On April 9, 2018, the Centers for Medicare and Medicaid Services (CMS) published the Notice of Benefit and Payment Parameters for 2019 final rule (Payment Notice) and related guidance affecting the health insurance markets, including: key dates for calendar year 2018; the final 2019 Letter to Issuers in the Federally-facilitated Exchanges; guidance extending the transitional plans; and guidance creating additional hardship exemptions. This is the latest the Payment Note has been released by CMS, leaving insurers with less time than in previous years to prepare their plan offerings for the 2019 plan year.  Qualified health plan applications are due by June 20, 2018.

The Payment Notice is an annual rule that provides policies surrounding health insurance coverage in the individual and small group markets, including the Affordable Care Act (ACA) market reforms and premium stabilization programs, and provides rules regarding the Exchanges.  This Payment Notice will garner significant attention as a result of several policies implemented by the Trump administration that are expected to create headwinds for the Exchange markets for the 2019 plan year.  A proposed Department of Labor rule, which if finalized, will expand the availability of Association Health Plans (Health Law Pulse summary here); a proposed CMS, Department of Labor, and Department of Treasury rule that would expand the availability of short-term limited duration plans (Health Law Pulse summary here); and the inability of Congress to pass market stabilization legislation funding cost-sharing reductions and increasing enrollment and outreach activities, create a challenging environment for health plans heading into 2019 open enrollment.  And yet, despite attempts to repeal and replace the ACA, significant cuts to Exchange marketing, a shortened open enrollment period, and the cessation of cost-sharing reduction payments to insurers shortly before open enrollment, there was a relatively strong and consistent enrollment for 2018.  CMS recently announced that there were 11.8 million enrollments through the federal and state Exchanges during the 2018 open enrollment period. 

A CMS press release stated that the Payment Notice aims to “mitigate the harmful impacts of Obamacare and empower states to regulate their insurance market.”  Below we highlight several important policies contained in the Payment Notice.

Essential Health Benefits (EHB)

The Payment Notice will provide states with significant flexibility when designating the EHB, a plan the individual and small group markets must include.  The ACA requires health plans in the individual and small group markets to include EHB, including the following categories: 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 habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.  The Secretary of HHS is required to define the EHB, with the limitation that the EHB benchmark plan must be “equal to the scope of benefits provided under a typical employer plan”. 

Until now states could choose one of the following as a benchmark plan in their state: the largest health plan by enrollment in the three small employer products with the greatest enrollment; the three largest state employee plans with the largest enrollment; the three largest Federal Employee Health Benefits plans as determined by enrollment; or the non-Medicaid HMO with the largest enrollment.

Beginning with the 2020 plan year, a state will have much greater latitude in selecting a benchmark plan.  A state may choose from any of the benchmark plans chosen by a state for the 2017 plan year; substitute one or more of the EHB categories of benefits under the benchmark plan the state used for 2017 with the same category of benefits from another state’s benchmark plan from the 2017 plan year; or otherwise design a set of benefits to be the benchmark plan.  A benchmark plan must be equal to or greater than a typical employer plan and must not be more generous than the most generous comparison plan (the state’s 2017 benchmark plan and the three small group health plans with the largest enrollment).  This will prevent states from having such generous plans that premiums will increase, which in turn increases the size of premium tax credits.

While the ten essential benefits must still be included, this change in policy may lead to significant differences between state benchmarks.  Because many of the ACA’s reforms are tied to EHB, how states implement this policy may have a noticeable impact on consumers.  For instance, prohibitions on annual and lifetime limits, cost-sharing reductions, and the premium tax credits are tied to EHB.

Rate Review

The ACA requires states to have an effective rate review program.  CMS conducts the rate review in states without an effective rate review program.  The Payment Notice increases the threshold rate increase that triggers the requirement for an issuer to submit a narrative justification from 10 to 15 percent.  States are permitted to have a higher or a lower threshold, but will be required to receive approval from CMS to have a higher threshold.  States may set alternative rate review filing dates for issuers offering QHPs and issuers only offering non-QHPs.  Issuers must submit rate filing information by June 1, 2018 in states that do not have an effective rate review program.  In states with an effective rate review program, issuers will have until July 25, 2018.  The Payment Notice requires states to give CMS five days’ notice before publicly posting proposed and final rate increases.  Beginning July 1, 2018, student health insurance will be exempt from federal rate review requirements.  However, in states without an effective rate review program, CMS will monitor compliance with the rating reforms. 

Standardized Plans

CMS has decided to sunset the standardized plans.  Standardized plans were introduced for the 2017 plan year and provided the same benefit design, such as cost-sharing and deductible amounts.  For the 2017 and 2018 plan years standardized plans have received preferential display on healthcare.gov.  Standardized plans were meant to simplify the shopping experience for consumers, but were criticized for stifling plan innovation. 

Network Adequacy

CMS finalized a policy deferring regulation of network adequacy and essential community providers to the states for 2019 and beyond.  This finalizes indefinitely a standard introduced in the 2017 Market Stabilization final rule under which CMS will defer to states with a sufficient network adequacy review process. CMS believes this confirms “States’ traditional role in overseeing their health insurance markets” and eliminates the duplicative nature of federal and state reviews.  States with a State-based Exchange using the federal platform will no longer be required to enforce the Federally-facilitated Exchange standards.  CMS believes this will promote competition.  In the accompanying Letter to Issuers, CMS also encourages the use of telehealth to ensure consumers have access to covered services. 

Risk Adjustment

Section 1343 of the ACA created the risk adjustment program, which transfers funds from non-grandfathered plans with healthier than average enrollees to non-grandfathered plans with sicker than average enrollees in the individual and small group markets, in order to mitigate against adverse selection.  In 2019, CMS will for the first time use enrollee data to calibrate the coefficients used in the risk adjustment program.  Historically, CMS has only used Truven MarketScan data, which contains employer data.  CMS will also continue the high-cost risk pool, whereby plans with an enrollee that has costs above $1 million will receive 60% coinsurance for costs above that threshold.

To address complaints that risk adjustment transfers have been cumbersome, CMS finalized a policy that will permit state regulators to request an adjustment to risk adjustment transfers within its state.  States may request a reduction to risk adjustment transfers in the individual, small group, or merged market of up to 50 percent, beginning in 2020.  The proposed rule only contained a proposal for adjustments in the small group market.  A state’s request will need to include supporting evidence and analysis to support the need for an adjustment.  The request will need to be submitted by August 1 two calendar years prior to the beginning of the applicable benefit year.  The requests for adjustments will be published in the relevant benefit year’s Payment Notice proposed rule.

Medical Loss Ratio (MLR)

One of the often touted reforms of the ACA is requirement for insurers to spend a certain amount of premium revenue on medical claims and quality improvement activities or provide a rebate to enrollees.  The Payment Notice finalizes a proposal that will reduce the likelihood of MLR rebates to consumers in future years.  Insurers will be able to automatically account for .8% of their earned premium as quality improvement expenses, which is expected to increase the MLR for most insurers.  Additionally, a state may petition for reductions in the MLR they would require of insurers before rebates are required.  HHS will permit a state to adjust the MLR standard if the state demonstrates a likelihood that an adjustment of the 80 percent standard (in the individual market) would help to stabilize the market.  Notably, the final rule estimates that 22 states will request an adjustment and is being finalized at a time when recent analysis show improved issuer performance.

Elimination of meaningful difference standards

The Payment Notice discards the requirement that QHPs offered through an Exchange be “meaningfully different”.  In support of this policy, CMS references reduced competition through the Exchanges and believes this change in policy will encourage plan innovation and lead to greater choices for consumers.  This policy aligns with the policy finalized in the Medicare Advantage and Part D final rule published on April 2, 2018 (A Health Law Pulse summary may be found here).

The Small Business Health Options Exchange (SHOP)

The SHOP was meant to facilitate the purchase of small group coverage and level the playing field for small group purchasers.  This goal never came to fruition and the SHOP has been an afterthought in many discussions regarding the ACA’s coverage expansion.  The Payment Notice finalizes a policy that will end the federally-facilitated SHOP Exchange as an online enrollment portal.  The FF-SHOP will no longer provide premium aggregation or online enrollment functions.  The SHOP will still provide certification of qualified health plans and provide information for small group purchasers and employees, and a call center will continue to operate. 

Importantly, the FF-SHOP will also continue to provide eligibility determinations for small employers, which is necessary for eligibility to receive the Small Business Healthcare tax credit under section 45R of the Internal Revenue.  Employers will be able to obtain this determination prior to or after purchasing SHOP coverage through an agent or broker or from an insurer.  The Payment Notice also ends the ability of states to have a SHOP Exchange that uses the federal platform. 

Hardship Exemptions

CMS also released guidance creating new categories of hardship exemptions.  Section 5000A(e) provides exemptions from the requirement to maintain minimum essential coverage and grants the Secretary of HHS discretion to provide an exemption to an individual “that has suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.”  This guidance creates additional circumstances where individuals may receive a hardship exemption, including: (1) Bare counties without a QHP offered through the Exchange; (2) Counties with a single issuer offering coverage that precludes a consumer from obtaining a QHP; (3) All available plans provide abortion coverage; and (4) Personal circumstances create a hardship such as needing specialty care that is out-of-network.

Extension of the Transitional Policy 

Finally, CMS extended the transitional policy for a sixth year.  First announced on November 14, 2013, this policy allows for states to permit insurance issuers to continue to offer so-called “grandmothered plans”.  These plans were offered in the individual or small group market prior to the implementation of certain ACA market reforms on January 1, 2014 and are not compliant with ACA reforms. 

The Payment Notice and accompanying CMS guidance released on April 9 contain policies intended to promote flexibility to states.  While many of the policies are likely to achieve this goal, they are likely to further erode the uniformity in state policies initially prescribed by the ACA and its implementation.