HHS Issues Final Rule Creating Risk Adjustment Programs to Stabilize Premiums

Health Insurance Report™ helps you track and analyze legal, legislative, and regulatory developments affecting the health-insurance industry throughout implementation of the Affordable Care Act...

By Sara Hansard  

The Department of Health and Human Services March 1 issued a final rule implementing risk adjustment programs intended to stabilize premiums when the primary provisions of the Affordable Care Act take effect in 2014.

The 483-page Notice of Benefit and Payment Parameters for 2014 final rule (NBPP) (CMS-9964-F), to be published in the March 11 Federal Register, will reduce premiums in the individual market by 10 percent to 15 percent in 2014, according to a fact sheet issued by HHS.

The rule, which takes effect April 30, expands on standards set forth in earlier rules and provides further information on the so-called RRR programs required by ACA: a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program, HHS said.

Tax Credits, Cost-Sharing Provisions

In addition, the NBPP final rule establishes key provisions governing advance payments of premium tax credits and cost-sharing reductions that will be available under ACA for low- and moderate-income people to buy health insurance in the online exchange markets that take effect in 2014.

The rule also sets a fee of 3.5 percent of premiums that issuers selling products in the federally facilitated exchange will have to pay. Insurers asserted in comment letters on the proposed rule that the fee is too high (see previous article).

Also on March 1, the Internal Revenue Service issued a proposed rule implementing fees that will be charged on health insurance plans (see related article), and the Office of Personnel Management issued a final rule establishing a multi-state plan program under ACA (see related article).

Pre-Existing Conditions

The risk adjustment programs implemented in the final rule will reduce the incentives for health insurers to avoid enrolling people with pre-existing medical conditions, HHS said. Under ACA, insurers are prohibited from refusing to enroll people with medical problems, or from charging them more than healthy people.

An estimated 27 million uninsured people are expected to gain coverage under the law, but it is not yet known how many new enrollees may have costly health problems that could result in “adverse selection” that would push up premiums. The risk adjustment program provides payments to insurers who have less healthy enrollees from insurers with healthier enrollees.

HHS issued a proposed rule on the NBPP for 2014 in November 2012 (see previous article).

States operating their own exchange “marketplaces” and their own risk adjustment programs can propose their own methodology for risk adjustment, HHS said in the fact sheet. The final rule sets out the methodology HHS will use for the federally facilitated exchange it will operate in states that do not run their own exchanges as well as in states that choose not to operate their own risk adjustment program. The rule provides a framework for HHS's approach to validating risk adjustment data, and HHS said it will consult with stakeholders on the approach before finalizing further details.

Reinsurance Will Lower Individual Premiums

The transitional reinsurance program, which will be in effect from 2014 through 2016, is designed to reduce premiums and ensure market stability by helping issuers cover the costs of high-risk enrollees in the individual market, HHS said. It will lower premiums by an estimated 10 percent to 15 percent in 2014, it said. There have been numerous warnings that premiums in that market could spike for young, healthy adults, due to the law's requirements that a comprehensive set of “essential health benefits” be covered, prohibitions on how much older enrollees can be charged, and new fees that will be levied on health insurers.

ACA requires insurers and third-party administrators to make contributions to fund the reinsurance program totaling $10 billion for 2014, $6 billion for 2015, and $4 billion for 2016. In addition, another $5 billion is to be collected by the Treasury Department to fund the program. The rule establishes a contribution rate of $63 per enrollee per year, or $5.25 per enrollee per month, in 2014.

The temporary risk corridors program, which also will be in effect from 2014 through 2016, is intended to protect against inaccurate rate-setting for qualified health plans (QHPs) sold in the exchanges by limiting the extent of issuer losses and gains, HHS said in the fact sheet. Issuers will be able to lower rates because they will not have to add a risk premium to account for possible uncertainties, the rule said.

Medical Loss Ratio Deadlines

The rule requires that beginning in 2014, issuers include premium stabilization payments in their calculation of the ACA's medical loss ratio (MLR) requirement that they spend at least 80 percent of premiums on medical claims or quality improvements. Insurers that do not meet the threshold must rebate the difference to policyholders. HHS extended the annual MLR reporting deadline from June 1 to July 31, and the deadline for disbursing rebates from Aug. 1 to Sept. 30 to give issuers time to calculate the MLR.

The rule also allows tax-exempt not-for-profit issuers, such as Kaiser Permanente and Geisinger Health System, to deduct from premiums community benefit expenditures, subject to caps, and state premium taxes in calculating MLRs and rebates. “This change promotes a level playing field for issuers within each state,” HHS said in the fact sheet. The Blue Cross and Blue Shield Association opposes this provision, arguing that making the allowance would create an “unlevel playing field.”

In the rule, HHS finalized the mechanisms for determining the amount of advance payments of premium tax credits to issuers for low- and moderate-income enrollees in QHPs bought through the exchanges. It also finalized its proposal to make advance payments of the value of cost-sharing reductions. Under the rule, issuers must provide the cost-sharing reductions at the point of service.

Small Business Options Proposal

At the same time that it issued the NBPP final rule, HHS issued a proposed rule, “Establishment of Exchanges and Qualified Health Plans; Small Business Health Options Program” (CMS-9964-P2), also to be published in the March 11 Federal Register. The proposed rule outlined a transitional policy allowing employers the option of offering a single QHP to employees in the federally facilitated exchange, as the small group market customarily does today in 2014, rather than being required to allow employees to choose plans. That will allow employers to participate in a federally facilitated exchange and retain potential eligibility for the small business tax credit, which is only available through a Small Business Health Options Program (SHOP) exchange beginning in 2014. Comments on the proposal are due April 1.

HHS also issued an interim final rule, to be published in the March 11 Federal Register, titled “Amendments to the HHS Notice of Benefit and Payment Parameters for 2014,” that allows QHP issuers to use an optional simplified methodology for calculating cost-sharing reductions during a transitional period. The interim final rule also adjusts risk corridor calculations to align with single risk pools.

In its summary of costs and benefits, the NBPP final rule said it would “improve the individual market by making insurance more affordable and accessible to millions of Americans who currently do not have affordable options available to them.” In 2011, only 10.8 million people were enrolled in the individual market, while 48.6 million were uninsured in the United States, it said.

The risk adjustment provisions, which appeared to largely follow the proposed rule, “are all insurer-friendly provisions intended to protect against adverse selection,” Ipsita Smolinski, senior health policy analyst at health care consulting firm Capitol Street LLP, told BNA. “For the most part these are things insurers support and are helpful to them.” The rule “is probably the most important one” for insurers, she said.


The Notice of Benefit and Payment Parameters for 2014 final rule (CMS-9964-F) is at http://op.bna.com/hl.nsf/r?Open=bbrk-95dmhp. The HHS Notice of Benefit and Payment Parameters Fact Sheet is available in HealthDocs™. The Establishment of Exchanges and Qualified Health Plans; Small Business Health Options Program proposed rule (CMS-9964-P2) is at http://op.bna.com/hl.nsf/r?Open=bbrk-95dmkf. The interim final rule, Amendments to the HHS Notice of Benefit and Payment Parameters for 2014, is at http://op.bna.com/hl.nsf/r?Open=bbrk-95dmg5.