Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review
This proposed rule would implement the Affordable Care Act's policies related to fair health insurance premiums, guaranteed availability, guaranteed renewability, risk pools, and catastrophic plans. The proposed rule would clarify the approach used to enforce the applicable requirements of the Affordable Care Act with respect to health insurance issuers and group health plans that are non-federal governmental plans. This proposed rule would also amend the standards for health insurance issuers and states regarding reporting, utilization, and collection of data under section 2794 of the Public Health Service Act (PHS Act). It also revises the timeline for states to propose state-specific thresholds for review and approval by CMS.
Table of Contents Back to Top
- FOR FURTHER INFORMATION CONTACT:
- SUPPLEMENTARY INFORMATION:
- I. Executive Summary
- A. Purpose of the Proposed Regulatory Action
- 1. Need for the Proposed Regulatory Action
- 2. Legal Authority
- B. Summary of the Major Provisions of This Proposed Regulatory Action
- C. Costs and Benefits
- II. Background
- A. Legislative Overview Prior to the Affordable Care Act
- B. Overview of the Changes in the Affordable Care Act
- C. Rate Increase Disclosure and Review
- III. Provisions of the Proposed Regulations
- A. Fair Health Insurance Premiums (Proposed § 147.102)
- 1. State and Issuer Flexibility Related to Rating Methodologies
- 2. Small Group Market Rating
- 3. Family Rating
- 4. Persons Included Under Family Coverage
- 5. Rating for Geography
- 6. Rating for Age
- 7. Rating for Tobacco Use
- B. Guaranteed Availability of Coverage (Proposed § 147.104)
- C. Guaranteed Renewability of Coverage (Proposed § 147.106)
- D. Applicability of the Proposed Rules Under PHS Sections 2701, 2702, and 2703 and Section 1312(c) of the Affordable Care Act to Student Health Insurance Coverage
- E. Single Risk Pool (Proposed § 156.80)
- F. CMS Enforcement in Group and Individual Insurance Market (Various Provisions in Parts 144 and 150)
- G. Enrollment in Catastrophic Plans (Proposed § 156.155)
- H. Rate Increase Disclosure and Review (Part 154)
- IV. Collection of Information Requirements
- A. ICRs Regarding State Disclosures [§ 147.102(a)(1)(iii), § 147.102(a)(1)(iv), § 147.102(b)(1), § 147.102(c)(2), § 147.102(c)(3), § 147.102(e), § 156.80 (c)]
- B. ICRs Regarding Rate Increase Disclosure and Review (§ 154.215, § 154.301)
- V. Regulatory Impact Analysis
- A. Summary
- B. Executive Orders 13563 and 12866
- 1. Need for Regulatory Action
- 2. Summary of Impacts
- 3. Anticipated Benefits, Costs and Transfers
- a. Benefits
- b. Costs
- c. Transfers
- C. Regulatory Alternatives
- D. Regulatory Flexibility Act
- E. Unfunded Mandates Reform Act
- F. Federalism
- G. Congressional Review Act
- List of Subjects
- PART 144—REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE
- PART 147—HEALTH INSURANCE REFORM REQUIREMENTS FOR THE GROUP AND INDIVIDUAL HEALTH INSURANCE MARKETS
- PART 150—CMS ENFORCEMENT IN GROUP AND INDIVIDUAL INSURANCE MARKETS
- PART 154—HEALTH INSURANCE ISSUER RATE INCREASES: DISCLOSURE AND REVIEW REQUIREMENTS
- PART 156—HEALTH INSURANCE ISSUER STANDARDS UNDER THE AFFORDABLE CARE ACT, INCLUDING STANDARDS RELATED TO EXCHANGES
Tables Back to Top
- CMS Proposed Standard Age Curve
- Table IV.1—Annual Reporting, Recordkeeping and Disclosure Burden
- Table V.1—Accounting Table
DATES: Back to Top
To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on December 26, 2012.
ADDRESSES: Back to Top
In commenting, please refer to file code CMS-9972-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.
You may submit comments in one of four ways (please choose only one of the ways listed):
1. Electronically. You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the “Submit a comment” instructions.
2. By Regular Mail. You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9972-P, P.O. Box 8012, Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received before the close of the comment period.
3. By Express or Overnight Mail. You may send written comments to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9972-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4. By Hand or Courier. Alternatively, you may deliver (by hand or courier) your written comments only to the following addresses prior to the close of the comment period:
a. For delivery in Washington, DC—
Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.
(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)
b. For delivery in Baltimore, MD—
Centers for Medicare & Medicaid Services,
Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address, call telephone number (410) 786-9994 in advance to schedule your arrival with one of our staff members.
Comments erroneously mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.
For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT: Back to Top
Jacob Ackerman, (410) 786-1565, concerning the health insurance market rules; Douglas Pennington, (410) 786-1553 (or by email: email@example.com), concerning rate review.
SUPPLEMENTARY INFORMATION: Back to Top
Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to view public comments.
Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (800) 743-3951.
I. Executive Summary Back to Top
A. Purpose of the Proposed Regulatory Action
1. Need for the Proposed Regulatory Action
Today, consumers with current or past medical problems can be denied health insurance coverage in the vast majority of individual (nongroup) markets (45 states). Similarly, individuals and small employers often find that they have few protections in terms of the premiums that issuers can charge them. For example, in the individual market, 43 states allow health status rating and 48 states allow age rating (often unlimited). While 37 states explicitly allow gender rating, three states that prohibit gender rating do not require maternity coverage in all individual market policies, meaning that, since maternity coverage requires additional premium in those states, a total of 40 states allow some form of gender rating in practice. In the small group market, 38 states allow health status rating, 48 states allow age rating (often unlimited), 35 states allow gender rating, and 37 states allow industry rating. 
Sections 2701, 2702, and 2703 of the Public Health Service Act (PHS Act), as added and amended by the Patient Protection and Affordable Care Act (Affordable Care Act), and section 1312(c) of the Affordable Care Act address these problems by extending guaranteed availability (also known as guaranteed issue) protections so that individuals and employers will be able to obtain coverage when it currently can be denied, by continuing current guaranteed renewability protections, by prohibiting the use of factors such as health status, medical history, gender, and industry of employment to set premium rates, by limiting age rating, and by prohibiting issuers from dividing up their insurance pools. These reforms are effective for plan years (group market) and policy years (individual market) starting on or after January 1, 2014.
The implementation of these proposed rules will ensure that every American, for the first time, will have access to affordable health insurance coverage notwithstanding any health problems they may have. In addition, also for the first time throughout the nation, health insurance issuers will be prevented from charging individuals and small employers higher premiums due to enrollees' health status or gender. CMS is issuing these proposed regulations to provide the necessary guidance to implement these important consumer protections included in sections 2701, 2702, and 2703 of the PHS Act and section 1312(c) of the Affordable Care Act.
In addition, PHS Act section 2723 provides CMS with enforcement authority with respect to health insurance issuers (in certain instances) and group health plans that are non-federal governmental plans in connection with the various health insurance and group health plan standards added by the Affordable Care Act. The proposed rules would make non-substantive changes that clarify the processes that CMS currently uses to enforce such standards. These technical changes seek to eliminate confusion among states, issuers, non-federal governmental group health plans, consumers, and others concerning CMS's enforcement processes.
The proposed rule would also include proposed policy for enrollment in catastrophic plans that are available for young adults and people who would otherwise find health insurance unaffordable.
The proposed rule would also revise the timing of the submission of requests for state-specific thresholds and the effective dates of such thresholds; require that health insurance issuers submit data on proposed rate increases in a form and manner to be determined by CMS, and amend the requirements for a state to have an Effective Rate Review Program. We are proposing these changes to align with the timing of rate submissions of qualified health plans (QHPs), as defined under section 1301 of the Affordable Care Act, in the Exchanges, and to adjust rate review to meet its additional purpose of helping to promote fair market competition beginning in 2014. The law requires that, beginning in 2014, the Secretary of the Department of Health and Human Services (the Secretary), in conjunction with states, monitor premium increases of health insurance coverage offered through an Exchange and outside of an Exchange. The Secretary will monitor these increases to identify patterns that could signal market disruption and assist in oversight of the new market-wide rating reforms created by the Affordable Care Act, which are effective on January 1, 2014.
2. Legal Authority
The substantive authority for these proposed rules is generally sections 2701, 2702, 2703, 2723 and 2794 of the PHS Act and sections 1302(e), 1312(c), and 1560(c) of the Affordable Care Act. PHS Act section 2792 authorizes us to promulgate regulations that are necessary or appropriate to carry out sections 2701, 2702, 2703, 2723, and 2794. Section 1321(a) of the Affordable Care Act authorizes rulemaking with respect to sections 1302(e), 1312(c), and 1560(c).
B. Summary of the Major Provisions of This Proposed Regulatory Action
Proposed 45 CFR 147.102 would require issuers offering non-grandfathered health insurance coverage in the individual and small group markets starting in 2014, and the large group market if such coverage is available through an Affordable Insurance Exchange (Exchange) starting in 2017, to limit any variation in premiums with respect to a particular plan or coverage to age and tobacco use within limits, family size, and geography.
Proposed § 147.104 would require issuers offering non-grandfathered health insurance coverage to accept every individual or employer who applies for coverage in the individual or group market, as applicable, subject to certain exceptions (for example, limits on network capacity).
Proposed § 147.106 would require issuers to renew all coverage in the individual and group markets, subject to certain exceptions (for example, non-payment of premiums or fraud).
The proposed revisions in 45 CFR part 154 would make three changes to the existing rate review program. Proposed revisions in § 154.200 would require states seeking state-specific thresholds to submit proposals for such thresholds by August 1 of each year and require CMS to review the proposals by September 1 of each year. If approved, a state-specific threshold would be effective January 1 of the following year. Proposed revisions in § 154.215 and § 154.220 would require health insurance issuers to submit, in a standardized format to be specified by the Secretary, data relating to proposed rate increases that are filed in a state on or after April 1, 2013, or effective on or after January 1, 2014 in a state that does not require the rate increases to be filed. Proposed revisions in § 154.301 would add criteria and factors for a state to have an Effective Rate Review Program, including that the state receives from all issuers proposing rate increases data and documentation about the rate increases in the standardized form specified by the Secretary; reviews the information for proposed rate increases greater than or equal to the review threshold; and makes information publicly available through its Web site.
Proposed § 156.80 generally would require health insurance issuers to treat all of their non-grandfathered business in the individual market and small group market, respectively, as a single risk pool. A state would have the authority to choose to direct issuers to merge their non-grandfathered individual and small group pools into a combined pool.
Proposed § 156.155 generally would codify section 1302(e) of the Affordable Care Act regarding catastrophic plans.
The proposed revisions in 45 CFR part 150 would clarify that CMS uses the same enforcement processes with respect to the requirements of 45 CFR part 147, which implements provisions added by the Affordable Care Act, as it does with respect to the requirements of 45 CFR parts 146 and 148, which pre-date the Affordable Care Act. Additional revisions would conform certain sections in 45 CFR part 144 to the clarification concerning the scope of 45 CFR part 150.
C. Costs and Benefits
The provisions of this proposed rule, combined with other provisions in the Affordable Care Act, will improve the individual health insurance market by making insurance affordable and accessible to millions of Americans who currently do not have affordable options available to them. The shortcomings of the individual market today have been widely documented.  Between 50 and 129 million Americans, if they tried to purchase coverage in the individual market, would be denied coverage entirely or would have their premiums “rated up,” and would likely have coverage for certain medical conditions excluded.  In addition, people previously enrolled in individual insurance with high health risks or costs are often further blocked from access to the market as they are put into “closed blocks” of business that are not open to new enrollees, and subject to large premium increases each year. Relatively healthy subscribers can switch into lower-priced, open blocks of coverage, while those who are sick only have the choice of paying the large premium increases or dropping coverage altogether.
These limitations of the individual market are made evident by how few people actually purchase coverage in the individual market. In 2011, approximately 48.6 million people were uninsured in the United States,  while only around 10.8 million were enrolled in the individual market.  The relatively small fraction of the target market that actually purchases coverage in the individual market in part reflects how expensive the product is relative to its value, people's resources, and how difficult it is for many people to access coverage.
The provisions of this proposed rule, combined with other provisions in the Affordable Care Act, will improve the functioning of both the individual and the small group markets. The provision for guaranteed availability will ensure that individuals with health problems who were previously unable to obtain coverage in the individual market will have access to coverage. The provision requiring that age, tobacco use, family size, and geography are the only permissible rating factors, within limits, will ensure that people with greater than average health needs are not priced out of the market. The provision requiring a single risk pool in each market will ensure that rate increases for healthy and less healthy people will be equal over time. Elimination of rating based on gender will mean lower premium rates for women, and the 3:1 limit on the rates charged to older subscribers will result in lower premium rates for older subscribers without shifting significant risk to younger subscribers as would happen under pure community rating. While eliminating gender rating and the limitations on age ratios could affect premium rates for some in some markets, this will be largely mitigated for most people by the availability of premium tax credits, by increased efficiencies and greater competition in the individual market, by measures such as the transitional reinsurance program and temporary risk corridors program to stabilize premiums, and by expected improvements in the overall health status of the risk pool. The availability of premium tax credits through Exchanges starting in 2014 will result in lower net premium rates for most people currently purchasing coverage in the individual market, and will encourage younger and healthier enrollees to enter the market, improving the risk pool and leading to reductions in premium rates for current policyholders.  Additionally, young adults and people for whom coverage would otherwise be unaffordable will have access to a catastrophic plan that will have a lower premium, protect against high out-of-pocket costs, and cover recommended preventive services without cost sharing. Similarly, the minimum coverage provision will lead to expansion in the number of purchasers and improvements in the health of the risk pool. Further, premium rates are expected to decline as a result of the administrative efficiencies from eliminating underwriting, and, more importantly, due to the effects of greater competition in the individual market created by Exchanges. Lower premium rates are expected to lead to further increases in purchase, and a further improvement in the risk pool.
We solicit comments on additional strategies consistent with the Affordable Care Act that CMS or states might deploy to avoid or minimize disruption of rates in the current market and encourage timely enrollment in coverage in 2014. For example, these strategies could include instituting the same enrollment periods inside and outside of Exchanges (as proposed in this rule) or a phase-in or transition period for certain policies. Additionally, we are examining ways in which states could continue their high risk pools beyond 2014 as a means of easing the transition. Ensuring premiums are affordable is a priority for the Administration as well as states, consumers, and insurers, so we welcome suggestions for the final rule on ways to achieve this goal while implementing these essential consumer protections.
Issuers may incur some one-time fixed costs in order to comply with the provisions of the final rule, including administrative and marketing costs. Administrative costs are, however, expected to decrease as a result of the elimination of medical underwriting to determine premium amounts. Issuer revenues and expenditures are also expected to increase substantially as a result of the expected increase in the number of people purchasing individual market coverage, which is projected to exceed 50 percent of current enrollment.  We are soliciting information on the nature and magnitude of these costs and benefits to issuers, and the potential effect of the provisions of this rule on premium rates and financial performance.
In addition, states may incur costs if they choose to establish their own, new geographic rating areas and age rating curves. We are also requesting information on such costs.
The proposed amendments to the rate review program would help issuers to avoid significant duplication of effort for filings subject to review by using the same standardized template for both non-QHPs and QHPs. Additionally, the collection of rate information below the rate review threshold and use of a standardized data template would provide the Department of Health and Human Services (HHS) and state departments of insurance with the ability to conduct the review and approval of products sold inside and outside an Exchange and ensure market stability. Health insurance issuers would incur administrative costs to prepare and submit the data.
In accordance with Executive Orders 12866 and 13563, we believe that the benefits of this regulatory action would justify the costs.
II. Background Back to Top
The Patient Protection and Affordable Care Act, Public Law 111-148, was enacted on March 23, 2010. The Health Care and Education Reconciliation Act, Public Law 111-152, was enacted on March 30, 2010. These laws are collectively referred to as the Affordable Care Act.
A. Legislative Overview Prior to the Affordable Care Act
The current individual and small group health insurance markets generally are viewed as dysfunctional, placing consumers at a disadvantage due to the high cost of health insurance coverage, resulting from factors such as lack of competition, adverse selection, and limited transparency. In the past ten years, average total premiums for group and individual health insurance coverage have increased substantially.  Similarly, the share of premium paid by employees in the group market has increased, as well as the amounts that employees pay in out-of-pocket costs. 
In 2007, 62 percent of personal bankruptcies were attributable to medical expenses. Many of these individuals and families either had health insurance that did not provide adequate coverage for their medical expenses or lost medical coverage due to illness. 
In addition to affordability concerns, many people have difficulty finding and enrolling in coverage options. If employer-based coverage is not available, a person may find that affordable individual market coverage is not available due to medical underwriting. Research has shown that individuals could be denied coverage based even on common medical conditions such as asthma, depression, hypertension, and knee injuries.  Even if a person is accepted for coverage in the individual market, that coverage may be conditioned on paying higher premiums, preexisting condition exclusion waiting periods, and even permanent exclusions of coverage for certain medical conditions. One study found that 38 percent of persons seeking individual market coverage reported it very difficult or impossible to find the coverage they needed.  Uninsured individuals are more likely to report not having routine medical check-ups, not receiving recommended medical treatments, and not refilling prescriptions. 
Among other policies, the Affordable Care Act expands affordable coverage to uninsured Americans through the private health insurance market. When fully implemented, its reforms will make health insurance coverage more affordable and accessible for individuals and families, many of whom could not previously get or afford coverage. The insurance market reforms will help ensure that no individual or small employer is denied insurance coverage, and that, once issued, coverage cannot be non-renewed due to health factors. Premiums charged by health insurance issuers may only vary by certain factors. Further, each issuer will have a single risk pool for its business in the individual market and a single risk pool for its business in the small group market (unless a state decides to merge the markets). This risk pool provision will spread risk more evenly among consumers, which will help keep premiums more affordable.
Prior to the Affordable Care Act, title XXVII of the PHS Act included certain insurance market protections for individuals and employers that were added by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA provided guaranteed renewability of coverage to individuals and employers, broad guaranteed availability rights to small employers, and narrower guaranteed availability rights in the individual market for certain individuals leaving group coverage. In practice, relatively few individuals exercise their HIPAA rights to individual market guaranteed availability due to the high costs of such coverage in many states and the requirement that they first exhaust any available continuation coverage, such as COBRA, which is often unaffordable.  HIPAA did not include any protections to ensure that all persons could obtain affordable coverage in the individual market. Thus, most individuals could be medically underwritten and denied coverage by issuers in the vast majority of states. HIPAA also did not include any limits on premium variation or requirements regarding risk pooling that would have made health insurance coverage more affordable for individuals and small employers. HIPAA included enforcement provisions allowing CMS to enforce these and other requirements of title XXVII of the PHS Act with respect to health insurance issuers (in some instances) and group health plans that are non-federal governmental plans.
Both before and after HIPAA, a number of states enacted limited, incremental reforms to improve access and increase affordability in their individual and group insurance markets. HIPAA explicitly recognized the role of the states as the primary insurance regulators where their standards were at least as protective as HIPAA. Although the level of activity varies by state, most states have adopted guaranteed availability and renewability reforms consistent with HIPAA, and several states have adopted rating standards. For example, one recent survey of state insurance market rules found that all states require guaranteed availability in the small employer market.  The same survey found that 41 states had implemented “alternative mechanisms” for guaranteed availability for HIPAA-eligible individuals, while the remaining states used the federal fallback mechanism.  However, only five states (Maine, Massachusetts, New Jersey, New York, and Vermont) went beyond HIPAA to require that all issuers accept all applicants in the individual market, with limited exceptions.  With respect to guaranteed renewability, one survey reported that 48 states require it in the small group market  and another survey reported that all 50 states require it in the individual market.  While HIPAA did not include any provisions addressing rating or pooling, 47 states have one or more requirements in the small group market and 18 states have one or more requirements in the individual market. 
Despite the advances in some states, only five states (Maine, Massachusetts, New Jersey, New York, and Vermont) have adopted a comprehensive set of guaranteed availability and community rating reforms in both their individual and small group markets that meet or exceed those in the Affordable Care Act. Only Massachusetts, which enacted a landmark health reform law in 2006 that coupled insurance market reforms with an insurance exchange, premium subsidies, and a minimum coverage provision, has succeeded in covering nearly all residents of the state. In 2011, only 3.4 percent of Massachusetts residents were uninsured, compared to 15.7 percent nationally.  In contrast, individuals with medical conditions in the 45 states without guaranteed availability and rating reforms often find themselves with few—or even no—coverage options at affordable prices.
B. Overview of the Changes in the Affordable Care Act
Subtitles A and C of title I of the Affordable Care Act reorganized, amended, and added provisions to part A of title XXVII of the PHS Act relating to health insurance issuers in the group and individual markets and group health plans that are non-federal governmental plans.  As relevant here, these provisions include PHS Act sections 2701 (fair health insurance premiums), 2702 (guaranteed availability of coverage), and 2703 (guaranteed renewability of coverage), which apply to health insurance coverage offered by health insurance issuers.  These provisions will establish a federal floor that ensures all individuals and employers have certain basic protections with respect to the availability of the health insurance coverage in all states.
Section 2701 regarding fair premiums applies to the individual and small group markets generally, and to the large group market if a state permits large employers to purchase coverage through an Exchange.  Pursuant to section 1312(f)(2)(B) of the Affordable Care Act, a state may permit large employers to purchase through an Exchange starting in 2017. Sections 2702 and 2703 apply to the individual and group (small and large) markets. These provisions apply to health insurance coverage in the respective markets regardless of whether such coverage is a QHP offered on Exchanges. Section 1255 of the Affordable Care Act provides that PHS Act sections 2701, 2702, and 2703 are effective for plan years (in the individual market, policy years) beginning on or after January 1, 2014.  Section 1251(a)(2) of the Affordable Care Act specifies that grandfathered health insurance coverage is not subject to sections 2701, 2702, and 2703 of the PHS Act. In addition, the Affordable Care Act amended the HIPAA enforcement provision that previously was applicable to group health insurance coverage and non-federal governmental group health plans by expanding its scope to include individual health insurance coverage and by renumbering the provision as PHS Act section 2723.
The preemption provisions of PHS Act section 2724(a)(1) apply so that the requirements of the Affordable Care Act are not to be “construed to supersede any provision of state law which establishes, implements, or continues in effect any standard or requirement solely relating to health insurance issuers in connection with individual or group health insurance coverage except to the extent that such standard or requirement prevents the application of a requirement” of the Affordable Care Act. Section 1321(d) of the Affordable Care Act applies the same preemption principle to requirements of title I of the Affordable Care Act. As mentioned, state laws that impose stricter requirements on health insurance issuers than those imposed by the Affordable Care Act will not be superseded by the Affordable Care Act. 
Section 1312(c) of the Affordable Care Act creates a single risk pool standard, applicable to both QHPs and non-QHPs, in the individual and small group markets; in addition, states may choose to have a merged individual and small group market pool. Although the Affordable Care Act does not provide an explicit effective date for section 1312(c), we interpret it to be effective for plan years (in the individual market, policy years) beginning on or after January 1, 2014, given its dependence on and interaction with the new market reforms, as well as its explicit reference to the establishment of the Exchanges in 2014. Section 1312(c) does not apply to grandfathered health plans.
Lastly, section 1302 of the Affordable Care Act specifies levels of cost-sharing protections that health plans will offer, including in subsection (e) a catastrophic plan for young adults and people who cannot otherwise afford health insurance.
C. Rate Increase Disclosure and Review
Section 1003 of the Affordable Care Act adds a new section 2794 of the PHS Act, which directs the Secretary, in conjunction with the states, to establish a process for the annual review of “unreasonable increases in premiums for health insurance coverage.” The statute provides that health insurance issuers must submit to the Secretary and the applicable state justifications for unreasonable premium increases prior to the implementation of the increases. Section 2794 also specifies that beginning with plan years beginning in 2014, the Secretary, in conjunction with the states, shall monitor premium increases of health insurance coverage offered through an Exchange and outside of an Exchange. Section 2794 of the PHS Act does not apply to grandfathered health insurance coverage, nor does it apply to self-funded plans. 
On May 23, 2011, CMS published a final rule with comment period (76 FR 29964), to implement the annual review of unreasonable increases in premiums for health insurance coverage called for by section 2794. Among other things, CMS established a process by which all proposed rate increases above a defined threshold in the individual and small group markets would be reviewed by a state or by CMS to determine whether or not the rate increases are unreasonable. These rates would be reviewed by the state in states with Effective Rate Review Programs and by CMS in states without Effective Rate Review Programs. For 2011, the review threshold was a rate increase of 10 percent or more. CMS also established a process for a state to set a state-specific threshold for future calendar years.
We are proposing revisions to the rate review program that would standardize and streamline data submission, fulfill the new requirement beginning in 2014 that the Secretary monitor premium increases of health insurance coverage offered through an Exchange and outside of an Exchange, and establish new standards that incorporate the effect of the market reform provisions that take effect in 2014.
III. Provisions of the Proposed Regulations Back to Top
Collectively, the proposed regulations regarding modified community rating, guaranteed availability, guaranteed renewability, and risk pooling create the foundation for a competitive and accessible health insurance market starting in 2014. The Affordable Care Act allows individuals and employers to obtain and renew health insurance coverage without regard to enrollees' health status. Health insurance premiums will no longer be based on enrollees' pre-existing conditions or gender, and health insurance issuers no longer will be able to divide up their risk pools (also known as blocks of business) in order to discriminate against less healthy individuals. These proposed rules would clarify health insurance issuers' obligations under these reforms.
These proposed rules regarding insurance market reforms are inextricably linked to several other reforms in the Affordable Care Act that function to expand access to and affordability of coverage. For example, subtitle D of title I of the Affordable Care Act authorizes the establishment of Exchanges where individuals and small employers can enroll in QHPs and creates certain premium stabilization programs for the reformed marketplace. Further, Code section 36B provides for premium tax credits for eligible individuals who enroll in QHPs through Exchanges. Similarly, Code section 45R provides for small business tax credits for eligible employers who enroll in health insurance coverage through the Small Business Health Options Program (SHOP). Although these other reforms are not the subjects of this proposed rule, they do influence the options available for implementing this proposed rule.
As noted, the proposed rule would make technical changes to clarify the processes that CMS uses to enforce Affordable Care Act reforms with respect to issuers and non-federal governmental group health plans. The proposed rule also would codify the policies related to catastrophic plans.
A. Fair Health Insurance Premiums (Proposed § 147.102)
PHS Act section 2701 provides that health insurance issuers may vary premium rates for health insurance coverage in the individual and small group markets  based on a limited set of specified factors. The factors are, with respect to a particular plan or coverage: (1) Whether the plan or coverage applies to an individual or family; (2) rating area; (3) age, limited to a variation of 3:1 for adults; and (4) tobacco use, limited to a variation of 1.5:1.  All other rating factors are prohibited. Thus, PHS Act section 2701 effectively prohibits several factors currently in use today, such as health status, claims experience, gender, industry, occupation, and duration of coverage, among others. Other factors that might be considered for rating purposes, such as eligibility for tax credits, prior source of coverage, and credit worthiness, also are prohibited. The practice of “re-underwriting” also is prohibited. Re-underwriting refers to issuers increasing premiums at renewal for existing customers because they incurred claims or experienced worsening health during a policy year. 
For purposes of family coverage, any premium variation for age and tobacco use must be applied to the portion of premium attributable to each family member. PHS Act section 2701(a)(2)(A) specifies that states can establish one or more rating areas. PHS Act section 2702(a)(2)(B) provides that CMS may establish rating areas if a state does not establish them. CMS, in consultation with the NAIC, will define permissible age bands. All non-grandfathered health insurance coverage in the individual and small group markets is subject to the requirements in this section.  In addition, health insurance coverage in the large group market is subject to these requirements, inside and outside an Exchange, if a state permits such coverage to be offered through an Exchange starting in 2017.  As discussed earlier, we welcome comments on whether and how this proposed rule could be modified to simultaneously secure the protections required by law and keep premiums affordable for individuals and small employers purchasing non-grandfathered health insurance coverage in these markets.
1. State and Issuer Flexibility Related to Rating Methodologies
While PHS Act section 2701 limits how issuers may vary premiums, the statute does not specify detailed rating methodologies. By rating methodology, we refer to the array of choices made in setting prices—for example, the age curves an issuer would use to distribute rates within the 3:1 limit on adult rates as enrollees grow older. The rating methodology also could include the method for computing rates in the small group market and the methods for computing family premiums. In current practice, most aspects of rating methodology are left to the discretion of health insurance issuers, subject to oversight by the states. As discussed later, greater standardization in rating methodologies starting in 2014 is advantageous for a number of reasons, including consumer protection, improved transparency, improved competition, and administrative simplification. We discuss various types of choices in rating methodology in more detail in the succeeding sections of this preamble, and welcome comment on them.
This proposed rule implements our authority under PHS Act section 2701 and would apply to all non-grandfathered health insurance coverage in the individual and small group markets starting in 2014. This rule proposes to standardize rating methodologies, particularly with respect to age rating and certain aspects of family rating, for health insurance coverage in the individual and small group markets when the market reforms go into effect in 2014. This proposed rule allows flexibility for states and issuers in rating methodology when it comes to certain aspects of family, tobacco, age, geography, and small group rating.
More standardization with respect to rating methodologies is advantageous in many respects. First, the risk adjustment methodology under section 1343 of the Affordable Care Act will need to accommodate permissible rating factors under PHS Act section 2701.  A standardized rating methodology for all plans within a state would enhance the transparency, predictability, and accuracy of risk adjustment because the risk adjustment methodology would account for rating as it is applied by issuers. For example, without a specified age curve, the risk adjustment methodology would have to rely upon an estimate of a state-level average age curve. This estimate, when applied to specific issuers, could lead to a loss of accuracy in the calculation of a plan's average actuarial risk to the extent the issuer's rating curve varies from the estimated average curve. To the extent there is decreased accuracy in the risk adjustment methodology as a result of such an approximation, its goals of promoting competition based on service and effective care, rather than risk selection, may be undermined and consumers and issuers would be negatively affected.
Furthermore, some core functions of the Exchange, such as calculating rates for QHPs and determining the benchmark plan for purposes of the premium tax credit under Code section 36B, would be simplified if issuers used the same age curves, age bands, and family rating methods. The second lowest cost silver plan is the benchmark plan that will be used to determine the maximum amount an applicant can receive for premium tax credits. If issuers choose their own age curves, age bands, and family rating methods, the definition of the second lowest cost silver plan would likely vary by applicant. In contrast, standardizing rating methodologies will result in all applicants having the same plan from the same issuer as the second lowest cost silver plan, regardless of the applicant's age and family composition, in a given rating area. This will improve price transparency for consumers by facilitating their ability to identify the second lowest cost silver plan. Lastly, allowing differences in rating methodologies between issuers in the same market in a state could provide an avenue for adverse selection.
The following sections discuss the proposed rating methodology. We welcome comments on the areas where and the extent to which state and issuer flexibility in rating methodologies versus a more standardized approach is desirable.
2. Small Group Market Rating
Two rating methods are used currently in the marketplace to generate small group market rates. The first method, known as composite rating, uses the rating characteristics of an entire small group, such as the average employee health risk,  average employee age, geography, group size, and industrial code, to determine an average per-employee rate (along with corresponding average family tier rates) for the small group. We understand that a few states require this approach. In states without such requirements, issuers generally use this approach for groups with, for example, more than ten employees. In contrast, under the second method, the issuer calculates a separate rate for each employee's coverage based on the allowable rating factors for that employee and then sums each individual rate to determine the total group premium. This approach is often used for very small groups (for example, those with ten or fewer employees).
Given that PHS Act section 2701 does not distinguish between individual and small group market rating, we propose that issuers would calculate rates for employee and dependent coverage in the small group market on a per-member basis, in the same manner that they would calculate rates for persons in the individual market, as discussed below, and then calculate the group premium by totaling the premiums attributable to each covered individual. Per-member rating is required by PHS Act section 2701(a)(4), which specifies that the age and tobacco use factors be apportioned to each family member. However, as discussed below, this proposed rule does not preclude the possibility that employees and their dependents would be charged amounts based on their group's average, rather than amounts based on their own specific factors, notwithstanding that issuers must base the total premium for a group on its actual current enrollment. We propose that states which anticipate requiring premiums to be based on average enrollee amounts submit information to CMS not later than 30 days after the publication of the final rule to support the accuracy of the risk adjustment methodology.
In the group context, the allowable rating factors, including tobacco use, would be appropriately associated with specific employees and dependents. Additionally, with per-member rating, premium changes for new hires and departures during the year would be priced more accurately, an issue of particular importance in smaller groups. And in the SHOP, when employees are offered choices among plans and issuers, the additional cost or savings resulting from an employee's plan choice would also be priced more accurately, ensuring that each issuer receives appropriate premiums for the individuals choosing its health plans.
The use of per-member rating would give employers flexibility to choose how to allocate their contributions to employees' coverage. PHS Act section 2701 governs the basis upon which an issuer may permissibly charge different groups or individuals different rates for the same insurance product, but it does not specify how an employer will allocate the premium contributions among employees.  Although many variations may be consistent with applicable state and federal law, we anticipate that there are two primary ways employee contributions may be determined.
An employer may choose to set the employee contribution as a percentage of the underlying cost of the employee's coverage. Under this option, older employees and smokers would make higher contributions toward coverage, reflecting their higher risk and permissible rate variation based on age and tobacco use. Younger employees would make lower contributions, which may improve the perceived value of insurance for these employees and increase take-up rates, making it easier for the employer to meet any minimum participation rate requirement that may apply.
Alternatively, after the issuer develops rates using the per-member methodology, an employer may elect to generate a composite rate in which each employee's contribution for a given family composition is the same, as most employers offering coverage do today, by adding the per-member rates and dividing the total by the number of employees to arrive at the group's average rate and determine employer and employee contributions based on that composite rate. This flexibility for small employers would take into account that many employers, states, and issuers are already accustomed to composite rating, it is relatively simple, and this method may be beneficial to older employees. However, this composite method may differ from how composite rates often are developed today. This decision will be up to employers.
We seek comment on the alignment of the method for calculating each employee's rate in the small group market with that used to calculate an individual's rate in the individual market. In particular, we seek comment on the implications of this approach for employers and employees, whether it is more compatible with employee choice in the SHOP, and whether it leads to more accurate pricing of employee choices.
3. Family Rating
PHS Act section 2701(a)(1)(A)(i) provides that issuers may vary rates based on whether a plan covers an individual or a family. PHS Act section 2701(a)(4) provides that, with respect to family coverage, the rating variation permitted for age and tobacco use must be applied based on the portion of the premium attributable to each family member covered under a plan.
The rule proposes that issuers add up the rate of each family member to arrive at a family premium.  However, we propose that the rates of no more than the three oldest family members who are under age 21 would be taken into account in computing the family premium. This policy is intended to mitigate the premium disruption for larger families accustomed to family tier structures, which typically cap the number of children taken into consideration in setting premiums. We propose a cut-off age of 21 for this cap so that it is consistent with the cut-off age used in the proposed rule on age rating, as well as the requirement that child-only policies be available to those under age 21. We do not propose a similar cap on the number of family members age 21 and older whose per-member rates would be added into the family premium.
Consistent with PHS Act section 2701(a)(4), the proposed per-member approach to family rating ensures that any variation in premium by age or tobacco use is applied to the appropriate family member. Per-member rating also simplifies the administration of risk adjustment because the risk associated with each family member would be easily identified. We solicit comments on the use of the per-member build-up methodology for individual and small group market coverage. In addition, we request comments on the appropriate cap, if any, on the number of child and adult family members whose premiums should be taken into account in determining the family premium and the appropriate cut-off age for a per-child cap (for example, whether this should be aligned with the extension of dependent coverage to age 26 instead).
Currently, some issuers apply specified family tier or family composition multipliers to a base premium to arrive at a family rate. Other issuers may determine a family premium rate based upon the policyholder or oldest adult's age. These current practices are impermissible under PHS Act section 2701(a)(4) to the extent that the multipliers or the base premium vary based on age or tobacco use, since some family members would be rated using factors that do not apply to them individually. However, this conflict does not exist in a state that does not permit variation based on age or tobacco use.
Accordingly, the proposed rule would permit a state to require issuers to use a standard family tier methodology (with corresponding multipliers) if the state requires pure community rating, without any adjustments for age or tobacco use. The multipliers for the tiers would need to be actuarially justified to ensure that health insurance issuers could not charge excessively high premiums to individuals or families that would render meaningless their guaranteed availability rights under PHS Act section 2702. PHS Act section 2701 does not require that issuers use a two-tier structure (that is, individual and family). For example, a state would be able to specify a four-tier structure (that is, individual; individual and spouse; individual and child/children; and all other families). If a state anticipates adopting such a policy in the event this proposed approach is finalized, we propose such states submit relevant information on their proposed family tiers to CMS no later than 30 days after the publication of the final rule to support the accuracy of the risk adjustment methodology.
We propose that if a state has pure community rating in place, but does not adopt a uniform family tier methodology (with corresponding multipliers), the per-member rating methodology would apply as the default. In a state that does not require community rating, an issuer that voluntarily uses pure community rating would need to use per-member rating, given the absence of a uniform family tier methodology in that state. We solicit comment on whether, instead of permitting flexibility in the final rule, states with pure community rating should also use the per-member approach that would be used in states that allow age and tobacco use adjustments.
4. Persons Included Under Family Coverage
Currently, issuers have considerable flexibility in determining how to set rates for family policies and in defining which family members may be on the same policy, subject to federal and state laws requiring coverage of certain individuals (for example, dependent children under age 26 pursuant to PHS Act section 2714, if a plan or issuer otherwise offers dependent child coverage). Our research indicates that covered family members typically include the employee or individual market policyholder; a spouse or partner, as defined by state law; biological children; adopted children; and children placed for adoption. Sometimes other classes of people are covered, such as stepchildren, grandchildren, other children related by blood, foster children, and children under guardianship.
We request comments on whether the final rule should specify the minimum categories of family members that health insurance issuers must include in setting rates for family policies, or whether we should defer to the states and health insurance issuers to make this determination. We also request comments on the types of individuals who typically are included under family coverage currently, including types of covered individuals who would not meet the classification of tax dependents. We note that any family member not covered under a family policy would be eligible for an individual policy pursuant to guaranteed availability of coverage under PHS Act section 2702.
5. Rating for Geography
PHS Act section 2701(a)(1)(A)(ii) provides that rates may vary by rating areas. PHS Act section 2701(a)(2) provides that a state must establish one or more rating areas within that state. CMS is charged with reviewing the adequacy of the rating areas established by a state. If the state's rating areas are inadequate (for example, they do not cover a sufficient number of individuals) or a state does not act, CMS may establish such rating areas. Although section 2701 does not specify the maximum variation for a rating area factor, in contrast to its specifying the maximum age factor (3:1 for adults) and the maximum tobacco factor (1.5:1), a rating area factor should be actuarially justified to ensure that issuers do not charge excessively high premiums that would render meaningless the guaranteed availability rights of individuals and employers under PHS Act section 2702.
Currently, in most states, issuers have considerable flexibility in establishing their rating areas. The rule proposes that a state could establish no more than seven rating areas within the state along geographic divisions, generally consistent with the maximum number in states today. The proposed rule makes no distinction between health insurance coverage offered inside or outside an Exchange, so these rating areas would apply equally to all non-grandfathered coverage in the individual or small group market.
The choice of a maximum of seven areas in the proposed rule is based on the higher-end of the number of rating areas that states currently have established in the individual and small group markets (for example, Massachusetts, New Jersey, and Oregon). We believe that setting an upper limit on the number of rating areas provides states with the flexibility needed to designate rating areas that are adequately sized and accommodate local market conditions, while avoiding an excessive number of rating areas that would be confusing to consumers and not reflect significant market differences. We solicit comments on the maximum number of rating areas that may be established within a state and the potential standards for determining an appropriate maximum number.
Taking into account the spectrum of current rating rules regarding geography and the need for state flexibility to account for local market conditions, the proposed rule includes three standards for the geographic divisions based on standards that we understand states and issuers currently use for rating areas. A state could select one of the approved standards that we would presume “adequate” or submit its own standard, which would be subject to approval. These are: (1) One rating area for the entire state; (2) rating areas based on counties or three-digit zip codes (that is, areas in which all zip codes share the same first three digits); or (3) rating areas based on metropolitan statistical areas (MSAs) and non-MSAs. The proposed rule would not require that all the sections of a rating area be geographically adjacent. For example, a state could create a rating area comprised of all non-MSA portions of a state that have similar health care costs.
Under the first standard, there would be one rating area for the entire state. While this approach would make it easier to establish and monitor rating areas, it may be most practical in states where there is not significant variation in health care costs among the different regions of the state.
Under the second standard, the rating areas would be based on counties or three-digit zip codes. A state using this method would be expected to use either counties or three-digit zip codes, but not both. In the United States, there are 3,068 counties, varying greatly in size and population. There are approximately 455 three-digit zip codes in the United States. Three-digit zip codes generally cover larger areas than a county. Current NAIC rating guidance notes that many small group plans currently use rating areas based on three-digit zip codes or counties. 
Under the third standard, rating areas could be based on the state's MSAs and non-MSAs. MSAs encompass at least one urban core with a population of at least 50,000 people, plus adjacent territory that has a high degree of social and economic integration with the core. MSAs are always established along county boundaries, but may include counties from more than one state. The 367 MSAs in the United States include approximately one-third of the counties and 83 percent of the population of the United States. MSAs could provide a convenient and established method of grouping counties into larger areas. Further, current NAIC rating guidance suggests that MSAs be considered as one possible standard for rating areas. For MSAs that cross state boundaries, we propose that these should be divided between the respective states if the MSA option is adopted. States with counties not encompassed by an MSA could create one or more non-MSA rating areas for those counties. For states with more than seven MSAs and non-MSA areas, we propose that these states combine some of the areas into no more than seven rating areas based on a reasonable methodology, such as cost similarity.
We request comments regarding the use of these proposed standards for rating areas, as well as comments regarding other options for standards for geographic divisions and other relevant factors that could be used for developing rating areas. We request comments from states that already have standard rating areas regarding what changes, if any, would be necessary to meet one or more of the proposed standards and the proposed limit of having no more than seven rating areas. We also request comments on whether the final rule should establish minimum geographic size and minimum population requirements for rating areas and whether state rating areas currently in existence should be deemed in compliance with this provision.
To the extent a state establishes rating areas using the proposed standards, that is one rating area for the entire state, or no more than seven rating areas if counties, three-digit zip codes, or MSAs/non-MSAs are used, we propose that the state's rating areas would be presumed adequate. We propose that CMS would take a more active role in assessing the adequacy of the state's rating areas when a state designates rating areas based on geographic divisions other than those identified in the proposed rule.
In the event that a state does not establish rating areas consistent with the proposed standards, the one-area-per-state standard would apply, unless we applied one of the other standards to designate rating areas in a particular state. In that case, we likely would be inclined to use the MSA/non-MSA standard. To the extent that we establish a state's rating areas, we would work with the state, local issuers, and others to determine how best to establish rating areas responsive to local market conditions.
We recognize that states and issuers need lead time to update pricing models and make related system changes to accommodate potentially new rating areas in 2014. To support the accuracy of the risk adjustment methodology, we propose that states needing such lead time submit relevant information on their rating areas to CMS within 30 days after the publication of the final rule. Lastly, we recognize that states may wish to establish or modify their rating areas after 2014. For example, states might wish to modify rating areas in light of local utilization and cost patterns, issuer service areas, or changes in MSA designations. We request comments on appropriate schedules and procedural considerations related to rating area designations for plan years after 2014.
6. Rating for Age
PHS Act section 2701(a)(1)(A)(iii) provides that the premium rate charged by an issuer for non-grandfathered health insurance coverage in the individual or small group market may vary by age, but may not vary by more than 3:1 for adults. The statute does not specify a premium rating limitation for children, but it provides that the 3:1 adult ratio must be “consistent with section 2707(c)” of the PHS Act. Section 2707(c), in turn, requires that child-only plans be made available to individuals under age 21.
We believe the statutory language supports an interpretation that the 3:1 age rating limitation was intended to apply only to adults age 21 and older. Further, we believe that PHS Act section 2702 supports a requirement that issuers set actuarially justifiable child rates using a standard population, to prevent the charging of unjustified premiums that would, in effect, prevent individuals under age 21 from exercising their guaranteed availability rights. Accordingly, we propose to allow rates to vary within a ratio of 3:1 for adults (defined for purposes of this requirement as individuals age 21 and older), and that rates must be actuarially justified based on a standard population for individuals under age 21, consistent with the proposed uniform age curve discussed later in this section. We request comment on this approach.
We propose that enrollees' age factors and bands should be determined based on an enrollee's age at policy issuance and renewal, so that age rating factors are applied on a consistent basis by all issuers and that consumers (including those purchasing policies covering multiple family members) do not receive multiple premium increases each year. This is the same measurement point as the first day of a plan or policy year, which is the age determination point for catastrophic plans. We request comments on whether other measurement points (for example, birthdays) might be more appropriate.
PHS Act section 2701(a)(3) directs CMS, in consultation with the NAIC, to define “permissible age bands” for purposes of age rating. Age bands are simply ranges of sequential ages. In the context of health insurance, they are often used to segregate where the slope of premium rate variation by age changes, the most common being that the slope is zero within the band (that is, does not change), and non-zero from one band to the next band in the sequence (for example, persons aged 30 to 34 pay the same premium, but lower than those age 35 to 39, who pay the same premium to each other, and similarly for age 40 to 44, etc.).
In accordance with section 2701(a)(3), we consulted with the NAIC, through its Health Care Reform Actuarial (B) Working Group, concerning the permissible age bands to be defined by CMS. The NAIC Working Group did not make specific recommendations, but provided valuable feedback regarding state regulation of age bands, issuer practices, and important policy considerations related to possible age band standards. Although state standards vary, and issuers that set their own age bands do so using a variety of different methods, our discussions with the industry indicate that bands smaller than five years are common in the individual market. Taking into consideration the feedback we received from NAIC, we propose the following standard age bands for use in all states and markets subject to the rating rules of PHS Act section 2701:
- Children: A single age band covering children 0 to 20 years of age, where all premium rates are the same.
- Adults: One-year age bands starting at age 21 and ending at age 63.
- Older adults: A single age band covering individuals 64 years of age and older, where all premium rates are the same.
We propose these age bands for a number of reasons. First, with respect to children, we are proposing a single age band for child ages 0-20 to reflect the generally small differences in costs between children of various ages (other than newborns and very young children). We believe that a single age band for children will simplify and make risk adjustment methodologies more efficient, and allow consumers to more easily compare and predict costs as children age, particularly if the consumer has children that are several years apart in age. We solicit comments on whether multiple age bands or a single age band for children are appropriate.
Second, with respect to adults ages 21 to 63, we propose one-year age bands so that consumers would experience steady, relatively small premium increases each year due to age. If broader age bands are adopted (for example, five-year bands), consumers would experience larger premium increases when they reach the end of one age band and move into the next. Although five-year bands are currently common in the small group market, we are also proposing to apply the same age-band structure to the small group market to align with our proposal that the per-member rating buildup approach be used in both the individual and the small group markets. We request comment on this approach.
Finally, we propose a single age band for adults age 64 and older largely to facilitate compliance with the Medicare Secondary Payer requirements when per-member rating is used for older individuals in the small group market. Medicare Secondary Payer requirements generally prohibit an employer with 20 or more employees from charging Medicare-eligible employees a premium that is higher than the premium charged to non-Medicare-eligible employees (section 1862(b)(1)(A) of the Social Security Act, 42 U.S.C. 1395y(b)(1)(A); 42 CFR 411.102(b), 411.108(a)(6)). Consequently, we believe that the highest age band used to generate individually rated premiums must begin before age 65, when individuals generally are not eligible for Medicare based on age. We believe this proposed age band is reasonable because individuals age 64 and older represent only a small proportion of enrollees in the individual and small group markets, and are likely to have similar claims costs despite their age differences. We seek comment on this approach.
This proposed rule would direct health insurance issuers within a market in a state to use a uniform age rating curve. An age curve is a specified distribution of relative rates across all age bands. Reflecting statutory requirements, our proposed age curve anchors the premium amount to age 21, and is expressed as a ratio, for all ages between ages 0 and 64, inclusive. We believe that using uniform age bands and rating curves will simplify identification of the second lowest cost silver plan used to determine premium tax credits, and will provide an incentive for issuers to compete to offer plans that provide the best value across the entire age curve. Doing so will also promote the accuracy of the risk adjustment program established under section 1343 of the Affordable Care Act, which is essential to ensuring market stability in the reformed marketplace, and reduce the potential for adverse selection.  A standardized rating methodology for all plans within a state would also enhance the transparency, predictability, and accuracy of the risk adjustment program because the risk adjustment methodology could account for age rating as it is applied by issuers.
We are proposing to apply the same default age rating curve to both the individual and small group markets. Our proposed uniform age curve assumes that issuers will vary premiums to the greatest extent permissible within the 3:1 age rating constraint for adults (or narrower ratios as provided under state law). We have constructed our proposed age curve based on gross premium amounts, which includes administrative, overhead, and marketing costs in addition to the amount attributable to enrollee claims costs, without accounting for any tax credits that may offset a consumer's premium costs. Because our analysis of premiums found evidence that issuers do not vary their age curves across much of the 21-64 age band in significant amounts across geography or product types, we do not believe that applying a uniform rating curve to individual and small group markets would disadvantage issuers according to the geographic region they are licensed in, or the value of the coverage that the product/plan type offers. 
Our review of base premium rates for 60,000 covered lives (based on data reported on HealthCare.gov by a sample of regional issuers operating in different regions of the country) has shown that base premium rates vary according to age at a mostly consistent rate, and are largely unaffected by product type/plan design or geographic region.  Furthermore, an examination of the large group insurance market demonstrates clear evidence that issuers generally utilize an underlying cost curve that varies by age in a manner that is independent of the value of the plan coverage.  The analysis of the large group market is particularly relevant as a predictor of post-2014 individual and small group market rating practices because the large group market is characterized by coverage for most essential benefits, has guaranteed availability of coverage, and does not use person-specific underwriting; these types of rates will likely be more characteristic of those of the reformed 2014 individual and small group market. Consequently, we do not believe that issuers need the flexibility to vary age curves across product/plan designs or geographic regions after taking into account the requirement for a 3:1 rating restriction, or that applying a uniform age curve to issuers in the individual and small group markets will lead to any significant disturbance in issuer pricing practices across different geographic regions or plan designs. Therefore, we are proposing that CMS's uniform age curve would apply by default in a state, unless a state adopted a different uniform age curve. We request comment on the application of a single, default age curve to the individual and small group market based on the above assumptions and the methodology for doing so.
We propose that we would fit our uniform age curve to the 3:1 adult age rating limit by “flattening” the ends of the age curve derived from expected claim cost patterns in a manner that accommodates the 3:1 premium ratio limit for the highest and the lowest adult ages. Under this approach, when other factors (for example, mix of gender, tobacco use, geographic region, and plan type) are held constant among ages, the rate of premium change from one age to the next will closely mirror the rate of expected claims costs, except for those ages closest to age 21 and age 64.  As compared to an approach that would proportionally compress the curve (that is, the relationship between premiums by age) for all ages, this proposed approach would ensure that the fewest number of individuals (or employees, in the small group market) would be affected by the 3:1 premium ratio constraint, thereby mitigating premium disruption for the largest number of consumers, and reducing the need for significant risk adjustment across age bands. We propose that we would revise our default curve periodically to reflect our most current knowledge of the individual and small group market (for example, enrollment, population distribution, and cost patterns) following implementation of 2014 reforms. We request comment on our proposed approach for fitting the proposed adult age curve to the statutorily specified 3:1 premium ratio.
With respect to the age curve for children's ages, we have constructed a proposed default curve using a single age band for ages 0-20, using the same data sources that we used to derive our proposed adult age curve, as described above. The value of our proposed default age curve for ages 0-20 was supported by the actual experience for those ages. The shift from the child age curve at age 20 to the adult age curve at age 21 could result in a premium differential for these ages that is not reflected in issuers' current rating practices. However, given the low premiums for individuals in these age groups, as well as the relative premium stability from age 21 through early 30s under the standardized age curve, we do not anticipate that this differential would result in a significant financial burden on consumers. While we do not believe that this discontinuity undermines the accuracy of the methodology we used to develop our proposed child and adult age curves, we request comment on potential implications that the transition from the proposed child curve to the proposed adult curve may have for issuers and consumers. We also seek comment on the proposed rating curve, including whether it is generally consistent with current insurer rating practices and minimally disruptive to the current market within the confines of the rating restrictions and reforms under the Affordable Care Act.
|Age||Premium ratio||Age||Premium ratio||Age||Premium ratio|
|34||1.214||49||1.706||64 and Older||3.000|
Although we are proposing a uniform age rating curve for the reasons described above, our proposed approach would maintain flexibility for states and issuers regarding certain aspects of age rating. In most states, premium rates for health insurance coverage are permitted to vary by age to the extent that issuers can actuarially justify such rates; this practice could continue within the boundaries of the proposed policy. A state law that prescribed a narrower ratio for adults (for example, 2:1) or prohibited different adult rates altogether would not be preempted under PHS Act section 2724(a)(1) since such state law would not “prevent the application” of section 2701.  To support the accuracy of the risk adjustment methodology, we propose that states using narrower ratios submit relevant information on their ratios to CMS no later than 30 days after the publication of the final rule. We also seek input on the consequences of these choices in terms of the likely percentage premium increases that consumers will face when aging from one age band to another, the impact on the administration and accuracy of risk adjustment, the administration of premium tax credits, and consumer convenience. We propose that states would have the option to designate a uniform age curve other than the CMS age curve. If a state anticipates using its own age curve, we propose the state submit relevant information on its proposed curve to CMS no later than 30 days after the publication of the final rule to support the accuracy of the risk adjustment methodology.
7. Rating for Tobacco Use
PHS Act section 2701(a)(1)(A)(iv) provides that health insurance issuers in the individual and small group markets cannot vary rates based on tobacco use by more than 1.5:1.  As mentioned, PHS Act section 2701(a)(4) provides that the rating variation for tobacco use applies based on the portion of premium that is attributable to each family member covered under the plan. A state law that prescribes a narrower ratio (for example, 1.25:1) or prohibits varying rates for tobacco use altogether would not be preempted since such state law would not impose a standard or requirement that conflicts, or makes it impossible to comply, with permissible rating practices under federal law, and thus would not prevent the application of PHS Act section 2701.  If a state anticipates adopting narrower ratios for tobacco use, we propose that the state submit relevant information on their ratios to CMS no later than 30 days after the publication of the final rule.
Currently, many states allow health insurance issuers in the individual and small group markets to vary premiums based on tobacco use. In addition, many states limit the amount by which premiums can vary due to tobacco use by allowing use of that factor only within their overall health status limits. For example, the NAIC's Small Employer Health Insurance Availability Model Act (1993 Version) does not specifically identify tobacco use as a permissible rating factor, but allows its use within the overall 1.67:1 ratio for the health status of the employees or dependents of the small employer.
There is not a clear and consistent definition of tobacco use among the states for rating purposes. Numerous states such as Louisiana, Maine, Massachusetts, Minnesota, and New Mexico allow tobacco use to be considered as a rating factor in both the individual and small group markets. While these states provide a definition of what constitutes a tobacco product, they do not specifically define “tobacco use.”
We understand that issuers typically rely on self-reported data, such as information from applications and health risk assessments, to determine tobacco usage. Since applications and health risk assessments vary from issuer to issuer, there is wide variation in how issuers define tobacco use.
One possible approach for purposes of implementing this provision upon which we invite comment would be to include one or more questions on tobacco use in the single streamlined application under § 155.405, or in connection with other enrollment-related processes for an Exchange. We specifically invite comment on the possible use of the single streamlined application to collect information concerning tobacco use in connection with a premium surcharge, as well as alternative options for identifying tobacco use, as well as how the information should be collected with respect to health insurance coverage offered outside an Exchange.
The proposed rule does not prohibit issuers from varying the tobacco use factor used for a particular age band, as long as any variation is not greater than 1.5:1, the maximum variation for tobacco use under PHS Act section 2701(a)(1)(A)(iv), and is consistent with other applicable law, including the HIPAA nondiscrimination provisions. In other words, an issuer could use a lower tobacco use factor for a younger individual (for example, 1.3:1) compared to an older individual (for example, 1.4:1), as long as the factor does not exceed 1.5:1 for any age group. In contrast to the age rating factor, where we are proposing that issuers utilize a standard age curve, we are proposing that states or issuers have the flexibility to determine the appropriate tobacco rating factor within a range of 1:1 to 1:1.5, consistent with the wellness requirements discussed below. We seek comments on this approach.
We also considered how the requirements under PHS Act section 2701(a)(1)(A)(iv) would interact with rewards for tobacco cessation offered as part of employer wellness programs. Tobacco cessation programs are a common aspect of employers' wellness programs. Prior to the enactment of the Affordable Care Act, the Departments of HHS, Labor, and the Treasury (jointly, the Departments) published final rules regarding the nondiscrimination and wellness program provisions under HIPAA (71 FR 75014, Dec. 13, 2006, referred to as the 2006 regulations).  The HIPAA wellness requirements implemented in these 2006 regulations were set forth in section 2702 of the PHS Act (with parallel provisions contained in ERISA section 702 and Code section 9802). While PHS Act section 2702 did not specifically impose any limit on rewards that could be offered under wellness programs, the 2006 regulations provided that plans and issuers could offer a reward that does not exceed 20 percent of the total cost of coverage in a health-contingent wellness program, provided specified consumer-protection conditions were met. 
The Affordable Care Act added a new PHS Act section 2705(j), effective for plan years beginning on or after January 1, 2014. Section 2705(j) largely reflects the wellness provisions from the 2006 regulations, with a few clarifications and modifications. Under PHS Act section 2705(j), plans and issuers generally can offer a reward of up to 30 percent of the cost of coverage  for participation in a wellness program that is based on an individual satisfying a standard that is related to a health status-related factor (“health factor”), subject to certain conditions. PHS Act section 2705(j) also authorizes the Departments to increase the maximum reward to as much as 50 percent of the total cost of coverage if they determine such an increase to be appropriate.
Contemporaneously with the publication of this proposed rule, the Departments are publishing a notice of proposed rulemaking (NPRM) under section 2705(j), which proposes to increase the maximum reward under a wellness program in group health coverage from 20 percent to 30 percent of the cost of coverage. The rule further proposes an increase of an additional 20 percentage points (to 50 percent) to the extent that the additional percentage is in connection with a program designed to prevent or reduce tobacco use.
We propose in this rule that the definition of “tobacco use” for purposes of section 2701 be consistent with the approach taken with respect to health-contingent programs designed to prevent or reduce tobacco use under section 2705(j). That is, by proposing to raise the maximum permissible reward for participating in a tobacco cessation program in the wellness rule, we are proposing that a health insurance issuer in the small group market would be required to offer a tobacco user the opportunity to avoid paying the full amount of the tobacco use surcharge permitted under PHS Act section 2701 if he or she participates in a wellness program meeting the standards of PHS Act section 2705(j) and its implementing regulations. 
There are several positive aspects to implementing PHS Act sections 2701 and 2705(j) in a coordinated manner with respect to tobacco use in the small group market. Rather than have the tobacco use surcharge under PHS Act section 2701 be strictly a negative financial incentive, this approach would encourage tobacco users to pursue tobacco cessation remedies offered under their employers' wellness programs, enhancing their long-term health and potentially reducing health care costs. It also would alleviate underreporting for tobacco use since tobacco users who disclose their tobacco use would not automatically have to pay the premium surcharge, but could instead participate in the employer's cessation program. Finally, group health plans and health insurance issuers with wellness programs may find it administratively more efficient to implement the two provisions concurrently given that employers are familiar with the requirements of wellness programs associated with increased premiums related to a health factor. We welcome comments on this proposal and other ideas for coordinating the implementation of the tobacco surcharge under PHS Act section 2701 and the wellness provisions under PHS Act section 2705(j).
We also invite comment on possible definitions of “tobacco use” that could be applied for purposes of sections 2701 and 2705(j). One possible definition would rely on self-reporting as to whether the individual would be considered a tobacco user. Another possibility may be what some issuers use today: a defined amount of tobacco use within a specified look-back period. A third possibility may be to define “tobacco use” as regular, and not infrequent or sporadic, tobacco use (perhaps including some standard of frequency). Another option would define a tobacco user as one who uses tobacco with sufficient frequency so as to be addicted to nicotine. Regardless of how tobacco use is defined, we are proposing that the definition of “tobacco use” for purposes of section 2701 be consistent with the approach taken with respect to health-contingent wellness programs designed to prevent or reduce tobacco use under section 2705(j).
PHS Act section 2705(b) also prohibits issuers from charging enrollees in the individual market higher premiums based on health factors. However, PHS Act section 2705(j) does not apply to the individual health insurance market. To the extent there is any conflict between PHS Act sections 2701 and 2705 as applied to the individual market, we think the more specific language of PHS Act section 2701 allowing tobacco use surcharges prevails over the more general language of PHS Act section 2705 prohibiting premium differences based on health factors. In other words, issuers could implement the tobacco use surcharge in the individual market without having to offer wellness programs. However, we solicit comments on whether and how, consistent with PHS Act sections 2701 and 2705, the tobacco surcharge in the individual market could be combined with the same type of incentive to promote tobacco cessation that is available in the group market.
B. Guaranteed Availability of Coverage (Proposed § 147.104)
PHS Act section 2702 provides that health insurance issuers that offer health insurance coverage in the individual or group market in a state must accept every individual and employer in the state that applies for coverage, subject to certain exceptions. These exceptions allow issuers to limit enrollment: (1) To certain open and special enrollment periods; (2) to an employer's eligible individuals who live, work, or reside in the service area of a network plan; and (3) in certain situations involving network capacity and financial capacity.
PHS Act section 2702 generally is based on the HIPAA provision for guaranteed availability in the small group market. Compared to HIPAA, however, the Affordable Care Act: (1) Expands guaranteed availability beyond the small group market to include the individual and large group markets as well; (2) requires the establishment of open enrollment periods; (3) establishes new special enrollment periods in addition to those in HIPAA; and (4) eliminates the guaranteed availability exception for coverage offered only to bona fide association members in the small group market. Accordingly, this proposed rule generally is based on the HIPAA rule for guaranteed availability in the small group market (§ 146.150). In addition, the proposed rule would add a new marketing standard pursuant to PHS Act section 2702 that is identical to that applicable to QHPs established under 45 CFR 156.225.
The proposed rule would direct that issuers offer coverage to and accept any individual or employer in the state that applies for such coverage—regardless of health status, risk, or medical claims and costs—with limited exceptions.  Issuers would be required to offer all products that are approved for sale in the applicable market. We believe that the protections of the Affordable Care Act apply to all non-grandfathered health insurance coverage in an applicable state market. Accordingly, beginning in 2014, even non-grandfathered “closed blocks” of business would be available to new enrollees, subject to the limited exceptions discussed below. We welcome comments on this proposal.
We propose that issuers offering health insurance coverage in the group market would maintain a year-round open enrollment period for employers to purchase such coverage, while issuers offering coverage in the individual market would offer plans during open enrollment periods (including the initial open enrollment period) consistent with those required by Exchanges for individual market QHPs. The effective dates of such coverage would align with the Exchange standards for the appropriate market (if any, in the case of the large group market). These standards are intended to minimize adverse selection by setting consistent open enrollment periods for the insurance marketplace, regardless of whether individuals or employers choose to purchase outside or through an Exchange. We solicit comments on whether this proposal sufficiently addresses the open enrollment needs of individual market customers whose coverage renews on dates other than January 1 and whether aligning open enrollment periods with policy years (based on a calendar year) in the individual market is more desirable. Given that employer groups generally pose less of an adverse selection risk than individuals and issuers currently are willing to offer them coverage at any point in the year, we believe that a year-round enrollment period for large and small employers will not be burdensome on issuers nor change the status quo in most states.
Prior to the Affordable Care Act, the HIPAA provision for guaranteed availability in the small group market had allowed issuers to establish employer contribution rules and group participation rules that small employers must meet in order to qualify for guaranteed availability, as allowed under applicable state law. PHS Act section 2702 does not include the contribution and participation exception to guaranteed availability; however, PHS Act section 2703 does include such an exception for guaranteed renewability. We are concerned that failing to provide a small employer contribution and participation exception to guaranteed availability by regulation would trigger adverse selection against the small group market, given its year-round open enrollment period, vis-à-vis the individual market, which has a time-limited open enrollment period. In other words, some individuals could use the open-ended enrollment period for small employers to buy insurance only as medical needs arise, thereby creating instability in the small group market and increasing premiums for other small employers. Thus, the proposed rule would allow issuers to condition year-round open enrollment in the small group market on a small employer being able to satisfy the same contribution and participation requirements at issuance that the issuer is permitted to consider at renewal, either as allowed by state law or, in the case of a QHP offered in the SHOP, as permitted by § 156.285(c). Establishing this requirement by rule effectively would preserve the status quo under HIPAA. If the final rule includes this requirement, we would also adopt corresponding changes in § 155.725, which establishes the enrollment periods in the SHOP.
The proposed rule sets forth that issuers make available special enrollment periods in both the individual and group markets for individuals and plan participants and beneficiaries in connection with the events that would trigger eligibility for COBRA coverage under ERISA section 603.  This set of special enrollment events is in addition to the special enrollment events provided under PHS Act section 2704(f) for loss of eligibility for other coverage or dependent special enrollment (that is, the special enrollment rights originally created under HIPAA for group health insurance coverage and group health plans  ) and § 155.420(d) and § 155.725(a)(3) (the special enrollment rights for QHPs). The proposed rule directs that the election period would be 30 calendar days, which is generally consistent with the HIPAA standard. However, we request comment as to whether another standard, such as 60 calendar days, generally consistent with the Exchange standard, is more appropriate.  The proposed rule also would include standards regarding the effective dates of coverage modeled upon the effective dates of coverage provided for the QHP special enrollment events under § 155.420(b). We also request comments on whether health insurance issuers in the individual market should provide to enrollees in their products a notice of special enrollment rights similar to what is currently provided to enrollees in group health plans (§ 146.117(c)).
In addition, the proposed rule would include provisions allowing issuers with network plans to limit guaranteed availability to employers with eligible individuals who live, work, or reside in the plans' service areas. While PHS Act section 2702(c)(1)(A) does not explicitly include a corresponding exception allowing issuers to limit the sale of individual market coverage to individuals who live or reside in the individual market plan's service area, failing to recognize such an exception would eliminate an issuer's ability to define a service area for its individual market business within a state. Moreover, references to persons with individual market coverage in paragraph (c)(1) and subparagraph (c)(1)(B) of PHS Act section 2702 suggest that such persons with individual market coverage also were intended to be described in paragraph (c)(1)(A). Accordingly, the proposed rule would clarify that individual market coverage also may limit enrollment to those individuals who live or reside in a service area.
Issuers with network plans also would not have to offer coverage to employers and individuals if they demonstrated to the appropriate state authority that they lacked the capacity to deliver services adequately to additional groups or individuals due to their existing contractual obligations to current group contract holders and enrollees. Issuers would need to apply the denial of guaranteed availability uniformly to all employers and individuals, without regard to the enrollees' claims experience or health status-related factors. Issuers invoking this exception generally would be barred from offering new coverage for at least 180 calendar days after coverage is denied, as directed by PHS Act section 2702(c)(2).
As noted, PHS Act section 2702 does not include an explicit guaranteed availability exception allowing issuers to limit the offering of certain products to members of bona fide associations. However, in the appropriate circumstances, we think that the network capacity exception to guaranteed availability could be used to provide a basis for limiting enrollment in certain products to bona fide association members. Additionally, while the guaranteed availability exception for bona fide association coverage is not allowed under the statute, we are interested in whether and how a transition or exception process for bona fide association coverage could be structured to minimize disruption while maintaining consumer protections. We seek comment on this issue.
Similarly, issuers would not have to offer coverage to employers and individuals, uniformly and without regard to claims experience, if they demonstrate to their applicable state authority (if required) that they lack the financial capacity to sell additional coverage. Issuers invoking this exception also would be barred from offering new coverage for at least 180 calendar days, as directed by PHS Act section 2702(d)(2).
Lastly, the proposed rule would include as a minimum standard a more detailed marketing standard in connection with guaranteed availability that had not been included in the earlier HIPAA rule. Nonetheless, it is similar to the guidance we provided in Health Care Financing Administration Bulletin No. 98-01 that interpreted the HIPAA provisions related to guaranteed availability in the individual and small group markets. Bulletin No. 98-01 stated that the PHS Act prohibited issuers from setting agent commissions for sales to HIPAA-eligible individuals and small groups so low that they were discouraged from marketing policies to such individuals and groups.  Pursuant to section 1311(c)(1)(A) of the Affordable Care Act, QHP issuers are required to comply with applicable state laws and regulations regarding marketing by health insurance issuers and not employ marketing practices or benefit designs that will have the effect of discouraging the enrollment of individuals with significant health needs in QHPs (§ 156.225). The proposed rule would adopt this standard and apply it to the entire marketplace in order to ensure consistency in the marketing of plans inside and outside of the Exchanges and leverage existing state oversight mechanisms.
The intent of this policy is for states to continue their traditional role of regulating marketing activities of issuers, consistent with § 156.225. We reiterated this point in guidance issued on November 29, 2011, where we indicated that we will apply existing state standards on marketing materials in states where a federally-facilitated Exchange operates.  We note that the NAIC's Model Unfair Trade Practices Act 880-1 has been adopted in a “substantially similar manner” by 46 states, and the NAIC's Advertisements of Accident and Sickness Insurance Model Regulation 40-1 has been adopted in a “substantially similar manner” by 44 states. Both the Model Act and Regulation include comprehensive marketing standards for issuers. 
We propose these marketing standards to minimize the potential for the adverse selection that could result if plans sold through Exchanges were subject to different marketing standards from plans sold outside of the Exchanges. A common standard covering the entire insurance market can protect the efficient operation of all markets and reduce confusion for consumers. As stated in Bulletin No. 98-01, which interpreted the HIPAA guaranteed availability requirement, marketing practices that fall below these standards represent a failure by issuers to offer required coverage. We propose that all issuers comply with state laws regulating the marketing of insurance unless the state has no laws regulating marketing or has laws which are below the federal minimum standard, in which case the federal minimum standard would govern. We solicit comment on this federal minimum standard.
Concerns have been raised about the ability of individuals to manipulate guaranteed availability each year. While PHS Act section 2703 allows an issuer to nonrenew coverage for an individual who has not paid premiums, PHS Act section 2702 does not include an exception allowing issuers to refuse to cover individuals with histories of non-payment under other policies either with the same issuer or other issuers. Nonetheless, we recognize the concerns that such potential gaming raises in relation to adverse selection, fairness to consumers maintaining continuous coverage, and the financial stability of issuers participating in the individual market. We solicit comments on possible ways to discourage consumers from abusing guaranteed availability rights (for example, by ensuring enrollees cannot use open and special enrollment periods to facilitate such abuses) while ensuring consumers are guaranteed the protections afforded to them under the law.
C. Guaranteed Renewability of Coverage (Proposed § 147.106)
PHS Act section 2703 directs that any health insurance issuer offering health insurance coverage in the individual or group market must renew coverage at the option of the plan sponsor or individual, with certain exceptions, which are more fully discussed below in connection with the proposed rule text. PHS Act section 2703 is based largely on the HIPAA provision for group market guaranteed renewability, but generally expands its scope to include both the group and individual markets.  While section 2703 does not include the individual market in its guaranteed renewability exceptions for uniform modifications of coverage and loss of bona fide association membership, nonetheless, we believe PHS Act section 2742 continues to provide a basis for those exceptions. This proposed rule generally is based on the corresponding HIPAA rule (§ 146.152).
The proposed rule would direct health insurance issuers offering health insurance coverage in the individual or group market to renew or continue in force the coverage at the option of the plan sponsor or individual, as applicable, with certain exceptions. These exceptions include: (1) Nonpayment of premiums by the plan sponsor, or individual, as applicable; (2) an act or practice that constitutes fraud or an intentional misrepresentation of material fact under the terms of coverage performed by the plan sponsor or individual, as applicable; (3) in the case of group health insurance coverage, the plan sponsor has failed to comply with a material plan provision relating to employer contribution or group participation rules pursuant to applicable state law; (4) the issuer is ceasing to offer coverage of this type, acting uniformly without regard to claims experience or health status-related factor (an issuer may also modify the health insurance coverage for a plan offered to a group health plan at renewal); (5) for network plans, there is no longer any enrollee under the plan who lives, resides, or works in the service area of the issuer (or in the area for which the issuer is authorized to do business); and in the case of the small group market, the issuer could limit the employers that may apply for coverage to those with eligible individuals who live, work, or reside in the service area for such network plan; and (6) for coverage made available in the small or large group market only through one or more bona fide associations, if the employer's membership in the association ceases, but only if the coverage terminated uniformly without regard to any health status-related factor relating to any covered individual. In the case of health insurance coverage that is made available by a health insurance issuer in the small or large group market to employers only through one or more associations, the reference to “plan sponsor” is deemed, with respect to coverage provided to an employer member of the association, to include a reference to such employer.
In addition, the proposed rule would set requirements for issuers closing blocks of business. In any case where an issuer decides to discontinue offering a particular plan offered in the group or individual market, that plan may be discontinued by the issuer in accordance with applicable state law in the particular market under certain circumstances. An issuer who elects to discontinue offering all health insurance coverage in a market (or markets) in a state may not issue coverage in the state's market (or markets) involved during the 5-year period beginning on the date of discontinuation of the last coverage not renewed, as directed by PHS Act section 2703(c)(2)(B).
Only at the time of renewal may issuers modify the health insurance coverage for a plan offered to a group health plan in the large group market, and small group market if, for coverage available in this market (other than only through one or more bona fide associations), the modification is consistent with state law and is effective uniformly among group health plans with that plan. 
PHS Act section 2703(b)(6) retains a guaranteed renewability exception for an employer's loss of membership in a bona fide association. Although not the subject of this proposed rule, PHS Act section 2742(b)(5) continues to provide a guaranteed renewability exception for an individual's loss of membership in a bona fide association.
Under § 155.430(b), an Exchange may terminate an enrollee's coverage, and permit a QHP issuer to terminate such coverage, under certain circumstances. These circumstances are: (1) The enrollee is no longer eligible for coverage in a QHP; (2) payments of premiums for coverage of the enrollee cease and any grace period(s) have been exhausted; (3) the enrollee's coverage is rescinded due to fraud or misrepresentation; (4) a QHP terminates or is decertified; or (5) the enrollee changes from one QHP to another during an annual open enrollment period or special enrollment period. Although some QHP termination of coverage events correspond to PHS Act non-renewal events (for example, nonpayment of premiums), other events do not (for example, a QHP's loss of certification). With respect to those instances, we request comments on whether an issuer would have to renew that coverage on a non-QHP basis, outside the Exchange, if applicable, to affected enrollees.
We are aware that issuers may need to make some plan design changes for non-grandfathered coverage issued between March 23, 2010 and January 1, 2014 in order to comply with the standards of the Affordable Care Act that are effective for the 2014 plan and policy years. In addition, on an ongoing basis, issuers may need to make some cost-sharing adjustments at renewal to ensure that policyholders' plans remain at the same actuarial value level from year to year. We believe that issuers can make these types of policy changes consistent with the uniform modification of coverage requirements under PHS Act sections 2703 and 2742, and solicit comments on whether our interpretation should be explicitly incorporated into text of the final rule.
D. Applicability of the Proposed Rules Under PHS Sections 2701, 2702, and 2703 and Section 1312(c) of the Affordable Care Act to Student Health Insurance Coverage
Section 1560(c) of the Affordable Care Act provides that nothing in title I of the Affordable Care Act, or an amendment made by title I, “shall be construed to prohibit an institution of higher education (as such term is defined for purposes of the Higher Education Act of 1965) from offering a student health insurance plan, to the extent that such requirement is otherwise permitted under applicable federal, state, or local law.” Title I of the Affordable Care Act includes the rating, guaranteed availability, guaranteed renewability, and single risk pool provisions that are discussed in this proposed rule.
We have interpreted section 1560(c) to mean that if particular requirements in the Affordable Care Act would have, as a practical matter, the effect of prohibiting an institution of higher education from offering a student health plan otherwise permitted under federal, state or local law, such requirements would be inapplicable pursuant to the rule of construction in section 1560(c).
We previously provided student health insurance coverage with exceptions from the HIPAA guaranteed availability and renewability requirements applicable to the individual market (§ 147.145(b)(1)). Consistent with that policy, this proposed rule would provide student health insurance coverage with exceptions from the Affordable Care Act's guaranteed availability and renewability requirements to ensure that enrollment in these policies is limited to students and their dependents.
Under this proposed rule, student health insurance coverage would be included in an issuer's individual market single risk pool, as described below. Nonetheless, given the differences between the student health insurance market and other forms of individual market coverage, we solicit comment on whether the final rule should allow issuers to maintain a separate risk pool for student health insurance coverage. We also seek comment on whether the final rule should provide any modifications with respect to the generally applicable individual market rating rules in connection with student health insurance coverage.
E. Single Risk Pool (Proposed § 156.80)
Section 1312(c)(1) and (2) of the Affordable Care Act states that a health insurance issuer must consider all of its enrollees in all health plans (other than grandfathered health plans) offered by the issuer to be members of a single risk pool in the individual market and small group market, respectively.  This requirement applies to health plans both inside and outside of an Exchange for both markets. Section 1312(c)(3) of the Affordable Care Act provides a state with an option to merge its individual and small group markets, in which case all non-grandfathered plans' risk would be merged. To support the accuracy of the risk adjustment methodology, we propose that states that intend to merge their individual and small group market pools in 2014 inform us no later than 30 days after the publication of the final rule. Lastly, section 1312(c)(4) of the Affordable Care Act renders inapplicable any state law requiring grandfathered health plans to be included in the single risk pool(s).
The proposed rule would largely codify the statutory language and clarify that the single risk pool requirement applies on a state-by-state basis and only to forms of non-grandfathered individual and small group market coverage subject to PHS Act section 2701. Thus, excepted benefit and short-term limited duration policies, for example, would not be subject to the single risk pool requirement. Also, this requirement would not be enforced against health insurance coverage issued to plans with fewer than two participants who are current employees (for example, retiree-only plans) (see 75 FR 34538, 34539-40 (June 17, 2010)).
Section 1312(c) of the Affordable Care Act represents a change from current market practice. Today, issuers often maintain several separate risk pools within their individual and small group market business, often as a way to segment risk and further underwrite premiums. For example, the NAIC's Small Employer Health Insurance Availability Model Act (1993 Version), adopted by a majority of states, allows issuers to maintain up to nine blocks of business in the small group market, subject to a limitation that the index rates between the blocks not vary by more than 20 percent. A 2004 study by the American Academy of Actuaries noted that the current regulatory climate in most states allows issuers to open and close books of business in the individual market at will, effectively causing many long-term policyholders in closed blocks to face very high premium increases at renewal because issuers can refuse to pool their claims experience with that of the newer or healthier policyholders. 
Beginning in 2014, issuers are no longer able to deny coverage based on applicants' health status and are limited in the types of rating factors they can apply in setting premiums in the individual and small group markets. Without a single risk pool rule, these prohibitions against traditional underwriting could incentivize issuers to find ways to segment the market into separate risk pools and charge differential premiums based on segmented risk, a de facto mechanism for underwriting. As a result, this statutory requirement that an issuer consider all of its enrollees in all plans (other than grandfathered plans) offered by the issuer to be members of a single risk pool in the individual market or small group market, respectively, prevents issuers from creating separate pools in order to segment high risk and low risk enrollees. While risk adjustment will address some risk segmentation, the single risk pool requirement provides another layer of protection against adverse selection among plans and protects consumers by requiring issuers to consider the risk of all enrollees when developing and pricing unique plans.
To implement the single risk pool protection, we propose that the claims experience of the enrollees in all non-grandfathered plans of an health insurance issuer in the individual or small group market within a state (or both, if the risk pools of the individual and small group market are merged within a state) be combined so that the premium rate of a particular plan is not adversely impacted by the health status or claims experience of its enrollees. For rates effective starting January 1, 2014, a health insurance issuer would use the estimated total combined claims experience of all non-grandfathered plans deriving from providing essential health benefits within a state market to establish an index rate (average rate) for the relevant market. The index rate would be utilized to set the rates for all non-grandfathered plans of the issuer in the market. After setting the index rate, an issuer would make a market-wide adjustment to the index rate based on the total expected market-wide payments and charges under the risk adjustment and reinsurance programs in a state.
The premium rate for any given plan could not vary from the resulting index rate, except for the following factors: 
- The actuarial value and cost-sharing design of the plan;
- The plan's provider network and delivery system characteristics, as well as utilization management practices. This factor is intended to pass savings onto consumers where issuers are able to negotiate better discounts, construct efficient networks, or manage care more efficiently;
- Plan benefits in addition to the essential health benefits. The additional benefits must be pooled with similar benefits provided in other plans to determine the allowable rate variation for plans that offer these benefits; and
- With respect to catastrophic plans, the expected impact of the specific eligibility categories for those plans.
The index rate, the market-wide adjustment based on total expected payments and charges for the risk adjustment and reinsurance programs, and the variations for individual plans would have to be actuarially justified. Furthermore, all such actuarially justified adjustments would have to be implemented by issuers in a transparent fashion, consistent with state and federal rate review processes. We seek comment on the approach described above, and on the proposed plan-specific adjustments to the index rate. This proposed rule would apply both when rates are initially established for a plan and at renewal. We expect that percentage renewal increases generally would be similar across all plans in the same risk pool, but might differ somewhat due to the permitted product differences described above. We are considering allowing additional flexibility in product pricing in 2016 after issuers have accumulated sufficient claims data. We request comments on this approach.
F. CMS Enforcement in Group and Individual Insurance Market (Various Provisions in Parts 144 and 150)
Part 150 of title 45 of the CFR sets forth our enforcement processes for all of the requirements of title XXVII of the PHS Act with respect to health insurance issuers and non-federal governmental group health plans. The scope of part 150 includes our processes for enforcing the requirements of title XXVII of the PHS Act added by the Affordable Care Act, given that the statutory enforcement provisions that part 150 implements, PHS Act sections 2723 and 2761, apply to all of parts A and B of title XXVII.
This proposed rule would make a number of conforming changes in various sections of parts 144 and 150 intended to clarify the applicability of enforcement procedures to the PHS Act requirements added by the Affordable Care Act. For example, we are proposing to replace the term “HIPAA requirements” with “PHS Act requirements” throughout part 150 to make clear that the part 150 processes would be used for enforcing not only the requirements emanating from HIPAA, but also the Affordable Care Act and other legislation enacted subsequent to HIPAA. Similarly, the proposed rule would add, where appropriate, references to part 147 (that is, the Affordable Care Act's group and individual market requirements) alongside references to parts 146 and 148 (the group and individual market requirements pre-dating the Affordable Care Act).
While these proposed changes should clarify to stakeholders our interpretation concerning part 150, the lack of these revisions in part 150 currently in no way prejudices our continued use of part 150 in connection with enforcing the requirements of part 147 prior to the issuance of a final rule.
G. Enrollment in Catastrophic Plans (Proposed § 156.155)
Section 1302(e) of the Affordable Care Act outlines standards for offering catastrophic plans, which we propose to codify in § 156.155. In paragraph (a)(1), we propose that a plan is a catastrophic plan if it meets all applicable requirements for health insurance coverage in the individual market (including but not limited to those requirements described in 45 CFR parts 147 and 148) and is offered only in the individual market. In proposed paragraph (a)(2), we specify that a catastrophic plan does not offer coverage at the bronze, silver, gold, or platinum coverage levels described in section 1302(d) of the Affordable Care Act and in proposed paragraph (a)(3), we clarify that a catastrophic plan does not provide coverage of essential health benefits until the enrolled individual reaches the annual limitation in cost sharing in section 1302(c)(1) of the Affordable Care Act. Proposed paragraph (a)(4) codifies the statutory requirement that a catastrophic plan must cover at least three primary care visits per year before reaching the deductible. We do not propose here to prohibit an issuer from imposing cost sharing in connection with these primary care visits so long as other applicable law (for example, PHS Act section 2713) permits.
In paragraph (a)(5), we propose codifying the statutory criteria identified in section 1302(e)(2) of the Affordable Care Act that lists the individuals who are permitted to enroll in a catastrophic plan. In paragraph (a)(5)(i), we propose that individuals younger than age 30 before the beginning of the plan year are eligible to enroll in catastrophic plans. If an individual enrolled in a catastrophic plan reaches age 30 during a plan year, we propose that the individual can remain enrolled in the catastrophic plan for the remainder of the plan year. In paragraph (a)(5)(ii), we propose that the second group of individuals eligible to enroll in a catastrophic plan are those who have been certified as exempt from the individual responsibility payment because they cannot afford minimum essential coverage, or they are eligible for a hardship exemption.
In paragraph (b), we propose to codify the exception found in section 1302(e)(1)(B)(i) of the Affordable Care Act by proposing that a health plan may not impose cost-sharing requirements (such as a copayment, coinsurance, or deductible) for preventive services identified in PHS Act section 2713. We note that a catastrophic plan must provide coverage for such services without regard to whether the enrollee accessing the service has reached the cost-sharing maximum.
In paragraph (c), we propose that if more than one person is covered by a single catastrophic plan, such as a non-self only plan, then each individual enrolled must meet at least one of the two eligibility criteria in proposed paragraph (a)(5). For example, a couple could enroll in a catastrophic family plan if one of them was under age 30 and the other had received a certificate of exemption in accordance with section 1302(e)(2)(B) of the Affordable Care Act.
H. Rate Increase Disclosure and Review (Part 154)
To account for the market changes in 2014, many of which are detailed in this proposed rule; to fulfill the statutory requirement beginning in 2014 that the Secretary, in conjunction with the states, monitor premium increases of health insurance coverage offered through an Exchange and outside of an Exchange; and in an effort to streamline data collection for issuers and states, we propose three changes to the existing rate review program under 45 CFR part 154.
First, we propose to amend § 154.200(a)(2) and (b), so that states seeking state-specific thresholds submit proposals to CMS by August 1 of each year; that the Secretary publish a notice no later than September 1 of each year concerning whether a state-specific threshold applies in a state; and that any state-specific threshold be effective on January 1 of each year following the Secretary's notice. We are proposing these changes in order to align with the timing of rate submissions of QHPs in the Exchanges, as well as market-wide rating rules created by the Affordable Care Act, which are effective January 1, 2014. We welcome comments on these proposed changes in the submission date and the effective date of state-specific thresholds.
Second, we propose to amend § 154.215 to direct health insurance issuers to submit data and documentation regarding rate increases on a standardized form in a manner determined by the Secretary. Beginning in 2014, section 2794(b)(2)(A) of the Affordable Care Act directs that the Secretary, in conjunction with states, “monitor premium increases of health insurance coverage offered through an Exchange and outside of an Exchange.” The purpose of this policy is to identify patterns that could indicate market disruption, which could occur given the additional standards that apply to qualified health plans, and to oversee the new, market-wide reforms. To assist the Secretary in carrying out this new monitoring function, we propose modifying the rate review standards by extending the requirement that health insurance issuers report information about rate increases above the review threshold to all rate increases, as is already the policy in the vast majority of states. Under this proposal, each issuer would submit the same set of files for all of their products in the same market, pursuant to work conducted in partnership with the NAIC to ensure consistency between the NAIC's System for Electronic Rate and Form Filing (SERFF) and HHS's Health Insurance Oversight System (HIOS) and to promote efficiency in data collection for states and issuers. The same type of information is currently collected by most states today, but in a variety of non-standardized formats. States would continue to have the authority to collect additional information, above this baseline, to conduct more thorough reviews or rate monitoring. The review threshold, described in § 154.200, would continue to be used to determine which rates must be reviewed rather than just reported.
Under the current rate review program, CMS collects rate filing information from issuers proposing increases of 10 percent or greater, including in states with Effective Rate Review Programs. This data collection allows the Secretary to ensure the public disclosure of information on such increases as required by the statute. Collecting rate filing information on all rate increases in applicable markets would provide CMS, in partnership with stat