The proposed rule imposes new requirements on health insurance issuers offering Qualified Health Plans through Health Insurance Exchanges and clarifies other obligations for various market reforms and the Premium Stabilization Programs, despite the fact that applications to offer coverage through Exchanges already have been submitted and 2014 benefit packages and rates already have been developed. 

The U.S. Department of Health and Human Services (HHS) issued a proposed rule on June 14, 2013, (Proposed Rule) that offers new provisions and clarifications covering a wide range of topics relating to Health Insurance Exchanges, the Premium Stabilization Programs and other health insurance market reforms.  The Proposed Rule also imposes new requirements and obligations for state-based Health Insurance Exchanges (State Exchanges) and health insurance issuers offering Qualified Health Plans (QHPs) through State Exchanges and federally-facilitated Health Insurance Exchanges (FFEs, and collectively with State Exchanges, Exchanges), despite the fact that health plans’ applications to participate in Exchanges already have been submitted and enrollment begins in mere months. 

HHS leaves unanswered several critical questions, such as whether health insurance issuers offering QHPs (QHP Issuers) through FFEs will have an opportunity (and the time) to appeal HHS’s decision not to certify a QHP for the 2014 (or subsequent) benefit year.

Comments on the Proposed Rule, which was published in the Federal Register on June 19, 2013, are due to HHS on July 19, 2013.

HHS Introduces “Program Integrity” Provisions for Issuers and States

HHS imposes new operational and contracting requirements and enforcement mechanisms for QHP Issuers participating in FFEs.  The Proposed Rule also proposes new oversight and program integrity requirements for states operating their own risk adjustment and reinsurance programs as well as for State Exchanges.  These developments are not surprising, given HHS’s approach to administering the Medicare Advantage and Part D Programs, although some of the requirements seem to blur the distinction between HHS’s administration of federal entitlement programs versus federally-administered marketplaces.

Issuers Face New Compliance Obligations, Including Responsibility for Contractors

Borrowing from the Medicare Advantage and Part D Programs, HHS proposes new oversight and contractual requirements for QHP Issuers with regard to their contractors and subcontractors–“Delegated Entities” and “Downstream Entities” in Exchange parlance.  These definitions include providers of both administrative and health care services, and therefore are inclusive of hospitals, accountable care organizations and other health care providers with which QHP Issuers contract.  QHP Issuers are responsible for their own compliance with applicable federal and state standards as well as for the compliance of their Delegated and Downstream Entities, regardless of the relationship.  Additionally, QHP Issuers must incorporate into their contracts with Delegated and Downstream Entities certain provisions if the QHP Issuers delegate their activities or obligations.  These provisions include specification of the delegated activity and reporting responsibility, revocation of the delegated activity/reporting standard or other remedy if the Delegated/Downstream Entity’s performance is unsatisfactory and an obligation of the Delegated/Downstream Entity to retain books and records (and make them available to federal regulators) for 10 years.  New contracts entered into on or after October 1, 2013 must include these provisions, but QHP Issuers have until January 1, 2015 to amend existing agreements.

The QHP Issuers subject to these requirements are unclear.  The placement of the regulation, under Part 156, Subpart D relating to Federally-Facilitated Exchange Qualified Health Plan Issuer Standards, suggests the obligations are imposed only on QHP Issuers participating in FFEs.  The regulatory text and the preamble discussion, however, do not contain any such limitation and refer to “QHP issuers” more generally, suggesting all QHP Issuers are subject to the provisions, even if the QHP Issuers offer products through State Exchanges.  Issuers, providers and other contractors operating in states with State Exchanges may request clarification on this point.

Given Issuers’ extensive operations and the variety of Delegated and Downstream Entities with which Issuers may contract—including marketing organizations, agents, brokers, health care providers and administrative service providers—this proposal creates a significant burden on QHP Issuers, which now are directly accountable for the compliance (or non-compliance) of their contractors.  Many may wonder as to the need or appropriateness for HHS to dictate the terms of QHP Issuers’ contracts with their vendors when HHS’s role is to facilitate a health insurance marketplace, and not to arrange for the provision of health care benefits as is HHS’s responsibility under the Medicare Program.  Moreover, entities familiar with these obligations pursuant to Medicare Advantage and Part D operations also can attest to the significant practical challenges this responsibility imposes, including amending all provider and administrative contracts and negotiations when the other party does not know that these federal requirements must “flow downstream” to contractors.  A QHP Issuer also may determine that more extensive contractual requirements—such as a Delegated Entity’s maintenance of a compliance program—are necessary in order for the QHP Issuer to be comfortable with the entity’s performance of a delegated activity and compliance with laws.  Some contractors may take a partnership approach to their QHP Issuer relationships and accept these responsibilities, but others may object to assuming more expansive obligations than those required by HHS.

HHS also proposes new compliance obligations (and implications for non-compliance) for QHP Issuers relating to cost-sharing subsidies.  QHP Issuers are responsible for ensuring that members are assigned to the appropriate standard plan or silver plan variation and that the appropriate cost-sharing reductions are applied.  HHS believes that members should be held harmless if the QHP Issuer “misapplies” the cost-sharing reductions.  Accordingly, QHP Issuers are obligated to refund any excess cost-sharing paid by or on behalf of the member to the person or entity that paid the excess cost-sharing (“whether the enrollee or the provider”) no more than 30 calendar days after discovery of any improper allocation of cost-sharing.  Further, QHP Issuers are not eligible to be reimbursed for any excess cost-sharing reductions improperly furnished to the member, such as through the end-of-year reconciliation.  Beginning with the 2015 benefit year, QHP Issuers would be required to provide HHS (and the State Exchange, as applicable) a report detailing occurrences of the improper application of cost-sharing violations, failure to refund any excess cost-sharing amounts paid, and QHP Issuer reimbursement for excess cost-sharing provided.  HHS requests comment on this report proposal, including frequency of the report and a minimum error rate or threshold that would trigger the reporting obligation.

The Proposed Rule imposes a similar refund obligation, 30-day time period and reporting requirement on QHP Issuers relating to their failure to reduce the portion of the premium charged to or for a member for the applicable month(s) by the amount of the advance premium tax credit available to the individual.  Additionally, QHP Issuers must submit to HHS summary statistics with respect to administration of cost-sharing reductions and premium tax credits.

QHP Issuers participating in an FFE that undergo a change of ownership, as recognized by the state in which the FFE is operating, will notify HHS at least 30 days prior to the change in ownership.  The form and format of the notice will be determined, and will include the legal name and Taxpayer Identification Number of the new owner and the effective date of the change in ownership.  HHS also requires that the new owner agree to “adhere to all applicable statutes and regulations,” presumably relating to the offering of QHPs through the FFE.  HHS elected not to require a novation agreement, similar to that required for Medicare Advantage Organization/Part D Plan Sponsor changes in ownership, based on the conclusion that such a requirement would duplicate existing state requirements, but requests comments on this issue.

10-Year Record Retention and Government Inspection Obligations

HHS imposes on Issuers a series of record retention and government-inspection provisions for the reinsurance (as described below) and risk adjustment programs.  Records must be “sufficient” to enable the regulators (whether federal or state, depending on who administers the program) to evaluate compliance with applicable risk adjustment standards and retained for 10 years.  HHS specifically references data validation obligations as well as records relating to premium rating and small group status as subject to the record retention and audit provisions.  Given the potential for allegations of federal False Claims Act (FCA) violations that could arise in connection with either program and HHS’s statements in the Proposed Rule relating to the FCA, these proposals are not surprising.

These record retention and government inspection provisions are in addition to those proposed by HHS for QHP Issuers relating to their participation in FFEs.  QHP Issuers must maintain records that are sufficient to enable periodic auditing by HHS, including financial records relating to participation in Exchanges (including auditing for financial solvency) and compliance reviews.  Risk corridor payment records, although not referenced, seem as though they could be included in the scope of this record retention requirement.  Interestingly, HHS imposes these record retention requirements on QHP Issuers participating in FFEs, and includes a separate record retention provision for QHP Issuers operating in State Exchanges for documents relating to application of cost-sharing subsidies and premium tax credits.  It is not clear, however, that HHS imposes on QHP Issuers participating in State Exchanges, or requires State Exchanges to impose on QHP Issuers participating in State Exchanges, the more expansive record retention and government audit obligations.

HHS Oversight and Enforcement Action in FFEs

The Proposed Rule codifies HHS’s prior statements, including in the FFE Application, regarding its intent to conduct compliance reviews of QHP Issuers participating in FFEs.  Using a risk-based approach for selecting QHP Issuers to audit that includes analyses of data submitted by QHP Issuers, HHS will audit QHP Issuer records, systems and facilities relating to its participation in the FFE, including to

• Evaluate compliance with Exchange standards and performance thereunder

• Verify performance of the duties to which the QHP Issuer attested in its certification process

• Assess the likelihood of fraud and abuse

HHS expects to focus its review on FFE standards for QHP Issuers “because oversight of market-wide standards will generally be performed by States as part of their regulatory oversight.”  HHS does not indicate whether it may take a more expansive approach in conducting audits in states where the state has elected not to enforce a standard or lacks the regulatory or enforcement authority to do so.  Although HHS expects the audits will be less rigorous than those applied to Medicare Advantage Organizations, audit findings will be incorporated into HHS’s process for evaluating whether permitting a QHP Issuer’s products to be available in an FFE is in the interest of the qualified individuals and qualified employers purchasing coverage through the FFE.  HHS may conduct audits up to 10 years from the last day of the applicable benefit year.

The Proposed Rule for the first time provides specific detail regarding HHS’s enforcement authority in administering FFEs.  Consistent with the authority granted under the Affordable Care Act (ACA), HHS sets out the bases upon which it would undertake the two “formal” enforcement actions against QHP Issuers: decertification and civil money penalties (CMPs).  HHS is silent regarding potential “informal” enforcement actions it may take against QHP Issuers, such as warning letters and corrective action plan requests imposed on Medicare Advantage Organizations and Part D Plan Sponsors.

• Civil Money Penalties: Similar to its audit approach, HHS intends to focus its oversight on FFE standards and avoid unnecessary duplication of state regulatory oversight of market-wide standards.  CMPs of up to $100 per day for each individual adversely affected may be imposed for “misconduct” or “substantial non-compliance” with Exchange standards.  In applying CMPs, HHS will take into consideration various factors, including “that 2014 will be a transitional year for issuers offering QHPs,” previous and ongoing record of compliance, the level of the violation and its impact on affected individuals, and any aggravating or mitigating circumstances.  QHP Issuers will receive a notice of HHS’s intent to assess CMPs and will have the right to a hearing before an administrative law judge (ALJ) to address whether there is a basis for CMPs and whether the assessed amount is reasonable.

• Decertification: Decertification, which HHS for the first time indicates may occur at the issuer or QHP level, may occur for one of several reasons, including substantial failure to comply with specific federal standards applicable to participation in an FFE.  HHS also adopts from the Medicare Advantage and Part D Programs two very general bases for decertification: substantial failure to comply with federal laws and regulations applicable to QHP Issuers in the FFE, and operating in a manner “that hinders the efficient and effective administration of an FFE.”  Under the standard decertification process, HHS will provide written notice of its intent to decertify a QHP/QHP Issuer to the Issuer, to members and to the department of insurance of the applicable state, indicating the effective date of certification (no earlier than 30 days from the notice date).  If HHS determines that the basis for decertification involves members’ ability to access necessary medical items or services or fraud, HHS may expedite decertification and impose an immediate effective date.  A right of appeal, including a hearing before an ALJ to evaluate whether a basis for decertification exists, will be available to QHP Issuers under both processes, although the hearing would occur after decertification (and the start of a special enrollment period for members) under the expedited process.

CMPs also may be imposed on Issuers for failure to comply with the terms and conditions of the risk adjustment and reinsurance programs.  For example, an Issuer that does not provide HHS with access to enrollee-level claims data or does not set up a “dedicated distributed data environment” for the risk adjustment and reinsurance programs may be subject to CMPs.

Financial Integrity and Oversight Requirements for States and State Exchanges

The Proposed Rule imposes a series of operational and reporting requirements on states and State Exchanges.  A state operating a reinsurance or risk adjustment program, for example, must submit to HHS—and make publicly available—summaries of the respective operations, and the programs also must be audited annually for financial and programmatic compliance by an independent qualifying auditing entity.  States’ reinsurance entities must account for monies received from HHS for reinsurance payments and administrative expenses, including claims for payment, payments made and incurred administrative expenses.  Records relating to the reinsurance and risk adjustment programs must be maintained for 10 years and be made available to federal authorities.  States must extend the obligation to their contractors as well.

State Exchanges similarly are subject to record retention and federal audit requirements and annual audit obligations.  They must submit various reports to HHS, including a financial statement and to-be-specified reports addressing eligibility, enrollment, performance monitoring and consumer satisfaction.  HHS also imposes auditing and reporting obligations specific to compliance with advance premium tax credit and cost-sharing reduction standards.

The Proposed Rule creates new requirements relating to privacy and security incidents and breaches for State Exchanges and “non-Exchange entities.”  For example, a one-hour reporting obligation (from discovery) for State Exchanges and non-Exchange entities associated with FFEs is imposed for “all privacy and security incidents and breaches” (as such terms are defined in the Proposed Rule and which differ from the HIPAA Security Rule definitions).  Non-Exchange entities associated with a State Exchange also must report all incidents and breaches to the applicable State Exchange, although HHS does not specify the terms of such reporting obligation.

Enhancing the Reinsurance Program’s Contributing Entity Provisions

The Proposed Rule offers several clarifying statements regarding responsibility for reinsurance contributions, in addition to imposing record retention requirements on contributing entities and Issuers offering reinsurance-eligible health insurance coverage.

Revised Definition of Contributing Entity

The definition of a “contributing entity” for the temporary reinsurance program is amended to include as a self-insured group health plan a group health plan that offers a benefit package that is partially self-funded and partially fully-insured when the insured coverage does not constitute major medical coverage (regardless of whether the self-insured coverage is major medical).  For example, a group health plan that offers a single benefit package for which the medical benefits are self-insured and the prescription drug coverage is fully-insured falls within the revised definition of a self-insured group health plan because the insured coverage is not major medical coverage.  Accordingly, the group health plan is responsible for reinsurance contributions, consistent with existing reinsurance contribution counting requirements.  The Proposed Rule further clarifies that if the insurance coverage in such a circumstance is major medical coverage, the Issuer is responsible for the contributions.

Multiple Coverage Scenarios

The Proposed Rule also allocates financial responsibility for reinsurance contributions in other scenarios involving various coverage options, including creating an exception to the general premise that an Issuer is not responsible for contributions when not offering major medical coverage.

• The Proposed Rule addresses a potential circumstance in which a group health plan offers a single benefit package that involves multiple health insurance coverages offered by more than one Issuer, none of which alone constitutes major medical coverage but the totality of which meets this threshold.  Under the general principle that an Issuer is not responsible for reinsurance contributions when it does not offer major medical coverage to a group health plan, there potentially is no “contributing entity” financially responsible for the contributions in this situation.  Accordingly, HHS creates an exception, providing that if a group health plan’s benefit package includes multiple health insurance coverages, none of which constitutes major medical coverage, and if the group health plan does not provide self-insured coverage for such covered lives (other than for excepted benefits), then the Issuer offering the largest percentage of coverage among the policies makes reinsurance contributions for such covered individuals.  The Proposed Rule sets out the bases upon which the “largest percentage of coverage” is determined, including using the average premium per covered life as a metric.

• Separately, the Proposed Rule clarifies financial responsibility for contributions when the group health plan offers more than one benefits option, at least one of which is fully-insured coverage and at least one of which is not fully-insured coverage (either because the group health plan or a non-Issuer assumes the risk).  Such a circumstance might arise if a group health plan provides a self-insured benefit package to the majority of its employees, but those employees working at a satellite facility in a separate geographic area are offered separate, fully-insured health insurance coverage (e.g., to ensure there is a sufficient provider network for the coverage).  In this instance, the Issuer is responsible for the reinsurance contributions for covered lives under the fully-insured option, while the group health plan is responsible for the reinsurance contribution associated with the coverage options that are not fully-insured.

Practical Challenges for Issuer Compliance

Issuers face several challenges for complying with federal regulations (such as coordinating the provision of summary of benefits notices) when offering fully-insured coverage to a group health plan that also makes available other coverage options (whether fully-insured, self-insured or otherwise).  These challenges, including obtaining complete and accurate information regarding the scope of coverages available under the group health plan, take on a greater significance under the temporary reinsurance program, however, because of the potential FCA risk that could arise if the Issuer knowingly or recklessly avoids a payment obligation to the federal government–a “reverse false claim.” 

Acknowledging that Issuers may not have all of the information necessary to evaluate their reinsurance contribution obligation in connection with a particular group health plan, HHS requests comments on whether it should direct Issuers to seek a representation from the group health plan sponsor regarding the relative percentage of coverage offered by the Issuer.  Furthermore, all contributing entities must maintain documents and records relating to enrollment count for 10 years so that the federal government may verify reinsurance contribution amounts.  (A similar obligation is imposed on Issuers offering reinsurance-eligible plans that request reinsurance payments under the program.) Issuers may consider whether their contracts with group health plan sponsors (and the sales agents associated with the account) should impose more expansive obligations in order for the Issuers to receive the information required to determine their reinsurance contribution payment obligations (and have continued access to such information for the 10-year period).

Clarifications and Technical Modifications for Market Reform Regulations

HHS in February 2013 finalized the health insurance market reform regulations (Market Reforms Final Rule) effective for plan and policy years beginning on and after January 1, 2014. With the Proposed Rule, HHS modifies several of the Market Reforms Final Rule requirements.

• Consistency Among the PHSA, ERISA, and the Code Definitions of Small and Large Employers: Finally addressing an issue that has proved challenging since the ACA’s enactment, HHS requests comments on what interpretations of the statute, if any, are necessary to ensure “smooth implementation” and address the inconsistency between the ACA-revised definitions of “small employer” and “large employer” in the Public Health Service Act and the corresponding definitions in the Employee Retirement Income Security Act and Internal Revenue Code, which were not so amended.

• Association Coverage: 45 C.F.R. § 144.102(c), as amended by the Market Reforms Final Rule, states that health insurance coverage offered through an association to a member that is an employer sponsoring a group health plan with fewer than two participants who are current employees on the first day of the plan year is considered individual health insurance coverage, regardless of state law.  This description does not recognize that the ACA changed the definition of “small employer” to include an employer with an average of at least one employee.  The Proposed Rule therefore modifies the description of association coverage in 45 C.F.R. § 144.102(c) in order to be consistent with the definition of “small employer” and makes corresponding changes to various definitions.

• Geographic Rating: Consistent with its April 26, 2013 guidance, HHS amends 45 C.F.R. § 147.102 to provide that geographic rating in the individual market is based on the primary policyholder’s address (regardless of the location of other individuals covered under the policy), and, in the small group market, the geographic rating is based on the group policyholder’s “principal business address.”

• Calendar Year Coverage: HHS amends 45 C.F.R. § 147.104 to provide that, effective January 1, 2015, (i) all non-grandfathered coverage in the individual market, and (ii) all non-grandfathered coverage in a market for which the individual and small group risk pools have been merged must be offered on a calendar year basis.  This revision, which HHS states was the intent of the Market Reform Final Rule, aligns the coverage year for the non-Exchange and Exchange markets and is consistent with the single risk pool provisions.  Therefore 2014 becomes a “stub year” for policies issued or renewed in these markets after January 1, 2014, so that all policies issue/renew effective January 1, 2015.  Small group markets for which the risk pool has not been merged are unaffected by this change.

• Rating Updates: HHS limits to once annually Issuers’ opportunity to modify their market-wide adjusted index rate and plan-specific pricing for individual markets and for markets in which the individual and small group risk pools are merged.  Issuers participating in the small group (only) market may make index rate and plan-specific pricing changes on an annual basis until HHS issues a notification that the Federally Facilitated Small Business Health Options Program (FF-SHOP) can process quarterly rate updates, after which adjustments may be made on a quarterly basis. The preamble to the Proposed Rule and the proposed regulatory language contain some phrasing that may cause confusion as to which Issuers would be subject to the initial annual update restriction–all Issuers offering small group coverage (regardless of whether the coverage is offered through a SHOP, and regardless of whether the SHOP is an FF-SHOP), or only QHP Issuers offering products through an FF-SHOP.  This is an area on which Issuers may request further clarification from HHS.