On November 20th, the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services (DHHS) issued three proposed rules as part of the ongoing implementation of the Affordable Care Act (ACA): one addressing how insurers can vary premiums based on certain rating factors (age, tobacco use, family size and geography); a second defining essential health benefits; and a third governing employer-based wellness programs. These proposed rules impact small group and individual insurance plans and will be effective for plan years starting on or after January 1, 2014.

Health Insurance Market Reforms

The first proposed rule1 implements provisions of the ACA that requires insurers to accept all applicants — including those with pre-existing health conditions — and prohibits them from charging higher rates based on health status, gender or occupation. Insurance companies would be permitted to vary premiums within limits, based only on age (within a 3:1 ratio for adults), tobacco use (within a 1.5:1 ratio and subject to wellness program requirements in the small group market), family size and geography. The proposed rule would prohibit insurers from varying premium rates by age for individuals under age 21, but insurers may charge slightly more each year until a person turns 63, at which point all individuals would be charged the same rate. In addition, starting in 2017, states may permit large employers to purchase coverage through health insurance exchanges, subject to proposed rating rules.

Additionally, health insurance issuers would be required to maintain a single statewide risk pool for each of their individual and small employer markets (unless the state chooses to merge the pools). Premiums and annual rate changes would be based on the health risk of the entire pool. Also, the rule calls for a catastrophic plan in the individual market for young adults (under age 30) and people who cannot afford minimum essential coverage.

The proposed rule also makes changes to the Effective Rate Review Program (the Program). The Program currently requires issuers to submit proposed rate increases of 10 percent or more for review. The proposed rule modifies the Program by adding a reporting threshold for rate increases. The 10 percent review threshold would continue to be the required threshold for reviewing rates for reasonableness; increases of less than 10 percent would be reported to CMS and to the states, but not otherwise subject to review.

Comments on the proposed rule are due by December 26, 2012.

Essential Health Benefits

The second proposed rule2 defines “essential health benefits” (EHB) as 10 categories of items and services that are required to be covered by all non-grandfathered individual and small group health insurers. Specifically, insurers would be required to cover the following as EHBs:

  • Ambulatory patient services
  • Emergency services
  • Hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder services, including behavioral health treatment
  • Prescription drugs
  • Rehabilitative and habilitation services and devices
  • Laboratory services
  • Preventive and wellness services and chronic disease management
  • Pediatric services, including oral and vision care, up to age 19

The ACA requires that the scope of the EHBs be substantially equal to the scope of benefits provided under a typical employer plan. The proposed rule requires each state to choose as a “benchmark” a plan comprising average benefits offered by employers in the state. Insurers would be required to provide plan benefits substantially equal to the covered benefits and limitations on coverage provided under the benchmark plan, including the coverage of benefit amount, duration and scope. States must select one of the following as its benchmark plan: one of the three largest small group plans3 by enrollment; one of the three largest state employee health plans by enrollment; one of the three largest federal employee health plan options by enrollment; or the largest HMO plan by enrollment. The proposed rule also clarifies that in the event a state does not make a selection, DHHS will select as the default benchmark the largest small group plan in the state.

If the benchmark plan does not include any of the 10 EHBs, the state or DHHS will supplement the benchmark plan in that category. The most common EHBs that may not be covered by a benchmark plan are pediatric dental and pediatric vision care. These categories may be supplemented with pediatric coverage included in the Federal Employees’ Dental and Vision Insurance Program (FEDVIP) with the largest national enrollment or from the state’s CHIP program. If a selected benchmark plan does not include one or more of the other EHB categories, the state may supplement the plan by adding the entire category of such benefits offered under any other base benchmark plan.

Beginning in 2014, non-grandfathered health plans in the individual and small group markets would be required to meet certain actuarial values (AVs) or “metal” levels: 60 percent for a bronze plan; 70 percent for a silver plan; 80 percent for a gold plan; and 90 percent for a platinum plan. The AV is defined as the percentage of total average costs for covered benefits that a plan will cover. In addition, issuers may offer catastrophiconly coverage with lower AV for eligible individuals. The metal level system is intended to allow consumers to compare plans with similar levels of coverage. The proposed rule permits insurers to exceed the annual deductible limits in the small group market in order to achieve a particular metal level.

Comments on the proposed rule are due by December 26, 2012.

Wellness Programs

DHHS, together with the Department of Labor and the Treasury, jointly released the proposed rule4 on employer wellness programs. The proposed rule would raise the maximum permissible award that employers can provide to employees who participate in wellness programs from 20 percent to 30 percent of the employee’s health coverage costs, and for workers who enroll in smoking cessation programs the maximum reward increases to 50 percent of coverage costs.

Wellness programs must be reasonably designed to promote health or prevent disease and also must have a reasonable chance of improving health or preventing disease and not be overly burdensome for individuals. The proposed rule does not specify the types of wellness programs employers can offer.

Comments on the proposed rule are due by January 25, 2013.

Next Steps

DHHS has solicited comments regarding many proposals posed in the rules, which could lead to modifications. Moreover, the administration has yet to issue regulations on other portions of the Affordable Care Act, including how new taxes on premiums and medical devices will work, and how the federal government will set up insurance markets in states that choose to do it on their own. Additional provisions of the Affordable Care Act will be phased in beginning in 2013, including increased Medicaid payments for primary care physicians, reductions in hospital DRG payments by one percent, annual excise taxes on health insurers and the start of the national Medicare Bundled Payment Pilot Program.