Final 2023 Payment Rule, Part 1: Essential Health Benefits And Other Market Reforms

On April 28, 2022, the U.S. Department of Health and Human Services (HHS) posted the final 2023 Notice of Benefit and Payment Parameters alongside a press release, a fact sheet, the final actuarial value calculator and methodology, the final letter to issuers, a final quality rating system information bulletin, and 2023 application materials for qualified health plans (QHPs).

The final rule touches on a range of topics, including a requirement that insurers offer standardized plans, new federal network adequacy standards, heightened standards for the inclusion of essential community providers in provider networks, a framework for discriminatory benefit design, clarification of medical loss ratio (MLR) calculations, user fees, risk adjustment, and more.

The final rule is quite similar to the proposed rule; HHS finalized many, although not all, of the proposed rule’s most significant changes. Most notably, HHS did not adopt changes that would have explicitly barred discrimination on the basis of sexual orientation and gender identity in benefit design (and the implementation of benefit design), in insurer marketing practices, by qualified health plans, and by states and exchanges. As discussed more below, HHS reiterates its commitment to nondiscrimination against LGBTQ people but defers finalizing these provisions to future rulemaking on Section 1557 of the Affordable Care Act (ACA).

This article addresses changes to the regulations implementing the market reforms enacted in the ACA. This includes EHB-related requirements, discriminatory benefit design, the repayment of past due premiums, and MLR changes. These provisions generally apply to coverage offered both inside and outside of the exchanges and extend, in limited instances, to coverage in the large group market. A second article will summarize the changes that are specific to the exchanges, and a third article will discuss changes to the risk adjustment program.

Brief Background

The payment rule is issued on an annual basis to adopt major changes for the next plan year. This is the Biden administration’s first full payment notice and generally addresses changes for the 2023 plan year. The 2023 payment rule builds on a June 2021 rule from HHS and the Department of the Treasury. That rule largely reversed the regulatory changes adopted in January 2021, such as allowing states to transition away from The June 2021 rule also extended the duration of the annual open enrollment period, eliminated the “double billing” rule for certain abortion services, and created a new monthly special enrollment period for low-income consumers.

Historically, the payment rule has been issued in the fall and finalized in early spring to give insurers, states, and other stakeholders time to understand and adjust to the rules for the next year. The timeline here is tight. The proposed rule was released on December 28, 2021, comments were due on January 27, 2022, and the final rule was released on April 28, 2022. In terms of timing, this is the second latest-ever final payment rule. (The prior record for the latest proposed rule was the 2021 payment rule, which was finalized on May 7, 2020.)

Even with the quick turnaround, insurers must still submit their 2023 QHPs to HHS by June 15, 2022 for approval s. HHS is also maintaining its “early bird” application option, with QHP applications due on May 18, 2022 under that option. Proposed rates in most states are due by July 20, 2022.

LGBTQ Nondiscrimination Protections

Current federal rules prohibit discrimination on a range of bases in benefit design and marketing practices, as well as by plans, states, and exchanges. These same rules explicitly barred discrimination on the basis of sexual orientation and gender identity—until a 2020 rule on Section 1557 that eliminated these protections for LGBTQ people. (Section 1557 is the ACA’s primary nondiscrimination statute and enforced by the HHS Office for Civil Rights.)

The proposed 2023 payment notice would have restored these prior references to nondiscrimination based on sexual orientation and gender identity to ensure that LGBTQ people are explicitly protected from discrimination by exchanges, states, insurers, and agents and brokers. HHS had noted that these nondiscrimination provisions are consistent with, but independent of, Section 1557.

In the proposed rule, HHS cited an executive order on LGBTQ nondiscrimination signed by President Biden in January 2021 and an announcement from the HHS Office for Civil Rights that it will interpret and enforce Section 1557 in a way that is consistent with the Supreme Court’s decision in Bostock v. Clayton County. The preamble also noted that nondiscrimination protections are warranted to address the barriers that LGBTQ people face in accessing health care.

But, in a shift from the proposed rule, HHS declines to finalize these changes (as well as an example of discriminatory benefit design related to gender-affirming care, which is discussed in more detail below). HHS remains committed to civil rights protections, including for LGBTQ people, but believes that the proposed changes should be deferred to a separate rule to implement Section 1557 of the ACA, which will more broadly address issues related to sex discrimination. HHS will address the proposed nondiscrimination policies and public comments in this future rule.

This rule could come soon: a proposed rule on Section 1557 is currently under review at the Office of Management and Budget, and HHS has previously told courts to expect the rule in April 2022. HHS also reminds entities that are already covered by Section 1557 that they should be complying with nondiscrimination requirements, including HHS’s interpretation that sex discrimination under Section 1557 includes sexual orientation and gender identity.

Essential Health Benefits Requirements

HHS adopts important but relatively narrow changes to EHB requirements. In general, HHS maintains the flexibility given to states by the Trump administration while eliminating some policies of particular concern and refocusing on discriminatory benefit design. The final rule standardizes the deadline for states to request changes to their EHB benchmark plan, prohibits insurers from substituting benefits between EHB categories, eliminates annual reporting of state-mandated benefits, and provides additional clarity on plan features that constitute discriminatory benefit design under the ACA.

EHB Benchmark Plan Selection Process

HHS adopts a permanent deadline for states to request amendments to their EHB benchmark plan. Beginning with the 2020 plan year, the Trump administration gave states a significant amount of flexibility to choose from among many more EHB benchmark plan options on an annual basis. States could also choose to allow for benefit substitution between EHB benefit categories. As discussed here, very few states have made changes to their EHB benchmark plans thus far, and where they have, it has been to enhance benefits. Colorado, for instance, recently received approval to amend its EHB benchmark plan to affirm and clarify the coverage of gender-affirming care for transgender people.

To take advantage of these options, states must opt into the changes by informing HHS of them far in advance. For instance, the 2022 payment notice required states that wanted to make these changes for the 2024 plan year to inform HHS by May 6, 2022. HHS proposed and then finalized a deadline for this reporting in each annual payment notice.

In the final 2023 payment notice, HHS adopts a consistent, permanent deadline (so it will no longer need to propose and then finalize deadlines each year). Going forward, to take advantage of the option to change the EHB-benchmark plan, states must submit documentation by the first Wednesday in May of the year that is two years before the effective date when the EHB changes would go into effect. Thus, the deadline for the 2025 plan year will be May 3, 2023, while the deadline for the 2026 plan year will be May 4, 2024. The early May deadline has historically provided states and insurers with enough time to submit this information.

All commenters supported this change to help make the process more predictable for states and stakeholders. Some commenters urged HHS to strengthen the transparency of the public comment process for EHB benchmark changes and identify best practices for states in benchmark plan selection. HHS dismissed these comments as beyond the scope of the proposed rule but may consider these suggestions ahead of future guidance or proposals.

No More Cross-Category Benefit Substitution

HHS eliminates the option for states to allow benefit substitution between EHB categories. No state has requested this option or even approached HHS about a proposal to do so. This lack of utilization—and concerns that this kind of benefit substitution could harm those with chronic conditions and disabilities—led HHS to eliminate this option. This change does not disturb the flexibility that insurers have to substitute benefits within EHB categories unless barred from doing so by state regulators.

A majority of commenters supported this proposal in light of potential harm to consumers. Some raised additional concerns about benefit substitution, urging HHS to also bar benefit substitution within EHB categories. These comments were beyond the scope of the proposed rule.

No More Annual Reporting Of State-Required Benefits

HHS eliminates a policy adopted in the 2021 payment notice that required states to submit an annual report on state benefit mandates that exceed the EHB. At the time, HHS believed that reporting was necessary to ensure compliance with a part of the ACA that requires states to defray the cost of a state-mandated benefit that exceeds the EHB. Under the existing policy, states would have to submit an annual report that identifies state-mandated benefits that apply in the individual and small group markets and that exceed EHB. The initial reporting deadline was July 1, 2021, but the Biden administration opted not to enforce this requirement for 2021 and announced that it would begin enforcing this requirement beginning with the report due on July 1, 2022.

Now, in the final 2023 payment notice, HHS eliminates this annual reporting requirement altogether. HHS cites “consistent feedback from states and stakeholders” that echo commenter concerns raised about this requirement. Indeed, most commenters on the 2021 payment notice objected to the new reporting requirement as unnecessary, unjustified, administratively burdensome, and disruptive. Others noted that federal officials had provided little guidance on how to determine if a benefit exceeded EHB and that there was insufficient evidence to justify the new policy.

HHS cites these same concerns in eliminating the requirement altogether, noting that a majority of commenters supported repealing the annual reporting requirement. States already make careful assessments about whether their mandated benefits exceed EHB, and federal officials have existing authority to investigate instances of potential noncompliance with the defrayal policy. Though some commenters argued that the policy was needed to promote transparency and limit federal expenditures, HHS believes there are other “more targeted” ways to achieve compliance without requiring all states to submit detailed annual reports. States remain responsible for identifying state-required mandates that exceed EHB and require defrayal but no longer need to submit an annual report.

Federal officials intend to continue providing technical assistance to states regarding EHB and defrayal requirements—and commit to providing written technical assistance to help clarify the defrayal policy. This was supported by a majority of commenters, including those opposed to repealing the reporting requirement. Those commenters encouraged HHS to set standards (including requirements for actuarial analysis) to determine if a benefit exceeds EHB.

Clarifying The Ban On Discriminatory Benefit Design

A Brief History

As noted above, existing regulations prohibit insurers from discriminating on the basis of race, color, national origin, disability, age, or sex. Some rules also bar benefit designs that discriminate on the basis of factors such as quality of life or a person’s degree of medical dependency. These rules are broad and help ensure that enrollees can access the medically necessary care they need.

But there has been little guidance to help insurers, states, and other stakeholders understand how to implement these requirements. Colleagues and I analyzed the challenges with implementing the ACA’s nondiscrimination protections as early as 2013. Our findings suggested that stakeholders struggled to articulate a standard for discriminatory benefit design, that few had changed their approach despite the ACA’s new requirements, and that federal guidance with clear examples of discrimination would be key. Discriminatory benefit design was also likely exacerbated by HHS’s decision to allow states to design EHB benchmark plans based on existing pre-ACA plans.

In 2015, the preamble to the 2016 payment notice identified some examples of potentially discriminatory practices, such as placing most or all drugs to treat a specific condition on the highest cost-sharing tier or trying to exclude adults from accessing a needed service by labeling the benefit a “pediatric service.” There had been little additional guidance or direction since that rule was issued.

2023 Final Payment Rule

In the final 2023 payment rule, HHS requires EHB benefit design—including plan limits and coverage requirements—to be based on clinical evidence in order to be nondiscriminatory. In general, an insurer should be able to rebut a presumption of discriminatory plan design by demonstrating that such plan designs are clinically based. This is a shift with the goal of ensuring more uniform coverage of benefits so that enrollees have more equal access to medically necessary care across different plans and insurers. HHS also finalized all but one of its examples of presumptively discriminatory benefit design.

As proposed, these standards would have gone into effect 60 days after publication of the final rule. However, in response to concerns from commenters, this policy will go into effect beginning on the earlier of January 1, 2023, or renewal of a plan subject to this standard (i.e., those that offer coverage in the individual and small group markets). Although HHS expects that insurers are already in compliance with federal nondiscrimination standards, the delay to the next plan year will give insurers more time to comply with the refined policy.

HHS did not finalize the entire policy as it was proposed. In the proposed 2023 payment notice, HHS would have gone further to require plan design to incorporate evidence-based guidelines into coverage and programmatic decisions and rely on current and relevant peer-reviewed medical journal articles, practice guidelines, recommendations from reputable governing bodies, or similar sources. HHS also declines to describe and identify examples of evidence-based guidelines (versus unscientific sources) or require insurers to use a standard of care but emphasizes that insurers cannot justify a discriminatory policy based on unscientific evidence or disreputable sources. HHS declined to finalize these components of the proposed rule based on feedback from commenters, noting that requiring benefit design to be clinically based should be sufficient to protect consumers from discrimination.

The Details

HHS emphasizes that the final rule clarifies and affirms existing requirements without significant substantive changes. Consistent with the proposed rule, the source of the discriminatory benefit design is immaterial, and an insurer cannot justify its discriminatory policy by pointing to the state’s EHB-benchmark or a state benefit mandate (when the mandate is for an EHB service or benefit). This is not new. Prior regulations and guidance have made clear that insurers are ultimately responsible for altering otherwise discriminatory benefit designs or justifying their policies with clinical evidence.

That said, HHS makes clear that plans can impose limits that might otherwise be discriminatory if doing so complies with federal coverage requirements. Here, HHS cites the example of preventive services recommended by the U.S. Preventive Services Task Force; these recommendations often include age limits (such as screening for colorectal cancer beginning at age 45). A plan design that reflects federal coverage limits will not be considered discriminatory. (While this might appear to back away from the standard HHS otherwise set, it is worth noting that recommendations from the U.S. Preventive Services Task Force and other similar bodies are, by definition, based on clinical evidence. This is in contrast to state benefit mandates that are not typically subject to the same rigorous process or evidence base.)

HHS also provides some additional clarifications. The nondiscrimination policy applies only to EHB services; plans are not required to cover new services that are not already covered as EHB or cover any and all medically necessary services. And plans can continue to use reasonable medical management to adopt coverage guidelines and standards. HHS also recognizes that some clinical evidence standards and practice guidelines may themselves be discriminatory due to embedded systemic racism and bias. Requiring plan design to be based on clinical evidence, on its own, will not fully address this racism or bias in medical research, and HHS expects insurers and states to evaluate clinical evidence while approving policy forms and issuing guidance. Nothing in the rule requires health care professionals to perform outside of their specialty area or scope of practice.

States can, but do not have to, revise their EHB-benchmark plan or state benefit mandates, formally update their EHB-benchmark plan, or issue guidance regarding discriminatory benefit design that stems from an EHB-benchmark plan or mandated benefit. However, states that opt to change their EHB-benchmark plans in the future should ensure that new EHB-benchmark plans themselves are not discriminatory. Federal officials also intend to monitor how EHB are delivered and whether insurers are incentivizing certain methods of delivery (e.g., telehealth) to ensure that the service delivery model does not inadvertently result in discrimination. The preamble explains that it is not, in HHS’s view, discriminatory to cover telehealth services with no copay while requiring a copay for an in-person visit. HHS is also considering the development of new tools to help detect discriminatory practices.

Finally, HHS included several examples in the proposed rule to illustrate its approach and identify presumptively discriminatory practices that violate the ACA. With one exception noted below, HHS finalized these examples from the proposed rule with some clarifications. Though urged to include additional examples of presumptively discriminatory benefit design, HHS declined to do so and emphasized that its list of examples is non-exhaustive.

As one example, insurers should not limit access to medically necessary services to only individuals under a certain age (e.g., hearing aid coverage only for those up to age 6 or age 21 or autism spectrum disorder interventions up to age 18) when age restrictions lack a clinical basis. Plan designs can be limited to pediatric enrollees (rather than available to both pediatric and adult enrollees) without being discriminatory because the ACA specifically requires the coverage of pediatric services. But other age-based limits must be based on clinical evidence. Age restrictions on infertility treatment are presumptively discriminatory if the services would be clinically effective for the affected age group. Insurers cannot not limit the coverage of routine foot care only to certain diagnoses (i.e., only for the treatment of diabetes) since such care is also clinically indicated to treat other conditions, such as neurologic disease.

Adverse tiering—when an insurer puts all or most drugs for certain medical conditions on the highest formulary tier to discourage enrollment by those with that condition—is presumptively discriminatory if without clinical justification. HHS notes that it has long held this position on adverse tiering; the new example merely clarifies and affirms this position. In assessing whether a plan design is discriminatory, HHS and states should consider the totality of the circumstances. Relevant factors might include whether the insurer used neutral principles to assign tiers to drugs and applied those principles across drug types. Insurers can consider the cost of prescription drugs but cannot rely on cost alone to defend discriminatory plan design.

HHS did not finalize a proposed example of presumptively discriminatory practices related to gender identity and will instead address this issue in a forthcoming rule to interpret Section 1557. As proposed, benefit designs that restrict coverage based on a person’s gender identity would be presumptively discriminatory since clinical evidence supports the coverage of medically necessary gender-affirming care for transgender people. That said, the example based on routine foot care is analogous: insurers should not limit the coverage of medically necessary services (e.g., hysterectomy) only to certain diagnoses (i.e., only for the treatment of cancer) since such care is also clinically indicated for transgender people to treat a diagnosis of gender dysphoria.

Actuarial Value And De Minimis Variation

Insurers that offer coverage in the individual and small group markets must comply with actuarial value requirements of 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. Under the ACA, HHS has flexibility to allow de minimis variation in actuarial value to account for differences in actuarial estimates. As a result, metal level plans must satisfy their specified actuarial value level within an allowable de minimis variation. Federal officials initially allowed a de minimis variation of 2 percentage points, but this amount was revised to +5/-4 percentage points for certain bronze plans and then to +2/-4 percentage points for all plans.

This flexibility has increased the percentage of bronze plans being offered on with actuarial values in the upper end of the de minimis range (meaning an actuarial value between 64 and 65 percent) while about one-third of silver plans are consistently in the lower end of the de minimis range (meaning an actuarial value between 66 and 68 percent). Because their actuarial values are similar, HHS is concerned that consumers are unable to distinguish between these different types of plans even though there are significant differences in cost sharing between the plan types.

To help minimize consumer confusion, HHS changes the de minimis ranges to +2/-2 percentage points for individual and small group market plans that must comply with EHB requirements. States will be responsible for enforcing these requirements but cannot apply an actuarial value range that exceeds the +2/-2 percentage point de minimis range (except for expanded bronze plans).

This is designed to ensure a more uniform approach, with a few exceptions designed to be more protective of consumers. First, the de minimis range for expanded bronze plans will remain more flexible but be changed to +5/-2 percentage points. Second, as a condition of QHP certification, insurers must agree to limit the de minimis range for individual market silver QHPs to +2/0 percentage points. Third, income-based silver CSR plan variations will be limited to a de minimis range of +1/0 percentage points. The latter two policies are designed to maximize marketplace subsidies for enrollees that qualify.

HHS expects that the policy will lead to slight premium increases for some plans—about 2 percent on average—but that this premium increase should be offset by an increase in premium tax credits. Premium tax credits are estimated to increase by $730 million in 2023, $770 million in 2024, $770 million in 2025, and $760 million in 2026 as a result of this change.

Comments on this proposal were mixed. HHS confirms that insurers can modify their plans at renewal so long as the revision is made uniformly and within a reasonable time period. This means insurers can adjust (rather than discontinue) plans that used the prior de minimis ranges, which will minimize disruption for consumers. Commenters also urged HHS to limit these changes to the individual market (i.e., not extend the de minimis shifts to the small group market), noting that there have not been similar shifts in small group enrollment by metal level, the policy will result in premium increases, and there is not similar pressure on the employees of small employers to select among competing plans. HHS acknowledged these concerns but believes that the benefits of this policy outweigh any small premium changes in the small group market that might result.

Repayment Of Past Due Premiums

HHS eliminates a policy that allows insurers to refuse to enroll an applicant in a new plan if the consumer fails to pay outstanding premium debt from the prior year. This change was not unexpected: HHS suggested it might revisit this policy in a rule finalized in June 2021, citing President Biden’s executive order on the ACA and the need to remove unnecessary barriers to enrollment in individual market coverage.

HHS additionally cites its own internal analysis and survey data showing that 36 percent of insured adults reported concerns about being able to afford monthly premiums. HHS’s own data suggests that about 7.8 percent of federal exchange enrollees had their coverage terminated in 2020 for nonpayment of premiums. This percentage was even higher in prior years: 10.7 percent in 2019, 12.4 percent in 2018, and 17.3 percent in 2017. (The level might have been lower in 2020 given pandemic-related policies such as premium credits.) Many of these individuals could have been locked out of coverage.

The prior interpretation was adopted in the market stabilization rule in 2017 and allowed insurers to lock consumers out of coverage that would otherwise be available during open and special enrollment periods if they cannot pay past-due premiums. This interpretation was a shift from prior rules, when the Obama administration interpreted the ACA’s guaranteed issue requirement to bar an insurer from requiring payment for past-due premiums before effectuating new coverage in a different product. Insurers could pursue collection for past-due premiums but could not condition new coverage on payment of the amount due.

In the final 2023 payment rule, HHS returns to the original policy and confirms that this interpretation applies to both the individual and group markets. HHS revised the rule in response to concerns that the policy creates barriers to coverage and is inconsistent with the ACA’s provision on guaranteed issue. The disparate negative impact of this policy on low-income people now outweighs any possible deterrent effect on those who might want to game the ACA’s guaranteed issue requirements.

Many commenters supported the proposal, raising the same concerns as HHS. Some explained that nonpayment of premiums may not be intentional and could rather result from financial hardship, hospitalization, an environmental disaster, or a lack of awareness. The prior interpretation, commenters noted, poses a “steep barrier” to enrollment even though there is no evidence that consumers are trying to “game the system” by enrolling in coverage and paying premiums only when care is needed.

Commenters that opposed the proposal suggested that premiums could rise from 0.3 to more than 3 percent, that more research is needed to determine why consumers fail to pay past-due premiums, and that the policy will leave insurers without a way to recoup past due premiums. Even if the exact cause for nonpayment is not known in all cases, HHS does not view this as a reason to deny coverage to individuals and believes insurers have adequate recourse to collect owed premiums (such as debt collection). Commenters and HHS also note that few insurers have adopted policies based on the Trump-era interpretation, suggesting that the policy was not necessary for insurers to recoup past-due premiums. HHS does not believe this policy will cause premiums to increase or negatively affect insurers or providers: there is “no evidence” to suggest these negative impacts. Rather, the policy could help improve the stability of the risk pool by reducing adverse selection and lowering administrative costs.

Medical Loss Ratio Requirements

HHS finalizes its changes that tighten how insurers calculate their MLRs. These changes are effective beginning with the 2021 MLR reporting year, with reports due on July 31, 2022. However, HHS will exercise enforcement discretion for an additional year. Said another way, HHS will not penalize insurers who make good faith efforts to comply and report quality improvement activities (QIA) consistent with the final rule until the 2022 MLR reporting year, with reports due July 31, 2023. HHS still expects accurate, consistent reporting of indirect QIA expenses but feels a transition period is important to allow insurers to adjust reporting practices. These changes were supported by a majority of commenters.

Under Section 2718 of the Public Health Service Act, as added by the ACA, insurers must spend a certain percentage of their premium revenue—80 percent in the individual and small group markets and 85 percent in the large group market—on health care claims or health care quality improvement expenses. If insurers fail to meet an MLR of 80 or 85 percent, they must rebate the difference to their enrollees. Insurers can issue a premium credit (for those enrolled with the same insurer) or make a check payment to individual enrollees; in the group market, savings can be shared between an employer and employee.

Rebates have been up significantly, especially in the individual market, due to exceptionally profitable years beginning in 2018. In 2021, insurers owed rebates of just over $2 billion to nearly 9.8 million consumers. This is down from record-high rebates of nearly $2.46 billion to more than 11.2 million consumers owed in 2020 but remains up from the $1.37 billion owed to nearly 9 million consumers in 2019, which was a record high relative to prior years.

Even with low MLRs and already-high rebates, HHS is concerned that MLRs are inflated (meaning rebates should be even higher than they are now) and clarified the types of expenses that insurers an include in the numerator of their MLR. A larger numerator increases an insurer’s MLR and thus decreases the likelihood of owing a rebate. HHS estimates that the first two changes below will increase rebates to consumers or reduce premiums by $61.8 million annually beginning in 2023.

First, HHS clarifies that incentives and bonuses paid to a provider must be tied to clearly defined, objectively measurable, and based on well-documented clinical or quality improvement standards to be included in the MLR numerator. This seems reasonable and straightforward, but HHS has observed that some incentive and bonus payments are not tied to quality or performance metrics and are instead being used to circumvent MLR rebate requirements. In some cases, the insurer’s failure to meet the ACA’s MLR standard is itself the trigger for a bonus payment to the provider to artificially inflate the insurer’s MLR. Providers in these instances might inflate paid claims by as much as 40 percent, and some incentives are not even going to a clinical provider (and instead go to a non-clinical parent holding company). Such payments are already barred under current MLR regulations, but HHS feels the need to clarify its standards; this is expected to increase consumer rebates or reduce premiums by an estimated $12 million per year. HHS also suggests it will consider the impact of vertical integration on the reporting and treatment of provider payments under the MLR framework.

Second, insurers will only be able to count expenses for QIA that are directly related to improving health care quality. Current regulations describe the types of activities that qualify as QIA, which seems clear enough. But HHS believes more clarity is needed regarding the types of expenses that can be included in the MLR numerator; federal officials observed “wide discrepancies” in what various insurers report as QIA expenses. This differential reporting has contributed to an unequal playing field among insurers who report varying degrees of direct expenses (such as the salaries of staff performing QIA functions) and indirect expenses (including overhead, marketing, and lobbying) as QIA expenses.

HHS is troubled by both types of reporting. While direct expenses such as staff salaries sound reasonable on their face, insurers attribute salaries towards QIA expenses even though employees typically perform QIA only part of the time and would be performing many of the same job-related functions even if the insurer did no QIA. Indirect expenses (e.g., IT cost centers, office space, data centers, etc.) inflate the QIA amounts by a whopping 33 to 50 percent and could be reducing rebates for enrollees while providing little to no value to consumers. Given these concerns, HHS disagrees that expenses for office space, equipment, and IT infrastructure are directly or (in some cases) even indirectly related to QIA; as such, these costs should not be included in the MLR numerator.

Inclusion of these types of costs in the MLR numerator is inappropriate. Section 2718 affirms that investing in QIA can improve enrollee health and thus increase the value of premium dollars. But, as the preamble puts it, “office space (including rent or depreciation, facility maintenance, janitorial, utilities, property taxes, insurance, wall art), human resources, salaries of counsel and executives, computer and telephone usage, travel and entertainment, company parties and retreats, IT systems, and marketing of issuers’ products” are examples of indirect expenses that should not be reported as QIA. Including those types of costs in the MLR numerator reduces the value of enrollee premiums and is inconsistent with the ACA. HHS estimates that this change will increase rebates or reduce premiums by about $49.8 million annually.

Third, HHS adopts a technical amendment to further eliminate a prior provision that allowed insurers to automatically claim and incorporate 0.8 percent of earned premium into the numerator of the MLR as QIA expenses. Insurers could take this automatic claim in lieu of tracking and reporting actual expenditures on quality improvement, which automatically increased the MLR for many insurers. This provision was set aside by a district court as contrary to law and arbitrary and capricious. While much of this policy was eliminated in the 2022 payment rule, HHS overlooked one related cross-reference and eliminated it in the final 2023 payment rule.

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