premium during rate setting and when deciding in
calendar year 2017 whether to participate in the market(s) during the
2018 benefit year.
Comment: Several commenters agreed with HHS's interpretation of the
statute as requiring the operation of the risk adjustment program in a
budget-neutral manner; several cited the absence of additional funding
which would cover any possible shortfall between risk adjustment
transfers as supporting the operation of the program in a budget-
neutral manner. One commenter highlighted that appropriations can vary
from year to year, adding uncertainty and instability to the market(s)
if the program relied on additional funding to cover potential
shortfalls and was not operated in a budget-neutral manner, which in
turn would affect issuer pricing decisions. These commenters noted that
any uncertainty about whether Congress would fund risk adjustment
payments would deprive issuers of the ability to make pricing and
market participation decisions based on a legitimate expectation that
risk adjustment transfers would occur as required in HHS regulations.
Other commenters noted that without certainty of risk adjustment
transfers, issuers would likely seek rate increases to account for this
further uncertainty and the risk of enrolling a greater share of high-
cost individuals. Alternatively, issuers seeking to avoid significant
premium increases would be compelled to develop alternative coverage
arrangements that fail to provide adequate coverage to people with
chronic conditions or high health care costs (for example, narrow
networks or formulary design changes). Another commenter pointed to the
fact that risk adjustment was envisioned by Congress as being run by
the states, and that if HHS were to require those states that run their
own program to cover any shortfall between what they collect and what
they must pay out, HHS would effectively be imposing an unfunded
mandate on states. The commenter noted there is no indication that
Congress intended risk adjustment to impose such an unfunded mandate.
Another commenter expressed that a budget-neutral framework was the
most natural reading of the PPACA, with a different commenter stating
this framework is implied in the statute.
However, one commenter stated that risk adjustment does not need to
operate as budget neutral, as section 1343 of the PPACA does not
require that the program be budget neutral, and funds are available to
HHS for the risk adjustment program from the CMS Program Management
account to offset any potential shortfalls. The commenter also stated
that the rationale for using statewide average premium to achieve
budget neutrality is incorrect, and that even if budget neutrality is
required, any risk adjustment payment shortfalls that may result from
using a plan's own premium in the risk adjustment transfer formula
could be addressed through pro rata adjustments to risk adjustment
transfers. This commenter also stated that the use of statewide average
premium is not predictable for issuers trying to set rates, especially
for small issuers which do not have a large market share, as they do
not have information about other issuers' rates at the time of rate
setting. Conversely, many commenters noted that, absent an
appropriation for risk adjustment payments, the prorated payments that
would result from the use of a plan's own premium in the risk
adjustment methodology would add an unnecessary layer of complexity for
issuers when pricing and would reduce predictability, resulting in
uncertainty and instability in the market(s).
Response: We acknowledged in the proposed rule that the PPACA did
not include a provision that explicitly required the risk adjustment
program be operated in a budget-neutral manner; however, HHS was
constrained by appropriations law to devise a risk adjustment
methodology that could be implemented in a budget-neutral fashion. In
fact, Congress did not authorize or appropriate additional funding for
risk adjustment beyond the amount of charges paid in, and did not
authorize HHS to obligate itself for risk adjustment payments in excess
of charges collected. In the absence of additional, independent funding
or the creation of budget authority in advance of an appropriation, HHS
could not make payments in excess of charges collected consistent with
binding appropriations law. Furthermore, we agree with commenters that
the creation of a methodology that was contingent on Congress agreeing
to appropriate supplemental funding of unknown amounts through the
annual appropriations process would create uncertainty. It would also
delay the process for setting the parameters for any potential risk
adjustment proration until well after rates were set and the plans were
in effect for the applicable benefit year. In addition to proration of
risk adjustment payments to balance risk adjustment transfer amounts,
we considered the impact of assessing additional charges or otherwise
collecting additional funds from issuers of risk adjustment covered
plans as alternatives to the establishment of a budget-neutral
framework. All of these after-the-fact balancing adjustments were
ultimately rejected because they are less predictable for issuers than
a budget-neutral methodology which does not require after-the-fact
balancing adjustments, a conclusion supported by the vast majority of
comments received. As detailed in the proposed rule, HHS determined it
would not be appropriate to rely on the CMS Program Management account
because those amounts are designated for administration and operational
expenses, not program payments, nor would the CMS Program Management
account be sufficient to fund both the payments under the risk
adjustment program and those administrative and operational expenses.
Furthermore, use of such funds would create the same uncertainty and
other challenges described above, as it would require reliance on the
annual appropriations process and would require after-the-fact
balancing adjustments to address shortfalls. After extensive analysis
and evaluation of alternatives, we determined that the best method
consistent with legal requirements is to operate the risk adjustment
program in a budget-neutral manner, using statewide average premium as
the cost scaling factor and normalizing the risk adjustment payment
transfer formula to reflect state average factors.
We agree with the commenters that calculating transfers based on a
plan's own premium without an additional funding source to ensure full
payment of risk adjustment payment amounts would create premium
instability. If HHS implemented an approach based on a plan's own
premium without an additional funding source, after-the-fact payment
adjustments would be required. As explained above, the amount of these
payment adjustments would vary from year to year, would delay the
publication of final risk adjustment amounts, and would compel issuers
with risk that is higher than the state average to speculate on the
premium increase that would be necessary to cover an unknown risk
adjustment payment shortfall amount. We considered and ultimately
declined to adopt a methodology that required an after-the-fact
balancing adjustment because such an approach is less predictable for
issuers than a budget-neutral methodology that can be calculated in
advance of a benefit year. This included consideration of a non-budget
neutral HHS-operated risk adjustment methodology that used a plan's own
premiums as the cost-scaling
[[Page 63424]]
factor, which we discuss in detail later in this preamble. Modifying
the 2018 benefit year risk adjustment methodology to use a plan's own
premium would reduce the predictability of risk adjustment payments and
charges significantly. As commenters stated, the use of a plan's own
premium would add an extra layer of complexity in estimating risk
adjustment transfers because payments and charges would need to be
prorated retrospectively based on the outcome of risk adjustment
transfer calculations, but would need to be anticipated in advance of
the applicable benefit year for use in issuers' pricing calculations.
We do not agree with the commenter that statewide average premium is
less predictable than a plan's own premium, as the use of statewide
average premium under a budget-neutral framework makes risk adjustment
transfers self-balancing, and provides payment certainty for issuers
with higher-than-average risk.
After considering the comments submitted, we are finalizing a
methodology that operates risk adjustment in a budget-neutral manner
using statewide average premium as the cost scaling factor and
normalizing the risk adjustment payment transfer formula to reflect
state average factors for the 2018 benefit year.
Comment: The majority of the comments supported the use of
statewide average premium in the HHS-operated risk adjustment
methodology for the 2018 benefit year. Some commenters stated that the
risk adjustment program is working as intended, by compensating issuers
based on their enrollees' health status, that is, transferring funds
from issuers with predominately low-risk enrollees to those with a
higher-than-average share of high-risk enrollees. One commenter stated
that the program has been highly effective at reducing loss-ratios and
ensuring that issuers can operate efficiently, without concern for
significant swings in risk from year to year. Although some commenters
requested refinements to ensure that the methodology does not
unintentionally harm smaller, newer, or innovative issuers, a different
commenter noted that the results for all prior benefit years of the
risk adjustment program do not support the assertion that the risk
adjustment methodology undermines small health plans. This commenter
noted that the July 9, 2018 ``Summary Report on Permanent Risk
Adjustment Transfers for the 2017 Benefit Year'' found a very strong
correlation between the amount of paid claims and the direction and
scale of risk adjustment transfers.\13\ It also pointed to the American
Academy of Actuaries' analysis of 2014 benefit year risk adjustment
results, in which 103 of 163 small health plans (those with less than
10 percent of market share) received risk adjustment payments and the
average payment was 27 percent of premium.\14\ This commenter cited
these points as evidence that risk adjustment is working as intended
for small issuers. This commenter also cited an Oliver Wyman study that
analyzed risk adjustment receipts by health plan member months (that
is, issuer size) and found no systematic bias in the 2014 risk
adjustment model.\15\
---------------------------------------------------------------------------
\13\ Available at https://downloads.cms.gov/cciio/Summary-Report-Risk-Adjustment-2017.pdf.
\14\ American Academy of Actuaries, ``Insights on the ACA Risk
Adjustment Program,'' April 2016. Available at https://actuary.org/files/imce/Insights_on_the_ACA_Risk_Adjustment_Program.pdf.
\15\ Oliver Wyman, ``A Story in 4 Charts, Risk Adjustment in the
Non-Group Market in 2014,'' February 24, 2016. Available at https://health.oliverwyman.com/2016/02/a_story_in_four_char.html.
---------------------------------------------------------------------------
A few commenters stated that use of statewide average premium to
scale risk adjustment transfers tends to penalize issuers with
efficient care management and lower premiums and rewards issuers for
raising rates. One of the commenters also stated that the HHS-operated
risk adjustment methodology does not reflect relative actuarial risk,
that statewide average premium harms issuers that price below the
statewide average, and that the program does not differentiate between
an issuer that has lower premiums because of medical cost savings from
better care coordination and an issuer that has lower premiums because
of healthier-than-average enrollees. The commenter suggested that HHS
add a Care Management Effectiveness index into the risk adjustment
formula. This commenter also stated that use of a plan's own premium
rather than statewide average premium could improve the risk adjustment
formula, stating that issuers would not be able to inflate their
premiums to ``game'' the risk adjustment system due to other PPACA
requirements such as medical loss ratio, rate review, and essential
health benefits, as well as state insurance regulations, including
oversight of marketing practices intended to avoid sicker enrollees.
However, other commenters opposed the use of a plan's own premium
in the risk adjustment formula based on a concern that it would
undermine the risk adjustment program and create incentives for issuers
to avoid enrolling high-cost individuals. Some commenters noted the
difficulty of determining whether an issuer's low premium was the
result of efficiency, mispricing, or a strategy to gain market share,
and that the advantages of using statewide average premium outweigh the
possibility that use of a plan's own premium could result in better
reflection of cost management. One commenter noted that encouraging
issuers to set premiums based on market averages in a state (that is,
using statewide average premium) promotes market competition based on
value, quality of care provided, and effective care management, not on
the basis of risk selection. Other commenters strongly opposed the use
of a plan's own premium, as doing so would introduce incentives for
issuers to attract lower-risk enrollees because they would no longer
have to pay their fair share, or because issuers that traditionally
attract high-risk enrollees would be incentivized to increase premiums
in order to receive larger risk adjustment payments. Others stated that
the use of a plan's own premium would add an extra layer of complexity
in estimating risk adjustment transfers, and therefore in premium rate
setting, because payments and charges would need to be prorated
retrospectively based on the outcome of risk adjustment transfer
calculations, but would need to be anticipated prospectively as part of
issuers' pricing calculations.
One commenter expressed concern that the risk adjustment payment
transfer formula exaggerates plan differences in risk because it does
not address plan coding differences.
Response: We agree with the majority of commenters that use of
statewide average premium will maintain the integrity of the risk
adjustment program by discouraging the creation of benefit designs and
marketing strategies to avoid high-risk enrollees and promoting market
stability and predictability. The benefits of using statewide average
premium as the cost scaling factor in the risk adjustment state payment
transfer formula extend beyond its role in maintaining the budget
neutrality of the program. Consistent with the statute, under the HHS-
operated risk adjustment program, each plan in the risk pool receives a
risk adjustment payment or charge designed to take into account the
plan's risk compared to a plan with average risk. The statewide average
premium reflects the statewide average cost and efficiency level and
acts as the cost scaling factor in the state payment transfer formula
under the HHS-operated risk adjustment methodology. HHS chose to use
statewide average premium to encourage issuers to rate for the average
risk, to automatically
[[Page 63425]]
achieve equality between risk adjustment payments and charges in each
benefit year, and to avoid the creation of incentives for issuers to
operate less efficiently, set higher prices, or develop benefits
designs or create marketing strategies to avoid high-risk enrollees.
HHS considered and again declined in the 2018 Payment Notice to
adopt the use of each plan's own premium in the state payment transfer
formula.\16\ As we noted in the 2018 Payment Notice, use of a plan's
own premium would likely lead to substantial volatility in transfer
results and could result in even higher transfer charges for low-risk,
low-premium plans because of the program's budget neutrality. Under
such an approach, high-risk, high-premium plans would require even
greater transfer payments. If HHS applied a balancing adjustment in
favor of these plans to maintain the budget-neutral nature of the
program after transfers have been calculated using a plan's own
premium, low-risk, low-premium plans would be required to pay in an
even higher percentage of their plan-specific premiums in risk
adjustment transfer charges due to the need to maintain budget
neutrality. Furthermore, payments to high-risk, low-premium plans that
are presumably more efficient than high-risk, high-premium plans would
be reduced, incentivizing such plans to inflate premiums. In other
words, the use of a plan's own premium in this scenario would neither
reduce risk adjustment charges for low-cost and low-risk issuers, nor
would it incentivize issuers to operate at the average efficiency.
Alternatively, application of a balancing adjustment in favor of low-
risk, low-premium plans could have the effect of under-compensating
high-risk plans, increasing the likelihood that such plans would raise
premiums. In addition, if the application of a balancing adjustment was
split equally between high-risk and low-risk plans, such an after-the-
fact adjustment, would create uncertainty and instability in the
market(s), and would incentivize issuers to increase premiums to
receive additional risk adjustment payments or to employ risk-avoidance
techniques. As such, we agree with the commenters that challenges
associated with pricing for transfers based on a plan's own premium
would create pricing instability in the market, and introduce
incentives for issuers to attract lower-risk enrollees to avoid paying
their fair share. We also agree that it is very difficult to determine
the reason an issuer has lower premiums than the average, since an
issuer's low premium could be the result of efficiency, mispricing, or
a strategy to gain market share. In all, the advantages of using
statewide average premium outweigh the possibility that the use of a
plan's own premium could result in better reflection of care or cost
management, given the overall disadvantages, outlined above, of using a
plan's own premium. HHS does not agree that use of statewide average
premium penalizes efficient issuers or that it rewards issuers for
raising rates.
---------------------------------------------------------------------------
\16\ 81 FR 94100.
---------------------------------------------------------------------------
Consistent with the 2018 Payment Notice,\17\ beginning with the
2018 benefit year, this final rule adopts the 14 percent reduction to
the statewide average premium to account for administrative costs that
are unrelated to the claims risk of the enrollee population. While low
cost plans are not necessarily efficient plans,\18\ we believe this
adjustment differentiates between premiums that reflect savings
resulting from administrative efficiency from premiums that reflect
healthier-than-average enrollees. As detailed in the 2018 Payment
Notice,\19\ to derive this parameter, we analyzed administrative and
other non-claims expenses in the Medical Loss Ratio (MLR) Annual
Reporting Form and estimated, by category, the extent to which the
expenses varied with claims. We compared those expenses to the total
costs that issuers finance through premiums, including claims,
administrative expenses, and taxes, and determined that the mean
administrative cost percentage in the individual, small group and
merged markets is approximately 14 percent. We believe this amount
represents a reasonable percentage of administrative costs on which
risk adjustment should not be calculated.
---------------------------------------------------------------------------
\17\ 81 FR 94099.
\18\ If a plan is a low-cost plan with low claims costs, it
could be an indication of mispricing, as the issuer should be
pricing for average risk.
\19\ 81 FR 94100.
---------------------------------------------------------------------------
We disagree that the HHS-operated risk adjustment methodology does
not reflect relative actuarial risk or that the use of statewide
average premium indicates otherwise. In fact, the risk adjustment
models estimate a plan's relative actuarial risk across actuarial value
metal levels, also referred to as ``simulated plan liability,'' by
estimating the total costs a plan is expected to be liable for based on
its enrollees' age, sex, hierarchical condition categories (HCCs),
actuarial value, and cost-sharing structure. Therefore, this
``simulated plan liability'' reflects the actuarial risk relative to
the average that can be assigned to each enrollee. We then use an
enrollee's plan selection and diagnoses during the benefit year to
assign a risk score. Although the HHS risk adjustment models are
calibrated on national data, and average costs can vary between
geographic areas, relative actuarial risk differences are generally
similar nationally. The solved coefficients from the risk adjustment
models are then used to evaluate actuarial risk differences between
plans. The risk adjustment state payment transfer formula then further
evaluates the plan's actuarial risk based on enrollees' health risk,
after accounting for factors a plan could have rated for, including
metal level, the prevailing level of expenditures in the geographic
areas in which the enrollees live, the effect of coverage on
utilization (induced demand), and the age and family structure of the
subscribers. This relative plan actuarial risk difference compared to
the state market risk pool average is then scaled to the statewide
average premium. The use of statewide average premium as a cost-scaling
factor requires plans to assess actuarial risk, and therefore scales
transfers to actuarial differences between plans in state market risk
pool(s), rather than differences in premium.
We have been continuously evaluating whether improvements are
needed to the risk adjustment methodology, and will continue to do so
as additional years' data become available. We decline to amend the
risk adjustment methodology to include the Care Management
Effectiveness index or a similar adjustment at this time. Doing so
would be beyond the scope of this rulemaking, which addresses the use
of statewide average premium and the operation of the risk adjustment
program in a budget-neutral manner. A change of this magnitude would
require significant study and evaluation. Although this type of change
is not feasible at present, we will examine the feasibility,
specificity, and sensitivity of measuring care management effectiveness
through enrollee-level EDGE data for the individual, small group and
merged markets, and the benefits of incorporating such measures in the
risk adjustment methodology in future benefit years, either through
rulemaking or other opportunities in which the public can submit
comments. We believe that a robust risk adjustment program encourages
issuers to adopt incentives to improve care management effectiveness,
as doing so would reduce plans' medical costs. As we stated above, use
of statewide average
[[Page 63426]]
premium in the risk adjustment state payment transfer formula
incentivizes plans to apply effective care management techniques to
reduce losses, whereas use of a plan's own premium could be
inflationary as it benefits plans with higher-than-average costs and
higher-than-average premiums.
We are sympathetic to commenters' concerns about plan coding
differences, and recognize that there is substantial variation in
provider coding practices. We are continuing to strengthen the risk
adjustment data validation program to ensure that conditions reported
for risk adjustment are accurately coded and supported by medical
records, and will adjust risk scores (and subsequently, risk adjustment
transfers) beginning with 2017 benefit year data validation results to
encourage issuers to continue to improve the accuracy of data used to
compile risk scores and preserve confidence in the HHS-operated risk
adjustment program.
Comment: Some commenters provided suggestions to improve the risk
adjustment methodology, such as different weights for metal tiers,
multiple mandatory data submission deadlines, reducing the magnitude of
risk scores across the board, and fully removing administrative
expenses from the statewide average premium. One commenter stated that,
while it did not conceptually take issue with the use of statewide
average premium, the payment transfer formula under the HHS-operated
risk adjustment methodology creates market distortions and causes
overstatement of relative risk differences among issuers. This
commenter cited concerns with the use of the Truven MarketScan[supreg]
data to calculate plan risk scores under the HHS risk adjustment
models, and suggested incorporating an adjustment to the calculation of
plan risk scores until the MarketScan[supreg] data is no longer used.
A few commenters stressed the importance of making changes
thoughtfully and over time, and one encouraged HHS to actively seek
improvements to avoid unnecessary litigation. Several commenters, while
supportive of the proposed rule and its use for the 2018 benefit year,
generally stated that the risk adjustment methodology should continue
to be improved prospectively. Another commenter stated that the
proposed rule did not do enough to improve the risk adjustment program,
and encouraged HHS to review and consider suggestions to improve the
risk adjustment methodology in order to promote stability and address
the concerns raised in lawsuits other than the New Mexico case. One
commenter further requested that HHS reopen rulemaking proceedings,
reconsider, and revise the Payment Notices for the 2017 and 2019
benefit years under section 553(e) of the Administrative Procedure Act.
Response: We appreciate the feedback on potential improvements to
the risk adjustment program, and will continue to consider the
suggestions, analysis, and comments received from commenters for
potential changes to future benefit years. This rulemaking is intended
to provide additional explanation regarding the operation of the
program in a budget-neutral manner and the use of statewide average
premium for the 2018 benefit year, consistent with the February 2018
decision of the district court. It also requires an expedited timeframe
to maintain stability in the health insurance markets following the
district court's vacatur of the use of statewide average premium in the
HHS-operated risk adjustment methodology for the 2018 benefit year. We
intend to continue to evaluate approaches to improve the risk
adjustment models' calibration to reflect the individual, small group
and merged markets actuarial risk and review additional years' data as
they become available to evaluate all aspects of the HHS-operated risk
adjustment methodology. We also continue to encourage issuers to submit
EDGE server data earlier and more completely for future benefit years.
However, the scope of the proposed rule was limited to the use of
statewide average premium and the budget-neutral nature of the risk
adjustment program for the 2018 benefit year, and consequently, we
decline to adopt the various suggestions offered by commenters
regarding potential improvements to the 2018 benefit year HHS-operated
risk adjustment methodology as to other issues because they are outside
the scope of this rule.
We reiterate that HHS is always considering possible ways to
improve the risk adjustment methodology for future benefit years. For
example, in the 2018 Payment Notice, based on comments received for the
2017 Payment Notice and the March 31, 2016, HHS-Operated Risk
Adjustment Methodology Meeting Discussion Paper,\20\ HHS made multiple
adjustments to the risk adjustment models and state payment transfer
formula, including reducing the statewide average premium by 14 percent
to account for the proportion of administrative costs that do not vary
with claims, beginning with the 2018 benefit year.\21\ HHS also
modified the risk adjustment methodology by incorporating a high-cost
risk pool calculation to mitigate residual incentive for risk selection
to avoid high-cost enrollees, to better account for the average risk
associated with the factors used in the HHS risk adjustment models, and
to ensure that the actuarial risk of a plan with high-cost enrollees is
better reflected in risk adjustment transfers to issuers with high
actuarial risk.\22\ Other recent changes made to the HHS-operated risk
adjustment methodology include the incorporation of a partial year
adjustment factor and prescription drug utilization factors.\23\
Furthermore, as outlined above, HHS stated in the 2019 Payment Notice
that it would recalibrate the risk adjustment model using 2016
enrollee-level EDGE data to better reflect individual, small group and
merged market populations.\24\ We also consistently seek methods to
support states' authority and provide states with flexible options,
while ensuring the success of the risk adjustment program.\25\ We
respond to comments regarding options available to states with respect
to the risk adjustment program below. We appreciate the commenters'
input and will continue to examine options for potential changes to the
HHS-operated risk adjustment methodology in future notice with comment
rulemaking.
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\20\ https://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/RA-March-31-White-Paper-032416.pdf.
\21\ See 81 FR 94100.
\22\ See 81 FR 94080.
\23\ See 81 FR at 94071 and 94074.
\24\ See 83 FR 16940.
\25\ Id. and 81 FR 29146.
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The requests related to the 2017 and 2019 benefit year rulemakings
are outside the scope of the proposed rule and this final rule, which
is limited to the 2018 benefit year.
Comment: One commenter suggested that states should have broad
authority to cap and limit risk adjustment transfers and charges as
necessary, stating that the requirements associated with the
flexibility HHS granted to states to request a reduction to risk
adjustment transfers beginning in 2020 are too onerous and unclear. The
commenter noted that state regulators know their markets best and
should have the discretion and authority to implement their own
remedial measures without seeking HHS's permission. Conversely, one
commenter specifically supported the state flexibility policy set forth
in Sec. 153.320(d). A few commenters requested that states be allowed
to establish alternatives to statewide
[[Page 63427]]
average premium, with one suggesting that this change begin with the
2020 benefit year, and providing as an example the idea that HHS could
permit states to aggregate the average premiums of two or more distinct
geographic markets within a state.
Response: HHS continually seeks to provide states with flexibility
to determine what is best for their state markets. Section 1343 of the
PPACA provides states authority to operate their own state risk
adjustment programs. Under this authority, a state remains free to
elect to operate the risk adjustment program and tailor it to its
markets, which could include establishing alternatives to the statewide
average premium methodology or aggregating the average premiums of two
or more distinct geographic markets within a state. If a state does not
elect to operate the risk adjustment program, HHS is required to do
so.\26\ No state elected to operate the risk adjustment program for the
2018 benefit year; therefore, HHS is responsible for operating the
program in all 50 states and the District of Columbia.
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\26\ See section 1321(c) of the PPACA.
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In the 2019 Payment Notice, HHS adopted Sec. 153.320(d) to provide
states the flexibility, when HHS is operating the risk adjustment
program, to request a reduction to the otherwise applicable risk
adjustment transfers in the individual, small group, or merged markets
by up to 50 percent.\27\ This flexibility was established to provide
states the opportunity to seek state-specific adjustments to the HHS-
operated risk adjustment methodology without the necessity of operating
their own risk adjustment programs. It is offered beginning with the
2020 benefit year risk adjustment transfers and, since it involves an
adjustment to the transfers calculated by HHS, it will require review
and approval by HHS. States requesting such reductions must
substantiate the transfer reduction requested and demonstrate that the
actuarial risk differences in plans in the applicable state market risk
pool are attributable to factors other than systematic risk
selection.\28\ The process will give HHS the necessary information to
evaluate the flexibility requests. We appreciate the comments offered
on this flexibility, but note that they are outside the scope of the
proposed rule, which was limited to the 2018 benefit year and did not
propose any changes to the process established in Sec. 153.320(d).
However, we will continue to consider commenter feedback on the
process, along with any lessons learned from 2020 benefit year
requests.
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\27\ See 83 FR 16955.
\28\ See Sec. 153.320(d) and 83 FR 16960.
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HHS has consistently acknowledged the role of states as primary
regulators \29\ of their insurance markets, and we continue to
encourage states to examine local approaches under state legal
authority as they deem appropriate.
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\29\ See 83 FR 16955. Also see 81 FR 29146 at 29152 (May 11,
2016), available at https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-11017.pdf.
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Comment: One commenter detailed the impact of the HHS-operated risk
adjustment methodology on the commenter, the CO-OP program's general
struggles, and the challenges faced by some non-CO-OP issuers, stating
that this is evidence that the HHS-operated risk adjustment methodology
is flawed. The commenter urged HHS to make changes discussed above to
the methodology to address what it maintains are unintended financial
impacts on small issuers that are required to pay large risk adjustment
charges, and also challenged the assertion that the current risk
adjustment methodology is predictable.
Response: HHS previously recognized and acknowledged that certain
issuers, including a limited number of newer, rapidly growing, or
smaller issuers, owed substantial risk adjustment charges that they did
not anticipate in the initial years of the program. HHS has regularly
discussed with issuers and state regulators ways to encourage new
participation in the health insurance markets and to mitigate the
effects of substantial risk adjustment charges. Program results
discussed earlier have shown that the risk adjustment methodology has
worked as intended, that risk adjustment transfers correlate with the
amount of paid claims rather than issuer size, and that no systemic
bias is found when risk adjustment receipts are analyzed by health plan
member months. We created an interim risk adjustment reporting process,
beginning with the 2015 benefit year, to provide issuers and states
with preliminary information about the applicable benefit year's
geographic cost factor, billable member months, and state averages such
as monthly premiums, plan liability risk score, allowable rating
factor, actuarial value, and induced demand factors by market. States
may pursue local approaches under state legal authority to address
concerns related to insolvencies and competition, including in
instances where certain state laws or regulations differentially affect
smaller or newer issuers. In addition, as detailed above, beginning
with the 2020 benefit year, states may request a reduction in the
transfer amounts calculated under the HHS-operated methodology to
address state-specific rules or market dynamics to more precisely
account for the expected cost of relative risk differences in the
state's market risk pool(s).
Finally, HHS has consistently sought to increase the predictability
and certainty of transfer amounts in order to promote the premium
stabilization goal of the risk adjustment program. Statewide average
premium provides greater predictability of an issuer's final risk
adjustment receivables than use of a plan's own premium, and we
disagree with comments stating that the use of a plan's own premium in
the risk adjustment transfer formula would result in greater
predictability in pricing. As discussed previously, if a plan's own
premium is used as a scaling factor, risk adjustment transfers would
not be budget neutral. After-the-fact adjustments would be necessary in
order for issuers to receive the full amount of calculated payments,
creating uncertainty and lack of predictability.
III. Provisions of the Final Regulations
After consideration of the comments received, this final rule
adopts the HHS-operated risk adjustment methodology for the 2018
benefit year which utilizes statewide average premium and operates the
program in a budget-neutral manner, as established in the final rules
published in the March 23, 2012 and the December 22, 2016 editions of
the Federal Register.
IV. Collection of Information Requirements
This document does not impose information collection requirements,
that is, reporting, recordkeeping, or third-party disclosure
requirements. Consequently, there is no need for review by the Office
of Management and Budget under the authority of the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501, et seq.).
V. Regulatory Impact Analysis
A. Statement of Need
The proposed rule and this final rule were published in light of
the February 2018 district court decision described above that vacated
the use of statewide average premium in the HHS-operated risk
adjustment methodology for the 2014-2018 benefit years. This final rule
adopts the HHS-operated risk adjustment methodology for the 2018
benefit year, maintaining the use of statewide average premium as the
cost-scaling factor in the HHS-operated risk adjustment methodology and
the
[[Page 63428]]
continued operation of the program in a budget-neutral manner, to
protect consumers from the effects of adverse selection and premium
increases that would result from issuer uncertainty. The Premium
Stabilization Rule, previous Payment Notices, and other rulemakings
noted above provided detail on the implementation of the risk
adjustment program, including the specific parameters applicable for
the 2018 benefit year.
B. Overall Impact
We have examined the impact of this rule as required by Executive
Order 12866 on Regulatory Planning and Review (September 30, 1993),
Executive Order 13563 on Improving Regulation and Regulatory Review
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19,
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act,
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22,
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4,
1999), the Congressional Review Act (5 U.S.C. 804(2)), and Executive
Order 13771 on Reducing Regulation and Controlling Regulatory Costs.
Executive Orders 12866 and 13563 direct agencies to assess all costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for major rules with economically
significant effects ($100 million or more in any one year).
OMB has determined that this final rule is ``economically
significant'' within the meaning of section 3(f)(1) of Executive Order
12866, because it is likely to have an annual effect of $100 million in
any 1 year. In addition, for the reasons noted above, OMB has
determined that this final rule is a major rule under the Congressional
Review Act.
This final rule offers further explanation of budget neutrality and
the use of statewide average premium in the risk adjustment state
payment transfer formula when HHS is operating the permanent risk
adjustment program established by section 1343 of the PPACA on behalf
of a state for the 2018 benefit year. We note that we previously
estimated transfers associated with the risk adjustment program in the
Premium Stabilization Rule and the 2018 Payment Notice, and that the
provisions of this final rule do not change the risk adjustment
transfers previously estimated under the HHS-operated risk adjustment
methodology established in those final rules. The approximate estimated
risk adjustment transfers for the 2018 benefit year are $4.8 billion.
As such, we also incorporate into this final rule the RIA in the 2018
Payment Notice proposed and final rules.\30\ This final rule is not
subject to the requirements of Executive Order 13771 (82 FR 9339,
February 3, 2017) because it is expected to result in no more than de
minimis costs.
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\30\ 81 FR 61455 and 81 FR 94058.
Dated: November 16, 2018.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
Dated: November 19, 2018.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2018-26591 Filed 12-7-18; 8:45 am]
BILLING CODE 4120-01-P
