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Interim Final Rule: Alternative Approaches to Cost-Sharing Reduction Payment and Risk Corridor Calculations

Posted on May 8, 2013 | No Comments

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Key Developments
Implementation Briefs

By Taylor Burke and Devi Mehta


The Affordable Care Act (ACA) requires the U.S. Department of Health and Human Services (HHS) to administer a federal, temporary risk corridors program from 2014 through 2016 inside the ACA’s health insurance exchanges, including state-based exchanges, state-federal partnership exchanges, and federally-facilitated exchanges.[1] The temporary risk corridors program is intended to protect against uncertainly in rate setting for qualified health plans (QHPs) in the individual and small group markets by limiting the extent of insurance issuer losses and gains in the first few years of exchange operations. The final rule titled “Standards Related to Reinsurance, Risk Adjustment and Risk Corridors” published on March 23, 2012 (known as the Premium Stabilization Rule) set up the framework for this program, followed by another final rule titled “HHS Notice of Benefit and Payment Parameters for 2014” published on March 11, 2013, which expanded upon that framework. This Implementation Brief focuses on an Interim Final Rule titled “Amendments to the HHS Notice of Benefit and Payment Parameters for 2014,” (IFR) also published March 11, 2013, which builds upon the standards set forth in the prior two final rules in two significant ways: (1) by adjusting the risk corridors calculation to better align it with the single risk pool requirement under the ACA’s insurance market reforms; and (2) by providing alternate standards for the administration and payment to issuers of the value of cost-sharing reductions provided to eligible individuals.[2]

Risk Corridor Calculations

The temporary risk corridors program allows the federal government to share a QHP’s profits or losses among other QHP issuers due to inaccurate rate setting inside the Exchanges from 2014-2016. To determine whether a QHP issuer has inaccurately set premium rates that lead to an unjustified profit or loss, a QHP’s “allowable costs” must be calculated per the requirements in the Premium Stabilization Rule. The IFR modifies the definition of “allowable costs” such that a QHP’s allowable costs are to be determined based on its pro-rata share of the QHP issuer’s incurred claims for all non-grandfathered health plans within a state, and allocated to the QHP based on premiums earned by the issuer in the market.[3]

To be consistent with the above definition of “allowable costs,” the IFR also modifies the rule related to attribution and allocation of revenue and expense items.[4] As modified, each item of revenue and expense in the risk corridors calculation must be reasonably attributable to the operation of the QHP based on a generally accepted accounting method, and will apply to the “target amount” but not to “allowable costs.”[5]

Cost-Sharing Reduction Payment Calculations

The ACA’s insurance market reforms provide eligible consumers with certain levels of protection from excessive cost-sharing imposed by QHPs. The ACA provides for reductions in cost-sharing amounts for qualified individuals purchasing QHPs through an Exchange, and also requires HHS to make advanced payments of these reduction amounts to issuers. The IFR establishes an alternative, optional methodology for QHP issuers calculating the amount of cost-sharing reductions provided for the purpose of reconciliation of advanced payments to issuers for these cost-sharing reductions. The alternate methodology will provide QHP issuers with greater flexibility and lower administrative burdens. This methodology also allows QHP issuers to calculate the value of the cost-sharing reductions they provide by using a formula based on specified cost-sharing parameters.[6]

Specifically, the market reform regulations require a QHP issuer to submit to HHS, for each QHP variation, the total costs for EHB services that were charged for the benefit year, broken down by:[7]

  • the amount the issuer paid;
  • the amount the enrollees paid; and
  • the amount the enrollees would have paid under the standard plan without the cost sharing reductions, calculated using the standard methodology by applying the cost sharing requirements for the standard plan to the allowed costs for each policy.[8]

The IFR establishes an alternative to the “standard methodology” mentioned above, setting forth a “simplified methodology” under which QHP issuers calculate the value of the cost-sharing reductions provided by using a formula based on certain summary cost-sharing parameters of the standard plan, applied to the total allowed costs for each policy. The IFR offers three possible formulas to use to calculate the amount enrollees would have paid under the standard plan, and is requesting comment on these formulas.[9] As with the standard methodology, HHS will use the information produced from this simplified methodology to calculate the difference between what the enrollees actually paid and the amount the enrollees would have paid under the standard plan without cost sharing reductions, and then reconcile this amount against the advanced payments made to the QHP issuer.[10]

The IFR allows QHP issuers greater flexibility in calculating cost sharing reductions by allowing issuers to calculate the amounts that would have been paid under the standard plan without cost sharing reductions using a simplified methodology.[11] The IFR contains a request for comment regarding the duration for which this alternative methodology should be permitted. QHP issuers must notify HHS at the beginning of each benefit year if the QHP will be using the alternate method.[12] This approach will allow QHP issuers to choose the methodology that best fits with its practices, and will reduce their administrative burdens in the initial years of the Exchange to allow extra time for systems implementation. The IFR notes that alternative approaches to reimbursing QHP issuers will be explored in the future.[13] Finally, the IFR notes that that alternate methodology also applies to multi-state plans, but that all information from these plans must be submitted to the Office of Personnel Management.

For additional information on  risk adjustment, transitional reinsurance, and risk corridors programs, please see this companion piece.

[1] ACA § 1342.
[2] Patient Protection and Affordable Care Act; Amendments to the HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 15541 (March 11, 2013) (to be codified at 45 CFR Parts 153 and 156).
[3] 45 CFR §153.500.
[4] 45 CFR §153.520.
[5] Id.
[6] 45 CFR §156.430(c).
[7] 45 CFR § 156.430(c)(1)-(2).
[8] 78 Fed. Reg. 15541, 15545.
[9] 78 Fed. Reg. 15541, 15545-46.
[10] 45 CFR § 156.430(a)-(b).
[11] 45 CFR § 156.430(c)(3).
[12] 45 CFR § 156.430(c)(3).
[13] 78 Fed. Reg. 15541, 15544.
ACA § 1342.
Patient Protection and Affordable Care Act; Amendments to the HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 15541 (March 11, 2013) (to be codified at 45 CFR Parts 153 and 156).
45 CFR §153.500.
45 CFR §153.520.
45 CFR §156.430(c).
45 CFR § 156.430(c)(1)-(2).
78 Fed. Reg. 15541, 15545.
78 Fed. Reg. 15541, 15545-46.
45 CFR § 156.430(a)-(b).
45 CFR § 156.430(c)(3).
45 CFR § 156.430(c)(3).
78 Fed. Reg. 15541, 15544.

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