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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 153, 155, 156, 157 and 158

[CMS-9964-P]

RIN 0938-AR51

Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Proposed rule.
SUMMARY: This proposed rule provides further detail and parameters related to: the risk adjustment, reinsurance, and risk corridors programs; cost-sharing reductions; user fees for a Federally-facilitated Exchange; advance payments of the premium tax credit; a Federally-facilitated Small Business Health Option Program; and the medical loss ratio program. The cost-sharing reductions and advanced payments of the premium tax credit, combined with new insurance market reforms, will significantly increase the number of individuals with health insurance coverage, particularly in the individual market. The premium stabilization programs--risk adjustment, reinsurance, and risk corridors--will protect against adverse selection in the newly enrolled population. These programs, in combination with the medical loss ratio program and market reforms extending guaranteed availability (also known as guaranteed issue) protections and prohibiting the use of factors such as health status, medical history, gender, and industry of employment to set premium rates, will help to ensure that every American has access to high-quality, affordable health insurance.
DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on December 31, 2012.
ADDRESSES: You may submit comments in one of four ways (please choose only one of the ways listed):

1.Electronically.You may submit electronic comments on this regulation tohttp://www.regulations.gov.Follow the "Submit a comment" instructions.

2.By regular mail.You may mail written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9964-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.By express or overnight mail.You may send written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9964-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.By hand or courier.Alternatively, you may deliver (by hand or courier) your written comments ONLY to the following addresses prior to the close of the comment period:

a. For delivery in Washington, DC--

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. For delivery in Baltimore, MD--

Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

Comments erroneously mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

For information on viewing public comments, see the beginning of theSUPPLEMENTARY INFORMATIONsection.

FOR FURTHER INFORMATION CONTACT: Adrianne Glasgow at (410) 786-0686 for matters related to reinsurance.

Michael Cohen at (301) 492-4277 for matters related to the methodology for determining the reinsurance contribution rate and payment parameters.

Grace Arnold at (301) 492-4272 for matters related to risk adjustment, the HHS risk adjustment methodology, or the distributed data collection approach for the HHS-operated risk adjustment and reinsurance programs.

Adam Shaw at (410) 786-1091 for matters related to risk corridors.

Johanna Lauer at (301) 492-4397 for matters related to cost-sharing reductions, advance payments of the premium tax credits, or user fees.

Rex Cowdry at (301) 492-4387 for matters related to the Small Business Health Options Program.

Carol Jimenez at (301) 492-4457 for matters related to the medical loss ratio program. SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:http://www.regulations.gov.Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Table of Contents I. Executive Summary II. Background III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 2014 A. Provisions for the State Notice of Benefit and Payment Parameters B. Provisions and Parameters for the Permanent Risk Adjustment Program 1. Approval of State-Operated Risk Adjustment 2. Risk Adjustment User Fees 3. Overview of the Risk Adjustment Methodology HHS Would Implement When Operating Risk Adjustment on Behalf of a State 4. State Alternate Methodology 5. Risk Adjustment Data Validation C. Provisions and Parameters for the Transitional Reinsurance Program 1. State Standards Related to the Reinsurance Program 2. Contributing Entities and Excluded Entities 3. National Contribution Rate 4. Calculation and Collection of Reinsurance Contributions 5. Eligibility for Reinsurance Payments Under Health Insurance Market Rules 6. Reinsurance Payment Parameters 7. Uniform Adjustment to Reinsurance Payments 8. Supplemental State Reinsurance Parameters 9. Allocation and Distribution of Reinsurance Contributions 10. Data Collection Standards for Reinsurance Payments D. Provisions for the Temporary Risk Corridors Program 1. Definitions 2. Risk Corridors Establishment and Payment Methodology 3. Risk Corridors Data Requirements 4. Manner of Risk Corridor Data Collection E. Provisions for the Advance Payment of the Premium Tax Credit and Cost-Sharing Reduction Programs 1. Exchange Responsibilities With Respect to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions 2. Exchange Functions: Certification of Qualified Health Plans 3. QHP Minimum Certification Standards Relating to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions 4. Health Insurance Issuer Responsibilities With Respect to Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions F. Provisions on User Fees for a Federally-Facilitated Exchange (FFE) G. Distributed Data Collection for the HHS-Operated Risk Adjustment and Reinsurance Programs 1. Background 2. Issuer Data Collection and Submission Requirements 3. Risk Adjustment Data Requirements 4. Reinsurance Data Requirements H. Small Business Health Options Program I. Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act 1. Treatment of Premium Stabilization Payments, and Timing of Annual MLR Reports and Distribution of Rebates 2. Deduction of Community Benefit Expenditures 3. Summary of Errors in the MLR Regulation IV. Collection of Information Requirements V. Response to Comments VI. Regulatory Impact Analysis A. Statement of Need B. Overall Impact C. Impact Estimates of the Payment Notice Provisions D. Regulatory Flexibility Act E. Unfunded Mandates F. Federalism G. Congressional Review Act Regulations Text Acronyms Affordable Care ActThe Affordable Care Act of 2010 (which is the collective term for the Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care and Education Reconciliation Act (Pub. L. 111-152)) APTCAdvance payment of the premium tax credit AVActuarial Value CFRCode of Federal Regulations CHIPChildren's Health Insurance Program CMSCenters for Medicare & Medicaid Services EHBEssential Health Benefits ERISAEmployee Retirement Income Security Act ESIEmployer sponsored insurance FFEFederally-facilitated Exchange FPLFederal Poverty Level GAAPGenerally accepted accounting principles HCCHierarchical condition category HHSUnited States Department of Health and Human Services HIPAAHealth Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191) IHSIndian Health Service IRSInternal Revenue Service MLRMedical Loss Ratio NAICNational Association of Insurance Commissioners OMBOffice of Management and Budget OPMUnited States Office of Personnel Management PHSAct Public Health Service Act PRAPaperwork Reduction Act of 1985 QHPQualified Health Plan SHOPSmall Business Health Options Program The CodeInternal Revenue Code of 1986 I. Executive Summary A. Purpose

Beginning in 2014, individuals and small businesses will be able to purchase private health insurance through competitive marketplaces, called Affordable Insurance Exchanges, or “Exchanges.” Individuals who enroll in health plans through Exchanges may receive premium tax credits to make health insurance more affordable, and financial assistance to cover cost sharing for health care services. The premium tax credits, combined with the new insurance reforms, will significantly increase the number of individuals with health insurance coverage, particularly in the individual market. Premium stabilization programs—risk adjustment, reinsurance, and risk corridors—protect against adverse selection in the newly enrolled population. These programs, in combination with the medical loss ratio program and market reforms extending guaranteed availability (also known as guaranteed issue) protections, prohibiting the use of factors such as health status, medical history, gender, and industry of employment to set premium rates, will help to ensure that every American has access to high-quality, affordable health insurance.

Premium stabilization programs:The Affordable Care Act establishes transitional reinsurance and temporary risk corridors programs, and a permanent risk adjustment program to provide payments to health insurance issuers that cover higher-risk populations and to more evenly spread the financial risk borne by issuers.

The transitional reinsurance program and the temporary risk corridors program, which begin in 2014, are designed to provide issuers with greater payment stability as insurance market reforms are implemented. The reinsurance program will reduce the uncertainty of insurance risk in the individual market by partially offsetting risk of high-cost enrollees. The risk corridors program, which is a Federally administered program, will protect against uncertainty in rates for qualified health plans by limiting the extent of issuer losses and gains. On an ongoing basis, the risk adjustment program is intended to provide increased payments to health insurance issuers that attract higher-risk populations, such as those with chronic conditions, and reduce the incentives for issuers to avoid higher-risk enrollees. Under this program, funds are transferred from issuers with lower-risk enrollees to issuers with higher-risk enrollees.

In the Premium Stabilization Rule (77 FR 17220), we laid out a regulatory framework for these three programs. In that rule, we stated that the specific payment parameters for those programs would be published in this proposed rule. In this proposed rule, we expand upon these standards, and propose payment parameters for these programs.

Advanced payments of the premium tax credit and cost-sharing reductions:This proposed rule proposes standards for advanced payments of the premium tax credit and for cost-sharing reductions. These programs assist low- and moderate-income Americans in affording health insurance on an Exchange. Section 1401 of the Affordable Care Act amended the Internal Revenue Code (26 U.S.C.) to add section 36B, allowing an advance, refundable premium tax credit to help individuals and families afford health insurance coverage. Section 36B of the Code was subsequently amended by the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) (124 Stat. 3285 (2010)); the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (Pub. L. 112-9) (125 Stat. 36 (2011)); and the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (Pub. L. 112-10) (125 Stat. 38 (2011)). The section36B credit is designed to make a qualified health plan affordable by reducing a taxpayer's out-of-pocket premium cost.

Under section 1411 of the Affordable Care Act, an Exchange makes an advance determination of tax credit eligibility for individuals enrolling in coverage through the Exchange and seeking financial assistance. Using information available at the time of enrollment, the Exchange determines: (1) whether the individual meets the income and other requirements for advance payments, and (2) the amount of the advance payments. Advance payments are made monthly under section 1412 of the Affordable Care Act to the issuer of the qualified health plan (QHP) in which the individual enrolls.

Section 1402 of the Affordable Care Act provides for the reduction of cost sharing for certain individuals enrolled in QHPs offered through the Exchanges and section 1412 of the Affordable Care Act provides for the advance payment of these reductions to issuers. This assistance will help low- and moderate-income qualified individuals and families afford the out-of-pocket spending associated with health care services provided through QHP coverage. The law directs issuers to reduce cost sharing for essential health benefits for individuals with household incomes between 100 and 400 percent of the Federal Poverty Level (FPL) who are enrolled in a silver level QHP through an individual market Exchange and are eligible for advance payment of premium tax credits. The statute also directs issuers to eliminate cost sharing for Indians (as defined in section 4(d) of the Indian Self-Determination and Education Assistance Act) with a household income at or below 300 percent of the FPL who are enrolled in a QHP of any “metal” level (that is, bronze, silver, gold, or platinum) through the individual market in the Exchange, and prohibits issuers of QHPs from requiring cost sharing for Indians, regardless of household income, for items or services furnished directly by the Indian Health Service, an Indian Tribe, a Tribal Organization, or an Urban Indian Organization, or through referral under contracted health services.

HHS published a bulletin1 outlining an intended regulatory approach to calculations of actuarial value and implementation of cost-sharing reductions on February 24, 2012 (the “AV/CSR Bulletin”). Specifically, HHS outlined an intended regulatory approach for the calculation of AV, de minimis variation standards, silver plan variations for individuals eligible for cost-sharing reductions, and advance payments of cost-sharing reductions to issuers, among other topics. In the Exchange Establishment Rule, we established eligibility standards for these cost-sharing reductions. In this proposed rule, we establish standards governing the administration of cost-sharing reductions and provide specific payment parameters for the program.

1Available at:http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf.

Federally-facilitated Exchange user fees:Section 1311(d)(5)(A) of the Affordable Care Act contemplates an Exchange charging assessments or user fees to participating issuers to generate funding to support its operations. As the operator of a Federally-facilitated Exchange, HHS has the authority, under this section of the statute, to collect and spend such user fees. In addition, 31 U.S.C. 9701 provides for an agency to establish a charge for a service provided by the agency. Office of Management and Budget Circular A-25 Revised (“Circular A-25R”) establishes Federal policy regarding user fees and specifies that a user charge will be assessed against each identifiable recipient for special benefits derived from Federal activities beyond those received by the general public. In this proposed rule, we establish a user fee for issuers participating in a Federally-facilitated Exchange.

Small Business Health Options Program:Section 1311(b)(1)(B) of the Affordable Care Act directs each State that chooses to operate an Exchange to establish a Small Business Health Options Program (SHOP) that provides health insurance options for small businesses. The Exchange Establishment Rule sets forth standards for the administration of SHOP Exchanges. In this proposed rule, we clarify and expand upon the standards established in that final rule.

Medical loss ratio program:Public Health Service (PHS) Act section 2718 generally requires health insurance issuers to submit an annual MLR report to HHS and provide rebates to consumers if they do not achieve specified MLRs. On December 1, 2010, we published an interim final rule, entitled “Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements under the Patient Protection and Affordable Care Act,” (75 FR 74864) that established standards for the MLR program. Since then, we have made several revisions and technical corrections to those rules. We propose in this proposed rule to amend the regulations to specify how issuers are to account for payments or receipts for risk adjustment, reinsurance, and risk corridors, and to change the timing of the annual MLR report and distribution of rebates required of issuers to allow for accounting of the premium stabilization programs. This proposed rule also proposes to amend the regulations to revise the treatment of community benefit expenditures in the MLR calculation for issuers exempt from Federal income tax.

B. Summary of the Major Provisions

This proposed rule fills in the framework established by the Premium Stabilization Rule by proposing provisions and parameters for the three premium stabilizationprograms—the permanent risk adjustment program, the transitional reinsurance program, and the temporary risk corridors program. It also proposes key provisions governing advance payments of the premium tax credit, cost-sharing reductions, and user fees for Federally-facilitated Exchanges. Finally, it proposes a number of amendments relating to the SHOP and the medical loss ratio program.

Risk Adjustment:The goal of the Affordable Care Act risk adjustment program is to mitigate the impacts of possible adverse selection and stabilize the premiums in the individual and small group markets as and after insurance market reforms are implemented. In this proposed rule, we propose a number of standards and parameters for implementing the risk adjustment program, including:

• Provisions governing a State operating a risk adjustment program;

• The risk adjustment methodology HHS will use when operating risk adjustment on behalf of a State, including the risk adjustment model, the payments and charges methodology, and the data collection approach; and

• An outline of the data validation process we propose to use when operating risk adjustment on behalf of a State.

Reinsurance:The Affordable Care Act directs that a transitional reinsurance program be established in each State to help stabilize premiums for coverage in the individual market from 2014 through 2016. In this proposed rule, we propose a number of standards and parameters for implementing the reinsurance program, including:

• Provisions excluding certain types of health coverage from reinsurance contributions;

• The national per capita contribution rate to be paid by health insurance issuers and self-insured group health plans along with the methodology to be used for calculating the contributionsdue from a health insurance issuer or self-insured group health plan;

• Provisions establishing eligibility for reinsurance payments;

• The national reinsurance payment parameters and the approach we propose to use to calculate and administer the reinsurance program; and

• The distributed data collection approach we propose to use to implement the reinsurance program.

Risk Corridors:The temporary risk corridors program permits the Federal government and QHPs to share in profits or losses resulting from inaccurate rate setting from 2014 to 2016. In this proposed rule, we propose to permit a QHP to include profits and taxes within its risk corridors calculations. We also propose an annual schedule for the program and standards for data submissions.

Advance Payments of the Premium Tax Credit:Sections 1401 and 1411 of the Affordable Care Act provide for advance payments of the premium tax credit for low- and moderate-income enrollees in QHPs on Exchanges. In this proposed rule, we propose a number of standards governing the administration of this program, including:

• Provisions governing the reduction of premiums by the amount of any advance payments of the premium tax credit; and

• Provisions governing the allocation of premiums to essential health benefits.

Cost-Sharing Reductions:Sections 1402 and 1412 of the Affordable Care Act provide for reductions in cost sharing on essential health benefits for low- and moderate-income enrollees in qualified silver level health plans in individual market Exchanges. It also provides for reductions in cost sharing for Indians enrolled in QHPs at any metal level. In this proposed rule, we propose a number of standards governing the cost-sharing reduction program, including:

• Provisions governing the design of variations of QHPs with cost-sharing structures for enrollees of various income levels and for Indians;

• The maximum out-of-pocket limits applicable to the various plan variations;

• Provisions governing the assignment and reassignment of enrollees to plan variations;

• Provisions governing issuer submissions of estimates of cost-sharing reductions, which are paid in advance to issuers by the Federal government; and

• Provisions governing reconciliation of these advance estimates against actual cost-sharing reductions provided.

User Fees:This proposed rule proposes a per billable member user fee applicable to issuers participating in a Federally-facilitated Exchange. This proposed rule also outlines HHS's approach to calculating the fee.

SHOP:Beginning in 2014, SHOP Exchanges will allow small employers to offer employees a variety of QHPs. In this proposed rule, we propose several standards and processes for implementing SHOP Exchanges, including:

• Standards governing the definitions and counting methods used to determine whether an employer is a small or large employer;

• A safe harbor method of employer contribution in a Federally-facilitated SHOP (FF-SHOP);

• The default minimum participation rate;

• QHP standards linking Exchange and FF-SHOP participation and ensuring broker commissions in FF-SHOP that are the same as those in the outside market; and

• Allowing Exchanges and SHOPs to selectively list only brokers registered with the Exchange or SHOP (and adopting that policy for FFEs and FF-SHOPs).

MLR:The MLR program requires issuers to rebate a portion of premiums if their MLRs fall short of the applicable MLR standard for the reporting year. MLR is calculated as a ratio of claims plus quality improvement activities to premium revenue, with adjustments for taxes, regulatory fees, and the premium stabilization programs. In this proposed rule, we propose a number of standards governing the MLR program, including:

• Provisions accounting for risk adjustment, reinsurance, and risk corridors in the MLR calculation;

• A revised timeline for MLR reporting and rebates; and

• Provisions modifying the treatment of community benefit expenditures.

C. Costs and Benefits

The provisions of this proposed rule, combined with other provisions in the Affordable Care Act, will improve the individual insurance market by making insurance more affordable and accessible to millions of Americans who currently do not have affordable options available to them. The shortcomings of the individual market today have been widely documented.2

2Michelle M. Doty et al., Failure to Protect: Why the Individual Insurance Market Is Not a Viable Option for Most U.S. Families: Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2007, The Commonwealth Fund, July 2009; Sara R. Collins, Invited Testimony: Premium Tax Credits Under The Affordable Care Act: How They Will Help Millions Of Uninsured And Underinsured Americans Gain Affordable, Comprehensive Health Insurance, The Commonwealth Fund, October 27, 2011.

These limitations of the individual market are made evident by how few people actually purchase coverage in the individual market. In 2011, approximately 48.6 million people were uninsured in the United States,3 while only around 10.8 million were enrolled in the individual market.4 The relatively small fraction of the target market that actually purchases coverage in the individual market in part reflects people's resources, how expensive the product is relative to its value, and how difficult it is for many people to access coverage.

3Source: U.S. Census Bureau, Current Population Survey, 2012 Annual Social and Economic Supplement, Table HI01. Health Insurance Coverage Status and Type of Coverage by Selected Characteristics: 2011.

4Source: CMS analysis of June 2012 Medical Loss Ratio Annual Reporting data for 2011 MLR reporting year, available athttp://cciio.cms.gov/resources/data/mlr.html.

The provisions of this proposed rule, combined with other provisions in the Affordable Care Act, will improve the functioning of both the individual and the small group markets while stabilizing premiums. The transitional reinsurance program will serve to stabilize premiums in the individual market. Reinsurance will attenuate individual market rate increases that might otherwise occur because of the immediate enrollment of higher risk individuals, potentially including those currently in State high-risk pools. In 2014, it is anticipated that reinsurance payments will result in premium decreases in the individual market of between 10 and 15 percent relative to expected premiums without reinsurance.

The risk corridors program will protect QHP issuers in the individual and small group market against inaccurate rate setting and will permit issuers to lower rates by not adding a risk premium to account for perceived uncertainties in the 2014 through 2016 markets.

The risk adjustment program protects against adverse selection by allowing issuers to set premiums according to the average actuarial risk in the individual and small group market without respect to the type of risk selection the issuer would otherwise expect to experience with a specific product offering in the market. This should lower the risk premium issuers would otherwise price into premiums in the expectation of enrolling individuals with unknown health status. In addition, it mitigates the incentive for health plans to avoidunhealthy members. The risk adjustment program also serves to level the playing field inside and outside of the Exchange, as payments and charges are applied to all non-grandfathered individual and small group plans.

Provisions addressing the advance payments of the premium tax credit and cost-sharing reductions will help provide for premium tax credits and the reduction or elimination of cost sharing for certain individuals enrolled in QHPs offered through the Exchanges. This assistance will help many low-and moderate-income individuals and families obtain health insurance. For many people, cost sharing is a barrier to obtaining needed health care.5 The availability of premium tax credits through Exchanges starting in 2014 will result in lower net premium rates for many people currently purchasing coverage in the individual market, and will encourage younger and healthier enrollees to enter the market, improving the risk pool and leading to reductions in premium rates for current policyholders.6

5Brook, Robert H., John E. Ware, William H. Rogers, Emmett B. Keeler, Allyson Ross Davies, Cathy D. Sherbourne, George A. Goldberg, Kathleen N. Lohr, Patricia Camp and Joseph P. Newhouse.The Effect of Coinsurance on the Health of Adults: Results from the RAND Health Insurance Experiment.Santa Monica, CA: RAND Corporation, 1984. Available at:http://www.rand.org/pubs/reports/R3055.

6Congressional Budget Office, Letter to Honorable Evan Bayh, providing an Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act, November 30, 2009; Sara R. Collins, Invited Testimony: Premium Tax Credits Under The Affordable Care Act: How They Will Help Millions Of Uninsured And Underinsured Americans Gain Affordable, Comprehensive Health Insurance, The Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The Coverage and Cost Effects of Implementation of the Affordable Care Act in New York State, Urban Institute, March 2012.

The provisions addressing SHOP Exchanges will reduce the burden and costs of enrolling employees in small group plans, and give small businesses many of the cost advantages and choices that large businesses already have. Additionally, SHOP Exchanges will allow for employers to preserve control over health plan choices while saving employers money by spreading insurers' administrative costs across more employers.

The provisions addressing the MLR program will result in a more accurate calculation of MLR and rebate amounts, since it will reflect issuers' claims-related expenditures, after adjusting for the premium stabilization programs.

We solicit comments on additional strategies consistent with the Affordable Care Act that HHS or States might deploy to help make rates affordable in the current market and encourage timely enrollment in coverage in 2014. Ensuring that premiums are affordable is a priority for HHS as well as States, consumers, and insurers, so we welcome suggestions for the proposed rule on ways to achieve this goal while implementing these essential consumer protections.

Issuers may incur some one-time fixed costs to comply with the provisions of the final rule, including administrative and hardware costs. However, issuer revenues and expenditures are also expected to increase substantially as a result of the expected increase in the number of people purchasing individual market coverage. That enrollment is projected to exceed current enrollment by 50 percent.7 We are soliciting comments on the nature and magnitude of these costs and benefits to issuers, and the potential effect of the provisions of this rule on premium rates and financial performance.

7Congressional Budget Office,http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf(Table 3).

In addition, States may incur administrative and operating costs if they choose to establish their own programs. We are also requesting information on such costs. In accordance with Executive Orders 12866 and 13563, we believe that the benefits of this regulatory action would justify the costs.

II. Background

Starting in 2014, individuals and small businesses will be able to purchase private health insurance through State-based competitive marketplaces called Affordable Insurance Exchanges (Exchanges). The Department of Health and Human Services (HHS), the Department of Labor, and the Department of the Treasury are working in close coordination to release guidance related to Exchanges in several phases. The Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 2010. The Health Care and Education Reconciliation Act (Pub. L. 111-152) was enacted on March 30, 2010. We refer to the two statutes collectively as the Affordable Care Act in this proposed rule.

A. Premium Stabilization

A proposed regulation was published in theFederal Registeron July 15, 2011 (76 FR 41930) to implement health insurance premium stabilization policies in the Affordable Care Act. A final rule implementing the health insurance premium stabilization programs (that is, risk adjustment, reinsurance, and risk corridors) (Premium Stabilization Rule) (77 FR 17220) was published in theFederal Registeron March 23, 2012. We published a white paper on risk adjustment concepts on September 12, 2011 (Risk Adjustment White Paper). We published a bulletin on May 1, 2012, outlining our intended approach to implementing risk adjustment when we are operating risk adjustment on behalf of a State (Risk Adjustment Bulletin). On May 7-8, 2012, we hosted a public meeting in which we discussed that approach (Risk Adjustment Spring Meeting).

We published a bulletin on May 31, 2012, outlining our intended approach to making reinsurance payments to issuers when we are operating the reinsurance program on behalf of a State (Reinsurance Bulletin). The Department solicited comment on proposed operations for both reinsurance and risk adjustment when we are operating the program on behalf of a State.

B. Cost-Sharing Reductions

We published a bulletin outlining an intended regulatory approach to calculating actuarial value and implementing cost-sharing reductions on February 24, 2012 (AV/CSR Bulletin). In that bulletin, we outlined an intended regulatory approach for the design of plan variations for individuals eligible for cost-sharing reductions, and advance payments and reimbursement of cost-sharing reductions to issuers, among other topics. We reviewed and considered comments to the AV/CSR Bulletin in developing section III.E. of this proposed rule.

C. Advance Payments of the Premium Tax Credit

A proposed regulation relating to the health insurance premium tax credit was published by the Department of the Treasury in theFederal Registeron August 17, 2011 (76 FR 50931). A final rule relating to the health insurance premium tax credit was published by the Department of the Treasury in theFederal Registeron May 23, 2012 (26 CFR parts 1 and 602).

D. Exchanges

A Request for Comment relating to Exchanges was published in theFederal Registeron August 3, 2010 (75 FR 45584). An Initial Guidance to States on Exchanges was issued on November 18, 2010. A proposed regulation was published in theFederal Registeron July 15, 2011 (76 FR 41866) to implement components of theExchange. A proposed regulation regarding Exchange functions in the individual market, eligibility determinations, and Exchange standards for employers was published in theFederal Registeron August 17, 2011 (76 FR 51202). A final rule implementing components of the Exchanges and setting forth standards for eligibility for Exchanges (Exchange Establishment Rule) was published in theFederal Registeron March 27, 2012 (77 FR 18310).

E. Market Reform Rules

A notice of proposed rulemaking relating to market reforms and effective rate review was published in theFederal Registeron November 26, 2012 (77 FR 70584) (proposed Market Reform Rule).

F. Essential Health Benefits and Actuarial Value

A notice of proposed rulemaking relating to essential health benefits and actuarial value was published in theFederal Registeron November 26, 2012 (77 FR 70644) (proposed EHB/AV Rule).

G. Medical Loss Ratio

HHS published a request for comment on PHS Act section 2718 in theFederal Registeron April 14, 2010 (75 FR 19297), and published an interim final rule with 60 day comment period relating to the medical loss ratio (MLR) program on December 1, 2010 (75 FR 74864). A final rule with 30 day comment period (MLR Final Rule) was published in theFederal Registeron December 7, 2011 (76 FR 76574).

H. Tribal Consultations

This proposed rule may be of interest to, and affect, American Indians/Alaska Natives. Therefore, we plan to consult with Tribes during the comment period and prior to publishing a final rule.

III. Provisions of the Proposed HHS Notice of Benefit and Payment Parameters for 2014 A. Provisions for the State Notice of Benefit and Payment Parameters

In § 153.100(c), we established a deadline of March 1 of the calendar year prior to the applicable benefit year for States to publish a State notice of benefit and payment parameters if the State wishes to modify the parameters for the reinsurance program or the risk adjustment methodology set forth in the applicable HHS notice of benefit and payment parameters. We recognize that, for this initial benefit year (that is, for benefit year 2014), it may be difficult for States to publish such a notice by the required deadline. We therefore propose to modify § 153.100(c) to require that, for benefit year 2014 only, a State must publish a State notice by March 1, 2013, or by the 30th day following publication of the final HHS notice of benefit and payment parameters, whichever is later. If a State that chooses to operate reinsurance or risk adjustment does not publish the State notice within that timeframe, the State would: (1) Adhere to the data requirements for health insurance issuers to receive reinsurance payments that are specified in the annual HHS notice of benefit and payment parameters for the applicable benefit year; (2) forgo the collection of additional reinsurance contributions under § 153.220(d) and the use of additional funds for reinsurance payments under § 153.220(d)(3); (3) forgo the use of more than one applicable reinsurance entity; and (4) adhere to the risk adjustment methodology and data validation standards published in the annual HHS notice of benefit and payment parameters.

B. Provisions and Parameters for the Permanent Risk Adjustment Program

The risk adjustment program is a permanent program created by the Affordable Care Act that transfers funds from lower risk, non-grandfathered plans to higher risk, non-grandfathered plans in the individual and small group markets, inside and outside the Exchanges. In subparts D and G of the Premium Stabilization Rule, we established standards for the administration of the risk adjustment program. A State approved or conditionally approved by the Secretary to operate an Exchange may establish a risk adjustment program, or have HHS do so on its behalf.

In the Premium Stabilization Rule, we established that a risk adjustment program is operated using a risk adjustment methodology. States operating their own risk adjustment program may use a risk adjustment methodology developed by HHS, or may elect to submit an alternate methodology to HHS for approval. In the Premium Stabilization Rule, we also laid out standards for States and issuers with respect to the collection and validation of risk adjustment data.

In section III.B.1. of this proposed rule, we propose standards for HHS approval of a State-operated risk adjustment program (regardless of whether a State elects to use the HHS-developed methodology or an alternate, Federally certified risk adjustment methodology). This approval process would be distinct from the approval process for State-based Exchanges. In section III.B.2. of this proposed rule, we propose a fee to support HHS operation of the risk adjustment program. This fee is a per-capita fee applied to issuers of risk adjustment covered plans in States where HHS is operating the risk adjustment program.

In section III.B.3. of this proposed rule, we describe the methodology that HHS would use when operating a risk adjustment program on behalf of a State. This methodology would be used to assign a plan average risk score based upon the relative average risk of a plan's enrollees, and to apply a payment transfer formula to determine risk adjustment payments and charges. We also describe the HHS-operated data collection approach, and the schedule for operating the HHS-operated risk adjustment program. States operating a risk adjustment program can use this methodology, or submit an alternate methodology, as described in section III.B.4. of this proposed rule.

Finally, in section III.B.5. of this proposed rule, we describe the data validation process we propose to use when operating a risk adjustment program on behalf of a State. We propose that issuers contract with independent auditors to conduct an initial validation audit of risk adjustment data, and that we conduct a second validation audit of a sample of risk adjustment data validated in the initial validation audit to verify the findings of the initial validation audit. We propose that this process be implemented over time, such that payment adjustments based on data validation findings would not be made in the initial years. We also describe a proposed framework for appeals of data validation findings.

1. Approval of State-Operated Risk Adjustment a. Risk Adjustment Approval Process

In the Premium Stabilization Rule, we laid out minimum standards for States that choose to operate risk adjustment. In § 153.310(a), we specified that a State that elects to operate an Exchange is eligible to establish a risk adjustment program. In § 153.310(a)(2) and (a)(3), we specified that HHS would carry out risk adjustment functions on behalf of the State if the State was not eligible to operate risk adjustment, or if the State deferred operation of risk adjustment to HHS. Under our authority in section 1321(a) of the Affordable Care Act on standards for operation of risk adjustment programs and section 1343(b) of the Affordable Care act on criteria and methods to be used in carrying out risk adjustment activities,we now propose to add § 153.310(a)(4) such that, beginning in 2015, HHS would carry out the risk adjustment functions on behalf of a State if the State is not approved by HHS (that is, does not meet the standards proposed in § 153.310(c)) to operate a risk adjustment program prior to State publication of its notice of benefit and payment parameters. We believe an approval process for State-operated risk adjustment programs will promote confidence in these programs so that they can effectively protect against the effects of adverse selection.

We propose that a new paragraph (c), entitled “State responsibilities for risk adjustment,” set forth a State's responsibilities with regard to risk adjustment program operations. With this change, we also propose to redesignate paragraphs (c) and (d) to paragraphs (e) and (f) of § 153.310. We note that the State must ensure that the entity it selects to operate risk adjustment complies with the standards established in § 153.310(b).

In paragraph § 153.310(c)(1), we propose that if a State is operating a risk adjustment program for a benefit year, the State administer the program through an entity that meets certain standards. These standards would ensure the entity has the capacity to operate the risk adjustment program throughout the benefit year, and is able to administer the risk adjustment methodology. We will work with States to ensure that entities are ready to operate a risk adjustment program by the beginning of the applicable benefit year.

As proposed in § 153.310(c)(1)(i), the entity must be operationally ready to administer the applicable Federally certified risk adjustment methodology and process the resulting payments and charges. We believe that it is important for a State to demonstrate that its risk adjustment entity has the capacity to implement the applicable Federally certified risk adjustment methodology so that issuers may have confidence in the program, and so that the program can effectively mitigate the effects of potential adverse selection. To meet this standard, a State would demonstrate that the risk adjustment entity: (1) Has systems in place to implement the data collection approach, to calculate individual risk scores, and calculate issuers' payments and charges in accordance with the applicable Federally certified risk adjustment methodology; and (2) has tested, or has plans to test, the functionality of the system that would be used for risk adjustment operations prior to the start of the applicable benefit year. States would also demonstrate that the entity has legal authority to carry out risk adjustment program operations, and has the resources to administer the applicable risk adjustment methodology in its entirety, including the ability to make risk adjustment payments and collect risk adjustment charges.

We propose in paragraph § 153.310(c)(1)(ii) that the entity have relevant experience to operate a risk adjustment program. To meet this standard, a State would demonstrate that the entity has on staff, or has contracted with, individuals or firms with experience relevant to the implementation of a risk adjustment methodology. This standard is intended to ensure that the entity has the resources and staffing necessary to successfully operate the risk adjustment program.

We propose in paragraph § 153.310(c)(2) that a State seeking to operate its own risk adjustment program ensure that the risk adjustment entity complies with all applicable provisions of subpart D of 45 CFR part 153 in the administration of the applicable Federally certified risk adjustment methodology. In particular, the State would ensure that the entity complies with the privacy and security standards set forth in § 153.340.

We propose in § 153.310(c)(3) that the State conduct oversight and monitoring of risk adjustment activities in order for HHS to approve the State's risk adjustment program. Because the integrity of the risk adjustment program has important implications for issuers and enrollees, we propose to consider the State's plan to monitor the conduct of the entity. HHS would examine the State's requirements for data integrity and the maintenance of records, and the State's standards for issuers' use of risk adjustment payments. We will provide more detail about oversight in future rulemaking.

Finally, we propose in § 153.310(d) that a State submit to HHS information that establishes that it and its risk adjustment entity meet the criteria set forth in § 153.310(c). Under the proposed § 153.310(a)(4), HHS would operate risk adjustment in the State, under the HHS-developed methodology, if the State does not receive approval prior to the March deadline for publication of the State notice of benefit and payment parameters. Thus, if a State wishes to operate risk adjustment for benefit year 2015, it would have to be approved prior to publication of the State notice of benefit and payment parameters for benefit year 2015 (publication of which must occur by March 1, 2014). We will issue future guidance on application dates, procedures, and standards.

We welcome comments on these proposed provisions.

b. Risk Adjustment Approval Process for Benefit Year 2014

For benefit year 2014, we recognize there are unique timing issues for approving a State-operated risk adjustment program. States would not know whether they are eligible to operate a risk adjustment program until they are approved or conditionally approved to operate an Exchange for the 2014 benefit year. In addition, the set of Federally certified risk adjustment methodologies and the State-operated risk adjustment program approval process will not be finalized until the final Payment Notice is effective.

Given these timing constraints, we are proposing a transitional policy for benefit year 2014. We would not require that a State-operated risk adjustment program receive approval for benefit year 2014. Instead, we propose a transitional process shortly after the provisions of § 153.310(a)(4), (c), and (d) become effective. We are requesting that States planning to operate risk adjustment in benefit year 2014 consult with HHS to determine the capacity of the State to operate risk adjustment. In these consultations, HHS would ask States to identify the entity they select to operate risk adjustment, and to describe its plans for risk adjustment operations in the State. This consultative process would apply for benefit year 2014; however, we intend that States obtain formal approval under the proposed process for benefit year 2015 and subsequent years.

For benefit year 2015 and subsequent benefit years, the proposed approval process would continue to involve ongoing consultations with States and their selected risk adjustment entities. In the course of these consultations, we would provide States and proposed entities with our ongoing views on whether they are adequately demonstrating the capacity of the entity to operate all risk adjustment functions. If the State does not produce the requested evidence or make the requested changes in the specified timeframe, HHS may determine that the relevant criteria were not met, and may decline to approve that State's risk adjustment program. We welcome comments on this proposal.

2. Risk Adjustment User Fees

If a State is not approved to operate or chooses to forgo operating its own risk adjustment program, HHS would operate risk adjustment on the State'sbehalf. We intend to collect a user fee to support the administration of HHS-operated risk adjustment. This fee would apply to issuers of risk adjustment covered plans in States in which HHS is operating the risk adjustment program.

Circular No. A-25R establishes Federal policy regarding user fees, and specifies that a user charge will be assessed against each identifiable recipient for special benefits derived from Federal activities beyond those received by the general public. The risk adjustment program will provide special benefits as defined in section 6(a)(1)(b) of Circular No. A-25R to an issuer of a risk adjustment covered plan because it will mitigate the financial instability associated with risk selection as other market reforms go into effect. The risk adjustment program will also contribute to consumer confidence in the insurance industry by helping to stabilize premiums across the individual and small group health insurance markets.

We propose to determine HHS' total costs for administering risk adjustment programs on behalf of States by examining HHS's contract costs of operating the risk adjustment program. These contracts cover development of the model and methodology, collections, payments, account management, data collection, program integrity and audit functions, operational and fraud analytics, stakeholder training, and operational support. We do not propose to set the user fee to cover Federal personnel.

We would set the user fee rate as a national per capita rate, which would spread the cost of the program across issuers of risk adjustment covered plans based on enrollment. We would divide HHS's projected total costs for administering the risk adjustment programs on behalf of States by the expected number of enrollees in risk adjustment covered plans in HHS-operated risk adjustment programs.

An issuer of a risk adjustment covered plan in a State where HHS is operating risk adjustment would pay a risk adjustment user fee equal to the product of its annual enrollment in the risk adjustment covered plan multiplied by the annual per capita risk adjustment user fee rate specified in the annual notice of benefit and payment parameters for the applicable benefit year. We would calculate the total user fee that would be charged to each issuer based on the issuer's monthly enrollment, as provided to HHS using the data collection approach for the risk adjustment program. This approach would ensure that user fees are appropriately tied to enrollment and spread across issuers. We expect that the use of existing data collection and submission methods would minimize burden on issuers, while promoting accuracy.

We anticipate that the total cost for HHS to operate the risk adjustment program on behalf of States for 2014 would be less than $20 million, and that the per capita risk adjustment user fee would be no more than $1.00 per enrollee per year.

HHS would collect risk adjustment user fees from issuers of risk adjustment covered plans in June of the year after the applicable benefit year to align with payments and charges processing, to provide issuers the time to fully comply with the data collection and submission standards, and to permit HHS to perform the user fee calculations based on actual monthly enrollment counts from the benefit year.

We seek comment on this proposed assessment of user fees to support HHS-operated risk adjustment programs.

3. Overview of the risk adjustment methodology HHS would implement when operating risk adjustment on behalf of a State

The goal of the risk adjustment program is to stabilize the premiums in the individual and small group markets as and after insurance market reforms are implemented. The risk adjustment methodology proposed here, which HHS would use when operating risk adjustment on behalf of a State, is based on the premise that premiums should reflect the differences in plan benefits and plan efficiency, not the health status of the enrolled population.

Under § 153.20, a risk adjustment methodology is made up of five elements:

• Therisk adjustment modeluses an individual's recorded diagnoses, demographic characteristics, and other variables to determine a risk score, which is a relative measure of how costly that individual is anticipated to be.

• Thecalculation of plan average actuarial riskand thecalculation of payments and chargesaverage all individual risk scores in a risk adjustment covered plan, make certain adjustments, and calculate the funds transferred between plans. In this proposed rule, these two elements of the methodology are presented together as the payment transfer formula.

• Thedata collection approachdescribes HHS' approach to obtaining data, using the distributed model described in section III.G. of this proposed rule that is required for the risk adjustment model and the payment transfer formula.

• Theschedule for the risk adjustment programdescribes the timeframe for risk adjustment operations.

States approved to operate risk adjustment may utilize this risk adjustment methodology, or they may submit an alternate methodology as described in section III.B.4. of this proposed rule.

The risk adjustment methodology addresses three considerations: (1) The newly insured population; (2) plan metal levels and permissible rating variation; and (3) the need for inter-plan transfers that net to zero. Risk adjustment payments or charges would be calculated from the payment transfer formula described in section III.B.3.c. of this proposed rule. The key feature of the HHS risk adjustment methodology is that the risk score alone does not determine whether a plan is assessed charges or receives payments. Transfers depend not only on a plan's average risk score, but also on its plan-specific cost factors relative to the average of these factors within a risk pool within a State.

As discussed in greater detail below, the risk adjustment methodology developed by HHS:

• Is developed on commercial claims data for a population similar to the expected population to be risk adjusted;

• Uses the hierarchical condition categories (“HCC”) grouping logic used in the Medicare population, with HCCs refined and selected to reflect the expected risk adjustment population;

• Calculates risk scores with a concurrent model (current year diagnoses predict current year costs);

• Establishes 15 risk adjustment models, one for each combination of metal level (platinum, gold, silver, bronze, catastrophic) and age group (adults, children, infants);

• Results in “balanced” payment transfers within a risk pool within a market within a State;

• Adjusts payment transfers for plan metal level, geographic rating area, induced demand, and age rating, so that transfers reflect health risk and not other cost differences; and

• Transfers funds between plans within a market within a State.

a. Risk Adjustment Applied to Plans in the Individual and Small Group Markets

Section 1343(c) of the Affordable Care Act stipulates that risk adjustment is to apply to non-grandfathered health insurance coverage offered in the individual and small group markets. We previously defined a “risk adjustment covered plan” in § 153.20 as healthinsurance coverage offered in the individual or small group markets, excluding plans offering excepted benefits and certain other plans, including “any other plan determined not to be a risk adjustment covered plan in the annual HHS notice of benefit and payment parameters.” We propose to amend this definition by replacing “and any plan determined not to be a risk adjustment covered plan in the annual HHS notice of benefit and payment parameters” with “and any plan determined not to be a risk adjustment covered plan in the applicable Federally certified risk adjustment methodology.” We note that, under this revised definition, we would describe any plans not determined to be risk adjustment covered plans under the HHS risk adjustment methodology in the annual notice of benefit and payment parameters, which is subject to notice and comment.

We describe below our proposed treatment of certain types of plans (specifically, plans not subject to market reforms, student health plans, and catastrophic plans), and our proposed approach to risk pooling for risk adjustment purposes when a State merges markets for the purposes of the single risk pool provision described in section 1312(c) of the Affordable Care Act. States may propose different approaches to these plans and to risk pooling in State alternate methodologies, subject to the requirements established at § 153.330(b) in this proposed rule.

Plans not subject to market reforms:Certain types of plans offering non-grandfathered health insurance coverage in the individual and small group markets would not be subject to the insurance market reforms proposed in the Market Reform Rule and the EHB/AV proposed rule. In addition, plans providing benefits through policies that begin in 2013, with renewal dates in 2014, would not be subject to these requirements until renewal in 2014. The law specifies that the risk adjustment program is to assess charges on non-grandfathered health insurance coverage in the individual and small group markets with less than average actuarial risk and to make payments to non-grandfathered health insurance coverage in these markets with higher than average actuarial risk. We interpret actuarial risk to mean predictable risk that the issuer has not been able to compensate for through exclusion or pricing. In the current market, plans are generally not subject to the insurance market reforms that begin in 2014 described at § 147.102 (fair health insurance premiums), § 147.104 (guaranteed availability of coverage, subject to the student health insurance provisions at § 147.145), § 147.106 (guaranteed renewability of coverage, subject to the student health insurance provisions at § 147.145), § 156.80 (single risk pool), and Subpart B 156 (essential health benefits package), and so are generally able to minimize actuarial risk by excluding certain conditions (for example, maternity coverage for women of child-bearing age), denying coverage to those with certain high-risk conditions, and by pricing individual premiums to cover the costs of providing coverage to an individual with those conditions.

We propose to use the authority in section 1343(b) of the Affordable Care Act to “establish criteria and methods to be used in carrying out * * * risk adjustment activities” to treat plans not subject to insurance market reforms at § 147.102 (fair health insurance premiums), § 147.104 (guaranteed availability of coverage, subject to the student health insurance provisions at § 147.145), § 147.106 (guaranteed renewability of coverage, subject to the student health insurance provisions at § 147.145), § 156.80 (single risk pool), and Subpart B 156 (essential health benefits package), as follows. Because we believe that plans not subject to these market reform rules are able to effectively minimize actuarial risk, we believe these plans would have uniform and virtually zero actuarial risk. We therefore propose to treat these plans separately, such that these plans would not be subject to risk adjustment charges and would not receive risk adjustment payments. Also, these plans would not be subject to the issuer requirements described in subparts G and H of part 153. We note that plans issued in 2013 and subject to these requirements upon renewal would become subject to risk adjustment upon renewal, and would comply with the requirements established in subparts G and H of part 153 at that time.

Student health plans:Only individuals attending a particular college or university are eligible to enroll in a student health plan (as described in § 147.145) offered by that college or university. We believe that student health plans, because of their unique characteristics, will have relatively uniform actuarial risk. We therefore propose to use the authority in section 1343(b) of the Affordable Care Act to “establish criteria and methods to be used in carrying out * * * risk adjustment activities” to treat these plans as a separate group that would not be subject to risk adjustment charges and would not receive risk adjustment payments. Therefore, these plans would not be subject to the issuer requirements described in subparts G and H of part 153.

Catastrophic plans:Unlike metal level coverage, only individuals age 30 and under, or individuals for whom insurance is deemed to be unaffordable as specified in section 1302(e) of the Affordable Care Act, are eligible to enroll in catastrophic plans. Because of the unique characteristics of this population, we propose to use our authority to establish “criteria and methods” to risk adjust catastrophic plans in a separate risk pool from the general (metal level) risk pool. Catastrophic plans with less than average actuarial risk compared with other catastrophic plans would b