CMS-10454 Supporting Statement - Part A final rev (2)

Supporting Statement – Part A
Disclosure of State Rating Requirements
(CMS-10454)
A. Background
The Patient Protection and Affordable Care Act, Pub. L. 111-148, was enacted on March 23,
2010; and the Health Care and Education Reconciliation Act of 2010, Pub. L. 111-152, was
enacted on March 30, 2010 (collectively known as the “Affordable Care Act”). The
Affordable Care Act reorganizes, amends, and adds to the provisions of title XXVII of the
Public Health Service Act (PHS Act) relating to group health plans and health insurance
issuers in the group and individual markets.
The final rule “Patient Protection and Affordable Care Act; Health Insurance Market Rules;
Rate Review” implements important consumer protections included in sections 2701, 2702,
and 2703 of the PHS Act, as added and amended by the Affordable Care Act, and sections
1302(e) and 1312(c) of the Affordable Care Act.
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 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. The final rule
standardizes 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 and
allows flexibility for states when it comes to certain aspects of family, tobacco, age,
geography, and small group rating. The final rule requires health insurance issuers in a
market in a state to use a uniform age rating curve. A default uniform age curve established
by CMS will apply in a state, unless a state adopts a different uniform age curve. A state
may also elect to have narrower age rating ratio than 3:1 and a narrower tobacco use rating
ratio than 1.5: 1. PHS Act section 2701(a)(2) requires a state to establish one or more rating
areas within that state. In the event that a state does not establish rating areas consistent with
the standards, the default will be one rating area for each metropolitan statistical area (MSA)
and one rating areas comprising all non-MSAs of the state. In addition, the final rule permits
a state to require issuers to use a standard family tier methodology if the state requires pure
community rating, without any adjustments for age or tobacco use. These rules will apply to
the large group market, if, beginning in 2017, a state permits large issuers that offer coverage
in the large group market in the state to offer such coverage through the Exchange pursuant
to section 1312(f)(2)(B) of the Affordable Care Act. The final rule also requires that issuers
calculate rates for employee and dependent coverage in the small group market on a permember basis, in the same manner that they calculate rates for persons in the individual
market, and then calculate the group premium by totaling the premiums attributable to each
covered individual. However, a state may require issuers to offer to a group premiums that
are based on average enrollee amounts, provided that the total group premium equals the
premium that would be derived through the per-member-rating approach.

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Section 1312(c) of the Affordable Care Act provides 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. A state may also elect to merge its individual and small group market
risk pools.
B. Justification
1.

Need and Legal Basis
Statutory Basis: Section 2701 of the PHS Act, as amended by the Affordable Care Act.
This section requires health insurance issuers to limit premium variation in the individual
and small group markets (and, if a state elects, the large group market starting in 2017) to
certain factors (i.e., age, tobacco use, geography, and family size). In addition, this section
applies in conjunction with section 1312(c) of the Affordable Care Act, which requires
issuers to develop premiums based on a single risk pool in the individual and small group
markets.
States will be permitted under section 2701 to establish state-specific rules relating to age
rating ratios for adults that are less than 3:1, age curves applying the relevant age factors,
tobacco use rating ratios that are less than 1.5:1, geographic rating areas, and, in conjunction
with pure community rating, family tier structures and corresponding multipliers. States also
will be able to merge their individual and small group market risk pools and require
premiums to be based on average enrollee amounts in the small group market. CMS will
need information on the state application of these factors in their individual and small group
markets in order to determine whether state-specific rules or Federal default rules apply.
CMS will also need this information in order to accurately implement the risk adjustment
provisions of section 1343 of the Affordable Care Act for health plans in the states.
Accordingly, states will need to disclose to CMS the rating factors and requirements
applicable to their individual and small group markets.

2.

Information Users
CMS will use the information on state rating requirements to determine whether statespecific rules Federal default rules apply and to accurately implement the risk adjustment
methodology for health plans in the states.

3.

Use of Information Technology
States are expected to submit rating information to CMS electronically.

4.

Duplication of Efforts
This is the first time such disclosures have been required, so there is no duplication of
efforts.

5.

Small Businesses
Small businesses are not affected by this collection.
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6.

Less Frequent Collection
If states do not submit information to CMS on the application of state rating and risk pooling
standards, CMS will not be able to determine whether state-specific rules or Federal default
rules apply. CMS will also not be able to accurately implement the federal risk adjustment
methodology for health plans in the states.

7.

Special Circumstances
There are no special circumstances.

8.

Federal Register/Outside Consultation
The 60-day Federal Register notice was published as part of a notice of proposed rulemaking
on November 26, 2012 (77 FR 70584).
CMS received a comment from one state indicating that it would submit rating information
and one state commented on the cost of establishing its own age rating curve and geographic
rating areas.

9.

Payments/Gifts to Respondents
No payments or gifts are associated with these ICRs.

10. Confidentiality
CMS will protect privacy of the information provided to the extent provided by law.
11. Sensitive Questions
These ICRs involve no sensitive questions.
12. Burden Estimates (Hours & Wages)
States are required to provide to CMS information on their rating ratios for age and tobacco
use, geographical rating areas, age rating curves, and family tier structures, as applicable.
They are also required to submit information to CMS if they require premiums to be based
on average enrollee amounts in the small group market and if they require merger of
individual and small group market risk pools. The burden associated with this requirement
is the time involved for states to provide to CMS information on the rating factors and
requirements applicable to their small group and individual markets. The burden estimates
have been updated based on experience. During 2013, 48 states and territories submitted
information on one or more rating factors. We expect the burden to be much lower in future
years since states only need to inform CMS of any changes in their rating requirements. We
generally used data from the Bureau of Labor Statistics to derive average labor costs
(including fringe benefits) for estimating the costs associated with the ICRs. We assume
that the reports are prepared by clerical staff (at a cost of $30.64 per hour) and are reviewed
by a senior manager (at a cost of approximately $64.75 per hour) prior to submission to
CMS.

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If a state adopts narrower rating ratios for age or tobacco use, or chooses to merge their
individual and small group market risk pools, the state will inform CMS. We estimate that it
will take 20 minutes for a state to prepare and submit a report to CMS for each of these
disclosures. The total burden for 8 states reporting age rating ratios, 12 state reporting
tobacco rating ratios and 4 states reporting merging of risk pools is estimated to be 8 hours at
a total cost of approximately $245.
This final rule provides that a state’s rating areas must be based on the geographic divisions
of counties, three-digit zip codes, or MSAs and non-MSAs and will be presumed adequate if
either of the following conditions are met: (1) As of January 1, 2013, the state had
established by law, rule, regulation, bulletin, or other executive action uniform geographic
rating areas for the entire state; or (2) After January 1, 2013, the state establishes by law,
rule, regulation, bulletin, or other executive action for the entire state no more geographic
rating areas than the number of MSAs in the state plus one. We anticipate that states that
currently have geographic rating areas will retain them. For states that establish rating areas,
we estimate that it will take one hour for a state to prepare and submit a report to CMS on its
geographical rating areas. In 2013, total burden for 42 states submitting reports on rating
areas is estimated to be 42 hours at a total cost of approximately $1,287.
If a state develops an age rating curve, the state will report the state’s age rating curve to
CMS. HHS’s default standard age rating curve will apply in most states, only 5 states
reported having a different age curve. For states that designate their own curve, we estimate
that it will take three hours for each state to prepare and submit a report on its age rating
curve. The total burden for 5 states submitting reports on age rating curves is 15 hours at a
total cost of approximately $460.
If a state is community rated and designates a uniform family tier structure with
corresponding multipliers, the state will report family tier structure information to CMS. We
estimate it will take one hour to prepare and submit a report to CMS. The total burden for 5
states reporting family tier structure information is estimated to be 5 hours, at a total cost of
approximately $153.
If a state requires premiums in the small group market to be based on average enrollee
amounts, it will submit that information to CMS. We estimate that it will take one hour for
a state to prepare and submit the report on small group market premiums to CMS. The total
burden for 10 states submitting reports on small group market premiums is estimated to be
10 hours at a total cost of approximately $306.
We assume that each report will be reviewed by a senior manager prior to submission to
CMS and that it will take approximately one hour to review all reports, if a state needs to
prepare and submit information in all of these areas. In total, the estimated burden for
management review of all disclosures from 48 states and territories is estimated to be 48
hours at a total cost of approximately $3,108.

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Table 12.1 Estimated Annualized Burden Hours for Disclosure of State Rating
Requirements

Forms
(if necessary)

Type of
Respondent

Number of
Respondents

Estimated
Burden
Hours per
response

Total
Estimated
Burden
Hours

Wage per
Hour
(including
fringe)

Total
Estimated
Cost

Disclosure of Age
Rating Curve

State
Government

5

3

15

$30.64

$460

Disclosure of
Geographical
Rating Areas

State
Government

42

1

42

$30.64

$1287

Disclosure of
Family Tier
Structure

State
Government

5

1

5

$30.64

$153

Disclosure of
Small Group
Market Premiums

State
Government

10

1

10

$30.64

$306

Disclosure of Age
Rating Ratio

State
Government

8

0.33

2.6

$30.64

$82

Disclosure of
Tobacco Rating
Ratio

State
Government

12

0.33

4

$30.64

$123

State
Government

4

0.33

1.3

$30.64

$41

State
Government

48

1

48

$64.75

$3,108

Disclosure of
Merged Individual
and Small Group
Market Risk Pools
Management
Review (of all
reports)
Total

48

1284

$5,559

We expect that states that already have established a narrower age or tobacco rating ratio, family
tier structure and requirements for small group market premiums to be based on average enrollee
amounts, will retain them and simply incur the burden of reporting them. Based on our
interactions with state officials and review of publicly available studies prepared by actuarial
firms on the impact of the Affordable Care Act on the health insurance market in various states,
we believe that many states have already studied the issue of merging their individual and small
group market risk pools and will only incur the burden of reporting.
Only 5 states established their own age rating curve and 42 states established geographical rating
areas and incurred related administrative costs. If a state chooses to establish its own age rating
curve, it is likely to engage an actuarial consultant. We estimate that it will require
approximately 100 hours of effort by an actuary (at a cost of $225 per hour) and 23 hours of
combined labor by state actuaries (10 hours at a cost of approximately $50 per hour) and senior
management (13 hours at a cost of approximately $65 an hour) to establish an age curve.
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The total burden for one state will be 123 hours and approximately $23,845. The estimated
burden for 5 states will is 615 hours at a cost of approximately $119,226.
If a state chooses to establish geographic rating areas, if they haven’t already done so, staff
actuaries are likely to conduct an analysis and prepare a report for management (30 hours at a
cost of approximately $50 per hour) and senior management will review the reports and make a
decision (2 hours at a cost of approximately $65 an hour). The total burden for one state would
be 32 hours and approximately $1,640. The estimated burden for 42 states is 1,344 hours at a
cost of approximately $68,867.
Table 12.2 Estimated One-time Burden Hours for Establishing State-specific Age Rating Curve
and Geographical Rating Area

Forms
(if necessary)
Age Rating
Curve
Geographical
Rating Area

Type of
Respondent
State
Government
State
Government

Total
Estimated
Burden
Hours

Average
Wage per
Hour
(including
fringe)

Total Cost
for all
Respondents

Number of
Respondents

Estimated
Burden
Hours per
respondent

5

123

615

$194

$119,226

42

32

1,344

$51

$68,867

13. Capital Costs
States are not expected to incur capital costs to fulfill these requirements.
14. Cost to Federal Government
CMS staff is expected to review the rating information submitted by states. We anticipate
that a reviewer will need 4 hours to review each submission from a state, if the submission
includes all seven disclosures.
Table 14.1 Estimated Cost to Federal Government
Type of
Federal
Employee
Support

Burden
Hours per
Review

Total
Number of
reviews

Total hours

Review of
state rating
information

4

48

192

Hourly Wage
Rate (GS 14
equivalent) –
(includes
fringe)
$72

Total Federal
Government
Costs

$13,824

Salaries are based on a 14 Grade/Step 1 in the Washington DC area with a benefit allowance
for a total annual salary of $150,000.

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15. Changes to Burden
Not applicable.
16. Publication/Tabulation Dates
There are no publication or tabulation dates associated with these ICRs.
17. Expiration Date
There is no expiration date for this collection requirement.
18. Certification Statement
There are no exceptions to the certification.

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