On December 7, 2018, the Department of the Treasury (the “Treasury Department”) and the IRS published proposed regulations (REG-105600-18) relating to foreign tax credits in the Federal Register (83 FR 63200) (the “2018 FTC proposed regulations”). The 2018 FTC proposed regulations addressed several significant changes that the Tax Cuts and Jobs Act (Pub. L. 115-97, 131 Stat. 2054, 2208 (2017)) (the “TCJA”) made with respect to the foreign tax credit rules and related rules for allocating and apportioning deductions in determining the foreign tax credit limitation. Certain provisions of the 2018 FTC proposed regulations relating to §§1.78-1, 1.861-12(c)(2), and 1.965-7 were finalized as part of TD 9866, published in the Federal Register (84 FR 29288) on June 21, 2019.

The remainder of the 2018 FTC proposed regulations were finalized on December 17, 2019 in TD 9882, published in the Federal Register (84 FR 69022) (the “2019 FTC final regulations”). On the same date, the Treasury Department and the IRS published proposed regulations (REG-105495-19) relating to foreign tax credits in the Federal Register (84 FR 69124) (the “2019 FTC proposed regulations”). The 2019 FTC proposed regulations related to changes made by the TCJA and other foreign tax credit issues. Correcting amendments to the 2019 FTC final regulations and the 2019 FTC proposed regulations were published in the Federal Register on May 15, 2020, see 85 FR 29323 (2019 FTC final regulations) and 85 FR 29368 (2019 FTC proposed regulations). A public hearing on the proposed regulations was held on May 20, 2020.

On November 7, 2007, the Federal Register published temporary regulations (TD 9362) at 72 FR 62771 and a notice of proposed rulemaking by cross-reference to the temporary regulations at 72 FR 62805 relating to sections 905(c), 986(a), and 6689 of the Internal Revenue Code (“Code”). Portions of these temporary regulations were finalized in the 2019 FTC final regulations, while certain portions were reproposed in the 2019 FTC proposed regulations.

This document contains final regulations (the “final regulations”) addressing the following issues: (1) the allocation and apportionment of deductions under sections 861 through 865, including rules on the allocation and apportionment of expenditures for research and experimentation (“R&E”), stewardship, legal damages, and certain deductions of life insurance companies; (2) the allocation and apportionment of foreign income taxes; (3) the interaction of the branch loss and dual consolidated loss recapture rules with section 904(f) and (g); (4) the effect of foreign tax redeterminations of foreign corporations, including for purposes of the application of the high-tax exception described in section 954(b)(4) (and for purposes of determining tested income under section 951A(c)(2)(A)(i)(III)), and required notifications under section 905(c) to the IRS of foreign tax redeterminations and related penalty provisions; (5) the definition of foreign personal holding company income under section 954; (6) the application of the foreign tax credit disallowance under section 965(g); and (7) the application of the foreign tax credit limitation to consolidated groups.

On December 28, 2018, the Treasury Department and the IRS published proposed regulations (REG-104352-18) relating to hybrid arrangements, including hybrid arrangements to which section 245A(e) applies, in the Federal Register (83 FR 67612) (the “2018 hybrids proposed regulations”). Those regulations were finalized as part of TD 9896, published in the Federal Register (85 FR 19802) on April 8, 2020 (the “2020 hybrids final regulations”). On the same date, the Treasury Department and the IRS published proposed regulations (REG-106013-19) in the Federal Register (85 FR 19858) (the “2020 hybrids proposed regulations”). Correcting amendments to the 2020 hybrids final regulations and the 2020 hybrids proposed regulations were published in the Federal Register on August 4, 2020, August 11, 2020, and August 12, 2020. See 85 FR 47027 (2020 hybrids final regulations), 85 FR 48485 (2020 hybrids proposed regulations), and 85 FR 48651 (2020 hybrids final regulations).

The 2020 hybrids proposed regulations address hybrid deduction accounts under section 245A(e), hybrid instruments used in conduit financing arrangements under section 881, and certain payments under section 951A (relating to global intangible low-taxed income). The Treasury Department and the IRS received written comments with respect to the 2020 hybrids proposed regulations. All written comments received in response to the 2020 hybrids proposed regulations are available at www.regulations.gov or upon request. A public hearing on the 2020 hybrids proposed regulations was not held because there were no requests to speak.

This document contains final regulations addressing the following issues: (1) the reduction to a hybrid deduction account under section 245A(e) by reason of an amount included in the gross income of a domestic corporation under section 951(a) or 951A(a) with respect to a controlled foreign corporation (“CFC”); (2) the treatment of a hybrid instrument as a financing transaction for purposes of the conduit financing rules under section 881; and (3) the treatment under section 951A of certain prepayments made to a related CFC after December 31, 2017, and before the CFC’s first taxable year beginning after December 31, 2017.

This rulemaking finalizes, without substantive change, certain provisions in the 2019 FTC proposed regulations and the 2020 hybrids proposed regulations with respect to which the Treasury Department and IRS did not receive any comments. See, for example, §1.904(b)-3, §1.904(g)-3, §1.951A-2(c)(6), §1.951A-7(d), §1.1502-4, or §301.6689-1. These provisions are generally not discussed in this preamble.

Comments received that do not pertain to the 2019 FTC proposed regulations or the 2020 hybrids proposed regulations, or that are otherwise outside the scope of this rulemaking, are generally not addressed in this preamble but may be considered in connection with future guidance projects.

A. Overview

Section 245A(e) was added to the Code by the TCJA. Section 245A(e) and the 2020 hybrids final regulations neutralize the double non-taxation effects of a hybrid dividend or tiered hybrid dividend by either denying the section 245A(a) dividends received deduction with respect to the dividend or requiring an inclusion under section 951(a)(1)(A) with respect to the dividend, depending on whether the dividend is received by a domestic corporation or a CFC. The 2020 hybrids final regulations require that certain shareholders of a CFC maintain a hybrid deduction account with respect to each share of stock of the CFC that the shareholder owns, and provide that a dividend received by the shareholder from the CFC is a hybrid dividend or tiered hybrid dividend to the extent of the sum of those accounts. A hybrid deduction account with respect to a share of stock of a CFC reflects the amount of hybrid deductions of the CFC that have been allocated to the share, reduced by the amount of hybrid deductions that gave rise to a hybrid dividend or tiered hybrid dividend.

The 2020 hybrids proposed regulations generally reduced a hybrid deduction account with respect to a share of stock of a CFC by three categories of amounts included in the gross income of a domestic corporation with respect to the share, including an “adjusted subpart F inclusion” or an “adjusted GILTI inclusion” with respect to the share. See proposed §1.245A(e)-1(d)(4)(i)(B)(1) and (2). An adjusted subpart F inclusion or an adjusted GILTI inclusion with respect to a share is intended to measure, in an administrable manner, the extent to which a domestic corporation’s inclusion under section 951(a)(1)(A) (“subpart F inclusion”) or inclusion under section 951A (“GILTI inclusion amount”) attributable to the share is likely “included in income” in the United States — that is, taken into account in income and not offset by, for example, foreign tax credits associated with the inclusion and, in the case of a GILTI inclusion amount, the deduction under section 250(a)(1)(B).

The final regulations retain the basic approach and structure of the 2020 hybrids proposed regulations that reduced hybrid deduction accounts, with certain revisions. Part I.B of this Summary of Comments and Explanation of Revisions discusses the revisions as well as comments received that relate to these rules.

B. Computation of adjusted subpart F income inclusion and adjusted GILTI inclusion

1. In General

Comments suggested several refinements or clarifications to the computation of an adjusted subpart F inclusion or adjusted GILTI inclusion with respect to a share of stock of a CFC, generally so that the adjusted subpart F inclusion or adjusted GILTI inclusion more closely reflects the extent that the subpart F inclusion or GILTI inclusion amount is in fact included in income in the United States.

2. Section 904 Limitation

Under the 2020 hybrids proposed regulations, an adjusted subpart F inclusion or adjusted GILTI inclusion with respect to a share of stock is computed by taking into account foreign income taxes that, as a result of the application of section 960(a) or (d), are likely to give rise to deemed paid credits eligible to be claimed by the domestic corporation with respect to the subpart F inclusion or adjusted GILTI inclusion. See proposed §1.245A(e)-1(d)(4)(ii)(A) and (B). To minimize complexity, the 2020 hybrids proposed regulations did not take into account any limitations on foreign tax credits when computing foreign income taxes that are likely to give rise to deemed paid credits. See proposed §1.245A(e)-1(d)(4)(ii)(D). A comment suggested that the final regulations take into account the limitation under section 904.

The Treasury Department and the IRS agree with the comment for computing an adjusted GILTI inclusion. Foreign income taxes that by reason of section 904 do not currently give rise to deemed paid credits eligible to be claimed with respect to the GILTI inclusion amount are not creditable in another year through a carryback or carryover. See section 904(c). Thus, there is generally no ability for such excess foreign income taxes to reduce the extent that an amount taken into account in income by the domestic corporation is included in income in the United States. The final regulations therefore provide that such foreign income taxes are not taken into account when computing an adjusted GILTI inclusion. See §1.245A(e)-1(d)(4)(ii)(D)(2)(iii) and (G). If the application of this rule results in circularity or ordering rule issues, a taxpayer may, solely for purposes of computing the adjusted GILTI inclusion, apply any reasonable method to compute the amount of foreign income taxes the creditability of which is limited by section 904.¹

The final regulations do not adopt a similar rule for computing an adjusted subpart F inclusion. This is because foreign income taxes that by reason of section 904 do not currently give rise to deemed paid credits eligible to be claimed with respect to the subpart F inclusion may become creditable in another year under section 904(c). Consequently, for example, the foreign income taxes could in a later year reduce the extent that an amount is included in income in the United States, and could thus inappropriately result in an outcome similar to the one that would have occurred had the foreign income taxes given rise to deemed paid credits in the year of the subpart F inclusion and thereby reduced the extent that the subpart F inclusion was subject to tax in the United States at the full statutory rate. The Treasury Department and the IRS have determined that special rules to prevent such results would be complex or burdensome as they would require, for instance, tracking the creditability of the foreign income taxes over prior or later years (potentially through a 10-year period), and then adjusting the hybrid deduction account as the foreign income taxes become creditable.

3. Section 250 Deduction

Under the 2020 hybrids proposed regulations, an adjusted GILTI inclusion is computed by taking into account the portion of the deduction allowed under section 250 by reason of section 250(a)(1)(B) that the domestic corporation is likely to claim with respect to the GILTI inclusion amount. See proposed §1.245A(e)-1(d)(4)(ii)(B). The 2020 hybrids proposed regulations did not take into account any limitations on the deduction under section 250(a)(2)(B). See id. A comment suggested that the final regulations take into account the taxable income limitation under section 250(a)(2).

The Treasury Department and the IRS agree with the comment, because taking into account the taxable income limitation results in an adjusted GILTI inclusion that more closely reflects the extent to which the GILTI inclusion amount is included in income in the United States. The final regulations thus provide a rule to this effect. See §1.245A(e)-1(d)(4)(ii)(B) and (H). Similar to the rule discussed in Part I.B.2 of this Summary of Comments and Explanation of Revisions (related to the section 904 limitation), a taxpayer may, solely for purposes of computing an adjusted GILTI inclusion, apply any reasonable method to compute the extent to which the portion of a deduction allowed under section 250 by reason of section 250(a)(1)(B) is limited under section 250(a)(2)(B).

4. Limit on Reduction of a Hybrid Deduction Account

The 2020 hybrids proposed regulations provided a limit to ensure that an adjusted subpart F inclusion or adjusted GILTI inclusion with respect to a share of stock of a CFC does not reduce the hybrid deduction account by an amount greater than the hybrid deductions allocated to the share for the taxable year multiplied by a fraction, the numerator of which is the subpart F income or tested income, as applicable, of the CFC for the taxable year and the denominator of which is the CFC’s taxable income. See proposed §1.245A(e)-1(d)(4)(i)(B)(1)(ii) and (d)(4)(i)(B)(2)(ii). In cases in which the CFC’s taxable income is zero or negative, the 2020 hybrids proposed regulations prevented distortions to the fraction – which would otherwise occur because the fraction would involve dividing by zero or a negative number – by providing that the fraction is considered to be zero. See proposed §1.245A(e)-1(d)(4)(i)(B)(1)(ii) and (d)(4)(i)(B)(2)(ii).

Distortions to the fraction could also occur if the CFC’s taxable income is greater than zero but less than its subpart F income or tested income (due to losses in one category of income) because, absent a rule to address, the fraction would be greater than one. The final regulations eliminate these distortions by modifying the fraction so that the numerator and denominator only reflect items of gross income. See §1.245A(e)-1(d)(4)(i)(B)(1)(ii) and (d)(4)(i)(B)(2)(ii).

5. Clarifications

Comments recommended that the final regulations clarify whether an adjusted subpart F inclusion or adjusted GILTI inclusion can be negative and result in an increase to the hybrid deduction account (that is, whether the hybrid deduction account can be reduced by a negative amount). The final regulations clarify that an adjusted subpart F inclusion or adjusted GILTI inclusion cannot be negative and thus cannot result in an increase to the hybrid deduction account. See §1.245A(e)-1(d)(4)(ii)(A) and (B).

A comment also recommended that the final regulations clarify whether the computation of an adjusted subpart F inclusion takes into account an amount that the domestic corporation includes in gross income by reason of section 964(e)(4). As noted in the comment, an amount that the domestic corporation includes in gross income by reason of section 964(e)(4) is in many cases offset by a 100 percent dividends received deduction under section 245A(a), and thus no portion of the amount is included in income in the United States (that is, taken into account in income and not offset by a deduction or credit particular to the inclusion). The final regulations clarify that the computation of an adjusted subpart F inclusion does not take into account an amount that a domestic corporation includes in gross income by reason of section 964(e)(4), to the extent that a deduction under section 245A(a) is allowed for the amount. See §1.245A(e)-1(d)(4)(ii)(A).

6. Comments Outside the Scope of the 2020 Hybrids Proposed Regulations

In response to a comment, the 2020 hybrids final regulations clarified that a deduction or other tax benefit may be a hybrid deduction regardless of whether it is used currently under the foreign tax law. See §1.245A(e)-1(d)(2). The preamble to the 2020 hybrids final regulations explained that even though a deduction or other tax benefit may not be used currently, it could be used in another taxable period and thus could produce double non-taxation. The preamble also noted that it could be complex or burdensome to determine whether a deduction or other tax benefit is used currently and, to the extent not used currently, to track the deduction or other tax benefit and add it to the hybrid deduction account if it is in fact used.

Comments submitted with respect to the 2020 hybrids proposed regulations raised additional issues involving the extent to which a hybrid deduction account should be adjusted based on the availability-for-use of a deduction or other tax benefit under the foreign tax law. These issues include the extent to which (or the mechanism by which) a hybrid deduction account should be adjusted when a deduction or other tax benefit reflected in the account is subsequently disallowed under the foreign tax law (for example, by reason of a foreign audit) or an economically equivalent adjustment is made under the foreign tax law, or the deduction or other tax benefit expires or otherwise cannot be used under the foreign tax law. The Treasury Department and the IRS are studying these comments, which are outside the scope of the 2020 hybrids proposed regulations, and may address these issues in a future guidance project.

A. Stewardship expenses, litigation damages awards and settlement payments, net operating losses, interest expense, and other expenses

1. Stewardship Expenses

The 2019 FTC proposed regulations made several changes to the rules for allocating and apportioning stewardship expenses, which are generally expenses incurred to oversee a related corporation. Although the 2019 FTC proposed regulations did not change the definition of stewardship expenses, the regulations did provide that expenses incurred with respect to partnerships are treated as stewardship expenses. The 2019 FTC proposed regulations also expanded the types of income to which stewardship expenses are allocated to include not only dividends but also other inclusions received with respect to stock. The 2019 FTC proposed regulations further provided that stewardship expenses are to be apportioned based on the relative values of stock held by a taxpayer, as computed for purposes of allocating and apportioning the taxpayer’s interest expense. Additionally, the preamble to the 2019 FTC proposed regulations requested comments regarding how to distinguish stewardship expenses from supportive expenses.

Several comments addressed the definition of stewardship expenses. Some comments recommended that the current regulations’ definition be retained without changes. One comment recommended that, because stewardship is among those activities that are not treated as providing a benefit to a related party under the section 482 regulations, such expenses should be treated as supportive expenses. Another recommended that the definition of stewardship expenses be narrowed to apply solely to expenses that result from oversight with respect to foreign subsidiaries or non-affiliated domestic entities. Comments also requested clarification on how to identify and distinguish between stewardship and supportive expenses and sought greater flexibility in identifying stewardship expenses. One comment recommended that further guidance be left to a separate project.

The final regulations generally retain the existing definition of stewardship expenses as either duplicative or shareholder activities as described in §1.482-9(l)(3)(iii) or (iv). Therefore, stewardship expenses either duplicate an expense incurred by the related entity without providing an additional benefit to that entity or are incurred primarily to protect the taxpayer’s investment in another entity or to facilitate the taxpayer’s compliance with its own reporting, legal or regulatory requirements. In contrast, supportive expenses are typically incurred in order to enhance the income-producing capabilities of the taxpayer itself, and so are definitely related and allocable to all, or broad classes, of the taxpayer’s gross income. See §1.861-8(b)(3). The fact that expenses attributable to stewardship activities do not provide a benefit to the related party does not mean that the expenses are supportive of all of the taxpayer’s income-producing activity. Instead, expenses categorized under §§1.861-8(e)(4)(ii) and 1.482-9(l)(3)(iii) and (iv) as stewardship expenses are properly allocated to income generated by the related party (and included in income of the taxpayer as a dividend or other inclusion), rather than to income earned directly by the taxpayer.

Comments recommended that the definition of stewardship expenses be expanded to include expenses incurred with respect to branches and disregarded entities, in addition to corporations and partnerships. The Treasury Department and the IRS agree that stewardship expenses can also be incurred with respect to all business entities (whether foreign or domestic) as described in §301.7701-2(a) and not only those business entities that are classified as corporations or partnerships for Federal income tax purposes. Therefore, the final regulations at §1.861-8(e)(4)(ii)(A) provide that stewardship expenses incurred with respect to oversight of disregarded entities are also subject to allocation and apportionment under the rules of §1.861-8(e)(4). However, the Treasury Department and the IRS have determined that it is inappropriate to extend the definition of stewardship expense to include oversight expenses incurred with respect to an unincorporated branch of the taxpayer, since the branch’s income is income of the taxpayer itself, not income of a separate entity in which the taxpayer is protecting its investment, and any reporting, legal or regulatory requirements that apply to an unincorporated branch of the taxpayer apply to the taxpayer itself.

Comments also requested that the final regulations make clear that stewardship expenses can be allocated and apportioned to income and assets of all affiliated and consolidated group members, noting that a portion of the dividends and stock with respect to domestic affiliates may be treated as exempt income or assets under section 864(e)(3) and §1.861-8(d)(2)(ii) and excluded from the apportionment formula, which could reduce apportionment of expenses to U.S. source income. In response to the comments, the final regulations at §1.861-8(e)(4)(ii)(A) provide that the affiliated group rules in §1.861-14 do not apply for purposes of allocating and apportioning stewardship expenses. As a result, stewardship expenses incurred by one member of an affiliated group in order to oversee the activities of another member of the group are allocated and apportioned by the investor taxpayer on a separate entity basis, with reference to the investor’s stock in the affiliated member. See §1.861-8(e)(4)(ii)(A). Furthermore, in response to comments, the final regulations at §1.861-8(e)(4)(ii)(C) provide that the exempt income and asset rules in section 864(e)(3) and §1.861-8(d)(2) do not apply for purposes of apportioning stewardship expenses.

Comments were also received regarding the rules for allocating stewardship expenses solely to income arising from the entity for which the stewardship expenses are being incurred in order to protect that investment. One comment argued that the rule in the prior final regulations for allocating stewardship expenses solely to dividend income should be retained and should not be expanded to include inclusions such as those under the GILTI rules. In contrast, another comment agreed with the approach to expand allocation to include shareholder-level inclusions such as GILTI inclusions in light of the changes made by the TCJA.

The Treasury Department and the IRS have determined that allocating stewardship expenses to all types of income derived from ownership of the entity, rather than solely dividend income, is appropriate because dividends do not fully capture all of the statutory and residual groupings to which income from stock is assigned. Limiting the allocation of stewardship expenses only to dividends would preclude allocation to stock in a CFC or passive foreign investment company (“PFIC”) whose income gave rise only to subpart F, GILTI, or PFIC inclusions, even if the expense clearly relates to overseeing activities that generate income in the CFC or PFIC that give rise to such inclusions. Therefore, the Treasury Department and IRS agree with the comment supporting the expansion of stewardship expense allocation in proposed §1.861-8(e)(4)(ii)(B) to include shareholder-level inclusions.

One comment recommended adding dividends eligible for a section 245A deduction to the list of income inclusions to which stewardship expenses are allocable. The existing regulations are already clear, however, that stewardship expenses are allocable to dividends. This allocation is not affected by the fact that dividends may qualify for the deduction under section 245A, which does not convert the dividends into exempt or excluded income for purposes of allocating and apportioning deductions. See §1.861-8(d)(2)(iii)(C). To the extent that stewardship expense is allocated and apportioned to dividend income in the section 245A subgroup, section 904(b)(4) requires certain adjustments to the taxpayer’s foreign source taxable income and entire taxable income for purposes of computing the applicable foreign tax credit limitation. Accordingly, the final regulations are not modified in response to the comment.

In response to a request for comments in the 2019 FTC proposed regulations on possible exceptions to the general rule for the allocation and apportionment of stewardship expenses, several comments recommended allowing taxpayers to show that stewardship expense factually relates only to the relevant income of a specific income-producing entity or entities. The Treasury Department and the IRS agree that stewardship expenses may be factually related to the taxpayer’s ownership of a specific entity (or entities) and should not be allocated and apportioned to the income derived from all entities in a group without taking into account the factual connection between the stewardship expense and the entity being overseen. Accordingly, the final regulations at §1.861-8(e)(4)(ii)(B) clarify that at the allocation step (but before applying the apportionment rules), only the gross income derived from entities to which the taxpayer’s stewardship expense has a factual connection are included and, in such cases, the apportionment rule applies based on the tax book value of the taxpayer’s investment in those particular entities. This approach recognizes that stewardship activities are not fungible in the same manner as interest expense.

With respect to the apportionment of stewardship expenses, several comments recommended retaining the flexibility of the prior final regulations, which provide for several permissible methods of apportionment, or alternatively apportioning stewardship expenses on the basis of gross income, rather than assets. One comment questioned the appropriateness of applying the apportionment rule used for interest expense in the context of stewardship expenses.

The Treasury Department and the IRS have determined that it is appropriate to provide a single, clear rule for the apportionment of stewardship expenses and that the asset-based rule for interest expense apportionment is the most appropriate method. The Treasury Department and the IRS have also determined that an explicit rule provides certainty for both taxpayers and the IRS and will minimize disputes. By definition, stewardship expenses typically relate to protecting the value of the taxpayer’s ownership interest in another entity. Therefore, such expenses should be apportioned on the basis of the tax book value (or alternative tax book value) of the taxpayer’s interest in the entity (or entities) in question, since that value more closely approximates the income generated by the entity over time, while income distributed from an entity (or entities) and taxed to the owner can vary from year to year and may not properly reflect all the income-generating activity of the entity. Although stewardship activities may be definitely related to indirectly-owned entities, the Treasury Department and the IRS have determined that apportioning stewardship expenses based on the value of an indirectly-owned entity would lead to unnecessary complexity for taxpayers and administrative burdens for the IRS; instead, such expenses are apportioned based on the values of the entities that are owned directly by the taxpayer. See §1.861-8(e)(4)(ii)(C).

For purposes of determining the value of an entity, the final regulations at §1.861-8(e)(4)(ii)(C) provide that the value of the stock in an affiliated corporation is characterized as if the corporation were not affiliated and the stock is characterized by the taxpayer in the same ratios in which the affiliate’s assets are characterized for purposes of allocating and apportioning the group’s interest expense. The final regulations also provide that the tax book value of a taxpayer’s investment in a disregarded entity is determined and characterized under the rules that would apply if the entity’s stock basis were regarded for purposes of allocating and apportioning the investor taxpayer’s interest expense.

2. Litigation Damages Awards, Prejudgment Interest, and Settlement Payments

The 2019 FTC proposed regulations included special rules for the allocation and apportionment of damages awards, prejudgment interest, and settlement payments incurred in settlement of, or in anticipation of, claims for damages arising from product liability, events incident to the production or sale of goods or provision of services, and investor suits. Damages or settlement awards related to product liability, or events incident to the production or sale of goods or provision of services, are allocated to the class of gross income produced by the specific sales of products or services that gave rise to the claims for damages or injury, or to the class of gross income produced by the assets involved in the production or sales activity, respectively. Damages awards related to shareholder suits are allocated to all income of the corporation and apportioned based on the relative values of all of the corporation’s assets that produce income in the statutory and residual groupings.

One comment suggested that the proposed rules lacked clearly articulated rationales, in contrast to, for example, the rules for R&E expenditures. The Treasury Department and the IRS have determined that the rules included in the 2019 FTC proposed regulations for specific types of litigation-related expenses are consistent with the general principles of the allocation and apportionment rules, which are based on the factual connection between deductions and the class of gross income to which they relate. See §1.861-8(b)(1). Accordingly, no change is made in the final regulations in response to this comment. However, the final regulations at §1.861-8(e)(5)(ii) include a new paragraph heading and a sentence to clarify that the damages rule is not limited to product liability claims.

One comment stated that the 2019 FTC proposed regulations could be interpreted to require a double allocation of deductions to royalty income, for example, if a taxpayer incurs damages from a patent infringement lawsuit and also indemnifies its CFC for damages paid in a separate lawsuit filed against the CFC. The Treasury Department and the IRS have determined that indemnification payments, to the extent deductible, are governed by the generally-applicable rules for allocating and apportioning expenses based on the factual relationship between the deduction and the class of gross income to which the deduction relates. The allocation of separate deductions that are both related to the same class of gross income does not constitute a double allocation. Accordingly, no changes are made in the final regulations in response to this comment.

The 2019 FTC proposed regulations contained an explicit apportionment rule for damages awards in response to industrial accidents and investor lawsuits, but not for product liability and similar claims. The final regulations add a sentence at §1.861-8(e)(5)(ii) to clarify that deductions relating to product liability and similar claims are apportioned among the statutory and residual groupings based on the relative amounts of gross income in the relevant class in the groupings in the year the deductions are allowed.

Finally, several comments disagreed with the approach in the 2019 FTC proposed regulations regarding lawsuits filed by investors against a corporation. These comments argued that it is inappropriate to allocate deductions for such payments to income produced by all of the taxpayer’s assets, because these expenses can have a closer factual connection to the jurisdiction where the litigation occurs or where the events (for example, any negligence, fraud, or malfeasance) at issue in the lawsuit occurred. Some comments advocated for a more flexible rule, noting that certain shareholder claims may have a very narrow geographic scope, whereas other claims may relate to a broader range of activities.

The Treasury Department and the IRS have determined that it is inappropriate to allocate deductions for payments with respect to investor lawsuits on the basis of the situs of the underlying events or the location of the lawsuit. The purpose of direct investor lawsuits against a company is generally to compensate investors for damages to their investment in the entire company. Even where the underlying misconduct directly relates to only a portion of the taxpayer’s business activities, the harm to the investor is generally attributable to the taxpayer’s business more generally and, therefore, any damages payment is related to all of the taxpayer’s income-producing activities. Moreover, any rule that attempted to quantify the portion of damages or settlements that relate to specific business activities and the portion that relates to more general reputational loss would by its nature be difficult for taxpayers to comply with and for the IRS to administer. Furthermore, the Treasury Department and the IRS disagree with the comments suggesting that award payments should be allocated based on the geographic location in which the lawsuit is filed, which could be governed by contractual terms or choice-of-law rules that have little to no factual relationship to the underlying activities to which the lawsuit relates. Accordingly, the comments are not adopted.

3. Net Operating Loss Deductions

The 2019 FTC proposed regulations clarified the treatment of net operating losses (NOLs) by specifying how the statutory and residual grouping components of an NOL are determined in the taxable year of the loss and by clarifying the manner in which the net operating loss deduction allowed under section 172 is allocated and apportioned in the taxable year in which the deduction is allowed. Comments requested that for purposes of applying §1.861-8(e)(8) to section 250 as the operative section, NOLs arising in taxable years before the TCJA’s enactment of section 250 should not be allocated and apportioned to gross FDDEI. On July 15, 2020, the Treasury Department and the IRS finalized regulations under section 250, which provide that the deduction under section 172(a) is not taken into account in computing FDDEI. See §1.250(b)-1(d)(2)(ii). Therefore, the comment is moot. However, a sentence is added to the final regulations at §1.861-8(e)(8)(i) to clarify that in determining the component parts of an NOL, deductions that are considered absorbed in the year the loss arose for purposes of an operative section may differ from the deductions that are considered absorbed for purposes of another provision of the Code that requires determining the components of an NOL. Therefore, for example, a taxpayer’s NOL may comprise excess deductions allocated to foreign source general category income for purposes of section 904, even though for purposes of section 172(b)(1)(B)(ii) the NOL is a farming loss comprising excess deductions allocated to U.S. source income from farming.

4. Application of the Exempt Income/Asset Rule to Insurance Companies in Connection with Certain Dividends and Tax-exempt Interest

The 2019 FTC proposed regulations clarified in proposed §1.861-8(d)(2)(ii)(B), (d)(2)(v), and (e)(16) the effect of certain deduction limitations on the treatment of income and assets generating dividends-received deductions and tax-exempt interest held by insurance companies for purposes of allocating and apportioning deductions to such income and assets. Specifically, the 2019 FTC proposed regulations provided that in the case of insurance companies, exempt income includes dividends for which a deduction is provided by sections 243(a)(1) and (2) and 245, without regard to the proration rules under section 805(a)(4)(A)(ii) disallowing a portion of the deduction attributable to the policyholder’s share of the dividends or any similar disallowance under section 805(a)(4)(D). Similarly, the regulations provided that the term exempt income includes tax-exempt interest without regard to the proration rules.

One comment requested that the final regulations modify §1.861-8T(d)(2) to permit insurance companies to adjust the amount of income and assets that are exempted in apportioning deductions. The comment asserted that such adjustment is required in order to reflect the addition of section 864(e)(7)(E) and relied on legislative history to a provision in proposed technical corrections legislation (Technical Corrections Act of 1987, H.R. 2636, 100^th Cong., section 112(g)(6)(A)) (June 10, 1987)) (the “1987 bill”) to suggest that Congress intended to create a different result for insurance companies than for other companies.

The 1987 bill, however, was not enacted, and the language in section 864(e)(7)(E) is not the same as the language proposed in the bill. Section 864(e)(7)(E) provides regulatory authority for the Secretary to issue regulations regarding any adjustments that may be appropriate in applying section 864(e)(3) to insurance companies. The legislative history to section 864(e)(7)(E) (which was enacted in 1988) does not contain the same language as did the committee reports from the 1987 bill, and the rule that was proposed in the 1987 bill is contrary to subsequent case law. See Travelers Insurance Company v. United States, 303 F.3d 1373 (2002). Therefore, the Treasury Department and the IRS have concluded that although section 864(e)(7)(E) provides regulatory authority for a rule applying section 864(e)(3) to insurance companies, there is no indication that Congress intended for Treasury to adopt a rule mirroring the rule in the 1987 bill (which Congress did not enact).

Section 864(e)(3) is clear that exempt income includes income for which a deduction is allowed under sections 243 and 245, and no exception is provided in the statute for insurance companies. Furthermore, as explained in Part I.A.4 of the Explanation of Provisions in the 2019 FTC proposed regulations, a special rule for either tax-exempt interest of a life insurance company or dividends-received deductions and tax-exempt interest of a nonlife insurance company is not appropriate because when a policyholder’s share or applicable percentage is accounted for as either a reserve adjustment or a reduction to losses incurred, no further modification to the generally applicable rules is required to ensure that the appropriate amount of expenses are apportioned to U.S. source income. Instead, the rule suggested by the comment would inappropriately distort the allocation and apportionment of deductions to U.S. source income. Therefore, the comment is not adopted.

5. Treatment of the Section 250 Deduction

One comment requested clarification on the allocation and apportionment of the deduction allowed under section 250 (“section 250 deduction”) with respect to members of a consolidated group. In general, under §1.1502-50(b), a consolidated group member’s section 250 deduction is determined based on the member’s share of the sum of all members’ positive FDDEI or GILTI. Separate from this determination under §1.1502-50(b), a taxpayer must also allocate and apportion the section 250 deduction to gross income for purposes of determining its foreign tax credit limitation. For this purpose, in allocating and apportioning the section 250 deduction to statutory and residual groupings, under §1.861-8(e)(13) the portion of the section 250 deduction attributable to FDII is treated as definitely related and allocable to the specific class of gross income that is included in the taxpayer’s FDDEI and then apportioned between the statutory and residual groupings based on the relative amounts of FDDEI in each grouping. In the context of an affiliated group, under §1.861-14T(c)(1) expenses are generally allocated and apportioned by treating all members of an affiliated group as if they were a single corporation.

In response to the comment requesting clarity on the allocation and apportionment of the section 250 deduction with respect to members of a consolidated group, the final regulations provide that the section 250 deduction is allocated and apportioned as if all members of the consolidated group are treated as a single corporation. See §1.861-14(e)(4). However, in the case of an affiliated group that is not a consolidated group, the section 250 deduction of a member of an affiliated group is allocated and apportioned on a separate entity basis under the rules of §1.861-8(e)(13) and (14).

6. Other Requests for Comments on Expense Allocation

The preamble to the 2019 FTC proposed regulations requested comments on whether future regulations should allow taxpayers to capitalize and amortize certain expenses solely for purposes of the rules in §1.861-9 for allocating and apportioning interest expense in order to better reflect asset values under the tax book value method. One comment was received recommending that such a rule be included with respect to R&E and advertising expenditures. The Treasury Department and the IRS agree with this comment and, accordingly, this rule is included in a notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register (the “the 2020 FTC proposed regulations”). See Part V.A of the Explanation of Provisions in the 2020 FTC proposed regulations.

One comment requested that a special rule be adopted in §1.861-10T to directly allocate certain interest expense related to regulated utility companies. The Treasury Department and the IRS agree that a special rule is warranted, and have included a rule in the 2020 FTC proposed regulations. See Part V.B. of the Explanation of Provisions in the 2020 FTC proposed regulations.

Finally, the preamble to the 2019 FTC proposed regulations requested comments on whether the rules in §1.861-8(e)(6) for allocating and apportioning state income taxes should be revised in light of changes made by the TCJA and changes to state rules for taxing foreign income. One comment was received requesting that the existing rules, which rely on state law to determine the income to which state taxes relate, be retained. The Treasury Department and the IRS agree that no changes to the rules in §1.861-8(e)(6) are required at this time.

7. Examples Illustrating Allocation and Apportionment of Certain Expenses of an Affiliated Group of Corporations

Examples 1 through 6 in §1.861-14T(j) apply the temporary regulations to fact patterns involving affiliated groups of corporations. However, Examples 1 and 4 of §1.861-14T(j) are no longer consistent with current law, and therefore the final regulations append an informational footnote to §1.861-14T(j) to reflect this fact. The Treasury Department and the IRS are also studying whether the remaining examples should be modified and whether new examples should be included in future guidance.

B. Partnership transactions

The 2019 FTC proposed regulations revised §§1.861-9(b) and 1.954-2(h)(2)(i) to provide that guaranteed payments for the use of capital described in section 707(c) are treated similarly to interest deductions for purposes of allocating and apportioning deductions under §§1.861-8 through 1.861-14, and are treated as income equivalent to interest under section 954(c)(1)(E). These rules were intended to prevent the use of guaranteed payments to avoid the rules under §§1.861-9(e)(8) and 1.954-2(h) that apply to partnership debt.

One comment stated that while guaranteed payments for capital are economically similar to interest payments in some respects, guaranteed payments are, for Federal income tax purposes, payments with respect to equity, not debt, and regulations issued under section 707 narrowly circumscribe the situations in which a guaranteed payment is treated as something other than a distributive share of partnership income. The comment recommended that guaranteed payments for capital be treated as interest only in cases when the taxpayer harbors an abusive motive to circumvent the relevant rule.

The Treasury Department and the IRS have determined that guaranteed payments for the use of capital share many of the characteristics of interest payments that a partnership would make to a lender and, therefore, should be treated as interest equivalents for purposes of allocating and apportioning deductions under §§1.861-8 through 1.861-14 and as income equivalent to interest under section 954(c)(1)(E). This treatment is consistent with other sections of the Code in which guaranteed payments for the use of capital are treated similarly to interest. See, for example, §§1.469-2(e)(2)(ii) and 1.263A-9(c)(2)(iii). In addition, the fact that a guaranteed payment for the use of capital may be treated as a payment attributable to equity under section 707(c), or that a guaranteed payment for the use of capital is not explicitly included in the definition of interest in §1.163(j)-1(b)(22), does not preclude applying the same allocation and apportionment rules that apply to interest expense attributable to debt, nor does it preclude treating such payments as “equivalent” to interest under section 954(c)(1)(E). Instead, the relevant statutory provisions under sections 861 and 864, and section 954(c)(1)(E), are clear that the rules can apply to amounts that are similar to interest.

Finally, a rule that would require determining whether the transaction had an abusive motive would be difficult to administer. Therefore, the comment is not adopted.

C. Treatment of section 818(f) expenses for consolidated groups

Section 818(f)(1) provides that a life insurance company’s deduction for life insurance reserves and certain other deductions (“section 818(f) expenses”) are treated as items which cannot definitely be allocated to an item or class of gross income. When the life insurance company is a member of an affiliated group of corporations, proposed §1.861-14(h)(1) provided that section 818(f) expenses are allocated and apportioned on a separate company basis.

One comment argued that the separate company approach was inconsistent with the general rule in section 864(e)(6) that expenses other than interest that are not directly allocable or apportioned to any specific income-producing activity are allocated and apportioned as if all members of the affiliated group were a single corporation. The comment also argued that the separate company approach would encourage consolidated groups to use intercompany transactions, such as related party reinsurance arrangements, to shift their section 818(f) expenses and achieve a more desirable foreign tax credit result. The comment advocated that the regulations instead adopt a single entity approach for life insurance companies that operate businesses and manage assets and liabilities on a group basis (a “life subgroup” approach).

In contrast, another comment argued that the separate company approach adopted in the proposed regulations was consistent with the fact that life insurance companies are regulated with respect to their reserves, investable assets, and capital. The comment, however, acknowledged that a life subgroup approach may be appropriate in certain cases, such as when an affiliated group of life insurance companies manages similar products on a cross-entity, product-line basis, rather than on an entity-by-entity basis. The comment recommended that final regulations provide a one-time election for taxpayers to choose either the separate company or life subgroup approach for allocating and apportioning section 818(f) expenses.

The Treasury Department and the IRS agree that there are merits and drawbacks to both the separate company and the life subgroup approaches and that a one-time election, as suggested by the comments, should be considered. Therefore, the final regulations at §1.861-14(h) do not include the separate company rule for section 818(f) expenses. The 2020 FTC proposed regulations instead propose a life subgroup approach as well as a one-time election for taxpayers to choose the separate company approach.

D. Allocation and apportionment of R&E expenditures

The 2019 FTC proposed regulations proposed several changes to §1.861-17, including eliminating the gross income method of apportionment, eliminating the legally-mandated R&E rule, and limiting the class of income to which R&E expenditures could be allocated to gross intangible income reasonably connected with a relevant Standard Industrial Code (SIC) category. In addition, the rule for exclusive apportionment of R&E expenditures was modified by eliminating the possibility of increased exclusive apportionment based on taxpayer-specific facts and circumstances, and by providing that exclusive apportionment applies solely for purposes of section 904.

1. Scope of Gross Intangible Income

Before being revised, §1.861-17(a) provided that R&E expenditures are related to all income reasonably connected to a broad line of business or SIC code category. The 2019 FTC proposed regulations narrowed and clarified the class of gross income to which R&E expenditures are considered to relate. The 2019 FTC proposed regulations defined the relevant class of gross income as gross intangible income (“GII”), which is defined as all income attributable, in whole or in part, to intangible property, including sales or leases of products or services derived, in whole or in part, from intangible property, income from sales of intangible property, income from platform contribution transactions, royalty income, and amounts taken into account under section 367(d) by reason of a transfer of intangible property. GII does not include dividends or any amounts included in income under section 951, 951A, or 1293.

One comment disagreed with the exclusion from GII of section 951A inclusions. According to this comment, R&E expenditures ultimately benefit foreign subsidiaries such that allocation to income described in section 904(d)(1)(A) (the “section 951A category”) is appropriate and should not be treated differently from other taxpayer expenses that reduce income in the section 951A category. Other comments generally supported the exclusion of GILTI and other income inclusions from GII on the grounds that a taxpayer incurring R&E expenditures to develop intangible property should be fully compensated for the value of that intellectual property and, conversely, the earnings of CFCs should not reflect returns on intellectual property owned by another person.

The Treasury Department and the IRS have determined that GII should continue to exclude GILTI or other inclusions attributable to ownership of stock in a CFC. As described in §1.861-17(b), R&E expenditures, whether or not ultimately successful, are incurred to produce intangible property. Under the rules of sections 367(d) and 482, the person incurring the R&E expenditures must be compensated at arm’s length when such intangible property is licensed, sold, or otherwise gives rise to income of controlled parties, and it is this income that gives rise to GII. In transactions not involving the direct transfer of intangible property to a related party, the section 482 regulations require compensation for the intangible property embedded in the underlying transaction. See generally §1.482-1(d)(3)(v). For example, §1.482-3(f) requires that intangible property embedded in tangible property be accounted for when determining the arm’s length price for the transaction. Similarly, §1.482-9(m) requires that intangible property used in a controlled services transaction be accounted for in determining the arm’s length price for the transaction.

In contrast to R&E expenditures giving rise to income required by sections 367(d) and 482, subpart F or GILTI inclusions reflect income earned by a CFC and not the taxpayer incurring the R&E expenditures; the fact that such taxpayer is deemed under section 951 or 951A to have income through an inclusion from a CFC licensee does not mean that such income is a result of the R&E expenditures incurred by the taxpayer, assuming that the CFC pays the taxpayer an arm’s length price for the transfer of the intangible property or, in the case of an exchange described in sections 351 or 361, the taxpayer reports the required annual income inclusion.² Therefore, including income in the section 951A category in GII would result in a mismatch between the R&E expenditures and the income generated by such expenditures. Although (as noted in a comment) R&E expenditures that are ultimately unsuccessful could be viewed as intended to benefit a taxpayer’s foreign subsidiaries more broadly, the Treasury Department and the IRS have determined that the GII earned by the taxpayer provides a reasonable proxy for how the taxpayer expects to recover its R&E costs, and providing separate rules for identifying and attributing unsuccessful R&E expenditures to a broader class of income would be unduly burdensome for taxpayers and difficult for the IRS to administer.

Several comments noted that while income in the section 951A category is excluded from GII, income giving rise to foreign-derived intangible income (“FDII”) is included in GII. These comments generally argued that the exclusion from GII of income in the section 951A category and inclusion of amounts included in FDII created a lack of parity between the two provisions even though the methodology and calculations of both are meant to be similar.

The Treasury Department and the IRS disagree with these comments. The allocation and apportionment of R&E expenditures to separate categories for purposes of section 904 as the operative section and the allocation and apportionment of R&E expenditures to FDDEI for purposes of section 250 as the operative section both require identifying the class of income to which the R&E expenditures are attributable. R&E expenditures incurred by a United States shareholder (“U.S. shareholder”) are not allocated and apportioned to income in the section 951A category because such income, which relates to an inclusion of income earned by the CFC, is not a return on the U.S. shareholder’s R&E expenditures and, thus, is not included in gross intangible income. In contrast, income giving rise to FDII is earned directly by the same taxpayer that incurs R&E expenditures and may include a return on those R&E expenditures. Income that gives rise to FDII is reduced by “the deductions (including taxes) properly allocable to such gross income.” See section 250(b)(3)(A)(ii) and §1.250(b)-1(d)(2). There is no indication that Congress intended to exclude R&E expenditures from that calculation. Furthermore, because expenses incurred by a CFC are allocated and apportioned to income of the CFC for purposes of computing tested income under section 951A(c)(2)(A)(ii), contrary to the suggestion in the comments, R&E expenditures of the CFC are in fact allocated and apportioned to tested income under §1.861-17 and reduce the ultimate amount of the taxpayer’s GILTI inclusion. Accordingly, the comment is not adopted.

One comment requested modifications to the definition of GII to exclude both acquired intangible property and income from certain platform contribution transactions described in §1.482-7(b)(1)(ii). According to the comment, income from these items should be excluded from GII because a taxpayer’s R&E expenditures could not relate to gross income from intangible property acquired from a different taxpayer (as opposed to developed by the taxpayer), or to gross income from certain platform contributions.

The Treasury Department and the IRS have determined that the comment does not accurately describe the premise on which the R&E allocation and apportionment rules are based. R&E expenditures are not reasonably expected to produce any current income in the taxable year in which the expenditures are incurred, and as the regulations explicitly recognize, the results of R&E expenditures are speculative. Accordingly, R&E expenditures are allocated to a class of currently recognized gross income only because it generally will be the best available proxy for the income that the current expense is reasonably expected to produce in the future. Specifically, although current R&E expense of a taxpayer likely does not directly contribute to gross intangible income currently recognized, it is reasonable to expect that R&E will contribute to GII earned by the taxpayer group in the future. The definition of GII is not intended to require a strict factual connection between the R&E expenditure and GII earned in the taxable year, but merely that the expenditures be “reasonably connected” with a class of income. The Treasury Department and the IRS have also determined that requiring the comment’s suggested level of explicit factual connection between R&E expenditures and GII would outweigh the administrative benefit and ease of broadly defining GII. Moreover, in cases in which a taxpayer has a valid cost sharing agreement, even though R&E expenditures may be allocated to PCT payments, those expenses are generally apportioned based on sales by the taxpayer or other entities reasonably expected to benefit from current research and experimentation. This ensures that R&E expenditures offset the categories of income included in GII that are expected to benefit from those expenditures. Accordingly, the comment is not adopted.

One comment requested clarification of the definition of GII and specifically that the final regulations provide that the services income included in GII does not include gross income allocated to or from a foreign branch under §1.904-4(f)(2)(vi) by reason of a disregarded payment for services performed by or for the foreign branch that contribute to earning GII of the taxpayer.

Under §1.904-4(f)(2)(vi)(B), a disregarded payment from a foreign branch owner to its foreign branch to compensate the foreign branch for the provision of contract R&E services that, if regarded, would be allocable to general category gross intangible income attributable to the foreign branch owner under the principles of §§1.861-8 through 1.861-17, would cause the general category GII attributable to the foreign branch owner to be adjusted downward and the GII attributable to the foreign branch and included in foreign branch category income to be adjusted upward. Although a disregarded payment for R&E services does not give rise to gross income for Federal income tax purposes and so does not in and of itself constitute GII, to the extent the disregarded payment results in the reattribution of regarded gross income that is GII from the general category to the foreign branch category (or vice versa), that income is treated as GII in the foreign branch category (or the general category). The final regulations at §1.861-17(b)(2) clarify that although GII does not include disregarded payments, certain disregarded payments that would be allocable to GII if regarded may result in the reassignment of GII from the general category to the foreign branch category or vice versa. Part II.D.6 of this Summary of Comments and Explanation of Revisions further describes comments regarding R&E expenditures and foreign branches.

One comment sought clarification regarding the portion of product sales derived from intangible property that would be considered GII. The final regulations at §1.861-17(b)(2) clarify that GII includes the full amount of gross income from sales or leases of products or services, if the income is derived in whole or in part from intangible property. Under the definition of GII, there is no bifurcation or splitting of sales income between a portion attributable to intangible property and other amounts such as distribution or marketing functions. Additionally, the definition of GII has been modified to more clearly delineate between amounts from sales or leases of products derived from intangible property versus sales or licenses of intangible property itself.

2. Allocation of R&E Expenditures

One comment requested modifications to the general rule that allocates R&E expenditures to GII that is reasonably connected with one or more relevant SIC code categories. The comment noted that in some cases, taxpayers are restricted by law or contract from exploiting research, with the result that the research would only generate income in a particular statutory grouping after several years from the date of the contract. Accordingly, the comment requested that such R&E expenditures be allocated to the statutory or residual grouping of income within GII that corresponds to the market restrictions on the use of the R&E. Alternatively, the comment requested that taxpayers be provided with the option to allocate R&E expenditures in a manner consistent with the taxpayer’s books and records to the extent there is a clear factual relationship between the expenditures and a particular category of income.

The Treasury Department and the IRS have determined that it is inappropriate to provide exceptions to the general rule that R&E expenditures are allocated to GII reasonably connected with one or more relevant SIC code categories. The two approaches suggested by the comment are premised on a goal of seeking to “trace” R&E expenditures to the actual income that they are expected to produce in the future. However, as discussed in Part II.D.1 of this Summary of Comments and Explanation of Revisions, R&E expenditures are not reasonably expected to produce any current income in the taxable year in which the expenditures are incurred, and the regulations recognize that the results of R&E expenditures are speculative. Instead, §1.861-17 relies on the use of current year sales as a proxy for the income that the expenses are reasonably expected to produce in the future, in recognition of the fact that it is difficult to ascertain the composition of future income that would be generated from R&E expenditures. This approach generally already takes into account the types of market or legal restrictions described by the comment — to the extent that a taxpayer’s sales of products in the same SIC code category are generally restricted to a particular market, these restrictions will be reflected in its sales and therefore are already taken into account under the sales method provided in proposed §1.861-17. Moreover, rules that specially allocate particular R&E expenditures based on the reasonableness of speculative expectations about sales that may or may not actually arise several years in the future would be very difficult for taxpayers to comply with and for the IRS to administer.

Finally, allowing taxpayers to elect the use of a books-and-records method to allocate R&E expenditures to less than all of a taxpayer’s GII would lead to inappropriate results, as taxpayers would only elect such option if the additional information reflected in the taxpayer’s books and records improved the tax result; in contrast, the IRS would not have any such information available to it if the taxpayer chose not to make the election. Since this information would generally be in the form of predictions about future income streams, an elective books-and-records rule would create administrability concerns for the IRS, which would have substantial difficulty verifying whether the predictions were reasonable. Accordingly, the comments are not adopted.

One comment recommended that the Treasury Department and the IRS reconsider the elimination of the “legally mandated R&E” rule from the 2019 FTC proposed regulations, noting that the rule seemed to be required by section 864(g)(1)(A). As explained in the preamble to the 2019 FTC proposed regulations, the legally mandated R&E rule was eliminated in light of changes to the international business environment and to simplify the regulations, and the comment does not argue the change is inappropriate. Additionally, the comment misstates the application of section 864(g)(1)(A), which is not applicable to the taxable years to which the final regulations apply. See section 864(g)(6). Accordingly, the comment is not adopted.

One comment sought clarification on the allocation of R&E expenditures where research is conducted with respect to more than one SIC code category. The comment noted that the current final regulations at §1.861-17(a)(2)(iii) mention two digit SIC code categories, or Major Groups in the terminology of the SIC Manual, yet the 2019 FTC proposed regulations omitted references to two digit SIC codes.

The Treasury Department and the IRS have determined that it is appropriate to aggregate some or all three digit SIC categories within the same Major Group, but it is inappropriate to aggregate any three digit SIC categories within different Major Groups. While R&E expenditures are speculative, it is not reasonable to expect R&E conducted for one broad line of business to benefit an unrelated line of business and, therefore, the allocation and apportionment of expenses should not be determined by aggregating different Major Groups. For example, if a taxpayer engages in both the manufacturing and assembling of cars and trucks (SIC code 371) it may aggregate that category with another three digit category in Major Group 37, which includes six other three digit categories (for example, aircraft and parts (SIC code 372) or railroad equipment (SIC code 374)), but taxpayers may not aggregate a three digit SIC code from a Major Group with another three digit SIC code from a different Major Group, except as provided in §1.861-17(b)(3)(iv) (requiring aggregation of R&E expenditures related to sales-related activities with the most closely related three digit SIC code, other than those within the wholesale and retail trade divisions, if the taxpayer conducts material non-sales-related activities with respect to a particular SIC code). The final regulations are modified accordingly.

3. Exclusive Apportionment of R&E Expenditures

i. Computation of FDII

Several comments argued that if the Treasury Department and the IRS determine that GII should include amounts giving rise to FDII, then the rule in the 2019 FTC proposed regulations in §1.861-17(c), which limits exclusive apportionment of R&E expenditures solely for purposes of applying section 904 as the operative section, should be revised to also allow for exclusive apportionment for purposes of calculating a taxpayer’s FDII deduction. The comments generally argued that the exclusive apportionment provision be applied such that 50 percent of a taxpayer’s R&E expenditures should be apportioned to income that is not foreign derived deduction eligible income (“FDDEI”) provided that at least 50 percent of the taxpayer’s research activities are conducted in the United States. Comments argued that such an exclusive apportionment rule would encourage R&E activity in the United States, consistent with the general intent of the TCJA to eliminate tax incentives for shifting activity and intellectual property overseas. Additionally, comments asserted that R&E expenditures provide greater value to the location where R&E is performed and that there is a technology “lag” before successful products are exported to foreign markets.

The Treasury Department and the IRS have determined that it is not appropriate to apply an exclusive apportionment rule for purposes of computing FDII. As discussed in Part II.D.1 of this Summary of Comments and Explanation of Revisions, R&E expenditures are not reasonably expected to produce any current income in the taxable year in which the expenditures are incurred, and the regulations explicitly recognize that the results of R&E expenditures are speculative. Furthermore, to the extent there is consistently a “lag” before a taxpayer’s successful products are exported to foreign markets, then such lag should generally be reflected in current year sales of newly successful products (which relate to R&E incurred in prior taxable years) being weighted towards domestic markets. Therefore, the rules’ use of current year sales as a proxy for the income that the expense is reasonably expected to produce in the future already takes into account to some extent the potential for a “lag” between exploiting intangible property in the domestic market versus foreign markets.

In addition, the Treasury Department and the IRS have determined that nothing in the text of the TCJA or its legislative history suggests that Congress intended that existing rules on allocation and apportionment of R&E expenditures be modified in a way to create particular incentives. Section 250(b)(3) requires determining the deductions that are “properly allocable” to deduction eligible income, and §1.250(b)-1(d)(2) confirms that the general rules under §1.861-17 apply for purposes of allocating and apportioning R&E expenditures to deduction eligible income and FDDEI. Nothing in the statute or legislative history suggests that any alternative allocation and apportionment rule should apply. Furthermore, adopting an R&E allocation and apportionment rule solely for purposes of increasing the amount of the FDII deduction to incentivize R&E activity (whether or not such expenditures were “properly” allocable to non-FDDEI income) would be inconsistent with the United States’ position, including as stated in forums such as the OECD’s Forum on Harmful Tax Practices, that the FDII regime is not intended to provide a tax inducement to shifting activities or income, but is intended to neutralize the effect of providing a lower U.S. effective tax rate with respect to the active earnings of a CFC of a domestic corporation (through a deduction for GILTI) by also providing a lower effective U.S. tax rate with respect to FDII earned directly by the domestic corporation. Such parity is generally furthered by ensuring that R&E expenditures incurred by a domestic corporation are allocated and apportioned to FDII in the same manner as R&E expenditures incurred by a CFC are allocated and apportioned to tested income that gives rise to GILTI.

Therefore, the final regulations provide that the exclusive apportionment rule is limited to section 904 as the operative section.

ii. Increased exclusive apportionment

Two comments recommended reinstating the rule allowing for an increased exclusive apportionment of R&E expenditures. Under the increased exclusive apportionment rule, a taxpayer may establish to the satisfaction of the Commissioner that an even greater amount of R&E expenditures should be exclusively apportioned. One comment indicated that there may be circumstances where an even greater amount of R&E expenditures should be apportioned, such as following the termination of a cost sharing arrangement (“CSA”). Another comment pointed out that the 2019 FTC proposed regulations reduce taxpayer options by eliminating both increased exclusive apportionment and the gross income method.

The Treasury Department and the IRS have determined that a rule allowing for increased exclusive apportionment is not warranted. The facts and circumstances nature of the determination that would be required and the potential for disputes outweigh the benefits of affording taxpayers additional flexibility in rare or unusual cases. Additionally, to the extent that there is a tendency to exploit intellectual property in the same market where the taxpayer conducts R&E, this will already be reflected in current sales, as those in part reflect the results of recently-developed intellectual property. Accordingly, this comment is not adopted.

iii. Mandatory application of exclusive apportionment

Two comments generally objected to the required application of exclusive apportionment for purposes of section 904. According to the comments, in certain situations where a taxpayer has insufficient domestic source gross income to absorb the apportioned R&E expenditures, the resulting overall domestic loss (“ODL”) would reduce foreign source income in each separate category described in §1.904-5(a)(4)(v), including the section 951A and foreign branch categories, reducing the taxpayer’s ability to claim foreign tax credits. The comments recommended that taxpayers either be allowed to elect out of exclusive apportionment or alternatively that it be applied in an amount less than 50 percent of the taxpayer’s R&E expenditures. One comment alternatively recommended a modification to the ODL and R&E expenditure rules such that the majority of the amounts otherwise subjected to exclusive apportionment would instead be allocated to income in the general category rather than the section 951A or foreign branch categories.

The TCJA did not modify the operation of section 904(f) or (g) with respect to the section 951A or foreign branch categories, nor is there any indication in the TCJA or legislative history that Congress intended the rules under section 904(f) and (g), or the allocation and apportionment rules under section 861, to apply differently in connection with section 951A or foreign branch category income. To the extent an ODL account is created as the result of a domestic loss offsetting foreign source income in the section 951A or foreign branch category under section 904(f)(5)(D), this reduction is reversed in later years through the recapture provisions in section 904(g)(3), when U.S. source income is recharacterized as foreign source income in the separate categories that were offset by the ODL. Additionally, the Treasury Department and the IRS have determined that the consistent application of the exclusive apportionment rule for purposes of section 904 promotes simplicity and certainty, whereas an optional rule would be more difficult to administer. Accordingly, these comments are not adopted.

4. Elimination of the Gross Income Method

Several comments requested that the gross income method for apportioning R&E expenditures be retained. In general, these comments recommended allowing taxpayers to choose either the gross income method or the sales method rather than being required to utilize only the sales method, including by allowing taxpayers to choose one method for certain operative sections and another method for other operative sections. Some comments asserted that the mandatory use of the sales method would inappropriately allocate and apportion more R&E expenditures to FDDEI than under the gross income method in cases where U.S. taxpayers license their intellectual property for foreign use but sell products directly to U.S. customers. One comment argued that the sales method could be distortive in certain situations where a taxpayer licenses its intellectual property to entities whose sales are at least partially attributable to self-developed intellectual property. Another comment argued that where a taxpayer’s primary type of GII is royalty income, it will be difficult to apportion R&E based on sales numbers and that therefore the gross income method should be maintained.

The Treasury Department and the IRS have determined that, on balance, the sales method results in substantially fewer distortions than the gross income method. Before being modified by these final regulations, taxpayers were permitted to apportion R&E expenditures under either a gross income or sales method. The Explanation of Provisions in the 2019 FTC proposed regulations explained that the gross income method could produce inappropriate, distortive results in certain cases. In particular, distortions could arise because the gross income method looks only to gross income earned directly by the taxpayer. Gross income that is earned by the taxpayer and that is attributable to one grouping (such as U.S. source income) may reflect value unrelated to intangible property, for example gross income from sales that reflect value from marketing or distribution activities of the taxpayer, whereas gross income of such taxpayer that is attributable to another grouping (such as foreign source income) may exclude such non-IP related value due, for example, to the fact that such gross income is earned solely from licensing intangible property to a related party without the performance of any marketing or distribution activities. The distortions arise both because gross income reflects a reduction of gross receipts for cost of goods sold but not for related deductible expenses, and also because the gross income method does not distinguish between gross income earned from customers (for which the gross income generally captures all of the value related to the product or service arising from the IP) versus from related parties (for which gross income generally only captures an intermediate portion of the value of the relevant product or service, which will generally be enhanced by the related party).

In contrast, the sales method provides a consistent, reliable method with fewer distortions than the gross income method. In particular, the sales method focuses on the gross receipts from sales of a product to final customers. This approach is more likely to achieve consistent results in the case of the same or similar final products, and thereby allows for a consistent comparison of value derived from intangible property with respect to each grouping. That is the case regardless of whether the taxpayer chooses to license its intangible property to other persons (including related parties) for purposes of manufacturing final products, or the taxpayer manufactures products itself, and regardless of whether other persons enhance the product with additional value attributable to other intangible property. Therefore, the sales method ensures that differences in supply chain structures do not alter the nature of how R&E expenditures are allocated and apportioned.

Alternatively, some comments recommended modifying the gross income method. One comment recommended modifying the gross income method to more accurately match income to related R&E expenditures by using only gross income that is attributable to the intangible property owned by the taxpayer. However, the Treasury Department and the IRS have determined that it would lead to complexity for taxpayers and administrative burdens for the IRS to seek to accurately determine the share of gross income that is attributable to intangible property when the intangible property is embedded in a final product. In addition, such a rule would be unlikely to result in significantly different results than under the sales method, because the ratio of gross income among groupings that is attributable solely to intangible property is likely to be broadly similar to the ratio of gross receipts from sales within those groupings, since the intangible component of gross income from sales is likely to be determined as a fraction of gross receipts, and such fraction would generally be the same for each grouping.

One comment argued that the gross income method must be included in the final regulations because it is statutorily required under section 864(g)(1). However, section 864(g) is not applicable to the taxable years covered by the final regulations. See section 864(g)(6). Therefore, the comment is not adopted.

Finally, one comment recommended allowing taxpayers to use the gross income method if using the sales method would otherwise cause the taxpayer to have an ODL. The Treasury Department and the IRS have determined that it would be inappropriate to allow for the targeted application of a method solely for the purpose of avoiding the ODL rules, which are statutorily mandated. The regulations under section 861, including §1.861-17, are premised on associating deductions in as accurate and reasonable a manner as possible with the income to which such deductions relate. It is inconsistent with this overall policy of relating deductions to the relevant income to revise the regulations under section 861 simply to achieve a specific result under an operative section. Accordingly, the final regulations eliminate the gross income method.

5. Application of Sales Method

The 2019 FTC proposed regulations retained the rule in the prior final regulations which provides that for apportionment purposes, the sales method includes certain gross receipts of related and unrelated entities that are reasonably expected to benefit from the taxpayer’s R&E expenditures, but does not include the receipts of entities that have entered into a valid CSA with the taxpayer. The 2019 FTC proposed regulations made limited changes to the sales method as it existed under the prior final regulations.

One comment requested guidance on the application of the sales method in the context of foreign branch category income; this comment is discussed in Part II.D.6 of this Summary of Comments and Explanation of Revisions.

Two comments asked for a modification to the treatment of controlled entities that terminate an existing CSA with a taxpayer. Under the sales method, gross receipts from sales of products or the provision of services within a relevant SIC code category by controlled parties of the taxpayer are taken into account when apportioning the taxpayer’s R&E expenditures if the controlled party is reasonably expected to benefit from the taxpayer’s research and experimentation. Under proposed §1.861-17(d)(4)(iv), the sales of controlled parties that enter into a valid CSA with a taxpayer are generally excluded from the apportionment formula because the controlled party is not expected to benefit from the taxpayer’s R&E expenditures. The comments argued that when a CSA is terminated and a taxpayer licenses newly-developed intangibles to a controlled party, all gross receipts from the controlled party are included in the apportionment formula, even though for some post-termination period the controlled party may benefit more from intangibles created by its own R&E expenditures incurred under the previously-existing CSA rather than from the newly-developed and licensed intangibles. The comments recommended varying adjustments, including rules specific to CSA terminations or alternatively more generalized adjustments such as the retention of the increased exclusive apportionment rule or the gross income method.

The Treasury Department and the IRS disagree with the comments’ characterization of §1.861-17 as seeking directly to match R&E expenditures with the income that such expenditures generate. According to the comments, following a CSA termination with a controlled party, a taxpayer’s current R&E expenditures should not offset the controlled party’s royalty payment to the taxpayer because the controlled party’s gross receipts would be attributable to the intangibles funded by the controlled party during the period the CSA existed. This assertion assumes that current sales are used to apportion R&E expenditures because they result from a taxpayer’s current or recent research and, therefore, it is inappropriate to include gross receipts attributable to the research of a different taxpayer. The regulations, however, are based in part on the acknowledgement that R&E is a speculative, forward-looking activity that often does not result in income or sales in the current year, or even in future years. As discussed in Part II.D.2 of this Summary of Comments and Explanation of Revisions, current sales are nevertheless used because they generally will be the best available proxy for the income R&E expenditures are expected to produce in future years. Accordingly, once a CSA is terminated, it is appropriate to include the sales of a controlled party that previously participated in a CSA if that controlled party is reasonably expected to benefit from the taxpayer’s current R&E expenditures to generate future sales. Additionally, the Treasury Department and the IRS have determined that attempting to distinguish between the sales attributable to the controlled party’s intangible property and those attributable to intangible property licensed from the taxpayer is generally difficult and uncertain and may often lead to disputes, making such a rule difficult for taxpayers to comply with and burdensome for the IRS to administer. Because those concerns also exist when a taxpayer and a controlled party enter into a CSA, the final regulations also do not adopt comments requesting such a rule in that context. Furthermore, the Treasury Department and the IRS have determined that the tax consequences of terminating a CSA may vary depending on the facts and circumstances and are considering whether it would be appropriate to provide special rules for these transactions, and thus it would not be appropriate to provide special rules in connection with §1.861-17 until these transactions have undergone further study. Therefore, the comments are not adopted.

Finally, several comments requested a modification to the rule in proposed §1.861-17(d)(3) and (4) providing that if a taxpayer has previously licensed, sold, or transferred intangible property related to a SIC code category to a controlled or uncontrolled party, then the taxpayer is presumed to expect to do so with respect to all future intangible property related to the same SIC code category. The comments argued that the 2019 FTC proposed regulations’ use of the term “presumption” suggested that taxpayers would be unable to rebut the presumption in appropriate cases. In response to the comments, the final regulations clarify that taxpayers may rebut the presumption by demonstrating that prior exploitation of the taxpayer’s intangible property is inconsistent with reasonable future expectations.

In addition, the final regulations make other revisions to the sales method. First, the final regulations specify under what circumstances the sales or services of uncontrolled or controlled parties are taken into account. In particular, the final regulations specify that the gross receipts are taken into account if the uncontrolled or controlled party is expected to acquire (through license, sale, or transfer) intangible property arising from the taxpayer’s current R&E expenditures, products in which such intangible property is embedded or used in connection with the manufacture or sale of such products, or services that incorporate or benefit from such intangible property. Second, the final regulations revise §1.861-17(d)(4) to refer to sales by controlled parties (which is defined as any person that is related to the taxpayer)), rather than controlled corporations, to clarify that, for example, sales made by a controlled partnership that is reasonably expected to license intangible property from the taxpayer are fully taken into account under the sales method. Finally, the final regulations revise §1.861-17(f)(3) to provide that if a partnership incurs R&E expenditures (and is not also an uncontrolled party or controlled party described in §1.861-17(d)(3) or (4)) and makes related sales, then those sales are considered made by the partners in proportion to their distributive shares of gross income attributable to the sales.

6. Foreign Branch Category Income and R&E Expenditures

Two comments addressed the interaction of §1.861-17 and foreign branch category income. One comment requested that a portion of sales earned by a foreign branch should be attributed to the general category for purposes of apportioning R&E expenditures in circumstances where a foreign branch utilizes intellectual property of the foreign branch owner to earn GII and pays a disregarded royalty to its U.S. owner. Under §1.904-4(f)(2)(vi)(A), the amount of foreign branch category income would be adjusted downward and the foreign branch owner’s general category income would be adjusted upward by the amount of the disregarded royalty. According to the comment, after exclusive apportionment (as applicable), the 2019 FTC proposed regulations would apportion entirely to foreign branch category income the remaining R&E expense, which should instead be apportioned to the general category income originally attributable to the GII of the foreign branch that was reassigned by reason of the disregarded royalty.

The Treasury Department and the IRS have determined that the 2019 FTC proposed regulations, in combination with §1.904-4(f)(2)(vi), already operate in the manner requested by the comment. Under proposed §1.861-17(d)(1)(iii), gross receipts are assigned to the statutory grouping (or groupings) or residual grouping to which the GII related to the sale, lease, or service is assigned. Adjustments to the amounts of gross income attributable to a foreign branch by reason of disregarded payments change the separate category grouping to which the gross income is assigned, but do not change the total amount, character, or source of a United States person’s gross income. See §1.904-4(f)(2)(vi)(A). After application of §1.904-4(f)(2)(vi), GII related to the foreign branch’s sales is assigned to the general category in the amount of the disregarded royalty payment, and only the balance of the GII is assigned to the foreign branch category. Accordingly, a proportionate amount of the gross receipts from sales made by the foreign branch to which a disregarded royalty payment would be allocable is assigned to the general and foreign branch categories in the same ratio as the disregarded royalty payment bears to the gross income attributable to the sales. The final regulations in §1.861-17(d)(1)(iii) clarify that the assignment of gross receipts occurs after gross income in the separate categories is adjusted under §1.904-4(f)(2)(vi) and clarify through an example the formula used to reassign gross receipts as a result of a disregarded reallocation transaction. See §1.861-17(g)(6) (Example 6).

The second comment requested changes to the treatment of foreign branches that provide contract R&E services for the benefit of the foreign branch owner. According to the comment, when disregarded payments made by the foreign branch owner in respect of the provision of contract R&E services by a foreign branch cause GII to be reallocated to the foreign branch, R&E expenditures incurred by the foreign branch owner may be apportioned to foreign branch category income in a manner inconsistent with the economics of the branch’s activities as a services provider, creating disparate tax results compared to those that would obtain if the services were performed by a CFC. The comment suggested that the foreign branch’s regarded costs of providing the research services that give rise to the disregarded payment from the foreign branch owner should reduce the amount of GII that was assigned to the foreign branch category, or more generally that GII should not be assigned to the foreign branch category by reason of disregarded payments for research services.

The Treasury Department and the IRS agree that R&E expenditures, including deductible expenses for the foreign branch’s costs in providing research services to the foreign branch owner, may be apportioned to foreign branch category income that is GII, including GII that is treated as attributable to the foreign branch category under §1.904-4(f)(2)(vi) by reason of disregarded payments from the foreign branch owner compensating the foreign branch for its research services that will generate GII for the foreign branch owner, and that the apportionment is based upon gross receipts assigned to the statutory groupings. However, as noted in §1.904-4(f)(2)(vi)(A), the reattribution of gross income between the general and foreign branch categories by reason of disregarded payments cannot change the character of a taxpayer’s realized gross income. The Treasury Department and the IRS have determined that the different characterization of services income earned by a CFC, which may not be GII, and sales income reflecting GII that is attributed to a foreign branch by reason of disregarded payments for services, results from the Federal income tax treatment of disregarded payments, which do not give rise to gross income, and that it is not appropriate effectively to override the characterization of gross income by modifying the rules for allocating and apportioning recognized R&E expenditures. Accordingly, the comment is not adopted.

7. Contract Research Arrangements

In the Explanation of Provisions in the 2019 FTC proposed regulations, the Treasury Department and the IRS requested comments on whether contract research arrangements involving expenditures that are reimbursed by a foreign affiliate are generally paid or incurred by a U.S. taxpayer such that a deduction under section 174 would be allowable for such expenditures, and whether any special rules for such arrangements should be considered. Generally, the comments received stated that where contract research is performed in the United States and is connected with a U.S.-based multinational’s trade or business, a deduction under section 174, rather than section 162, may be appropriate.

The Treasury Department and the IRS have determined that it is beyond the scope of the final regulations to determine whether contract research expenses are, or are not, eligible to be deducted under either section 162 or 174.

8. Amended Returns and Applicability Dates

One comment requested clarification of the applicability date provisions of the §1.861-17 portion of the 2019 FTC proposed regulations. The comment noted that it was unclear whether a taxpayer that originally elected to apply the gross income method on its 2018 tax return would be eligible to amend its 2018 tax return to apply the sales method. The 2019 FTC final regulations included a provision addressing the binding election contained in former §1.861-17(e)(1). Under this provision, as modified in the 2019 FTC final regulations at §1.861-17(e)(3), taxpayers otherwise subject to the binding election were permitted to change their election. On May 15, 2020, correcting amendments to the 2019 FTC final regulations were issued in 85 FR 29323. These amendments make clear that the change in method can occur on an original or an amended return. See also Part VII of this Summary of Comments and Explanation of Revisions for a discussion of the ability for taxpayers to rely on the proposed or final versions of §1.861-17 for taxable years before the years in which the final regulations are applicable. Accordingly, changes to the applicability date provisions are not necessary in response to this comment.

Finally, one comment requested that the applicability of the regulations under section 250 be deferred until after §1.861-17 is finalized. Because the applicability of the regulations under section 250 has been deferred until taxable years beginning on or after January 1, 2021, which is consistent with the applicability date of §1.861-17, the comment is moot. See §1.250-1(b).

E. Application of section 904(b) to net operating losses

Proposed §1.904(b)-3(d)(2) contained a coordination rule providing that for purposes of determining the source and separate category of a net operating loss, the separate limitation loss and overall foreign loss rules of section 904(f) and the overall domestic loss rules of section 904(g) are applied without taking into account the adjustments required under section 904(b). No comments were received on this provision, which is finalized without change.

One comment requested that the final regulations include a rule switching off the application of section 904(b)(4) with respect to pre-2018 U.S. source NOLs that offset foreign source income and created ODL accounts in pre-2018 taxable years, because in certain cases the increase in the denominator of the foreign tax credit limitation fraction required by section 904(b)(4) could limit the utilization of foreign tax credits that would otherwise be allowed by reason of the recapture of the ODL.

Nothing in section 904(b)(4) allows for the rule to be applied differently in cases when a taxpayer recaptures a pre-2018 ODL versus a post-2017 ODL or has no ODL recapture at all. Instead, the adjustments required by section 904(b)(4) apply in all taxable years beginning after 2017. Therefore, the comment is not adopted.

A. Overview

The conduit financing regulations in §1.881-3 allow the IRS to disregard the participation of one or more intermediate entities in a “financing arrangement” where such entities are acting as conduit entities, and to recharacterize the financing arrangement as a transaction directly between the remaining parties for purposes of imposing tax under sections 871, 881, 1441 and 1442. In general, a financing arrangement exists when through a series of transactions one person advances money or other property (the financing entity), another person receives money or other property (the financed entity), the advance and receipt are effected through one or more other persons (intermediate entities), and there are “financing transactions” linking each of those parties. See §1.881-3(a)(2)(i). An instrument that for U.S. tax purposes is stock (or a similar interest, such as an interest in a partnership) is not a financing transaction under the existing conduit financing regulations, unless it is “redeemable equity” or is otherwise described in §1.881-3(a)(2)(ii)(B)(1).

The 2020 hybrids proposed regulations expanded the definition of a financing transaction, such that an instrument that for U.S. tax purposes is stock or a similar interest is a financing transaction if: (i) under the tax law of a foreign country where the issuer is a tax resident or has a taxable presence, such as a permanent establishment, the issuer is allowed a deduction or another tax benefit, including a deduction with respect to equity, for an amount paid, accrued, or distributed with respect to the instrument; or (ii) under the issuer’s tax laws, a person related to the issuer is entitled to a refund, including a credit, or similar tax benefit for taxes paid by the issuer upon a payment, accrual, or distribution with respect to the equity interest and without regard to the related person’s tax liability in the issuer’s jurisdiction. See proposed §1.881-3(a)(2)(ii)(B)(1)(iv) and (v). The 2020 hybrids proposed regulations relating to conduit financing arrangements were proposed to apply to payments made on or after the date that final regulations are published in the Federal Register.

B. Scope of instruments treated as financing transactions

A comment agreed that a financing transaction should include an instrument that is stock or a similar interest for U.S. tax purposes but debt under the tax law of the issuer’s country because, according to the comment, cases of potential conduit abuse are likely to involve “classic” hybrid instruments not covered by the types of equity described in §1.881-3(a)(2)(ii)(B)(1). However, the comment recommended that an instrument that is equity for purposes of both U.S. tax law and the issuer’s tax law not be treated as a financing transaction, except in limited circumstances, such as if the instrument is issued by a special purpose company formed to facilitate the avoidance of tax under section 881 and the instrument gives rise to a notional deduction or a refund or credit to a related person. According to the comment, the proposed rule that treated an instrument that is equity for both U.S. and foreign tax purposes as a financing transaction was overbroad – as it could deem an operating company to have entered into a financing transaction simply because foreign tax law provides for notional interest deductions or a similar regime of general applicability – or was unclear or vague in certain cases.

If the final regulations were to retain the proposed rules treating other types of equity instruments as financing transactions, the comment requested several clarifications, modifications, and limitations with respect to the rules. These included: (i) treating an instrument that is equity in a partnership for U.S. tax purposes and under the issuer’s tax law as a financing transaction only if the partnership is a hybrid entity that claims treaty benefits; (ii) either eliminating or clarifying the rule providing that an instrument can be a financing transaction by reason of generating tax benefits in a jurisdiction where the issuer has a permanent establishment; and (iii) modifying the applicability date for payments under existing financing arrangements.

Consistent with the comment, the final regulations adopt without substantive change the rule that included as a financing transaction an instrument that is stock or a similar interest (including an interest in a partnership) for U.S. tax purposes but debt under the tax law of the country of which the issuer is a tax resident. See §1.881-3(a)(2)(ii)(B)(1)(iv). In addition, the final regulations provide that if the issuer is not a tax resident of any country, such as an entity treated as a partnership under foreign tax law, the instrument is a financing transaction if the instrument is debt under the tax law of the country where the issuer is created, organized, or otherwise established. See id.

The final regulations do not include the rules under the 2020 hybrids proposed regulations that treated as a financing transaction an instrument that is stock or a similar interest for U.S. tax purposes but gives rise to notional interest deductions or other tax benefits (such as a deduction or credit allowed to a related person) under foreign tax law. The Treasury Department and the IRS plan to finalize those rules separately, in order to allow additional time to consider the comments received. In addition, the Treasury Department and the IRS are continuing to study instruments that generate tax benefits in the jurisdiction where the issuer has a permanent establishment and may address these instruments in future guidance.

A. Definition of financial services entity

In order to promote simplification and greater consistency with other Code provisions that have complementary policy objectives, §1.904-4(e)(2) of the 2019 FTC proposed regulations proposed to define a financial services entity as an individual or a corporation “predominantly engaged in the active conduct of a banking, insurance, financing, or similar business,” and proposed to define financial services income as “income derived in the active conduct of a banking, insurance, financing, or similar business.” These modified definitions are generally consistent with sections 954(h), 1297(b)(2)(B), and 953(e); the 2019 FTC proposed regulations also included conforming changes to the rules for affiliated groups in proposed §1.904-4(e)(2)(ii) and partnerships in proposed §1.904-4(e)(2)(i)(C).

Comments stated that the 2019 FTC proposed regulations increased uncertainty and resulted in the disqualification of certain banks or insurance companies that would qualify as financial services entities under the existing final regulations. Comments also suggested that it was inappropriate to seek to align the relevant definitions in section 904 with those in section 954 because of the differing policies and scope of the two rules. Comments suggested various modifications to more closely align the revisions with the existing approach under §1.904-4(e), or in the alternative, withdrawing the proposed rules entirely.

The Treasury Department and the IRS have determined that revisions to the financial services entity rules in §1.904-4(e) continue to be necessary in light of statutory changes made in 2004 (under the American Jobs Creation Act of 2004, Pub. L. 108-357) and the changes to the look-through rules in §1.904-5 in the 2019 FTC final regulations, which were precipitated by the revisions to section 904(d) under the TCJA. However, the Treasury Department and the IRS have determined the changes to §1.904-4(e) should be reproposed to allow further opportunity for comment. Therefore, the 2020 FTC proposed regulations contain new proposed regulations under §1.904-4(e), as well as a delayed applicability date. See Part IX.B. of the Explanation of Provisions in the 2020 FTC proposed regulations.

B. Allocation and apportionment of foreign income taxes

Proposed §1.861-20 provided detailed guidance on how to match foreign income taxes with income, particularly in the case of differences in how U.S. and foreign law compute taxable income with respect to the same transactions. Proposed §1.861-20(c) provided that foreign tax expense is allocated and apportioned among the statutory and residual groupings by first assigning the items of gross income under foreign law (“foreign gross income”) on which a foreign tax is imposed to a grouping, then allocating and apportioning deductions under foreign law to that income, and finally allocating and apportioning the foreign tax among the groupings. See proposed §1.861-20(c).

Proposed §1.861-20(d)(2)(ii)(B) provided that if a taxpayer recognizes an item of foreign gross income that is attributable to a base difference, then the item of foreign gross income is assigned to the residual grouping, with the result that no credit is allowed if the tax on that item is paid by a CFC. The proposed regulations provided an exclusive list of items that are excluded from U.S. gross income and that, if taxable under foreign law, are treated as base differences.

Several comments requested that distributions described in sections 301(c)(2) and 733, representing nontaxable returns of capital, be removed from the list of base differences on the grounds that foreign tax on such distributions is more likely to result from timing differences. Some comments argued that the foreign law characterization of the distribution should govern the determination of the income group to which the foreign tax is allocated. Other comments suggested that foreign tax on return of capital distributions should be associated with passive category capital gains, because by reducing basis such distributions may increase the amount of capital gain recognized for U.S. tax purposes in the future.

The purpose of the rules in §1.861-20, as well as §1.904-6, is to allocate and apportion foreign income taxes to groupings of income determined under Federal income tax law, and the final regulations at §1.861-20(d)(1), consistent with the approach in former §1.904-6, provide that Federal income tax law applies to characterize foreign gross income and assign it to a grouping. Characterizing items solely based on foreign law, with no comparison to the U.S. tax base, would altogether eliminate base differences, which are expressly referenced in section 904(d)(2)(H)(i).

However, the Treasury Department and the IRS have determined that in most cases, a foreign tax imposed on distributions described in sections 301(c)(2) and 733 is likely to represent tax on earnings and profits of the distributing entity that are accounted for at different times under U.S. and foreign tax law, such as earnings of a hybrid partnership, earnings that are accelerated and subsequently eliminated for U.S. tax purposes by reason of a section 338 election, or earnings and profits of lower-tier entities, rather than tax on amounts that are permanently excluded from the U.S. tax base. Although in some cases involving net basis foreign income taxes imposed at the shareholder level, distributions described in sections 301(c)(2) and 733 may reflect a timing difference in the recognition of unrealized gain with respect to the equity of the distributing entity, the Treasury Department and the IRS have determined that these situations are less likely to occur than timing differences in the recognition of earnings subject to withholding taxes because of the prevalence of foreign participation exemption regimes. Moreover, treating the foreign tax on distributions as representing a timing difference on earnings and profits of the distributing entity is more consistent with the general approach in the Code and regulations to the treatment of distributions as representing a tax on the earnings (see, for example, sections 904(d)(3) and (4), and 960(b)) and with treating gain on stock sales as related in part to earnings and profits (see section 1248(a)).

Therefore, these distributions are removed from the list of base differences, and the final regulations at §1.861-20(d)(3)(ii)(B)(2) generally associate a foreign law dividend that gives rise to a return of capital distribution under section 301(c)(2) with hypothetical earnings of the distributing corporation, measured based on the groupings to which the tax book value of the corporation’s stock is assigned under the asset method in §1.861-9. Similar rules are included in the 2020 FTC proposed regulations for partnership distributions described in section 733.

The Treasury Department and the IRS have determined that similar rules should apply in appropriate cases to associate a portion of foreign tax imposed on an item of foreign gross income constituting gain recognized on the sale or other disposition of stock in a corporation or a partnership interest with amounts that constitute nontaxable basis recovery for U.S. tax purposes. Such similar treatment is appropriate to minimize differences in the foreign tax credit consequences of a sale or a distribution in redemption of the taxpayer’s interest. Proposed rules on the allocation of foreign income tax on such dispositions are included in the 2020 FTC proposed regulations.

Proposed §1.861-20 addressed the assignment to statutory and residual groupings of foreign gross income arising from disregarded payments between a foreign branch (as defined in §1.904-4(f)(3)) and its owner. If the foreign gross income item arises from a payment made by a foreign branch to its owner, proposed §1.861-20(d)(3)(ii)(A) generally assigned the item by deeming the payment to be made ratably out of the foreign branch’s accumulated after-tax income, calculated based on the tax book value of the branch’s assets in each grouping. If the item of foreign gross income arises from a disregarded payment to a foreign branch from its owner, proposed §1.861-20(d)(3)(ii)(B) generally assigned the item to the residual grouping, with the result that any taxes imposed on the disregarded payment would be allocated and apportioned to the residual grouping as well. In addition, proposed §1.904-6(b)(2) included special rules assigning foreign gross income items arising from certain disregarded payments for purposes of applying section 904 as the operative section.

Several comments asserted that foreign tax on disregarded payments from a foreign branch owner to a foreign branch should not be allocated and apportioned to the residual grouping, which results in an effective denial of foreign tax credits in the case of a branch of a CFC, because items of foreign gross income that arise from disregarded payments of items such as interest or royalties should give rise to creditable foreign income taxes despite being nontaxable for Federal income tax purposes. Some comments recommended adopting a tracing regime similar to the rules in §1.904-4(f) to trace foreign gross income that a taxpayer includes by reason of a disregarded payment to current year income of the payor for purposes of determining the grouping to which tax on the disregarded payment is allocated and apportioned. Comments also requested that the final regulations clarify whether the rule for remittances or contributions applies in the case of payments between two foreign branches.

The Treasury Department and the IRS generally agree with the comments that rules similar to the rules in §1.904-4(f) should apply under §1.861-20 to trace foreign gross income that a taxpayer includes by reason of a disregarded payment to the current year income of the payor to which the disregarded payment would be allocable if regarded for U.S. tax purposes. However, in order to provide taxpayers additional opportunity to comment, the final regulations reserve on the allocation and apportionment of foreign tax on disregarded payments, and new proposed rules are contained in the 2020 FTC proposed regulations. See Part V.F.4 of the Explanation of Provisions in the 2020 FTC proposed regulations. Similarly, the special rules in proposed §1.904-6(b)(2) for assigning foreign gross income items arising from certain disregarded payments for purposes of applying section 904 as the operative section are reproposed in the 2020 FTC proposed regulations. The other special rules in proposed §1.861-20(d)(3) for allocating foreign tax in connection with a taxpayer’s investment in a corporation or a disregarded entity are reorganized, and some of the definitions in proposed §1.861-20(b) are correspondingly revised, in the final regulations to group the rules on the basis of how the entity is classified, and whether the transaction giving rise to the item of foreign gross income results in the recognition of gross income or loss, for U.S. tax purposes. The rule in proposed §1.904-6(b)(3) relating to dispositions of property resulting in certain disregarded reallocation transactions is removed and reproposed as part of proposed §1.861-20 as contained in the 2020 FTC proposed regulations.

Finally, one comment requested that §§1.904-1 and 1.904-6 clarify that the tax allocation rules apply to taxes paid to United States territories, which are generally treated as foreign countries for purposes of the foreign tax credit. The final regulations clarify this point by including a cross reference to §1.901-2(g), which defines a foreign country to include the territories. See §1.861-20(b)(6).

Portions of the temporary regulations relating to sections 905(c), 986(a), and 6689 (TD 9362) (the ‘‘2007 temporary regulations’’) were reproposed in order to provide taxpayers an additional opportunity to comment on those rules in light of the changes made by the TCJA. In particular, the rules in the 2007 temporary regulations that were reproposed in the 2019 FTC proposed regulations were: (1) proposed §1.905-3(b)(2), which addressed foreign taxes deemed paid under section 960, (2) proposed §1.905-4, which in general provided the procedural rules for how to notify the IRS of a foreign tax redetermination, and (3) proposed §301.6689-1, which provided rules for the penalty for failure to notify the IRS of a foreign tax redetermination. In addition, the 2019 FTC proposed regulations contained a transition rule in proposed §§1.905-3(b)(2)(iv) and 1.905-5 to address foreign tax redeterminations of foreign corporations that relate to taxable years that predated the amendments made by the TCJA.

A. Adjustments to foreign taxes paid by foreign corporations

One comment requested clarification on whether multiple payments to foreign tax authorities under a single assessment (for example, payments to stop the running of interest and penalties) each result in a foreign tax redetermination under section 905(c).

Under §1.905-3(a) of the 2019 FTC final regulations, each payment of tax that has accrued in a later year in excess of the amount originally accrued results in a separate foreign tax redetermination. However, the 2019 FTC proposed regulations at §1.905-4(b)(1)(iv), which is finalized without change, only required one amended return for each affected prior year to reflect all foreign tax redeterminations that occur in the same taxable year. In the case of payments that are made across multiple taxable years, §1.905-4(b)(1)(iv) of the final regulations also provides that, if more than one foreign tax redetermination requires a redetermination of U.S. tax liability for the same affected year and those redeterminations occur within the same taxable year or within two consecutive taxable years, the taxpayer may file for the affected year one amended return and one statement under §1.905-4(c) with respect to all of the redeterminations. Otherwise, separate amended returns for each affected year are required to reflect each foreign tax redetermination. Accordingly, no changes are made in response to this comment.

The comment also requested that the Treasury Department and the IRS clarify whether contested taxes that are paid before the contest is resolved are considered to accrue for foreign tax credit purposes when paid or whether they represent an advance payment against a future liability that does not accrue until the final liability is determined. Proposed rules addressing this issue are included in the 2020 FTC proposed regulations. See Part X.D.3 of the Explanation of Provisions in the 2020 FTC proposed regulations.

B. Deductions for foreign income taxes

One comment requested clarification on whether the general rules under section 905(c) apply to taxpayers who elect to take a deduction, rather than a credit, for creditable foreign taxes in the prior year to which the adjusted taxes relate. Additionally, the comment requested that the Treasury Department and the IRS clarify whether the ten-year statute of limitations under section 6511(d)(3)(A) applies to refund claims based on such deductions.

In the case of a U.S. taxpayer that directly pays or accrues foreign income taxes, no U.S. tax redetermination is required in the case of a foreign tax redetermination of such taxes if the taxpayer did not claim a foreign tax credit in the taxable year to which such taxes relate. See §1.905-3(b)(1) (a redetermination of U.S. tax liability is required with respect to foreign income tax claimed as a credit under section 901). However, in the case of a U.S. shareholder of a CFC that pays or accrues foreign income tax, proposed §1.905-3(b)(2)(i) and (ii), which are finalized without substantive change, provided that a redetermination of U.S. tax liability is required to account for the effect of a foreign tax redetermination even in situations in which the foreign tax credit is not changed, such as for purposes of computing earnings and profits or applying the high-tax exception described in section 954(b)(4), including in the case of a U.S. shareholder that chooses to deduct foreign income taxes rather than to claim a foreign tax credit. Additional guidance addressing the accrual rules for creditable foreign taxes that are deducted or claimed as a credit is included in §1.461-4(g)(6)(B)(iii) and in the 2020 FTC proposed regulations.

The question of whether section 6511(d)(3)(A) applies to refunds relating to foreign taxes that are deducted, instead of taken as a foreign tax credit, is beyond the scope of this rulemaking. See, however, Trusted Media Brands, Inc. v. United States, 899 F.3d 175 (2d. Cir. 2018) (holding that section 6511(d)(3)(A) only applies to refund claims based on foreign tax credits). In addition, the 2020 FTC proposed regulations include proposed amendments to the regulations under section 901(a), which provides that an election to claim foreign income taxes as a credit for a particular taxable year may be made or changed at any time before the expiration of the period prescribed for claiming a refund of U.S. tax for that year. See Part X.B.2 of the Explanation of Provisions in the 2020 FTC proposed regulations.

C. Application to GILTI high-tax exclusion

Proposed §1.905-3(b)(2)(ii) provided that the required adjustments to U.S. tax liability by reason of a foreign tax redetermination of a foreign corporation include not only adjustments to the amount of foreign taxes deemed paid and related section 78 dividend, but also adjustments to the foreign corporation’s income and earnings and profits and the amount of the U.S. shareholder’s inclusions under sections 951 and 951A in the year to which the redetermined foreign tax relates.

One comment requested that final regulations clarify whether a U.S. tax redetermination is required when the foreign tax redetermination affects whether the taxpayer is eligible for the GILTI high-tax exclusion. Specifically, the comment stated that because a redetermination of U.S. tax liability is required when the foreign tax redetermination affects whether a taxpayer is eligible for the subpart F high-tax election under section 954(b)(4), a similar result should apply for taxpayers that make (or seek to make) the GILTI high-tax exclusion election, and that taxpayers should be allowed to make the election on an annual basis. Further, the comment suggested that if taxpayers are allowed to make an annual election under the final GILTI high-tax exclusion regulations, then taxpayers should be permitted to make or revoke the election on an amended return following a foreign tax redetermination.

Proposed §1.905-3(b)(2)(ii) provided that the required U.S. tax redetermination applies for purposes of determining amounts excluded from a CFC’s gross tested income under section 951A(c)(2)(A)(i)(III), and this provision is retained in the final regulations with minor modifications. Furthermore, under final regulations issued on July 23, 2020 (TD 9902, 85 FR 44620), taxpayers may make the GILTI high-tax exclusion election on an annual basis and may do so on an amended return filed within 24 months of the unextended due date of the original income tax return. See §1.951A-2(c)(7)(viii)(A)(1)(i).

D. Foreign tax redeterminations of successor entities

Proposed §1.905-3(b)(3) provided that if at the time of a foreign tax redetermination the person with legal liability for the tax (the ‘‘successor’’) is a different person than the person that had legal liability for the tax in the year to which the redetermined tax relates (the ‘‘original taxpayer’’), the required redetermination of U.S. tax liability is made as if the foreign tax redetermination occurred in the hands of the original taxpayer. The proposed regulations further provided that Federal income tax principles apply to determine the tax consequences if the successor remits, or receives a refund of, a tax that in the year to which the redetermined tax relates was the legal liability of, and thus considered paid by, the original taxpayer.

One comment suggested that proposed §1.905-3(b)(3), as drafted, did not clearly address cases where the ownership of a disregarded entity changes. The comment recommended clarifying that in the case of a disregarded entity, the owner of the disregarded entity is treated as the person with legal liability for the tax or the person with the legal right to a refund, as applicable.

The Treasury Department and the IRS have determined that no clarification is necessary. Existing regulations make clear that the owner of a disregarded entity is considered to be legally liable for the tax. See §1.901-2(f)(4)(ii) (legal liability for income taxes imposed on a disregarded entity).

The same comment stated that the preamble to the proposed regulations incorrectly suggested that under U.S. tax principles the payment of tax by a successor entity owned by the original taxpayer (for example, by a CFC that was formerly a disregarded entity) is treated as a distribution. The comment further recommended addressing the issue of contingent liabilities in future guidance. The Treasury Department and the IRS agree that there may be multiple ways to characterize the tax consequences of tax paid by a successor in the example described in the preamble to the proposed regulations. Furthermore, the Treasury Department and the IRS have determined that the issue of contingent foreign tax liabilities in connection with foreign tax redeterminations under section 905(c) requires further study and may be considered as part of future guidance.

E. Notification to the IRS of foreign tax redeterminations and related penalty provisions

1. Notification Through Amended Returns

In general, proposed §1.905-4(b)(1)(i) provided that any taxpayer for which a redetermination of U.S. tax liability is required must notify the IRS of the foreign tax redetermination by filing an amended return.

Several comments suggested that taxpayers should be allowed to report adjustments to U.S. tax liability in prior years by reason of foreign tax redeterminations on an attachment to their Federal income tax return for the taxable year in which the redetermination occurs, instead of requiring taxpayers to file amended tax returns for the taxable year in which the adjusted foreign tax was claimed as a credit and any intervening years in which the foreign tax redetermination affected U.S. tax liability. Specifically, comments suggested that taxpayers could be allowed to file a statement with their return for the taxable year in which the foreign tax redetermination occurs notifying the IRS of overpayments or underpayments of U.S. tax and applicable interest due for prior taxable years that resulted from the foreign tax redetermination. One comment suggested that taxpayers could be required to maintain books and records reflecting all the adjustments that would normally accompany an amended return, without actually being required to prepare and file such a return. Another comment suggested that the IRS could amend Schedule E on Form 5471 to include this type of information about the changes to prior year U.S. tax liabilities that result from foreign tax redeterminations. Comments noted that providing an alternative to filing amended Federal income tax returns would relieve taxpayers from having to file amended state tax returns.

The Treasury Department and the IRS have determined that, based on existing processes, the only manner in which taxpayers can properly notify the IRS of a change in U.S. tax liability for a prior taxable year that results from a foreign tax redetermination is by filing an amended return reflecting all the necessary U.S. tax adjustments. In addition, the Treasury Department and the IRS have determined that the type of statement suggested by the comments, reflecting a recomputation of Federal income tax liability for a prior year, could be viewed by state tax authorities as the functional equivalent of an amended Federal income tax return that may not necessarily operate to relieve taxpayers of their obligations to file amended state tax returns. In any event, taxpayer requests for relief from state tax filing obligations are properly directed to state tax authorities, rather than to the Treasury Department and the IRS. Therefore, the comments are not adopted. However, the Treasury Department and the IRS continue to study whether new processes or forms can be developed to streamline the filing requirements while ensuring that the IRS receives the necessary information to verify that taxpayers have made the required adjustments to their U.S. tax liability. Under §1.905-4(b)(3) of the final regulations, the IRS may prescribe alternative notification requirements through forms, instructions, publications, or other guidance.

Comments also suggested that the notification due date should be extended (for example, to up to three years from the due date of the original return for the taxable year in which the foreign tax redetermination occurred).

The Treasury Department and the IRS have determined that deferring the due date of the required amended returns beyond the due date (with extensions) of the return for the year in which the foreign tax redetermination occurs would not substantially reduce compliance burdens and could be more difficult for the IRS to administer, because the same filing obligations would be required, though with respect to foreign tax redeterminations that occurred three years earlier rather than in the current taxable year. In addition, taxpayers have an economic incentive to promptly file amended returns claiming a refund of U.S. tax in cases where a foreign tax redetermination reduces, rather than increases, U.S. tax liability; the Treasury Department and the IRS have determined that it is appropriate to require comparable promptness when a foreign tax redetermination increases U.S. tax due in order to permit timely verification of the required U.S. tax adjustments when the relevant documentation and personnel are more readily available. Accordingly, the comments are not adopted. However, a transition rule is added at §1.905-4(b)(6) to give taxpayers an additional year to file required notifications with respect to foreign tax redeterminations occurring in taxable years ending on or after December 16, 2019, and before November 12, 2020.

Comments also requested that the final regulations provide that for foreign tax redeterminations below a certain de minimis threshold (for example, 10 percent of foreign taxes as originally accrued, or $5 million), taxpayers should be allowed to account for the foreign tax redeterminations by making adjustments to current year taxes and foreign tax credits claimed in the taxable year in which the foreign tax redetermination occurs, rather than by adjusting U.S. tax liability in the prior year or years in which the adjusted foreign taxes were claimed as a credit. Alternatively, some comments requested that for foreign tax redeterminations below a de minimis or materiality threshold, taxpayers should be completely relieved of adjusting U.S. tax liability and from all notification and amended return requirements.

The Treasury Department and the IRS have determined that, as amended by the TCJA, section 905(c) mandates retroactive adjustments to U.S. tax liability when foreign taxes claimed as credits are redetermined. The TCJA repealed section 902 and the regulatory authority at the end of section 905(c)(1) to prescribe alternative adjustments to multi-year pools of earnings and taxes of foreign corporations in lieu of the required adjustments to U.S. tax liability for the affected years. Recharacterizing prior year taxes as current year taxes would have substantive effects on the amounts of a taxpayer’s GILTI and subpart F inclusions, the applicable carryover periods for excess credits, the applicable currency translation conventions, the amounts of interest owed by or due to the taxpayer, and the applicable statutes of limitation for refund or assessment. Therefore, the comments are not adopted.

Finally, a comment requested that §1.905-4(b)(1)(ii) be amended to allow a taxpayer that avails itself of special procedures under Revenue Procedure 94-69 to notify the IRS of a foreign tax redetermination when the taxpayer makes a Revenue Procedure 94-69 disclosure during an audit for the taxable year for which U.S. tax liability is increased by reason of the foreign tax redetermination.

In relevant part, Revenue Procedure 94-69 provides special procedures for a taxpayer in the Large Corporate Compliance program (formerly the Coordinated Examination Program or Coordinated Industry Case program) to avoid the potential application of the accuracy-related penalty currently described in section 6662. Under Revenue Procedure 94-69, a taxpayer may file a written statement that is treated as a qualified amended return within 15 days after the IRS requests it. However, Revenue Procedure 94-69 does not provide any protection for penalties under section 6689 for failure to file a notice of a foreign tax redetermination, and it requires a statement that is less detailed than the notification statement required under §1.905-4(b)(1)(ii). Further, section 905(c) contemplates that the burden is on the taxpayer to notify the IRS of a foreign tax redetermination, whereas Revenue Procedure 94-69 places the burden on the IRS to request information. Finally, the notification requirement under §1.905-4(b)(1)(ii) affords a taxpayer more time to satisfy its reporting obligation as opposed to the 15-day notification requirement in Revenue Procedure 94-69. Therefore, the comment is not adopted.

2. Foreign Tax Redeterminations of Pass-through Entities

Proposed §1.905-4(b)(2) generally provided that a pass-through entity that reports creditable foreign income tax to its partners, shareholders, or beneficiaries is required to notify the IRS and its partners, shareholders, or beneficiaries if there is a foreign tax redetermination with respect to such foreign income tax. See proposed §1.905-4(c) for the information required to be provided with the notification. Additionally, proposed §1.905-4(b)(2)(ii) provided that if a redetermination of U.S. tax liability would require a partnership adjustment as defined in §301.6241-1(a)(6), the partnership must file an administrative adjustment request (“AAR”) under section 6227 without regard to the time restrictions on filing an AAR in section 6227(c). See also §1.6227-1(g).

One comment suggested that S corporations should be allowed to follow similar notification procedures as partnerships that are subject to sections 6221 through 6241 (enacted in §1101 of the Bipartisan Budget Act of 2015, Pub. L. 114-74 (‘‘BBA’’) and as amended by the Protecting Americans from Tax Hikes Act of 2015, Pub. L. 114-113, div Q, and by sections 201 through 207 of the Tax Technical Corrections Act of 2018, contained in Title II of Division U of the Consolidated Appropriations Act of 2018, Pub. L. 115-141).

By their terms, the BBA rules only apply to partnerships and not S corporations, except in the limited circumstance in which an S corporation is a partner in a partnership subject to the BBA rules. See sections 6226(b)(4) and 6227(b). But in cases where the S corporation is not a partner in a BBA partnership that made the election, there is no provision under BBA or any other provision of the Code to allow the S corporation to pay the imputed underpayment on behalf of its shareholders. Because the statute does not generally allow for S corporations to pay imputed underpayments on behalf of its shareholders, the approach suggested by the comment is not viable and therefore the comment is not adopted. However, as described in Part V.E.1 of this Summary of Comments and Explanation of Revisions, the Treasury Department and the IRS continue to study whether new processes or forms can be developed to streamline the amended return requirements, including in the case of S corporations that report foreign tax redeterminations to their shareholders.

3. Foreign Tax Redeterminations of LB&I Taxpayers

Proposed §1.905-4(b)(4) provided a limited alternative notification requirement for U.S. taxpayers that are under the jurisdiction of the IRS’s Large Business & International (“LB&I”) Division. Under proposed §1.905-4(b)(4)(i)(B), the alternative notification requirement is available only if certain conditions are met, including that an amended return reflecting a foreign tax redetermination would otherwise be due while the return for the affected taxable year is under examination, and that the foreign tax redetermination results in a downward adjustment to the amount of foreign tax paid or accrued, or included in the computation of foreign taxes deemed paid.

Several comments suggested broadening the scope of proposed §1.905-4(b)(4) to include upward adjustments to foreign taxes paid or accrued. The comments also recommended that the special notification rules apply when multiple foreign tax redeterminations involving different foreign jurisdictions occur in the same taxable year and result in offsetting adjustments, for example, if there is an additional payment of foreign tax in one jurisdiction and a refund of a comparable amount in another jurisdiction.

The proposed regulations limited the alternative notification requirement to cases where the foreign tax redetermination results in a downward adjustment to the amount of foreign taxes paid or accrued because failure to comply with the notification requirements exposes taxpayers to penalties under section 6689 only if the foreign tax redetermination results in an underpayment of U.S. tax. As provided in §1.905-4(b)(1)(iii), if a foreign tax redetermination results in an overpayment of U.S. tax, in order to claim a refund of U.S. tax the taxpayer must file an amended return within the period specified in section 6511. See section 6511(d)(3)(A), providing a special 10-year period of limitations for refund claims based on foreign tax credits. However, in unusual circumstances, an increase in foreign tax liability for a prior year may result in an underpayment (rather than an overpayment) of U.S. tax (for example, if an increase in foreign income tax liability causes a CFC to have a tested loss or to qualify for the high-tax exclusion of section 954(b)(4), reducing the amount of foreign taxes deemed paid). In addition, in some cases the complexity of the required computations may make it difficult for taxpayers to identify easily which particular foreign tax redeterminations will ultimately result in an underpayment of U.S. tax. Accordingly, the final regulations extend the alternative notification procedures to cover the case of any adjustment (whether upward or downward) of foreign taxes by reason of a foreign tax redetermination that increases U.S. tax liability, and so would otherwise require the filing of an amended return while the affected year of the LB&I taxpayer is under examination. In addition, the final regulations provide that an LB&I taxpayer that has a foreign tax redetermination that decreases U.S. tax liability for an affected year that is under examination may (but is not required to) notify the examiner of the adjustment in lieu of filing an amended return to claim a refund (within the time period provided in section 6511). However, because section 6511(d)(3) generally allows taxpayers 10 years to seek a U.S. tax refund attributable to foreign tax credits and the regulations do not preclude taxpayers from filing such an amended return before the audit of an affected year is completed, the IRS may either accept the alternative notification or require the taxpayer to file an amended return. The additional flexibility added to the final regulations will assure timely notification of, and penalty protection for taxpayers with respect to, all foreign tax redeterminations that may increase or decrease U.S. tax liability for an affected taxable year, including in the case of offsetting foreign tax redeterminations that occur in the same taxable year.

Finally, comments recommended that examiners should be granted authority to accept notifications of foreign tax redeterminations outside the periods specified in §1.905-4(b)(4)(ii)(A) through (C) and for affected taxable years that are not currently under examination. For example, the comments suggested that the notification deadline for an LB&I taxpayer should be extended upon the taxpayer’s request and at the examiner’s discretion.

The Treasury Department and the IRS have determined that amended returns reflecting additional U.S. tax due should be timely filed in order to ensure examiners have sufficient time to take into account any redetermination of U.S. tax liability without prolonging the audit. In addition, the special notification rules are not extended to taxpayers that are not currently under examination. The alternative notification rules in §1.905-4(b)(4) are predicated on the fact that the examiner is in the process of determining whether to propose adjustments to the items included on the taxpayer’s return for the taxable year under examination, and it is appropriate to defer the requirement to file an amended return reflecting the effect of a foreign tax redetermination on the taxpayer’s U.S. tax liability for that taxable year until the examination has concluded. These considerations do not apply to affected taxable years that are not currently under examination when an amended return would otherwise be due. Accordingly, these comments are not adopted.

F. Transition rule relating to the TCJA

Proposed §§1.905-3(b)(2)(iv) and 1.905-5 provided a transition rule providing that post-2017 redeterminations of pre-2018 foreign income taxes of foreign corporations must be accounted for by adjusting the foreign corporation’s taxable income and earnings and profits, post-1986 undistributed earnings, and post-1986 foreign income taxes (or pre-1987 accumulated profits and pre-1987 foreign income taxes, as applicable) in the pre-2018 year to which the redetermined foreign taxes relate.

The preamble to the 2019 FTC proposed regulations requested comments on whether an alternative adjustment to account for post-2017 foreign tax redeterminations with respect to pre-2018 taxable years of foreign corporations, such as an adjustment to the foreign corporation’s taxable income and earnings and profits, post-1986 undistributed earnings, and post-1986 foreign income taxes as of the foreign corporation’s last taxable year beginning before January 1, 2018, may provide for a simplified and reasonably accurate alternative.

Several comments supported this suggestion. A comment further noted that certain taxpayers should be excluded from any alternative rule where it would be distortive. For example, the comment suggested excluding taxpayers that distributed material amounts of earnings and profits, as well as taxpayers who took advantage of the subpart F high-tax exception in the foreign corporation’s final pre-TCJA taxable year. Another comment noted that taxpayers should be allowed to adjust the foreign corporation’s final pre-2018 year only if the adjustments would not cause a deficit in the foreign corporation’s tax pool in that final year. A comment also suggested that the alternative rule should provide that in case of foreign corporations that ceased to be subject to the pooling regime before 2018 (for example, due to a liquidation or sale to a foreign acquiror), the required adjustments should be made in the foreign corporation’s last year in which the pooling rules are relevant). Additionally, several comments suggested that foreign tax redeterminations of foreign corporations below a certain threshold should not require a redetermination or adjustment of a taxpayer’s section 965(a) inclusion or the amount of foreign taxes deemed paid with respect to such section 965(a) inclusion. Instead, some comments suggested that the redetermination be taken into account in the post-2017 year of the redetermination.

In response to comments, the final regulations under §1.905-5(e) provide an irrevocable election for a foreign corporation’s controlling domestic shareholders to account for all foreign tax redeterminations that occur in taxable years ending on or after November 2, 2020, with respect to pre-2018 taxable years of foreign corporations as if they occurred in the foreign corporation’s last taxable year beginning before January 1, 2018 (the “last pooling year”). The rules in §§1.905-3T and 1.905-5T (as contained in 26 CFR part 1 revised as of April 1, 2019) will apply for purposes of determining whether a particular foreign tax redetermination must instead be accounted for in the year to which the redetermined foreign tax relates, instead of in the last pooling year. The election is made by the foreign corporation’s controlling domestic shareholders, and is binding on all persons who are, or were in a prior year to which the election applies, U.S. shareholders of the foreign corporation with respect to which the election is made for all of its subsequent foreign tax redeterminations, as well as foreign tax redeterminations of other members of the same CFC group as the foreign corporation for which the election is made. For this purpose, the definition of a CFC group in §1.905-5(e)(2)(iv)(B) is modeled off the definition contained in §1.951A-2(c)(7)(viii)(E)(2).

No exception is provided that would allow taxpayers to avoid redetermination or adjustment of the amount of a taxpayer’s section 965(a) inclusion or foreign income taxes deemed paid with respect to such section 965(a) inclusion if under section 905(c) a foreign tax redetermination with respect to a foreign corporation’s pre-2018 year requires such an adjustment to the taxpayer’s U.S. tax liability. As discussed in Part V.E.1 of this Summary of Comments and Explanation of Revisions, section 905(c) mandates retroactive adjustments to U.S. tax liability when foreign taxes claimed as credits are redetermined, and there is no technical or policy basis on which to exclude such adjustments when the U.S. tax liability arises as a result of section 965 as opposed to another section of the Code.

G. Protective claims

One comment requested guidance on how to file protective refund claims to account for contested foreign taxes that may result in foreign tax redeterminations after the expiration of the applicable statute of limitations. Providing guidance on the procedures for filing protective claims is beyond the scope of this rulemaking.

The 2019 FTC proposed regulations included a clarification relating to schemes involving jurisdictions that do not impose corporate income tax on a CFC until its earnings are distributed. The proposed regulations clarified that foreign income taxes that have not accrued because they are contingent on a future distribution are not taken into account for purposes of determining the amount of foreign income taxes paid or accrued with respect to an item of income.

No comments were received with respect to this provision, and the rules are finalized without change. In addition, proposed §1.905-1(d)(1) in the 2020 FTC proposed regulations further clarifies that taxes contingent on a future distribution are not treated as accrued.

A. Regulations relating to foreign tax credits

The 2019 FTC proposed regulations provided that the rules in proposed §§1.861-8, 1.861-9, 1.861-12, 1.861-14, 1.904-4(c)(7) and (8), 1.904(b)-3, 1.905-3, 1.905-4, 1.905-5, 1.954-1, 1.954-2, 1.965-5(b)(2), and 301.6689-1 are applicable to taxable years that end on or after December 16, 2019. Certain provisions, such as §§1.704-1(b)(4)(viii)(d)(1), 1.861-17, 1.861-20, 1.904-6, and 1.960-1, were proposed to be applicable to taxable years beginning after December 31, 2019, while proposed §§1.904-4(e) and 1.904(g)-3 were proposed to be applicable to taxable years ending on or after the date the final regulations are filed. Proposed §1.1502-4 was proposed to be applicable to taxable years for which the original consolidated Federal income tax return is due (without extensions) after December 17, 2019.

Several comments requested that the applicability dates to the 2019 FTC proposed regulations generally be delayed to taxable years beginning on or after the final regulations are published to allow more time for taxpayers to adapt to the new rules, and also requested that the regulations allow taxpayers the flexibility to rely on either the 2019 FTC proposed regulations or the final regulations for any preceding taxable years.

The Treasury Department and the IRS agree that the applicability date of the expense allocation rules in §§1.861-8 and 1.861-14, which particularly in the case of stewardship expenses contain significant changes relative to the 2019 FTC proposed regulations, should be delayed to allow taxpayers more time to comply with the revisions made in the final regulations. Therefore, the applicability dates of §§1.861-8 and 1.861-14 are revised to apply to taxable years beginning after December 31, 2019 (consistent with the later applicability date provided for §§1.861-17, 1.861-20, 1.904-6, and 1.960-1). In addition, although the applicability date of the notification requirements for foreign tax redeterminations in §1.905-4 is adopted as proposed to apply to foreign tax redeterminations occurring in taxable years ending on or after December 16, 2019, a transition rule is added to the final regulations to provide taxpayers an additional year to file required notifications with respect to foreign tax redeterminations occurring in taxable years ending before November 12, 2020. Also, because section 1503(a) provides that regulations under section 1502 only apply to consolidated tax returns if they are prescribed before the last day prescribed by law for the filing of such return, the applicability date of §1.1502-4 is revised to apply to taxable years for which the original consolidated Federal income tax return is due (without extensions) after January 11, 2021. However, the other provisions in the 2019 FTC proposed regulations which were proposed to apply to taxable years ending on or after December 16, 2019 (§§1.861-9, 1.861-12, 1.904-4(c)(7) and (8), 1.904(b)-3, 1.905-3, 1.905-5, 1.954-1, 1.954-2, 1.965-5(b)(2), and 301.6689-1), generally received minimal or no comments and have been adopted with no or minimal changes. Therefore, the Treasury Department and the IRS have determined that taxpayers with 2019 calendar years have been sufficiently on notice of these rules and little benefit would be afforded by providing a delayed applicability date or an election to apply either the proposed or final regulations to preceding years, given that these rules have not significantly changed between the proposed and final regulations.

The 2019 FTC proposed regulations provided that, with respect to §1.861-17, taxpayers that use the sales method for taxable years beginning after December 31, 2017, and before January 1, 2020 (or taxpayers that use the sales method only for their last taxable year that begins before January 1, 2020), may rely on proposed §1.861-17 if they apply it consistently with respect to such taxable year and any subsequent year. Therefore, a taxpayer using the sales method for its taxable year beginning in 2018 may rely on proposed §1.861-17 but must also apply the sales method (relying on proposed §1.861-17) for its taxable year beginning in 2019.

These final regulations provide that a taxpayer may choose to apply §1.861-17 (as contained in these final regulations) to taxable years beginning before January 1, 2020, provided that it applies the final regulations in their entirety, and provided that if a taxpayer applies the final regulations to the taxable year beginning in 2018, the taxpayer must also apply the final regulations for the subsequent taxable year beginning in 2019. Alternatively, and consistent with the 2019 FTC proposed regulations, a taxpayer may rely on proposed §1.861-17 in its entirety for taxable years beginning after December 31, 2017, and beginning before January 1, 2020. A taxpayer that applies either the proposed or final version of §1.861-17 to a taxable year beginning on or after January 1, 2018, and beginning before January 1, 2020, must apply it with respect to all operative sections (including both section 250 and 904). See §1.861-8(f).

B. Rules relating to hybrid arrangements and section 951A

Under the 2020 hybrids proposed regulations, the rules under section 245A(e) relating to hybrid deduction accounts were proposed to be applicable to taxable years ending on or after the date that final regulations are published in the Federal Register, although a taxpayer could choose to consistently apply those final regulations to earlier taxable years. See proposed §1.245A(e)-1(h)(2). In addition, the 2020 hybrids proposed regulations provided that a taxpayer could consistently rely on the proposed rules with respect to earlier taxable years.

Further, under the 2020 hybrids proposed regulations, the rules under section 881 relating to conduit financing arrangements were proposed to be applicable to payments made on or after the date that final regulations are published in the Federal Register. See proposed §1.881-3(f). Finally, the rules under section 951A relating to disqualified payments were proposed to be applicable to taxable years of foreign corporations ending on or after April 7, 2020, and to taxable years of United States shareholders in which or with which such taxable years end. See proposed §1.951A-7(d).

As discussed in Part III.B of this Summary of Comments and Explanation of Revisions, a comment recommended modifying the applicability date for the rules under section 881 if the final regulations were to include some of the proposed rules, such as the rule that treated as a financing transaction an instrument that is equity for both U.S. and foreign tax purposes and that gives rise to notional interest deductions. The final regulations do not include those rules. In addition, no comments suggested a modification to the applicability dates for the other rules under the 2020 hybrids proposed regulations. Therefore, the final regulations adopt applicability dates consistent with the proposed applicability dates under the 2020 hybrids proposed regulations. See §§1.245A(e)-1(h)(2); 1.881-3(f); and 1.951A-7(d). The final regulations also clarify that for a taxpayer to apply the final rules under section 245A(e) to a taxable year ending before November 12, 2020, the taxpayer must consistently apply those rules to that taxable year and any subsequent taxable year ending before November 12, 2020. See §1.245A(e)-1(h)(2).

Executive Orders 13771, 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. For purposes of Executive Order 13771, this final rule is regulatory.

These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA) (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these regulations as economically significant under section 1(c) of the MOA. Accordingly, the OMB has reviewed these regulations.

A. Background and need for the final regulations

1. Regulations Relating to Foreign Tax Credits

Before the Tax Cuts and Jobs Act (TCJA), the United States taxed its citizens, residents, and domestic corporations on their worldwide income. However, to the extent that a foreign jurisdiction and the United States taxed the same income, this framework could have resulted in double taxation. The U.S. foreign tax credit (FTC) regime alleviated potential double taxation by allowing a non-refundable credit for foreign income taxes paid or accrued that could be applied to reduce the U.S. tax on foreign source income. Although TCJA eliminated the U.S. tax on some foreign source income, the United States continues to tax other foreign source income, and to provide foreign tax credits against this U.S. tax. The changes made by TCJA to international taxation necessitate certain changes in this FTC regime.

The FTC calculation operates by defining different categories of foreign source income (a “separate category”) based on the type of income.³ Foreign taxes paid or accrued as well as deductions for expenses borne by U.S. parents and domestic affiliates that support foreign operations are also allocated to the separate categories under similar principles. The taxpayer can then use foreign tax credits allocated to each category against the U.S. tax owed on income in that category. This approach means that taxpayers who pay foreign taxes on income in one category cannot claim a credit against U.S. taxes owed on income in a different category, an important feature of the FTC regime. For example, suppose a domestic corporate taxpayer has $100 of active foreign source income in the “general category” and $100 of passive foreign source income, such as interest income, in the “passive category.” It also has $50 of foreign taxes associated with the “general category” income and $0 of foreign taxes associated with the “passive category” income. The allowable FTC is determined separately for the two categories. Therefore, none of the $50 of “general category” FTCs can be used to offset U.S. tax on the “passive category” income. This taxpayer has a pre-FTC U.S. tax liability of $42 (21 percent of $200) but can claim an FTC for only $21 (21 percent of $100) of this liability, which is the U.S. tax owed with respect to active foreign source income in the general category. The $21 represents what is known as the taxpayer’s foreign tax credit limitation. The taxpayer may carry the remaining $29 of foreign taxes ($50 minus $21) back to the prior taxable year and then forward for up to 10 years (until used), and is allowed a credit against U.S. tax on general category foreign source income in the carryover year, subject to certain restrictions.

The final regulations are needed to address changes introduced by the TCJA and to respond to outstanding issues raised in comments to foreign tax credit regulations issued in 2018. In particular, the comments highlighted the following areas of concern: (a) uncertainty concerning appropriate allocation of R&E expenditures across FTC categories, and (b) the need to treat loans from partnerships to partners the same as loans from partners to partnerships with respect to aligning interest income to interest expense. In addition, the final regulations are needed to expand the application of section 905(c) to cases where a foreign tax redetermination changes a taxpayer’s eligibility for the high-taxed exception under subpart F and GILTI.

In addition to the 2018 FTC final regulations, the Treasury Department and the IRS also issued final regulations in 2019 (84 FR 69022) (2019 FTC final regulations) and proposed regulations (84 FR 69124) (2019 FTC proposed regulations), which are being finalized in this document, and are issuing additional proposed regulations simultaneously with these final regulations.

2. Regulations Relating to Hybrid Arrangements and to Section 951A

The TCJA introduced two new provisions, sections 245A(e) and 267A, that affect the treatment of hybrid arrangements, and a new section 951A, which imposes tax on United States shareholders with respect to certain earnings of their CFCs.⁴ The Treasury Department and the IRS previously issued final regulations under sections 245A(e) and 267A (2020 hybrids final regulations) as well as proposed regulations under sections 245A(e), 881, and 951A (2020 hybrids proposed regulations). See TD 9896, 85 FR 19802; REG-106013-19, 85 FR 19858. The Treasury Department and the IRS are issuing additional final regulations relating to finalize the 2020 hybrids proposed regulations.

Section 245A(e) disallows the dividends received deduction (DRD) for any dividend received by a U.S. shareholder from a CFC if the dividend is a hybrid dividend. In addition, section 245A(e) treats hybrid dividends between CFCs with a common U.S. shareholder as subpart F income. The statute defines a hybrid dividend as an amount received from a CFC for which a deduction would be allowed under section 245A(a) and for which the CFC received a deduction or other tax benefit in a foreign country. This disallowance of the DRD for hybrid dividends and the treatment of hybrid dividends as subpart F income neutralizes the double non-taxation that might otherwise be produced by these dividends.⁵ The 2020 hybrids final regulations require that taxpayers maintain “hybrid deduction accounts” to track a CFC’s (or a person related to a CFC’s) hybrid deductions allowed in foreign jurisdictions across sources and years. The 2020 hybrids final regulations then provide that a dividend received by a U.S. shareholder from the CFC is a hybrid dividend to the extent of the sum of those accounts.

These final regulations also include rules regarding conduit financing arrangements.⁶ Under the regulations in §1.881-3 (the “conduit financing regulations”), a “financing arrangement” means a series of transactions by which one entity (the financing entity) advances money or other property to another entity (the financed entity) through one or more intermediaries, and there are “financing transactions” linking each of those parties. If the IRS determines that a principal purpose of such an arrangement is to avoid U.S. tax, the IRS may disregard the participation of intermediate entities. As a result, U.S.-source payments from the financed entity are, for U.S. withholding tax purposes, treated as being made directly to the financing entity.

For example, consider a foreign entity that is seeking to finance its U.S. subsidiary but is not entitled to U.S. tax treaty benefits; thus, U.S.-source payments made to this entity are not entitled to reduced withholding tax rates. Instead of lending money directly to the U.S. subsidiary, the foreign entity might loan money to an affiliate residing in a treaty jurisdiction and have the affiliate lend on to the U.S. subsidiary in order to access U.S. tax treaty benefits.

Under the conduit financing regulations, if the IRS determines that a principal purpose of such an arrangement is to avoid U.S. tax, the IRS may disregard the participation of the affiliate. As a result, U.S.-source interest payments from the U.S. subsidiary are, for U.S. withholding tax purposes, treated as being made directly to the foreign entity.

In general, the conduit financing regulations apply only if “financing transactions,” as defined under the regulations, link the financing entity, the intermediate entities, and the financed entity. Under the prior conduit financing regulations, before the finalization of these regulations, an instrument that is equity for U.S. tax purposes generally will not be treated as a “financing transaction” unless it provides the holder significant redemption rights or the issuer has a right to redeem that likely will be exercised. This is the case even if the instrument is treated as debt under the laws of the foreign jurisdiction (for example, perpetual debt). As a result, the prior conduit financing regulations would not apply to an equity instrument in the absence of such attributes, and the U.S.-source payment might be entitled to a lower rate of U.S. withholding tax.

These final regulations also implement items in section 951A of the TCJA. Section 951A provides for the taxation of global intangible low-taxed income (GILTI), effective beginning with the first taxable year of a CFC that begins after December 31. 2017. The existing final regulations under section 951A address the treatment of a deduction or loss attributable to basis created by certain transfers of property from one CFC to a related CFC after December 31, 2017, but before the date on which section 951A first applies to the transferring CFC’s income. Those regulations state that such a deduction or loss is allocated to residual CFC gross income; that is, income that is not attributable to tested income, subpart F income, or income effectively connected with a trade or business in the United States.

B. Overview of the final regulations

1. Regulations Relating to Foreign Tax Credits

These final regulations address the following issues: (1) the allocation and apportionment of deductions under sections 861 through 865, including new rules on the allocation and apportionment of research and experimentation (R&E) expenditures; (2) the allocation of foreign income taxes to the foreign income to which such taxes relate; (3) the interaction of the branch loss and dual consolidated loss recapture rules with sections 904(f) and (g); (4) the effect of foreign tax redeterminations of foreign corporations on the application of the high-tax exception described in section 954(b)(4) (including for purposes of determining tested income under section 951A(c)(2)(A)(i)(III)), and required notifications under section 905(c) to the IRS of foreign tax redeterminations and related penalty provisions; (5) the definition of foreign personal holding company income under section 954; (6) the application of the foreign tax credit disallowance under section 965(g); and (7) the application of the foreign tax credit limitation to consolidated groups.

2. Regulations Relating to Hybrid Arrangements and to Section 951A

These final regulations address three main issues. First, these final regulations address adjustments to hybrid deduction accounts under section 245A(e) and the 2020 hybrids final regulations. The 2020 hybrids final regulations stipulate that hybrid deduction accounts should generally be reduced to the extent that earnings and profits of the CFC that have not been subject to foreign tax as a result of certain hybrid arrangements are included in income in the United States by some provision other than section 245A(e). These final regulations provide new rules for reducing hybrid deduction accounts by reason of income inclusions attributable to subpart F, GILTI, and sections 951(a)(1)(B) and 956. An inclusion due to subpart F or GILTI reduces a hybrid deduction account only to the extent that the inclusion is not offset by a deduction or credit, such as a foreign tax credit, that likely will be afforded to the inclusion. Because deductions and credits are not available to offset income inclusions under section 951(a)(1)(B) and 956, these inclusions reduce a hybrid deduction account dollar-for-dollar.

Second, these final regulations address conduit financing arrangements under §1.881-3 by expanding the types of transactions classified as financing transactions. These final regulations state that if a financial instrument is debt under the tax law of the foreign jurisdiction where the issuer is a resident, or, if the issuer is not a tax resident of any country, where it is created, organized, or otherwise established, then it may now be characterized as a financing transaction even though the instrument is equity for U.S. tax purposes. Accordingly, the conduit financing regulations would apply to multiple-party financing arrangements using these types of instruments. This change is consistent with the policy of §1.881-3 and also helps to align the conduit regulations with the policy of section 267A by discouraging the exploitation of differences in treatment of financial instruments across jurisdictions. While section 267A and the 2020 hybrids final regulations apply only if the D/NI outcome is a result of the use of a hybrid entity or instrument, the conduit financing regulations apply regardless of causation and instead look to whether there is a tax avoidance plan. Thus, this new rule, to a limited extent, will address economically similar transactions that section 267A and the 2020 hybrids final regulations do not cover.

Finally, these final regulations address certain payments made after December 31, 2017, but before the date of the start of the first fiscal year for the transferor CFC for which 951A applies (the “disqualified period”) in which payments, such as pre-payments of royalties, create income during the disqualified period and a corresponding deduction or loss claimed in taxable years after the disqualified period. Absent these final regulations, those deductions or losses could have been used to reduce tested income or increase tested losses, among other benefits. However, under these final regulations, these deductions will no longer provide such a tax benefit, and will instead be allocated to residual CFC income, similar to deductions or losses from certain property transfers in the disqualified period under the existing final regulations under section 951A.

C. Economic analysis

1. Baseline

In this analysis, the Treasury Department and the IRS assess the benefits and costs of these final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations.

2. Summary of Economic Effects

i. Regulations relating to foreign tax credits

The final regulations provide certainty and clarity to taxpayers regarding the allocation of income, expenses, and foreign income taxes to the separate categories. In the absence of the enhanced specificity provided by these provisions of the regulations, similarly-situated taxpayers might interpret the foreign tax credit provisions of the Code differently, potentially resulting in inefficient patterns of economic activity. For example, in the absence of the final regulations, one taxpayer might have chosen not to undertake research (that is, incur R&E expenses) in a particular location, based on that taxpayer’s interpretation of the tax consequences of such expenditures, that another taxpayer, making a different interpretation of the tax treatment of R&E, might have chosen to pursue. If this difference in interpretations confers a competitive advantage on the less productive enterprise, U.S. economic performance may suffer. Thus, the guidance provided in these regulations helps to ensure that taxpayers face more uniform incentives when making economic decisions. In general, economic performance is enhanced when businesses face more uniform signals about tax treatment.

To the extent that taxpayers would generally, in the absence of this final guidance, have interpreted the foreign tax credit rules as being less favorable to the taxpayer than the final regulations provide, the final regulations may result in additional international activity by these taxpayers relative to the no-action baseline. This additional activity may include both activities that are beneficial to the U.S. economy (perhaps because they represent enhanced international opportunities for businesses with U.S. owners) and activities that are not beneficial (perhaps because they are accompanied by reduced activity in the United States). The Treasury Department and the IRS recognize that additional foreign economic activity by U.S. taxpayers may be a complement or substitute to activity within the United States and that to the extent these regulations change this activity, relative to the no-action baseline or alternative regulatory approaches, a mix of results may occur.

The Treasury Department and the IRS have not undertaken quantitative estimates of the economic effects of the foreign tax credit provisions of the regulations. The Treasury Department and the IRS do not have readily available data or models to estimate with reasonable precision (i) the tax stances that taxpayers would likely take in the absence of the final regulations or under alternative regulatory approaches; (ii) the difference in business decisions that taxpayers might make between the final regulations and the no-action baseline or alternative regulatory approaches as a result of these tax stances; or (iii) how this difference in those business decisions would affect measures of U.S. economic performance.

In the absence of such quantitative estimates, the Treasury Department and the IRS have undertaken a qualitative analysis of the economic effects of the final regulations relative to the no-action baseline and relative to alternative regulatory approaches. This analysis is presented in Parts I.C.3.i through iii of this Special Analyses.

ii. Regulations relating to hybrid arrangements and section 951A

These provisions of the final regulations provide certainty and clarity to taxpayers regarding (i) adjustments to hybrid deduction accounts under section 245A(e) and the 2020 hybrids final regulations; (ii) the determination of withholding taxes on payments made pursuant to conduit financing arrangements under §1.881-3; and (iii) the allocation of deductions for certain payments between related CFCs for purposes of section 951A and the final regulations under section 951A.

In the absence of this clarity, the likelihood that different taxpayers would interpret the rules regarding hybrid arrangements and certain deductible payments under the final regulations under section 951A differently would be exacerbated. In general, overall economic performance is enhanced when businesses face more uniform signals about tax treatment. Certainty and clarity over tax treatment generally also reduce compliance costs for taxpayers.

For those statutory provisions for which similar taxpayers would generally adopt similar interpretations of the statute even in the absence of guidance, the final regulations provide value by helping to ensure that those interpretations are consistent with the intent and purpose of the statute. Because the tax treatment in these final regulations advances the intent and purpose of the statute, this guidance enhances U.S. economic performance, relative to the no-action baseline or alternative regulatory approaches, within the context of Congressional intent.

These provisions of the final regulations will further enhance U.S. economic performance by helping to ensure that similar economic arrangements face similar tax treatments. Disparate tax treatment of similar economic transactions may create economic inefficiencies by leading taxpayers to undertake less productive economic activities.

The Treasury Department and the IRS have not undertaken quantitative estimates of the economic effects of these provisions of the final regulations because they do not have readily available data or models to estimate with reasonable precision (i) the types or volume of hybrid arrangements or certain disqualified payments between related CFCs that would likely be covered under these regulations, under the no-action baseline, or under alternative regulatory approaches; or (ii) the effects of those hybrid arrangements or disqualified payments on businesses’ overall economic performance, including possible differences in compliance costs.

In the absence of such quantitative estimates, the Treasury Department and the IRS have undertaken a qualitative analysis of the economic effects of the final regulations relative to the no-action baseline and relative to alternative regulatory approaches. This analysis is presented in Parts I.C.3.iv through vi of this Special Analyses.

iii. Summary of economic effects of all provisions

The Treasury Department and the IRS project that the final regulations will have economic effects greater than $100 million per year ($2020) relative to the no-action baseline. This determination is based on the substantial size of many of the businesses potentially affected by these regulations and the general responsiveness of business activity to effective tax rates,⁷ one component of which is the creditability of foreign taxes. Based on these two magnitudes, even modest changes in the treatment of foreign taxes or the allocation of deductions between related CFCs provided by the final regulations, relative to the no-action baseline, can be expected to have annual effects greater than $100 million ($2020).

3. Economic Effects of Specific Provisions

i. Rules for allocating R&E expenditures under the sales method

a. Background

Under long-standing foreign tax credit rules, taxpayers must allocate expenditures to income categories. In the case of research and experimentation (R&E) expenditures, taxpayers can elect between a “sales method” and a “gross income method” to allocate the R&E expenses.⁸

The TCJA created some uncertainty regarding the application of the sales method because of the introduction of the section 951A category. In particular, comments raised issues regarding whether any R&E expenditures should be allocated to the section 951A category. The fact that sales by CFCs generate tested income and tested income is generally assigned to the section 951A category might imply that R&E expenditures should be allocated to the section 951A category. But the fact that royalty payments from the CFC to the U.S. taxpayer (e.g., in remuneration for IP held by the parent that is licensed to the CFC to create the products that are sold) are in the general category implies that R&E expenditures should be allocated to the general category.

The gross income method is based on a different apportionment factor (gross income) as compared to the sales method (gross receipts). However, the gross income method is subject to certain conditions that require the result to be within a certain band around the result under the sales method, because historically the Treasury Department and the IRS have considered that the gross income method could lead to anomalous results and could be more easily manipulated than the sales method.⁹ The uncertainty with respect to R&E expense allocation under the sales method needed resolution, and because the gross income method is tied to the sales method, any changes to the sales method required consideration of the gross income method.

b. Options considered for the final regulations

The Treasury Department and the IRS considered three options with respect to the allocation of R&E expenditures to the section 951A category for purposes of calculating the FTC limitation. The first option was to confirm that R&E expenditures are allocated to the section 951A category under the sales method and to otherwise leave their treatment under the gross income method unchanged. The second option was to revise the sales method to provide that R&E expenditures are only allocated to the income that represents the taxpayer’s return on intellectual property (thus, R&E expenditures could not be allocated to income from the taxpayer’s CFC sales) and otherwise leave their treatment under the gross income method unchanged. The third option was to revise the sales method as considered in the second option and eliminate the gross income method for purposes of allocating R&E expenditures.

The final regulations adopt the third option. This option allows for the provision of an allocation and apportionment method for R&E expenditures that generally matches the expense reasonably with the income it generates. The matching of income and expenses generally produces a more efficient tax system contingent on the overall Code relative to the alternative options. Additionally, because this option results in no R&E expense being allocated to section 951A category income, it does not incentivize taxpayers with excess credits (which cannot be carried over to prior or future taxable years and therefore become unusable) in the section 951A category to perform R&E through foreign subsidiaries; instead, the chosen option generally incentivizes choosing the location of R&E based on economic considerations rather than tax-related reasons, contingent on the overall Code. Finally, because the final regulations adopt the principle of allocating and apportioning R&E expenditures to IP-related income of the U.S. taxpayer, the gross income method is no longer relevant, because it allocates and apportions R&E expenditures to the section 951A category, and section 951A category gross income is not IP income to the U.S. taxpayer.

c. Number of affected taxpayers

The Treasury Department and the IRS have determined that the population of affected taxpayers consists of any U.S. taxpayer with R&E expenditures and foreign operations. There are around 2,500 such taxpayers in currently available tax filings from tax year 2018. Based on Statistics of Income data, approximately $40 billion of R&E expenses of such taxpayers were allocated to foreign source income, out of a total of $190 billion in qualified research expenses reported by such taxpayers.¹⁰

ii. Application of section 905(c) to changes affecting the high-tax exception

a. Background

Section 905(c) provides special rules for a foreign tax redetermination (FTR), which is when the amount of foreign tax paid in an earlier year (origin year) is changed in a later year (FTR year). This redetermination may be necessary, for example, because the taxpayer gets a refund or because a foreign audit determines that the taxpayer owes additional foreign tax. Since these additional taxes (or refunds) relate to the origin year, an FTR affects a taxpayer’s origin year tax position (as well as FTC carryovers from that year). Before the TCJA, FTRs of foreign corporations generally resulted in prospective “pooling adjustments” to foreign tax credits. Under this approach, taxpayers simply added to or reduced the amount of foreign taxes in their foreign subsidiary’s FTC “pool” going forward rather than amend the deemed paid taxes claimed on their origin year return. TCJA eliminated the pooling mechanism for taxes (because the adoption of a participation exemption system along with the elimination of deferral made it unnecessary) and replaced it with a system where taxes are deemed paid each year with an inclusion or distribution of previously taxed earnings and profits (“PTEP”).

The 2019 FTC final regulations make clear that an FTR of a United States taxpayer must always be accounted for in the origin year, and that the taxpayer must file an amended return reflecting any resulting change in the taxpayer’s U.S. tax liability.

Section 905(c) provides tools to enforce this amended return requirement. It suspends the statute of limitations with respect to the assessment of any additional U.S. tax liability that results from an FTR, and imposes a civil penalty on taxpayers who fail to notify the IRS (through an amended return) of an FTR. To reflect the repeal of the pooling mechanism, the final regulations generally require taxpayers to account for FTRs of foreign subsidiaries on an amended return that reflects revised foreign taxes deemed paid under section 960 and any resulting change in the taxpayer’s U.S. tax liability. However, the 2019 FTC final regulations require U.S. tax redeterminations only by reason of FTRs that affect the amount of foreign tax credit taxpayers claimed in the origin year. The rules do not apply to other tax effects, such as when the FTR changes the amount of earnings and profits the taxpayer’s CFC had in the origin year, or affects whether or not the CFC’s income qualifies for the high-tax exception under GILTI or subpart F.

The interaction of FTRs and the high-tax exception under GILTI and subpart F increases the importance of filing an origin year amended return. In particular, FTRs can give rise to inaccurate origin year U.S. liability calculations in the absence of an amended return precisely because they can change taxpayers’ eligibility for the high-tax exception. Therefore, the final regulations provide that the section 905(c) rules cover situations in which the FTR affects not only the amount of FTCs taxpayers claimed in the origin year, but also whether or not their CFC’s income qualified for the high-tax exception.

b. Options considered for the final regulations

The Treasury Department and the IRS considered two options in applying section 905(c) in connection with the high-tax exception. The first option was to limit section 905(c) to changes in the amount of FTCs. The second option was to provide that section 905(c) applies in connection with the high-tax exceptions under GILTI and subpart F.

The final regulations adopt the second option. The first option would lead to frequent occurrences of inaccurate results with respect to the GILTI and subpart F high- tax exceptions because it is common for foreign audits to change the amount of tax paid in a prior year. Furthermore, taxpayers would have an incentive to overpay their CFC’s foreign tax in the origin year, claim the high-tax exception to avoid subpart F or GILTI inclusions, wait for the 3 year statute of limitations to pass, and then claim a foreign tax refund with the foreign authorities. Without section 905(c) applying, taxpayers would have no obligation or threat of penalty for not amending the origin year return. Although there are FTC regulations that deny a credit if taxpayers make a noncompulsory payment of tax (i.e., taxpayers paid more foreign tax than is necessary under foreign law), those rules are challenging to administer. While taxpayers have the burden to prove that they were legally required to pay the tax, the IRS may need to engage foreign tax law experts to establish that the taxpayer could have successfully fought paying it.

The second option provides a more accurate tax calculation than the first option, and it is instrumental in avoiding abuse. The increased number of amended returns relative to the alternative regulatory approach will increase compliance costs for taxpayers, but the Treasury Department and the IRS consider that, in light of the high-tax exception, accurate origin year tax liability calculations necessitate these increased costs.

c. Number of affected taxpayers

The Treasury Department and the IRS determined that the final regulations potentially affect those U.S. taxpayers that pay foreign taxes and have a redetermination of that tax. Although data reporting the number of taxpayers subject to an FTR in a given year are not readily available, some taxpayers currently subject to FTRs will file amended returns. The Treasury Department and the IRS estimate that there were between 8,900 and 13,500 taxpayers with foreign affiliates that filed amended returns in 2018. However, the elimination of the pooling mechanism and the expanded incidence of deemed paid taxes in connection with the GILTI regime may significantly increase the number of taxpayers filing amended returns, and the expansion of the section 905(c) requirement to file an amended return to instances where a FTR changes eligibility for the high-tax exception under GILTI or subpart F (but does not affect the taxpayer’s foreign tax credit) has the potential to modestly increase that number. The Treasury Department and the IRS have determined that a high upper bound for the number of taxpayers subject to a FTR that will be required to file amended returns (that is, taxpayers affected by this provision) can be derived by estimating the number of taxpayers with a potential GILTI or subpart F inclusion. Based on currently available tax filings for taxable year 2018, there were about 16,500 C corporations with CFCs that filed at least one Form 5471 with their Form 1120 return. In addition, for the same year, there were about 41,000 individuals with CFCs that e-filed at least one Form 5471 with their Form 1040 return.

In 2018, there were about 3,250 S corporations with CFCs that filed at least one Form 5471 with their 1120S return. The identified S corporations had an estimated 23,000 shareholders. Finally, the Treasury Department and the IRS estimate that there were approximately 7,500 U.S. partnerships with CFCs that e-filed at least one Form 5471 as Category 4 or 5 filers in 2018. The identified partnerships had approximately 1.7 million partners, as indicated by the number of Schedules K-1 filed by the partnerships. This number includes both domestic and foreign partners, so it substantially overstates the number of partners that would actually be affected by the final regulations because it includes foreign partners.

iii. Extension of the partnership loan rule to loans from the partnership to a U.S. partner

a. Background

The 2019 FTC final regulations provide a rule that aligns interest income and expense when a U.S. partner makes a loan to the partnership. Under this matching rule, the partner’s gross interest income is apportioned between U.S. and foreign sources in each separate category based on the partner’s interest expense apportionment ratios. This rule minimizes the artificial increase in foreign source taxable income based solely on offsetting amounts of interest income and expense from a related party loan to a partnership. Comments in response to the 2018 FTC proposed regulations requested an equivalent rule when the partnership makes a loan to a U.S. partner.

b. Options considered for the final regulations

The Treasury Department and the IRS considered two options with respect to this rule. The first option was to not provide a rule, because the abuse the Treasury Department and the IRS were concerned about was not relevant with respect to loans from the partnership to the partner. In the absence of a matching rule, the U.S. partner’s U.S. source taxable income would be artificially increased but this income is not eligible to be sheltered by FTCs. The second option was to provide an identical rule for loans from the partnership to the partner as was provided in the 2019 FTC final regulations for loans from the partner to the partnership. The final regulations adopt the second option. This symmetry helps to ensure that similar economic transactions are treated similarly.

c. Number of affected taxpayers

The Treasury Department and the IRS consider the population of affected taxpayers to consist of any U.S. partner in a partnership which has a loan from the partnership to the partner or certain other parties related to the partner. The Treasury Department and the IRS estimate that there are approximately 450 partnerships and 5,000 partners that would be affected by this regulation.

iv. Section 245A(e) – Adjustment of hybrid deduction account

a. Background

Under the 2020 hybrids final regulations, taxpayers must maintain hybrid deduction accounts to track income of a CFC that was sheltered from foreign tax due to hybrid arrangements, so that it may be included in U.S. income under section 245A(e) when paid as a dividend. The final regulations address how hybrid deduction accounts should be adjusted to account for earnings and profits of a CFC included in U.S. income due to certain provisions other than section 245A(e). The final regulations provide rules reducing a hybrid deduction account for three categories of inclusions: subpart F inclusions, GILTI inclusions, and inclusions under sections 951(a)(1)(B) and 956.

b. Options considered for the final regulations

One option for addressing the treatment of earnings and profits included in U.S. income due to provisions other than section 245A(e) would be to not issue additional guidance beyond current tax rules and thus not to adjust hybrid deduction accounts to account for such inclusions. This would be the simplest approach among those considered, but under this approach, some income could be subject to double taxation in the United States. For example, if no adjustment is made, to the extent that a CFC’s earnings and profits were sheltered from foreign tax as a result of certain hybrid arrangements, the section 245A DRD would be disallowed for an amount of dividends equal to the amount of the sheltered earnings and profits, even if some of the sheltered earnings and profits were included in the income of a U.S. shareholder under the subpart F rules. The U.S. shareholder would be subject to tax on both the dividends and on the subpart F inclusion. Owing to this double taxation, the final regulations do not adopt this approach.

A second option would be to reduce hybrid deduction accounts by amounts included in gross income under the three categories; that is, without regard to deductions or credits that may offset the inclusion. While this option is also relatively simple, it could lead to double non-taxation and thus would give rise to results not intended by the statute. Subpart F and GILTI inclusions may be offset by – and thus may not be fully taxed in the United States as a result of – foreign tax credits and, in the case of GILTI, the section 250 deduction.¹¹ Therefore, this option for reducing hybrid deduction accounts may result in some income that was sheltered from foreign tax due to hybrid arrangements also escaping full U.S. taxation. This double non-taxation is economically inefficient because otherwise similar activities are taxed differently, potentially leading to inefficient business decisions.

A third option, which is the option finalized by the Treasury Department and the IRS, is to reduce hybrid deduction accounts by the amount of the inclusions from the three categories, but only to the extent that the inclusions are likely not offset by foreign tax credits or, in the case of GILTI, the section 250 deduction. For subpart F and GILTI inclusions, the final regulations stipulate adjustments to be made to account for the foreign tax credits and the section 250 deduction available for GILTI inclusions. These adjustments are intended to provide a precise, administrable manner for measuring the extent to which a subpart F or GILTI inclusion is included in U.S. income and not shielded by foreign tax credits or deductions. This option results in an outcome aligned with statutory intent, as it generally ensures that the section 245A DRD is disallowed (and thus a dividend is included in U.S. income without any regard for foreign tax credits) only for amounts that were sheltered from foreign tax by reason of a hybrid arrangement but that have not yet been subject to U.S. tax.

Relative to a no-action baseline, these final regulations provide taxpayers with new instructions regarding how to adjust hybrid deduction accounts to account for earnings and profits that are included in U.S. income by reason of certain provisions other than section 245A(e). This new instruction avoids possible double taxation. Double taxation is inconsistent with the intent and purpose of the statute and is economically inefficient because it may result in otherwise similar income streams facing different tax treatment, incentivizing taxpayers to finance operations with specific income streams and activities that may not be the most economically productive.

The Treasury Department and the IRS have not estimated the difference in compliance costs under each of the three options for the treatment of earnings and profits included in U.S. income due to provisions other than section 245A(e) because they do not have readily available data or models that can provide such estimates.

c. Number of affected taxpayers

The Treasury Department and IRS estimate that this provision will impact an upper bound of approximately 2,000 taxpayers. This estimate is based on the top 10 percent of taxpayers (by gross receipts) that filed a domestic corporate income tax return for tax year 2017 with a Form 5471 attached, because only domestic corporations that are U.S. shareholders of CFCs are potentially affected by section 245A(e).¹²

This estimate is an upper bound on the number of large corporations affected because it is based on all transactions, even though only a portion of such transactions involve hybrid arrangements. The tax data do not report whether these reported dividends were part of a hybrid arrangement because such information was not relevant for calculating tax before the TCJA. In addition, this estimate is an upper bound because the Treasury Department and the IRS anticipate that fewer taxpayers would engage in hybrid arrangements going forward as the statute and §1.245A(e)-1 would make such arrangements less beneficial to taxpayers. Further, it is anticipated that the final regulations will result in only a small increase in compliance costs for those taxpayers who do engage in hybrid arrangements (relative to the baseline) because a reduction to hybrid deduction accounts under these final regulations generally uses information required to be computed under other provisions of the Code.

v. Conduit financing regulations to address hybrid instruments

a. Background

The conduit financing regulations allow the IRS to disregard intermediate entities in a multiple-party financing arrangement for the purposes of determining withholding tax rates if the instruments used in the arrangement are considered “financing transactions.” Financing transactions generally exclude instruments that are treated as equity for U.S. tax purposes unless they have significant redemption-type features. Thus, in the absence of further guidance, the conduit financing regulations would not apply to an equity instrument in the absence of such features. This would allow payments made under these arrangements to continue to be eligible for reduced withholding tax rates through a conduit structure.

b. Options considered for the final regulations

One option for addressing the current disparate treatment would be to not change the conduit financing regulations, which currently treat equity as a financing transaction only if it has specific redemption-type features; this is the no-action baseline. This option is not adopted by the Treasury Department and the IRS, since it is inconsistent with the Treasury Department’s and the IRS’s ongoing efforts to address financing transactions that use hybrid instruments, as discussed in the 2008 proposed regulations.

A second option, which is adopted in the final regulations, is to treat as a financing transaction an instrument that is equity for U.S. tax purposes but debt under the tax law of the issuer’s jurisdiction of residence or, if the issuer is not a tax resident of any country, the tax law of the country in which the issuer is created, organized or otherwise established. This approach will prevent taxpayers from using this type of hybrid instrument to engage in treaty shopping through a conduit jurisdiction. However, this approach does not cover certain cases, such as if a jurisdiction offers a tax benefit to non-debt instruments (for example, a notional interest deduction with respect to equity). The Treasury Department and the IRS adopt this second option in these final regulations because it will, in a manner that is clear and administrable, prevent a basic form of inappropriate avoidance of the conduit financing regulations.

A third option considered, which was proposed in the 2020 hybrids proposed regulations, would be to treat as a financing transaction any instrument that is equity for U.S. tax purposes and which entitles its issuer or its shareholder a deduction or similar tax benefit in the issuer’s resident jurisdiction or in the jurisdiction where the resident has a permanent establishment. This rule would be broader than the second option. It would cover all instruments that give rise to deductions or similar tax benefits, such as credits, rather than only those instruments that are treated as debt under foreign law. This rule would also cover instruments where a financing payment is attributable to a permanent establishment of the issuer, and the tax law of the permanent establishment’s jurisdiction allows a deduction or similar treatment for the instrument. This approach would prevent issuers from routing transactions through their permanent establishments to avoid the anti-conduit rules. The Treasury Department and the IRS did not adopt this third option in these final regulations. As discussed in Part III.B of the Summary of Comments and Explanation of Revisions, the Treasury Department and the IRS plan to finalize this rule separately to allow additional time to consider the comments received.

Relative to a no-action baseline, the final regulations are likely to incentivize some taxpayers to shift away from conduit financing arrangements and hybrid arrangements, a shift that is likely to result in little to no overall economic loss, or even an economic gain, because conduit arrangements are generally not economically productive arrangements and are typically pursued only for tax-related reasons. The Treasury Department and the IRS recognize, however, that as a result of these provisions, some taxpayers may face a higher effective tax rate, which may lower their economic activity.

The Treasury Department and the IRS have not undertaken more precise quantitative estimates of either of these economic effects because they do not have readily available data or models to estimate with reasonable precision: (i) the types or volume of conduit arrangements that taxpayers would likely use under the final regulations or under the no-action baseline; or (ii) the effects of those arrangements on businesses’ overall economic performance, including possible differences in compliance costs.

c. Number of affected taxpayers

The Treasury Department and the IRS estimate that the number of taxpayers potentially affected by the final conduit financing regulations will be an upper bound of approximately 7,000 taxpayers. This estimate is based on the top 10 percent of taxpayers (by gross receipts) that filed a domestic corporate income tax return with a Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” attached because primarily foreign entities that advance money or other property to a related U.S. entity through one or more foreign intermediaries are potentially affected by the conduit financing regulations.¹³

This estimate is an upper bound on the number of large corporations affected because it is based on all domestic corporate arrangements involving foreign related parties, even though only a portion of such arrangements are conduit financing arrangements that use hybrid instruments. The tax data do not report whether these arrangements were part of a conduit financing arrangement because such information is not provided on tax forms. In addition, this estimate is an upper bound because the Treasury Department and the IRS anticipate that fewer taxpayers would engage in conduit financing arrangements that use hybrid instruments going forward as the proposed conduit financing regulations would make such arrangements less beneficial to taxpayers.

vi. Rules under section 951A to address certain disqualified payments made during the disqualified period

a. Background

The final section 951A regulations include a rule that addresses certain transactions involving disqualified transfers of property between related CFCs during the disqualified period that may have the effect of reducing GILTI inclusions due to timing differences between when income is included and when resulting deductions, such as depreciation expenses, are claimed. The disqualified period of a CFC is the period between December 31, 2017, which is the last earnings and profits measurement date under section 965, and the beginning of the CFC’s first taxable year that begins after December 31, 2017, which is the first taxable year with respect to which section 951A is effective. The final regulations refine this rule to extend its applicability to other transactions for which similar timing differences can arise.

b. Options considered for the final regulations

The Treasury Department and the IRS considered two options with respect to providing a rule that would apply to certain transactions during the disqualified period in addition to disqualified transfers. The first option was to not provide a rule that would apply to additional transactions. This option was not adopted in the final regulations, since it would result in certain transactions involving payments during the disqualified period giving rise to reduced GILTI inclusions simply due to timing differences. In addition, this option would not provide a similar tax treatment for transactions involving payments as for disqualified transfers of property occurring during the disqualified period.

The second option, which is the option adopted in the final regulations, is to provide an identical rule for disqualified payments between related CFCs as was provided in the section 951A final regulations for disqualified transfers of property between related CFCs during the disqualified period. This symmetry helps to ensure that similar economic transactions are treated similarly.

In the absence of such a rule, certain payments between related CFCs made during the disqualified period may give rise to lower income inclusions for their U.S. shareholders. For example, suppose that a CFC licensed property to a related CFC for ten years and received pre-payments of royalties during the disqualified period from the related CFC. Since these prepayments were received by the licensor CFC during the disqualified period, they would not have affected amounts included under section 965 nor given rise to GILTI tested income. However, the licensee CFC that made the payments would not have claimed the total of the corresponding deductions during the disqualified period, since the timing of deductions are generally tied to economic performance over the period of use. The licensee CFC would claim deductions over the ten years of the contract, and since these deductions would be claimed during taxable years when section 951A is in effect, these deductions would reduce GILTI tested income or increase GILTI tested loss. Thus, this type of transaction could lower overall income inclusions for the U.S. shareholder of these CFCs in a manner that does not accurately reflect the earnings of the CFCs over time.

Under the final regulations, all deductions attributable to disqualified payments to a related CFC during the disqualified period are allocated and apportioned to residual CFC gross income. These deductions will not thereby reduce tested, subpart F or effectively connected income. This rule provides similar treatment to transactions involving payments as the rule in the section 951A final regulations provides to property transfers between related CFCs during the disqualified period.

Relative to a no-action baseline, the final regulations harmonize the treatment of similar transactions. Since this rule applies to deductions resulting from transactions that occurred during the disqualified period and not to any new transactions, the Treasury Department and the IRS do not expect changes in taxpayer behavior under the final regulations, relative to the no-action baseline.

c. Number of affected taxpayers

The Treasury Department and the IRS estimate that the number of taxpayers potentially affected by this rule will be an upper bound of approximately 25,000 to 35,000 taxpayers. This estimate is based on filers of income tax returns with a Form 5471 attached because only filers that are U.S. shareholders of CFCs or that have at least a 10 percent ownership in a foreign corporation would be subject to section 951A. This estimate is an upper bound because it is based on all filers subject to section 951A, even though only a portion of such taxpayers may have engaged in the pre-payment transactions during the disqualified period described in the proposed regulations. Therefore, the Treasury Department and the IRS estimate that the number of taxpayers potentially affected by this rule will be substantially less than 25,000 to 35,000 taxpayers.

A. Regulations relating to foreign tax credits

For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (“PRA”), there is a collection of information in §§1.905-4 and 1.905-5(b) and (e).

When a redetermination of U.S. tax liability is required by reason of a foreign tax redetermination (FTR), the final regulations generally require the taxpayer to notify the IRS of the FTR and provide certain information necessary to redetermine the U.S. tax due for the year or years affected by the FTR. If there is no change in the U.S. tax liability as a result of the FTR or if the FTR is caused by certain de minimis fluctuations in foreign currency rates, the taxpayer may simply attach the notification to their next filed tax return and make any appropriate adjustments in that year. However, taxpayers are generally required to file an amended return (or an administrative adjustment request in the case of certain partnerships) for the year or years affected by the FTR along with an updated Form 1116 Foreign Tax Credit (Individual, Estate, or Trust) (covered under OMB Control Number 1545-0074 individual, or 1545-0121 and 1545-0092 estate and trust) or Form 1118 Foreign Tax Credit-Corporations (OMB Control Number 1545-0123), and a written statement providing specific information relating to the FTR (covered under OMB Control Number 1545-1056). Since the burden for filing amended income tax returns and the Forms 1116 and 1118 is covered under the OMB Control Numbers listed in the prior sentence, the burden estimates for OMB Control Number 1545-1056 only cover the burden for the written statements. Sections 1.905-5(b) and 1.905-5(e) only apply to foreign tax redeterminations of foreign corporations that relate to a taxable year of the foreign corporation beginning before January 1, 2018. Section 1.905-4 applies to all other foreign tax redeterminations. Section 1.905-5(b) and (e) reference the same notification and information requirements as §1.905-4, subject to certain modifications.

For purposes of the PRA, the reporting burden associated with §§1.905-4 and 1.905-5(b) and (e) will be reflected in the PRA submission associated with OMB control number 1545-1056, which is set to expire on December 31, 2020. The number of respondents to this collection was estimated to be in a range from 8,900 to 13,500 and the total estimated burden time was estimated to be 56,000 hours and total estimated monetized costs of $2,583,840 ($2017). The IRS will be requesting a revision of the paperwork burden under OMB control number 1545-1056 prior to its expiration date.

For taxpayers who are required to file an amended return (along with related Form 1116 or Form 1118) in order to report an FTR, and for purposes of the PRA, the reporting burden for filing the amended return will be reflected in OMB control numbers 1545-0123 (relating to business filers, which represents a total estimated burden time, including all related forms and schedules, of 3.344 billion hours and total estimated monetized costs of $61.558 billion ($2019)), 1545-0074 (relating to individual filers, which represents a total estimated burden time, including all related forms and schedules, of 1.717 billion hours and total estimated monetized costs of $33.267 billion ($2019)), 1545-0092 (relating to estate and trust filers with respect to all related forms and schedules except Form 1116, which represents a total estimated burden time, including all related forms and schedules except Form 1116, of 307,844,800 hours and total estimated monetized costs of $14.077 billion ($2018)), and 1545-0121 (relating to estate and trust filers but solely with respect to Form 1116, which represents a total estimated burden time related solely to Form 1116 of 25,066,693 hours and total estimated monetized costs of $1.744 billion ($2018)). In general, burden estimates for OMB control numbers 1545-0123 and 1545-0074 include, and therefore do not isolate, the estimated burden of the foreign tax credit-related forms. These reported burdens are therefore insufficient for future calculations of the burden imposed by the final regulations. However, with respect to estate and trust filers (OMB control numbers 1545-0121 and 1545-0092) the burdens with respect to foreign tax credit-related forms are isolated in OMB control number 1545-0121 which relates solely to Form 1116, and, therefore may be sufficient to determine future burdens imposed by the final regulations. These particular burden estimates, except OMB control number 1545-0121, have also been reported for other regulations related to the taxation of cross-border income and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burden that international tax provisions imposed prior to the TCJA.

As a result of the changes made in the TCJA to the foreign tax credit rules generally, and to section 905(c) specifically, the Treasury Department and the IRS anticipate that the number of respondents may increase among taxpayers who file Form 1120 series returns. The possible increase in the number of respondents is due to the increase in foreign tax credits claimed by taxpayers in connection with the new GILTI regime and the elimination of adjustments to pools of post-1986 earnings and profits and post-1986 foreign income taxes as an alternative to filing an amended return following the changes made in the TCJA. These changes to the burden estimate will be reflected in the PRA submission for the renewal of OMB control number 1545-1056 as well as in the OMB control numbers 1545-0074 (for individuals) and 1545-0123 (for business taxpayers).

The estimates for the number of impacted filers with respect to the collections of information described in this Part II of the Special Analyses are based on filers of income tax returns that file a Form 1065, Form 1040, or Form 1120 series for years 2015 through 2017 because only filers of these forms are generally subject to the collection of information requirement. The IRS estimates the number of impacted filers to be the following:

Source: IRS data (MeF, DCS, and Compliance Data Warehouse)

No burden estimates specific to the final regulations are currently available. The Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under the final regulations. Those estimates would capture both changes made by the TCJA and those that arise out of discretionary authority exercised in the final regulations.

The Treasury Department and the IRS request comments on all aspects of the forms that reflect the information collection burdens related to the final regulations, including estimates for how much time it would take to comply with the paperwork burdens related to the forms described and ways for the IRS to minimize the paperwork burden. Proposed revisions (if any) to these forms that reflect the information collections related to the final regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be finalized until after these forms have been approved by OMB under the PRA.

B. Regulations relating to hybrid arrangements and section 951A

Pursuant to §1.6038-2(f)(14), certain U.S. shareholders of a CFC must provide information relating to the CFC and the rules of section 245A(e) on Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” (OMB control number 1545-0123), as the form or other guidance may prescribe. The final regulations do not impose any additional information collection requirements relating to section 245A(e). However, the final regulations provide guidance regarding certain computations required under section 245A(e), and such could affect the information required to be reported on Form 5471. For purposes of the PRA, the reporting burden associated with §1.6038-2(f)(14) is reflected in the PRA submission for Form 5471. See the chart at the end of this Part II.B of this Special Analyses section for the status of the PRA submission for Form 5471. As described in the Special Analyses section in the 2020 hybrids final regulations, and as set forth in the chart below, the Treasury Department and the IRS estimate the number of affected filers to be 2,000.

Pursuant to §1.6038-5, certain U.S. shareholders of a CFC must provide information relating to the CFC and the U.S. shareholder’s GILTI inclusion under section 951A on new Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),” (OMB control number 1545-0123), as the form or other guidance may prescribe. The final regulations do not impose any additional information collection requirements relating to section 951A. However, the final regulations provide guidance regarding computations required under section 951A for taxpayers who engaged in certain transactions during the disqualified period, and such guidance could affect the information required to be reported by these taxpayers on Form 8992. For purposes of the PRA, the reporting burden associated with the collection of information under §1.6038-5 is reflected in the PRA submission for Form 8992. See the chart at the end of this Part II.B of the Special Analyses for the status of the PRA submission for Form 8992. As discussed in the Special Analyses of the preamble to the proposed regulations under section 951A (REG-104390-18, 83 FR 51072), and as set forth in the chart below, the Treasury Department and the IRS estimate the number of filers subject to §1.6038-5 to be 25,000 to 35,000. Since the final regulations only apply to taxpayers who engaged in certain transactions during the disqualified period, the Treasury Department and the IRS estimate that the number of filers affected by the final regulations and subject to the collection of information in §1.6038-5 will be significantly less than 25,000 to 35,000.

There is no existing collection of information relating to conduit financing arrangements, and the final regulations do not impose any new information collection requirements relating to conduit financing arrangements. Therefore, a PRA analysis is not required with respect to the final regulations relating to conduit financing arrangements.

As a result, the Treasury Department and the IRS estimate the number of filers affected by the final regulations for hybrid arrangements and section 951A to be the following.

Source: IRS data (MeF, DCS, and Compliance Data Warehouse)

The current status of the PRA submissions related to the tax forms associated with the information collections in §§1.6038-2(f)(14) and 1.6038-5 is provided in the accompanying table. The reporting burdens associated with the information collections in §§1.6038-2(f)(14) and 1.6038-5 are included in the aggregated burden estimates for OMB control number 1545-0123, which represents a total estimated burden time for all forms and schedules for corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017). The overall burden estimates provided in 1545-0123 are aggregate amounts that relate to the entire package of forms associated with the OMB control number, and are therefore not suitable for future calculations needed to assess the burden specific to certain regulations, such as the information collections under §1.6038-2(f)(14) or §1.6038-5.

No burden estimates specific to the final regulations are currently available. The Treasury Department and the IRS have not identified any burden estimates, including those for new information collections, related to the requirements under the final regulations. The Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Changes in those estimates from the estimates reported here will capture both changes made by the TCJA and those that arise out of discretionary authority exercised in the final regulations.

The Treasury Department and the IRS request comments on the forms that reflect the information collection burdens related to the final regulations, including estimates for how much time it would take to comply with the paperwork burdens related to the forms described and ways for the IRS to minimize the paperwork burden. Proposed revisions (if any) to these forms that reflect the information collections related to the final regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be finalized until after these forms have been approved by OMB under the PRA.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act.

A. Regulations relating to foreign tax credits

These final regulations provide guidance needed to comply with statutory changes and affect individuals and corporations claiming foreign tax credits. The domestic small business entities that are subject to the foreign tax credit rules in the Code and in these final regulations are generally those domestic small business entities that are at least 10 percent corporate shareholders of foreign corporations, and so are eligible to claim dividends-received deductions or compute foreign taxes deemed paid under section 960 with respect to inclusions under subpart F and section 951A from CFCs. Other aspects of these final regulations also affect domestic small business entities that operate in foreign jurisdictions or that have income from sources outside of the United States. Based on 2017 Statistics of Income data, the Treasury Department and the IRS computed the fraction of taxpayers owning a CFC by gross receipts size class. The smaller size classes have a relatively small fraction of taxpayers that own CFCs, which suggests that many domestic small business entities would be unaffected by these regulations.

Many of the important aspects of these final regulations, including all of the rules in §§1.861-8(d)(2)(ii)(B), 1.904-4(c)(7), 1.904-6(f), 1.905-3(b)(2), 1.905-5, 1.954-1, 1.954-2, and 1.965-5(b)(2) apply only to U.S. persons that operate a foreign business in corporate form, and, in most cases, only if the foreign corporation is a CFC. Other provisions in these final regulations, including the rules in §§1.861-8(d)(2)(v) and (e)(16), 1.861-14, 1.1502-4, and 1.1502-21, generally apply only to members of a consolidated group and insurance companies or other members of the financial services industry earning income from sources outside of the United States. It is infrequent for domestic small entities to operate as part of an affiliated group, to be taxed as an insurance company, or to constitute a financial services entity, and also earn income from sources outside of the United States. Consequently, the Treasury Department and the IRS expect that these final regulations are unlikely to affect a substantial number of domestic small business entities; however, adequate data are not available at this time to certify that a substantial number of small entities would be unaffected.

The Treasury Department and the IRS have determined that these final regulations will not have a significant economic impact on domestic small business entities. Based on published information from 2017, foreign tax credits as a percentage of three different tax-related measures of annual receipts (see Table for variables) by corporations are substantially less than the 3 to 5 percent threshold for significant economic impact for businesses in all categories of business receipts. The amount of foreign tax credits in 2017 is an upper bound on the change in foreign tax credits resulting from these final regulations.

Source: RAAS: KDA: (Tax Year 2017 SOI Data)

Although §1.905-4 contains a collection of information requirement, the small businesses that are subject to the requirements of §1.905-4 are domestic small entities with significant foreign operations. The data to assess precise counts of small entities affected by §1.905-4 are not readily available. However, as demonstrated in the accompanying Table in this Part III, foreign tax credits do not have a significant economic impact for any gross-receipts class of business entities. Accordingly, it is hereby certified that the requirements of §1.905-4 will not have a significant economic impact on a substantial number of small entities.

Pursuant to section 7805(f), the proposed regulations preceding these final regulations (REG-105495-19) were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses and no comments were received.

B. Regulations relating to hybrid arrangements and section 951A

The final regulations amend certain computations required under section 245A(e) or section 951A. As discussed in the Special Analyses accompanying the preambles to the 2020 hybrids final regulations and the proposed regulations under section 951A (REG-104390-18, 83 FR 51072), as well as in Part II.B of the Special Analyses, the Treasury Department and the IRS project that a substantial number of domestic small business entities will not be subject to sections 245A(e) and 951A, and therefore, the existing requirements in §§1.6038-2(f)(14) and 1.6038-5 will not have a significant economic impact on a substantial number of small entities.

The small entities that are subject to section 245A(e) and §1.6038-2(f)(14) are controlling U.S. shareholders of a CFC that engage in a hybrid arrangement, and the small entities that are subject to section 951A and §1.6038-5 are U.S. shareholders of a CFC. A CFC is a foreign corporation in which more than 50 percent of its stock is owned by U.S. shareholders, measured either by value or voting power. A U.S. shareholder is any U.S. person that owns 10 percent or more of a foreign corporation’s stock, measured either by value or voting power, and a controlling U.S. shareholder of a CFC is a U.S. person that owns more than 50 percent of the CFC’s stock.

The Treasury Department and the IRS estimate that there are only a small number of taxpayers having gross receipts below either $25 million (or $41.5 million for financial entities) who would potentially be affected by these regulations.¹⁴ The Treasury Department and the IRS’s estimate of those entities who could potentially be affected is based on their review of those taxpayers who filed a domestic corporate income tax return in 2016 with gross receipts below either $25 million (or $41.5 million for financial institutions) who also reported dividends on a Form 5471. The Treasury Department and the IRS estimate that this number is between 1 and 6 percent of all affected entities regardless of size.

The Treasury Department and the IRS cannot readily identify from these data amounts that are received pursuant to hybrid arrangements because those amounts are not separately reported on tax forms. Thus, dividends received as reported on Form 5471 are an upper bound on the amount of hybrid arrangements by these taxpayers.

The Treasury Department and the IRS estimated the upper bound of the relative cost of the statutory and regulatory hybrids provisions, as a percentage of revenue, for these taxpayers as (i) the statutory tax rate of 21 percent multiplied by dividends received as reported on Form 5471, divided by (ii) the taxpayer’s gross receipts. Based on this calculation, the Treasury Department and the IRS estimate that the upper bound of the relative cost of these statutory and regulatory provisions is above 3 percent for more than half of the small entities described in the preceding paragraph. Because this estimate is an upper bound, a smaller subset of these taxpayers (including potentially zero taxpayers) is likely to have a cost above three percent of gross receipts.

Pursuant to section 7805(f), the proposed regulations preceding these final regulations (REG-106013-19) were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses and no comments were received.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive order.

The Administrator of the Office of Information and Regulatory Affairs of the OMB has determined that this Treasury decision is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (‘‘CRA’’). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Accordingly, the Treasury Department and IRS are adopting these final regulations with the delayed effective date generally prescribed under the Congressional Review Act.

The final rules require group health plans and health insurance issuers in the individual and group markets to disclose cost-sharing information upon request, to a participant, beneficiary, or enrollee, which, unless otherwise indicated, for the purpose of the final rules includes an authorized representative, and require plans and issuers to disclose in-network provider rates, historical out-of-network allowed amounts and the associated billed charges, and negotiated rates for prescription drugs in 26 CFR part 54, 29 CFR part 2590, and 45 CFR part 147. HHS also finalizes amendments to its MLR program rules in 45 CFR part 158.

A.Statutory Background and Enactment of PPACA

The Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) was enacted on March 30, 2010 (collectively, PPACA). As relevant here, PPACA reorganized, amended, and added to the provisions of part A of title XXVII of the Public Health Service (PHS) Act relating to health coverage requirements for group health plans and health insurance issuers in the group and individual markets. The term group health plan includes both insured and self-insured group health plans.

PPACA also added section 715 to the Employee Retirement Income Security Act of 1974 (ERISA) and section 9815 to the Internal Revenue Code (Code) to incorporate the provisions of part A of title XXVII of the PHS Act, PHS Act sections 2701 through 2728, into ERISA and the Code, making them applicable to group health plans, and health insurance issuers providing coverage in connection with group health plans.

1.Transparency in Coverage

Section 2715A of the PHS Act provides that group health plans and health insurance issuers offering group or individual health insurance coverage must comply with section 1311(e)(3) of PPACA, which addresses transparency in health coverage and imposes certain reporting and disclosure requirements for health plans that are seeking certification as qualified health plans (QHPs) that may be offered on an Exchange. A plan or coverage that is not offered through an Exchange (as defined by section 1311(b)(1) of PPACA) is required to submit the information required to the Secretary of HHS and the relevant state’s insurance commissioner, and to make that information available to the public.

Paragraph (A) of section 1311(e)(3) of PPACA requires a plan seeking certification as a QHP to make the following information available to the public and submit it to state insurance regulators, the Secretary of HHS, and the Exchange:

Paragraph (A) also requires a plan seeking certification as a QHP to submit any “[o]ther information as determined appropriate by the Secretary.”

Paragraph (C) of section 1311(e)(3) of PPACA requires plans, as a requirement of certification as a QHP, to permit individuals to learn the amount of cost sharing (including deductibles, copayments, and coinsurance) under the individual’s coverage that the individual would be responsible for paying with respect to the furnishing of a specific item or service by an in-network provider in a timely manner upon the request of the individual. Paragraph (C) specifies that, at a minimum, such information must be made available to the individual through an internet website and through other means for individuals without access to the internet.

Together these statutory provisions require the overriding majority of private health plans¹ to disseminate a substantial amount of information to provide transparency in coverage. The portions of the final rules that require plans and issuers to disclose cost-sharing information upon request, to a participant, beneficiary, or enrollee implement paragraph (C) of section 1311(e)(3) of PPACA. The portions of the final rules that require plans and issuers to disclose in-network provider rates, historical out-of-network allowed amounts and the associated billed charges, and negotiated rates for prescription drugs implement paragraph (A) of section 1311(e)(3) of PPACA. The requirements to disclose out-of-network allowed amounts specifically implements the requirement in section 1311(e)(3)(A)(vii) to provide information on “payments with respect to any out-of-network coverage.” In addition to payment information on out-of-network charges, the Secretary of HHS determined that payment information on in-network rates and prescription drugs is also appropriate information to require plans and issuers to disclose to provide transparency in coverage under section 1311(e)(3)(A)(ix).

PPACA’s transparency in coverage requirements were enacted in coordination with a set of requirements that transformed the regulation of private market health plans and issuers. These requirements for the first time apply a comprehensive framework for regulating private health coverage through federal law.² Prior to PPACA, federal law relied on states to be the primary regulators of health insurance, but applied only a limited set of federal requirements to govern private health coverage. Where federal law regulated private health coverage, there was a substantial variation in how these regulations applied, depending on whether private health coverage was self-insured group coverage, large group insurance coverage, small group insurance coverage, or individual insurance coverage. To establish a comprehensive framework for regulating private health coverage, PPACA first set out a series of requirements on “Improving Coverage” that generally apply to group health plans and health insurance issuers offering group or individual health insurance coverage.³ These requirements ranged from the prohibition on lifetime or annual dollar limits in section 2711 of the PHS Act to the requirement to cover out-of-network emergency services in section 2719A of the PHS Act and include the transparency in coverage requirements in section 2715A of the PHS Act.⁴ By including transparency in coverage in this set of requirements that apply to most private coverage, Congress established transparency as a key component to PPACA’s comprehensive framework for regulating private health coverage.⁵

On March 27, 2012, HHS issued the Exchange Establishment final rule that implemented sections 1311(e)(3)(A) through (C) of PPACA at 45 CFR 155.1040(a) through (c) and 156.220.⁶ The Exchange Establishment final rule created standards for QHP issuers to submit specific information related to transparency in coverage. QHPs are required to post and make data related to transparency in coverage available to the public in plain language and submit this same data to HHS, the Exchange, and the relevant state insurance commissioner. In the preamble to the Exchange Establishment final rule, HHS noted that “health plan standards set forth under the final rules are, for the most part, strictly related to QHPs certified to be offered through the Exchange and not the entire individual and small group market. Such policies for the entire individual and small and large group markets have been, and will continue to be, addressed in separate rulemaking issued by HHS, and the Departments of Labor and the Treasury.”

2. Medical Loss Ratio

Section 2718(a) of the PHS Act, as added by PPACA, generally requires health insurance issuers offering group or individual health insurance coverage (including a grandfathered health insurance plan) to submit an annual report to the Secretary of HHS that details the percentage of premium revenue (after certain adjustments) expended on reimbursement for clinical services provided to enrollees under health coverage and on activities that improve health care quality. The proportion of premium revenue spent on clinical services and quality improvement activities is called the MLR. Section 2718(b) of the PHS Act requires an issuer to provide annual rebates to enrollees if its MLR falls below specified standards (generally 80 percent for the individual and small group markets, and 85 percent for the large group market). HHS published an interim final rule to implement the MLR program in the December 1, 2010 Federal Register (75 FR 74863). A final rule was published in the December 7, 2011 Federal Register (76 FR 76573). The MLR program requirements were amended in final rules published in the December 7, 2011 Federal Register (76 FR 76595), the May 16, 2012 Federal Register (77 FR 28790), the March 11, 2014 Federal Register (79 FR 13743), the May 27, 2014 Federal Register (79 FR 30339), the February 27, 2015 Federal Register (80 FR 10749), the March 8, 2016 Federal Register (81 FR 12203), the December 22, 2016 Federal Register (81 FR 94183), the April 17, 2018 Federal Register (83 FR 16930), the April 25, 2019 Federal Register (84 FR 17454), and the February 6, 2020 Federal Register (85 FR 7088).

B. Benefits of Transparency in Health Coverage and Past Efforts to Promote Transparency

PPACA’s transparency in coverage requirements can help ensure the accurate and timely disclosure of information appropriate to support an efficient and competitive health care market. A well-functioning, competitive market depends on information being available to buyers and sellers.⁷ As President Trump’s “Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First” explains: “To make fully informed decisions about their health care, patients must know the price and quality of a good or service in advance.” Yet, as the Executive Order then notes, “patients often lack both access to useful price and quality information and the incentives to find low-cost, high-quality care.” The lack of this information is widely understood to be one of the root problems causing dysfunction within America’s health care system.

The Departments of Labor, HHS, and the Treasury (Departments) are of the view that transparency in health coverage requirements will strengthen America’s health care system by giving health care consumers, researchers, regulators, lawmakers, health innovators, and other health care stakeholders the information they need to make, or assist others in making informed decisions about health care purchases. Health care consumers include various persons and entities that finance health care needs through the purchase of insurance. Health care consumers also include uninsured persons without health coverage who must pay out-of-pocket for health care items and services and uninsured persons who may be shopping for health coverage. Employers that sponsor health plans for their employees and government programs that provide health care services and benefits to consumers are also health care consumers.

By requiring the dissemination of price and benefit information directly to consumers and to the public, the transparency in coverage requirements will provide the following consumer benefits:

The goal of the final rules is to deliver these benefits to all consumers and health care stakeholders through greater transparency in coverage.

Comments received in response to the proposed rules on transparency in coverage (discussed in more detail later in this preamble) have strengthened the Departments’ view that this price transparency effort will equip the public with information to actively and effectively participate in the health care system as consumers.⁸ The majority of commenters acknowledged the importance of the availability of health care pricing information and appropriate tools to assist consumers in health care decision-making and managing health care costs. For these reasons and those explained in more detail below in this preamble, the Departments continue to be of the view that price transparency efforts are crucial to providing consumers (individual and institutional) with meaningful and actionable pricing information in an effort to contain the growth of health care costs.

1. Transparency provides necessary information for consumers to make more informed health care spending decisions

As explained in the report, “Reforming America’s Healthcare System Through Choice and Competition,” consumers have an important role to play in controlling costs, but consumers must have meaningful information in order to create the market forces necessary to achieve lower health care costs.⁹ When consumers seek care, they do not typically know whether they could have received the same service from another provider at lower prices. Third-party payers negotiate prices on the consumer’s behalf and reimburse costs directly to health care providers, concealing the actual price from the consumer at the point of care. After receiving care, consumers typically receive an Explanation of Benefits (EOB), which details the price charged by the provider, contracted or negotiated rate, and consumer cost sharing. Often, only after services are rendered is the cost of care disclosed to the consumer.

Historically, there has been little to no incentive for some consumers to consider price and seek lower-cost care.¹⁰ Rapidly rising health care spending in the past 20 years, however, has led to consumers shouldering a greater portion of their health care costs through increases in out-of-pocket expenses.¹¹

Since 1970, per capita out-of-pocket expenditures have nearly doubled due to a number of factors.¹² These factors include increased enrollment in high deductible health plans (HDHPs) and accompanying health savings accounts (HSAs), and increased plan and issuer reliance on payments towards deductibles comprising the proportion of total cost-sharing payments.¹³ As explained in the preamble to the proposed rules, these shifts in plan design and enrollment are correlated with consumers bearing a greater share of their overall health care costs in the private health insurance market than in previous years.¹⁴ From 2002 to the enactment of PPACA in 2010, nationally, the percentage of private sector employees enrolled in a health plan with a deductible increased from 47.6 percent to 77.5 percent and continued to increase to 86.6 percent in 2019.¹⁵ Average family deductibles for private sector employees grew from $958 in 2002 to $1,975 in 2010, and then to $3,655 in 2019—an 85 percent increase since the enactment of PPACA.¹⁶ These changes represent a substantial increase in the amount that consumers must pay for health care before insurance begins to cover items or services.¹⁷ Deductibles made up 52 percent of cost-sharing spending in 2016, up from 30 percent in 2006, while copays dropped from 43 percent to 17 percent of cost-sharing payments over the same period. ¹⁸ The gradual shift away from copayments, which are predictable to the consumer through their set dollar amounts for each covered item or service, to deductibles and coinsurance, has increased the need for consumers to know the negotiated price in order to plan ahead and budget for out-of-pocket costs. Over time, price disclosure can improve consumers’ ability to better manage costs of utilized health care for a variety of health care plans. Increased enrollment in HDHPs and the shift to coinsurance across plan and benefit designs means that consumers have a vested interest in learning the costs of care prior to paying for items or services, as they are responsible for paying out-of-pocket expenditures, which are directly dependent on the negotiated or contractual price.

These trends in designing health plans have led to consumers bearing an increased share of their health care costs. The fact that more consumers are bearing greater financial responsibility for the cost of their health care provides an opportunity to establish a more consumer-directed and consumer-driven health care market. Eighty-eight percent of consumers support requirements for providers and issuers to disclose prices prior to care.¹⁹ If consumers have better pricing information and can shop for health care items and services more efficiently, they can increase competition and demand for lower prices.²⁰ However, consumers generally have little information regarding negotiated rates or out-of-network costs until after services are rendered. There is also wide variability in health care prices for the same service.²¹ As a result, it can be difficult for consumers to estimate potential out-of-pocket costs.

2. Transparency strengthens stakeholders’ ability to support consumers

Making price transparency information publicly available strengthens the work of other health care stakeholders that help provide care or promote access to care to consumers, or otherwise aim to protect consumers and their interests in the health care system. These entities include researchers, regulators, lawmakers, patient and consumer advocates, and businesses that provide consumer support tools and services. A key aspect of transparency in coverage is to make health care pricing information more accessible and useful to consumers by making the information available to persons and entities with the requisite experience and expertise to assist individual consumers and other health care purchasers to make informed health care decisions.

With information on pricing, these other health care stakeholders can better fulfill each of the unique roles they play to improve America’s health care system for consumers. For instance, with pricing information researchers could better assess the cost-effectiveness of various treatments; state regulators could better review issuers’ proposed rate increases; patient advocates could better help guide patients through care plans; employers could adopt incentives for consumers to choose more cost-effective care; and entrepreneurs could develop tools that help doctors better engage with patients.

3. Transparency reduces the potential for surprise billing

Making the price of care available to consumers before they receive care can reduce the potential for consumers to be surprised by the price of a health care item or service when they receive the bill after receiving care. However, accessible pricing information holds special value for insured consumers.²² Surprise billing has become a substantial concern for insured consumers, in particular, consumers who receive a bill from an out-of-network provider when they thought an in-network provider was treating them. While price transparency alone is not a complete solution to this problem, the disclosure of pricing directly to consumers could help mitigate some unexpected health care costs. As just noted, making pricing information public can also strengthen other health care stakeholders’ ability to protect consumers. In the case of surprise billing, public information on pricing for in-network and out-of-network services could allow stakeholders to develop better tools to help patients avoid surprises and improve oversight of health insurance issuers, plans, and providers.

4. Transparency increases competition and contains costs.

Without transparency in pricing, market forces cannot drive competition. This lack of competition in many health care markets is demonstrated by significant, unexplained variations in prices for procedures, even within a single region.²³ For example, studies of price variation within California and nationally suggest that there is substantial opportunity for increased transparency to save money by shifting patients from high to lower-cost providers.²⁴ The Departments are of the view that consumers will take advantage of increased transparency to shop for their health care if price transparency is put into place nationwide.²⁵ Many empirical studies have investigated the impact of price transparency on non-health care markets, with most research showing that “price transparency leads to lower and more uniform prices, a view consistent with predictions of standard economic theory.”²⁶ Studies suggest that consumers want and will use actionable pricing information to shop for more cost-effective care.²⁷ For example, when automobile prices were presented transparently on the internet, inclusive of the dealer invoice price, the consumers who did not like the traditional bargaining process were able to reduce spending overall by 1.5 percent.²⁸ Another study demonstrated the public display of life insurance prices for comparison led to a 5 percent decrease in the consumer price.²⁹ Price transparency also reduced price dispersion across other markets, such as the airline industry, which saw a reduction in price dispersion from 18 percent in 1997 narrowing to 0.3-2.2 percent in 2002 for fares available at multiple travel websites.³⁰ These lessons from other markets suggest that more thoroughly implementing price transparency across the health care industry could increase competition to provide lower costs and limit price variation.³¹

Despite the general absence of price transparency in the health care sector, there is research showing how price transparency leads to lower and more uniform pricing in health care markets. For instance, as noted in the preamble to the proposed rule, research shows patients saved $7.9 million and issuers saved $36 million on imaging services in New Hampshire after the state launched a website publishing health prices for most consumers with private health insurance.³² One study found use of a telephone- and email-based tool to search for health care prices reduced the price paid by 10 to 17 percent and reduced the prices paid for care on average by 1.6 percent.³³ Another study of a program that provided health plan participants, beneficiaries, or enrollees with price and quality information to help select high-value imaging services found an increase in the use of lower-cost facilities.³⁴ This consumer behavior prompted higher-cost facilities to lower their prices, which resulted in a 30 percent reduction in the price variation between low- and high-cost facilities.³⁵ These studies, as well the numerous studies highlighted in subsequent sections of this rule, offer substantial evidence that price transparency in health care markets will result in consumer benefits similar to those that result from transparency in other markets.

5. The final rules will fill gaps left by state and private transparency efforts.

Currently, the information that consumers need to make informed decisions based on the prices of health care services is not readily available or is presented in a manner that makes it challenging to understand. As noted in the preamble to the proposed rules, the 2011 Government Accountability Office (GAO) report, “Health Care Price Transparency: Meaningful Price Information is Difficult for Consumers to Obtain Prior to Receiving Care,” found that the lack of transparency in health care prices, coupled with the wide pricing disparities for particular procedures within the same market, can make it difficult for consumers to understand health care prices and to shop effectively based on cost.³⁶ The report also explored various price transparency initiatives, including tools that consumers could use to generate price estimates before receiving a health care service. The report notes that pricing information displayed by tools varies across initiatives, in large part due to limits reported by the initiatives in their access or authority to collect certain necessary price data. In particular, the report notes the lack of public disclosure of rates negotiated between providers and third-party payers. The GAO report, therefore, recommended that HHS determine the feasibility of, and the next steps for, making estimates of out-of-pocket costs for health care services available to consumers.

States have been at the forefront of transparency initiatives and have adopted a variety of approaches to improve price transparency.³⁷ More than half of the states have passed legislation establishing price transparency websites or mandating that health plans, hospitals, or physicians make pricing information available to patients.³⁸ For example, as of September 2020, thirty one states have enacted laws that provide participants, beneficiaries, and enrollees with at least partial protection against the practice of “balance billing.”³⁹ At least eighteen states have All-Payer Claims Databases. However, state transparency requirements are generally not applicable to self-insured group health plans, which cover approximately 58.7 percent of private-sector workers.⁴⁰ As a result, the data collected under state law does not include data from self-insured plans, and a significant portion of consumers may not have access to information on their plans.

In response to state action and consumer demands for more information on health care pricing, and to align with increased price transparency in other markets, health insurance issuers and self-insured plans have moved to increase price transparency. For example, some plans are using price transparency tools to incentivize employees to make cost-conscious decisions when purchasing health care services. Most large issuers have comparative cost information, which includes rates that plans and issuers have negotiated with in-network providers and suppliers.

However, many existing tools are either insufficient in the amount of detail they provide or the level of accuracy available. In order to expand price transparency to all consumers, federal action is therefore necessary to establish standards and universal access to this information. In preparation for writing the proposed rules, the Departments met with over 50 stakeholders including plans, issuers, and third-party tool developers. Several stakeholders provided demonstrations of their tools to the Departments. The Departments note that over 90 percent of plans offer some version of a price comparison tool.⁴¹ However, many of the plans and issuers that the Departments met with, who did not have a tool serve large portions of participants, beneficiaries, and enrollees. It is therefore the Departments’ understanding that there are still millions of insured Americans that do not have access to any type of health care pricing tool. Also based on these demonstrations, the Departments are of the view that many price transparency tools on the market only offer wide-range estimates or average estimates of pricing that use historical claims data and do not always take into account the accumulated amount a participant, beneficiary, or enrollee has paid toward their deductible or out-of-pocket limit (sometimes referred to as an “accumulator”). The Departments are of the view that wide-range estimates are of limited value to consumers, given that they may not accurately reflect an individual’s plan design and benefits, and that ranges should be replaced by actual estimated out-of-pocket costs, in order to allow the consumer to meaningfully predict costs. In addition, the inclusion of negotiated rates in these tools could help show the changes to a participant’s, beneficiary’s, or enrollee’s costs if they have a future need for the same service, conditioned on the level of fulfillment of any cost-sharing responsibilities. This could help the consumer better understand the full value of the health care they are considering and how the cost may be different in the future when the participant’s, beneficiary’s, or enrollee’s accumulator resets in a new plan year. Information on quality and results are also important for assessing the value of care.⁴² Through this increased availability of information and consumer comprehension, transparent pricing can apply pressure on providers to demonstrate and improve quality and health care results. Providers may likely then be in the position of having to justify their costs relative to alternative options.

The Departments are of the view that existing price transparency tools often function in a way that makes them difficult for users to navigate. These tools often display information that makes it difficult to compare one plan against another, understand the scope of services covered and their costs, and interpret the terminology plans and issuers use. Consumers may be discouraged by these difficult user interfaces and may be less likely to make fully informed decisions with their healthcare choices. Research demonstrates that poor or confusing user interfaces will lead users to abandon engagement with the hosting website.⁴³ The Departments are of the view that it is important to establish a minimum set of standards regarding what is acceptable so that consumers can fully utilize all relevant information. Tools that provide consistent information to every consumer across all markets, and that base cost estimates on accurate and recent information, will be a significant improvement over all or most existing options. Accuracy and consistency are intended to give consumers confidence that the information presented by these tools will not change significantly from the prices they are ultimately charged. Reliability should assure consumers that information in these tools accurately reflects plans’ and issuers’ best estimates of consumer out-of-pocket costs. The availability of these tools across most private markets will ensure broad access for all participants, beneficiaries, or enrollees to the intended outcomes and potential benefits of the final rules. The Departments anticipate that participants, beneficiaries, and enrollees will become accustomed to having access to this standardized information, no matter what private market plan or coverage they choose, which will make them more comfortable with using this information in health care purchasing decisions. The Departments further anticipate and encourage plans and issuers to include additional functionality and innovation in existing price transparency tools, but a baseline is necessary to give participants, beneficiaries, and enrollees the confidence that, regardless of the tool they use, they can expect the same standard information and functionality.

C. Stakeholder Feedback and Prior Actions in Support of Transparency

In the HHS 2020 Notice of Benefit and Payment Parameters (2020 Payment Notice) proposed rule,⁴⁴ HHS sought input on ways to provide consumers with greater transparency regarding their own health care data, QHP offerings on the Federally-facilitated Exchanges (FFEs), and the cost of health care services.⁴⁵ Additionally, HHS sought comment on ways to further implement section 1311(e)(3) of PPACA, as implemented by 45 CFR 156.220(d), under which, upon the request of an enrollee, a QHP issuer must make available in a timely manner the amount of enrollee cost sharing under the enrollee’s coverage for a specific service furnished by an in-network provider. HHS was particularly interested in what types of data would be most useful to improving consumers’ abilities to make informed health care decisions, including decisions related to their coverage specifications and ways to improve consumer access to information about health care costs.

Commenters on the 2020 Payment Notice overwhelmingly supported the idea of increased price transparency. Many commenters provided suggestions for defining the scope of price transparency requirements, such as providing costs for both in-network and out-of-network health care, and providing health care cost estimates that include an accounting for consumer-specific benefit information, like progress toward meeting deductibles and annual limitations on cost sharing, as well as remaining visits under visit limits. Commenters expressed support for implementing price transparency requirements across all private markets and for price transparency efforts to be a part of a larger payment reform effort and a provider empowerment and patient engagement strategy. Some commenters advised HHS to carefully consider how such policies should be implemented, warning against federal duplication of state efforts and requirements that would result in plans and issuers passing along increased administrative costs to consumers and cautioning that the proprietary and competitive nature of payment data should be protected.

In the summer and fall of 2018, HHS hosted listening sessions related to the goal of empowering consumers by ensuring the availability of useable pricing information. The listening sessions included a wide representation of stakeholders including providers, issuers, researchers, and consumer and patient advocacy groups. Attendees noted that currently available pricing tools are underutilized, in part because consumers are often unaware that they exist,⁴⁶ and even when used, the tools sometimes convey inconsistent and inaccurate information.

Attendees also commented that tool development could be expensive, especially for smaller health plans, which tend to invest less in technology because of the limited return on investment. Attendees further commented that most tools developed to date do not allow for comparison shopping. Attendees stated that existing tools usually use historical claims data, which results in broad, sometimes regional, estimates, rather than accurate and individualized prices. In a national study, there was alignment among patients, employers, and providers in wanting to know and discuss the cost of care at the point of service.⁴⁷ However, attendees noted pricing tools are rarely available when and where consumers are likely to make health care decisions, for example, during interactions with providers. Thus, patients are not able to consider relevant cost issues when discussing referral options or the tradeoffs of various treatment options with referring providers. With access to patient-specific cost estimates for services furnished by particular providers, referring providers and their patients could take pricing information into account when considering clinically appropriate treatment options. Separately, CMS has met with members from several state Departments of Insurance to discuss the limits to state authority to require price transparency in a meaningful way and the benefits and drawbacks of All Payer Claims Databases (APCDs). During these discussions, it became clear that APCDs’ reliance on historical claims data that is not necessarily linked to a specific plan or issuer limits the utility of such databases for consumers. These conversations helped clarify the types of price transparency information necessary to empower consumers.

CMS has pursued initiatives in addition to the final rules to improve access to the information necessary to empower consumers to make more informed decisions about their health care costs, including a multi-step effort to implement section 2718(e) of the PHS Act. Section 2718(e) of the PHS Act requires each hospital operating within the United States, for each year, to establish (and update) and make public (in accordance with guidelines developed by the Secretary of HHS) a list of the hospital’s standard charges for items and services provided by the hospital, including for diagnosis-related groups established under section 1886(d)(4) of the Social Security Act (SSA). In the Fiscal Year (FY) 2015 Hospital Inpatient Prospective Payment System and Long-Term Care Hospital Prospective Payment System (IPPS/LTCH PPS) proposed and final rules, CMS reminded hospitals of their obligation to comply with the provisions of section 2718(e) of the PHS Act and provided guidelines for its implementation.⁴⁸ At that time, CMS required hospitals to either make public a list of their standard charges or their policies for allowing the public to view a list of those charges in response to an inquiry. In addition, CMS stated that it expected hospitals to update the information at least annually, or more often as appropriate, to reflect current charges. CMS also encouraged hospitals to undertake efforts to engage in consumer-friendly communication of their charges to enable consumers to compare charges for similar services across hospitals and to help them understand what their potential financial liability might be for items and services they obtain at the hospital.

In the FY 2019 IPPS/LTCH PPS proposed and final rules, CMS again reminded hospitals of their obligation to comply with section 2718(e) of the PHS Act and announced an update to its guidelines.⁴⁹ The updated guidelines, which have been effective since January 1, 2019, require hospitals to make available a list of their current standard charges (whether in the form of a “chargemaster” or another form of the hospital’s choice) via the internet in a machine-readable format and to update this information at least annually, or more often as appropriate.

In response to stakeholder feedback and in accordance with Executive Order 13877, issued on June 24, 2019,⁵⁰ CMS took another important step toward improving health care value and increasing competition in the Calendar Year 2020 Hospital Outpatient Policy Payment System (OPPS) Policy Changes and Payment Rates and Ambulatory Surgical Center Payment System Policy Changes and Payment Rates: Price Transparency Requirements for Hospitals to Make Standard Charges Public final rule (Hospital Price Transparency final rule) by codifying regulatory requirements that implement section 2718(e) of the PHS Act, as well as a regulatory scheme under section 2718(b)(3) of the PHS Act that enables CMS to enforce those requirements.⁵¹ The price transparency disclosure requirements that CMS finalized in the Hospital Price Transparency final rule will be effective on January 1, 2021, and they require hospitals to make publicly available, as applicable, their gross charges (as found in the hospital’s chargemaster), payer-specific negotiated charges, discounted cash prices, and de-identified minimum and maximum negotiated charges for all items and services they provide through a single online machine-readable file that is updated at least once annually. Additionally, the Hospital Price Transparency final rule requires hospitals to display online in a consumer-friendly format, as applicable, the payer-specific negotiated charges, discounted cash prices (or, to the extent one does not exist for a shoppable service, the undiscounted gross charge) and de-identified minimum and maximum negotiated charges for as many of the 70 shoppable services selected by CMS that the hospital provides and as many additional hospital-selected shoppable services as are necessary for a combined total of at least 300 shoppable services (or if the hospital provides fewer than 300 shoppable services, then for as many as the hospital provides). The rule defines a shoppable service as a service that can be scheduled by a health care consumer in advance and further explains that a shoppable service is typically one that is routinely provided in non-urgent situations that does not require immediate action or attention to the patient, thus allowing patients to price shop and schedule such a service at a time that is convenient for them.⁵²

In addition to making pricing information available for items and services provided by hospitals, the Administration has also been engaged in increasing transparency of prescription drug pricing and lowering the costs of prescription drugs. Four Executive Orders direct CMS and other HHS agencies to develop and issue tools, models, and several regulations to increase competition and lower patients’ drug costs.⁵³ The actions directed in these Executive Orders supplement those CMS has already taken to increase drug-pricing transparency and lower drug costs. Through the Drug Spending Dashboard, CMS publishes data on Medicare and Medicaid spending for prescription drugs in an interactive web-based tool so researchers and consumers can easily sort the data to identify trends. Over the past four years, CMS has expanded this dashboard to include reporting on payments for prescription drugs in their first year on the market and information on the drugs’ manufacturers.⁵⁴ Through the Part D Senior Savings model, beginning January 1, 2021, CMS is testing a change to the Manufacturer Coverage Gap Discount Program (the “discount program”) to allow Part D sponsors to offer a Part D benefit design that includes predictable copays in the deductible, initial coverage, and coverage gap phases for a broad range of insulins included in the Model by offering supplemental benefits that apply after manufacturers provide a discounted price.⁵⁵

CMS issued regulations addressing prescription drug transparency,⁵ including a regulation implementing the statutory prohibition on pharmacist gag clauses,⁵⁷ helping to ensure patients have information on lower cost alternatives or that they can save money by paying cash. As part of the Calendar Year (CY) 2018 Medicare Physician Fee Schedule, CMS adopted a policy that all FDA-approved Part B biosimilars would be assigned their own HCPCS codes. Under this revised coding policy, CMS pays for separately payable Part B biosimilars based on its own Average Sales Price (ASP) plus 6 percent of the ASP of its reference product. This policy change was made to promote a stable and robust biosimilars market that drives competition and lowers prices.

In the CY 2019 Medicare Advantage and Part D final rule, CMS adopted a policy to allow for certain low-cost generic drugs to be substituted onto plan formularies at any point during the year, so beneficiaries immediately benefit and have lower cost sharing.⁵⁸ The Modernizing Part D and Medicare Advantage To Lower Drug Prices and Reduce Out-of-Pocket Expenses rule⁵⁹ finalized in May 2019 requires Part D plans to implement, no later than January 1, 2021, a real-time benefit tool that can be integrated into at least one prescriber’s electronic prescribing or EHR system to provide patient-specific formulary and benefit information, including cost sharing.⁶⁰ The rule also requires that beginning January 2021, the Explanation of Benefits document that Part D enrollees receive each month must include information on drug price increases and lower-cost therapeutic alternatives. In June 2020, CMS proposed⁶¹ further policy changes that would begin removing barriers to value-based purchasing arrangements between drug manufacturers and payers.⁶² Value-based payments for prescription drugs has the potential to increase patient access to new medicines by holding prescription drug manufacturers accountable for outcomes their drug achieves, as well as creating alternatives to traditional cost controls that may impede patient access.⁶³

As part of its effort to incentivize states to pursue innovative responses to rising drug prices, CMS approved nine states’ (and the District of Columbia’s) plan amendment proposals to negotiate supplemental rebate agreements involving value-based purchasing arrangements with drug manufacturers.⁶⁴ These supplemental rebate agreements allow states to link payment for prescription drugs to the value delivered to patients. Increasing states’ flexibility empowers them to develop policies that are effective and responsive to local conditions and price “hot spots” that lower costs, increase the predictability of expenses, and improve access for patients.

As it currently stands, and despite ongoing Federal efforts to improve price transparency, there continues to be a lack of standardized pricing information to assist consumers in the private market when shopping for health care items and services. While there are several efforts across states, 33 still do not have comprehensive statewide price transparency initiatives,⁶⁵ and as noted earlier, sometimes cannot legally require private market plans and issuers to provide real-time, out-of-pocket cost estimates to participants, beneficiaries, and enrollees.

The Departments have concluded that the Hospital Price Transparency final rule and the other efforts described earlier in this section cannot result in enrollees receiving complete price estimates for health care items and services because, as the GAO concluded, complete price estimates require pricing information from both providers and health insurance issuers.⁶⁶ In other words, this rule complements existing State, Federal, and private sector price transparency efforts by ensuring that pricing information is available from both hospitals and payers in both the public and private markets and by expanding transparency to pricing information for health care items and services provided outside of a hospital setting. As a result of these rules, regardless of where a consumer seeks information, be it their plan or issuer, or their hospital, they will have guaranteed access to up to date and accurate pricing information. In addition, because section 2718(e) of the PHS Act applies only to items and services provided by hospitals the Hospital Price Transparency final rule does not address price transparency with respect to items and services provided by other health care providers. Accordingly, the Departments have concluded that additional price transparency efforts are necessary and required under the statute to empower a more price-conscious and responsible health care consumer, promote competition in the health care industry, and lower the overall rate of growth in health care spending.⁶⁷

The Departments are of the view that the disclosures required under the final rules are necessary and appropriate to more fully implement section 2715A of the PHS Act and section 1311(e)(3)(C) of PPACA to ensure that consumers have ready access to the information they need to estimate their potential out-of-pocket costs for health care items and services before that service is rendered or that item is delivered. The final rules are also intended to empower consumers by incentivizing market innovators to help consumers understand how their plan or coverage pays for health care and to shop for health care items and services based on price, which is a fundamental factor in any purchasing decision.

D. Executive Order

On June 24, 2019, President Trump issued Executive Order 13877, “Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First.” Section 3(b) of Executive Order 13877 directed the Secretaries of the Departments to issue an advance NPRM (ANPRM), consistent with applicable law, soliciting comment on a proposal to require health care providers, health insurance issuers, and self-insured group health plans to provide or facilitate access to information about expected out-of-pocket costs for items or services to patients before they receive care. The Departments considered the issue, including by consulting with stakeholders, and determined that an NPRM, rather than an ANPRM, would allow for more specific and useful feedback from commenters, who would be able to respond to specific proposals.

E. Proposed Rules

In response to Executive Order 13877 and to also implement legislative mandates under sections 1311(e)(3) of PPACA and section 2715A of the PHS Act, the Departments published an NPRM entitled “Transparency in Coverage” on November 27, 2019 (to be codified at 26 CFR part 54, 29 CFR part 2590, and 45 CFR part 147) (the proposed rules) with comments requested by January 14, 2020.⁶⁸ In response to requests from stakeholders, the Departments extended the comment period 15 days, to January 29, 2020.⁶⁹ The proposed rules set forth proposed requirements for group health plans and health insurance issuers in the individual and group markets to disclose cost-sharing information upon request to a participant, beneficiary, or enrollee, including an estimate of an individual’s cost-sharing liability for covered items or services furnished by a particular provider. The Departments proposed that plans and issuers be required to make such information available on an internet website and, if requested, through non-internet means, thereby allowing a participant, beneficiary, or enrollee to obtain an estimate and understanding of the individual’s out-of-pocket expenses and effectively shop for items and services. The proposed rules also included proposals to require plans and issuers to disclose in-network provider negotiated rates, and historical out-of-network allowed amounts through two machine-readable files posted on an internet website, thereby allowing the public to have access to health coverage information that can be used to understand health care pricing and potentially dampen the rise in health care spending.

The proposed rules also included requests for information (RFIs) on topics closely related to the rulemaking. Due to the design and capability differences among the information technology (IT) systems of plans and issuers, as well as difficulties consumers experience in deciphering information relevant to health care and health insurance, the Departments sought comment on additional price transparency requirements that could supplement the proposed requirements for disclosing cost-sharing information to participants, beneficiaries, or enrollees and the proposed requirements for public disclosure of negotiated rates and historical allowed amount data for covered items and services from out-of-network providers. Specifically, the Departments sought comment on whether plans and issuers should be required to disclose information necessary to calculate a participant’s, beneficiary’s, or enrollee’s cost-sharing liability through a publicly-available, standards-based application programming interface (API).

Such a requirement would build off a final rule, “Medicare and Medicaid Programs; Patient Protection and Affordable Care Act; Interoperability and Patient Access for Medicare Advantage Organization and Medicaid Managed Care Plans, State Medicaid Agencies, Children’s Health Insurance Program (CHIP) Agencies and Chip Managed Care Entities, Issuers of Qualified Health Plans in the Federally-Facilitated Exchanges and Health Care Providers” (CMS Interoperability & Patient Access final rule), that CMS published on May 1, 2020.⁷⁰ That rule requires Medicare Advantage organizations, Medicaid and CHIP Fee-for-Service programs, Medicaid managed care plans, CHIP managed care entities, and QHP issuers in the FFEs to provide enrollees with access to select data, including claims data, through a standards-based API that conforms to the technical standards adopted in the Office of the National Coordinator for Health Information Technology (ONC) 21^st Century Cures Act final rule at 45 CFR 170.215. The CMS Interoperability & Patient Access final rule requires certain entities, such as FFE QHP issuers, to provide certain data through a standards-based API. The Departments appreciate the comments received in response to the API RFI and will use the comments to inform the need for future rulemaking regarding whether plans and issuers should be required to disclose information necessary to calculate cost-sharing liability through a publicly-available, standards-based API. HHS will also monitor the implementation of the CMS Interoperability & Patient Access final rule to inform any such future rulemaking.

The proposed rule also included RFIs on how provider quality measurements and reporting in the private health insurance market may be used to complement cost-sharing information for plans and issuers in the private health insurance market. The Departments sought comment on how existing quality data on health care provider items and services could be leveraged to complement the proposals in the proposed rules. The primary goal of the proposed and final rules is making information available to address the absence of price transparency in the health care market; the final rules do not address health care quality at this time.

HHS also proposed to amend its MLR program rules using the authority under section 2718(c) of the PHS Act, under which the standardized methodologies for calculating measures of the activities reported under section 2718(a) of the PHS Act shall be designed to take into account the special circumstances of smaller plans, different types of plans, and newer plans. Specifically, HHS proposed to recognize the special circumstances of a different and newer type of plan for purposes of MLR reporting and calculations for plans that share savings with consumers who choose lower-cost, higher-value providers. HHS proposed to amend 45 CFR 158.221 to add a new paragraph (b)(9) to allow any such “shared savings” payments made by an issuer to an enrollee as a result of the enrollee choosing to obtain health care from a lower-cost, higher-value provider, to be factored into an issuer’s MLR numerator, beginning with the 2020 MLR reporting year (for reports filed by July 31, 2021).

The Departments requested comments on all aspects of the proposed rules, as well as a number of specific issues. The Departments received over 25,000 comments in response to the proposed rules from a range of stakeholders, including plans and issuers, health care providers, prescription drug companies, employers, state regulators, health IT companies, health care policy organizations and think tanks, and individuals. No requests for a public hearing were received. The Departments received a number of comments and suggestions that were outside the scope of the proposed rules that are not addressed in the final rules (for example, regarding hospital prices, other methods for reducing health care and prescription drug costs, consumer education and provider directories). After careful consideration of the comments, the Departments are finalizing the proposed rules with certain modifications made in response to comments. These modifications are discussed later in this preamble.

F. Legal Authority

Several commenters questioned the Departments’ legal authority regarding various aspects of the proposed rules. The Departments are of the view that the legal authorities identified earlier in this preamble are sufficient to support the final rules.

1. Statutory authority under section 1311(e)(3) of PPACA

Several commenters contended that section 1311(e)(3)(A)(ix) of PPACA does not give the Departments statutory authority to require that plans and issuers make the rates they have negotiated with providers and out-of-network allowed amounts publicly available. The commenters noted that section 1311(e)(3)(A) of PPACA enumerates eight specific categories of information subject to the transparency in coverage mandate followed by a ninth “catchall” category consisting of “other information as determined appropriate by the Secretary.”⁷¹ These commenters maintained that the Secretary of HHS’s authority under section 1311(e)(3)(A)(ix) of PPACA is insufficient to support a requirement to publicize negotiated rates because they are not sufficiently similar to the other categories of information identified under section 1311(e)(3)(A) of PPACA.

The Departments disagree with these comments and are of the view that the information required to be disclosed under this rule fits squarely within the scope of information that plans and issuers may be required to disclose under section 1311(e)(3)(A)(ix) of PPACA and section 2715A of the PHS Act. Section 1311(e)(3)(A)(i) to (viii) of PPACA outlines specific information and data that must be submitted to the Exchange, the Secretary of HHS, the relevant State insurance commissioner, and the public on an accurate and timely basis. In addition, section 1311(e)(3)(A)(ix) of PPACA requires health plans to submit “other information as determined appropriate by the Secretary.” Under established principles of statutory construction, when a general term follows a list of specific terms in a statute, the general term is construed to encompass subjects of a similar character to the specific terms. The principle of ejusdem generis guides courts in evaluating a catch-all at the end of a list. Therefore, when a statute allows an implementing agency to exercise its discretion by adding additional items to a list, the implementing agency is empowered to add additional items as long as those items are of similar character to the items enumerated in the statute.⁷ In this case, the statutory list includes information and data useful to evaluate the coverage offered by plans and issuers with an emphasis on business practices, financial stability, and consumer experience. The list also includes information useful to regulators and the public in general to evaluate plans’ and issuers’ business practices and activity in the market. Given that the list includes some disclosures that are more immediately useful to individual consumers and others that are more immediately useful to regulators, the catchall provision is reasonably and best read as Congress’ recognition that the Secretary of HHS (and, therefore, the Departments, by virtue of their joint authority under section 2715A of the PHS Act) would need broad flexibility to require the disclosure of information as appropriate to deliver the transparency necessary for consumers to understand their coverage options and for regulators to hold plans and issuers accountable.

It is important to note that Congress considered one amendment that would have only required public disclosure at least annually of in-network allowed charges and expected allowed charges for out of network without allowing the Secretary discretion to add to the content of the required disclosure.⁷³ Instead of adopting this prescriptive approach, Congress required public disclosure of a broader set of information that similarly included payments for out-of-network services, as well as providing the Secretary discretion to require disclosure of other information. While Congress did not specifically include in-network allowed charges in the provision enacted, the discretion they provided suggests they understood that the Secretary might later find that requiring the disclosure of additional information, including information considered by Congress, might be useful and appropriate. That Congress considered and rejected a more prescriptive approach strongly suggests Congress intended that the Secretary have the ability to mandate more particularized disclosures in the future, including the disclosure of in-network negotiated rates.⁷⁴

A plan’s or issuer’s negotiated rates provide important information to help consumers both evaluate their options before buying coverage and, after choosing coverage, evaluate how to use their coverage when they need care. Those shopping for coverage will benefit from knowing how effectively a plan or issuer negotiates rates; for example, by comparing the rates one plan or issuer pays a provider for a particular item or service that this consumer knows they, or their family, will need in the future, which can then allow them to shop and compare which plans and issuers offer the most value. Once coverage is obtained, knowing negotiated rates upfront will ensure consumers covered under a variety of plan designs and coverage options to, in each case, have access to the information they need to obtain health care services in an efficient, cost-effective manner, when considering available options for a shoppable service. As discussed earlier in this preamble, making negotiated rates public also strengthens other health care stakeholders’ ability to support consumers. Because negotiated rates provide important information to help people—including consumers, regulators and the general public—evaluate the coverage offered by a plan or issuer, it clearly falls within the scope of information already required under section 1311(e)(3)(A) of PPACA. As discussed in more detail later in this section, out-of-network allowed amounts likewise provide vital information to help evaluate coverage.

Out-of-network allowed charges also provide consumers with important information. Consumers may opt for out-of-network services for numerous reasons, such as the unavailability of an in-network provider who can meet certain medical needs, an existing relationship with an out-of-network provider, the recommendation of another provider, or personal convenience. Disclosure of estimates of out-of-network allowed amounts is essential to the ability of consumers considering out-of-network services to form an estimate of their potential liability. Limiting transparency in pricing requirements to only providers under contract with a carrier would prevent transparency for all such services, contrary to the plain language of the statute.⁷⁵ Indeed, the language of the statute (for example, the requirement of section 1311(e)(3)(B) of PPACA that the intended audience, including individuals with limited English proficiency, can readily understand and use because that language is concise, well-organized, and follows other best practices of plain language writing) indicates an intention to assist consumers by enhancing their ability to make cost-conscious decisions; this is an essential component of establishing and maintaining robust market competition with costs that are reasonable and plausibly tethered to standard market discipline. As the preamble to the proposed rules observed, there is substantial evidence that increased price transparency provides consumers and the public at large with the information that is necessary to improve market efficiency.⁷⁶ For these reasons, the Departments are of the view that requiring disclosure of estimates of out-of-network allowed amounts, which reflect out-of-network benefits under a plan, is well within both the text and spirit of the statute and its aims to assist consumers in selecting providers, evaluating market options, increasing competition, and reducing market disparities. The Departments have identified these requirements as beneficial to the ongoing efforts of employers and regulators to aid consumers, and as consistent with the goals of the statute; thus, the Departments reject the assertion of commenters that these purposes are beyond the scope of the statute.

Several commenters asserted that the specific justifications the Departments cite as support for mandating the disclosure of negotiated rates are unrelated to the purposes authorized by statute. They asserted that those purposes – assisting consumers in selecting health care providers, assisting consumers in evaluating options in the market, increasing competition and reducing disparities in the market, assisting employers, and assisting state regulators – have no relationship to the statutory purpose of providing transparency in coverage for consumers. Moreover, commenters stated that the statute does not authorize the use of price transparency mechanisms to affect issuer and provider rate negotiations or health care costs generally, to assist employers in negotiations, or to aid state regulators in their duties. The Departments, however, find ample support in PPACA evidencing the relationship between the purposes intended to be served by this final rule, the overall purposes of PPACA, and the PPACA’s price transparency measures, including section 1311(e)(3).

The purposes underlying the final rule’s requirement to disclose negotiated rates are directly tied to providing transparency in coverage to consumers. The negotiated rate information that the final rules require to be disclosed pursuant to the Departments’ authority under section 1311(e)(3)(A)(ix) of PPACA, and section 2715A of the PHS Act, is directly relevant to providing consumers with transparent pricing information sufficient to allow them to assess, in advance of receiving services, their liability under a health plan or health coverage in the numerous instances in the course of any plan year in which the negotiated rate will determine all or a portion of a consumer’s liability. This is important information that helps consumers under a wide variety of plan designs and cost-sharing arrangements in both choosing and using coverage. The Departments are requiring the disclosure of cost information to further the goal of price transparency and are doing so under the authority of section 1311(e)(3) of PPACA.

Two commenters suggested that the proposal to require the release of negotiated rates in machine-readable format is not authorized under the statute. The statute mandates that transparency in coverage information “shall be provided in plain language... that the intended audience, including individuals with limited English proficiency, can readily understand and use because it is concise, well-organized, and follows best practices of plain writing.”⁷⁷ These commenters contended that machine-readable information is not plain language that is accessible or understandable to the typical consumer, and is therefore not within the scope of information authorized for public disclosure under section 1311(e)(3)(B) of PPACA.

The Departments disagree with this assertion. Consistent with the statute, the final rules require the machine-readable files to include a plain language description for each billing code. The proposed requirement that two data files be provided in “machine-readable format” – one containing negotiated rates and the other containing out-of-network allowed amounts – is a purely operational consideration intended to ensure that the file data can be imported or read by a computer system directly, without altering the data, and without reliance on proprietary software.⁷⁸ Under section 1311(e)(3)(B) of PPACA, the “plain language” requirement concerns information to be made available to the public, the “intended audience,” per the statute. The Departments require the publication of data in machine-readable files so that the required information may be presented to all members of the intended audience in a concise, well-organized manner that follows best practices of plain writing relevant to the intended audience.

The Departments explain elsewhere in the preamble that the intended audience for the information required to be published under the final rules includes all consumers and purchasers of health care items and services, including individual consumers, employers, and government health care programs. The intended audience also includes health care stakeholders such as researchers, legislators, and regulators, as well as application developers who could make the information usable and easily understood by laypersons. Accordingly, application developers will be able to access the data in a format that is easily used and understood using skills common to application developers. This same expertise allows such innovators to incorporate large data sets into easy-to-use internet-based tools and mobile applications that will present information to laypersons in easy-to-understand, plain language that is sufficiently concise and well-organized. The Departments are of the view that providing the files in machine-readable format is an effective and necessary mechanism to ensure that price transparency information be made available to all members of the intended audience in a consistent, understandable, plain language format, as the statute requires.

One commenter suggested that the disclosures to the public required under section 1311(e)(3)(A) of PPACA consist of aggregated data only and do not contemplate or allow public disclosure of specific rate and price information. The Departments disagree. While it is true that several of the data elements listed under section 1311(e)(3)(A) of PPACA are general in nature, such as financial disclosures and enrollment data, this fact does not compel the conclusion that all elements listed must be construed as requiring aggregated information. As noted above, the list encompasses information and data useful to the evaluation of plans and issuers by all varieties of health care consumer, including individuals, employers, and government programs. Certain elements provide information specific to the benefits and protections a plan or issuer’s coverage provides to an individual, including claims payment policies and information on enrollee rights under the law. In particular, the data element listed at section 1311(e)(3)(A)(vii) of PPACA encompasses “information on cost sharing and payments with respect to any out-of-network coverage,” which, by its plain terms, does not contemplate general or cumulative information.

The final rules specify the nature of the information that must be made available pursuant to sections 1311(e)(3)(A)(vii) and (ix) of PPACA, and the manner in which it is to be made available to fully implement the goals and purposes of the statute. Section 1311(e)(3)(C) of PPACA concerns disclosures to participants, beneficiaries, and enrollees receiving services from participating providers only, whereas section 1311(e)(3)(A) of PPACA concerns disclosures to the public generally and incorporates out-of-network payment information as well. Taken together, and as implemented under the final rules, the statute and regulatory schemes cover all persons seeking health pricing information in a given market, and advance the purposes of enhancing competition, reducing price disparities, and ultimately lowering costs through transparency in coverage.

Ultimately, by adding section 2715A of the PHS Act and section 1311(e)(3) of PPACA through the manager’s amendment prior to passing PPACA in the Senate, Congress made transparency a key component of the PPACA’s comprehensive framework for regulating private health coverage through federal law. Notably, in contrast to the amendment rejected by Congress discussed earlier in this preamble, the transparency in coverage provisions signed into law provide a far more comprehensive and expansive approach toward providing transparency. The law covers nearly all private health plans, requires disclosure by plans through an internet website, requires disclosures to more entities, requires a broader set of information disclosures, and provides additional discretion to expand information disclosures. By taking this approach, Congress recognized both the importance and the complexity of requiring transparency. The discretion provided under the statute ensures that the Departments can accommodate changes in technology and health care markets, as well as build on the information disclosures specifically itemized in the statute.

A commenter also contended that the proposal to require issuers to make estimates of out-of-network allowed amounts available through the internet-based self-service tool is not authorized by the statute. This commenter asserted that section 1311(e)(3)(C) of PPACA only authorizes a requirement that payers make available information concerning cost-sharing obligations with respect to items or services furnished by a participating provider, not by out-of-network providers.

The Departments disagree and are of the view that the statute fully supports a requirement that plans and issuers make available information concerning cost-sharing obligations with respect to items or services furnished by out-of-network providers. The information to be made available under section 1311(e)(3) specifically includes “[i]nformation on cost sharing and payments with respect to any out-of-network coverage,” as well as “[o]ther information as determined appropriate by the Secretary.”⁷⁹ While section 1311(e)(3)(C) of PPACA focuses primarily on providing information to enrollees, section 1311(e)(3)(A) of PPACA authorizes the Departments to make certain out-of-network information available to the public, which includes participants, beneficiaries, and enrollees. Thus the Departments reasonably determined that section 1311(e)(3)(A) and (C), together, authorize the requirement that plans and issuers provide cost estimates for covered items and services provided by out-of-network providers.

2. Constitutional Concerns

Several commenters asserted that requiring issuers to make rates they have negotiated with providers available to the public constitutes compelled commercial speech in violation of the First Amendment to the Constitution, and an unlawful taking of trade secrets without just compensation in violation of the Fifth Amendment. Commenters cited various reasons for their belief that the requirement in the proposed rules to disclose negotiated rates to the public could not survive constitutional scrutiny.

Several commenters contended that the proposed requirement constituted compelled commercial speech, and that the rationale the Departments articulated to justify the proposed requirement failed to meet the legal standard necessary to justify such action. One commenter asserted that a standard of constitutional scrutiny higher than that relevant to compelled commercial speech applies to the requirement to publish negotiated rates because, the commenter contended, the disclosure of negotiated rates does not propose a future commercial transaction. Some commenters challenged the proposed rules on the basis that negotiated rates have little or no relevance or value to consumers attempting to ascertain their potential liability for a particular service at a given point in time in the future because negotiated rates do not reflect the terms of different plan designs or the status of the individual consumer at a given point in time in relation to cost-sharing obligations, in particular any annual deductible.

Two commenters asserted that the requirement to publicly disclose negotiated rates would go well beyond the stated goal of providing notice to participants, beneficiaries, and enrollees of cost-sharing liability for covered services because it calls for negotiated rates to be available to the public generally, not just to enrolled consumers inquiring about their coverage. They also claimed that disclosure of negotiated rates would be extremely burdensome because fulfilling the mandate would require the disclosure of millions, or even billions, of data points. One commenter asserted that because the requirement to publish negotiated rates would not be useful to consumers in all situations, the requirements in the proposed rules were not narrowly tailored enough to survive constitutional scrutiny.

Some commenters also contended that the Departments’ other stated interests in mandating the publication of negotiated rates, including lowering prices, increasing competition, and informing decision-making in the market generally, are not authorized under relevant statute; therefore, the breadth of these requirements is overly burdensome and inclusive of information not necessary to advance the goals of the statute. These commenters concluded that, to the extent the mandated publication of negotiated rates is calculated to advance those purposes, they are not sufficiently tailored to statutory goals to survive constitutional scrutiny.

a. First Amendment Compelled Speech.

The Departments disagree that the proposed rules and the final rules run afoul of the First Amendment and would not survive constitutional scrutiny. As the United States Supreme Court recognized in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) and recently confirmed in National Institute of Family and Life Advocates v. Becerra, 138 S. Ct. 2361, 2372, 2376 (2018) (“NIFLA”), required disclosures of factual, uncontroversial information in commercial speech are subject to more deferential First Amendment scrutiny. Under the approach articulated in Zauderer, courts have upheld required disclosures of factual information in the realm of commercial speech where the disclosure requirement reasonably relates to a government interest and is not unjustified or unduly burdensome such that it would chill protected speech. See, e.g., Am. Meat Inst. v. U.S. Dept. of Agric., 760 F.3d 18, 27 (D.C. Cir. 2014); Mass. Ass’n of Private Career Sch. v. Healey, 159 F. Supp. 3d 173, 201 (D. Mass. 2016).

The Departments articulated substantial governmental interests in proposing these requirements: assisting consumers of health care services in understanding the costs for which they will be liable for covered services prior to the delivery of the services; assisting other consumers of health care, such as employers and government health benefits programs, in evaluating and negotiating coverage options and obtaining the most value for health care dollars; and supporting a market-driven health care economy that is sustainable. The preamble to the proposed rules also explained how the information required to be disclosed under the proposed rules is of substantial value to consumers, including health plan participants, beneficiaries, and enrollees who have and have not satisfied their annual deductible or reached their maximum out-of-pocket limit, and that remains true under the final rules. For such consumers who have not met their deductibles, knowledge of negotiated rates is necessary for estimating their out-of-pocket costs because these consumers generally will be responsible for paying the full negotiated rate for health care items and services until they reach their deductible (or the maximum annual limit on cost sharing).

As the Departments noted earlier in the preamble, between the enactment of PPACA and 2019, average family deductibles for private sector employees increased by 85 percent, up to $3,655 in 2019.⁸⁰ Consumers in the private health insurance market are increasingly responsible for a greater share of their health care costs through higher deductibles and shifts from copayments to coinsurance.⁸¹ The final rules will give health care consumers and stakeholders information vital to their roles in creating and supporting a sustainable market-driven health care economy.

The final rules also will provide critical information to consumers who have satisfied their deductibles or reached their out-of-pocket limit. These consumers may wish to base their health care spending decisions on underlying prices to avoid excess spending by their issuer or employer that could lead to premium increases, increased out-of-pocket obligations, or lower employer contributions toward employer-sponsored coverage. Knowing the rates negotiated by other issuers in their geographic market will assist consumers during open enrollment, as they search for a plan that may lower their out-of-pocket costs in the coming year.

The government also has a substantial interest in assisting other health care spenders, such as employers and government benefits programs, to make coverage choices that drive value for the public. Given the size and scope of the country’s health care market and the fact that choices made by employers and benefits programs operate at scale to direct health care spending, the government can increase the value of health care expenditures by ensuring those entities have access to accurate information. Providing employers and government benefit programs with actionable data may also help drive down total health care spending, as issuers compete to offer higher-value programs.

The government’s interest in promoting a sustainable health care economy driven by market forces is substantial, as reflected in section 1311(e) of PPACA. As of 2018, U.S. health care spending had reached $3.6 trillion, or $11,172 per person and accounted for 17.7 percent of the nation’s Gross Domestic Product.⁸² Given the scope of the market and the earlier-discussed data suggesting that price transparency and market forces can drive down health care costs, the government’s interest in increasing price transparency is substantial.

Each of the three interests identified above is furthered by the final rules. For individuals, the data provided will permit them to compare prices for health care items and services and allocate their funds accordingly. For benefit plans and employers, the information provided will guide decision-making about which coverage options to offer, and which providers or third parties, like pharmacy benefit managers (PBMs), to contract with. For the health care economy as a whole, the Departments are of the view (based on available data) that transparency and market forces will drive savings and reduce expenditures. Accordingly, the Departments continue to hold the view that the final rules serve substantial government interests.

Furthermore, the requirement to provide these disclosures does not unduly burden plan or issuer speech because nothing in the final rules would “drown out [a plans’ or issuers’] own message” or “effectively rule out” any mode of communication. See NIFLA, 138 S. Ct. at 2378. Plans and issuers remain free to communicate with consumers using methods and media they have always used or may choose to use in the future.

The Departments further disagree that the final rules would be subject to a standard of constitutional scrutiny higher than that applied to compelled commercial speech. For First Amendment purposes, commercial speech is speech “related solely to the economic interests of the speaker and its audience.” Cent. Hudson Gas & Electric Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557, 561 (1980). Price information concerning the cost of health services is related solely to the economic interests of providers and the consumers who seek their services. The speech in question here, therefore, is commercial speech.

Furthermore, the disclosure of negotiated rates is one concerning “purely factual and uncontroversial information about the terms [i.e., the price] under which services are available.” See Zauderer, 471 U.S. at 651; see also Am. Meat Inst. v. U.S. Dept. of Agric., 760 F.3d 18, 27 (D.C. Cir. 2014). Therefore, the imposition on commercial speech by the final rules need only be “reasonably related” to the government’s stated interest. For the reasons discussed above, the Departments are of the view that making available negotiated rates to consumers is reasonably related to the government’s stated interests in providing greater cost information to consumers and benefit plans, as well as increasing price transparency in the health care market more broadly. While the Departments disagree that the stricter constitutional scrutiny under Central Hudson would apply to the final rules for the reasons discussed above, the Departments also are of the view that the government interests described above are “substantial,” and the regulations, for the reasons described above, directly advance that governmental interest and are not more extensive than necessary to serve that interest. None of the alternatives considered by the Departments would provide the full panoply of information necessary to achieve the identified interests. Specifically, the only way to provide information concerning a consumer’s personal liability for health care services when the negotiated rate is all or any portion of that liability is by disclosing those rates.

The Departments disagree that the rules are excessively burdensome and are invalid because they purportedly exceed the statute’s goal of providing notice of cost-sharing liability. The Departments are of the view that, in addition to providing participants, beneficiaries, and enrollees with notice of cost-sharing liability, the final rules are intended to advance a number of concurrent goals, as described earlier in this preamble. These goals are consistent with the full text of section 1311(e)(3) of PPACA and section 2715A of the PHS Act. They include the overarching goal of facilitating a market-driven heath care system by giving consumers of health care services data that will enable consumers to make fully informed, cost-conscious decisions when choosing health care. These transparency requirements will support the creation of a competitive dynamic in health care markets that leads to narrower price differentials for the same services, fosters innovation, and potentially lowers overall health care costs over time.⁸³ These goals are consistent with the statutory mandate to promote transparency in coverage by making available to the public accurate and timely health care information, including cost-sharing information, and other information as deemed appropriate by the Departments.

The Departments also disagree with any notion that, because published negotiated rates would not be useful to all consumers in all situations, the final rules are not sufficiently tailored to survive constitutional scrutiny. Consumers seeking in-network items or services must have access to negotiated rate information to calculate out-of-pocket costs under the majority of health care payment models. These negotiated rates determine the price they will be obliged to pay, up to the applicable out-of-pocket limit. Thus, disclosing the negotiated rate is important to the consumer’s ability to reasonably estimate his or her personal financial liability in advance of receiving services. In particular, and as explained earlier in this preamble, annual deductibles for plans and issuers now routinely obligate consumers to pay several thousand dollars before the plan or issuer pays any benefits. The requirement to disclose negotiated rates to consumers is, therefore, crucial to providing meaningful transparency in health care markets.

b. Fifth Amendment Taking

The Departments also disagree that the requirement to disclose negotiated rates in the final rules constitutes an unlawful taking without just compensation under the Fifth Amendment. As an initial matter, the subject of any “taking” is a cognizable property interest. Commenters asserted that their negotiated rates constitute property because they are trade secrets. The Departments disagree. In order for a piece of information to qualify as a trade secret, it must be the subject of efforts to maintain its secrecy that are reasonable under the circumstances. Under most circumstances, if a piece of information is disclosed to third parties who have no obligation to keep it a secret, it does not qualify for trade secrets protection. Negotiated rates for health care items and services are routinely disclosed in EOBs provided to participants, beneficiaries, and enrollees. Participants, beneficiaries, and enrollees have no obligation to keep the information contained in their EOBs secret; some patients provide them to journalists or upload them to crowd-sourcing websites.⁸⁴ The Departments are of the view that this routine disclosure of negotiated rate information is sufficient to defeat any asserted trade-secret protection, and, therefore, the issuers have no proprietary interest in the negotiated rates that could be the subject of a constitutional “taking.”

Moreover, plans’ and issuers’ expectations of confidentiality in information provided as a condition of participation in a highly regulated industry (for example, health insurance) are substantially diminished by the highly regulated nature of the industry. See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1007 (1984) (noting that expectations are necessarily adjusted in areas that “ha[ve] long been the source of public concern and the subject of government regulation”); Me. Educ. Ass’n Benefits Trust v. Cioppa, 695 F.3d 145 (1st Cir. 2012) (discussing a Maine law requiring health issuers to disclose loss information); Franklin Mem’l Hosp. v. Harvey, 575 F.3d 121, 128 (1st Cir. 2009) (holding that a claimant’s investment-backed expectations were “tempered by the fact that it operate[d] in the highly regulated hospital industry”).⁸⁵ Plans and issuers are already subject to extensive regulation under federal and state law. As noted by the 1st Circuit in Pharmacy Care v. Rowe:

If [regulated parties] truly assumed that they would be free from disclosure requirements ... this would be more wishful thinking than reasonable expectation. Whether or not the law strikes the right economic balance between competing producer and consumer interests, it is no more a taking than the requirement that public corporations disclose private corporate information about financial prospects to the public through regular SEC filings.

Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294, 316 (1st Cir. 2005) (joint concurring opinion representing the opinion of the court). The Court further stated: “Given the absence of a full-scale taking and the presence of a traditional regulatory interest, it is enough to defeat the takings claim that no reasonable investment-backed expectation is present at all.” Id. at 315; see also Good v. United States, 189 F.3d 1355, 1363 (Fed. Cir. 1999) (“We have previously held that the government is entitled to summary judgment on a regulatory takings claim where the plaintiffs lacked reasonable, investment-backed expectations....”).

Even if there were some property interest in negotiated rates, the Departments are of the view that this regulation is not a taking. The Supreme Court “has identified several factors that should be taken into account when determining whether a governmental action has gone beyond ‘regulation’ and effects a ‘taking.’” Monsanto, 467 U.S. at 1005. Among those factors are “the character of the governmental action, its economic impact, and its interference with reasonable investment-backed expectations.” Id. (citing PruneYard Shopping Ctr. v. Robins, 447 U.S. 74, 83 (1980)); see also Kaiser Aetna v. United States, 444 U.S. 164, 175 (1979); Penn Cent. Transp. Co. v. City of N.Y., 438 U.S. 104, 124 (1978).

In requiring disclosure under the final rules, the government does not do so with the intention that the information is primarily and explicitly for the government’s own use, or that any such potential impact is the purpose for requiring the disclosure. Instead, the final rules are intended to, and will, enable consumers to access information needed to make informed decisions on health care services. Under Penn Central, “[a] ‘taking’ may more readily be found when the interference with property can be characterized as a physical invasion by government than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” Penn Central, 438 U.S. at 124 (citation omitted). The final rules clearly fall on the other end of the spectrum, arising from statutory provisions, section 1311(e)(3) of PPACA and section 2175A of the PHS Act, that “adjust[t] the benefits and burdens of economic life to promote the common good.” Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 212 (1986).

3. Protections for proprietary, confidential business information, and trade secrets.

Several commenters objected to the proposed rules on grounds that the requirement that issuers make public negotiated rates with providers would require the disclosure of allegedly confidential, proprietary business information, and trade secrets that are expressly protected from disclosure by a variety of federal and state laws, and the statute does not in any way purport to abrogate those protections. Several commenters pointed to the Defend Trade Secrets Act, (DTSA) which protects the property rights of trade secret holders,⁸⁶ and the Freedom of Information Act (FOIA),⁸⁷ which protects confidential, proprietary business information, and trade secrets from public disclosure, as examples of Congress’ intent that such information be protected.

The Departments disagree. As discussed above, the Departments are of the view that the routine disclosure of negotiated rate information to third parties via EOBs means that the rate information is not a trade secret, and the DTSA, therefore, does not apply. Even if it did, there can be no meaningful sense in which the disclosure of this information pursuant to the final rules would constitute a misappropriation by improper means prohibited by the DTSA. The disclosures in question would be made pursuant to a regulatory mandate authorized by law, to effectuate policy priorities enacted by Congress: namely, transparency in health care. These disclosures cannot reasonably be construed as “theft, bribery, or misrepresentation.”⁸⁸

The disclosures required under the final rules would also not constitute a breach or inducement of a breach of a duty to maintain secrecy, as the final rules apply prospectively in a regulatory environment in which all parties to provider agreements, and all affected plans and issuers, are being placed on notice and should be aware in advance of the requirements of the final rules. All parties to these contracts are therefore positioned to modify contractual arrangements, or similar policies, practices, or expectations relating to privacy or trade secrets to conform to the final rules. Otherwise, the final rules will supersede these arrangements to the extent necessary to implement these rules.

FOIA is also not relevant to the disclosure that would be required by the final rules.⁸⁹ FOIA is a public information law that applies to federal agencies, and generally enables the public to obtain records in possession of an agency.⁹⁰ Under the final rules, by contrast, negotiated rate information and out-of-network allowed amount information would be made available for the express purpose of making the information broadly available to the public, consistent with the authority Congress vested in the Departments. FOIA does not apply to disclosures by private entities such as the plans and issuers that would be subject to the disclosure requirements in the final rules. The exemptions found in the FOIA statute apply to disclosures by the government; that a piece of information might be subject to a FOIA exemption does not mean it is entitled to a heightened protection from disclosure when held by a private party.

Neither does FOIA apply to information maintained by private entities and not by an agency or government contractor, as that information would not constitute an agency record. To be an agency record subject to FOIA, an agency must have created or obtained the materials and must be in control of the materials. U.S. Dep’t of Justice v. Tax Analysts, 492 U.S. 136, 145 (1989). Regardless of whether the negotiated rates and allowed amounts would constitute trade secrets or commercial information under FOIA, a requirement that private entities make certain information public does not implicate FOIA.

One commenter contended that the proposed disclosure of negotiated rates does not concern trade secrets, and is therefore not prohibited for that reason. The commenter asserted that the proposed disclosures concern end prices, which are comparable to the “sticker price” of a medical service or device. The commenter stated that those prices are not themselves trade secrets, which the commenter contended consist of negotiating tactics which the proposed rules would not require issuers to make available to the public. As indicated above in relation to the DTSA, the Departments agree that the final rules do not implicate trade secrets.

In support of the proposition that Congress could not have intended to undermine existing protections for confidential or proprietary business information and trade secrets when it enacted section 1311(e)(3) of PPACA, one commenter noted that elsewhere in PPACA, where Congress mandated pricing-related disclosures, it included language or arrangements that protected individual negotiated rates and pricing information from disclosure. A provision relating to the disclosure of drug cost information mandates release of only aggregated information and includes a specific designation of the information as confidential and protected from publication except in specific formats and for limited purposes that protect the identity of the parties to particular pricing arrangements.⁹¹ Another provision mandates that hospitals make public a list of standard charges for items and services, not negotiated rates, on an annual basis only.⁹² Both of these provisions, the commenter suggested, indicate Congressional intent to protect proprietary business information that is contrary to the requirements of the proposed rule.

The Departments are aware that Congress included provisions preventing or limiting disclosures of health care information in other sections of PPACA but note that Congress did not include such provisions in section 1311(e)(3)(A) of PPACA, indicating no intention that such restrictions apply in this context.⁹³

Several commenters also pointed to the Sherman Antitrust Act, and specific applications of antitrust principles relating to the disclosure of trade secrets, including negotiated rates between issuers and providers in the health care context. They contend that Congress could not have intended to indirectly undermine these long-standing standards and policies when it enacted section 1311(e)(3) of PPACA. Several commenters also cited interpretive communications and similar guidance from the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice for the proposition that public disclosure of negotiated prices can have anticompetitive effects and harm consumers, contrary to long standing principles of antitrust law. One commenter recommended that any plan to make public privately negotiated rates should include requirements to aggregate information to ensure that arrangements of specific market participants remain confidential, and that a time lag also should be applied to any released data to ensure current information is not compromised.

The Departments disagree with the notion that the final rules will lead to anticompetitive behavior by plans, issuers, and providers. The Sherman Antitrust Act prohibits any contract, combination, or conspiracy in restraint of trade or commerce.⁹⁴ Specifically, the law prohibits any “person” from entering into any such contract, trust, or similar arrangement.⁹⁵ “The primary purpose of the antitrust laws is to protect interbrand competition.” State Oil Co. v. Khan, 522 U.S. 3, 15 (1997) (citing Bus. Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 726 (1988)). The Departments are not of the view that publication of plans’ and issuers’ negotiated rates with providers is likely to spur plans and issuers (“persons”) to violate the law by colluding to fix their prices in a manner that restrains trade. Rather, while the publication of price information sometimes facilitates tacit collusion, based on public comments and the many empirical studies that have investigated the impact of price transparency on other, non-health care markets, the Departments are of the view that transparency of negotiated rates will likely motivate plans, issuers, and providers to reassess the competitiveness of their prices in order to continue to successfully compete with lower premiums, deductibles, and other cost-sharing responsibilities, and lower priced health care items and services. As stated in the preamble of the Hospital Price Transparency Final Rule, many empirical studies have investigated the impact of price transparency on markets, with most research, consistent with predictions of standard economic theory, showing that price transparency leads to lower and more uniform prices.⁹⁶ Traditional economic analysis suggests that if consumers were to have better pricing information for health care services, providers would face pressure to lower prices and provide better quality care. Falling prices may, in turn, expand consumers’ access to health care.⁹⁷

By disclosing negotiated rates, the Departments are of the view that the public (including patients, employers, clinicians, and other third parties) will have the information necessary to make more informed decisions about their care. The Departments expect that the impact of more expansive transparency in pricing information will increase market competition and may ultimately drive down the cost of health care services, making care more affordable for all consumers.

Although the Departments appreciate that regulated entities could seek to engage in unlawful behavior in restraint of trade, antitrust law does not proscribe or limit action by the federal government to address chronic issues in the nation’s health care markets. Such actions include new, innovative measures that, based on evidence and research, are likely to improve competition and lower costs to consumers. The Departments also are of the view that the statute and the final rules do not constitute an abrogation of antitrust law. Nothing under the final rules creates, compels, or endorses agreements or conspiracies between or among persons to form illegal arrangements or trusts in restraint of trade or commerce. To the contrary, antitrust law enforcement remains an important tool to protect these markets from anticompetitive behavior.

The Departments are of the view that the disclosure of negotiated rates would serve a greater public interest and that “concealing negotiated price information serves little purpose other than protecting dominant providers’ ability to charge above-market prices....”⁹⁸ For example, in Maine, one state official indicated that “to date, there is no evidence that the release of [Maine Health Data Organization] claims data has resulted in an anticompetitive market. Similarly, disclosure of claims data in New Hampshire has resulted increased competition and reduced prices for health care.⁹⁹

For the reasons set forth in this preamble, the Departments are of the view that the final rules will enhance competition, improve markets, and benefit all consumers of health care, including individuals, employers, and government health care programs. Under the final rules, disclosure of the negotiated rate is critical to the ability of consumers, including those who have not met their annual deductible obligation, to be able to reasonably estimate in advance their personal liability for covered services from participating providers. It is also critical in estimating coinsurance liabilities that are calculated as a percentage of provider charges. In addition, the Departments are of the view that accessible pricing information improves market efficiency.¹⁰⁰

3. Administrative Procedure Act (APA) and Arbitrary and Capricious Agency Action

Some commenters asserted that the proposed rules were arbitrary and capricious and thus violate the APA. Two commenters contended that the Departments’ rationale is entirely speculative. They also contended that the Departments have not quantified in a reliable way the costs or anticipated benefits of the proposed rules, examined relevant data, or articulated a satisfactory explanation for the proposed rules. One commenter held the opposite position and asserted that the proposed rules were fully consonant with APA requirements. The commenter believed the Departments are implementing PPACA appropriately, and that the interpretation of the authorities underlying the proposed rules was reasonable and rationally explained by the Departments.

The Departments are also of the view that the final rules are consistent with the APA. Section 1311(e)(3) of PPACA and section 2715A of the PHS Act are designed to assist consumers by enhancing their ability to make cost-conscious decisions, which is essential to establish and maintain the level of market competition necessary to ensure that health care costs are rational, reasonable, and governed by standard market discipline. As the preamble to the proposed rules observed, there is substantial evidence that increased price transparency improves market efficiency.¹⁰¹ For these reasons, it is within the scope of the statute to assist consumers with selecting providers, evaluating market options, increasing competition, and reducing market disparities. The carefully targeted information is essential to the goals of price transparency, and there is no other means of making cost-sharing liability information available to consumers whose personal liability is determined in whole or in part by reference to negotiated rates or allowed amounts. The Departments further hold the view that the Departments have made reasonable efforts to quantify all aspects of the final rules, and their potential effects, for which data is available. The Departments also note that efforts have been made to qualitatively address those areas where the Departments are unable to adequately derive quantitative assessments. Responses to additional comments are discussed later in the Regulatory Impact Analysis (RIA) and Regulatory Alternatives Considered sections of this preamble.

This preamble (as well as the preamble to the proposed rules) cites substantial research indicating that increased price transparency increases competition and lowers costs, leads to more uniform pricing within markets, and increases overall market efficiency.¹⁰² This preamble also cites an abundance of evidence indicating that industry and other stakeholders believe that increased price transparency will enhance competition and benefit consumers. As stated earlier in this preamble in relation to comments regarding the First Amendment, the information the final rules require to be disclosed is clearly identified and has a direct nexus to the government’s legitimate and substantial interest in ensuring that consumers have sufficient information to calculate out of pocket costs for health care items and services and ultimately assess whether the payment terms of plans and coverages are fair, reasonable, or advantageous to the consumer. Furthermore, in the Impact Estimates of the Transparency in Coverage Provisions and Accounting Table section later in this preamble, the Departments identify ranges of relevant factors and categories of information that the Departments have attempted to quantify, as well as those factors and categories that the Departments cannot quantify at this time. Nevertheless, the Departments are of the view that those determinations are reasonable and sufficiently thorough, and that the Departments’ expectations regarding the impacts of the final rules are not speculative.

4. Other legal concerns

Several commenters asserted that requiring issuers to make negotiated prices public could violate various state laws, principles of common law, and tort laws concerned with the protection of trade secrets and proprietary business information. Several commenters specifically stated that the proposal would violate the Uniform Trade Secrets Act (UTSA)¹⁰³ as adopted by several states.

The Departments understand these concerns and appreciate that States have passed laws and regulations that may address the same or similar information the final rules require to be publicly disclosed, or disclosed to participants, beneficiaries, or enrollees. The final rules will preempt these laws, to the extent they conflict with federal law and would prevent application of federal requirements, as required under section 1321(d) of PPACA and section 2724(a) of the PHS Act. The Departments discuss this issue in more detail later in this preamble in the context of addressing federalism considerations.

Moreover, the Departments are also of the view that negotiated rates do not constitute trade secrets as defined under the UTSA and under principles of tort law. A trade secret under the UTSA is “information, including a formula, pattern, compilation, program, device, method, technique, or process” that “derives independent economic value... from not being generally known [or] readily ascertainable by proper means by... other persons who can obtain economic value from its disclosure [and] is the subject of efforts to... maintain its secrecy.”¹⁰⁴ Critically, and as discussed earlier, negotiated rates are routinely disclosed to beneficiaries in EOBs.

To the extent the final rules require disclosure of trade secrets, the activity that supports a cause of action under tort law includes obtaining the information by improper means or a breach of confidence.¹⁰⁵ No such scenario is implicated where the disclosure is made pursuant to a regulatory mandate authorized by statute. In this context, the disclosure is a legal obligation, and so the disclosure is by definition proper and made in the absence of any duty of confidence.

Finally, even if negotiated rates could constitute trade secrets under a state’s law, state law cannot invalidate the authority Congress granted to the Departments under section 1311(e)(3) of PPACA to require disclosure of negotiated rates and other information that the Departments determine appropriate to create a level of transparency in coverage sufficient to address chronic issues in American health care markets, including rising health care prices.

Several commenters asserted that making negotiated rates public would violate contractual arrangements between virtually all issuers and providers, in particular contractual provisions that prohibit disclosure of negotiated rates. One commenter noted that this would, at a minimum, require a considerable effort to amend many existing contracts.

The Departments understand that changes in applicable laws and regulations may necessitate changes to certain business and contractual relationships over time. The Departments are of the view, however, that the final rules are necessary to advance the interests of consumers and to fulfill the goals of the relevant statutes. The Departments also anticipate that in most cases, affected contracts include clauses that specifically anticipate the possibility of future changes to applicable law or regulations. Additionally, even if a contract between a provider and a payer includes a provision prohibiting the public disclosure of its terms, it is the Departments’ understanding that such contracts typically include exceptions if a particular disclosure is required by federal law. Finally, as the Supreme Court has found, “[c]ontracts, however express, cannot fetter the constitutional authority of Congress. Contracts may create rights of property, but when contracts deal with a subject matter which lies within the control of Congress, they have a congenital infirmity. Parties cannot remove their transactions from the reach of dominant constitutional power by making contracts about them.” Norman v. Balt. & Ohio R.R. Co., 294 U.S. 240, 307–08 (1935) (“If the regulatory statute is otherwise within the powers of Congress... its application may not be defeated by private contractual provisions.”); see also Connolly, 475 U.S. at 224.

Several commenters contended that the proposed rules would be inconsistent with certain executive orders. One commenter contended that Executive Order 13877, which the Departments cited as the impetus for the proposed rules, directs the agencies to “require... health insurance issuers... to provide or facilitate access to information about expected out-of-pocket costs for items or services to patients before they receive care.” The commenter asserted that this directive does not rationally encompass a requirement that issuers make public all negotiated rates and allowed amounts. The commenter also asserted that the proposed rules are incompatible with section 3(b) of Executive Order 13877, which provides that any rulemaking be “consistent with applicable law,” in that the proposed rules run contrary to antitrust law as well as prohibitions against disclosing trade secrets.

The Departments disagree with these comments. First, Executive Order 13877 clearly states that it is “not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.” Executive Order 13877, Sec. 8(c). Thus, an executive order cannot form the basis of a challenge to a rulemaking. Second, for all the reasons detailed earlier in this preamble, the Departments are of the view that the final rules are necessary and appropriate measures that are sufficiently narrowly tailored to meet the stated goals of the Executive Order. Making public the negotiated rates and out-of-network allowed amounts is essential for consumers to obtain useful information about out-of-pocket costs they are likely to incur before receiving services. Due to the prevalence of high deductibles throughout markets nationwide, this information will be crucial for a significant cohort of persons enrolled in health plans to be able to anticipate costs in advance of each plan year. For the public, access to information concerning allowed amounts is essential to obtain reliable advance estimates of personal liability to facilitate cost-conscious choices that enhance competition and lower overall costs. Finally, as described later in this preamble, the Departments considered many alternatives to the proposed and final rules. The Departments are of the view that the final rules are a straightforward implementation of the mandate of section 1311(e)(3) of PPACA, and that the choices taken in particular instances are well calculated to effectively and fully implement the goals of the authorizing statutes. Moreover, the regulations provide tools and information to consumers that are critical to their ability to access meaningful price information, including the personal liability associated with a substantial portion of health care services. This directly facilitates the meaningful engagement of consumers with their own health care and protects patients from the likelihood of unanticipated health care costs. As such, the regulations fulfill the mandate of Executive Order 13877.

For the foregoing reasons, the final rules adopt the majority of the provisions in the proposed rules, with certain modifications, as described in detail in the following sections of this preamble.

The Departments are finalizing price transparency requirements set forth in the final rules in 26 CFR 54.9815-2715A1, 26 CFR 54.9815-2715A2, 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A1, 29 CFR 2590.715-2715A2, 29 CFR 2590.715-2715A3, and 45 CFR 147.210, 147.211, and 147.212. The final rules separate the proposed regulations all contained in 26 CFR 54.9815-2715A, 29 CFR 2590.715-2715A, and 45 CFR 147.210, into three separate regulations for each of the Departments. The regulations set forth the scope and relevant definitions in 26 CFR 54.9815-2715A1, 29 CFR 2590.715-2715A1, and 45 CFR 147.210 (which correspond with paragraph (a) of the proposed regulations). The regulations at 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and, 45 CFR 147.211 (which correspond with paragraph (b) of the proposed regulations) include: (1) a requirement that group health plans and health insurance issuers in the individual and group markets disclose to participants, beneficiaries, or enrollees upon request, through a self-service tool made available by the plan or issuer on an internet website, cost-sharing information for a covered item or service from a particular provider or providers, and (2) a requirement that plans and issuers make such information available in paper form, upon request. As explained in more detail later in this preamble, the final rules adopt a three-year, phased-in approach with respect to the scope of the requirement to disclose cost-sharing information. Plans and issuers must make cost-sharing information available for 500 items and services identified by the Departments for plan years (in the individual market, for policy years) beginning on or after January 1, 2023, and must make cost-sharing information available for all items and services for plan years (in the individual market, for policy years) beginning on or after January 1, 2024.

The regulations at 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, and 45 CFR part 147.212 (at paragraph (c) of the proposed regulations) require that plans and issuers disclose pricing information to the public through three machine-readable files. One file requires disclosure of payment rates negotiated between plans or issuers and providers for all covered items and services. The second file will disclose the unique amounts a plan or issuer allowed, as well as associated billed charges, for covered items or services furnished by out-of-network providers during a specified time period. To reduce the complexity and burden of including prescription drug information in the negotiated rate machine-readable file, the final rules require a third file that will include pricing information for prescription drugs. The final rules modify the applicability date for these provisions to plan years (in the individual market, policy years) beginning on or after January 1, 2022.

The provisions proposed at paragraph (d) of the proposed regulations are finalized in 26 CFR 54.9815-2715A2 and 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A2, and 29 CFR 2590.715-2715A3, and 147.211 and 147.212 with non-substantive editorial changes for increased readability, and with effective dates reflecting the phased approach to implementation mentioned earlier and discussed in more detail later in this preamble.

In addition to splitting the final rules into three separate regulations for each Department, the Departments have added severability clauses to the final rules to emphasize the Departments’ intent that, to the extent a reviewing court holds that any provision of the final rules is unlawful, the remaining rules should take effect and be given the maximum effect permitted by law. The final rules provide that any provision held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, shall be severable from the relevant section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.

To streamline the final rules, the Departments have removed definitions of terms that are defined in the applicable statute or elsewhere in such statutes’ implementing regulations and have revised certain definitions to provide more clarity. Finally, based on comments received, the Departments have reassessed the associated burden estimates in the Economic Impact Analysis and Paperwork Burden section of this preamble.

A. Definitions

The final regulations at 26 CFR 54.9815-2715A1(a), 29 CFR 2590.715-2715A1(a), and 45 CFR 147.210(a) (paragraph (a) of the proposed regulations) set forth definitions that are applicable to the regulations at 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211 (paragraph (b) of the proposed regulations) and 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, 45 CFR 147.212 (paragraph (c) of the proposed regulations). The Departments have revised the proposed definitions of some terms and included new defined terms in order to clarify the final requirements of 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211, and 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, and 45 CFR 147.212. Comments on the definitions in the proposed rule focused on concerns regarding consistency of definitions across related government programs, the general need for increased clarity in relation to some proposed definitions, and the need for resolution of perceived ambiguities in the proposed definitions. In response to these comments, the Departments are not finalizing certain proposed definitions that are already defined in existing, pertinent regulations. The Departments are finalizing revised versions of other proposed definitions to clarify their meaning, as well as the policies and requirements adopted in the final rules.

Commenters recommended aligning definitions in the proposed regulations with those in other existing regulations to avoid conflicts. In light of these recommendations, the Departments are not finalizing the proposed definition of “participant” under 26 CFR 54.9815-2715A1, 29 CFR 2590.715-2715A1, or part 147.210 because the term is already defined in the Departments’ regulations at 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. Likewise, the Departments are not finalizing the proposed definition of “beneficiary” under proposed 45 CFR 145.210 and 29 CFR 2590.715-2715A1, because the term is already defined under HHS regulation at 45 CFR 144.103 and in statute at ERISA section 3(8). The Departments, however, are finalizing the definition of “beneficiary” proposed under 26 CFR 54.9815-2715A(a) (now at 26 CFR 54.9815-2715A1), because the term is not otherwise defined in Treasury Regulations or the Code. Finally, the Departments are not finalizing the proposed definition for “qualified health plan” at 45 CFR 145.210 since the term is not used in the regulation text.

Some commenters requested clarification of the terms “participants” and “beneficiaries” because the proposed rules’ definitions of these terms included individuals who may become eligible for a plan or coverage, and as the proposed rules envisioned personalized feedback to “participants” and “enrollees” it would be impossible to provide such information to an individual not currently enrolled in a plan or coverage. The Departments agree. However, instead of modifying existing, applicable definitions for “participants” and “beneficiaries,” the final rules, at 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211, and this preamble below clarify to whom these disclosures are required.

One commenter recommended the Departments define the term “in-network provider” in the final rules to clearly exclude device suppliers and manufacturers that, the commenter suggested, have not traditionally been considered in-network providers and whose price information is of limited value to consumers. The Departments do not agree that device suppliers and manufacturers should be excluded. Based on the numerous public comments from individuals who support broad price transparency for all covered items and services, the Departments are of the view that pricing information for all covered items and services should be available, including pricing for durable medical equipment (DME) or other medical devices that are supplied to a participant, beneficiary, or enrollee by a provider under a contract with a plan or issuer. To clarify, the final rules define in-network provider to mean any provider of items and services with which the plan or issuer, or a third-party for a plan or issuer, has a contract setting forth the terms under which a covered item or service may be provided to a participant, beneficiary, or enrollee. The Departments broadened this definition to clarify that even where a provider and a plan or issuer have a limited rate agreement of some kind, or a rate agreement covering DME, those providers should be considered in-network providers for purposes of the final rules. Additionally, if a plan or issuer enters into a contract or has such payment arrangements, then the pricing information for the specific covered items or services subject to that contract or payment arrangement are required to be disclosed as part of the internet self-service tool and machine-readable files.

The proposed regulations included a definition for “negotiated rate” to mean the amount a group health plan or health insurance issuer, or a third party on behalf of a plan or issuer, has contractually agreed to pay an in-network provider for covered items and services, pursuant to the terms of an agreement between the provider and the plan or issuer, or a third-party on behalf of a plan or issuer. Consistent with the proposed and final definitions of “items and services,” plans and issuers are required to disclose “negotiated rates” for encounters, procedures, medical tests, supplies, prescription drugs, durable medical equipment, and fees (including facility fees) to participants, beneficiaries, and enrollees through the internet-based self-service tool (and in paper form) as well as to the public through a machine-readable file. One commenter requested the Departments clarify the meaning of “negotiated rate” for prescription drugs, noting that they assumed the Departments expected plans and issuers to provide the drug price negotiated by a PBM on behalf of the plan. Another commenter asserted that the “negotiated rate” of prescription drugs for disclosure should be the price patients will see at the point-of-sale, meaning the undiscounted price of the drug, plus dispensing fees. Conversely, another commenter stated that dispensing fees are not paid by enrollees or used in determining cost-sharing liability. Other commenters suggested that the Departments grant plans and issuers flexibility in determining the appropriate rate for disclosure, as plans and issuers use a variety of different benchmarks, such as the Average Wholesale Price (AWP), or Wholesale Acquisition Cost (WAC) which may be considered as the “negotiated rate” for the purpose of determining cost-sharing liability under the plan or coverage.

In the final rules, the Departments have revised the definition of “negotiated rate” to mean the amount a plan or issuer has contractually agreed to pay for a covered item or service, whether directly or indirectly through a third party administrator (TPA) or PBM, to an in-network provider, including an in-network pharmacy or other prescription drug dispenser, for covered items or services. The final rules adopt the proposed definition with two key modifications. First, the term “third party” from the proposed definition is expanded in the final rules to explicitly refer to “third-party administrator or pharmacy benefit manager.” Second, the final definition of “negotiated rate” specifically notes that the term in-network provider includes an in-network pharmacy or other prescription drug dispenser. The purpose of these modifications is to confirm the commenter’s inference that in the case of prescription drugs, the plan or issuer should include the price negotiated for that plan or issuer by a PBM. Furthermore, the “negotiated rate” in the final rules is intended to be broad enough to account for different plan designs and benchmarks for determining negotiated rates.

The final rules also add definitions for the following terms that were not included in the proposed regulations: “billed charge,” “copayment assistance,” “derived amount,” “historic net price,” “national drug code,” and “underlying fee schedule.” The addition of these definitions is discussed later in this preamble.

One commenter noted that the Departments have proposed definitions for “accumulated amounts,” “cost-sharing liability,” and “cost-sharing information” that are unique to the proposed rules and, in some cases, differ from definitions of similar terms used in other related regulations. In particular, this commenter recommended that all definitions should explicitly recognize that cost sharing can be paid by or on behalf of an enrollee, participant, or beneficiary, since that is how cost sharing is defined by HHS regulation. The commenter also requested that the Departments clarify the proposed definition of “accumulated amounts” and suggested revising the definition to state clearly that accumulated amounts are the “amount of financial responsibility a participant, beneficiary, or enrollee has incurred, whether satisfied by or on behalf of the participant, beneficiary, or enrollee....”

The Departments recognize that cost sharing may be paid by a third-party on behalf of an enrollee, participant, or beneficiary. However, the Departments are of the view that some plans and issuers do not count cost-sharing liability payments made by a third-party towards a participant’s, beneficiary’s, or enrollee’s accumulated amounts, and modifying the definitions as suggested by the commenter could cause confusion in the context of the final rules.

The Departments have added disclosure requirements that are discussed in detail elsewhere in this preamble to address this concern. The definitions being finalized also include non-substantive editorial changes from the proposed regulations for readability to the following terms; “accumulated amounts,” “billing code,” “bundled payment arrangement,” “cost-sharing liability,” “cost-sharing information,” “covered items or services,” “item or services,” and “out-of-network allowed amount.”

The definitions identified as new or substantively modified in this section, as well as those that are being finalized as proposed, are discussed further in relation to the requirements of 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211 and 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, and 45 CFR part 147.212 throughout this preamble.

B. Requirements for Disclosing Cost-Sharing Information to Participants, Beneficiaries, and Enrollees

The final rules are intended to enable participants, beneficiaries, and enrollees to obtain an estimate of their potential cost-sharing liability for covered items and services they might receive from a particular health care provider, consistent with the requirements of section 2715A of the PHS Act and section 1311(e)(3)(C) of PPACA. Accordingly, the Departments proposed in paragraph (b) of the proposed regulations to require group health plans and health insurance issuers to disclose certain information relevant to a determination of a consumer’s out-of-pocket costs for a particular health care item or service in accordance with specific method and format requirements, upon the request of a participant, beneficiary, or enrollee.

A majority of commenters supported the Departments’ proposal and urged the Departments to finalize this section of the proposed rules. Many commenters were supportive of being able to know their costs before receiving care in order to make informed shopping decisions. Some commenters agreed that consumers should have access to cost information in advance of receiving care, but suggested modifications to the proposed requirements. The final rules adopt the requirement that plans and issuers disclose certain cost-sharing information for a particular health care item or service, generally as set forth in the proposed rules, but with certain modifications and clarifications explained later in this section of this preamble.

1. Information Required to be Disclosed to Participants, Beneficiaries, or Enrollees

Based on significant research and review of public comments, the Departments concluded that requiring group health plans and health insurance issuers to disclose to participants, beneficiaries, or enrollees cost-sharing information in the manner most familiar to them is the best means to empower individuals to understand their potential cost-sharing liability for covered items and services furnished by particular providers. The Departments, therefore, modeled the proposed price transparency requirements on existing notice requirements.

Specifically, section 2719 of the PHS Act (incorporated into the Code by section 9815 of the Code and into ERISA by section 715 of ERISA) requires non-grandfathered plans and issuers offering non-grandfathered coverage in the individual or group markets to provide a notice of adverse benefit determination (typically satisfied by the EOB) to participants, beneficiaries, or enrollees after health care items or services are furnished and claims for benefits are adjudicated. EOBs typically include the amount billed by a provider for items and services, negotiated rates or underlying fee schedules with in-network providers or allowed amounts for out-of-network providers, the amount the plan paid to the provider, and the individual’s obligation for deductibles, copayments, coinsurance, and any other balance under the provider’s bill. Consumers are accustomed to seeing cost-sharing information as it is presented in an EOB. The proposed rules were intended to similarly require plans and issuers to provide the specific price and benefit information on which an individual’s cost-sharing liability is based. Based on comments, the Departments are of the view that participants, beneficiaries, and enrollees would also benefit from understanding the price of items and services, even in circumstances when their cost-sharing liability is not based upon a negotiated rate or underlying fee schedule rate. Given this primary goal of overall price transparency, the Departments are requiring disclosure of the negotiated rate, even if it is not the amount used as the basis for cost-sharing liability.

The proposed rules set forth seven content elements that a plan or issuer must disclose, upon request, to a participant, beneficiary, or enrollee for a covered item or service: estimated cost-sharing liability, accumulated amounts, negotiated rates, out-of-network allowed amounts, a list of items and services subject to bundled payment arrangements, a notice of prerequisites, if applicable, and a disclosure notice. These seven content elements generally reflect the same information that is included in an EOB after health care services are provided. The Departments determined that each of the seven content elements, as well as two additional content elements, are necessary and appropriate to implement the mandates of section 2715A of the PHS Act and section 1311(e)(3)(C) of PPACA by permitting individuals to learn the amount of their cost-sharing liability and understand the price for specific items or services under a plan or coverage from a particular provider. The final rules adopt the requirement that plans and issuers must satisfy these elements through disclosure of actual data relevant to an individual’s cost-sharing liability that is accurate at the time the request is made. The Departments acknowledge that plans and issuers may not have processed all of an individual’s outstanding claims when the individual requests the information; therefore, plans and issuers would not be required to account for outstanding claims that have not yet been fully processed. As set forth in 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211 this cost-sharing information must be disclosed upon request in two ways: (1) through a self-service tool that meets certain standards and is available on an internet website, and (2) in paper form, if requested by the participant, beneficiary, or enrollee.

Furthermore, under the final rules, the cost-sharing information must be disclosed to the participant, beneficiary, or enrollee in plain language. The final rules define “plain language” to mean written and presented in a manner calculated to be understood by the average participant, beneficiary, or enrollee. Determining whether this standard has been satisfied requires an exercise of considered judgment and discretion, taking into account such factors as the level of comprehension and education of typical participants, beneficiaries, or enrollees in the plan or coverage and the complexity of the terms of the plan or coverage. Accounting for these factors would likely require limiting or eliminating the use of technical jargon and long, complex sentences, so that the information provided will not have the effect of misleading, misinforming, or failing to inform participants, beneficiaries, or enrollees.

Several commenters agreed that the information found in an EOB is a good basis for informing individuals of their cost-sharing liability and will effectively further coverage transparency efforts. One commenter stated that information found in an advance EOB is neither a trade secret, nor proprietary, as it is routinely disclosed following care. Other commenters expressed concern about this concept of an advance EOB, stating that most plans and issuers do not have access to all the information necessary to provide beneficiaries with an upfront adjudication of the beneficiary’s claim, and that the vast majority of data provided via online tools now rely on estimated costs drawn from publicly available sources rather than personal information and circumstances.

Many commenters expressed concerns that the elements and methods of disclosure proposed by the Departments are overly prescriptive, hindering health plan innovation and requiring potentially significant reworking of existing transparency tools, as well as requiring massive IT and resource investments by all commercial plans and issuers to develop, build or modify, test, and implement tools that meet the new standards. Several commenters recommended providing plans and issuers with flexibility to build upon current systems. Another commenter urged the Departments to evaluate the individualized tools currently available, and that if requirements for cost-estimator tools are adopted, they should give carriers and TPAs maximum flexibility in designing their tools. One commenter felt a better approach would be to educate consumers about the online tools that are currently available and assist employers to encourage their use. Several commenters opposed the requirement to provide the tool and suggested the Departments remove this requirement from the final rules altogether. These commenters stated that price estimator tools should not be required, citing studies showing low tool utilization by consumers and plan participants, beneficiaries, or enrollees. These commenters stated that the administration should instead focus on educating consumers about the online tools that are currently available and assisting employers and plans in encouraging their use.

The Departments are of the view that modeling the pricing disclosures on the elements provided within an EOB is both reasonable and appropriate. The Departments acknowledge the potential burden of updating existing tools to comply with the final rules, but the Departments think that the potential burden is outweighed by the importance of all enrollees, beneficiaries, and participants having access to self-service tools that provide a baseline of accurate pricing elements. The Departments also acknowledge that, historically, there has been low utilization of existing tools; however, the Departments are of the view that by creating minimum uniform standards, consumers will have access to more reliable, personalized estimates and will be more likely to use the tools.

As described earlier in this preamble, through independent examination and engagement with stakeholders, the Departments are of the view that existing tools vary widely in usability and reliability due to the lack of minimum standards.¹⁰⁶ The Departments received thousands of supportive comments from individuals eager for access to transparent pricing information, indicating that the current tools available are inadequate in practice. Furthermore, as discussed in great detail throughout this preamble, as consumers increasingly become financially responsible for a greater proportion of the cost of their care (through deductible and coinsurance requirements, for example) they have a vested interest in comparing prices of potential providers and such items as prescription drugs. As such, it is likely in the best interest of plans, issuers, and providers to promote and educate their consumers on the benefits of these shopping tools, and the Departments encourage them to do so. The Departments do not agree with the commenter who stated that educating consumers regarding existing tools and encouraging their use would be a better approach than requiring the self-service tool as proposed. While the Departments agree that educating consumers on existing self-service tools is important, it does not replace the benefits of making reliable self-service tools available to most participants, beneficiaries, and enrollees in private market plans and coverages. The Departments are of the view that minimum consistent requirements for all plans and issuers may lead to an increase in health literacy and drive consumerism as participants, beneficiaries, and enrollees become more familiar with how plans and issuers calculate cost-sharing liability. Furthermore, the final rules adopt a phased implementation approach to these requirements as a mechanism to help mitigate the associated implementation burdens.

Some commenters requested that the Departments confirm that the intent of the proposed rules is that only participants and beneficiaries enrolled in the plan would have access to the tool, noting that the proposed regulations used the ERISA definitions of “participant” and “beneficiary,” which include individuals who may become eligible for the plan. Many commenters encouraged the Departments to also require that plans and issuers make cost-sharing information easily accessible to authorized representatives—which may include health care providers—so that they can better respond to patient inquiries. These commenters suggested that patients reasonably turn to providers for this information when contemplating or scheduling health care services, but providers often face barriers in accessing the necessary details from issuers to provide a timely, accurate estimate. Commenters suggested that plans and issuers should be required to give providers access to their patients’ specific benefit information via a secure website, subject to patient consent. One commenter recommended that the tool be made applicable for the public while they are in the shopping and plan selection phase, not just after someone is enrolled in a plan. This commenter suggested that true cost transparency would not be possible if this information was not made available in advance.

The final rules clarify that disclosures of cost-sharing information are only required to individuals who are enrolled in the plan or coverage; no disclosures are required to be made to a “participant” or “beneficiary” solely because they might become eligible for the plan in the future. This is reflected by a revision to the proposed language being finalized at 26 CFR 54.9815-2715A2(b), 29 CFR 2590.715-2715A2(b), and 45 CFR 147.211(b) to refer to plans and issuers providing cost-sharing information to a participant, beneficiary, or enrollee who is enrolled in a plan or coverage. The Departments understand the value in provider access to cost-sharing information required under the final rules. However, this rulemaking focuses on implementing the statutory obligation for plans to make this information available to participants, beneficiaries, and enrollees. A participant, beneficiary, or enrollee may choose to share information regarding their personal cost-sharing liability with a provider for the purposes of making health care decisions. The final rules also require that this information must be provided to a participant’s, beneficiary’s, or enrollee’s authorized representative. Under other applicable regulations, participants, beneficiaries, or enrollees may appoint a health care provider as their authorized representative.¹⁰⁷

Regarding whether other types of information should be required to be disclosed in the self-service tool, several commenters expressed concern that information regarding cost without accompanying provider quality information could have a detrimental effect on overall health care cost and delivery of value-based care. One commenter stated that shifting care to a lower-cost provider could have unintended consequences of higher costs associated with unnecessary or improper care. Commenters recommended that a quality metric be included and that quality information be allowed to be included alongside price.

As discussed in the background section of this preamble and later in this preamble, the Departments acknowledge that quality information could be a valuable addition to a self-service tool. However, the Departments did not propose to require disclosure of quality information. Rather, the Departments sought comments regarding quality information in the proposed rules and plan to take those comments into consideration for future action. The Departments encourage plans and issuers to further innovate around the baseline standards outlined above and include quality information and other metrics not required by the final rules that would assist in consumer decision-making.

Several commenters suggested that plans and issuers should be required to disclose information not directly related to cost sharing. One commenter urged the Departments to include an additional requirement in the final rules for plans and issuers to provide consumers with information they need to fully understand their cost-sharing obligations for emergency services at the time they obtain their coverage, and recommended plans and issuers also update this information on an annual basis or when major changes occur that would impact their access to, and overall cost of, emergency care, such as changes to their provider. Another commenter recommended that when consumers enter a search for a primary service or treatment, that they also be provided with an “alert” that additional services, such as anesthesia, pathology, or laboratory tests, likely will be involved and will entail additional costs, which should also be disclosed. Another commenter requested that the Departments add the “type of plan” (for example, ERISA-covered group health plan, a QHP, a Medicare Advantage plan, a Medicaid MCO plan, an individual health plan, or a plan that is grandfathered from PPACA requirements) and in what state the plan is providing coverage as disclosure content elements that health plans would be required to post on the proposed internet-based self-service tool, so that the information is readily available.

The Departments recognize the benefit of providing information for emergency services at the time consumers obtain their coverage. The Departments are of the view, however, that existing rules governing summaries of benefits and coverage are designed to provide such information to consumers at the time they obtain coverage. As such, the Departments are not inclined to duplicate existing requirements in the final rules. The Departments also acknowledge that alerting consumers to additional services associated with a service or treatment for which they searched could be beneficial. For this reason, the final rules provide plans and issuers flexibility to give disclaimers that can address the likelihood that services in addition to the one for which a consumer searched will be necessary. The final rules also require that plans and issuers outline individual services when a consumer requests an estimate for a service that, per the agreement between a payer and a provider, will be provided and billed as a bundle. Plans and issuers are also free to provide such information in any way they so choose, including through an alert. The Departments are also of the view that participants, beneficiaries, and enrollees are generally aware of the type of plan they are enrolled in or can reasonably access this information by contacting their plan or issuer and therefore decline to require this information as part of the final rules.

Scope of Items and Services

Many commenters stated that the requirement to disclose the price of all covered items and services was overly broad and overly burdensome, and instead suggested the Departments limit disclosure to a core set of “shoppable services” that are commonly searched for in existing cost-estimator tools. Many commenters referenced the recently finalized definition of a shoppable service that was included in the Hospital Price Transparency final rule as “a service that can be scheduled by a health care consumer in advance.”¹⁰⁸ Two commenters recommended no more than 300 shoppable items and services, while another suggested a limit of 200. As a way to reduce the cost burden, one commenter suggested that the requirements under the rules be limited to services that are priced above a certain threshold and provided $5,000 as an example. One commenter said the Departments should permit health plans and issuers to tailor their tools to best meet their enrollees’ and providers’ demonstrated needs and priorities, including selection of the items and services for which estimates are most useful and meaningful for participants, beneficiaries, and enrollees. Another commenter recommended that the cost-sharing requirement be limited to items and services where the estimated out-of-pocket price is frequently the same as the final price. Another recommended the tool not require data on those items/services with volatile prices or low volume.

One commenter, representing many plans and issuers, provided a list of 421 items and services that they recommended including under this disclosure requirement. The recommended list of 421 items and services are a result of an analysis the commenter performed which compared member feedback, claims frequency, operational feasibility, and state mandates and regulations, as well as variability of cost and search frequency. All 421 items and services were included by, at the minimum, a subset of issuers, indicating confidence that the covered items and services were shoppable. This commenter also noted that their survey of existing tools found a median of 526 services available to consumers enrolled in commercial coverage.

A few commenters recommended that the Departments limit the list of items and services to only major medical services. One commenter recommended the Departments not include cost sharing for DME. Several commenters suggested that a Technical Expert Panel (TEP) was needed to review data and input from stakeholders, advise on research the Departments should undertake, and determine which items and services and functional requirements would be suitable to include in the future.

Many individual commenters expressed their desire for dental, vision, and other excepted benefits to be included under the requirements of the final rules or in the near future. Further, a majority of individual commenters encouraged the Departments to require the inclusion of all items and services, stating that consumers have a right to know this information for all items and services in advance. Several commenters recommended that the rules be implemented in a more gradual phased-in timeline, by requiring the tool to cover a narrower data set of the most common shoppable services first and then broadened to eventually include all items and services. Another commenter stated that to the extent that the services include non-medical estimates like pharmacy and dental costs, those costs could likely only be included by allowing third parties that fulfill those benefits to provide separate transparency tools that integrate with a plan’s tool.

The Departments agree with commenters who stated that consumers should be given price estimates in advance, and the Departments understand that what is considered useful and meaningful pricing information is likely to be unique to an individual’s circumstances. For these reasons, and the rationale for this rulemaking described throughout this preamble, the Departments decline to accept suggestions related to limiting the number or types of items and services included under this requirement. However, the Departments acknowledge the potential burden of incorporating all items and services into a self-service tool immediately and are therefore finalizing a phased-in implementation timeline. Under the final rules, plans and issuers are required to provide estimates for the 500 items and services identified in Table 1 for plan years (in the individual market, for policy years) beginning on or after January 1, 2023. However, plans and issuers will be required to disclose pricing information with respect to all items and services for plan years (in the individual market, for policy years) beginning on or after January 1, 2024. Given that pricing estimates for all items and services will ultimately be required, the Departments do not find it necessary to convene a TEP to determine which items and services and functional requirements would be suitable to include in the future.

Further, in finalizing the provision that plans and issuers disclose cost-sharing liability information for all covered items and services, the Departments are clarifying that cost-sharing information must also be provided for covered prescription drugs and DME. As discussed later in this preamble, a plan or issuer will be considered compliant with this requirement if it offers its participants, beneficiaries, or enrollees access to the pricing information that is required under 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211, through a third-party tool, such as a PBM tool. As discussed elsewhere in this preamble, the Departments clarify that excepted benefits, such as limited-scope dental benefits offered under a separate policy, certificate, or contract of insurance that are not an integral part of a group health plan or health insurance coverage, are not subject to the requirements established under the final rules.

In developing the list of 500 items and services that are required to be included in the self-service tool during the first year of implementation, the Departments considered the recommendations made by the commenters to include shoppable items and services that are commonly used in existing tools. As mentioned above, in a survey of existing price transparency tools currently in use, one commenter found that the median number of items and services in existing tools is 526. Table 1 lists 500 items and services that will be required to be included in the first phase of implementation of the internet-based self-service tool. The Departments will publish a copy of this list on a publicly available website. The majority of these items and services (416) are based on the recommendation of several stakeholders. The Departments have determined not to include five of the recommended codes because they have since been retired. The Departments augmented the list with 84 additional services. These 84 services reflect some of the most frequently found services in External Data Gathering Environment (EDGE)¹⁰⁹ data, which are representative of services commonly provided in the individual and small group (or merged) markets. The Departments also examined the aggregate claims costs associated with these services nationally and concluded that these services could have significant cost variability, ranging from the 25^th percentile to the 75^th percentile of costs, depending on service.

As outlined above, below are the five codes that appear on the commenter list of recommended items and services that are not being required for the initial list of 500 items and services.

The Departments understand that plans and issuers may use different billing codes (for example, MS-DRGs vs. APR DRGs). Therefore, in the first year of the implementation of the self-service tool, when plans and issuers are required to provide cost estimates for the 500 items and services identified by the Departments, plans and issuers are permitted to make appropriate code substitutions as necessary to allow them to disclose cost-sharing information for the 500 items and services through the self-service tool. If necessary, the Departments will issue future guidance regarding standards for code substitutions.

a. First Content Element: Estimated cost-sharing liability

The first content element that plans and issuers are required to disclose under the final rules is an estimate of the cost-sharing liability for the furnishing of a covered item or service by a particular provider or providers. The calculation of the cost-sharing liability estimate is required to be computed based on the other relevant cost-sharing information that plans and issuers are required to disclose, as described later in this section of this preamble.

The proposed rules defined “cost-sharing liability” as the amount a participant, beneficiary, or enrollee is responsible for paying for a covered item or service under the terms of the plan or coverage. The disclosure must include all applicable forms of cost sharing, including deductibles, coinsurance requirements, and copayments. The term cost-sharing liability does not include premiums, any applicable balance billing amounts charged by out-of-network providers, or the cost of non-covered items or services. For QHPs offered through Exchanges, an estimate of cost-sharing liability for a requested covered item or service provided must reflect any cost-sharing reductions the individual would receive under the coverage.

Many commenters supported the disclosure of cost-sharing liability for a particular item or service. One stated that providing cost-sharing amounts to consumers in advance of receiving a service would likely make it easier for providers to collect consumers’ cost-sharing amounts. However, some commenters were concerned that information provided in advance of care would not provide an accurate estimate of actual participant, beneficiary, or enrollee liability, which would lead to consumer confusion and frustration. A few commenters requested that the tool include additional information, such as all providers expected to be involved in providing an item or service, and the price of items and services historically provided along with that particular item or service by the provider. Some commenters urged the Departments to ensure appropriate educational information is provided to patients to help them better understand and navigate the information being displayed. Others recommended a federally funded and coordinated outreach and education campaign to encourage the use of price transparency tools and help patients understand the complexities of health care prices. One commenter urged the Departments to clarify that, to the extent that the actual services provided are consistent with those provided under the estimate, plans would not be permitted to hold an enrollee responsible for more than what was provided under the estimate.

The Departments underscore that the estimates required by the final rules are not required to reflect the actual or final cost of a particular item or service. Unforeseen factors during the course of treatment (which may involve additional services or providers) can result in higher actual cost-sharing liability following receipt of care than the estimate provided in advance. Nonetheless, the Departments are finalizing the requirement that cost-sharing liability estimates be built upon accurate information, including the relevant cost-sharing information described in 26 CFR 54.9815-2715A2(b)(1)(ii)-(iv), 29 CFR 2590.715-2715A2(b)(1)(ii)-(iv), and 45 CFR 147.211(b)(1)(ii)-(iv). However, this requirement does not mean that the estimates must reflect the amount ultimately charged to a participant, beneficiary, or enrollee. Instead, the estimate should reflect the amount a participant, beneficiary, or enrollee would be expected to pay for the covered item or service for which cost-sharing information is sought. Thus, the final rules do not require the cost-sharing liability estimate to include costs for unanticipated items or services the individual could incur due to the severity of his or her illness or injury, provider treatment decisions, or other unforeseen events. Attendant notice requirements in 26 CFR 54.9815-2715A2(b)(1)(vii), 29 CFR 2590.715-2715A2(b)(1)(vii), and 45 CFR 147.211(b)(1)(vii) also require inclusion of a statement that actual charges for the participant’s, beneficiary’s, or enrollee’s covered items and services may be different from those described in a cost-sharing liability estimate, depending on the actual items and services received at the point of care.

Additionally, while the Departments acknowledge the value of not allowing group health plans and health insurance issuers to impose higher cost sharing than estimated, to the extent that the actual services provided were consistent with those provided under the estimate, the Departments are of the view that it would not be prudent to hold plans and issuers liable to the exact estimate that is provided through the tool, as cost-sharing obligations may ultimately vary from the estimates provided in advance. Additionally, the Departments are concerned that such a requirement could incentivize plans and issuers to provide high estimates, rather than the most accurate estimates.

Commenters recommended the final rules provide plans and issuers with the flexibility to apply a reasonable methodology for estimating reliable out-of-pocket costs for a specific network provider, and recommended that this methodology could include, but should not be limited to, using current year negotiated rates, historical negotiated rates, historical claims, or a combination of these data points. One commenter urged the Departments to remove the proposed requirement that cost-sharing liability information be calculated based on negotiated rates, stating that this is not the methodology used by most existing cost-estimate tools.

The Departments understand that plans and issuers with existing cost-estimate tools may use advanced analytics in calculating cost-sharing liability estimates. However, the Departments are of the view that the most accurate estimates of cost-sharing liability should be provided using the actual rates and fees upon which liability is determined. It is the Departments’ understanding that, while provider reimbursement may be based on negotiated rates, plans and issuers do not always calculate a consumer’s liability using the negotiated rate as defined in paragraph (a) of the proposed rules, such as in capitation arrangements where the provider is reimbursed retrospectively. Rather, some plans and issuers may determine a participant’s, beneficiary’s, or enrollee’s cost-sharing liability on a contractually agreed upon underlying fee schedule between the provider and the plan or issuer.

Therefore, the final rules require that cost-sharing liability for a particular item or service be calculated based on in-network rates, out-of-network allowed amounts, and individual-specific accumulators, such as deductibles and out-of-pocket limits. However, the Departments clarify that plans and issuers may incorporate additional metrics and analytics beyond this minimum standard: for example, by using complex historical analytics to predict total costs of items and services available through a bundled payment arrangement. The Departments will assess how additional useful information can be provided to consumers in this area going forward.

Under the proposed rules, plans and issuers would be required to provide participants, beneficiaries, and enrollees with cost-sharing information for either a discrete item or service or for items or services for a treatment or procedure for which the plan uses a bundled payment arrangement, according to how the plan or issuer structures payment for the item or service. Several commenters pointed out that providing cost-sharing liability estimates for bundled payment arrangements might introduce confusion as consumers may not realize that billing and payment rates are different when items and services are rendered individually versus as part of a bundled item or service. Commenters stated that ultimately, patients would very likely receive inaccurate or misleading estimates in a significant proportion of self-service estimate requests. Similarly, several commenters sought clarification regarding how plans and issuers that incorporate innovative and cost-saving methods like reference-based pricing, value-based insurance design, and direct primary care as part of their services and plan designs would comply with the requirements of the proposed rules.

The Departments recognize the variability in pricing structures and plan designs for many plans and issuers. The Departments understand that developers have demonstrated that formulas for unique pricing models are already being incorporated into existing estimator tools. The Departments further understand that while providing cost estimates in advance for a plan or issuer that incorporates reference-based reimbursement may be complex, it is still feasible to estimate such costs. For example, plans or issuers could develop a method for analyzing past claims of specific providers to look for patterns in their payment rates from which to derive an accurate predictive estimate in advance. In response to the Hospital Price Transparency final rule, one hospital claims to have developed a tool that provides cost estimates with 95 percent to 99 percent accuracy.¹¹⁰ While some factors associated with the course of care are incorporated after services are rendered, others, like gender or location, are known in advance. Therefore, the Departments expect plans and issuers to provide a reasonable estimate using information the plan or issuer knows about the participant, beneficiary, or enrollee or the average participant, beneficiary, or enrollee.

The Departments again acknowledge that how a provider is reimbursed does not necessarily indicate how a participant, beneficiary, or enrollee will be billed. Specifically, as commenters explained, the bundled payment arrangement as defined in the proposed rules may not reflect the cost-sharing liability for which the consumer is liable. For instance, if a provider is reimbursed in a bundled payment arrangement for a surgical procedure that includes the surgery and pre- and post-surgery office visits, but the enrollee is billed a copayment for each office visit and coinsurance for the surgical procedure, the enrollee should be able to obtain the separate copayment liabilities for each of the office visits and the surgical procedures, not one bundled charge. However, under this example, if the individual is only responsible for one copayment that includes all office visits and the surgical procedures, the plan or issuer could provide the cost-sharing liability estimate for that bundled payment arrangement.

Therefore, the final rules clarify that plans and issuers should provide one overall cost-sharing liability estimate for a bundled payment arrangement if that is the only cost sharing for which the participant, beneficiary, or enrollee would be liable. However, if a plan or issuer reimburses a provider under a bundled payment arrangement for all covered items and services provided for a specific treatment or procedure, but cost sharing is imposed separately for each unique item and service included in the bundled payment, plans and issuers should disclose the cost-sharing liability for those distinct items and services to the participant, beneficiary, or enrollee. The Departments also recognize that providing one estimate that includes all items and services that are typically provided within an episode of care may be consumer-friendly in some situations, even where the items and services are not subject to a bundled payment arrangement. Therefore, the final rules clarify that while plans and issuers are not required to provide bundled estimates where the provider is not reimbursed through a bundled payment arrangement, nothing prohibits plans or issuers from providing bundled estimates in situations where such estimates could be relevant to participants, beneficiaries, or enrollees, as long as the plan or issuer also discloses information about the relevant items or services individually, as required by the final rules.

Plans and issuers should take a similar approach for plan designs that incorporate alternative payment structures such as direct primary care or other bundled or capitated payment arrangements. The Departments understand that there are many unique plan designs and may issue additional guidance to address specific questions from plans, issuers, and enforcement entities regarding the requirements of the final rules.

The Departments appreciate comments requesting education and outreach to help ensure that participants, beneficiaries, and enrollees know that these consumer tools exist and can understand the information displayed. The Departments recognize that more than 94 percent of plans and issuers recently surveyed already have some variation of an internet self-service tool,¹¹¹ yet another study noted that only 12 percent of participants, beneficiaries, or enrollees currently use the tools available to them,¹¹² which might suggest that there is an opportunity for improved awareness and understanding of these tools. However, the Departments are also of the view that plans and issuers have their own incentives to provide quality customer service and know what types of outreach and messaging would be most helpful to their participants, beneficiaries, and enrollees. Therefore, the Departments have decided not to institute specific outreach and education requirements, but rather strongly encourage plans and issuers to develop educational and outreach materials to promote awareness that self-service tools exist, where to find them on the plan’s or issuer’s website, how to use the tool, what, if any, further innovations above the baseline standards that differentiates their tool from competitors, and what additional information may be available. In addition, the Departments are of the view that employers may want to conduct outreach and education to encourage their employees to shop for lower-priced services that may slow increases in employer-sponsored coverage premiums.

One commenter stated that the final rules should provide the flexibility for health plans to display cost-sharing information either as dollars or using some proxy variable that either conveys costs relative to other providers or the cost-effectiveness of the providers for a given items or service relative to their peers. Another commenter recommended that cost estimates include both an average price and a reasonable range of the possible prices that the treatment could cost. Other commenters recommended the Departments allow cost estimates to be provided as a range.

The Departments are of the view that cost-sharing averages and ranges would not provide personalized and specific cost-sharing information and therefore the final rules adopt, as proposed, the provision that estimated cost-sharing liability be reflected as a dollar amount. However, the Departments understand that providing an estimated range could help consumers understand how their costs may vary depending on the complexity of a procedure. In addition to providing a cost-sharing estimate that is specific to the participant, beneficiary, or enrollee, plans and issuers may also choose to provide low and high ranges of what the consumer may expect to pay to reflect other needed services, complications, and other factors.

Several commenters expressed concerns about the ability of plans and issuers to provide these cost-sharing estimates, noting that few, if any, currently provide this level of disclosure to participants, beneficiaries, or enrollees before the incurrence of a claim. Commenters stated that most major issuers have treatment cost estimators available, but these tools are rudimentary and are not necessarily available for all plan designs. Commenters also stated that few regional issuers currently make any cost-estimation data available and the vast majority of data provided via online tools currently relies on estimated costs drawn from publicly available sources rather than personal information and circumstances.

Another commenter stated that most self-insured group health plans do not have easy access to all the data necessary to provide beneficiaries with what they described as upfront adjudication of the beneficiary’s claim, like an EOB. One commenter expressed concern, stating that plans could be subject to significant penalties for failure to comply and highlighted that self-insured plans typically do not establish their own networks, but rather contract with an issuer, TPA or other entity for the use of their network. Another commenter stated that issuers, preferred provider networks, and TPAs continue to maintain network pricing information as confidential and proprietary, even with respect to their own plan clients. Some commenters stated that while the preamble to the proposed rules suggests that plans could renegotiate their contracts in order to gain access to this proprietary information, this ignores the realities of the market. These commenters opined that, in the absence of clearer guidance applicable to issuers and TPAs, plans and issuers will be burdened with trying to force disclosure of this information.

The Departments are of the view that the ability to access cost-sharing liability information in advance of seeking care should not be limited by the participant’s, beneficiary’s, or enrollee’s plan or issuer type. The Departments are aware of several issuers that provide advance cost estimates that are based on an individual’s specific information, such as out-of-pocket amount accumulators. The intent of the final rules is to make this information available to a larger number of participants, beneficiaries, and enrollees, empowering them to shop for care that best meets their needs.

Additionally, while the Departments recognize that some self-insured group health plans (or TPAs acting on their behalf) may not currently have access to the information that would be required to calculate a participant’s or beneficiary’s cost liability, the Departments do not foresee any barriers that would prohibit the plan or TPA from obtaining this information. As discussed in the preamble to the proposed rules, plans may have to amend existing contracts with issuers, TPAs, or providers. Consistent with the discussion of legal authority elsewhere in this preamble, even if a contract between a self-insured plan and a TPA contains a provision prohibiting the public disclosure of its terms, it is the Departments’ understanding that such contracts typically include exceptions where a particular disclosure is required by federal law, and federal law would control over contractual terms in any case.

In response to whether other types of information are necessary to provide an estimate of cost-sharing liability prior to an individual’s receipt of items or services from a provider(s), one commenter suggested—in order to enhance the usability and accuracy of these data—that CMS and payers utilize the open-source episode grouper maintained by the not-for-profit Patient-Centered Episode System (PACES) Center, to create a single industry standard for defining clinical episodes of care using current medical record and payment systems and based on consensus across multiple stakeholders including providers, payers, purchasers, and consumers.

While the Departments generally support standardization across the complex health care ecosystem, there is no current required standardization of items and services provided for certain common episodes of care. Because of the lack of this particular standard, requiring plans and issuers to use PACES or similar services to determine costs will not accurately reflect what different plans and issuers actually reimburse for different episodes of care.

The Departments acknowledge that section 2713 of the PHS Act requires non-grandfathered group health plans and issuers offering non-grandfathered coverage in the individual or group markets to provide coverage without the imposition of any cost-sharing requirements for select preventive items and services. However, if the same items or services are furnished for non-preventive purposes, the participant, beneficiary, or enrollee may be subject to the cost-sharing terms of his or her plan. The Departments are of the view that if an item or service will be furnished at no cost to the participant, beneficiary, or enrollee, the participant, beneficiary, or enrollee should know this information. One commenter expressed a desire that price transparency not serve as a disincentive for individuals seeking preventive and maintenance therapy services. The Departments are of the view that clearly indicating when items and services have a $0 cost-sharing liability may have the opposite effect—it may actually encourage consumers to seek preventive care. The Departments understand that determining whether an item or service is preventive or not for an individual may be complex, and, indeed, may be impossible prior to service. Therefore, to the extent an item or service is a recommended preventive service under section 2713 of the PHS Act, and the plan or issuer cannot determine whether the request is for preventive or non-preventive purposes, the plan or issuer must display the non-preventive cost-sharing liability in the internet-based self-service tool, along with a statement that the item or service may not be subject to cost sharing if it is billed as a preventive service. For example, if an individual requests cost-sharing information for an in-network colonoscopy, the plan should display the applicable cost-sharing information for a diagnostic colonoscopy and a statement that the service may not be subject to cost sharing if it is billed as a preventive service from an in-network provider. As an alternative, a plan or issuer may allow an individual to request cost-sharing information for the specific preventive or non-preventive item or service by including the appropriate terms such as “preventive,” “non-preventive,” or “diagnostic” as a means to request the most accurate cost-sharing information.

b. Second Content Element: Accumulated amounts

The second content element is a participant’s, beneficiary’s, or enrollee’s accumulated amounts. The proposed rules defined “accumulated amounts” as the amount of financial responsibility that a participant, beneficiary, or enrollee has incurred at the time the request for cost-sharing information is made, with respect to a deductible and/or an out-of-pocket limit. If an individual is enrolled in other than self-only coverage, these accumulated amounts would include the financial responsibility a participant, beneficiary, or enrollee has incurred toward meeting his or her individual deductible and/or out-of-pocket limit, as well as the amount of financial responsibility that the individuals enrolled under the plan or coverage have incurred toward meeting the other than self-only coverage deductible and/or out-of-pocket limit, as applicable. The Departments interpret section 2707(b) of the PHS Act as requiring non-grandfathered group health plans to comply with the maximum out-of-pocket limit promulgated under section 1302(c)(1) of PPACA, including the HHS clarification that the self-only maximum out-of-pocket limit applies to each individual, regardless of whether the individual is enrolled in self-only coverage or in other than self-only coverage. Accordingly, the self-only maximum out-of-pocket limit applies to an individual who is enrolled in family coverage or other coverage that is not self-only coverage under a group health plan.¹¹³ For this purpose, the Departments proposed that accumulated amounts would include any expense that counts toward the deductible or out-of-pocket limit (such as copayments and coinsurance), but would exclude expenses that would not count toward a deductible or out-of-pocket limit (such as premium payments, out-of-pocket expenses for out-of-network services, or amounts for items or services not covered under a plan or coverage).

Furthermore, to the extent a plan or issuer imposes a cumulative treatment limitation on a particular covered item or service (such as a limit on the number of items, days, units, visits, or hours covered in a defined time period) independent of individual medical necessity determinations, the accumulated amounts would also include the amount that has accrued toward the limit on the item or service (such as the number of items, days, units, visits, or hours the participant, beneficiary, or enrollee has used).

As discussed in the proposed rules, the Departments understand that independent of cumulative treatment limitations, cost-sharing liability may vary by individual based on a determination of medical necessity and that it may not be reasonable for a plan or issuer to account for this variance as part of the accumulated amounts. Therefore, under the final rules, plans and issuers are required to provide cost-sharing information with respect to an accumulated amount for a cumulative treatment limitation that reflects the status of the individual’s progress toward meeting the limitation, and this information does not include any individual determination of medical necessity that may affect coverage for the item or service. For example, if the terms of an individual’s plan or coverage limit coverage of physical therapy to 10 visits per plan or policy year, subject to a medical necessity determination, and at the time the request for cost-sharing information is made the individual has had claims paid for three physical therapy visits, the plan or coverage would make cost-sharing information disclosures based on the fact that the individual could be covered for seven more physical therapy visits in that plan or policy year, regardless of whether or not a determination of medical necessity for future visits has been made at that time.

Several commenters supported the inclusion of the accumulated amounts as one of the content elements. One commenter agreed with the proposed requirement that the accumulated amounts include the financial responsibility incurred toward both an individual deductible and/or out-of-pocket limit and toward the other than self-only coverage deductible and/or out-of-pocket limit. One commenter recommended that plans be required to disclose to prospective enrollees whether an enrollee’s accumulated amounts are reduced through a plan’s accumulator adjustment program because, the commenter noted, having this information prior to enrollment in a plan is crucial because of the impact such programs have on participant, beneficiary, and enrollee access, adherence, and outcomes.

The Departments agree that an essential part of providing accurate cost-sharing estimates is disclosing individuals’ progress toward their accumulated amounts. However, the intent of the self-service tool is to provide current participants, beneficiaries, and enrollees with information about their plan or issuer, and, therefore, the Departments are not finalizing any provisions related to disclosures to potential enrollees. The final rules adopt this provision as proposed.

One commenter recommended the Departments confirm amounts made available in account-based arrangements that can or must be used toward cost-sharing expenses under a separate plan need not be reflected in the accumulated amounts or cost-sharing estimate under the tool. The commenter stated that there is an array of these types of arrangements of varying types and structures and to incorporate them into the cost-sharing estimate could be administratively challenging and would impose a significant burden.

The Departments clarify that the estimates do not include amounts made available through separate account-based arrangements. In addition, the Departments encourage, but are not requiring, plans and issuers to issue a disclaimer regarding such arrangements, as necessary.

Certain commenters stated that the proposed requirement to display accumulated amounts toward a cumulative treatment limitation on a particular item or service would be difficult to implement and requested elimination or delay of this requirement. Commenters expressed that in some cases, this information may be tracked by third-party vendors and not integrated into claims systems; for example, plans and issuers often contract with third parties that provide medical benefits management for certain services (physical therapy, for example). Commenters stated that building the connectivity necessary to exchange information on accumulated amounts in real time would take significant time. Other commenters recommended this requirement be optional.

The Departments acknowledge that disclosure of accumulated amounts may present challenges for plans and issuers. However, an accurate estimate of cost-sharing liability cannot be achieved without taking into account a participant’s, beneficiary’s, or enrollee’s accumulated amounts, including cumulative treatment limitations. Nonetheless, to give plans and issuers additional time to prepare, the disclosure requirements related to cost-sharing liability estimates in the final rules are not applicable until plan years (or in the individual market, policy years) beginning on or after January 1, 2023, providing two years for implementation, which should give plans and issuers sufficient time to ensure that they are able to comply.

One commenter urged the Departments to include a requirement for plans to provide the cost for the beneficiary to purchase a non-covered prescription drug and to indicate whether and, if so, to what extent, that cost will be applied against the deductible. The commenter stated that knowing to what extent a non-covered drug expense will count towards meeting a deductible and the annual limitation on cost sharing, if at all, especially with regard to specialty drugs, is critical because there are significant coverage gaps.

While the Departments appreciate the suggestions related to non-covered prescription drugs, this rulemaking is focused on covered items and services. The Departments are not inclined to increase the burden imposed by the final rules by adding requirements to disclose information regarding non-covered services, given that plans and issuers may not have access to the costs of drugs they do not cover and include in their formulary. The Departments will take this suggestion into consideration for future rulemaking.

c. Third Content Element: In-network Rates

Negotiated Rates

In the proposed rules, the Departments proposed to require group health plans and health insurance issuers to disclose the negotiated rate, reflected as a dollar amount, for an in-network provider or providers for a requested covered item or service, to the extent necessary to determine the participant’s, beneficiary’s, or enrollee’s cost-sharing liability. Many commenters did not support the disclosure of negotiated rates, stating that publishing negotiated rates would not meet the Departments’ purported goal of helping consumers understand costs and would possibly make purchasing more confusing and difficult for consumers. Additionally, some commenters expressed concerns that publication of negotiated rates would force plans and issuers to violate non-disclosure contracts with providers. Conversely, many other commenters did support the disclosure of negotiated rates and offered support for their disclosure to participants, beneficiaries, and enrollees. These commenters stated that consumers should be engaged and educated about health care spending, and as discussed in more detail below, several commenters supported the disclosure of negotiated rates even when it is not relevant to a consumer’s cost-sharing liability.

The Departments maintain that the disclosure of the negotiated rates is a key element of overall price transparency. Participants, beneficiaries, and enrollees are often responsible for a percentage of the negotiated rate through coinsurance or the entire negotiated rate if they have not yet met their deductible. Consistent with discussions elsewhere in this preamble, the Departments are of the view that such contracts typically include exceptions where a particular disclosure is required by federal law.

In the preamble to the proposed rules, the Departments acknowledged that some provider contracts express negotiated rates as a formula (for example, 150 percent of the Medicare rate), but disclosure of formulas is not likely to be helpful or understandable for many participants, beneficiaries, and enrollees viewing this information. For this reason, the final rules require plans and issuers to disclose the negotiated rates and underlying fee schedules that result from using such a formula, as a dollar amount.

A few commenters recommended disclosing negotiated rate ranges or benchmarks to help consumers compare prices among providers. One commenter stated it would be useful if plans disclosed their range of in-network rates (or their average or median rate) for each service. This commenter stated that, for certain services such as complex surgeries, for which fees may be bundled and may vary widely depending on the severity of a participant’s, beneficiary’s or enrollee’s condition, providing the range of in-network fees may be particularly appropriate. This type of disclosure could alert participants, beneficiaries, and enrollees to consider, and prompt them to consult providers about, the full range of potential expenses for their care. Another commenter recommended that, regardless of the participant’s, beneficiary’s, or enrollee’s out-of-pocket liability, the participant, beneficiary, or enrollee should always be provided the full in-network amount, as well as a comparison of that amount to a benchmark such as the Fair Price or median in-network price. This commenter stated that the in-network price for a service can vary by as much as 200 to 1,000 percent, depending on the provider selected. In order to achieve the goals of transparency, consumers need to know the full price of a service prior to care so they are able to effectively compare providers’ prices.

In the Departments’ view, disclosure of formulas or ranges are not likely to be helpful or understandable for many participants, beneficiaries, and enrollees viewing this information. The purpose of the internet-based self-service tool is to provide personalized costs based on the participant’s, beneficiary’s, or enrollee’s specific plan or coverage, and ranges and formulas do not achieve this goal. For this reason, the final rules retain the proposed requirement to disclose the rate that results from using such a formula, which is required to be expressed as a dollar amount.

Underlying Fee Schedule Rate

Given the unique nature of certain plan designs, in the proposed rules, the Departments requested comment on whether there were certain reimbursement or payment models that should be exempt from all or certain aspects of the proposed rules. A few commenters urged the Departments to clarify how capitation arrangements and value-based reimbursement designs, including bundled payment arrangements and reference-based pricing, would be regulated under the proposed rules. Commenters stated that provider payment amounts are not knowable under these types of arrangements until after care is provided and that they cannot be attributed to a particular item or service provided to a particular participant, beneficiary, or enrollee. Other commenters stated that participants, beneficiaries, and enrollees should have access to cost-sharing liability data for items and services that might be rendered in the course of their care, but that the Departments’ proposed approach downplayed the complexity of payer-provider contracts in a way that could inadvertently lead to participants, beneficiaries, and enrollees receiving misleading estimates of their cost-sharing liability. The commenter stated that only the consumer’s cost sharing and the fee-for-service component of reimbursement should be required to be disclosed under these requirements. Another commenter stated that the vast majority of bundled payment arrangements use a retrospective settlement, in which the payer and provider determine a final settlement after all care in the relevant episode has been delivered, suggesting that a negotiated rate under these arrangements could not be provided in advance.

The Departments are of the view that, for transparency in coverage to be truly effective, consumers should have access to all pricing information related to their care so they can make meaningful decisions about their health care spending. Further, the Departments do not agree that the disclosure of negotiated rates will be misleading to participants, beneficiaries, or enrollees. Negotiated rates are already an element of an EOB that participants, beneficiaries, and enrollees are accustomed to receiving after receiving health care items or services. As stated elsewhere in this preamble, providing this information in advance equips a more cost-conscious participant, beneficiary, and enrollee with the necessary information to make a more informed decision about their health care. Furthermore, the Departments are of the view that it is in the best interest of plans and issuers to indicate, when disclosing these rates, what each rate is and how it is applicable to the participant’s, beneficiary’s, or enrollee’s plan or coverage.

To more fully understand the complexity of payer-provider contracts and, in an effort to clarify how the proposed rules would apply to capitated, bundled, and other alternative reimbursement designs, the Departments considered these public comments and conducted additional research to understand different contracting models and the inputs that would be necessary for determining a participant’s, beneficiary’s, or enrollee’s cost-sharing liability under these models.

Under some capitation arrangements, payers reimburse a provider a set amount per participant, beneficiary, or enrollee for a pre-defined amount of time, regardless of whether the participant, beneficiary, or enrollee uses the provider’s services. Capitation payments are generally guided by actuarial principles and may be determined by different factors, such as a participant’s, beneficiary’s, or enrollee’s age and gender. For instance, under some capitated models, plans and issuers pay a provider or a collective panel of providers a per-member-per-month (PMPM) capitation amount, which is the negotiated rate. It is the Departments’ understanding that under certain capitated and bundled payment arrangements, providers’ payments may be reconciled retrospectively to account for utilization, value adjustments, or other weighting factors that can affect the final payment to a provider. The Departments understand that capitation arrangements also may include at least one underlying fee schedule rate upon which a participant’s, beneficiary’s, or enrollee’s cost-sharing liability is determined.

As the Departments acknowledged earlier in this preamble, negotiated rates, as defined in the final rules, do not always affect a participant’s, beneficiary’s, or enrollee’s cost-sharing liability. To account for alternative reimbursement arrangements such as capitated and bundled payment arrangements, the Departments are renaming the third content element as “in-network rates,” comprised of the following elements, as applicable to the plan’s or issuer’s payment model: negotiated rate and underlying fee schedule rate, reflected as dollar amounts. Plans and issuers must disclose the underlying fee schedule rate used to determine participant, beneficiary, or enrollee cost-sharing liability only where that rate is different from the negotiated rate. As discussed earlier in this preamble, the final rules require that the cost-sharing liability estimate for a requested covered item or service be calculated using the current underlying fee schedule rate if the plan or issuer uses such a fee schedule. The Departments are of the view that disclosing underlying fee schedule rates will provide the most relevant data on which cost sharing is based, if cost sharing is not based on the negotiated rate, as originally proposed.

Disclosing the Negotiated Rate and Underlying Fee Schedule Rate

In the proposed rules, the Departments acknowledged that if the negotiated rate does not impact an individual’s cost-sharing liability under a plan or coverage for a covered item or service (for example, if the copayment for the item or service is a flat dollar amount or zero dollars and the individual has met a deductible, or a deductible does not apply to that particular item or service), disclosure of the negotiated rate may be unnecessary to calculate cost-sharing liability for that item or service. Therefore, the Departments proposed that disclosure of a negotiated rate would not be required if it is not relevant for calculating an individual’s cost-sharing liability for a particular item or service. The Departments sought comment on whether there are any reasons disclosure of negotiated rates should nonetheless be required under these circumstances.

Many commenters agreed that negotiated rates should only be disclosed to the extent they are used for determining cost-sharing liability. Commenters further expressed that only information meaningful to consumers’ cost-sharing liability should be required to be disclosed. One commenter stated that this interpretation should be extended to payments tied to value, such as “shared savings,” bonuses, and other performance-based reimbursements.

Conversely, as stated earlier, many commenters supported the disclosure of negotiated rates in all circumstances. One commenter stated that disclosing the amount of the negotiated rate is extremely valuable regardless of whether the disclosure of this information impacts a participant’s cost-sharing liability, because it will illuminate the costs of these particular items and services—reflecting the benefit consumers receive from their enrollment in the plan or coverage, as well as helping them to be conscious of the costs incurred by the plan overall. This commenter pointed out that if the plan or issuer has different negotiated in-network rates with different providers furnishing the same item or service, participants, beneficiaries, and enrollees will have the opportunity to compare the different rates among the different providers.

Another commenter suggested a number of benefits that could come from the disclosure of negotiated rates through the cost-sharing tool, even in cases in which that information is not relevant to the specific cost-sharing inquiry. The commenter pointed out that even if the participant’s, beneficiary’s, or enrollee’s cost is not affected, the plan’s or issuer’s cost could be significantly affected and that allowing participants, beneficiaries, and enrollees awareness and visibility of negotiated rates could provide consumers with a greater understanding of health care costs and enable participants, beneficiaries, and enrollees to seek out lower cost providers. The commenter further stated that although participants, beneficiaries, and enrollees will use the tool to look up estimated cost-sharing for specific items and services, often they will also expect to seek services from the same provider repeatedly (for example, for ongoing treatment and follow-up care).

The Departments agree with those commenters who favored requiring disclosure of negotiated rates even when the negotiated rate is not relevant to determining cost sharing, because it may promote awareness and understanding of health care prices and promotes transparency in coverage. Accordingly, the phrase “to the extent relevant to the participant’s or beneficiary’s cost-sharing liability” that appeared in paragraph (b)(1) of the proposed regulations has been removed from the final rules. The final rules modify the third content element to require that the negotiated rate always be disclosed with cost-sharing liability estimates, even if it is not used to determine cost sharing, and that the underlying fee schedule rate also be disclosed, to the extent that it is different from the negotiated rate, as applicable to the plan’s payment model.

With regard to plans and issuers using an alternative reimbursement model, such as a capitated or bundled payment arrangement that does not have negotiated rates or an underlying fee schedule, one commenter stated that issuers do not always have access to the negotiated rates or internal payment methodologies utilized by capitated medical groups or other providers and would not be able to reliably provide cost transparency based on a negotiated rate at the service level. In contrast, another commenter stated there is no justification for excluding plans that reimburse their providers based on capitation from the internet-based self-service tool requirements as this would result in an incomplete data set, and these plans already assign values to services to administer benefits with deductibles and coinsurance, as well as for risk adjustment and internal reporting purposes. Another commenter stated that the Departments should include Accountable Care Organizations (ACOs) and other capitated arrangements within the ambit of the final rules and should require transparency and full disclosure of financial incentive arrangements that underlie capitated arrangements under a specific plan or contract, not just a consumer’s anticipated liability. This commenter stated that any exemptions may actually be incentives for plans and issuers to move toward opaque pricing models.

The Departments acknowledge that it is possible that some plans and issuers using alternative reimbursement models may not have negotiated rates or underlying fee schedule rates to disclose in the internet-based self-service tool. However, the numbers of plans and issuers without negotiated rates or underlying fee schedule rates is limited and the Departments are of the view that an exemption for such arrangements is not necessary. Additionally, the Departments are of the view that providing an exemption for such arrangements will result in incomplete data sets. As stated in the final rules, the in-network rate must be disclosed, as applicable to the plan’s or issuer’s payment model. If the plan or issuer does not have negotiated rates or underlying fee schedule rates, the third content element does not apply.

Prescription Drugs

The final rules adopt the requirement that group health plans and health insurance issuers disclose to participants, beneficiaries, or enrollees an estimate of cost-sharing liability for each item or service, including prescription drugs. As discussed in the preamble to the proposed rules, this would allow participants, beneficiaries, and enrollees to request cost-sharing information for a specific billing code (as described later in this preamble) associated with a prescription drug or by descriptive terms (such as the name of the prescription drug), which would permit participants, beneficiaries, and enrollees to learn the estimated cost of a prescription drug obtained directly through a provider, such as a pharmacy or mail order service. In addition to allowing participants, beneficiaries, and enrollees to obtain cost-sharing information by using a billing code or descriptive term, the proposed rules would also have permitted participants, beneficiaries, and enrollees to learn the cost of a set of items or services that include a prescription drug or drugs that is subject to a bundled payment arrangement for a treatment or procedure. In the proposed rules, the Departments acknowledged that outside of a bundled payment arrangement, plans and issuers often base cost-sharing liability for prescription drugs on the undiscounted list price, such as the AWP or WAC, which frequently differs from the price the plan or issuer has negotiated for the prescription drug.¹¹⁴ In these instances, providing the participant, beneficiary, or enrollee with a rate that has been negotiated between the issuer or plan and its PBM could be misleading, as this rate would reflect rebates and other discounts, and could be lower than what the individual would pay—particularly if the participant, beneficiary, or enrollee has not met his or her deductible.

The Departments sought comment as to whether a rate other than the negotiated rate, such as the undiscounted price, should be required to be disclosed for prescription drugs, and whether and how to account for any and all rebates, discounts, and dispensing fees to ensure participants, beneficiaries, and enrollees have access to meaningful cost-sharing liability estimates for prescription drugs.

Several commenters supported disclosure of rebates, discounts, and other price concessions for drugs. One commenter referred to drug price concessions as one of the “most confounding black boxes of health care” and stated that data suggests these concessions are actually increasing out-of-pocket costs for participants, beneficiaries, and enrollees. This commenter urged the Departments to require plans and issuers to disclose the list price, the negotiated rate, a single dollar value reflecting the total amount of price concessions, and the price used to calculate the participant’s, beneficiary’s, and enrollee’s coinsurance along with, if different from the negotiated rate, an explanation as to why the price is different from the negotiated rate. Another commenter opined that participants, beneficiaries, and enrollees have the right to know a drug’s undiscounted price, discounted or negotiated price, and the total sum of all price concessions for that drug, including fees, rebates, and discounts. This commenter stated that providing a beneficiary with these three data points strikes the appropriate balance between improving transparency without misleading or overwhelming the participant, beneficiary, or enrollee.

Many commenters suggested that plans and issuers be required to disclose when the participant’s, beneficiary’s, or enrollee’s cost-sharing requirement exceeds the price paid by the plan or issuer. One commenter stated that in cases where plans pass through some or all rebates and other price concessions to participants, beneficiaries, and enrollees, the prices disclosed to participants, beneficiaries, and enrollees should be the price net of those rebates and concessions. The commenter emphasized the importance of plans and issuers also disclosing to participants, beneficiaries, and enrollees when manufacturer rebates and discounts are not passed through to them at the point-of-sale or factored into cost-sharing. One commenter noted that negotiated prices for prescriptions or cash price alternatives may sometimes appear less expensive, but that such alternative rates (for example, cash price options) may increase overall costs if such rates offset the ability to reach a plan’s deductible or out-of-pocket maximum thresholds. Therefore, this commenter requested that the Departments provide clarity as to whether plans and issuers would be responsible for notifying participants, beneficiaries, and enrollees of such considerations and/or making such calculations. Similarly, two commenters urged the Departments to require disclosure of the negotiated rate for drugs in all situations, even where the beneficiary owes a fixed-amount copayment, and cited reports of cases when, for inexpensive generics, the beneficiary’s fixed-amount copay actually exceeded the negotiated rate.

Three commenters recommended that the Departments provide plans the flexibility to display the most meaningful price to an enrollee for drugs. One commenter stated that if the participant, beneficiary, or enrollee’s cost sharing is based upon a specified benchmark, the plan should be allowed to specify the benchmark used in the tool’s documentation. This commenter suggested that requiring plans to conform to a single standard is not possible, and in effect may be unhelpful to consumers, given the multitude of contracts (and different contract terms) that each plan’s PBM may have with pharmacies. Another commenter stated providing this flexibility will allow for issuer innovation in developing cost-estimator functionality that provides real-time, accurate, and useful prescription drug estimates to participants, beneficiaries, or enrollees.

One commenter recommended the Departments consider using “net price” rather than the “negotiated rate” for estimating cost-sharing liability for prescription drugs. The commenter explained that direct and indirect remuneration (DIR) fees under Medicare Part D and similar PBM practices in the private market were originally designed to capture rebates and other mechanisms not included at the point-of-sale. However, the commenter stated that DIR fees and other retroactive fees utilized by PBMs are now being used beyond their original purpose to retroactively adjust pharmacies’ payment months after the sale, sometimes below the price paid by the pharmacy.

Some commenters stated that the Departments should not require display of negotiated drug prices, rebates, or other discounts or fees. Two commenters expressed that, rather than increasing transparency or providing actionable or meaningful information to participants, beneficiaries, or enrollees, estimated rebate information would simply confound and frustrate participants, beneficiaries, or enrollees, given its lack of direct relevance to the amount the participant, beneficiary, or enrollee is required to pay for the drug at a pharmacy. Another commenter stated that disclosing highly confidential dispensing fees would benefit only those parties being paid dispensing fees, by giving them a window into the dispensing fees paid to their competitors, and advised that the Departments should avoid requiring any disclosure of drug prices, rebates, discounts, or fees that would undermine plans’ and issuers’ ability to negotiate lower drug costs.

The Departments also solicited comment as to whether there are scenarios in which including drug pricing information in cost estimates would be problematic. One commenter recommended that the final rules require disclosure of an estimate of the cost-sharing liability associated with a drug only when there is an out-of-pocket cost to the participant, beneficiary, or enrollee that is directly attributable to the drug. Another recommended that when the price of a drug is not the basis of the enrollee’s cost-sharing liability, plans should be given the option to publish the benchmark price or omit a price altogether, displaying only the enrollee’s cost-sharing liability.

The Departments also sought comment on whether the relationships between plans or issuers and PBMs allow plans and issuers to disclose rate information for drugs, or if contracts between plans and issuers and PBMs would need to be amended to allow plans and issuers to provide a sufficient level of transparency. If those contracts would need to be amended, the Departments sought comment on the time that would be needed to make those changes. While some commenters stated that the rates negotiated between PBMs and pharmacies are considered confidential, other commenters stated that existing contracts would not prevent PBMs or issuers from disclosing the required information. One commenter stated that it is common that contracts be modified in response to changes in a statute or regulation, and that federal public policy imperatives override existing contractual provisions. This commenter stated the public interest in complete disclosure to reduce costs for consumers unquestionably outweighs any confidentiality provisions in current contracts that might otherwise protect disclosure of relevant information to the federal government.

The Departments agree that participants, beneficiaries, and enrollees, as well as health care payers such as employers, should have access to meaningful pricing information related to drug pricing in order to meaningfully evaluate plan and issuer offerings and gain transparency into potential out-of-pocket costs.

The Departments also acknowledge that contract terms may need to be amended based on the final rules. The Departments agree that disclosure of rebates, discounts, and other price concessions would further the goals of price transparency, but also acknowledge other commenters’ concerns that disclosing all these elements might cause consumer confusion. The Departments also acknowledge that there could be value in using “net price” rather than “negotiated rate” and in disclosing when a participant’s, beneficiary’s, or enrollee’s cost-sharing liability exceeds the price paid by the plan or issuer. As described by commenters, there are numerous pricing inputs throughout the drug supply chain that affect the final price for the consumer—making complete transparency on drug pricing more complex than that of other items and services. The Departments aim to strike a balance between illuminating some of the factors that drive drug costs and not overwhelming consumers with information that is not directly relevant to their cost-sharing liability. To that end, the final rules require plans and issuers to disclose in element (i), an individual’s out-of-pocket cost liability for prescription drugs, and in element (iii), the negotiated rate of the drug. As discussed elsewhere in this preamble, the Departments recognize that the negotiated rate might be different for branded and generic drugs. For instance, the negotiated rate might be the WAC for branded drugs and the Maximum Allowed Cost (MAC) for generic drugs. The Departments also acknowledge that this price might be established differently for different plans and issuers. The Departments anticipate this disclosure generally will not necessitate the disclosure of information on discounts, rebates, or price concessions for a drug.

The Departments recognize there may be circumstances in which a drug carries no cost-sharing liability for a participant, beneficiary, or enrollee. If there is no cost sharing associated with a prescription drug, under the final rules, the tool should reflect a cost-sharing value of $0 for clarity, but the negotiated rate must be displayed.

The proposed rules sought comment on the possibility of requiring access to the APIs used by pharmacies in accessing drug prices. One commenter stated that drug prices frequently differ from period to period over the course of the year, as well as across pharmacy locations even within the same national pharmacy chain. The commenter recommended that the Departments consider requiring PBMs to provide payers, group plans, and third parties with access to the same price APIs accessed by pharmacies, stating that, with access to an open API, the plan or third party could request the estimated price for the same prescription at multiple retail pharmacies and receive real-time retail pricing based upon the participant’s, beneficiary’s, or enrollee’s plan. The Departments recognize the value in requiring cost-sharing information be made available through an API and will use the comments received to inform future rulemaking.

Commenters requested that the Departments confirm that issuers may provide a link to prescription drug cost tools offered through PBMs or vendors to satisfy the requirement to provide pricing information for prescription drugs. One commenter also urged the Departments to prohibit the internet-based, self-service tool from being used by prescribers’ e-prescribing and electronic medical record systems or by plans to steer patients to pharmacies other than a patient’s pharmacy of choice, such as those owned wholly or partially by health plans or PBMs.

The Departments agree that plans and issuers who provide participants’, beneficiaries’, or enrollees’ cost-sharing liability estimates and negotiated rates through a standalone tool provided by a PBM or third-party vendor satisfy the requirements under the final rules. The Departments also clarify that if the PBM or other third-party vendor fails to provide full or timely information, then the plan or issuer, not the PBM or third-party vendor, violates these transparency disclosure requirements. Regarding a prohibition on steering patients to certain pharmacies by plans or prescribers, the Departments are not finalizing any prohibitions at this time and will monitor the implementation of these disclosure requirements.

d. Fourth Content Element: Out-of-network allowed amount

The fourth content element is the out-of-network allowed amount for the requested covered item or service. In the proposed rules, the Departments proposed to define “out-of-network allowed amount” to mean the maximum amount a group health plan or health insurance issuer would pay for a covered item or service furnished by an out-of-network provider. Under the proposed rules, plans and issuers would be required to disclose an estimate of cost-sharing liability for a participant, beneficiary, or enrollee. Therefore, the Departments proposed that, when disclosing an estimate of cost-sharing liability for a covered item or service from an out-of-network provider, a plan or issuer would disclose the out-of-network allowed amount and any cost-sharing liability the participant, beneficiary, or enrollee would be responsible for paying. For example, if a plan has established an out-of-network allowed amount of $100 for an item or service from a particular out-of-network provider and the participant, beneficiary, or enrollee is responsible for paying 30 percent of the out-of-network allowed amount ($30), the plan would disclose both the allowed amount ($100) and the individual’s cost-sharing liability ($30), indicating that the individual is responsible for 30 percent of the out-of-network allowed amount. Under the proposed rules, this element would only be relevant when a participant, beneficiary, or enrollee requests cost-sharing information for a covered item or service furnished by an out-of-network provider.

In the proposed rules, the Departments explained that the definition of cost-sharing liability does not include amounts charged by out-of-network providers that exceed the out-of-network allowed amount, which participants, beneficiaries, or enrollees must pay (sometimes referred to as balance bills). Therefore, it may be difficult for participants, beneficiaries, or enrollees to determine their likely out-of-pocket costs for covered items and services furnished by an out-of-network provider. The Departments also explained that the statutory language of section 1311(e)(3)(A)(vii) of PPACA and section 2715A of the PHS Act indicates that Congress intended that participants, beneficiaries, enrollees, and other members of the public have access to accurate and timely information regarding cost sharing and payments with respect to any out-of-network coverage. In the Departments’ view, requiring plans and issuers to disclose out-of-network allowed amounts and a participant’s, beneficiary’s, or enrollee’s cost-sharing obligation for covered items and services is necessary and appropriate to fulfill this statutory mandate, and would give individuals information necessary to estimate their out-of-pocket costs, assuming they request additional information from an out-of-network provider about how much the provider would charge for a particular item or service.

One commenter encouraged the Departments to eliminate the proposed “maximum amount” standard and to instead incorporate usual, customary, and reasonable (UCR) amounts as the required plan disclosure for out-of-network cost estimates under any final rulemaking. The commenter stated that the “maximum amount” a plan may be willing to pay a given provider for a service is not necessarily predetermined. This commenter stated that while some out-of-network providers and plans may participate in super-regional or national “discount” arrangements through third parties, in many cases payments to out-of-network providers are individually negotiated. Further, while a plan might generally start with payment that is consistent with UCR calculations (with every intention of paying no more than this amount), other circumstances may result in negotiated increases to that reimbursement. As such, prospectively reporting an accurate “maximum amount” is impossible in some cases. Additionally, this commenter stated that because many out-of-network reimbursements, and in particular high-cost claims, are individually negotiated, initial disclosure of a plan’s true maximum reimbursement, insofar as this can be calculated or even estimated in advance, would materially reduce a plan’s bargaining power by notifying non-contracted providers in advance of the amount they are likely to secure from a plan if they assert all available leverage in a negotiation. To the extent participant, beneficiary, or enrollee cost-sharing liability is ultimately derived from out-of-network payment amounts, this requirement is likely to increase out-of-pocket costs for consumers when seeking care from out-of-network providers.

Conversely, one commenter stated that while larger, for-profit, national health plans can afford to utilize the UCR, smaller, regional health plans are at a market disadvantage if they are compelled to base allowed amounts on the UCR, rather than negotiating on a case-by-case basis in a constrained market. As a result, some health plans will struggle to determine and provide information about maximum out-of-network allowed amounts—a range of possible “allowed amounts” may be the most information some health plans have available.

The Departments agree with commenters that the UCR may be a more accurate estimate of the amount a plan or issuer will pay an out-of-network provider for covered items or services, if the plan relies on UCR to determine out-of-network rates. However, the Departments acknowledge that basing allowed amounts on the UCR may disadvantage smaller plans. The Departments also acknowledge that a plan or issuer may be able to provide a participant, enrollee, or beneficiary with a more accurate estimate of an out-of-network allowed amount by using calculations based on historical claims data, because the plan or issuer does not have a pre-determined negotiated rate with out-of-network providers. The Departments acknowledge the concern that plans may lose bargaining power by disclosing out-of-network allowed amount to consumers; however, the Departments are of the view that the out-of-network allowed amount is a critical element of price transparency and its disclosure is essential to enabling consumers to estimate their out-of-network costs in advance. To this end, the Departments are modifying this provision to require plans and issuers to disclose the out-of-network allowed amount or any other calculation that provides a more accurate estimate of the amount a plan will pay for the requested covered item or service, such as a UCR. Allowing plans and issuers to provide an amount other than the out-of-network allowed amount could better serve consumers with a more accurate estimate of what a plan or issuer may reimburse an out-of-network provider. The Departments clarify that if a plan or issuer chooses to use another metric that provides a reasonably accurate estimate of what a plan or issuer will pay for a covered item or service from an out-of-network provider, the plan or issuer must still provide a participant, beneficiary, or enrollee with information regarding any cost sharing the participant, beneficiary, or enrollee would be responsible for paying.

Some commenters recommended the Departments not require plans and issuers to provide allowed amount and cost-sharing information for covered services furnished by an out-of-network provider. One commenter stated it is not possible for issuers to include allowed amounts for out-of-network providers because, without a provider contract, issuers do not have the necessary information, including provider names, National Provider Identifier (NPI), address, specialty, or other demographic information to include these providers in a price transparency tool. One commenter stated that providing real-time disclosures of allowed amounts could be challenging to the extent that plans and issuers determine the allowed amount for certain out-of-network items and services based on a percentage of billed charges, as billed charges are unknown by the plan or issuer prior to a claim for health care services.

The Departments acknowledge the challenges plans and issuers may face disclosing this element, but the Departments are of the view that information regarding out-of-network coverage is essential to the goal of price transparency. With regard to plans and issuers lacking the necessary information for providers with whom they do not contract, the Departments are of the view that plans and issuers should know what they are willing to pay for certain items and services, irrespective of provider. The final rules provide flexibility for plans and issuers to provide an estimate of what the plan will pay by allowing plans and issuers to disclose either the out-of-network allowed amount or another amount that would provide a reasonably accurate estimate of what a plan would reimburse an out-of-network provider for a covered item or service. Given that some plans and issuers determine the allowed amount for certain out-of-network items and services based on a percentage of billed charges, the final rules provide that a percentage can be disclosed instead of a dollar amount, if plans and issuers reimburse out-of-network providers a percentage of the billed charges for a covered item or service.

One commenter sought clarification that the tool is meant to provide cost-sharing information for out-of-network providers and not just the allowed amounts.

As discussed earlier in this preamble under the first content element, under the final rules, the plan or issuer is required to disclose both the out-of-network allowed amount, as described earlier in this preamble, and any cost-sharing liability, based on that allowed amount, that the participant, beneficiary, or enrollee would be responsible for paying.

One commenter stated that the Departments should not require Health Maintenance Organizations’ (HMOs’) out-of-pocket calculators to provide out-of-network data. The commenter noted that the proposed rules limited the tool to covered services, and HMOs generally do not cover benefits provided by out-of-network and, therefore, should not be required to estimate out-of-network costs.

The Departments understand that some plans and issuers may not provide any reimbursement to an out-of-network provider for an otherwise covered item or service. Nonetheless, it is the Departments’ understanding that some HMOs reimburse an out-of-network provider for covered items and services in certain circumstances and, therefore, the Departments expect HMOs to provide cost-sharing information with regard to out-of-network coverage. The Departments recognize that in many cases, an HMO’s maximum allowed amount for an out-of-network service will be $0. However, the Departments are of the view that it is important for a participant, enrollee, or beneficiary to understand what the plan or issuer will or will not pay for out-of-network costs. Therefore, if the plan or issuer, including an HMO, does not provide any reimbursement for an item or service provided by an out of network provider, the Departments expect the plan or issuer to disclose $0 as the allowed amount.

e. Fifth Content Element: Items and services content list

The fifth content element is a list of those covered items and services for which cost-sharing information is being disclosed for items or services subject to a bundled payment arrangement. The Departments proposed that this requirement would apply only when a participant, beneficiary, or enrollee requests cost-sharing information for an item or service that is subject to a bundled payment arrangement that includes multiple items or services. The Departments proposed that, in cases in which an individual requests a cost-sharing liability estimate for a covered item or service that is subject to a bundled payment arrangement, plans and issuers would be required to disclose a list of each covered item and service included in the bundled payment arrangement and the individual’s cost-sharing liability for those covered items and services as a bundle, but not a cost-sharing liability estimate separately associated with each covered item or service included in the bundle.

While some commenters supported the inclusion of cost-sharing information for bundled payment arrangements, others did not support requiring the disclosure of bundled payment arrangements and the items and services included in the arrangement. These commenters stated disclosure of this information would likely be unhelpful to the participant, beneficiary, or enrollee and might cause confusion. One commenter encouraged the Departments to clarify that disclosure for diagnostic imaging procedures in particular should be presented to consumers in a method that is inclusive of the combined professional and technical rates, or the globally billed rate.

The Departments are of the view that understanding which items and services are included in a bundled payment arrangement will provide helpful information for participants, beneficiaries, and enrollees, so that they understand what items and services are accounted for in calculating their cost-sharing liability. The Departments are of the view that this list is unlikely to cause confusion. Instead, it will reduce confusion by clearly identifying what individual items and services would be covered under their estimated cost-sharing liability. If the plan or issuer reimburses a procedure, such as imaging, at a global rate that includes both professional and technical charges, then that global rate is a rate for a bundled payment arrangement for which the applicable content elements must be disclosed, just as for all other items and services. The final rules adopt the provision that plans and issuers provide a list of items or services for items and services subject to bundled payment arrangements for which a cost-sharing liability estimate is being disclosed, with non-substantive edits for improved readability.

f. Sixth Content Element: Notice of prerequisites to coverage

The sixth content element is a notification, whenever applicable, informing the individual that a specific covered item or service for which the individual requests cost-sharing information may be subject to a prerequisite for coverage. The proposed rules defined the term prerequisite to mean certain requirements relating to medical management techniques for covered items and services that must be satisfied before a plan or issuer will cover the item or service. Specifically, the proposed rules provided that prerequisites include such techniques as concurrent review, prior authorization, and step-therapy or fail-first protocols. In the proposed rules, the Departments intended for the definition of prerequisite to capture medical management techniques that apply to an item or service that require action by the participant, beneficiary, or enrollee before the group health plan or health insurance issuer will cover the item or service. Accordingly, the proposed definition of prerequisite did not include medical necessity determinations generally, or other forms of medical management techniques that do not require action by the participant, beneficiary, or enrollee. While the prerequisites enumerated in the proposed rules were provided as an illustrative list, the Departments solicited comment on whether there are any additional medical management techniques that should be explicitly included as prerequisites in the final rules.

Several commenters supported the inclusion of this element. One commenter stated that helping patients understand any coverage prerequisites prior to care, such as prior authorization, may help to eliminate some of the confusion and unnecessary administrative burden following care. Another stated that requiring a plan to disclose prerequisites in an easily understandable format may help patients complete required protocols and thus would improve adherence.

A few commenters recommended additional disclosures or offered suggestions to strengthen these requirements. One commenter encouraged the Departments to include clinical coverage policies for services that are more specific than general medical necessity criteria. For example, some plans and issuers utilize coverage policies that require specific diagnoses or documented symptoms before an item or service may be covered. The commenter explained that while these policies may not technically require an action by the beneficiary, they are important in determining whether the specific item or service is covered. Another commenter recommended that plans and issuers clearly disclose every utilization control that stands between the participant, beneficiary, or enrollee and a prescription, suggesting that this type of disclosure would help patients meet utilization control standards. Another commenter urged the Departments to strengthen this requirement by requiring plans and issuers to provide a description of the actual required prerequisites. The commenter stated that the proposed regulation requires only notification of the existence of a prerequisite, but not any detail about what the prerequisite is and how it can be satisfied. Two commenters encouraged the Departments to standardize this type of notification language to ensure that all consumers receive a consistent message regarding the provision of health care services.

One commenter requested that the Departments provide that the prerequisites listed in proposed rules (that is, concurrent review, prior authorization, step-therapy, and fail-first protocols) are an exclusive list. Another commenter stated that prerequisite notification should be limited to simple notifications that prerequisites apply to a service, and communication of specific prerequisites should not be required until a Fast Healthcare Interoperability Resources (FHIR) standard for transmission of this information is established and operationalized.

As discussed in the proposed rules, the Departments intended for the definition of prerequisite to capture medical management techniques that apply to an item or service that require action by the participant, beneficiary, or enrollee before the plan or issuer will cover the item or service. The Departments consider plan or policy provisions that require a diagnosis or documented symptoms before a service or item would be covered to be medical necessity determination requirements that do not require action on behalf of the participant, beneficiary, or enrollee. Therefore, the Departments did not include such terms in the proposed prerequisite requirement. The Departments are finalizing regulation text to reflect that concurrent review, prior authorization, and step-therapy or fail-first protocols are the exhaustive list of prerequisites about which plans and issuers would need to provide notice. Furthermore, while the Departments acknowledge that providing a complete description of prerequisites might be helpful to consumers, the Departments are not of the view that requiring plans or issuers to provide such descriptions is necessary. The Departments determined that requiring a complete description of the prerequisite would create unnecessary complexity and impose significant burdens on plans and issuers regarding information that is already available in plan documents. Additionally, while the Departments recognize the importance of FHIR in the push towards greater interoperability, it is not necessary to delay finalizing these rules until the FHIR standards are finalized as the final rules do not require any APIs to be built nor exposed for public consumption. The final rules adopt this content element requirement, with the modifications discussed in this section.

g. Seventh Content Element: Disclosure notice

The seventh and final content element proposed is a notice that communicates certain information in plain language, including several specific disclosures. First, the Departments proposed that this notice would include a statement that out-of-network providers may bill participants, beneficiaries, or enrollees for the difference between providers’ billed charges and the sum of the amount collected from the group health plan or health insurance issuer and the amount collected from the participant, beneficiary, or enrollee in the form of cost-sharing (the difference often referred to as balance billing) and that these estimates do not account for those potential additional amounts. In the proposed rules, the Departments acknowledged that there are numerous state laws that address balance-billing practices such that the notice described in the proposed content element regarding balance bills may be misleading or inaccurate for beneficiaries, participants, or enrollees enrolled in a plan or coverage in certain states. The Departments requested comment on whether any modifications to this content element would be appropriate to allow plans and issuers to accurately advise participants, beneficiaries, or enrollees of their potential exposure to or protection from any balance bills.

Second, the Departments proposed that the notice be required to convey that actual charges for the participant’s, beneficiary’s, or enrollee’s covered items and services may be different from those described in a cost-sharing liability estimate, depending on the actual items and services received at the point of care.

Third, the Departments proposed that the notice be required to include a statement that the estimated cost-sharing liability for a covered item or service is not a guarantee that coverage will be provided for those items and services.

Finally, the Departments proposed that plans and issuers be permitted to include any additional information, including other disclaimers that the plan or issuer determines appropriate, so long as the additional information does not conflict with the information they are required to provide. For example, plans and issuers would have been permitted to include additional language so long as the language could not reasonably be read to disclaim the plan’s or issuer’s responsibility for providing a participant, beneficiary, or enrollee with accurate cost-sharing information, or plans and issuers could choose to provide a disclaimer that informs consumers who are seeking estimates of cost-sharing liability for out-of-network allowed amounts that they may have to obtain a price estimate from the out-of-network provider in order to fully understand their out-of-pocket cost liability. Plans and issuers would also have been permitted to provide a disclaimer indicating how long the price estimate will be valid, based on the last date of the contract term for the negotiated rate or rates (if multiple providers with different contract terms are involved). The Departments are of the view that this type of disclaimer could provide participants, beneficiaries, and enrollees with a better understanding of how their cost estimate may change over time. The Departments sought comment on whether a specific disclaimer indicating the expiration of the cost estimate should be required. Furthermore, the Departments explained in the proposed rules that plans and issuers may also include disclaimer information regarding prescription drug cost estimates and whether rebates, discounts, and dispensing fees may impact the actual cost to the participant, beneficiary, or enrollee.

The Departments developed model language that plans and issuers could use, but would not be required to use, to satisfy the disclosure notice requirements described above. This model language was proposed contemporaneously with, but separate from, the proposed rules.¹¹⁵ The Departments sought comment on the proposed model language and any additional information that stakeholders believed should be included in the model notice or any information that should be omitted from the model notice.

The proposed rules clarified that this disclosure notice would be in addition to the information that QHP issuers are currently required to publish on their websites pursuant to 45 CFR 156.220(a)(7) regarding cost-sharing and payments with respect to out-of-network coverage. In addition, some portions of this disclosure may overlap with network adequacy disclosure standards under 45 CFR 156.230(e). That section requires QHP issuers to count the cost-sharing paid by an enrollee for an out-of-network essential health benefit (EHB) provided by an out-of-network ancillary provider in an in-network setting toward the enrollee’s out-of-pocket limit or provide a notice to the enrollee that additional costs may be incurred for an EHB, including balance billing charges, if applicable.

The Departments requested comment on the proposed notice disclaimers and whether any additional disclaimers would be necessary or beneficial to participants, beneficiaries, and enrollees in learning about their potential cost-sharing liability for covered items and services. For example, the Departments inquired whether the Departments should require a notice that explains that the cost-sharing information provided may not account for claims a participant, beneficiary, or enrollee has submitted that the plan or issuer has not yet processed. The Departments also considered whether to require plans and issuers to provide a participant, beneficiary, or enrollee information regarding non-covered items or services for which the individual requests cost-sharing information. For example, there could be a requirement that a plan or issuer provide a statement, as applicable, indicating that the item or service for which the participants, beneficiaries, and enrollees has requested cost-sharing information is not a covered benefit under the terms of the plan or coverage, and expenses charged for that item or service will not be reimbursed by the plan or coverage.

Several commenters agreed with the proposed disclosure notice requirements. Specifically, many commenters supported the disclosure that estimates may not reflect the amount ultimately charged to the participant, beneficiary, or enrollee. One commenter recommended the disclosure include examples of circumstances under which a participant’s, beneficiary’s, or enrollee’s actual cost-sharing liability may differ from the estimate provided by their plan or issuer (for example, comorbidities or unanticipated complications). The commenter stated that a more comprehensive explanation of how participant, beneficiary, or enrollee characteristics might affect charges for covered items and services would help them better understand their potential exposure to higher cost-sharing amounts. One commenter suggested that the notice include stronger wording to educate the plan participant about the strong likelihood of a surprise amount due that differs greatly from the estimate. One commenter recommended that the notice include information that DIR Fees charged to pharmacies inflate participants’, beneficiaries’, and enrollees’ cost sharing and that plans and issuers may claw back that inflated cost sharing from the pharmacy.

One commenter recommended that plans and issuers be required to disclose additional information to help participants, beneficiaries, and enrollees understand the appropriate point of contact for questions and complaints. This commenter recommended that the final rules require issuers to provide participants, beneficiaries, and enrollees with contact information for their state departments of insurance when covered by insurance that is primarily state-regulated. For group health plans that are not fully insured, the commenter recommended that the plan provide contact information for the appropriate federal regulator.

One commenter requested flexibility with disclaimer language regarding a notice provided in paper form to reflect that the estimate may not be reflective of services received or claims processing, or to direct the participant, beneficiary, or enrollee to call their plan or issuer or use the internet for more up-to-date information. Similarly, one commenter recommended that a timestamp be required for notices provided in paper form to account for potential price changes. Several commenters supported requiring plans and issuers to add to the notice a date on which the estimate will expire, while other commenters did not.

One commenter expressed concern regarding the statement in the preamble to the proposed rules that the required disclosure notice regarding balance-billing information “may be misleading or inaccurate for beneficiaries, participants, or enrollees enrolled in a plan or coverage in certain states,” given the multi-state nature of most employer-sponsored plans. Another commenter stated that state regulators should be able to direct issuers to include information in the disclosure that accurately describes the state’s balance billing laws, and that any notice provided to consumers in advance of receiving services should have information as to whether the participant, beneficiary, or enrollee is likely to be protected from liability under state or federal balance billing laws. The commenter further stated that some states already have state laws related to disclosure of costs to consumers and the final rules should be clear that this requirement does not preempt these state requirements. Two commenters urged the Departments to make clear that participants, beneficiaries, and enrollees are not protected from out-of-network provider and facility balance billing, except where balance billing would be barred by state law.

The final rules are not intended to preempt state laws regarding balance billing. In the final rules, the Departments have modified this requirement to clarify that the balance billing statement is only required if balance billing is permitted under state law. Plans and issuers have flexibility to use the model notice language or create their own notices with greater specificity regarding their state’s laws.

One commenter expressed concern that allowing plans to include a statement that the estimated cost-sharing liability is not a guarantee of coverage negates the intent of the proposed rules, given that consumers who receive a notice from their health plan regarding estimated out-of-pocket costs would naturally assume coverage of those services.

The Departments acknowledge this concern; however, there are many reasons estimated cost-sharing information may not be accurate when items and services are ultimately furnished. For example, it is possible for coverage to end (for example, due to non-payment of premiums) between the time an estimate is provided and an item or service is furnished. Additionally, an estimate may show the cost for an item or service as a treatment for a certain condition, but the item or service may not be covered for the condition that is ultimately diagnosed at the point of care. Therefore, the final rules adopt the provision as proposed.

Several commenters recommended that the Departments issue guidelines as to what is considered “plain language.” The commenters recommended that the Departments provide examples of typical disclosure language compared to its “plain language” equivalent. They further recommended that these examples be tested through various focus groups to ensure consumer comprehension.

The final rules define “plain language” to mean language written and presented in a manner calculated to be understood by the average participant, beneficiary, or enrollee.¹¹⁶ Determining whether this standard has been satisfied requires taking into account such factors as the level of comprehension and education of typical participants, beneficiaries, or enrollees in the plan or coverage and the complexity of the terms of the plan. Accounting for these factors would require limiting the use of technical jargon and long, complex sentences, so that the information provided will not have the effect of misleading, misinforming, or failing to inform participants, beneficiaries, or enrollees. The Departments are of the view that the final rules and this preamble provide sufficient detail regarding the meaning of plain language.

Some commenters recommended that plans and issuers should disclose whether they count copayment assistance and other third-party payments in the calculation of the beneficiary’s deductible and out-of-pocket maximum. The commenter noted that as more plans implement copay accumulators that do not count these payments, issuers should be required to disclose these policies to their beneficiaries.

The Departments are of the view that knowing whether these payments apply to accumulators is germane to price transparency and should be required in the final rules. To that end, the final rules adopt a fifth notice content requirement (codified at 26 CFR 54.9815-2715A2(b)(1)(vii)(D), 29 CFR 2590.715-2715A2(b)(1)(vii)(D), and 45 CFR 147.211(b)(1)(vii)(D)) that plans and issuers must provide a statement disclosing whether copayment assistance and other third-party payments are included in the calculation of the participant’s, beneficiary’s, or enrollee’s deductible and out-of-pocket maximum.

As discussed under the first content element, some items or services may not be subject to cost sharing if they are furnished as preventive items or services, while the same item or service could be subject to cost sharing if it is furnished for non-preventive purposes or provided by an out-of-network provider. Therefore, the final rules adopt an additional notice requirement (codified at 26 CFR 54.9815-2715A2(b)(1)(vii)(E), 29 CFR 2590.715-2715A2(b)(1)(vii)(E), and 45 CFR147.211(b)(1)(vii)(E)) stating that, for an item or service that is a recommended preventive service under section 2713 of the PHS Act where the plan or issuer cannot determine whether the request is for a preventive or non-preventive item or service, the plan or issuer must provide a statement that the item or service may not be subject to cost-sharing if it is billed as a preventive service.

One commenter recommended information be included to help participants, beneficiaries, and enrollees understand the appropriate point of contact for questions and complaints. This commenter recommended issuers provide consumers with contact information for the appropriate regulator—either the State Department of Insurance or the appropriate Federal office.

The Departments appreciate this recommendation, but are declining to finalize this additional requirement because the Departments are of the view that plans and issuers already have avenues in place to address participants’, beneficiaries’, and enrollees’ complaints.

Several commenters recommended that additional notice disclaimers be provided. One commenter suggested that the final rules require a statement that cost-sharing liability estimates may differ from actual costs, depending on changes after claims are processed. Another commenter recommended that the Departments develop model disclaimers stating that quoted amounts for drugs may be time-limited and subject to manufacturer pricing practices. Another commenter recommended the addition of consumer disclaimers indicating that “services subject to the cost estimate may be provided and billed by providers associated with multiple payer contracts which will result in multiple EOBs.” Another commenter recommended the Departments permit plans to require participants, beneficiaries, and enrollees to review and acknowledge a disclaimer prior to viewing or searching for any pricing information, which would help ensure that consumers understand that what they are receiving may not be an accurate estimate of their total out-of-pocket costs. Another commenter recommended that the presentation of the out-of-network information make clear that the issuer is unable to provide an estimate for the full cost of the service. The commenter suggested that this disclosure should be presented on the same screen as the maximum allowed amount and the participant, beneficiary, or enrollee’s cost liability because it may be unclear that the maximum allowed amount is not the total cost of care. Another commenter requested that the Departments add a requirement that plans or issuers provide participants, beneficiaries, or enrollees with meaningful and simple explanations regarding emergency care, including informing them of the prudent layperson standard.¹¹⁷ Another commenter that recommended plans and issuers be required to provide explanatory information about the operation of their plans, including glossaries of relevant terms and explanations of insurance plan features and health care services, including in-network and out-of-network costs, limited plan designs, deductibles, telehealth, and additional features in consumer-friendly language.

The Departments decline to adopt these commenters’ suggestions for additional notice disclaimers. The Departments are of the view that adopting these additional requirements would add to the burden imposed on plans and issuers without creating corresponding benefits for participants, beneficiaries, or enrollees that would outweigh the burden, and would be unhelpfully prescriptive regarding the information plans and issuers are required to convey to these individuals. Existing plan and issuer resources for this information, such as the uniform glossary required under the Summary of Benefits and Coverage (SBC) final regulation¹¹⁸ provide consumer-friendly language definitions of insurance terms. Additionally, in response to comment, the Departments are providing flexibility to plans and issuers to design their internet-based tools and disclosures so that they meet the needs of their participants, beneficiaries, and enrollees. However, the Departments encourage plans and issuers to provide additional information at their discretion, if appropriate. The final rules adopt these provisions as proposed, with one correction of a typographical error (“bill” rather than “billed”) in 26 CFR 54.9815-2715A2(b)(1)(vii)(A), 29 CFR 2590.715-2715A2(b)(1)(vii)(A), and 45 CFR 147.211(b)(1)(vii)(A) and a clarification that this statement element is only required if balance billing is permitted under state law, with paragraph (b)(1)(vii)(D) re-designated as paragraph (b)(1)(vii)(F), and with new paragraphs (b)(1)(vii)(D) and (E) added, as described earlier in this section of this preamble.

2. Required Methods for Disclosing Information to Participants, Beneficiaries, or Enrollees

Section 1311(e)(3)(C) of PPACA requires that cost-sharing information be made available through an internet website and other means for individuals without access to the internet. Therefore, in the proposed rules, the Departments proposed to require that group health plans and health insurance issuers disclose to participants, beneficiaries, or enrollees the cost-sharing information described earlier in this preamble in two ways: (1) through a self-service tool that meets certain standards and is available on an internet website, and (2) in paper form.

a. First Delivery Method: Internet-based self-service tool

Under the proposed rules, plans and issuers would be required to make available a self-service tool on an internet website for their participants, beneficiaries, or enrollees to use, without a subscription or other fee, to search for cost-sharing information for covered items and services. The tool would be required to allow users to search for cost-sharing information for a covered item or service provided by a specific in-network provider, or by all in-network providers. The tool also would be required to allow users to search for the out-of-network allowed amount for a covered item or service provided by out-of-network providers. The tool would be required to provide users real-time responses that are based on cost-sharing information that is accurate at the time of the request.

Many commenters supported the Departments’ proposal to require plans and issuers to make available personalized out-of-pocket cost information for all covered health care items and services through an internet-based self-service tool and urged the Departments to finalize this section of the regulation as proposed. Some commenters recommended the Departments identify a core set of functional requirements that must be included in all price transparency tools. Commenters suggested that these functional requirements should ensure all people enrolled in commercial products have access to the same baseline functionality, while providing enough flexibility for issuers to develop, and iterate on, innovative existing internet-based self-service tools. Examples of functional requirements include providing tailored information to participants, beneficiaries, or enrollees on their benefit summary (plan coverage, copayments, deductibles); being able to browse by service category (for example, medical specialty, procedures, drugs, imaging, labs) or diagnosis; or being able to select from an A-Z list of popular searches or episodes of care. One commenter recommended the following functional requirements: (1) provide individuals with their personal health plan details, a digital ID card, deductible and copay information, the ability to download and view claims, and information on provider network status and quality performance; (2) display cost and quality information in clear, user-friendly language to facilitate and inform health care decisions; (3) allow consumers to compare facilities and clinicians based on curated cost estimates, common quality measures, value metrics, and patient ratings; (4) offer personalized out-of-pocket cost estimates for episodes of care, services, and prescriptions, calculated using their specific health plan design before they receive care; (5) comply with all state and federal health care data privacy and security laws, including the Health Insurance Portability and Accountability Act (HIPAA) privacy and security rules and the Health Information Trust (HITRUST) Common Security Framework.

The Departments agree that the self-service tool requirements should ensure all people enrolled in group health plans and health insurance coverage have access to the same baseline functionality, while providing enough flexibility for plans and issuers to develop and iterate on innovative internet-based self-service tools. It is the Departments’ intent that the required elements be broad enough to avoid being overly prescriptive for plans and issuers. The Departments agree that certain additional content elements could be beneficial to participants, beneficiaries, and enrollees, including general benefit summary information and quality metrics. However, the primary initial goal of the self-service tool is to provide personalized out-of-pocket cost estimates for episodes of care, services, and prescriptions, and to provide transparency around the pricing elements that determine out-of-pocket costs. Therefore, the Departments are not inclined to require additional elements unrelated to this primary goal at this time. The Departments note that the intent of the final rules is to provide a minimum standard for the disclosure of pricing information to lay a foundation for transparency in coverage and the Departments may consider additional disclosure requirements to build upon the final rules in the future. To that end, the Departments are finalizing the required content elements for the self-service tool as described earlier in this preamble to the final rules. The final rules include a change regarding the search function related to out-of-network allowed amounts. Specifically, that element is modified to include the other metrics that a plan or issuer is permitted to use in place of out-of-network allowed amounts, as discussed earlier in this preamble in connection with the fourth content element that must be disclosed to participants, beneficiaries, and enrollees. Additionally, the Departments encourage plans and issuers to add additional elements to their tools according to the needs of the populations they serve.

In order for plans and issuers to provide accurate cost-sharing information, the Departments noted that the participant, beneficiary, or enrollee will have to input certain data elements into the tool. Therefore, under the proposed rules, plans and issuers would be required to make available a tool that allows users to search for cost-sharing information: (1) by billing code (for example, Current Procedural Terminology (CPT) Code 87804) or, (2) by a descriptive term (for example, “rapid flu test”), at the option of the user. The tool also would be required to allow users to input the name of a specific in-network provider in conjunction with a billing code or descriptive term, to produce cost-sharing information, and a cost-sharing liability estimate for a covered item or service provided by that in-network provider. Regarding a request for cost-sharing information for all in-network providers, under the proposed rules, if a plan or issuer utilizes a multi-tiered network, the tool would be required to produce the relevant cost-sharing information for the covered item or service for individual providers within each tier. In the proposed rules, the Departments explained that to the extent that cost-sharing information for a covered item or service under a plan or coverage varies based on factors other than the provider, the tool would also be required to allow users to input sufficient information for the plan or issuer to disclose meaningful cost-sharing information. For example, if the cost-sharing liability estimate for a prescription drug depends on the quantity and dosage of the drug, the tool would be required to allow the user to input a quantity and dosage for the drug for which he or she is seeking cost-sharing information. Similarly, to the extent that the cost-sharing liability estimate varies based on the facility at which an in-network provider furnishes a service (for example, at an outpatient facility versus in a hospital setting), the tool would be required to either permit a user to select a facility, or display in the results cost-sharing liability information for every in-network facility at which the in-network provider furnishes the specified item or service.

It remains the Departments’ understanding that a plan or issuer may require certain information, in addition to the identification of a covered item or service, before it can provide an out-of-network allowed amount for a covered item or service, and that plans and issuers may have different ways of establishing an allowed amount for covered items or services from an out-of-network provider (such as by zip code or state). Therefore, under the final rules, plans and issuers are required to allow users to search for the out-of-network allowed amount or other metric as discussed in the fourth content element, for a covered item or service provided by out-of-network providers, by inputting a billing code or descriptive term and the information that is necessary for the plan or issuer to produce the out-of-network allowed amount (such as the zip code for the location of the out-of-network provider).

To the extent a user’s search returns multiple results, the tool would be required to have functionalities that would allow users to refine and reorder results (also referred to as sort and filter functionalities) by geographic proximity of providers and the amount of estimated cost-sharing liability. The Departments solicited comment on whether the tool should be required to have additional refining and reordering functionality, including whether it would be helpful or feasible to refine and reorder by provider subspecialty (such as providers who specialize in pediatric psychiatry), or by the quality rating of the provider, if the plan or issuer has available data on provider quality.

Some commenters stated that it is unrealistic to expect consumers to know and understand CPT/Diagnosis Related Group (DRG)/International Classification of Disease-10 (ICD-10) codes and supported the inclusion of descriptive terms. One commenter stated that search capability by standard medical terms will be crucial, and that, to be successful, this type of search system will need to be broad and user-friendly, accommodating an extensive range of consumer inputs and terms. Another commenter recommended the tool also contain a layperson-friendly descriptor of the service to improve understanding. Other commenters lauded the requirement that issuers must use plain language when disclosing price information, which would ensure that patients can understand their expected costs without expert knowledge of insurance language and practices. Some commenters recommended that the Departments follow industry standards and use the CMS-approved National Correct Coding Initiative (CCI) for consumer searches, as well as for any information relating to standards for services that fall into bundled payment arrangements.

One commenter expressed concern that the conversion of thousands of CPT codes into plain English by thousands of health plans, carriers, and TPAs is inefficient, and will result in inconsistencies across the country. For example, there are multiple CPT codes for procedures in a hospital that differ in price depending upon severity, which is often unknown when a procedure is first recommended.

The Departments agree that it is essential for tools to support descriptive terms because consumers may not be familiar with specific procedure codes. The Departments acknowledge the challenge of converting CPT code descriptions to plain language but are of the view that the benefit to consumers outweighs the burden to plans and issuers. The Departments also acknowledge the potential value in requiring the use of CCI standards but are of the view that their use should be voluntary, not required, in order to avoid placing additional burdens on plans and issuers in the absence of clear benefits to consumers. As noted earlier in this preamble, the intent of the final rules is to provide foundational requirements and to allow plans and issuers maximum flexibility to build upon existing tools while providing consumers with reliable cost estimates. The Departments also highlight that the phased implementation of the final rules affords plans and issuers additional time to address administrative challenges. Accordingly, the final rules adopt this provision as proposed.

One commenter sought clarification that the tool is not required to support searches with multiple parameters at the same time (for example, by provider name and medical code at once). Another commenter suggested that the Departments allow that, as one permissible method, the tool may provide for geographic proximity based on a zip code entered by the participant, beneficiary, or enrollee to enable the consumer to choose whether to search based on the proximity to home or work or some other location.

The self-service tool must allow users to search for cost-sharing information for a covered item or service by inputting the name of a specific in-network provider in conjunction with a billing code or descriptive term, as well as other relevant factors like location of service, facility name, or dosage. For covered items and services provided by out-of-network providers, the tool should provide the out-of-network allowed amount, percentage of billed charges, or other rate that provides a reasonably accurate estimate of the amount a plan or issuer will pay by allowing consumers to input a billing code, descriptive code, or other relevant factor, such as location. In addition, the final rules adopt the requirement that the tool must allow the user to refine and reorder search results based on geographic proximity of in-network providers. The final rules require refining and reordering search results only for in-network providers, as the Departments are of the view that doing so for out-of-network providers would be too burdensome at this stage. The Departments expect that in order for beneficiaries, participants, and enrollees to search for out-of-network providers, they would have to input, at minimum, the billing code or name of an item or service and the geographical location of the provider. In addition, in order to align with revisions to the fourth content element allowing flexibility to provide another rate instead of the out-of-network allowed amount, the final rules have been revised to reflect that participants, beneficiaries, and enrollees can search for the out-of-network allowed amount, the percentage of billed charges, or other rate that provides a reasonably accurate estimate of the amount a plan or issuer will pay for a covered item or service provided by out-of-network providers. This “other rate” is also included in paragraph (b)(2)(i)(B)(2) of the final regulations for consistency.

Regarding refining and reordering features, one commenter suggested that the tools include an ability to display only in-network providers and an ability to filter or sort by provider quality if a quality metric is made available. Three commenters requested that requirements not limit plans to developing provider and service filters that only account for price and geographic proximity: they suggested that the tools should also have functionality filters based on sub-specialty and a measure of value. Another commenter requested that any additional functionality relating to refining and reordering search results be optional for plans and issuers at this time.

One commenter stated that, to enhance the accuracy of the tool and better account for fluctuations in cost-sharing amounts, the Departments should require that it be configured to allow users to self-select health characteristics (for example, chronic conditions, body mass index) in order to further personalize its outputs for consumers. The commenter recommended that payers be given flexibility to dictate the specific health characteristics to be included in their tools based on their participant, beneficiary, and enrollee populations, the types of products that they offer, and other elements that might cause cost-sharing estimates to fluctuate.

The Departments agree that plans and issuers should have flexibility to design tools that can maximize consumer utility and acknowledge that the suggested additions to search functionality could be beneficial to consumers. However, the Departments decline to require the adoption of these suggestions to preserve plans and issuers’ discretion regarding the most effective way to provide search results and to avoid being overly burdensome or prescriptive.

The Departments intend that plans and issuers create user-friendly internet-based self-service tools, but the proposed rules did not include a definition for “user-friendly” because there are a variety of ways a tool can be designed to be user-friendly. The Departments wish to preserve plan and issuer flexibility to create tools that are best for their participants, beneficiaries, or enrollees, including by soliciting user feedback and consumer testing in the development of their tools. However, it is the Departments’ view that a user-friendly tool would mean a tool that allows intended users to search for the cost-sharing information outlined in the final regulations efficiently and effectively, without unnecessary steps or effort. The Departments are of the view that plans and issuers can look to federal plain language guidelines, ERISA requirements for a Summary Plan Description’s method of presentation at 29 CFR 2520.102-2(a), and general industry standards for guidance when designing and developing their internet-based self-service tools.¹¹⁹

The Departments also received comments on whether the self-service tool should be made available through an internet website, through a mobile application, or both. The proposed rules provided that the self-service tool be made available on an internet website to be consistent with section 1311(e)(3)(C) of PPACA, which provides that “at a minimum,” cost-sharing information be made available through an “internet website.” However, the Departments sought feedback on whether this term should be interpreted to include other comparable methods of accessing internet-based content. The statute was enacted in 2010, when the primary mode of accessing internet-based content was through a personal computer. Since that time, ownership of mobile devices with internet access and use of internet-based mobile applications has become much more common. The Departments acknowledged that there may be technical differences between a website and other methods of viewing internet-based content, such as mobile applications. However, as stated in the proposed rules, the Departments also understand that technology evolves over time, and it is the Departments’ view that Congress did not intend to limit the ability to access information via alternative methods of viewing internet-based content that may be available now or in the future.

The Departments acknowledged that mobile applications may provide benefits beyond those of traditional websites. Due to the portability of mobile devices, a self-service tool that is made available through a mobile application might provide participants, beneficiaries, enrollees, and their health care providers greater opportunities to use the tool together at the point of care to evaluate treatment options based on price. The Departments further acknowledged that mobile applications, as a general matter, may offer greater privacy and security protections than an internet website, accessed either from a mobile device or a computer.¹²⁰ Accordingly, the Departments sought comment on whether the final rules should permit the proposed disclosure requirements to be satisfied with a self-service tool that is made available through a website or comparable means of accessing the internet, such as a mobile application, or whether multiple means, such as websites and mobile applications, should be required. The Departments also sought comment on the relative resources required for building an internet website versus an internet-based mobile application.

Some commenters recommended that the Departments finalize the proposed rules with the self-service tool requirement satisfied by being made available through a website or comparable means of accessing the internet. Others believed that plans and issuers should be free to determine whether to offer a mobile app, an internet website, or both. One commenter stated the resources necessary for building and supporting a mobile application are significantly greater than building a website and did not support a proposal to require multiple applications, while other commenters supported a mobile application to enable patients to make cost-effective decisions in the doctor’s office. Another commenter recommended both a mobile application and an internet-based platform with fully responsive internet-based design. Two commenters recommended that the requirements not preclude a plan, issuer, or TPA from developing other means of electronic delivery beyond internet disclosure.

The Departments have considered these comments and are of the view that requiring an internet website, as opposed to a comparable means of accessing the internet, such as a mobile application or both, ensures access to a broader set of consumers while limiting the burden on plans and issuers to produce both an internet site and a mobile application. Internet websites can be accessed on mobile devices and people without access to the internet or mobile devices can access tools through resources where internet access may be available, such as a local library. Conversely, if the tool were available only through a mobile device, people without a capable mobile device would not have access to the tool. The final rules, therefore, adopt the requirement that the self-service tool be provided via internet website; however, the Departments encourage plans and issuers to also provide a mobile application version in addition to an internet website.

b. Second Delivery Method: Paper form

Paragraph (e)(3)(C) of section 1311 of PPACA specifies that at a minimum, cost-sharing information be made available to an individual through an internet website and such other means for individuals without access to the internet. Therefore, the proposed rules included a proposal that group health plans and health insurance issuers would have to furnish, at the request of the participant, beneficiary, or enrollee, without a fee, all of the information required to be disclosed under paragraph (b)(1) of the proposed regulations, as outlined earlier in this preamble, in paper form. Further, the proposed rules included a proposal that a plan or issuer would be required to provide the information in accordance with the requirements under paragraph (b)(2)(i) of the proposed regulations and as described earlier in this preamble. That is, the plan or issuer would be required to allow an individual to request cost-sharing information for a discrete covered item or service by billing code or descriptive term, according to the participant’s, beneficiary’s, or enrollee’s request. Further, the plan or issuer would be required to provide cost-sharing information for a covered item or service in connection with an in-network provider or providers, or an out-of-network allowed amount for a covered item or service provided by an out-of-network provider, according to the participant’s, beneficiary’s, or enrollee’s request, permitting the individual to specify the information necessary for the plan or issuer to provide meaningful cost-sharing liability information (such as dosage for a prescription drug or zip code for an out-of-network allowed amount). To the extent the information the individual requests returns more than one result, the individual would also be permitted to request that the plan or issuer refine and reorder the information disclosed by geographic proximity and the amount of the cost-sharing liability estimates.

The Departments proposed that this information would be required to be mailed to a participant, beneficiary, or enrollee via the U.S. Postal Service or other delivery system no later than 2 business days after a participant’s, beneficiary’s, or enrollee’s request is received.

Two commenters supported the Departments’ proposal to allow individuals the ability to access their information through electronic means or via paper form, given that many Americans lack access to high-speed internet services. Some commenters opposed the requirement to deliver the cost-sharing information to participants in paper form due to administrative burden, while others recommend limiting the requirements. Several recommended the timeframe to respond be expanded, including a range of 5 days to 10 days. One commenter requested that the compliance time for producing paper copies of personalized information be consistent with current federal requirements for furnishing paper copies of the SBC, Summary Plan Description, or Consolidated Omnibus Budget Reconciliation Act (COBRA) notices. Other commenters expressed concern about volume, given that a participant, beneficiary, or enrollee could request cost estimates for all in-network providers of a given service, which could be tens of thousands of providers, resulting in thousands of pages of results. Some recommended a reasonable limit to the volume of information that would be provided in response to any single request for a covered item or service—for, example, no more than 20 or 25 providers per request.

Several commenters recommended that the Departments reconsider mandating paper responses “without a fee.” While these commenters did not support charging participants, beneficiaries, or enrollees for access to cost-sharing information in general, they asserted that it is unreasonable to expect health plans to provide what could easily be boxes worth of information in response to multiple requests per enrollee.

Nothing in the proposed rules would have prohibited a plan or issuer from providing participants, beneficiaries, or enrollees with the option to request disclosure of the information required under paragraph (b)(1) of the proposed regulations through other methods (such as, over the phone, through face-to-face encounters, by facsimile, or by email). The Departments requested comment on these proposed disclosure methods, including whether additional methods of providing information should be required, rather than permitted. The Departments were particularly interested in feedback on whether plans and issuers should be required to provide the information over the phone, or by email, at the request of a participant, beneficiary, or enrollee.

Several commenters requested alternatives to the paper disclosure, particularly a phone option. One commenter recommended the final rules require that plans or issuers set up a designated toll-free number that participants, beneficiaries, or enrollees can call to receive pricing information, in addition to offering that as an option on their main consumer information phone line. Two commenters urged the Departments to consider making the second form of disclosure one of the plan or issuer’s choice (that is, paper or phone service). Conversely, one commenter stated that the volume and complexity of information that a given request could produce would preclude providing this information over the phone or in-person. Another commenter recommended the alternative format to include telephone, in-person, or fax. One commenter recommended emailing digital versions of the paper requests to a participant’s, beneficiary’s, or enrollee’s inbox at the participant’s, beneficiary’s, or enrollee’s request, and another requested that if results were emailed, the same information should not also need to be provided via paper form.

The Departments acknowledge commenters’ concerns that the volume of paper requests could be unwieldy. To that end, the final rules adopt the requirement that cost-sharing information be provided in paper form, but a plan or issuer may limit any results for a paper request to 20 providers per request, as suggested by some commenters. The Departments are of the view that the commenters’ suggestion of limiting paper request to 20 providers per request is a reasonable approach to balancing the burdens on plans and issuers with the benefits of providing consumers with enough information to be able to compare cost and provider options. The final rules provide an additional flexibility that, to the extent participants, beneficiaries, or enrollees request disclosure by another means (for example, by phone or e-mail), plans and issuers may provide the disclosure through the means requested by the participant, beneficiary, or enrollee, provided the participant, beneficiary, or enrollee agrees that disclosure through such means is sufficient to satisfy the request and the request is fulfilled at least as rapidly as required for the paper method. The Departments further acknowledge that requiring plans and issuers to set up a designated toll-free number for pricing information could be beneficial to participants, beneficiaries, and enrollees, but are not requiring this step given the Departments’ view that its burden outweighs its benefit in light of the other available disclosure methods, including the flexibility to provide this information via the preferred disclosure method of the participant, beneficiary, or enrollee.

3. Special Rule to Prevent Unnecessary Duplication

a. Insured Group Health Plans

The proposed rules included a special rule to streamline the provision of the required disclosures and to avoid unnecessary duplication of the disclosures with respect to group health insurance coverage. The Departments are finalizing this special rule, which provides that, to the extent coverage under a plan consists of fully-insured group health insurance coverage, the plan satisfies the requirements of the final rules if the plan requires the issuer offering the coverage to provide the information pursuant to a written agreement between the plan and issuer. For example, if a plan and an issuer enter into a written agreement under which the issuer agrees to provide the information required under the final rules, and the issuer fails to provide full or timely information, then the issuer, but not the plan, has violated the transparency disclosure requirements.¹²¹

Many commenters requested that the Departments extend the special rule to self-insured group health plans that are administered by an administrative service organization or other TPA. These commenters stated that self-insured plan sponsors that contract in good faith with their TPAs to comply with the reporting requirements should be held harmless with respect to compliance obligations and liability under this regulation because in many instances a provider network is merely rented from a TPA, necessary information may not be held by the plan itself, and because liability could be contractually assigned to the TPA.

Section 2715A of the PHS Act provides the authority for the Departments to require this information from plans and issuers, but not TPAs. Therefore, it is ultimately the responsibility of the plan or issuer to provide the information required by the final rules. Nonetheless, the Departments note that nothing in the final rules prevents a self-insured plan from contracting with another party to provide the required disclosure, including, to the extent permitted under other federal or state law, entering into an agreement for the other party to indemnify the plan in the event the other party fails to make the full or timely disclosure required by the final rules. However, the plan must monitor the other party to ensure that the entity is providing the required disclosure. Moreover, the Departments are of the view that the special rules providing certain safe harbors for actions taken in good faith as further described later in this preamble provide adequate protections for self-insured plans. The final rules also include the addition of the phrase “insured group health plans” to clarify that this special rule applies to insured group plans.

b. Other contractual arrangements

The Departments also received requests for clarification about the responsibility of employer plan sponsors that offer benefits under a level-funded arrangement. In general, under a level-funded arrangement, a plan sponsor self-insures expected claims and purchases stop-loss insurance for claims that exceed a specified threshold. Group health plans that are offered through a level-funded arrangement are subject to the final rules. Just like self-insured plans that are not level-funded, nothing in the final rules prevents a level-funded plan from contracting with another party to provide the required disclosures, but the level-funded plan remains liable for compliance with the final rules, and must monitor the other party to ensure that the entity is providing the required disclosure.

In several of the comments that addressed the special rule to prevent unnecessary duplication, commenters requested that the Departments permit plans and issuers to fulfill pricing disclosure requirements for prescription drugs through a third-party tool, such as a PBM tool. The Departments agree that this approach is permissible under the final rules. The Departments recognize that self-insured plans may rely on written agreements with other parties, such as PBMs, to obtain the necessary data to comply with the disclosure requirements. A plan or health insurance issuer may satisfy the requirements for prescription drug items and services under paragraph (b) by entering into a written agreement under which another party (such as a PBM or other third-party) provides the information required by paragraph (b) related to prescription drugs in compliance with this section. Nonetheless, if a plan or issuer chooses to enter into such an agreement and the party with which it contracts fails to provide the information in compliance with the final rules, the plan or issuer may be held responsible for violating the transparency disclosure requirements of the final rules for the same reasons explained above in connection with self-insured plans entering into agreements with TPAs.

c. Application to account-based arrangements

Another commenter sought clarification about the responsibility of employer plan sponsors that offer the following types of coverage to employees: (1) individual coverage health reimbursement arrangements (HRAs); (2) qualified small employer HRAs (QSEHRAs); and (3) flexible spending arrangements (FSAs) that are not fully integrated with group major medical coverage, stating that these types of plans were not explicitly addressed in the exemptions and the anti-duplication provisions outlined in the proposed rules.

The final rules do not apply to account-based group health plans, such as HRAs, including individual coverage HRAs, or health FSAs. QSEHRAs are not group health plans and are, thus, not subject to the requirements of section 2715A of the PHS Act.¹²² Therefore, these types of arrangements are not required to comply with the final rules.

4. Privacy, Security, and Accessibility

The requirements for group health plans and health insurance issuers to provide cost-sharing liability estimates and related cost-sharing information will operate in tandem with existing state and federal laws governing the privacy, security, and accessibility of the information that will be disclosed under these disclosure requirements. For example, the Departments are aware that the content to be disclosed by plans and issuers may be subject to the privacy, security, and breach notification rules under HIPAA or similar state laws. Nothing in the final rules is intended to alter or otherwise affect plans’, issuers’, and other entities’ data privacy and security responsibilities under the HIPAA rules or other applicable state or federal laws.

The Departments also expect that plans and issuers will follow applicable state and federal laws regarding persons who may or must be allowed to access and receive the information that is required to be disclosed under the final rules. The final rules refer to such persons as “authorized representatives” and do not establish any new class of persons or entities who are authorized to access the information specified by the final rules.

One commenter expressed concerns about potential privacy violations related to implementation and compliance with the proposed measure. This commenter stated that all entities need to be made aware of their existing privacy and data-security responsibilities and that states and federal regulators need to be diligent about compliance and enforcement. This commenter further stated it is important to note that employers, TPAs, and carriers may incur increased costs related to complying with the proposed rules regarding potential data breaches, increased liability, and cyber-coverage costs that could impact plan premiums.

The Departments agree that it is important that entities subject to the final rules be aware of their privacy and data-security responsibilities. Accordingly, the Departments are finalizing, as proposed, a provision that reminds plans and issuers of their duty to comply with requirements under other applicable state or federal laws, including requirements governing the accessibility, privacy, or security of information, or those governing the ability of properly authorized representatives to access participant, beneficiary, or enrollee information held by plans and issuers.

The Departments further appreciate the concern that employers, TPAs, and issuers may incur cybersecurity costs related to providing an online tool that provides some access to participant, beneficiary, and enrollee protected health information (PHI). However, given the Departments’ understanding that as many as 94.4 percent of surveyed plans and issuers already maintain and operate an internet-based self-service tool,¹²³ the Departments anticipate any additional costs associated with cybersecurity will not be substantial.¹²⁴ The Departments have otherwise evaluated the burden of operating an internet-based self-service tool in section VI, later in this preamble.

One commenter expressed concern that certain requests for cost-sharing information could include items and services that may reveal particularly sensitive health information (for example, information related to substance abuse, mental health, or HIV). This commenter recommended the Departments provide carve-outs so that plans and issuers are not required to disclose such information through unsecured methods of communication (for example, email or phone). Alternatively, they recommended that the Departments provide more clarity or examples of when plans and issuers are not required to disclose certain information to comply with HIPAA and other federal and state privacy laws.

The Departments remind stakeholders that current privacy and security requirements applicable under HIPAA rules and other applicable federal requirements continue to apply under these rules. As noted earlier in this section of the preamble, the final rules are not intended to alter or otherwise affect plans’, issuers’, or other entities’ responsibilities under HIPAA or other applicable federal privacy laws. Furthermore, to the extent that state laws are more stringent regarding the disclosure of information subject to the final rules, plans and issuers are required to comply with the relevant state laws. The Departments acknowledge that there have been several recent security breaches affecting plans, issuers, and third-party vendors that may have compromised the PII and PHI of participants, beneficiaries, and enrollees. As acknowledged elsewhere in this preamble, privacy and security are important to the Departments and, while outside the scope of this rule, these are issues the Departments will continue to monitor. In light of existing risks and new risks that may arise as a result of increased innovation in the health care space, the Departments encourage plans and issuers to continue to educate their participants, beneficiaries, and enrollees about these risks and about ways to minimize or prevent unintended usage or sharing of their health data and encourage consumers to pay close attention to any new internet-based tools or applications they may choose to use.

C. Requirements for Public Disclosure of In-Network Rates, Historical Allowed Amount Data, and Prescription Drug Pricing Information for Covered Items and Services from In- and Out-of-Network Providers

As explained earlier in this preamble and in the proposed rules, the Departments proposed to exercise specific authority under section 1311(e)(3)(A)(vii) and (ix) of PPACA (as applied to group health plans and health insurance issuers in the individual and group markets through section 2715A of the PHS Act), which requires plans and issuers to publicly disclose information on cost-sharing and payments with respect to any out-of-network coverage and any other information the Secretary of HHS determines to be appropriate to enhance transparency in health coverage. Consistent with this authority, the Departments proposed for plans and issuers to make public negotiated rates with in-network providers and data outlining the different amounts a plan or issuer has paid for covered items or services, including prescription drugs, furnished by out-of-network providers. The Departments proposed to require plans and issuers to make this information available in machine-readable files that would include information regarding negotiated rates with in-network providers, allowed amounts for all covered items or services furnished by particular out-of-network providers, and other relevant information in accordance with specific method and format requirements. The Departments proposed to require plans and issuers to update this information on a monthly basis to ensure it remains accurate. The Departments are finalizing these policies and requirements with modifications to clarify the proposed requirements and underlying policies, and to respond to commenter suggestions and concerns.

The preamble to the proposed rules outlined several reasons why the public disclosure of negotiated rates and historical out-of-network allowed amounts is both appropriate and necessary for transparency in coverage. First, the Departments asserted that the public availability of negotiated rates and historical out-of-network allowed amounts would empower the nation’s 26.1 million uninsured consumers to make more informed health care decisions.¹²⁵ Uninsured consumers generally must pay a provider’s full charges for health care items and services. Though negotiated rates will not apply to the uninsured, it will offer a baseline when negotiating with providers. Pricing information is critical to their ability to evaluate their service options and control their health care spending. Uninsured consumers could also use publicly available pricing information to find which providers offer the lowest price, depending on the consumer’s personal needs and priorities. The Departments noted in the preamble to the proposed rules that provider lists of standard charges often do not reflect the true cost of particular items and services.¹²⁶ Again, although a provider’s negotiated rates with plans and issuers do not necessarily reflect the prices providers charge to uninsured patients, uninsured consumers could use this information to gain an understanding of the payment amounts a particular provider accepts for a service. Uninsured patients or participants, beneficiaries, or enrollees seeking care from an out-of-network provider also may use this data to negotiate a price prior to receiving an item or service or negotiate down a bill after receiving a service.¹²⁷

Second, the Departments stated in the proposed rules that information regarding negotiated rates and historical out-of-network allowed amounts is critical for any consumer, insured, or uninsured, who wishes to evaluate available options for group or individual market coverage. Specifically, negotiated rate information for different plans or coverage and their in-network providers is key to consumers’ ability to effectively shop for coverage that best meets their needs at prices they can afford, whether the consumer wishes to purchase new coverage or change existing coverage. Publicly-available negotiated rate data will assist all consumers in choosing the coverage that best meets their needs in terms of deductible requirements, coinsurance requirements, and out-of-pocket limits—all factors frequently determined by plan’s or issuer’s in-network rates, including negotiated rates, or out-of-network allowed amounts. This information, added to plan premium information and benefit design (for example coinsurance percentages), will give consumers an understanding of how affordable a particular coverage option will be.

In the preamble to the proposed rules, the Departments noted that publicly available historical allowed amount data for covered items and services provided by out-of-network providers would enable consumers who require specialized services to find the best coverage for their circumstances. For instance, plans and issuers often place limitations on benefits for specialized services, which causes many specialists to reject insurance; this can make it difficult, if not impossible, for consumers in need of certain services to find in-network providers in their area who are accepting new patients or who have sufficient availability or expertise to meet their needs. The Departments understand, for example, that many speech therapists and pathologists do not accept insurance because of the limitations plans and issuers place on coverage for their services, such as annual visit limits on speech therapy services. Accordingly, consumers who have a need for such specialized services may base their coverage choices primarily, if not solely, on a plan’s or issuer’s out-of-network benefits. Historical data outlining different amounts paid to out-of-network providers will enable consumers who rely on out-of-network providers to ascertain potential out-of-network benefits among different plans and issuers.

Third, the Departments stated in the preamble to the proposed rules that public disclosure of pricing information is necessary to enable consumers to use and understand price transparency data in a manner that will increase competition, potentially reduce disparities in health care prices, and potentially lower health care costs. One of the recognized impediments to increased competition for health care items and services is the widespread lack of knowledge many consumers have regarding health care pricing. In the preamble to the proposed rules, the Departments noted that many consumers do not fully comprehend the basics of health coverage, much less the more complex facets of the health care system that can affect an individual’s out-of-pocket cost for items and services, including: its specialized billing codes and payment processes; the various specialized terms used in plan and coverage contracts and related documents (such as copayment and coinsurance); and the various billing and payment structures plans and issuers use to compensate providers and assign cost-sharing liability to individuals (for example, bundled payment arrangements).¹²⁸ Pricing information is necessary to spur innovation that will help educate consumers on how to get the most value out of their plan or coverage. Making the required pricing information public could facilitate and incentivize the design, development, and offering of internet-based self-service tools and support services that are necessary to address the general inability of consumers to use or otherwise understand the available health care pricing information.

In developing the proposed rules, the Departments considered that, due to the complexity of the health care system and the data that drives plan and issuer payments for health care items and services, such raw data is likely to be difficult for the average consumer to understand and effectively use. As a result, the Departments determined that proposing to make public negotiated rates with in-network providers and historical payment data outlining out-of-network allowed amounts would be appropriate because it would encourage innovation that could ultimately help consumers understand and effectively use price transparency information.

The Departments stated that the proposed requirement to make pricing information publicly available could allow health care software application developers and other innovators to compile, consolidate, and present this information to consumers in a manner that allows consumers to consider price as a factor when making meaningful comparisons between different coverage options and providers.¹²⁹ For instance, third-party developers could develop mobile applications that operate as look-up tools and permit comparison of prices for specific services across plans. The tools could also allow consumers to access their medical records or other information about their health care utilization and create estimates based upon patient-specific information. Ultimately, the Departments are of the view that improved access and usability of this information has the potential to increase health insurance literacy, consumerism, and competition, resulting in more reasonable costs for health care items and services.

Fourth, in the proposed rules the Departments noted that, along with consumers, sponsors of self-insured and fully-insured group health plans are also disadvantaged by the lack of price transparency.¹³⁰ Absent action taken such as through the final rules, health care cost trends are expected to continue to outpace inflation, with employer-sponsored large group plans’ annual per employee costs expected to increase between 5.5 to 9.0 percent over the next decade.¹³¹ Without information related to what other plans or issuers are actually paying for particular items and services, employer plans currently lack the pricing information necessary to shop or effectively negotiate for the best coverage for their participants and beneficiaries. In the proposed rules, the Departments stated that public availability of pricing information is appropriate to empower plans to make meaningful comparisons between offers from issuers and evaluate the prices offered by providers who wish to be included in their pool of in-network providers. The Departments noted that the pricing information would also assist employer plans that contract with TPAs or issuers to provide a network of physicians. That information would provide valuable data an employer plan could use to assess the reasonableness of network access prices offered by TPAs and issuers by evaluating the specific price providers in a TPA’s or issuer’s network are accepting for their services.

Armed with transparency data, employers could also use their leverage to negotiate for lower prices for their participants and beneficiaries and, potentially, if enough employers take action, it could help lower health care prices.¹³² For instance, employers could employ network and benefit design tools to move participants and beneficiaries toward lower-priced providers and shift from less favorable provider contracting models (such as a discounted-charge contact, which can be vulnerable to list-price inflation) to more favorable, alternative value-based contracting models (such as reference-based pricing and bundled payment arrangements).¹³³ As stated elsewhere in this preamble, based on 2019 Census data, there are 183 million Americans enrolled in employer-sponsored health coverage through a household member’s employer at some point during the year.¹³⁴ Based on estimates of the United States population in 2019, this would mean that more than 56 percent of the nation’s insured population has employer-sponsored coverage. Therefore, the ability of employer plans to effectively negotiate pricing for coverage and services could be a boon to competition in the health care market.

Fifth, the Departments stated in the proposed rules that public disclosure of price transparency information is also appropriate because it could assist health care regulators in carrying out their duties to oversee issuers in their states, as well as in designing and maintaining sustainable health care programs. Regulators may be able to independently access, aggregate, and analyze the data to support oversight of plans and issuers. For example, because the machine-readable files must be updated regularly, regulators could use the pricing information to identify trends in rates of items and services over time or identify potentially collusive practices or substantial price variations within a geographic area that may be in need of additional monitoring or future regulatory action. It may also become possible for regulators to use the pricing information related to items and services to assist in better understanding and monitoring premium rate fluctuations and increases in their respective markets; further allowing them to assess whether the trend rates issuers use in their rate filings are reasonable in order to assess whether proposed rates should be approved. Because the in-network applicable rate data will be reasonably current, regulators may be able to address potential concerns more quickly than at present.

Local, state, and federal agencies responsible for implementing health care programs that rely on issuers to provide access to care would be privy to actual pricing information that could inform their price negotiations with issuers. Insights gained from research using the pricing information could support regulators in their oversight of plans and issuers and could also help identify new ideas for market reforms to enhance the performance and efficiency of health insurance markets.

The public availability of health care pricing information offers researchers the ability to better understand the impact of specific plan, issuer, and provider characteristics on negotiated rates and out-of-network payments, evaluate and supplement existing models and predictions, and formulate new policies and regulatory improvements to improve competition and lower health care spending. Researchers have already utilized localized and state-wide data to review trends in issuer market share, issuer location, and covered services and their corollary effects on consumer pricing and experience in the market.¹³⁵ They have also examined these similar effects on consumers by provider market shares, structures, and offered similar data. Expanding the availability of this data could allow for the expansion and validation of these and other models and hypotheses. With larger and more complete datasets, researchers could refine their policy and regulatory suggestions regarding payment and delivery models, including those that are most likely to mitigate upwards pricing pressure from issuer, provider, consumer, and geographic factors. The release of this data could also supplement ongoing efforts to help control health care costs.

The Departments acknowledge that these stakeholders, notably researchers, may have access to some pricing data through existing sources, such as the Health Care Cost Institute (HCCI) and databases established through state health care price transparency efforts. However, it is the Departments’ understanding that these health care pricing datasets are often costly to purchase, only contain older, historical data, and generally only include de-identified plan data for a limited number of plans and issuers who voluntarily participate in the data collection.¹³⁶

By contrast, the pricing information required through the final rules would generally be current data for all plans and issuers and will be available to the public free of charge. This data, where it is related to in-network coverage, can also be tied back to specific plans and issuers and the geographic regions in which they provide plans or coverage. With access to the pricing data required through the final rules, researchers may be able to design new studies that develop novel insights into the health insurance markets. Stakeholders, including employers, may be able to gain insights, inform oversight efforts, negotiate improved terms for items and services, or make improvements to insurance products, such as plans and issuers moving toward value-based plan designs or broadening or narrowing networks based on customer shopping habits. The pricing information could also support market innovation and improvements by plans and issuers. For example, researchers and industry experts could use pricing information to establish baseline data to assist in identifying, designing, and testing new or existing health care delivery and coverage models.

While all of these stakeholders stand to benefit from access to the pricing information required through the final rules, the Departments continue to be of the view that the ultimate beneficiaries of access to pricing information are consumers. Indeed, public access to health care pricing information could lead to more targeted oversight, better regulations, market reforms to ensure healthy competition, improved benefit designs, and more consumer-friendly price negotiations.

The Departments expressed the view that effective downward pressure on health care pricing cannot be fully achieved without public disclosure of pricing information. Standard economic theory holds that markets work best when there is price competition.¹³⁷ When consumers shop for services and items based on price, providers and suppliers typically compete to lower prices and improve quality.¹³⁸ Based on this understanding of standard economic principles and past experience, the Departments are persuaded that innovators and other entities in the health care market will be incentivized to innovate in the price transparency and health care consumerism space once access to pricing information that allows for meaningful evaluation of different options for delivering health care items or services, coverage options, and provider options becomes available.

1. Information Required to be Disclosed to the Public.

The Departments are finalizing requirements, under 26 CFR 54.9815-2715A3(b), 29 CFR 2590.715-2715A3(b), and 45 CFR 147.212(b), for plans and issuers to make public applicable rates, including negotiated rates, with in-network providers; data outlining the different billed charges and allowed amounts a plan or issuer has paid for covered items or services, including prescription drugs, furnished by out-of-network providers; and negotiated rates and historical net prices for prescription drugs furnished by in-network providers.¹³⁹ The Departments are of the view that public availability of in-network applicable rates, including negotiated rates, billed charges and historical out-of-network allowed amounts, and in-network negotiated rates and historical net prices for prescription drugs is appropriate and necessary to provide comprehensive effective transparency in coverage, which may, in turn, empower consumers to make informed decisions about their health care, spur competition in health care markets, and slow or potentially reverse the rising cost of health care items and services.

The vast majority of the commenters agreed with the Departments’ objectives of price transparency under the proposed rule. Many commenters offered general support (in whole or in part) of the proposed requirements for public disclosure of in-network negotiated rates and out-of-network allowed amounts. One commenter supported the public disclosure of out-of-network allowed amounts but expressed concerns about disclosure of in-network negotiated rates.

Disclosure of Pricing Information Generally

Some commenters who offered support stated that the requirements will help create more efficient and value-based health care systems by, for example, encouraging plans and issuers to adopt innovative benefit designs that push patients toward lower-cost care. Another commenter who offered support stated that requiring plans and issuers to share publicly the negotiated rates for in-network providers and allowed amounts for out-of-network providers has the potential to increase competition among issuers. One commenter stated that public disclosure of negotiated rates is needed to address the provider consolidation that is driving up health care costs and leading to more favorable reimbursements to large hospitals with bargaining power. Another commenter recommended the Departments reject arguments against transparency that payment data should be protected as proprietary, and adopt a presumption in favor of transparency.

The Departments received comments from state and local government regulators who were supportive of the rules generally and provided suggestions for improving the proposals. Regulators recognized that greater transparency holds promise in improving pricing of health care items and services in ways that improve consumer comprehension and policymakers’ ability to manage the health care system. One local government commenter supported the goal of price transparency, but voiced concern that the proposed rules might unintentionally drive up the cost of health care. Individual consumers who submitted comments offered general support and emphasized the importance of obtaining pricing information in advance of receiving health care for their personal health care decision-making. Some individual commenters noted that consumers seek the price of a product or service in every other sector prior to making a spending decision and should be able to do so when purchasing health care. Other individual commenters stated their support for policies that will help consumers choose whether to seek care from an in-network or out-of-network provider.

Many other commenters, comprised largely of health insurance issuers and health care providers, offered support for the objective of price transparency, but did not support the requirements for public disclosure of in-network provider rates and out-of-network allowed amounts, expressing particular concerns about the in-network provider rate disclosure requirements

Commenters stated that, as proposed, the disclosure of payer-specific negotiated rates could distort the markets, creating an unbalanced focus on costs at the expense of other factors influencing market dynamics, such as quality, efficiency, and effectiveness. Some commenters stated that negotiated rates reflect factors other than price such as experience, previous volumes/market power, anticipated growth, strategic initiatives, and select concessions.

The Departments do not agree that publication of negotiated rates for items and services will have negative distortive effects on health care markets. Rather, the Departments are of the view that the final rules will help to counteract the recognized price distortions that result from the unavailability of pricing information to health care consumers.¹⁴⁰ As discussed elsewhere in this preamble, the current unavailability of pricing information for health care items and services prohibits the health care markets from achieving a meaningful level of competition based on price because it ensures that health care consumers typically are not able to include price in their health care purchasing decisions. The Departments are of the view that making pricing information available could begin to ameliorate price distortions in health care by encouraging consumer decision-making that takes cost into account.

Another commenter stated that the release of negotiated rates would inappropriately result in the steering of consumers to particular providers based on contractual prices. The commenter stated that informed decision-making is not solely based on price, but is multi-factorial, involving looking at a provider’s clinical expertise, ability to coordinate care, quality, effectiveness of utilization management, and guidance from a referring physician. The Departments agree that informed decision-making is not solely based upon price. The final rules are only one part of the solution to address issues contributing to the lack of competition in the health care market and resulting increases in health care costs. While the Departments address the problem of price transparency through this rulemaking, other government and industry stakeholders are working to address other issues highlighted by commenters, such as the availability of reliable quality data.

The Departments, in shaping the proposed and final rules, considered that there is quality data available to individual consumers and other consumers of health care like employers and government programs. Various government and industry stakeholders sponsor programs that aim to provide reliable health care quality information to health care purchasers. For instance, HHS engages in continual efforts to develop quality measures that are meaningful and accurately reflect hospital quality. CMS’s Hospital Inpatient Quality Reporting Program collects quality data from certain hospitals with the goal of driving quality improvement through measurement and transparency.¹⁴¹ CMS publicly displays this quality data to help consumers make more informed decisions about their health care.¹⁴² HHS’s Agency for Healthcare Research and Quality (AHRQ) publishes comparative information on health plans that include reports sponsored by federal and state agencies, private organizations, and purchasing coalitions.¹⁴³ The Departments appreciate comments received through the RFI in the proposed rule and are also evaluating future actions to help ensure quality information is more readily available.

The Departments are also of the view that it is worth noting that private sector entities have been working to provide useful quality information to consumers.¹⁴⁴ For example, the National Quality Forum (NQF) is a private standard-setting organization focused on the evaluation and endorsement of standardized performance measurements that makes available on its website all NQF work products, reports, and quality measures.¹⁴⁵ As another example, the Joint Commission is a not-for-profit organization that develops and applies standards that focus on patient safety and quality of care.¹⁴⁶ Finally, the National Committee for Quality Assurance (NCQA) measures and accredits health plans as well as the quality of medical providers and practices. For example, more than 191 million people are enrolled in health plans that report quality results using NCQA’s Healthcare Effectiveness Data and Information Set (HEDIS),¹⁴⁷ which includes more than 90 measures across six “domains of care,” including effectiveness of care, access/availability of care, and experience of care.¹⁴⁸

Once pricing data is available through the final rules, existing quality data can be considered with pricing data to produce a more complete and accurate picture of total value. The same third-party developers who will have access to the information published pursuant to these final rules could develop platforms capable of presenting available quality data alongside pricing information. The Departments, therefore, anticipate that making health care prices transparent may spur consumers to seek and consider available quality and price information to determine whether a particular item or service is worth a higher or lower price. There is evidence from retail sector studies showing that consumers want high-quality, low-priced goods and will seek the lower price among products of the same quality.¹⁴⁹ Given the high cost of health care, the Departments are of the view that the same trend toward seeking lower prices will more likely than not hold true in the health care market when prices become transparent.¹⁵⁰

The Departments received many comments stating that publishing negotiated rates is unlikely to meet the Departments’ goal of helping consumers understand their health coverage and reasonably predict their out-of-pocket costs. Many of these commenters stated that negotiated rates information would not provide consumers with meaningful, actionable pricing information, and could possibly make purchasing decisions more confusing and difficult for consumers. One commenter noted that the public disclosure of negotiated rate information could distract from relevant participant, beneficiary, or enrollee-specific cost-sharing information such as accumulated amounts. One commenter stated that confusing and unhelpful pricing information would erode consumer trust and present long-term challenges for the health care system.

The Departments disagree that public knowledge of the price of health care items and services will increase individual consumers’ confusion regarding health coverage or distract them from other information relevant to their out-of-pocket costs, such as the status of their accumulated amounts and note that commenters who raised this point cited no empirical or anecdotal evidence supporting these concerns. On the contrary, as explained throughout this preamble, the Departments are of the view that standard economic theory, experience from several states, and evidence from other markets demonstrate that increased transparency leads to better-informed purchasing decisions, generally lower prices, and quality improvements. Moreover, the Departments expect that third-party developers will compete to make pricing information available to the public in formats that are user-friendly, so disclosure of detailed pricing information is unlikely to lead to significant consumer confusion.

As noted earlier in this preamble, the Departments expect the public disclosure of pricing information related to health care items and services to help both uninsured and insured individuals in their health care and health coverage purchasing decisions. Furthermore, research suggests that having access to pricing information can increase consumers overall satisfaction and provide opportunities for education and engagement on health care pricing.¹⁵¹ For instance, when the Children’s Hospital of Philadelphia incorporated a Patient Cost Estimate Department, they found that cost estimates resulted in “fewer billing-related complaints, decreased revenue losses, and increased overall patient satisfaction.”¹⁵² A targeted study in the American Surgeon journal found five out of six medical centers that adopted price transparency reported increases in patient satisfaction and patient engagement after price transparency.¹⁵³

One commenter stated that public disclosure of pricing information through the machine-readable files is unlikely to benefit uninsured consumers, in particular, as it will be difficult for them to make the necessary comparisons or negotiate with providers as providers are not incentivized to negotiate with uninsured consumers. Another commenter stated that the machine-readable files would not be very helpful for current beneficiaries, participants, or enrollees, but acknowledged they could benefit uninsured individuals and enrollees considering alternative coverage.

By contrast, other commenters, including many individual commenters, stated that access to negotiated rate information would empower both insured and uninsured consumers by helping to correct the lack of consumer choice and information and help support efforts by other market actors. In particular, one commenter stated that consumers would likely use the pricing information, especially if their cost-sharing liability is in the form of coinsurance that is tied to the negotiated rates. One commenter stated that release of information on negotiated rates would help consumers by spurring innovation by third-party application developers to create tools to help consumers and payers, especially self-insured group health plans. Finally, one commenter did not support the requirements for public disclosure of in-network provider rates but did acknowledge that public disclosure of de-identified aggregated data for both in-network and out-of-network providers could empower consumer decision-making.

The Departments agree that transparency would help provide more consumer information and support consumer choice for both insured and uninsured consumers. The Departments continue to be of the view that market actors, including IT developers, researchers, industry experts, and plans and issuers would be incentivized to innovate in the price transparency and health care consumerism space once access to the pricing information required to be disclosed through the final rules becomes available. In the proposed rule, the Departments emphasized that individual consumers need easy to use tools and resources to help them better understand their current health care coverage, health coverage they consider purchasing, and their out-of-pocket exposure under those plans. Health care stakeholders and other industry participants, including web and mobile application developers, are already attempting to meet this need, despite the incomplete pricing information available to them. Given actionable data that can improve such tools and resources, industry actors will likely be incentivized to design innovations to deliver the help and information consumers need to make informed health care decisions based, at least in part, on the important factor of price. The final rules will support current and future efforts to help guide consumers to the lowest cost items and services that meet their specific needs and qualifications. To spur this innovation, the pricing information must allow for meaningful evaluation of different options for delivering health care items or services, coverage options, and provider options. One of the main avenues through which the Departments assumed this innovation would materialize is through IT developers who could be incentivized to design and make available internet-based tools and mobile applications that could guide consumers in accessing available price information; as well as researchers who would have the ability to analyze health care pricing at local and national levels and provide the public with their findings. Industry experts and plans and issuers would also have the ability to use pricing information to develop innovative plan benefit designs that could result increased competition and cost savings. Based on comments received from interested IT developers and other innovators, the Departments continue to believe many innovators are interested in utilizing this pricing information, once available, to spur innovation in the health care space, as intended. The Departments expect internet-based tools and mobile applications will increase the likelihood that both insured and uninsured consumers will be able to use the information to make informed health care purchasing decisions. And, as stated by a commenter, the information required to be made public through the proposed rules would help reduce wasteful spending because it would support efforts by employers, state regulators, and other purchases of health care to evaluate prices and identify unwarranted spending variation. Therefore, the Departments did not intend or expect that behavioral changes emanating from public disclosure of this information will be limited to consumers but will benefit a variety of stakeholders.

The goals the Departments seek to achieve through these requirements for public disclosure are not mutually exclusive. The Departments expressed a desire to bring about an outcome where innovators, including researchers, would enter or expand in the health care purchasing space to develop tools, applications, and public information that would support consumer decision-making. Thus, the Departments disagree with commenters who argued that public disclosure of negotiated rates would not support consumer decision-making.

The Departments disagree with commenters who suggested that pricing information presented through the public disclosures would be confusing and misleading to consumers and could erode consumer trust and present long-term challenges for the health care system. Based on the review of the over 25,000 comments received on the proposed rules, the vast majority of which were submitted by individuals, consumer trust in the health care system is already quite low, due in substantial part to the opacity of health care pricing.¹⁵⁴ In one study of a nationally representative sample, researchers found that participants often believed that providers and issuers set prices that do not reflect either the quality or the cost of goods and services, contributing to the study’s conclusion that most Americans do not perceive the price and quality of health care to be associated. Study participants described prices as both too high and irrational, noting that prices varied within their regions for unknown reasons.¹⁵⁵ The Departments’ transparency efforts are meant to increase transparency of health care pricing information. The Departments do not agree that this information would further frustrate consumers compared to the status quo, even if it is difficult to navigate for the average consumer without the use of internet-based tools or applications.

One commenter stated that disclosure of negotiated rates could harm the ability of health issuers to reward high performing providers with higher reimbursements. Additionally, some commenters noted that focus on price could particularly harm small health plans and TPAs who may have been able to negotiate discounted rates by offering health plans in a limited service area.

The Departments understand that requiring release of this pricing information may impact commercial arrangements and result in certain one-time and ongoing administrative costs, which could disproportionately affect small group plans, TPAs, and issuers offering coverage in the small group market. However, the Departments view making this information available to consumers and the public as beneficial to the public’s long-term interests in facilitating a consumer-oriented, information-driven, and more competitive market. In addition, as discussed below, the Departments are establishing several special rules for streamlining the provision of public disclosures required through the final rules. These special rules will help mitigate the concerns of small group plans and issuers by allowing them to leverage a contractual relationship through an issuer or clearinghouse to satisfy the public disclosure requirements of the final rules.

Several commenters submitted feedback on how disclosures in the proposed rules could affect contractual arrangements. One commenter expressed the view that the requirement to release negotiated rates threatens contracts negotiated between two private entities. Several commenters submitted comments related to gag clauses or non-disclosure agreements contained in provider contracts as well as other contract terms that are often included in contracts between providers and payers (such as anti-steering and anti-tiering provisions) that may limit the ability of third parties to use the data. Gag clauses, which also may be referred to as non-disclosure agreements, are terms that are often included in provider-payer contracts, which prohibit one or both parties from making public the negotiated rates therein.¹⁵⁶ Anti-steering and anti-tiering provisions are terms that may be included in provider-payer contracts (usually between issuers and hospital systems), which prohibit the plan or issuer from directing participants, beneficiaries, or enrollees toward higher-quality or lower-cost providers, and require that all providers associated with the contracting provider (for example, for a hospital system this could include hospitals, other affiliated facilities, and physicians) to be placed in the most favorable tier of providers.¹⁵⁷

One commenter stated that if the Departments do not fully address the implications of non-disclosure agreements in provider and payer contracts, legal complications could arise from payers attempting to meet the requirements to disclose negotiated rates and violating these agreements in the process. Another commenter strongly supported revisions to the proposed rules to address the barriers associated with gag clauses. To address this issue, another commenter recommended the Departments provide that the final rules supersede any provider contract gag clause to the extent the final rules conflict with current or future contractual language.

The Departments understand that this requirement may require alterations to some existing contracts. For example, payers and providers may need to remove contract terms that conflict with the requirement to disclose negotiated rates such as gag clauses or non-disclosure agreements.¹⁵⁸ It is not uncommon for new or modified regulatory requirements or new statutory provisions to alter private contractual arrangements such as those between a health insurance payer and health care provider. Because changes in law or statute that may need to be reflected in payer-provider contracts is not uncommon, the Departments expect that providers and payers have processes in place address to these requirements of the final rules. Often, the possibility that that new or modified regulatory requirements or new statutory provisions could alter such contracts is contemplated by the contracts themselves; for example, drafters may include contract language that indicates terms may be altered by changes in law or regulation. Such language would obviate the need for updates outsides of the regular contracting schedule.

As a general matter, the onus for ensuring a contract provision does not violate applicable law rests with the parties to the contract. Nothing in the final rules prevents providers and payers from implementing contract revisions to ensure terms are not in conflict with the requirements of the final rules. Because the Departments are of the view that prescription or prohibition of specific contract terms or language in payer-provider contracting is not necessary, the Departments leave it to plans, issuers, and providers to avoid contract terms that would prohibit or frustrate either party’s compliance with the final rules.

Many commenters who did not support the requirements for public disclosure of in-network provider rates and out-of-network allowed amounts requested that the Departments withdraw the proposed rules or otherwise work with stakeholders to develop policy solutions that meet consumer needs with less burden and guard against potential unintended consequences. Some commenters suggested the Departments collect more data about the potential impacts of public disclosure of negotiated rates to ensure the policy is modified, if needed, to protect against the risk of unintended consequences, noted earlier. One commenter suggested the Departments pilot the requirement for public disclosure of negotiated rates. Another commenter recommended the Departments pilot the release of negotiated rates in a state where there are a few small carriers to gain a clearer understanding of potential consequences of the public disclosure requirements. Another commenter recommended the Departments pilot full price transparency in several markets and conduct longitudinal studies on the impacts.

Some commenters suggested the Departments refocus transparency efforts to already existing solutions or different initiatives. Some commenters recommended that the final rules require plans and issuers to send claims data to the HCCI to ensure that health care cost data reaches the public domain through researchers without disclosing confidential information or distorting the market. A few commenters suggested the Departments leverage existing data sources such as all-payer claims databases to promote transparency goals. One commenter stated the Administration should support congressional and states’ efforts to pursue and expand upon transparency efforts, including through all-payer claims databases.

The Departments appreciate both private and public transparency efforts already underway. In the development of the proposed and final rules, the Departments sought feedback from industry and other stakeholders. While the Departments agree that expanding data sent to HCCI will help researchers gain a better understanding of market dynamics, the Departments are of the view that health care pricing data should be coupled with plan and issuer information. If the information were to be decoupled, as through HCCI or in an all-payer claims database, it would not provide the degree of transparency in prices needed to effectuate the objectives the Departments seek to achieve through the final rules. For example, pricing data, decoupled from plan and issuer data, would not provide actionable information to consumers that seek to evaluate health coverage options, as they would not be able to connect pricing to specific plans.

The Departments view the disclosure requirements set forth in the final rules as complementary to and supportive of state-level efforts. States act as incubators for transparency efforts. Nothing in the final rules precludes states from continuing to establish and run state-level transparency efforts. Indeed, the Departments intend for state regulators to be able to use the disclosures required to be made public through the machine-readable files to support their oversight of health insurance markets, including supporting their own state-level transparency efforts such as all-payer claims databases. However, the Departments are also aware that there are limits to the pricing information that states can obtain through state-level transparency efforts. For instance, states are not able to obtain pricing information from self-insured group health plans; the final rules will help states obtain this information.

The Departments further maintain that the final rules are significantly more likely to achieve positive results for consumers and health care markets than they are likely to result in the potential negative consequences outlined by certain commenters. The Departments are of the view that traditional market forces that affect prices in any market, including competition between providers; the threat of new market entrants that offer quality, lower cost services; and the increased bargaining power of consumers will be supported by the final rules. The Departments also are of the view that providers who choose to arbitrarily or unreasonably increase their prices based on publicly-available negotiated rate data are more likely to damage their own competitive positions and reputation than they are to cause widespread health care cost increases in their particular markets. For these reasons, the Departments remain confident that the final rules’ requirements for disclosure of negotiated rate information will benefit health care consumers by giving them information necessary to effectively shop for and choose the health care coverage and providers that fit their needs and budgets. As consumers make more informed choices, based on available price data, market forces will have a chance to operate and potentially correct the current course of unsustainable increases in health care costs.

In light of the Departments’ commitment to health care price transparency and the importance of addressing the distortive effects of the absence of pricing information, the Departments are not convinced there is a need to change the policies in the final rules to mitigate the risk of unintended consequences or violations of law such as price fixing and collusion among providers. As discussed elsewhere in this preamble, research, academic literature, and the experience of various state efforts have provided support for the Departments’ conclusion that the public availability of in-network rate information is substantially more likely than not to lead to more informed health care choices, increased competition, and lower prices.

The Departments note that price transparency is not a novel concept, even in health care pricing. Several states, including New Hampshire and Maine, have implemented state-level price transparency efforts. While the Departments acknowledge that these state efforts differ in material ways from the disclosure requirements of the final rules, the same underlying principle of price transparency that undergirds state efforts also undergirds the final rules. These state efforts provide evidence that transparency at a more localized geographic level does not result in the extreme unintended consequences postulated by some commenters. The Departments acknowledge that other national health policy initiatives are sometimes tested through pilots; however, the Departments are of the view that such an approach is not necessary for price transparency, in part, because there is already evidence through state initiatives that price transparency is achievable.

The proposed and final rules reflect the Departments’ conclusion that an expansive implementation of these requirements will be the most effective manner in which to reasonably ensure that the impact will be spread across all markets, rather than isolated to particular geographic areas, markets, or groups of consumers. The goal of the final rules is to expand access to price transparency information among the public, which will not be realized without an expansive implementation. The Departments are concerned that if pricing information for group health plans and insurance in the individual and group markets is not made available to the public or is made public in a piecemeal fashion, there will be little incentive for health care researchers, third-party application developers, or other industry actors to invest scarce resources into a tool that will only offer regional or otherwise limited pricing data. Other stakeholders, such as researchers and regulators, would also find incomplete pricing information less useful to their efforts to better understand, better oversee, and develop innovations in the health care markets. Finally, the Departments are concerned that limiting the implementation of this rule, by scope or by geographic market area, will limit the impact for the millions of consumers (both individuals and employers) who are expected to benefit from the public disclosures required through the final rules. Consumers located in a geographic market where data would not be made available under a more limited requirement would not experience any benefit from the availability of actionable pricing information in other markets. Even those consumers located in geographic markets where pricing information would be made available under a more limited requirement would likely experience more limited benefits than with a market-wide requirement to release pricing information because these consumers would likely not have access to tools developed by third-party application developers. These consumers would also be less likely to experience downstream benefits from contributions expected from other stakeholders, such as researchers and regulators.

In addition to establishing a preference for establishing market-wide rules, in the preamble to the proposed rules, the Departments explained the importance of timely action to increase transparency.¹⁵⁹ The Departments observed that continuously rising health care costs and increases in out-of-pocket liability, without transparent, meaningful information about health care pricing, have left consumers poorly equipped to make cost-conscious decisions when purchasing health care items and services. In addition, consumers across all markets should come to expect and receive the same access to standardized pricing information and estimates. This broader applicability also has the greatest potential to reform health care markets. The Departments recognized the need for a faster and nimbler approach to addressing the pressing issue of rising health care prices. For these reasons, the Departments are of the view that a pilot approach in a specific geographic area or an otherwise phased-in approach for the requirement to publicly disclose negotiated rates through the machine-readable files would not be sufficient to meet the requirement for transparency in coverage.

Because the Departments have determined a need for an expansive implementation of transparency in coverage requirements, and for the reasons discussed at length in response to public comments, the final rules adopt the requirement to publicly disclose negotiated rates for all group health plans and individual and group market issuers, regardless of geographic market.

Scope of Pricing Information to be Made Publicly Available

Several commenters explicitly supported public disclosure of negotiated rates and out-of-network allowed amounts for all items and services. However, other commenters recommended the Departments limit the items and services to only the most common items and services or a narrow set of shoppable services in order to make the machine-readable files more meaningful to consumers. Another commenter did not support the negotiated rate disclosure proposals, but acknowledged that disclosure of rates for a subset of shoppable services would be manageable, could allow issuers to account for innovative payment arrangements, and could be used to gather empirical evidence on the impact of transparency on the health care markets.

The Departments understand that requiring plans and issuers to include all items and services in the machine-readable files could produce large data sets that could be cumbersome and may be costlier to maintain than a more limited file of shoppable services. However, the Departments are of the view that release of this information for all items and services, as proposed, is crucial for advancing the key objectives of the final rules to spur innovation, increase competition, and empower consumer activities in the health insurance markets. The Departments are of the view that limiting the data in the machine-readable files would undermine efforts to achieve these objectives. In particular, the Departments are concerned that if the requirement were to be modified to apply to only a shoppable subset of items and services, then third-party application developers may not be as interested in innovating in this area.

Furthermore, the Departments are of the view that efficiencies will be gained after initial development of these files. Although the initial implementation burden for some plans and issuers may be sizeable, future releases of data could be automated, greatly reducing the burden in subsequent years.

One commenter stated the type of data being required to be disclosed is prohibited from disclosure by CMS for laboratory services under section 1834A of the SSA, which requires CMS to keep confidential payer rates reported by applicable laboratories. The commenter stated section 1834A of the SSA should also apply to disclosure of similar information by health plans.

Section 1834A of the SSA is applicable to reporting of private sector payment rates for the limited purpose of establishing Medicare reimbursement rates for laboratory services. Section 1834A protects the confidentiality of information disclosed to HHS by a laboratory and prohibits the Secretary of HHS or a Medicare contractor from disclosing the information in a manner that identifies the particular payer or laboratory, identifies the prices charged, or identifies the payments made to any such laboratory notwithstanding any other provision of law. The confidentiality protections of the data required to be disclosed to HHS under section 1834A protects laboratories and payers from re-disclosure by HHS and Medicare contracts. These protections are not applicable to the public disclosures required under the final rules. First, the final rules require plans and issuers to publicly disclose in-network providers’ negotiated rates and out-of-network providers’ allowed amounts for all covered items and services. These disclosures must be made through machine-readable files posted in a public location on a plan or issuer’s website. HHS or contractors of HHS will have no active role in publicizing the information required to be public through the final rules. Second, the confidentiality requirements in section 1834A are applicable “notwithstanding any other provision of law.” The public disclosure requirements in the final rules are being finalized through an exercise of specific authority under section 1311(e)(3)(A)(vii) and (ix) of PPACA (as applied to plans and issuers in the individual and group markets through section 2715A of the PHS Act). Even if the public disclosures were to be subject to section 1834A of the SSA, the confidentiality provision of section 1834A would not be applicable because the public disclosure requirements established under the final rules are required by an exercise of authority under a separate provision of law. For these reasons, and because laboratory services fall within the scope of all covered items and services, the final rules clarify that disclosure by plans and issuers of pricing information for laboratory services is required under the final rules.

As discussed earlier in this preamble, the Departments are modifying the proposed requirements relating to inclusion of all items and services in the internet-based self-service tool. For the internet-based self-service tool, 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211 adopt a phased-in approach under which plans and issuers are required to include only include a subset of items and services during the initial year of implementation. However, plans and issuers will still eventually be required to include all covered items and services in their internet-based self-service tools in order to meet the requirements of the final rules. The Departments are of the view that a similar phased-in approach for the machine-readable files is not necessary and would not support the achievement of the goals of the final rules.

For these reasons, the final rules adopt, as proposed, the requirement to include all covered items and services, including prescription drugs, in the public disclosures required to be made through the machine-readable files.

One commenter made the point that in order to provide meaningful transparency to consumers, as well as to address the issues of inconsistent pricing among hospitals in particular, the Departments should require public disclosure of data related to pricing in addition to the negotiated rate. The commenter stated the data elements should include the following: number of procedures performed by the provider in the reported period, number of bed days, total billed charges in the reporting period, total amount received/paid for services in the reporting period, mean billed charged amount, mean accepted amount, median billed charged amount, mean accepted amount, median billed charged amount, median accepted payment, minimum billed charged amount, maximum billed charged amount, minimum accepted payment, and maximum accepted payment.

A goal of the final rules is to provide transparency for all covered health care items and services. To this end, the final rules’ public disclosures are tailored to require only certain critical pricing information that the Departments view as most likely to achieve this goal, while minimizing the burdens for plans and issuers of producing and maintaining the information. Requiring additional data elements, such as those listed by the commenter, would introduce an increased level of complexity to the machine-readable files and increase the burden of making the public disclosures.

Additionally, the Departments are of the view that it would be unnecessarily burdensome to isolate hospital pricing information for additional disclosure when hospitals already have separate price transparency disclosure obligations. As discussed elsewhere in this preamble, the Hospital Price Transparency final rule requires hospitals to make public their standard charges for items or services they provide.¹⁶⁰ The Hospital Price Transparency final rule requires disclosure of five types of standard charges:

The Departments are of the view that the public disclosure requirements for hospitals under the Hospital Price Transparency final rule, in combination with the public disclosure requirements of the final rules, will address the concern raised by one commenter regarding inconsistent pricing among hospitals. The disclosure required for hospitals under the Hospital Price Transparency final rule will help provide local and more specific pricing information through the availability of information on five types of standard charges, but the information will only be made publicly available for the items and services that hospitals provide. The final rules supplement this information by providing information related to negotiated rates or derived amounts and allowed amounts for all covered items and services. Thus, the final rules will provide a window into pricing for all items and services, while the Hospital Price Transparency final rule requires disclosure of more specific pricing information for the items and services provided by hospitals. Finally, the final rules also supplement the Hospital Price Transparency final rule because the final rules make the information for all contracted network hospitals available from one plan or issuer in a single, centralized file. Therefore, the final rules permit consumers—especially when using third-party web-based tools—to more readily compare hospital rates within and across plans and issuers.

Several commenters expressed concerns about participant, beneficiary, and enrollee privacy related to the proposed disclosures of negotiated rates and allowed amounts. Some commenters expressed concerns about how third-party developers or other downstream entities would use and protect participant, beneficiary, and enrollee data. They noted that even though the Departments’ disclosure requirements do not include PHI, patients could be enticed to share personal data with third-party developers and other secondary entities who could potentially use the information to re-identify consumers. Some commenters stated that parties not subject to HIPAA could seek to commercialize consumers’ information. One commenter suggested the Departments look to HCCI as an example of how de-identified data can advance the goals of transparency, which could mitigate concerns about proprietary information while maintaining meaningful, granular information that illuminates price variation in the health care system.

One commenter stated that the Departments should consider the proposed rules in the context of other HHS rules related to the interoperability of data and delay the implementation of all such rules until HHS develops consumer privacy and protection requirements for third-party applications developed by non-HIPAA-covered entities. Another commenter recommended that, if the rules are finalized without additional privacy protections, the Departments should conduct an educational campaign to inform consumers of the consequences of providing information to third-party application developers. A commenter also expressed national security concerns regarding the machine-readable files, noting that the health status of Americans is a valuable commodity for foreign intelligence services.

The Departments acknowledge commenters’ concerns about third-party application developers and other entities gaining access to personally identifiable information (PII) and PHI through consumer use of online applications. The Departments further acknowledge comments that consumers may not always fully understand how their information, including sensitive medical information, will be used or stored by such third parties. However, the Departments also acknowledge that consumers have a right to access, use, and share their own health information, both generally and under HIPAA. The Departments are also of the view that there is ample evidence that consumers require help to understand their health coverage, their out-of-pocket costs for health care items and services, and how their health care choices affect the overall costs of their health coverage and health care items and services.¹⁶¹ The final rules will allow access to data, supplementary resources, and other assistance consumers need to make informed choices by fostering innovation and offering access to tools that consumers may use to make informed health care choices.

The Departments likewise considered evidence of significant consumer reliance on the internet for all kinds of information, but especially for health information. In a study conducted by the Pew Internet & American Life Project and published in July 2003, researchers found that 80 percent of internet users, or about 93 million Americans, have searched for a health-related topic online, a 62 percent increase since 2001.¹⁶² Popular search topics included health insurance (25 percent); a particular doctor or hospital (21 percent); and alternative treatments (28 percent).¹⁶³ By 2013, the number of Americans searching for health information online had nearly doubled from 2003, to about 182 million people.¹⁶⁴ A 2018 study found a significant correlation between the use of online resources to obtain health information and the decisions consumers take concerning health care services.¹⁶⁵

The Departments are of the view that many American consumers have some experience with dealing with the disclosure of sensitive health information on the internet¹⁶⁶ and that consumer reliance on the internet for health care information will only increase despite inherent privacy risks. The Departments considered that websites and internet applications that collect consumer information provide information through privacy policies and terms of service that are available to users of how their information may be used and shared. Federal laws and enforcement mechanisms are in place to help protect consumers from unfair and deceptive practices, including deceptive data collection and the sale of data collected without adequate consumer notice.¹⁶⁷ Given existing measures to protect consumer privacy on the internet, the Departments are of the view that common internet privacy risks should not operate to deprive consumers of the information, tools, and support they need to make informed choices related to health care coverage, providers, items, and services.

Even though the Departments are not persuaded that privacy risks common to the use of internet applications outweigh the benefits of the disclosures under these the final rules or the general need for price transparency, ensuring the privacy and security of consumer PII and PHI is a top priority for the Departments. The Departments will work with plans and issuers to provide information they can use to educate participants, beneficiaries, and enrollees about sharing their health information with third party applications. This will include information on about the roles of federal agencies such as the Office for Civil Rights (OCR), the FTC, and ONC, which already focus on ensuring that consumer privacy rights and interests are appropriately protected. The Departments will encourage plans and issuers to share this information with their participants, beneficiaries, and enrollees who might elect to share health information with third-party applications.

In finalizing the rules, the Departments considered the large number of consumers who have decided to share personal information because they have determined that the benefits offered by an internet website or mobile application outweigh potential risks to their privacy. The Departments are of the view that consumers will be able to make similar determinations with regard to applications that make use of data to be disclosed through the machine-readable files required by the final rules.

As discussed earlier in the preamble to the final rules, the Departments also are not persuaded by the argument that the disclosures required under the final rules, or disclosures consumers may make to applications that leverage the data required, could introduce national security concerns. First, the information the Departments are requiring to be disclosed through the machine-readable files does not include PHI or PII. Additionally, as discussed in more detail later in this preamble, in an effort to ensure that the disclosures balance price transparency with the need to protect privacy, the Departments have modified the proposed rules to increase the minimum disclosure threshold from 10 to 20 unique payment amounts, where any historical payment amounts connected to less than 20 claims for payment would be omitted from the machine-readable file containing out-of-network allowed amounts and historical billed charges (the Allowed Amount File). The increase will further limit the possibility that individual participants, beneficiaries, and enrollees may be identified through historical allowed amount data. Second, the information a consumer could share with applications incorporating data required to be disclosed through the final rules is not significantly different from data consumers already actively share through similar applications. Therefore, the Departments are not convinced there are unique national security concerns flowing from the disclosures required by the final rules.

One commenter was concerned about allowing third parties to use plan and issuer information to provide cost and pricing information to consumers without those third parties being obligated to provide accurate and relevant information to consumers. The accuracy of third-party internet-based tools and applications will be important to achieving the goals of transparency in coverage. However, the cost and pricing information included in third-party internet-based tools, and tools developed by other secondary entities, would only be as accurate as the public disclosures made by plans and issuers. Therefore, the Departments are of the view that it is in the best interest of plans and issuers to ensure data accuracy through a robust quality assurance process if they have concerns about the accuracy of cost and pricing information being provided to consumers through third-party internet-based tools. Furthermore, nothing in the final rules prohibits plans and issuers from including comprehensive data dictionaries and other supplementary documentation along with the machine-readable files. Plans and issuers are also free to provide plan-specific disclaimers or clarifications regarding the information they are required to produce. Finally, the Departments expect that consumers, plans, issuers, and other health care stakeholders will monitor third-party internet-based tools for accuracy and will and report concerns to the developer, the public, and appropriate state and federal agencies, including the Departments, for evaluation and potential action.

The Departments further expect that market forces will act to weed out applications that do not provide reliable information. Consumers who use a third-party application or other online tools for health care decision support and later conclude that the tool misled or misinformed them will, at minimum, cease use of the tool. Such consumers are also likely to rate the application poorly or leave unfavorable reviews, reducing the likelihood that other consumers who see the rating or review will rely on the tool. Over time, consumers and other stakeholders may collectively identify the most accurate and highest quality tools, while reducing use of less accurate, unreliable tools. The Departments also expect that third-party tools will inform users of limitations on the accuracy of their information and will present relevant disclaimers informing consumers that any estimates of out-of-pocket liability are not guarantees regarding consumer liability for services. Tool users also will have the opportunity to evaluate and could attempt to confirm any cost estimates provided by online tools by contacting the plan, issuer, or health care provider they ultimately choose based on information provided by the tool. Such measures will address the risk that consumers will be led to unreasonably rely on any cost estimate provided by a third-party tool to their financial detriment.

The Departments are of the view that it is in plans’, issuers’, and developers’ best interests to provide accurate information. However, the Departments will monitor the accuracy of the information provided through third-party developers and secondary entities and will take information obtained through this monitoring into account for future regulatory action or guidance, as appropriate.

One commenter recommended that any information made available to the public should provide an explanation of why the cost of care is variable among hospitals. The commenter further suggested the explanation reference unique challenges faced by essential hospitals that care for a larger proportion of vulnerable patients.

Being mindful of the goal to provide sufficient technical flexibility in the formatting of the machine-readable files, the Departments decline to require plans and issuers to include specific supplementary information beyond reporting the data specified for the machine-readable file formats. As noted above, nothing in the final rules prevents a plan or issuer from providing supplementary materials, including footnotes, disclaimers, data dictionaries, and other explanatory language, as accompaniments with the machine-readable files. The Departments are of the view that any additional context around the machine-readable files that can be provided through supplementary materials are likely to be a benefit to consumers and others who seek to understand and use the data contained in the machine-readable files. The Departments recommend plans and issuers work closely with providers, consumers, developers, community leaders, and other stakeholders to ensure that all perspectives are taken into account when developing materials supplemental to the machine-readable files. While declining to require plans and issuers to include a specific explanation for why the cost of care could vary among hospitals, the Departments acknowledge that this information is an example of appropriate explanatory language that could accompany the machine-readable files.

The final rules adopt, with modifications, the requirements that plans and issuers publicly disclose applicable in-network rates (including negotiated rates, derived amounts, and underlying fee schedule rates), out-of-network allowed amounts for covered items and services, including prescription drugs, through machine-readable files. The final rules also adopt the requirement that plans and issuers publicly disclose in-network historical net prices for covered prescription drugs through a machine-readable file. In recognition of the unique pricing attributes of prescription drugs, the final rules require the reporting of information on prescription drugs that would have been included in the In-network Rate File (referred to as the Negotiated Rate File in the proposed rules) in a separate machine-readable file, as described later in this preamble. The Departments continue to be of the view that the release of this information is appropriate and necessary to empower consumers to make informed decisions about their health care, spur competition in health care markets, and to slow or potentially reverse the rising cost of health care items and services.

The Departments stated the intention in the proposed rules to make available non-substantive technical implementation guidance through the collaborative GitHub platform (an online hosting platform for development and source code management that permits version control), which will facilitate further technical assistance in addressing how unique plan designs can comply with the requirements of the final rules, as needed. The Departments received comments that supported the Departments’ development of specific technical standards for the files to which plans and issuers must adhere. One commenter recommended the Departments provide guidance to plan sponsors who are able to provide some, but not all, of the file data elements. Another commenter stated that the proposed rules do not make clear how to report items and services provided through capitated and bundled payment arrangements in the files; noting that this information is necessary for consumers to measure provider value. One commenter supported the Departments’ statement that it would provide technical implementation guidance for the files but requested a robust public comment solicitation far in advance of the applicability date for the rules.

The Departments are of the view that providing specific technical direction in separate technical implementation guidance, rather than in the final rules, will better enable the Departments to update the file technical requirements to keep pace with and respond to technological developments. The Departments note that the technical implementation guidance is intended to facilitate a collaborative effort between the Departments and plans and issuers in order for plans and issuers to meet the public disclosure requirements of the final rules, while providing flexibility to account for unique IT systems, and issuer and plan attributes. To the extent a plan’s or issuer’s unique attributes (such as use of an alternative contracting model) are not addressed sufficiently through the technical implementation guidance, the Departments intend to provide targeted technical assistance to help ensure all plans and issuers are able to meet the public disclosure requirements under the final rules. Therefore, the Departments are developing technical implementation guidance for plans and issuers, which will be available on GitHub, to assist them in developing the machine-readable files.

In the proposed rules, the Departments indicated that minimum requirements for standardized data elements would be necessary to ensure users would have access to accurate and useful pricing information. Without such baseline requirements, the negotiated rate and allowed amount data for out-of-network services made available by each group health plan and health insurance issuer could vary dramatically. This would further create a disincentive to health care innovators developing tools and resources to enable consumers to accurately and meaningfully use, understand, and compare pricing information for covered items and services across providers, plans, and issuers. Accordingly, under the proposed rules, a plan or issuer would be required to publish two machine-readable files. The first file would include information regarding rates negotiated with in-network providers. The second file would include historical data showing allowed amounts for covered items and services furnished by out-of-network providers. The preamble to the proposed rules referred to these files as the Negotiated Rate File and the Allowed Amount File, respectively. For the final rules, the file referred to as the Negotiated Rate File in the proposed rules has been renamed the In-network Rate File to reflect modifications made in the final rules to ensure the file accommodates plans and issuers operating under payment models other than the fee-for-service (FFS) model. The final rules adopt the requirement to produce both the In-network Rate File and Allowed Amount File with the modifications discussed elsewhere in this preamble. As previously discussed, the final rules also adopt the requirement to produce an additional file, referred to in this preamble as the Prescription Drug File through which plans and issuers are required to publicly disclose negotiated rates and historical net prices connected to prescription drugs.

As noted, the final rules modify the In-network Rate File requirements to clarify the expectations for reporting negotiated rates (or comparable derived amounts, which are explained in detail later in this section) for plans and issuers using alternative reimbursement models. The final rules also clarify that plans and issuers must include an underlying fee schedule rate when one is used to determine cost-sharing liability, where that amount differs from the negotiated rate (or comparable derived amount) used to determine provider reimbursement.

The final rules modify the Allowed Amount File to clarify that it must also include information related to billed charges in addition to allowed amounts. The final rules also finalize additional requirements for the In-network Rate File, Allowed Amount File, and Prescription Drug File to require plans and issuers to include a Place of Service Code and a provider tax identification number (TIN) in addition to the provider NPI. These modifications are discussed in more detail later in this section of this preamble.

Specific Content Elements

In the proposed rule, the Departments indicated that the Negotiated Rate File and the Allowed Amount File would be required to include content elements discussed in this section of this preamble. In the final rules, these content elements continue to apply to the In-network Rate File and the Allowed Amount File, as well as to the Prescription Drug File, except where otherwise indicated.

a. First Content Element: Name and Identifier for Each Coverage Option

The first content element that plans and issuers will be required to include in the machine-readable files is the name and identifier for each coverage option offered by a group health plan or health insurance issuer. For the identifier, the Departments proposed that plans and issuers use their Employer Identification Number (EIN) or Health Insurance Oversight System (HIOS) IDs, as applicable. The Departments sought comment on whether EINs and HIOS IDs are the appropriate identifiers for this purpose. The Departments also sought comment on whether there are other plan or issuer identifiers that should be considered and adopted.

The Departments did not receive any comments on this content element, and the final rules adopt this provision with modifications to ensure clarity of the expectations for reporting. As reflected in the updated regulatory text, the Departments are clarifying whether an EIN or HIOS ID is applicable for this element. Plans and issuers must include their HIOS ID at the 14-digit product level unless the plan or issuer does not have a HIOS ID at the plan or product level, in which case the plan or issuer must use the HIOS ID at the 5-digit issuer level. If a plan or issuer does not have a HIOS ID, it must use its EIN.

b. Second Content Element: Billing Codes

The second content element that plans and issuers will be required to include in the machine-readable files is any billing code consistent with the definition of billing code provided in the final rules, including:

The Departments proposed to require that plans and issuers associate each negotiated rate or out-of-network allowed amount with a CPT, HCPCS code, DRG, NDC, or other common payer identifier, as applicable, because plans, issuers, and providers uniformly understand these codes and commonly use them for billing and paying claims (including for both individual items and services and items and services provided under a bundled payment arrangement). The Departments also proposed that plans and issuers must include plain language descriptions for each billing code. In the case of items and services that are associated with common billing codes (such as the HCPCS codes), the Departments specified that the plan or issuer could use the codes’ associated short text description.

In order to ensure that the machine-readable files provide meaningful information to consumers, as well as other stakeholders, the final rules adopt this content element as proposed, with the following modifications. For clarity, the regulation text is amended to remove language that merely restated the definition for the term “billing code” for each machine-readable file.¹⁶⁹ This modification has been made purely to streamline the regulatory language, and it does not substantively alter the requirement to include a billing code, except as otherwise noted in this preamble. Additionally, along with separating prescription drugs into a separate machine-readable file, the final rules include a modification that clarifies that, in the case of prescription drugs, plans and issuers may only use the NDC as the billing code type because, as discussed later in this preamble, the accuracy of pricing information for prescription drugs requires precise and specific product information, including package size and manufacturer, which can only be achieved through the use of the NDC billing code. However, the Departments recognize that prescription drug products may be included in the In-network Rate File to the extent a plan or issuer uses an alternative payment arrangement, such as a bundled payment arrangement that includes prescription drugs. Therefore the final rules clarify that the In-network Rate file must include the required information under paragraph (b)(1)(i) of the final rules for all covered items and services, except for prescription drugs that are subject to a fee-for-service reimbursement arrangement, which would be reported in the prescription drug machine-readable file pursuant to paragraph (b)(1)(iii) of the final rules.

The final rules require plans and issuers to include in the machine-readable files a billing code or other code used to identify covered items or services for purposes of claims adjudication, payment, and cost-sharing liability when making public the disclosure required under 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, and 45 CFR 147.212. The final rules adopt the requirement that plans and issuers associate each amount required to be reported with a CPT, HCPCS, DRG, NDC, or other common payer code identifier, as applicable, because plans, issuers, and providers uniformly understand these codes and commonly use them for billing and paying claims (including for both individual items and services and for bundled payment arrangement). As provided by the definition of billing code in the final rules, the Departments intend to provide flexibility to plans and issuers to make the data available through the codes that they use for billing services. While the final rules do not require plans and issuers to use a specific billing code (for example, CPT codes) for making public the disclosures required through the final rules, definition of billing code states that it is the code used by the plan or issuer “for purposes of billing, adjudicating, and paying claims for a covered item or service.” Therefore, where a plan or issuer uses a CPT code to identify a covered item or service for purposes of billing, adjudicating, and paying claims for that covered item or service, then they would need to use the CPT code in order to make public the disclosure required through the final rules for that item or service.

One commenter recommended that the negotiated rates should be clearly stated in plain language that should be easy to understand rather than provided by billing codes through the machine-readable files. As an alternative, the Departments received some comments stating that the Departments should require hospitals and health insurance issuers to disclose all negotiated reimbursements by International Classification of Disease (ICD) code.

The preamble to the proposed rules identified several common billing codes, noting that the list provided was not exhaustive. Further, the Departments did not explicitly prohibit including ICD-10 codes on the file. The Departments note that nothing in the final rules would constrain plans or issuers from including ICD codes in the machine-readable files when these codes are used by the plan or issuer in a manner that meets the definition of a billing code in the final rules. In other words, where the plan or issuer uses an ICD code to identify health care items or services for the purpose of billing, adjudicating, and paying claims for a covered item or service, the plan or issuer may use the ICD code in the machine-readable files. As discussed earlier in this preamble, the Departments intend to issue technical implementation guidance; this guidance will include sample file schemas for the machine-readable files. To facilitate identification of the billing code type, there will be an indicator in the file schemas that will allow plans and issuers to specify the particular type of billing code entered for each data entry in the machine-readable files.

The Departments are aware that some covered items and services may not have a corresponding HCPCS, ICD, DRG, NDC or CPT code. The Departments clarify that plans and issuers are still required to include these covered items and services in their machine-readable files regardless of whether all corresponding data elements are available. When a covered item or service does not have a corresponding HCPCS, ICD, DRG, or CPT code associated with an item or service, a plan or issuer is permitted to choose its own indicator or other method to communicate to the public that there is no corresponding code. In the alternative, a plan or issuer is permitted to use the code to be defined by the Departments in technical implementation guidance issued along with the final rules that indicates that an item or service is not defined.

At this time, the Departments have concluded that the common data requirements adopted by the final rules, which include a requirement to include a plain language description for each billing code, provides consumers with sufficient information to meaningfully inform health care purchasing decisions.

Regarding information about prescription drug pricing, a commenter also suggested that, in lieu of NDC or HCPCS codes, a useful unit for reporting for drugs would be the RxNorm concept unique identifier (RxCUI).¹⁷⁰ The commenter suggested use of RxCUIs because it would minimize burden by reducing the list of entries (3,000 to 4,000 RxCUIs down from 100,000 active NDCs) and because existing prescription drug machine-readable file requirement for Medicare Part D (Part D) and QHPs use RxCUIs.

The Departments appreciate the commenter’s alternative suggestion for including prescription drug information in the machine-readable files. The Departments considered requiring prescription drug pricing information through an alternative identifier. The Departments understand that an RxCUI could minimize the burden on plans and issuers by reducing the number of codes required to be included in the Prescription Drug File. RxCUI is a drug naming system that is produced by the National Library of Medicine (NLM), and RxCUIs are unique identifiers, which can represent multiple NDCs for similar drug products with the same brand name, active ingredient, strength and dose form (for example, multiple package sizes and/or manufacturers can be represented by a single RxCUI). The NDC, in contrast, is a unique 10-digit or 11-digit 3-segment number, which provides a universal product identifier for drugs in the United States. The three segments of the NDC identify: the labeler (any firm that manufactures the drug); the product (specific strength, dosage form, and formulation of a drug); and the commercial package size and types. As noted above, multiple NDCs can be encompassed by one RxCUI, which is why there are many fewer RxCUI codes than NDCs. However, the accuracy of pricing information requires precise and specific product information, including package size and manufacturer. The Departments are concerned that permitting drug pricing information disclosures to be made through RxCUIs would potentially lead to inaccurate or misleading information being provided to the consumer. If drug pricing information is provided in the machine-readable files in the form of RxCUIs, then plans and issuers may not be able to provide the manufacturer negotiated rate, especially for those RxCUIs that include NDCs from several manufacturers.

Some commenters noted that, because RxCUI is used by the Part D program and in the QHP program, the Departments should also require RxCUI in the machine-readable file for consistency across programs. While the Departments acknowledge that RxCUI is used in some contexts in both the Part D and QHP programs, namely formulary development, these programs do not exclusively use RxCUI. Indeed, both the Part D and QHP programs use NDC in addition to RxCUI, and NDCs are more generally used when information is required to be submitted to CMS for payment programs. For example, the Part D program receives the NDC on claims submitted by Part D plan sponsors through Prescription Drug Events (PDEs) and issuers in the individual and small group market include NDCs on claims data submitted to issuers’ EDGE servers for HHS risk adjustment purposes. In short, other programs cited by commenters actually use NDCs for prescription drugs data submissions, particularly for payment that is similar to the pricing data required by the final rules. The Departments therefore conclude that requiring use of NDCs for the prescriptions drug pricing information included in the machine-readable files is consistent with the practices CMS follows in other programs. Therefore, as stated earlier, the Departments are requiring that the only allowable billing code for prescription drugs in the machine-readable files is the NDC. The Departments determined that the NDC should be the required billing code for the reasons stated above and because the NDC is a standard billing code required for prescription drug transactions.

c. Third Content Element: In-Network Applicable Amounts (Negotiated Rates, Amounts in Underlying Fee Schedules, and Derived Amounts); Out-of-Network Allowed Amounts; or Negotiated Rates and Historical Net Prices for Prescription Drugs

The third-content element in the machine-readable files depends on the type of file: in-network amounts for the In-network Rate File, allowed amounts and historical billed charges for the Allowed Amount File, or negotiated rates and historical net prices for the Prescription Drug File.

All Machine-Readable Files

The proposed rules specified that the specific pricing information within each file would have to be associated with a provider identifier, specifically the provider’s NPI. Some commenters suggested additional data elements to support accurately identifying the provider through the machine-readable files. One commenter recommended that the Departments include the Place of Service Code in the machine-readable files. The commenter explained that this data element would clarify prices when provider entities associated with the same NPI have multiple sites of service. Place of Service Codes are CMS-maintained two-digit codes that are placed on professional claims, including Medicare, Medicaid, and private insurance, to indicate the setting in which a service was provided.¹⁷¹ The Place of Service code set is required for use in the implementation guide adopted as the national standard for electronic transmission of professional health care claims under HIPAA.¹⁷²

The Departments have considered this comment and agree that, in addition to NPI, including a Place of Service Code is important where a provider could be using the same NPI for multiple places of service. For instance, the same procedure from the same provider NPI received at an ambulatory surgery center (Place of Service Code 24) could have a significantly different price if received at an on-campus outpatient hospital (Place of Service Code 22). The Departments are of the view that being able to identify the place of service would be beneficial to consumers seeking to rely on the machine-readable files or third-party applications developed using the information publicly disclosed through the machine-readable files, in order to make health care purchasing decisions. The Departments are also of the view that this data element will help provide valuable insights regarding market dynamics for researchers, employers, regulators, and other files users. Because the Place of Service Code is information that must be included on a professional medical claim, the Departments do not foresee any issue with plans and issuers including this data element in the machine-readable files in addition to the NPI. For these reasons, the Departments are finalizing a requirement to include the Place of Service Code in all three machine-readable files.

In addition to the NPI and the Place of Service Code, the Departments have also become aware, through independent research, that a provider’s TIN can be relevant to communication of accurate negotiated rates and allowed amounts information. It is the Departments’ understanding that negotiated rates for items and services are based on the unique combination of a provider (NPI), service or item location (Place of Service code), and the TIN under which the provider is furnishing the item or service. If the TIN is not required in the file, the Departments are concerned that plans and issuers could report multiple negotiated rates for the same NPI for the same item or service without context to identify the underlying source of the difference. For example, if a provider NPI has a relationship with two different entities that have negotiated rates and bills under both of these entities, the same item or service for that provider NPI could appear in the report with two different negotiated rates. Without the TIN, consumers of the file would not be able to discern the reason for the difference in the two distinct negotiated rates. With the TIN, consumers of the file could see that the provider is billing for the same services under two separate entities. Therefore, if this unique combination of NPI, Place of Service Code, and TIN is not required, the pricing information represented in the machine-readable files might not present a complete and accurate picture of the market or provide consumers with reliable data upon which to base health care purchasing decisions. The Departments are of the view that this information is crucial to ensure that consumers are ultimately receiving location-specific pricing information upon which they can rely to help make informed health care purchasing decisions. In order for the machine-readable files to provide meaningful and actionable information, the final rules adopt a modification to all three machine-readable files, to require plans and issuers to provide the provider TIN in the file in addition to provider NPI and the Place of Service Code.

The Departments have updated the technical implementation guidance and schemas for all three machine-readable files, so that location-specific pricing information can be provided in the machine-readable files. This guidance will also provide more details on how the Place of Service Code, TIN, and NPI should be reported in order to represent the information for which public disclosure is required through the machine-readable files. The Departments are aware that this modification to the machine-readable files will increase the complexity and size of the machine-readable files and have considered this additional burden in the Information Collection Requests (ICR) section of the of the final rules. The benefits of including the Place of Service Code and TIN outweigh the costs, as the Departments are of the view that location-specific pricing information is critical to the meaningfulness of these files for the public.

Another commenter noted that using NPIs to identify providers would make it difficult for consumers to use the machine-readable files because consumers do not usually have NPI information. The commenter stated that it would also be useful for consumers using the In-network Rate Files (including the uninsured and those shopping for alternative coverage) to have access to public information that lists the providers who participate in local plan and issuer networks.

The Departments agree that including provider names in the machine-readable files in addition to NPIs would help consumers and other stakeholders review and use the machine-readable files. However, the Departments have some concerns about requiring inclusion of provider names in the files. From a technical perspective, the Departments are concerned that inclusion of provider names, which do not have a consistent character length and can be quite long, will increase the size of the machine-readable files and, therefore, increase the burden of the files for plans and issuers. Additionally, provider names may include non-alphanumeric or other non-standard character encoding types that could interfere with the coding of the machine-readable files and cause defects. The Departments are concerned that the additional quality assurance procedures that plans and issuers would need to implement in order to address these issues could add even more burden with limited benefit.

In addition, because the Departments expect the greatest benefits of these machine-readable files will be through the innovative tools developed by third parties, the Departments are of the view that the lack of availability of provider names in the machine-readable files is not a significant concern. The Departments anticipate that third-party internet-based developers and other secondary entities will be able to link the NPIs in the machine-readable files to publicly available provider information. The Departments note that there are several internet-based NPI lookup tools available online, including CMS’s National Plan & Provider Enumeration System (NPPES) NPI registry.¹⁷³ Nothing in the final rules prevents a plan or issuer from linking to an NPI lookup tool or providing more information for consumers and other stakeholders on its website through supplementary materials supporting the machine-readable files.

For these reasons, the final rules do not require plans and issuers to include provider names in addition to NPI, TINs, and Place of Service Codes in the three machine-readable files.

In-Network Rate File

The Departments finalize with modifications the proposed requirement that group health plans and health insurance issuers publish as the third content element negotiated rates in a machine-readable file for all covered items and services—except that the Negotiated Rate File in the proposed rules has been re-named the In-network Rate File. With the exception of information relevant to prescription drug products that are included as part of an alternative payment arrangement (such as a bundled payment arrangement), the In-network Rate File will exclude information relevant to prescription drugs, as that information will be provided in the third machine-readable file. Based on comments and technical expertise within the agencies, the Departments have made modifications to clarify the expectations for reporting negotiated rates (or comparable derived amounts as explained elsewhere in this section) for plans and issuers using alternative reimbursement models for health care items and services. These modifications also clarify that plans and issuers must include an underlying fee schedule rate when one is used to determine cost-sharing liability, where that amount differs from the negotiated rate (or comparable derived amount) used to determine provider reimbursement. The Departments also finalize this change to reflect other modifications to the proposed rules meant to ensure the required In-network Rate File accommodates plans and issuers operating under payment models other than a standard fee-for-service (FFS) model.

In the proposed rules, the third content element was negotiated rates under a plan or coverage regarding each covered item or service, including prescription drugs furnished by in-network providers. To the extent a plan or issuer reimburses providers for an item or service based on a formula or reference based-pricing (such as a percentage of a Medicare reimbursement rate), the proposed rules would have required the plan or issuer to provide the calculated dollar amount of the negotiated rate for each provider.

In the proposed rules, the Departments expressed the understanding that some plans and issuers do not vary negotiated rates across in-network providers. For instance, some plans and issuers have a negotiated rate that applies to every provider in a certain network tier. In such a case, the Departments proposed to require the plan or issuer to provide the negotiated rate for a covered item or service separately for every provider that participates in that tier of the network. If the plan or issuer reimburses for certain items and services (for example, maternity care and childbirth) through a bundled payment arrangement, the Departments proposed to require the plan or issuer to identify the bundle of items and services by the relevant billing code.

The Departments also proposed to require plans and issuers to include the last date of the contract term for each provider-specific negotiated rate that applies to each item or service (including rates for both individual and bundled items and services).

Several commenters suggested modifications to the requirement for public disclosure of negotiated rates, which they claimed would help mitigate the risk of unintended consequences, such as anticompetitive practices and increased health care prices. Commenters suggested that the final rules require plans and issuers to disclose the median rate or lowest negotiated rate instead of negotiated rates. Other commenters also expressed the opinion that information presented as summary or aggregated data would be more helpful for consumers. One of these comments noted that this could be achieved through plans identifying a range of in-network rates for common services.

The Departments considered modifying the requirement to require plans and issuers to report the median negotiated rate, the lowest negotiated rate, or some other aggregated negotiated rate. The Departments noted in the proposed rules that consumers, researchers, and regulators gaining access to pricing information, including information on the variation in prices, could place downward pressure on health care prices and reduce overall health care spending, which is one of the goals of the final rules. The Departments are concerned that using an aggregated or otherwise summarized rate would not sufficiently address issues of pricing variation and could undermine other goals of price transparency efforts. A median or summarized rate would not be as reliable for insured or uninsured consumers to use when making health care purchasing decisions as it is individual prices upon which these consumers must rely to make health care purchasing decisions. Under standard economic theory, it is individual prices, and consumers’ responses to those prices, that drive market forces. If the public disclosures do not include specific individual prices for in-network items and services, consumers may not have actionable information upon which to rely to make specific decisions.¹⁷⁴ A median or summarized rate would not address the issue of price variation or dispersion, as it would mask the variation in a given geographic area.¹⁷⁵ Additionally, a median or summarized rate could mask the differences between plans and coverages in a manner incompatible with drawing comparisons between coverage options. Therefore, the Departments are of the view that release of alternative data points, such as aggregated negotiated rates, or other summarized forms of negotiated rates, would not sufficiently advance the price transparency efforts and could undermine the intended impacts of the In-network Rate File.

Commenters suggested the Departments limit the requirement for public disclosure of negotiated rate information in a way that protects plans and issuers from reverse engineering specific rates. For example, a commenter suggested the Departments limit the disclosure to plans and employer plan sponsors, while another commenter suggested that the final rules require plans and issuers to provide limited information to the public, such as statistical ranges, or rates distributions and require the provision of more detailed information to other stakeholders.

The Departments considered limiting these disclosures by stakeholder type such that the disclosure of the most detailed information to the widespread public would be more limited. The Departments’ determined that these limitations would conflict with the statute, which requires public disclosure, and the goals of the final rules. The Departments’ goal is to empower consumers through the disclosure of actionable pricing information through the In-network Rate Files, as translated into consumer-friendly tools by third-party application developers.

Some commenters expressed the view that public disclosure of rates by plans and issuers with alternative reimbursement models should be required and suggested the Departments work with stakeholders to establish requirements that are consistent with innovative payment models. One commenter stated that the Departments should not exclude from the negotiated file requirements plans with reimbursement arrangements different from FFS arrangements, such as plans with reimbursements based on a capitated amount or a value-based agreement. Some commenters noted that the release of negotiated rates places emphasis on FFS provider contracting and may hinder innovation in alternative payment contracting models, such as value-based contracting.

The Departments received some comments on how the Departments could require plans and issuers to report capitated and bundled payment arrangements through the In-network Rate File. One commenter noted that plans with a capitated arrangement should be able to assign a price to items and services based on an internal methodology. The commenter observed that plans with capitated payment arrangements must assign prices for purposes of submission of claims in support of the HHS risk adjustment program under 45 CFR 153.710(c). Some commenters, however, argued that implementing some aspects of the proposed rules would not be feasible, such as listing prices for quality-adjusted and risk-adjusted contracts, which can only be calculated after the fact.

By contrast, other commenters did not support a requirement for plans and issuers with alternative reimbursement arrangements to make public the disclosures required through the In-network Rate File. Commenters stated that releasing negotiated rate information for bundled or capitation arrangements would be a significant operational burden and could lead to inaccuracies and misinformed consumers. For example, several commenters noted that the entire suite of services that a consumer might need to look up for an episode of care is not known to patients or providers prior to the receipt of care. Another commenter noted that the information could be misleading to consumers because prices may not include the services provided by all providers that are involved in a patient’s hospital care such as surgeons and anesthesiologists.

The Departments agree that plans and issuers that use alternative reimbursement arrangements should still be subject to requirements to disclose rates through the In-network Rate File. Nowhere in the proposed rules did the Departments indicate that only plans and issuers that reimburse on a standard FFS model would be required to make public the disclosure of negotiated rates. As evidenced by the discussion of reporting of bundled payment arrangements and plans and issuers using alternative reimbursement models such as formula-based or reference-based pricing in the proposed rules, the Departments intended the disclosures required through the final rules to apply to all plans and issuers, regardless of reimbursement model. The Departments clarify that plans and issuers that reimburse providers on a basis that is different from a standard FFS model would still be required to make public the disclosures of in-network negotiated rates, out-of-network allowed amounts and prices for prescription drugs as required by the final rules.

Later in this preamble, the Departments have summarized the general reporting expectations for several alternative reimbursement models, including bundled payment arrangements and capitation arrangements (including sole capitation arrangements and partial capitation arrangements), reference-based pricing without a defined network, reference-based pricing with a defined network, and value-based purchasing. This summary is not meant to be exhaustive, as the Departments are aware that other alternative reimbursement or contracting models exist. However, before clarifying how these payment arrangements would work under the final rules, the Departments note modifications to the requirements for the pricing information that must be publicly disclosed through the In-network Rate File.

Some commenters stated that the proposed rules did not acknowledge that negotiated rates alone provide an inaccurate or incomplete picture of health care item and service pricing. In response, the Departments conducted additional research to understand how the final rules could require the appropriate level of detail in the In-network Rate File and provide a more complete and transparent picture of prices of health care items and services. In response to comments, and as a result of this additional research, the Departments are modifying the language describing the requirement for the pricing information that must be publicly disclosed through the file. Specifically, the Departments are clarifying that the In-network Rate File should include all applicable rates, even where not referred to as negotiated rates. As described in the final rules, this could include negotiated rates, an underlying fee schedule rate or, derived amounts, as applicable. These modifications are intended to clarify disclosure requirements for plans and issuers that use alternative reimbursement arrangements and to ensure that the rates upon which consumer cost-sharing liability is determined as well as negotiated rates are publicly disclosed through the In-network Rate File. The Departments are of the view that this approach is consistent with the goals of transparency as outlined in the proposed rules because it ensures that the In-network Rate File will be both meaningful for consumers and requires transparency in price disclosures that will promote increased competition in health care markets. Without this clarification, the In-network Rate File could have potentially excluded rates that are used to determine cost-sharing liability, which is essential information upon which consumers would need to rely to make health care purchasing decisions. Further, retaining as proposed the requirement to include the negotiated rates that plans and issuers use to determine provider reimbursement is crucial to price transparency efforts, which will help foster competition and lower prices. Public disclosure of negotiated rates and derived amounts will also support research and regulatory oversight. For example, this information will help researchers evaluate alternative payment models in relation to the traditional FFS payment model, which could help spur more innovation in health care markets. State regulators will also be able to gain further insight into the various payment models, which would support general oversight of plans and issuers using different payment models, and could support market reform efforts.

One commenter noted that plans and issuers that use capitated reimbursement arrangements may assign prices to items and services as a normal course of business. Thus, they should be able to disclose those prices as part of the In-network Rate File. The Departments agree. The final rules require a plan or issuer that does not have a negotiated rate to disclose a “derived amount,” which is defined as the price that a plan or issuer assigns an item or service for the purpose of internal accounting, reconciliation with providers, or for the purpose of submitting data in accordance with the requirements of 45 CFR 153.710(c).

45 CFR 153.710(c) sets forth a process through which capitated plans that do not generate individual enrollee claims in the normal course of business must submit data for the purpose of the HHS-operated risk adjustment program.¹⁷⁶ As stated in the preamble to the HHS Notice of Benefit and Payment Parameters for 2014 final rule, many capitated plans currently use some form of encounter data pricing methodology to derive claims’ prices, often by imputing an amount based upon the Medicare fee-for-service equivalent price or the usual, customary, and reasonable equivalent that would have been paid for the service in the applicable state market risk pool.¹⁷⁷ For the purposes of 45 CFR 153.710(c), an issuer offering a capitated plan is required to use its principal internal methodology for pricing those encounters for purposes of submitting risk adjustment data, such as the methodology in use for other State or Federal programs (for example, a methodology used for the Medicare Advantage market).¹⁷⁸ If an issuer, including an issuer of a capitated risk adjustment covered plan, has no such methodology, or has an incomplete methodology, it must supplement the methodology in a manner that yields derived claims that are reasonable in light of the specific market that the plan is serving. Given these requirements under 45 CFR 153.710(c), the Departments are of the view that most issuers offering capitated plans that do not process claims on an individual basis, and therefore do not have negotiated rates, will have a derived amount.

The Departments acknowledge that 45 CFR 153.710(c)does not apply to group health plans or all health insurance issuers subject to these rules and so they may not calculate derived amounts for this purpose. The final rules do not require plans or issuers to develop a new methodology for providing derived amounts if the plan or issuer does not have an existing methodology used in the normal course of business. Therefore, the final rules require plans and issuers that do not have a negotiated rate to provide a derived amount, to the extent these amounts are already calculated in the normal course of business. Where a plan or issuer does not have a derived amount calculated in the normal course of business, they are not required to provide a derived amount.

The Departments also note that under the final rules, where a plan or issuer includes in the In-network Rate File a comparable derived amount in lieu of the negotiated rate (for example, under a capitation arrangement where a specific negotiated rate is not available for a particular item or service), they will be required to add a notation to the machine-readable files indicating that the rate is subject to an alternative payment arrangement. The Departments are also aware that some plan and issuer contracting models use a mixture of approaches and note that plans and issuers should follow the general guidelines (to be provided by the Departments in the technical implementation guidance) based on how a particular covered item or service is reimbursed where a mixture of approaches is used in the same plan or coverage.

The final rules clarify that, where plans and issuers use negotiated rates or a comparable derived amount and an underlying fee schedule rate as defined in the final rules, they are required to report both the negotiated rate or comparable derived amount and the underlying fee schedule rate used for that item or service. Therefore, the Departments are also modifying the In-network Rate File to require public disclosure of an underlying fee schedule rate, when applicable. The Departments are aware that under some reimbursement models, one set of negotiated rates is used for provider reimbursement (or comparable derived amounts are used for internal accounting purposes) and another set of rates, referred to in the final rules as an underlying fee schedule rate, is used for determining consumer cost-sharing liability. The Departments view the modification to the In-network Rate File to require public disclosure of an underlying fee schedule rate important to ensuring the public disclosures required through the rules include transparency in the prices used by all plans and issuers in making determinations of consumer cost-sharing liability. The final rules define the underlying fee schedule rates as the rate for an item or service that a plan or issuer uses to determine a participant’s, beneficiary’s, or enrollee’s cost-sharing liability from a particular provider or providers, when that rate is different from the negotiated rate. For instance, under certain capitation payments which reimburse a provider a PMPM rate, the PMPM rate would be the negotiated rate. However, the plan or issuer would also have assigned a price for an item or service from that provider for the purpose determining cost-sharing liability; that amount is the underlying fee schedule rate. Therefore, in this example, in the In-network Rate File, the plan or issuer would be required to report the negotiated rate, which in this case is the PMPM rate, and the underlying fee schedule rate used to determine cost-sharing liability.

In the final rules, plans and issuers are required to disclose only those rates that are applicable to their particular reimbursement arrangement model. If a plan or issuer only uses one rate for determining both provider reimbursement and consumer cost-sharing liability, then only that rate would be applicable to the plan or issuer, and therefore required to be disclosed through the In-network Rate File. Where a plan or issuer uses an alternative reimbursement arrangement and does not have a negotiated rate, as defined in the final rules, the plan or issuer would be required to publicly disclose through the In-network Rate File the derived amount, to the extent the plan or issuer generates such an amount in the normal course of business. If a plan or issuer has a negotiated rate or a derived amount but does not also use that applicable rate to make determinations of consumer cost-sharing liability, then the plan or issuer would be required to publicly disclose both the negotiated rate or derived amount and the underlying fee schedule rate used to determine consumer cost-sharing liability.

The Departments note that, while a scenario where a plan or issuer uses both negotiated rates or a comparable derived amount and an underlying fee schedule rate in their operations is more likely to occur under an alternative reimbursement model, it is possible to have both a negotiated rate and an underlying fee schedule rate in an FFS reimbursement arrangement. Such a scenario is possible where a plan that uses a traditional negotiated rate to reimburse a provider for a particular covered item or service and bases participant, beneficiary, or enrollee cost-sharing liability upon a different rate for the same item or service.

Under bundled payment arrangements, plans and issuers may reimburse a provider for multiple services and items under a single billing code. Under these arrangements, plans and issuers should provide a negotiated rate (or comparable derived amount) for that single billing code and list the items and services, including prescription drugs, that are included in that bundle. If a negotiated rate (or comparable derived amount) exists for each item and service, including prescription drugs, within the bundle, the plan or issuer should include the negotiated rate for the total bundle and also include in the In-network Rate File the respective negotiated rates (or comparable derived amount) for all covered items or services included in the bundle.

It is the Departments’ understanding that, if the bundled payment arrangement exists to the exclusion of any reimbursement arrangement for the underlying services and items, payers and providers often continue to track, for purposes of informing renegotiation of the bundle, reimbursement at the level of the individual item or service using a derived amount. For the In-network Rate File, plans and issuers with this type of model are required to disclose the negotiated rate for the total bundle and the derived amounts for individual items or services in the bundled payment arrangement. If a derived amount for these purposes does not exist, then plans and issuers would not be required to report a derived amount. Where a plan or issuer uses a derived amount or reasonable estimate in lieu of the negotiated rate, they will be required to add a notation to the machine-readable files indicating that the rate is subject to an alternative payment arrangement.

The Departments acknowledge that there are many different types of capitation models. As stated in the example earlier, for capitation arrangements that reimburse a provider a capitated amount, such as a PMPM, or a similar direct primary care arrangement, the plan or issuer would report the negotiated rate, which in this case is the PMPM amount, and the underlying fee schedule, as applicable. Under certain other capitation models, the provider’s capitation amount may be weighted dependent upon certain characteristics of the participant, beneficiary, or enrollee, such as age, gender, or co-morbidities. Plans and issuers with this type of capitation arrangement should provide the base negotiated rate, which is the negotiated rate before adjustments have been made for certain participant, beneficiary, or enrollee characteristics. Plans and issuers using capitation arrangements should notate any entry that represents a capitated amount and list all items and services, including prescription drugs that are covered under a particular capitation amount in the In-network Rate File.

In some cases, a sole capitation arrangement exists, such as staff model HMOs under which services are provided by in-network salaried providers and there are neither negotiated rates nor an underlying fee schedule rate. In this case, plans and issuers are required to include a derived amount in the In-network Rate File. If an applicable rate (a negotiated rate, derived amount, or underlying fee schedule rate) does not exist for an item or service, then plans and issuers are not be required to report pricing information for that particular item or service.

The Departments are aware that some plans and issuers use a partial capitation model where the plan or issuer reimburses providers under a variable FFS amount in addition to a flat capitation amount. The Departments expect plans and issuers using a partial capitation model to make public the FFS negotiated rate as well as the capitation amount. Plan and issuers must also add a notation to the file indicating that a capitation arrangement (or a partially capitated arrangement) exists. For specific items and services where plans and issuers using this model do not have an FFS negotiated rate in addition to a capitation amount (that is, for items and services where they do follow a full capitation model), plans and issuers are required to follow the reporting requirements described for sole capitation arrangements.

Reference-based pricing without a defined network is an arrangement where payers reimburse providers based on a percentage (usually 120 percent to 200 percent) of the Medicare rate, but do not have contractual agreements with providers. The Departments expect there will be no In-network Rate File for this type of arrangement because the plan or issuer does not have in-network providers as defined in the final rules.

By contrast, under a reference-based pricing model with a defined network, payers have contractual agreements to reimburse providers based on a percentage of a different rate that is known or determinable by the parties (usually 120 percent to 200 percent of the Medicare rate), which is subject to change based upon adjustments that can be specific to the participant, beneficiary, or enrollee, such as age, gender, and severity of illness. To represent this type of arrangement, and other provider reimbursement models that are based upon participant, beneficiary, or enrollee-specific adjustments, the final rules clarify that plans and issuers are required to include for each item or service in the In-network Rate File, the base negotiated rate that applies before adjusting for participant, beneficiary, or enrollee -specific characteristics. The negotiated rate in the referenced-based pricing model must be represented as a dollar value that is the result of the calculation of the referenced amount and the applicable reference-based percentage. For example, a plan calculates provider reimbursement using a reference-based pricing model that sets reimbursement to Provider X at 120 percent of the Medicare rate for covered Item A. The reference-based percentage used to determine the base negotiated rate would be 120 percent. In the general course of business, the plan determines the Medicare rate for Item A using participant, beneficiary, or enrollee-specific characteristics, but, because there is no specific participant, beneficiary, or enrollee for purposes of populating the In-network Rate File, the plan or issuer must report the base negotiated rate that would apply prior to application of any participant, beneficiary, or enrollee-specific characteristics. In this example, the Medicare rate for Item A is $150, before applying adjusters for participant, beneficiary, or enrollee-specific characteristics. Therefore, the plan would report a negotiated rate for Item A when received from Provider X of $180 ($150 multiplied by 120 percent) and must include this rate in the In-network Rate File.

Finally, under a reimbursement arrangement that adjusts payments or reconciles provider payments after providing care, such as in many value-based purchasing models, the plan or issuer must also provide the base negotiated rate for the specific provider in the In-network File. For instance, in a value-based purchasing model, payers may adjust negotiated rates for a particular provider if the provider meets certain contractual goals, which may be related to quality, volume, and efficiency of care. The Departments clarify that quality or value dependent weighting factors or adjusters are not required to be included in the negotiated rate made public under the final rules.

As noted earlier in this preamble, nothing in the final rules prevents a plan or issuer from providing supplementary materials, including footnotes, disclaimers, data dictionaries, and other explanatory language, as accompaniments with the machine-readable files. For example, a plan or issuer may choose to provide clarifying information related to how the negotiated rate, if reported as a base negotiated rate, may change depending on quality or value-dependent weighting factors, or participant, beneficiary, or enrollee-specific factors such as the severity of illness, age, or gender. Because base rates unadjusted for participant, beneficiary, or enrollee-specific factors are required to be reported for reference-based pricing arrangements, the Departments note that it is a best practice to include a disclaimer noting that the rate could change subject to participant, beneficiary, or enrollee-specific characteristics.

Some commenters noted that simply listing the negotiated rates without context regarding overall cost would not help consumers make informed decisions. The commenter further noted that consumer decision-making could be harmed if relying on negotiated rate information without context regarding provider billing practices. Other commenters stated that non-negotiated billed charges would be useful as an additional category of pricing information for the public, especially for the uninsured and those seeking out-of-network care. Another commenter agreed that information on provider-billed charges is important for transparency, but this commenter suggested that providers, not issuers, would be the appropriate source of this information.

As discussed later in this preamble, the Departments are of the view that inclusion of billed charges in the In-network Rate File is unnecessary to achieve the goals of the final rules because in-network providers are not permitted to balance bill participants, beneficiaries, or enrollees as in-network providers have agreed to accept the negotiated rate as payment in full (less any participant, beneficiary, or enrollee cost-sharing liability) for the item or service. However, inclusion of billed charges in the Allowed Amount File will provide meaningful information when coupled with allowed amount information because it will allow consumers to estimate their potential balance billing liability when receiving items and services furnished by out-of-network providers if balance billing is allowed in their state. Therefore, inclusion of billed charges in the In-network Rate File would not provide additional value for consumers.

Moreover, the Departments are of the view that inclusion of the billed charge could be more misleading in the In-network Rate File because the billed charge is very rarely what the consumer or the payer ends up paying for a particular claim and may not have a clear relationship with the negotiated rate or underlying fee schedule. While the Departments agree that inclusion of billed charges in the In-network Rate File would provide another data point for developers in developing the tools, adding billed charges would also increase both the size and complexity of the In-network Rate File. Because it appears that inclusion of this data element could obscure other pricing information and would not increase transparency of actual prices paid by participants, beneficiaries, enrollees, or payers, the Departments decline to add a billed charge data element requirement to the In-network Rate File at this time.

As discussed earlier in this preamble, the final rules finalize a requirement for plans and issuers to associate the pricing information disclosed on each of the three machine-readable files with three data elements that identify the provider and the location where the service was provided: NPI, TIN, and Place of Service Code. For the In-network Rate File, the Departments proposed that the negotiated rate should be the rate that applies to each item or service that is associated with the last date of contract term for each provider NPI. The final rules modify this requirement to clarify that the applicable rates publicly disclosed in the In-network Rate File should be the rates that apply to each item or service that is associated with the last date of the contract term or the contract expiration date for each provider as identified by NPI, TIN, and Place of Service Code.

Allowed Amount File

For the Allowed Amount File, the third content element is historical out-of-network allowed amounts for covered items and services. The proposed rules would require plans and issuers to include in the Allowed Amount File each unique out-of-network allowed amount in connection with covered items or services furnished by a particular out-of-network provider during the 90-day time period that begins 180 days prior to the publication date of the Allowed Amount File. As with the In-network Rate File, where a plan or issuer reimburses providers for an item or service based on a formula or reference based-pricing (such as a percentage of a Medicare reimbursement rate), the plan or issuer would be required to provide the calculated dollar amount of the allowed amount for each provider. Allowed amounts would have to be associated with the provider’s NPI, TIN, and Place of Service code.

The Departments designed this reporting requirement to elicit payment data that reflects recent out-of-network allowed amounts in connection with claims for out-of-network covered services. The Departments assumed these amounts would provide payment data that is useful to consumers because it is reflective of the most recent reimbursements. Specifically, the Departments proposed to require reporting based on dates of service within 180 days of the Allowed Amount File publication date to ensure that data is composed of recent claims (rather than older claims from multiple time periods) and to avoid the reporting of payments from inconsistent periods of time. The Departments took the view that payment data from defined periods of time would enable users to make meaningful comparisons across plans and coverage options.

When disclosing an out-of-network allowed amount under this requirement, the Departments proposed to require a plan or issuer to disclose the actual amount the plan or issuer paid to the out-of-network provider, plus the participant’s, beneficiary’s, or enrollee’s share of the cost. For instance, if the out-of-network allowed amount for a covered service was $100, and the plan or issuer paid 80 percent of the out-of-network allowed amount ($80) per the terms of the plan or coverage, so that the participant, beneficiary, or enrollee was responsible for paying twenty percent of the out-of-network allowed amount ($20), the plan or issuer would report an out-of-network allowed amount of $100. This unique payment amount would be associated with the particular covered item or service (identified by billing code) and the particular out-of-network provider who furnished the item or service (identified by NPI, TIN, and Place of Service Code).

The Departments clarify that, in contrast to the In-network Rate File, no special considerations for reporting alternative payment arrangements are necessary for the Allowed Amount File because plans and issuers are required to disclose actual amounts paid in the Allowed Amount File and can therefore account for retrospective reconciliations and weighting factors that require special considerations. For the Allowed Amounts File, the Departments expect plans and issuers that reimburse in-network providers using alternative payment methodologies to adhere to the standard requirement of providing allowed amounts on historical claims paid to out-of-network providers for each covered item or service during the applicable reference period. Plans and issuers generally do not reimburse out-of-network providers, with whom they do not maintain a contractual relationship, under an alternative payment arrangement. However, to the extent a plan or issuer uses an alternative payment arrangement to reimburse out-of-network providers, the plan or issuer would still be required to report the allowed amount paid to the out-of-network provider. The Departments will address, through the technical implementation guidance, how a plan or issuer will be able to represent data in the Allowed Amount File, as necessary. The Departments anticipate that plans and issuers that reimburse providers using reference-based pricing without a network will have larger than average Allowed Amount Files, as all of the payments would be made to out-of-network providers and would therefore be subject to this requirement.

Some commenters supported disclosure of the “historical” payments made by plans and issuers to out-of-network providers. One commenter acknowledged that bulk de-identified data that informs a consumer of historical out-of-network allowed amounts may be relevant to consumer decision-making regarding a particular provider or procedure. One commenter pointed out that if the Departments failed to adopt this requirement in tandem with the In-network Rate File requirement, providers could withdraw from networks to avoid transparency requirements.

By contrast, other comments were less supportive of the Allowed Amount File proposal. Several commenters stated that publishing historical out-of-network allowed amounts would not meet the Departments’ purported goal of helping consumers understand costs and would possibly lead to consumer confusion. Commenters expressed concern that the Allowed Amount File could result in consumers receiving misleading information, which would lead to negative financial consequences for consumers because the file would not provide all information about potential out-of-network costs, such as those that could be incurred through balance billing, if allowed in their state. One commenter stated that inclusion of billed charges would allow the development of open source charge schedules. One commenter pointed out that the information in the machine-readable files would not address scenarios where a participant, beneficiary, or enrollee receives out-of-network care in an in-network facility. Still other commenters expressed concerns about the reliability of the data as historical allowed amounts with out-of-network providers may not provide an accurate portrait of future cost information because issuers do not have contracts with out-of-network providers. Similarly, another commenter stated that health plans should not be responsible for publishing rates for providers with whom they do not maintain a relationship.

One commenter recommended the Departments withdraw the proposal, making the argument that small health plans are unlikely to have a sufficient number of claims billed for any one procedure from a particular provider to make the file meaningful. In lieu of requiring the Allowed Amount File, another commenter suggested the Departments instead place the onus on out-of-network providers or suppliers to provide consumers with information about the costs of their services.

The Departments continue to be of the view that release of this information is appropriate and necessary to empower consumers to make informed decisions about their health care, spur competition in health care markets, and to slow or potentially reverse the rising cost of health care items and services. As noted earlier in this preamble and in the preamble to the proposed rules, limiting access to data to a subset of consumers would not promote the transparency goals of PPACA and the final rules, and would reduce the potential for the final rules to drive down health care costs by increasing competition. If the Departments were to eliminate the Allowed Amount File requirement or reduce its scope, it would significantly reduce the benefits of the final rules for uninsured consumers and insured consumers evaluating out-of-network treatment options.

The information in the Allowed Amount File, especially as filtered through innovative platforms and tools, will help consumers make more informed decisions regarding changes to their health coverage (for example, the purchase of new coverage or switching to a new plan). Furthermore, this information may help insured consumers make more informed health care decisions when seeking out-of-network treatment; and may help uninsured consumers make health care decisions and potentially allow them to negotiate more effectively with providers. Finally, the creation of Allowed Amount Files may help researchers and regulators monitor plan benefit design and help spur innovation.

While there is some potential for some consumers to be confused by the information in the Allowed Amount Files, the Departments do not agree that the files will provide misleading information to consumers. The Departments expect most consumers to access this information through tools created by third-party application developers and other stakeholders, which will be able to provide additional context for the average consumer.

The Departments proposed to require plans and issuers to report out-of-network allowed amounts for services furnished at least 90 days in the past to help ensure the availability of reasonable volumes of out-of-network allowed amount data in the Allowed Amount File. The Departments expressed the view that a 90-day lag between the end of a reporting period and the publication of required out-of-network allowed amount data will allow plans and issuers sufficient time to adjudicate and pay claims from out-of-network providers for the relevant reporting period. Claims processing times may vary between plans and issuers, and external factors may increase processing timelines. For example, the Departments noted in the proposed rules that many out-of-network providers do not send claims directly to plans and issuers but instead require participant, beneficiary, or enrollee to file out-of-network claims. This could mean that an out-of-network claim may not reach a plan or issuer for 6 to 12 months after a service is rendered. Such delays could negatively affect the volume of out-of-network allowed amount data and the ultimate usefulness of this data. For this reason, the Departments sought comment regarding whether requiring plans and issuers to report out-of-network allowed amounts for items and services furnished at least 90 days in the past is sufficient to ensure the proposed disclosures will yield sufficient volumes of historical data to be useful to consumers who wish to shop for services based on price. The Departments requested comment on whether there should be more time between the end of the reporting period and publication of the data, such as 120 days, 180 days, or longer, which would increase the likelihood that out-of-network claims from the relevant reporting period have been adjudicated and paid by the time of publication.

The Departments did not receive comments directly in response to this comment solicitation and are finalizing the Allowed Amount File historical lookback period as proposed. The final rules, therefore, adopt a requirement for the Allowed Amount Files to include data for the 90-day period beginning 180 days before the file publication date. For example, a file published on June 30, 2021, should include data for a 90-day period beginning on January 1, 2021. The Departments will monitor the implementation of this requirement for the Allowed Amount Files and may revisit the lookback period if the 90-day reporting period beginning 180 days before file publication fails to yield sufficient out-of-network data on allowed amounts.

The Departments specifically sought comment on whether the required disclosures of historical out-of-network allowed amounts would provide useful information that can assist consumers in locating services at an affordable cost, or whether there could be additional information that would be both useful to anticipated users and practical for plans and issuers to disclose for this purpose. For instance, the Departments stated in the preamble to the proposed rules that the Departments considered requiring plans and issuers to disclose amounts out-of-network providers have charged participants, beneficiaries, and enrollees for covered services in the Allowed Amount File. The Departments noted they understood that such charged amounts would be included in any claim for out-of-network benefits and could be helpful to consumers shopping for services based on price. The Departments sought comment on this data element.

As summarized earlier in this preamble regarding the In-network Rate File, some commenters who supported the inclusion of non-negotiated billed charges in the In-network Rate File also supported inclusion of billed charges in the Allowed Amount File. These commenters noted that billed charge information would be especially useful for the uninsured or those seeking out-of-network care. Another commenter agreed that information on provider-billed charges is important for transparency, but this commenter stated that providers, not issuers, would be the appropriate source for this information.

Regarding these comments, the Departments agree that that a billed charges data element is important to ensure that the public disclosures required through the out-of-network Allowed Amount File are as useful to consumers as possible, including in the scenario where an insured consumer receives items or services from an out-of-network provider. Although the Departments are aware that the amount an out-of-network provider will ultimately balance bill (if allowed in their state) a consumer for an item or service does not always equal the difference between the billed charge and the allowed amount, the Departments are of the view that this information would aid consumers in understanding their potential out-of-pocket liability. In the jurisdictions that do not prohibit or limit balance billing, information on billed charges could aide consumers in their health care decision-making as it is possible that consumers may choose to receive or forgo a particular item or service from a particular provider based on the additional out-of-pocket liability they could be expected to pay through a balance billing charge from a provider.

Consumers may be able to shop for a particular out-of-network provider based on total cost of an item or service. For example, in a state that allows providers to balance bill, a consumer has a coinsurance of 40 percent for Service X when Service X is furnished by an out-of-network provider. Out of network Provider A’s billed charge for Service X is $200, and the consumer’s plan allows an amount of $100 to be paid to the provider. Therefore, the consumer is responsible for a coinsurance amount of $40 ($100 allowed amount multiplied by the consumer’s 40 percent coinsurance) and the consumer may be balance billed an additional $100 ($200 billed charge minus the $100 allowed amount). In comparison, out-of-network Provider B’s billed charge for Service X is $120 and the consumer’s plan allows the same amount of $100 to be paid to the provider. If the consumer receives Service X from Provider B, they will be responsible for the same coinsurance amount of $40 ($100 allowed amount multiplied by the consumer’s 40 percent coinsurance). However, if the consumer receives Service X from Provider B, the consumer may only be balance billed $20 ($120 billed charge minus $100 allowed amount), which would be an $80 savings to the consumer compared with receiving the Service X from Provider A. Note that this example assumes that both Provider A and Provider B will balance bill consumers, which is not always true even in states that allow balance billing. Consumers should also contact providers to inquire whether they will balance bill before making health care purchasing decisions using this information. Therefore, with information on both allowed amounts and billed charges, the consumer may choose to receive Service X from Provider B because their total out-of-pocket costs will likely be lower.

The Departments note that it is possible that plans and issuers will populate the Allowed Amount File with multiple billed charges for the same item or service furnished by the same out-of-network provider. If this is the case, the billed charge in the Allowed Amount File will present an expected range and give consumers access to a reasonably accurate estimate of how much they can expect to be balance billed by an out-of-network provider, but the billed charge cannot provide to the consumer the exact amount they can expect to be balance billed when receiving items and services furnished by the out-of-network provider.

For these reasons, the Departments are of the view that inclusion of the billed charges in the Allowed Amounts File will help provide a more complete picture of the full amount a provider could receive for a particular item or service, either from plans and issuers or directly from a participant, beneficiary, or enrollee. Furthermore, the Departments are of the view that requiring this information is consistent with the goal of providing consumers an understanding of their potential out-of-pocket liability in advance, similar to an EOB provided in advance, as billed charges are included on a participant’s, beneficiary’s, or enrollee’s EOB and are often the first data available for understanding a participants, beneficiary’s, or enrollee’s out-of-pocket liability.

The Departments are aware that plans and issuers have information regarding providers’ billed charges, even if they do not necessarily have information regarding specific balance billing amounts. The Departments are therefore of the view that the inclusion of billed charges in the Allowed Amount File will not substantially increase the burdens of the final rules. Nonetheless, the Departments are aware that adding billed charges will also increase both the size and complexity of the Allowed Amounts File. The Departments do not intend to increase the burden of developing and maintaining these files unless the inclusion of the additional data element is essential for providing meaningful pricing information to consumers. Because it is the Departments’ view that this data element will increase transparency of actual prices paid by participants, beneficiaries, enrollees, and payers, the Departments are finalizing the Allowed Amounts File with the modification to add billed charges as an additional data point required to be disclosed through the file.

The final rules define billed charges as total charges for an item or service billed to a plan or issuer by a provider. Plans and issuers are required to publicly disclose billed charges associated with each unique allowed amount that would be required under the final rules. The final rules further clarify that plans and issuers must report each unique combination of allowed amounts and billed charges for each out-of-network provider, and their associated Place of Service Code, provider NPI, and provider TIN. For example, an out-of-network provider (under a single NPI, TIN, and Place of Service Code) submits 25 claims (or any other number of claims to meet the 20 unique claim threshold requirement discussed in more detail later in this preamble) to a plan or issuer for the service Y. The 25 claims have three¹⁷⁹ different billed charges ($100, $150 and $200) and two different allowed amounts ($50 and $150) for item Y. The plan or issuer should have one entry that represents each unique combination of billed charges and allowed amounts submitted by the out-of-network provider. Therefore, in this example, the Departments would expect the plan or issuer to represent in the Allowed Amounts File no fewer than three unique entries, and no more than six unique entries for item Y from this out-of-network provider. For example:

The Departments do not expect to see 25 different entries, unless they represented 25 distinct combinations of billed charges and associated allowed amounts from the out-out network provider for Item Y.

In the Allowed Amount File, the file structure is envisioned as a parent/child data relationship, where certain data elements are included under or belong to other data elements, as a child to a parent. In the Allowed Amount File, the billed charge data element would serve as a child to the parent allowed amount element. Therefore, under each unique allowed amount for a particular item or service from a particular provider, the amount of each provider-billed charge is listed as a unique dollar amount.

One commenter requested the Departments clarify what is meant by “allowed amounts for covered items or services furnished by particular out-of-network providers,” questioning whether through inclusion of the word “particular” the Departments intended to reference specialized out-of-network providers upon which plans and issuers might place coverage limitations. The Departments clarify that inclusion of the word “particular” as a modifier of “out-of-network providers” was not intended to be a reference to specialized out-of-network providers upon which plans and issuers might place coverage limitations. Rather, use of the word “particular” indicates that Allowed Amount Files must include the historical allowed amounts for covered items and services furnished to each out-of-network provider to whom such payments were made during the reference period. The Departments clarify that under the final rules, and as contemplated in the proposed rules, plans and issuers are expected to include historical allowed amounts for every covered item or service furnished by each out-of-network provider so long as the unique claims threshold for the out-of-network provider is met.

The Departments further clarify that plans and issuers are only required to include in the Allowed Amount File those covered items and services furnished by an out-of-network provider for which the plan or issuer has adjudicated claims and determined it will pay an allowed amount. If the plan or issuer has not adjudicated claims and determined it will pay an allowed amount for items or services furnished by an out-of-network provider, the plan or issuer is not required to include those allowed amounts or billed charges in the Allowed Amount File.

In response to the comment that the information in the files would not address the scenario where a participant, beneficiary, or enrollee receives out-of-network care in an in-network facility, the Departments clarify that the expectation is that this information would be captured in the Allowed Amounts File. If a participant, beneficiary, or enrollee receives out-of-network care, even if the facility is in the participant’s, beneficiary’s, or enrollee’s network, the provider will generate a claim and send a billed charge to the payer that will establish an allowed amount for the claim; the Departments expect this allowed amount to appear in the Allowed Amounts File in this scenario. As noted elsewhere in this preamble, the Departments will provide technical implementation guidance (as well as individualized technical assistance, as needed) to ensure that plans and issuers are able to make public the disclosures required through the final rules.

The Departments do not agree with the commenter who asserted that, because some small health plans will not have a sufficient number of any one procedure from a particular provider to make the file meaningful, the Allowed Amount File requirement should be withdrawn. The relevant commenter did not provide a number of claims that it believed would make the file meaningful. In contrast, the Departments are of the view that the files will be meaningful to the public regarding all covered items and services from a particular provider regardless of the specific numbers of claims at issue, even if a particular provider bills relatively few claims to a particular plan or issuer. As discussed elsewhere in this preamble, for privacy and security reasons, the Departments are requiring disclosure for all covered items and services from a particular provider that meets the unique claims threshold established by the final rules. If a small health plan does not have sufficient claims for a covered item or service to meet the unique claims threshold for a particular provider, then that health plan is not permitted to publicly disclose information for that particular item or service paid to the particular provider. The Departments are of the view that most health plans and issuers will meet the unique claims threshold for a large proportion of items, services, and providers to make the files sufficiently meaningful to justify this requirement.

In the preamble to the proposed rules, the Departments noted that providing this information could raise health privacy concerns. The Departments are committed to protecting PHI and other sensitive information. To address these privacy concerns, as discussed in this preamble, the Departments proposed that plans and issuers would not be required to provide out-of-network allowed amount data in relation to a particular provider and a particular item or service when compliance would require a plan or issuer to report out-of-network allowed amounts to a particular provider in connection with fewer than 10 different claims for payment. The Departments also noted that disclosure of such information would not be required if compliance would violate applicable health information privacy laws. In addition to proposing this exemption, the Departments proposed to require plans and issuers to include only unique out-of-network allowed amounts to mask the total episodes of care for a particular provider and item or service. In the proposed rules, the Departments expressed the view that these mitigation strategies, in addition to flexibilities proposed to allow the aggregation of reported data (as described later in this preamble), were sufficient to protect patients from identification based on information in the Allowed Amount File. The Departments solicited comment on whether additional privacy protections would be required.

The Departments specifically requested comment on whether a higher minimum claims threshold, such as a threshold of 20 claims, would better mitigate privacy concerns and minimize complexity in complying with federal or state privacy laws without compromising the integrity of the compiled information. The Departments also sought comment on additional approaches that could decrease the potential for aggregated health information that would be disclosed under the proposed rules to be identified, especially with respect to smaller group health plans.

In response, some commenters expressed concerns about maintaining HIPAA protections on the Allowed Amount File due to the small number of claims associated with specific services for out-of-network providers. Several commenters stated the threshold of 10 unique claims to require public disclosure of unique historical allowed amounts would be too low to protect consumers’ PHI. One commenter requested that the Departments clarify how they arrived at the 10 claims threshold. Some commenters recommended different minimum thresholds. Some commenters recommended a minimum threshold of 50 claims. On the other hand, other commenters did not support increasing the threshold, noting that the files do not contain identifiable data and so would not pose a risk. One commenter stated that the files should be released including the lowest number of claims necessary to achieve the goal of protecting participant, beneficiary, and enrollee privacy and recommended keeping the proposed threshold of 10 claims. Another commenter requested that the Departments not make the threshold any higher, and even consider lowering the cutoff to five claims, to maintain access to price transparency data for rural Americans.

Based upon comments received the final rules adopt a 20 unique claim threshold. The Departments are of the view that the 20 unique claim threshold balances the concerns expressed by commenters who suggested the Departments increase the threshold to 50 claims with the concerns of commenters who expressed the opinion that the proposed 10 claim threshold (or an even lower threshold) would be sufficient to ensure the files include a meaningful amount of data. The Departments are of the view that 20 unique claims are sufficient to balance the privacy concerns against the needs for transparency through the Allowed Amounts File. This 20 unique claim threshold is more stringent than CMS’ cell size suppression policy, which requires cells containing values of 1 through 10 to be suppressed in CMS data sets.¹⁸⁰ Increasing the unique claim threshold from 10 to 20 claims will not significantly reduce the amount of data that are required to be made public through the Allowed Amount File. However, if the Departments were to increase the unique claim threshold to 50 claims, as suggested by some commenters, the Departments are concerned that this could significantly reduce the amount of data that are required to be made public through the Allowed Amount File, which could undermine the goal of price transparency.

The Departments are of the view that increasing the unique claim threshold from 10 to 20 claims will better balance the policy goal of maximum transparency with the need to protect participants, beneficiaries, and enrollees from the possibility of being re-identified through the data included in the Allowed Amount File. In addition to this strategy, the Departments expect that the flexibility discussed later in this preamble under the special rule to permit aggregation of reported data will help protect participants, beneficiaries, and enrollees from identification based on information in the Allowed Amount File. Finally, the Departments reiterate that the disclosure of the information is not required if disclosure would violate applicable health information privacy laws. The Departments note that this exception does not mean that these disclosures are not required where a law that would otherwise prohibit the disclosure permits disclosure if required by law.

Prescription Drug File

The Departments finalize negotiated rates for prescription drugs as the third content element in the Prescription Drug File. The Departments received several comments related to whether negotiated rates for prescription drugs should be disclosed through the machine-readable files, and if so, which price or prices related to prescription drugs should be required to be included. Many commenters provided general support for the public release of negotiated rates for prescription drugs. One commenter asserted that releasing negotiated rates for prescription drugs would result in lower costs for health plans and consumers, which could lead to a reduction in manufacturer discounts of upwards of three percent.

Several commenters did not support disclosure of negotiated rates for prescription drug prices through the machine-readable files. Commenters recommended that the In-network Rate File should not include prescription drugs for several reasons. These reasons include: the complexity of prescription drug pricing (prices are determined by a formula that is determined at the point-of-sale and can change on a daily basis; the information would not be relevant to consumer decision-making; and the existence of established drug pricing tools that provide support for consumer decision-making. Some commenters stated that the unique nature of prescription drug pricing would make the release of negotiated rates difficult and further noted that the rates negotiated between PBMs and pharmacies are considered confidential. Another commenter stated that the Departments should only require disclosure of prescription drug prices when the information disclosed is directly related to the cost a plan participant, beneficiary, or enrollee would need to pay out of pocket so as not to undermine group health plans’ and health insurance issuers’ ability to negotiate lower drug costs. Some commenters claimed that plans and issuers have no control over prescription drug costs and may not be able to provide this information. Instead, commenters asserted that information related to prescription drug costs should come from PBMs or prescription drug manufacturers.

In 2018, retail prescription drug spending represented approximately nine percent ($335 billion) of overall health spending.¹⁸¹ In 2017 large group health plans and issuers accounted for the largest share of prescription drug spending amongst other payers, despite generally having a younger and healthier population than public payers.¹⁸² The Departments maintain that plans and issuers have an essential role,¹⁸³ and vested interest in controlling prescription drug spending. Moreover, as prescription spending continues to rise,¹⁸⁴ so does the trend of prescription rebates.¹⁸⁵ According to surveyed health plan and PBM personnel, PBMs passed through 78 percent of manufacturer rebates to health plans in 2012 and 91 percent in 2016.¹⁸⁶ And while some plans and issuers may use these rebates to dampen premium increases,¹⁸⁷ there remains an unclear prescription drug supply chain that masks the true costs of prescription drugs. The Departments are of the view that it would not advance the goals of the final rules to exclude a category of items and services that comprises such a significant proportion of health care spending.

The Departments agree that prescription drug pricing is complex but are of the view that complexity is not a valid reason for inaction. There are many different players in the prescription drug supply chain that may have some control over costs, including plans and issuers, manufacturers, wholesalers, pharmacies, and PBMs.¹⁸⁸ As commenters stated, it is often the case that PBMs negotiate the price of a prescription drug for a plan or issuer based on a contract the plan or issuer maintains with the PBM; however, it is ultimately the plan or issuer who is responsible for deciding how the costs of prescription drugs are passed along to a participant, beneficiary, or enrollee. The Departments, therefore, are of the view that plans and issuers are aware of the negotiated rate for a prescription drug for which their participants, beneficiaries, or enrollees may have cost-sharing liability, or can be informed of this negotiated rate by their contracted PBM.

The Departments do not agree that prescription drug pricing information, such as negotiated rates, will confuse consumers. As discussed elsewhere in this preamble, the Departments recognize that the information included in the machine-readable files may not be easy for an average consumer to navigate and expect that third-party developers will use this information to make tools available that make this information more useful for the average consumer.

The Departments agree with commenters who acknowledged the existence of many tools that provide prescription drug prices. However, the Departments are of the view that existing prescription drug pricing tools are insufficient as they lack competitive pricing information across all PBMs, and health plans and issuers.¹⁸⁹ Once prescription drug pricing is made more fully available, health care providers will have greater opportunity to factor pricing information into their prescribing decisions. Many health care providers benefit financially when they can reduce costs and improve their patients’ medication adherence.¹⁹⁰ This benefit to providers can also have a significant impact on overall health care spending.

For these reasons, and those discussed more fully below, the Departments are finalizing, with modifications from the proposed rules, requirements to disclose pricing information for prescription drugs through a machine-readable file. However, reflecting the unique attributes of prescription drug pricing, the final rules respond to comments by adopting requirements that are more detailed than what was included in the proposed rules, including the inclusion of a third machine-readable file for prescription drug pricing information.

The final rules require plans and issuers to produce a third machine-readable file for reporting prescription drug pricing information, the Prescription Drug File, whereas the proposed rules would have required plans and issuers to include negotiated rates for covered prescription drugs in the In-network Rate File. The Departments have made this change to ensure that prescription drug pricing information is produced in a manner that is most useful to the public. As noted earlier in this preamble, there are upwards of 100,000 NDCs for prescription drugs. Divorcing negotiated rates for prescription drugs from negotiated rates for other items and services allows the pricing information for medical items and services to be discernible from pricing information for prescription drugs. Further, a PBM may administer pharmacy benefits for a plan or issuer in addition to any other services it may provide to a plan or issuer. Therefore, keeping prescription drugs pricing data separate from pricing data for other items and services is generally better aligned with plan and issuer operations and will reduce the burden associated with combining data from different sources. As discussed in the Information Collection Requests (ICR) section of this preamble, the Departments estimate that the Prescription Drugs File requirement will not add significantly to the development and maintenance costs of the machine-readable files because the cost and burdens related to prescription drugs will largely be transferred from the In-network Rate File to the Prescription Drug File. Additionally, the Departments anticipate that removal of prescription drugs from the In-network Rate Files will significantly reduce the size of those files, which could reduce the costs associated with maintenance and storage of each individual file. The Departments are of the view that removing prescription drugs from the In-network Rate File and requiring this information to be included in a separate Prescription Drug File is consistent with the Departments’ goal of separating fundamentally different types of data into distinct files. Because, as many commenters observed, prescription drug prices are unique, the Departments are of the view that this information would be more appropriately represented through a third machine-readable file. Furthermore, the updated machine-readable file structure will support consumers, researchers, and third-party developers in reviewing, ingesting, aggregating, and analyzing the data.

The Disclosure of Prescription Drugs Pricing Information

Under the proposed rules, group health plans and health insurance issuers would be required to publicly disclose negotiated rates in the In-network Rate file. The Departments defined negotiated rates in the proposed rule as the amount a group health plan or health insurance issuer, or a third party on behalf of a group health plan or health insurance issuer, has contractually agreed to pay an in-network provider for covered items and services, pursuant to the terms of an agreement between the provider and the group health plan or health insurance issuer, or a third party on behalf of a group health plan or health insurance issuer. As discussed in the Definitions section of this preamble, the final rules adopt this definition as proposed, with modifications to provide additional clarity.

In the preamble to the proposed rules, the Departments acknowledged that cost-sharing liability for prescription drugs is often based on an amount other than the negotiated rate, such as manufacturer list prices or undiscounted list prices such as AWP or WAC. The Departments further acknowledged that, because of the application of rebates and other discounts, the inclusion of just the negotiated rate for prescription drugs could mislead consumers because the rate paid by the plan could ultimately be lower than the price paid by the consumer at the point-of-sale, as it is the Departments’ understanding that these rebates and other discounts typically are not passed on to the consumers at the point of sale. The Departments expressed the concern that including only the negotiated rate for prescription drugs used to determine cost-sharing liability could perpetuate the lack of transparency surrounding prescription drug pricing. To this end, the Departments solicited comment on which pricing information related to prescription drugs should be disclosed.¹⁹¹

Despite the Departments’ concerns regarding negotiated rates for prescription drugs outlined in the preamble to the proposed rules, commenters responded that negotiated rates, in addition to other information, are an important data point necessary to achieving useful transparency into coverage and out-of-pocket costs for prescription drugs. Several commenters recommended that the machine-readable file include both the negotiated price and the undiscounted “list” price, upon which coinsurance and deductibles are often based, in order to promote competition. Other commenters suggested that plans and issuers should disclose to enrollees when they do not pass through manufacturer rebates and discounts at the point-of-sale or factor these amounts into enrollee cost sharing. Another commenter recommended the Departments consider requiring a “net price” for prescription drugs rather than the negotiated rates. This commenter stated that, it is vital that this “negotiated rate” also include the “net price” (which accounts for all price concessions, including direct and indirect remuneration fees (DIR) and/or similar policies/terminology, such as “true up” practices under employer-sponsored and private plans to accurately estimate participant, beneficiary, and enrollee cost-sharing liability for prescription drugs). One commenter noted that if the public disclosure did not include information related to rebates, the file could be misleading and could lead to a continuing overemphasis on prescription drug list prices without recognition of the role played by rebates.

Another commenter recommended that the Departments allow plans and issuers to report the most appropriate available price type based on the plan’s benefit design. This commenter suggested that plans should also be required to identify the price reported, such as AWP or WAC or the contracted pharmacy reimbursement amount (for example, the Part D negotiated price).

The Departments have closely reviewed the comments to determine the prescription drug pricing information plans and issuers should provide in the Prescription Drug File in order to achieve the goals of transparency. Based on this review, the final rules are adopting as content element three for the Prescription Drug File a requirement for plans and issuers to publicly disclose two amounts for prescription drugs in the Prescription Drug File: the negotiated rate and the historical net price.

Prescription Drug Negotiated Rate Disclosure

As evidenced by the comments and the Departments’ independent research, there is wide variability in how negotiated rates are assigned for prescription drugs. For instance, some commenters noted that negotiated rates for prescription drugs include rebates, price concessions, and other “true-ups, while others likened the negotiated rates to the undiscounted list price used for determining cost-sharing liability. Therefore, plans and issuers may use varying types of prices when reimbursing providers for prescription drugs. For example, it is the Departments’ understanding that for generic prescription drugs, the Maximum Allowable Cost (MAC)—an amount the plan or issuer uses as the maximum amount they will pay for a particular prescription drug product—may be the amount that plans and issuers use to pay providers for a prescription drug. Plans and issuers may reimburse providers for other prescription drugs using a UCR amount or an amount based on the undiscounted list price, such as AWP or WAC. It is the Departments’ understanding that contracts negotiated between plans and issuers (or their contracted PBM) and providers generally do not include specific negotiated rates for prescription drugs, but instead include formulas that determine the type of price that will be used to reimburse providers for a particular prescription drug product. The negotiated rate may differ by drug or class of drug in the contract as the lesser of several types of prices based on one of the benchmarks described above—that is, WAC, AWP, MAC, or UCR. Because prices for prescription drugs can fluctuate on a daily basis, the price that is used to reimburse the provider can also fluctuate based on application of the contract terms.

In addition to better appreciating the wide variability in how negotiated rates are assigned, the Departments also now understand based on comments and independent research, that, contrary to the Departments’ understanding as explained in the preamble to the proposed rule, no matter what benchmark or formula is used to determine the negotiated rate, the negotiated rate is frequently also the rate upon which cost-sharing liability is based for prescription drugs.

Based on the circumstances described above, the Departments therefore agree with commenters that a certain amount of flexibility is required for plans and issuers as it relates to the benchmarks and inputs required for the disclosure of negotiated rates for prescription drugs. To allow for flexibility, as proposed, the final rules do not assign a benchmark or necessary inputs to the definition of negotiated rates. The final rules include a broad definition for negotiated rates to mean the amount a group health plan or health insurance issuer has contractually agreed to pay an in-network provider, including an in-network pharmacy or other prescription drug dispenser, for covered items and services, whether directly or indirectly, including through a TPA or PBM.

As noted above, the negotiated rate can be one of several different rates and can fluctuate on a daily basis depending on the terms of the contract between plans or issuers (or the PBM for the plan or issuer) and the provider, which includes pharmacies and other prescription drug dispensers. Therefore, the Departments clarify that, where a plan or issuer uses a formula as described above to determine the rate that will be used to reimburse providers for a prescription drug, the negotiated rate that should be included in the Prescription Drug File should be the rate that would be used by the plan or issuer to reimburse providers on the date that the file is extracted.

Notably, the final rules do not finalize a requirement to include the manufacturer list price, as contemplated in the proposed rules. The manufacturer list price is a manufacturer-specified metric for drug prices that is commonly used by both federal and commercial health care programs as a benchmark for negotiated rates. The manufacturer list price in this context is often the WAC, which is defined in statute as,

[T]he manufacturer’s list price for the drug or biological to wholesalers or direct purchasers in the United States, not including prompt pay or other discounts, rebates or reductions in price, for the most recent month for which the information is available, as reported in wholesale price guides or other publications of pricing data with respect to a drug or biological.¹⁹²

Like negotiated rates, the list price does not include discounts, dispensing fees, rebates, or other retrospective pricing adjustments. The manufacturer list price is not plan- or issuer-specific. If the Departments were to require plans and issuers to include the manufacturer list price in the Prescription Drug File, the information included in the files would be the same or similar across all plans and issuers. Further, manufacturer list price information is already aggregated, available through several companies, and could be incorporated into third party applications to be made accessible to consumers. WAC prices for drugs and biologics are collected and published by several companies, including First Databank and Medi-Span. Additionally, CMS publishes a monthly National Average Drug Acquisition Cost (NADAC), which provides a national benchmark for the prescription drug prices paid by retail pharmacies.¹⁹³ Because information on manufacturer list prices would be largely redundant across plans and issuers, and because this information is publicly available through other existing resources, the Departments concluded this information would be of limited value for the public.

The Departments do not intend to increase the burden of developing and maintaining the machine-readable files unless the inclusion of the additional data element is essential to provide meaningful, transparent pricing information to the public. Inclusion of the manufacturer list price would not significantly advance transparency as this information is already available publicly, and it would increase the burden of developing the Prescription Drug File. The Departments expect that third-party developers will access and incorporate publicly available databases, such as those including manufacturer list pricing information, where that information is relevant to providing meaningful information to consumers.

The Departments are of the view that it is important for transparency for negotiated rates to be included in the Prescription Drug File. Consumers, both insured and uninsured, can use this information to better understand the cost of prescription drugs and to advocate for less expensive alternatives. The Departments are also of the view that making the negotiated rate public in a manner that is highly visible to consumers, researchers, innovators and regulators could potentially place pressure on manufacturers to lower their list prices, which could, in turn, lower negotiated rates upon which consumer cost-sharing liability is based.

Nonetheless, as stated in this preamble and in the preamble to the proposed rules, requiring disclosure of only the negotiated rate for prescription drugs could perpetuate the lack of transparency surrounding prescription drug pricing. As commenters noted, the negotiated rate is not generally tied to the amount a plan or issuer will ultimately pay for the prescription drug or prescription drug service due to the use of post-point-of-sale rebates, discounts, and other price concessions that reduce the price that plans and issuers pay for prescription drugs. To address this issue and to introduce greater transparency surrounding prescription drug pricing, in response to comments, the Departments are also finalizing a requirement that plans and issuers must publicly disclose historical net prices, as discussed in detail below.

Prescription Drug Historical Net Price Disclosure

For purposes of the final rules, historical net price means the retrospective average amount a plan or issuer paid for a prescription drug, inclusive of any reasonably allocated rebates, discounts, chargebacks, fees, and any additional price concessions received by the plan or issuer with respect to the prescription drug. Net price is the price for a prescription drug after discounts are deducted, and is paid at different points in the prescription drug distribution chain (for example, the plan or issuer to the pharmacy, the pharmacy to a wholesaler, and the wholesaler to the manufacturer).¹⁹⁴ For the purposes of the final rules, the Departments are concerned with the price ultimately paid by a plan or issuer to a drug manufacturer.¹⁹⁵ Essentially, rebates, discounts, chargebacks, fees, and other additional price concessions are adjustments made after the point-of-sale that affect the total price paid by the plan or issuer (or through a contract with the PBM) to the manufacturer for a prescription drug product. As a general matter, a price concession is a discount or rebate available to a purchaser of a product or service, wherein the discount or rebate is conditioned upon the purchaser complying with the contractual terms of the rebate or discount offer.¹⁹⁶ More specifically, a rebate is an amount that the prescription drug manufacturer returns to a payer based on utilization by consumers enrolled through a plan or issuer or based on purchases by a provider.¹⁹⁷ A chargeback is a type of discount process through a prescription drug wholesaler where manufactures reimburse wholesalers who offer drugs to purchasers at discounted prices, and the discount negotiation occurs between the manufacturer and the purchaser.¹⁹⁸ Finally, fees include any payment adjustments, incentives, or other discounts that are not included in the negotiated price for a drug (for example, prompt pay discounts, pharmacy network fees, performance-based fees, and incentive fees).¹⁹⁹ The Departments note that manufacturers also may offer additional price concessions to certain providers or directly to consumers in the form of coupons. The final rules only require disclosure of reasonably allocated rebates, discounts, chargebacks, fees, and any additional price concessions received by the plan or issuer (or the PBM under contract with the plan or issuer).

As noted earlier, several commenters commented on the nature of the prescription drug pricing information that should be captured to achieve the goals of price transparency. Some commenters noted the net price would be important to price transparency efforts because it would put consumers on notice when the net price is less than their cost-sharing amount and it would capture the actual prices of prescription drugs after the application of price concessions, which would provide transparency regarding actual prescription drug costs. The Departments agree with these commenters that disclosure of information about the net price for prescription drugs (and therefore rebates and other price concessions that are included in the net price) is necessary to achieve the goals of the final rules.

Therefore, the final rules adopt a requirement to make public a historical net price, as defined by the final rules. Furthermore, rather than require disclosure of the actual net price, the final rules establish and adopt a definition of historical net price that balances the need for transparency against concerns expressed by other commenters that release of net prices could affect issuers and PBMs’ ability to negotiate drug prices, including rebates and other price concessions. Specifically, the final rules define historical net price as the retrospective average amount a plan or issuer paid an in-network provider, including any in-network pharmacy or other prescription drug dispenser, for a prescription drug, inclusive of any reasonably allocated rebates, discounts, chargebacks, fees, and any additional price concessions received by the plan or issuer with respect to the prescription drug or prescription drug service. The Departments note that for the purposes of the final rules, the definition of historical net price only includes those price concessions received by the plan or issuer (or under the contract between the PBM and the plan or issuer). Because of timing delays related to application of rebates, discounts, chargebacks, fees, and other price concessions, plans and issuers are required to provide historical or retrospective data, rather than prospective or current pricing data regarding the net price of prescription drugs. In the case prescription drug net prices, historical data will provide valuable information for stakeholders, as the actual prices plans and issuers ultimately pay for prescription drugs cannot be known until after the application of time-delayed rebates, discounts, chargebacks, fees, and other price concessions. As discussed later in this section, plans and issuers will be required to include historical net prices for a 90-day period beginning 180 days before the date a particular Prescription Drug File is published. The final rules also require the historical net price, as defined earlier in this section, to be disclosed through the Prescription Drug File.

As discussed earlier in this preamble, the Departments are aware that an estimated allocation of rebates, discounts, chargebacks, fees, and any other additional price concessions may be necessary to represent the historical net price. Product-specific and non-product specific rebates, discounts, chargebacks, fees, and other price concessions must be allocated by dollar value if the total amount of the price concession is known to the plan or issuer at the time of file publication. It is the Departments’ understanding that most discounts, such as those related to market sharing and rebates based on volume, are calculated within time periods as short as one to three months. Therefore, the Departments expect the total amounts for these types of discounts, rebates, and other price concessions will be known at the time of file publication. Where the total amount of a price concession is known at the time of file publication, plans and issuers must allocate the price concession by the total dollar amount.

The Departments also understand that some product-specific and non-product specific price concessions are based upon outcomes- or value-based payment arrangements that calculate rebates over a longer period of time—usually six months to more than three years. Because these price concessions will not be known at the time of file publication, the Departments are requiring plans and issuers to estimate the historical net price using a reasonable allocation and good faith estimate of the total concession amount. Therefore, if the total amount of the price concession is not known to the plan or issuer at the time of file publication, then rebates, discounts, chargebacks, fees, and other price concessions should be reasonably allocated using an estimate of the average price concessions based on the rebates, discounts, chargebacks, fees, and other price concessions received over a time period prior to the current reporting period and of equal duration to the current reporting period.

Rebates may reflect discounts negotiated with drug manufacturers that lower drug prices for the plan or issuer. Rebates may not directly benefit participants, beneficiaries, or enrollees, however, as the decision of whether and how to share savings from rebates is at the discretion of the plan or issuer. Nonetheless, there is evidence that rebates are positively correlated with increased manufacturer list prices for prescription drugs, which is typically the basis for a consumer’s cost-sharing liability.²⁰⁰ A recent analysis found that, on average, from 2015 to 2018, a $1 increase in rebates was associated with a $1.17 increase in manufacturer list prices.²⁰¹ Therefore, due to the positive correlation between rebates and manufacturer list prices, a policy that results in a reduction to rebates may result in a reduction in the manufacturer list price (and also overall prescription drug prices). A policy that requires plans and issuers to make public historical net prices could expose the extent of rebates and other price concessions, and this transparency in historical net price could cause a reduction in the use of rebates and other price concessions, and, therefore, a reduction in the manufacturer list price.²⁰² The resulting reductions in manufacturer list price could lead to lowered out-of-pocket costs for both uninsured consumers who must pay the manufacturer list price and insured consumers with deductibles and coinsurance. Because negotiated rates for prescription drugs are largely based upon the manufacturer list price, the reduction in the manufacturer list price will likely be reflected in the negotiated rate. Further, because negotiated rates are used to determine cost-sharing liability for prescription drugs, a reduction in such rates will likely result in lower consumer costs through a reduction to deductibles and coinsurance.

The Departments are of the view that requiring both the negotiated rate and the historical net price, as defined by the final rules, will produce sufficient transparency regarding prescription drug pricing information to support consumer health care purchasing decisions and provide other stakeholders insight into actual prescription drug pricing. Inclusion of both the negotiated rate and historical net price addresses the Departments’ concern, expressed in the preamble to the proposed rules, that merely requiring disclosure of the rate that is used to determine an individual’s cost-sharing liability (that is, as clarified in the final rules, the negotiated rate) could perpetuate the lack of transparency in prescription drug pricing.

Additionally, in the preamble to the proposed rules, the Departments specifically solicited comment on whether and how the public disclosure requirements should account for rebates, discounts, and dispensing fees to ensure individuals have access to meaningful cost-sharing liability estimates for prescription drugs.²⁰³ Upon review of the comments, the Departments are of the view that public disclosure of the historical net price, which takes into account rebates, discounts, dispensing fees, and other price concessions, in addition to the negotiated rate, upon which cost sharing is based, provides the appropriate combination of pricing information to achieve the goals of transparency and ensure that individuals have access to meaningful prescription drug pricing information. First, the negotiated rate will help support consumer health care purchasing decisions. Second, the historical net price will support the public in gaining enhanced knowledge of actual drug prices. Enhanced knowledge of actual drug historical net prices could also support consumer health care purchasing decisions, as consumers could use the information to determine whether their out-of-pocket costs are commensurate with the rebates, discounts, and other price concessions received by their plan or issuer. The historical net price will also make consumers and other stakeholders aware of situations where cost-sharing liability for a prescription drug exceeds the amount their plan or issuer ultimately paid for the prescription drug. In these situations, participants, beneficiaries, and enrollees will be able to make an informed decision regarding whether to utilize their plan or coverage when purchasing the prescription drug. Furthermore, plans and issuers could be incentivized to pass through a larger or more significant share of the rebates and other discounts that they receive from drug manufacturers if those discounts are effectively disclosed via historical net price information.

The Departments acknowledge that there are potential adverse consequences of requiring plans and issuers to make public rebates and other price concessions, directly or indirectly, through the historical net price. For instance, stakeholders such as PBMs and prescription drug manufacturers could attempt to find ways to obscure rebates and other price concessions such that they would not be required to be publicly disclosed under the final rules. However, the Departments are of the view that such attempts would likely be discouraged by the nature of the disclosures themselves and would otherwise be unsuccessful if attempted. A benefit of requiring the widespread public disclosure of pricing information for prescription drugs is that the transparency data itself can be used to identify where plans and issuers (or third parties acting on their behalf) may be attempting to circumnavigate disclosure requirements. Researchers and other entities who aggregate and analyze the data will be able to compare pricing data across plans and issuers. This can help identify plans and issuers whose data is an outlier and identify them for further scrutiny by regulators. The current lack of transparency in prescription drug pricing does not allow this type of oversight and monitoring. While it is possible that stakeholders will act in ways that conflict with the intent of the public disclosures, it is also very likely that transparency itself will help state and local regulators to identify these anti-competitive practices. Indeed, it is possible that the public disclosures could help to uncover other unknown anti-competitive business practices that exist today. For these reasons, the Departments are of the view that the benefits of public disclosure of prescription drug pricing information outweigh the potential risk that certain stakeholders may seek to take advantage of the disclosure requirements in ways that would increase prescription drug costs.

A commenter observed that if the Departments were to include the net price, it would be important to clarify that that the information is not necessarily predictive of future transactions because information about rebates is not known with certainty before a drug is dispensed. The Departments recognize that prospective net prices for prescription drugs could be complicated to estimate accurately due to the nature of prescription drug pricing. Nonetheless, the Departments are of the view that the historical net price will be a sufficiently accurate guide for potential prescription drug prices and will fulfill the objectives of the final rules.

The final rules adopt a requirement to include in the Prescription Drug File the historical net price over a 90-day reporting period for each NDC for dates of service within 180 days of the Prescription Drug File publication date. This approach will ensure that data is composed of the historical net price for relatively recent claims (rather than older claims from multiple time periods) and will avoid the conflation of payments from different periods of time. The Departments are of the view that historical net prices from defined periods of time will enable users to make meaningful comparisons across plans and coverages. Additionally, the Departments chose this reporting reference period to be consistent with the period proposed and being finalized through the final rules for reporting of allowed amounts through the Allowed Amounts File. The Departments are of the view that consistency across machine-readable file requirements, where applicable, will reduce potential confusion among file users as well as reduce burdens for plans and issuers. The Departments are of the view that the 180-day lookback period (which is expected to capture many of the market-share and volume rebates and other price concessions) and requirement to make a reasonable allocation will balance the need to be transparent in current prices with the delayed timing of the application of certain rebates and other price concessions.

To reasonably allocate any particular non-product specific or product-specific rebate, discount, chargeback, fee, or other additional price concession by dollar value of the drug where the totals amount is fully known at the time of file publication, plans and issuers should divide the rebate or discount amount by the total dollar value of drugs on which the rebate is calculated, and then apply that percentage to all applicable drugs. For example, if a rebate amount of $20,000 is received during the 3-month file reference period in connection with $100,000 in sales on two drugs during the same period, the rebate is allocated as a 20 percent discount to the prices of those two drugs. Sales for Drug A totaled $60,000 and sales for Drug B totaled $40,000. A rebate of $12,000 ($60,000 multiple by 20 percent) is allocated to Drug A, resulting in a historical net price populated in the Prescription Drug File of $48,000. Similarly, a rebate of $8,000 is allocated to Drug B, resulting in a historical net price populated in the Prescription drug file of $32,000. The Departments are aware that this allocation methodology will not always perfectly allocate the rebate amounts because of the complexities of rebate calculation, or because of timing issues. However, the Departments are of the view that this simplified approach balances the goal of providing actionable drug pricing information to the public while limiting the burdens on plans and issuers in producing the information.

To reasonably allocate any particular non-product specific or product-specific rebate, discount, chargeback, fee, or other additional price concession where the total amounts are not fully known at the time of file publication, plans and issuers must make a good faith, reasonable estimate of the price concession using an historical adjustment amount. To make this estimate, plans and issuers shall determine the average value of price concessions for the relevant product over a time period prior to the current reporting period and of equal duration to the current reporting period and use that amount to apply an estimated adjustment amount in the current reporting period. For example, Plan X has $100,000 in total sales for 20,000 units—averaging $5 per unit—of Drug A during the current reporting period, which is January 1, 2020, through March 31, 2020. However, Plan X will not know the total amount of product-specific rebate to expect for sales of Drug A for at least another six months. To address this timing issue, Plan X can apply a reasonable estimate to allocate an adjustment to the current reporting period. For instance, Plan X can look back to the total rebates received for the product during a comparable time period. In this example, Plan X reviews its historical data and determines the rebates received for Drug A, from the period between January 1, 2019, and March 31, 2019, totaled $10,000 for sales of 30,000 units totaling $160,000. The average price per unit was $5.33 and the average discount per unit was $0.33 resulting in an average final net price of $5 for Drug A. Plan X then applies this historical rebate percentage to the current reporting period for Drug A. Plan X subtracts $6,250 ($100,000 total sales for the current reporting period multiplied by the estimated 6.25 percent historical rebate percentage) from the $100,000 total sales for a total net price of $93,750 and an average net price for Drug A, rounded to the nearest hundredth, of $4.69. Plan X reports in the Prescription Drug File an average historical net price for Drug A of $4.69 for the current reporting period.

In the discussion of the Allowed Amounts File in the preamble to the proposed rules, the Departments noted that providing the Allowed Amounts information could raise health privacy concerns. The Departments are of the view that similar concerns could be raised regarding the historical net price information in the Prescription Drug File. For example, there may be instances—such as in a small group plan or with respect to an NDC for a rare chronic condition—where, through deduction, disclosure of historical net price information may enable users to identify the participant, beneficiary, or enrollee who received a particular prescription drug because a very small number of claims are used to derive the historical net price of a particular NDC at a particular pharmacy or other prescription drug dispenser. Additionally, as noted in relation to the Allowed Amount File, there may also be instances when the historical net price public disclosure requirement would be inconsistent with federal or state laws governing health information that are more stringent than HIPAA regarding the use, disclosure, and security of health data that was produced pursuant to a legal requirement, such that plans and issuers would be required to further de-identify data. For example, some of the claims for payment used to derive the historical net price could relate to services provided for substance use disorders, which could implicate disclosure limitations under 42 CFR part 2 governing the confidentiality of patient records related to treating a substance use disorder. The Departments are committed to protecting PHI. To address privacy concerns, the final rules adopt an approach consistent with the out-of-network Allowed Amount File. The final rules do not require plans and issuers to provide historical net price data in relation to a particular pharmacy or other prescription drug dispenser and a particular NDC when compliance would require a plan or issuer to report an historical net price for a particular pharmacy or other prescription drug dispenser calculated with fewer than 20 different claims for payment. Furthermore, the Departments note that disclosure of historical net prices will not be required if compliance would violate applicable health information privacy laws. The Departments are of the view that these mitigation strategies, in addition to the historical net price being an average of amounts paid to a particular provider for a particular NDC during the reference period, are sufficient to protect patients from identification based on information in the Prescription Drug File. The Departments note that the low volume exemption applies only to the requirement to include the historical net price and does not affect the requirement to include the negotiated rates in the Prescription Drug File.

Regarding prescription drugs, the Departments received a comment that requested discounts under section 340B of the PHS Act be included in the applicable machine-readable file, noting that providing this information is important to ensure consumers can access those savings. However, this commenter acknowledged that health plans often do not have access to information about when a section 340B discount is paid and so recommended the Departments develop and implement a process to help health plans identify this information.

Discounts under the section 340B Drug Pricing Program are only available to eligible providers (known as covered entities as outlined in section 340B of the PHS Act) and regulations under section 340B of the PHS Act are outside of the scope of the final rules.

2. Required Method and Format for Disclosing Information to the Public

As explained in section II.C.1.c of this preamble, the final rules adopt the requirement that plans and issuers produce the In-network Rate File, the Allowed Amount File, and the Prescription Drug File. The Departments are finalizing a requirement that the In-network Rates, Allowed Amounts, and Prescription Drug Files must be disclosed as machine-readable files. The final rules define “machine-readable file” to mean a digital representation of data or information in a file that can be imported or read by a computer system for further processing without human intervention, while ensuring no semantic meaning is lost. The requirement ensures that the machine-readable file can be imported or read by a computer system without those processes resulting in alterations to the ways data and commands are presented in the machine-readable file. The Departments proposed to require each machine-readable file to use a non-proprietary, open format to be identified by the Departments in technical implementation guidance (for example, JavaScript Object Notation (JSON), Extensible Markup Language (XML), or Comma Separate Value(s) (CSV)). A portable document format (PDF) file, for example, would not meet this definition due to its proprietary nature.

Contemporaneous with the proposed rules, the Departments published a PRA package (OMB control number: 0938-1372 (Transparency in Coverage (CMS-10715)) that further described the specific data elements that would be disclosed in the proposed machine-readable files. Updated cost and burden estimates related to the collection requirements are discussed in the ICR section of this preamble and are included in in the corresponding PRA package, including changes to costs and burdens and additional collection instruments as a result of modifications to the proposed rule made through the final rules.

The Departments proposed requiring group health plans and health insurance issuers to publish their negotiated rates and historical allowed amount data in two machine-readable files, one including required negotiated rate data with in-network providers, and a second including required out-of-network allowed amount data. The Departments proposed requiring plans and issuers to publish the data in two separate machine-readable files to account for the dissimilarity between the negotiated rates paid to in-network providers under contract and the more variable allowed amounts paid to out-of-network providers. The Departments solicited comment on whether building and updating one file could be less burdensome for plans and issuers than maintaining multiple files, and whether having the data in a single file could facilitate use by third-party developers. The Departments were particularly interested in comments regarding whether a single file for disclosure of all the required information would likely be extremely large, making it less than optimal for anticipated users, such as software application developers and health care researchers.

Some commenters supported keeping the In-network Rates File and out-of-network Allowed Amount File separate. One commenter noted the structure would allow quick development of data aggregation efforts and consumer-friendly tools. Additionally, the commenter stated that keeping the files separate would support file ingestion. Another commenter stated that each file would contain fundamentally different data, and the costs associated with storing and maintaining a large combined file would be very large.

The Departments agree that the information being required to be publicly disclosed through the machine-readable files related to negotiated rates and allowed amounts is sufficiently distinct to justify separating the information into separate files. In particular, the out-of-network allowed amounts information must be derived from historical claims data, which is fundamentally different in kind from simply listing applicable rates for each service. Furthermore, the Departments also agree with comments indicating that splitting the files would help reduce the maintenance and storage burdens of the files. Throughout this preamble, the Departments have stressed the importance of ensuring the public disclosures required through the final rules are accessible, especially to internet-based and mobile application developers, to support development of innovative consumer-facing tools, as well as to other entities, such as researchers, and regulators, to support efforts to better understand and support the competitiveness of health care markets.

The requirement to publish more than one machine-readable file which will facilitate the disclosure of data that is different in character, scope, and other factors, which will help facilitate data ingestion for users of the machine-readable files, including third-party developers, researchers, regulators, and other interested parties. This approach will also help facilitate file ingestion, data aggregation, and data analysis by researchers whose projects could lead to important market insights that could inform efforts to further address the wide variation in health pricing, and by regulators who would be able to leverage the data in their oversight activities.

As discussed earlier in this preamble, the final rules adopt a third Prescription Drug File in recognition of the unique pricing attributes of prescription drug products. Prices related to prescription drug products that plans and issuers would have been required to include in the In-network Rate File under the proposed rules will now be required to be publicly disclosed through the third Prescription Drug File. As discussed earlier in this preamble, the Departments estimate that requiring a third file for prescription drugs will not add significantly to the burdens and costs of developing and maintaining the machine-readable files calculated in relation to the final rules because costs and burdens calculated for prescription drugs as included in the In-network Rate File will be transferred to the Prescription Drug File. Additionally, the Departments anticipate that removal of prescription drugs from the In-network Rate File will significantly reduce the size of that file, which could reduce the costs associated with maintenance and storage for the In-network Rate File. The Departments clarify that not all prescription drug pricing information required to be disclosed through the final rules is required to be included in the Prescription Drug File. Rather, the Prescription Drug File is required to include prescription drug pricing information for in-network providers, including pharmacies and other prescription drug dispensers, while the Allowed Amount File is required to include prescription drug pricing information for out-of-network providers, including pharmacies and other prescription drug dispensers. The Departments also clarify that the In-network Rate file may also contain prescription drug information to the extent the prescription drug is a part of a bundled payment arrangement.

Some commenters argued that the method and format for providing information to the public is not feasible. One commenter did not support the policy that the machine-readable files should be provided in a public use file format, claiming the files would be millions of rows long and very difficult to review. Another commenter expressed concern that the volume of data would make it impossible to post all of the information in two files and further stated that there is no single set of codes that describe every item or service, so it would be impossible to post this data without very specific, standard definitions. Given the lack of standard definitions, this commenter argued that there is no systematic way to compile and display the information requested, so claim compilation would have to be done manually. The commenter further stated that, even if there were standard definitions, it would be impossible to provide them in “plain language.”

Based on consultations with industry and IT development professionals, the Departments do not agree with commenters who stated that development of the machine-readable files would not be feasible as envisioned by the proposed rules. The Departments are aware that these files could be very large and could be difficult for laypersons to navigate. However, the Departments are of the view that the files’ primary benefit to health care consumers will be the availability of web-based tools and mobile applications developed for consumer use by third-party developers, aggregation and analysis conducted by researchers, and oversight efforts by regulators. The required machine-readable files will be optimal for ingestion, data aggregation, and data analysis, all of which are functions performed by third-party internet-based developers, researchers, and regulators who use large data sets in a manner that will lead to benefits for consumers. Additionally, notwithstanding that the Departments have designed these transparency requirements so that it is not necessary that individual consumers use or ingest the data in the machine-readable files, the Departments are of the view that many individual health care consumers do possess the necessary expertise to access and navigate the files. The final rules also impose a requirement to include plain language to identify each item and service included in each file. This requirement will help ensure consumers, third party application developers, researchers, regulators, and other interested parties are able to easily understand the information.

The Departments have determined that the potential benefits for consumers of requiring the disclosure of required data through machine-readable files outweigh the potential for consumer confusion at the individual consumer level. Additionally, the Departments expect that third party application developers, researchers, regulators, and other file users will have the expertise to aggregate, standardize, and interpret the pricing information included in the file and translate the pricing information into products, research, and market oversight and reforms that will ultimately benefit consumers.

The Departments also do not agree that the volume of data would make the machine-readable files too large to post publicly, regardless of whether the data is posted in two or three files. The Departments’ rough estimate of file size, based, in part, upon numbers provided by commenters, suggests a file size of approximately 5 gigabytes.²⁰⁴ CMS currently makes available for download on its website some large public use file (PUF) data sets that are several gigabytes. For example, the Part D Prescriber PUF, ²⁰⁵ available on the CMS website, is over three gigabytes in size. The Departments acknowledge that because of the large file size, file users will likely need to use database or statistical software to download the machine-readable files as importing into Microsoft Excel would result in incomplete loading of data. However, this approach is similar to that used for some of the larger PUF data sets available on the CMS website, including the Part D Prescriber PUF, which must be opened using specialty software.

Assuming that plans’ and issuers’ negotiated rates are in a digitized format, even if the negotiated rates are not stored in a single database, this information can be systematically compiled and maintained by the plan or issuer. In recognition that there is no single set of billing codes for non-prescription drug services, the Departments are providing flexibility in the final rules by not prescribing which code or set of codes plans and issuers must use to publicly disclose their data. Rather, the Departments are requiring that plans and issuers associate each in-network applicable rate or out-of-network allowed amount with a CPT, HCPCS code, DRG, or other common payer identifier. In the case of prescription drugs, the Departments are requiring plans and issuers to associate each negotiated rate and historical net price with an NDC. The Departments’ expectation is that the type of billing code plans and issuers use to populate the machine-readable files will be consistent with the billing codes that plans and issuers use in their operations when actually determining provider reimbursement and cost-sharing liability.

The Departments further note that nothing prevents plans and issuers from including in the files a mixture of billing code types so long as the billing codes included in the file are reflective of the plan’s or issuer’s operations. To facilitate identification of the billing code type, there will be an indicator in the file format described by the technical implementation guidance that will allow plans and issuers to specify the particular type of billing code entered for each data entry in the machine-readable files. The final rules also require that plans and issuers include plain language descriptions for each billing code. The Departments note that in the case of items and services that are associated with common billing codes (such as the HCPCS codes), plans and issuers are permitted to use the codes’ associated short text description.

The final rules further clarify that, in the case of NDCs for prescription drugs, the plain language description must be the proprietary and nonproprietary name assigned to the NDC by the FDA. The Departments have made this change to align with the change to require only the NDC billing code to be used for prescription drugs. Requiring the proprietary and nonproprietary name assigned to the NDC by the FDA further standardized the product identifiers for prescription drugs and will facilitate comparisons across prescription drug pricing information for plans and issuers.

For all other items and services, as the Departments explicitly stated in the proposed rules and elsewhere in this preamble, plans and issuers can meet the “plain language” description requirements by using their chosen code’s short text description. However, the Departments note that including the short text description for each code is a minimum requirement and nothing in the final rules prevents plans and issuers from providing a more consumer-friendly plain language description for each covered item or service. Plans and issuers may be incentivized to provide more consumer-friendly information in machine-readable files because it may permit them to include disclaimer or clarifying language in the files, where applicable. Furthermore, if a plan or issuer uses plain language descriptions for billing codes in its operations that are more consumer-friendly than the established short text descriptions, the Departments expect plans and issuers to include in the machine-readable files the plain language descriptions they use in their operations.

The Departments received comments that supported the Departments’ development of specific technical standards for the files to which plans and issuers must adhere. One commenter recommended the Departments provide guidance to plan sponsors who are able to provide some, but not all, of the file data elements. Another commenter stated that the proposed rules do not make clear how to report items and serviced provided through capitated and bundled payment arrangements in the files; noting that this information is necessary for consumers to measure provider value. One commenter responded positively to the Departments’ provision of technical implementation guidance for the files, but requested a robust public comment solicitation far in advance of the applicability date for the rules.

The Departments are of the view that providing specific technical direction in separate technical implementation guidance, rather than in the final rules, will better enable the Departments to respond to technical issues and developments, as well as compliance questions related to novel or rare payment arrangements. Therefore, as proposed, the Departments are developing technical implementation guidance for plans and issuers to assist them in developing the machine-readable files.

The technical implementation guidance will be available online through GitHub, a website and cloud-based service that helps developers store and manage their code, as well as to track and control changes to their code. The GitHub space offers the Departments the opportunity to collaborate with industry, including regulated entities, and third-party developers to ensure the file format is adapted for reporting of the required public disclosure data for various plan and contracting models. For example, the Departments have updated the schematics of the file formats in response to comments received about and bundled payments and capitated payment arrangements, as well as other alternative contracting models. Plans and issuers will be able to access the GitHub schemas at any time and collaborate with the Departments in real-time.

The Departments’ goal in using GitHub is to facilitate this collaborative effort all allow plans and issuers to meet the public disclosure requirements of the final rules while addressing their unique IT system, issuer, and plan attributes. To the extent a plan or issuer’s unique attributes (for example, IT system, plan benefit design, or reimbursement model) are not addressed sufficiently through the technical implementation guidance, the Departments intend to provide targeted technical assistance to ensure all plans and issuers are able to meet the public disclosure requirements under the final rules. The technical implementation guidance will provide instructions on how to obtain this technical assistance should the need arise.

The technical implementation guidance hosted on GitHub will include a repository set of schemas describing the data formats (encoded as JSON, XML, and CSV) for all three machine-readable files: the In-network Rate File, the Allowed Amount File, and the Prescription Drug File. The technical implementation guidance will be available as part of the PRA package developed for the ICRs included in the final rules. As part of the PRA process, stakeholders have an additional opportunity to submit comments related to the PRA for 30 days following the publication of the final rules.

In the proposed rules, the Departments requested comment on whether the final rules should adopt a single non-proprietary format for the machine-readable files, specifically JSON files. The Departments understand that this format generally is easily downloadable, and it could simplify the ability of file users to access the data.

The Departments received one comment in support of requiring JSON as the standardized file format for the required machine-readable files. However, the Departments’ internal technical experts agreed that the speed of technology developments weighs heavily in favor of maintaining flexibility to adopt a suitable file format as a non-substantive, operational requirement that will be identified in the relevant implementation guidance for the required machine-readable files. Additionally, this flexibility will allow the Departments to adapt the file technical specifications for new and emerging technologies. Therefore, the Departments decline to require in regulation a more specific file format for the machine-readable files.

The Departments reiterate that, as finalized, all machine-readable files must conform to a non-proprietary, open-standards format that is platform-independent and made available to the public without restrictions that would impede the re-use of the information. Therefore, because a PDF file format is proprietary, it would not be an acceptable file format in which to produce the files. A plan or issuer’s file will be acceptable so long as it includes all required data elements required for the respective file (that is, all applicable rates in the In-network Rate File, allowed amounts and billed charges in the Allowed Amounts File, and negotiated rates and historical net process in the Prescription Drug File) and is formatted in a manner consistent with the technical implementation guidance the Departments are developing.

The final rules therefore adopt, with modification, the required method and format for disclosure of information through the machine-readable files. The Departments note several non-substantive modifications to the regulatory text, which are being adopted in the final rules to clarify and streamline the text. To further highlight the file technical implementation guidance, the regulation text of the final rules has been modified non-substantively to specify that the machine-readable files must be made available in a form and manner specified in guidance issued by the Departments. In the proposed rules, the regulation text stated more broadly that the machine-readable files must be made available in a form and manner determined by the Departments. Additionally, the proposed rule included two sentences that simply restated what must be publicly disclosed through the two proposed machine-readable files.²⁰⁶ The Departments have removed these sentences from this this section of the regulatory text because they duplicate language contained in the previous sections of the regulatory text, do not add any additional value to this section of the regulatory text, and could cause confusion.

3. Required Accessibility Standards for Disclosure of Information to the Public

The Departments proposed to require a plan or issuer to make available on an internet website the required machine-readable files, and that the files must be accessible free of charge, without having to establish a user account, password, or other credentials, and without having to submit any personal identifying information such as a name, email address, or telephone number. The Departments also proposed to allow plans and issuers flexibility to publish the files in the locations of their choosing based upon their superior knowledge of their website traffic and the places on their website where the machine-readable files would be readily accessible by the intended users. The Departments are finalizing these requirements as proposed. The Departments also considered requiring plans and issuers to submit the internet addresses for the machine-readable files to CMS, and having CMS make the information available to the public. A central location could allow the public to access the information in one centralized location, reducing confusion and increasing accessibility. However, the Departments opted to propose flexible rules allowing plans and issuers to publish the files in the locations they have chosen based upon their determinations regarding where the files will be most easily accessible by the intended users. The Departments also considered that requiring plans and issuers to notify CMS of the internet address for their machine-readable files would increase the burdens on plans and issuers. The Departments requested comment on whether the proposed requirement to allow issuers to display the files in the location of their choice is superior to requiring plans and issuers to report the internet-based addresses of their files to CMS for public display. The Departments were specifically interested in whether the burden associated with reporting file locations to CMS would be outweighed by the risk that members of the public would be unable to easily locate plans’ and issuers’ machine-readable files.

Several commenters supported the Departments’ proposal to make the machine-readable files easily and publicly available. One commenter supported making the files available free of charge and stated that individuals should not be required to register a user account, password, or enter other credentials, or to submit PII to access the files. Several commenters suggested alternative methods or more stringent requirements for making public the information required to be disclosed through the machine-readable files. One commenter expressed a preference for CMS to maintain a centralized location on the CMS website from which the public can access links to the files. The commenter noted that if the Departments elected not to maintain a centralized database, the Departments should require plans and issuers to prominently display a link to the files in the main menu of the homepage on their respective websites. Similarly, another commenter asserted that the final rules should require issuers to report the location of their files and provide a data dictionary to facilitate oversight and enforcement of plans and issuers.

Other commenters suggested the Departments create a centralized database to house the data required to be disclosed through the machine-readable files. One commenter recommended the information required to be disclosed through the files be loaded into a publicly available searchable database that anyone can access prior to receiving a medical service. Similarly, another commenter recommended that HHS aggregate the data to create a centralized database. By contrast, another commenter recommended the Departments should not create a central location for negotiated rate information and historical data, making the argument that the private sector is best suited to deliver this information to consumers.

As proposed, the machine-readable files must be made publicly available and accessible to any person free of charge and without conditions, such as establishment of a user account, password, or other credentials, or submission of PII to access the file. Additionally, the proposed rules specified that the files must be made available in the form and manner specified by the Departments. While the Departments considered comments related to the manner of the public file disclosures (such as prominent display on a plan or issuer’s homepage), the Departments are also mindful of the need to provide flexibility to plans and issuers so that they are able to house the files in a location that meets their unique technical specifications. At this time, the Departments are of the view that reporting of the links to the file locations is not necessary to achieve the goals of the final rules. However, the Departments note that nothing in the final rules prevents a federal or state regulatory body, such as a state Department of Insurance (DOI), from collecting this information from issuers subject to their jurisdiction.

The Departments are aware and understand commenters’ interest in HHS aggregating and centralizing all of the data required to be publicly disclosed through the machine-readable files. However, the Departments are of the view that HHS is not best suited for this role. As noted throughout this preamble, the Departments expect making negotiated rate and allowed amount information available through the machine-readable files will spur third-party internet-based developers to innovate, resulting in consumer-facing tools. The Departments anticipate that these consumer-facing tools developed by third parties could act as centralized databases, aggregating the pricing information for many plans and issuers. The Departments are of the view that the private sector is better suited to developing internet-based tools using this information than the Departments, and further, that the competition spurred by several different third parties operating in this space could benefit consumers seeking to find the third-party tool that is best suited to their individual consumer needs.

The final rules adopt, as proposed, the accessibility requirements for the machine-readable files. The final rules clarify that the accessibility requirements apply to all three machine-readable files finalized within the final rules: the In-network Rate File (referred to in the proposed rules as the Negotiated Rate File), the Allowed Amount File, and the Prescription Drug File.

4. Required Timing of Updates of Information to be Disclosed to the Public

The proposed rules would have required group health plans and health insurance issuers to update the information required to be included in each machine-readable file monthly. The Departments also proposed to require plans and issuers to clearly indicate the date of the last update made to the In-network Rate Files and Allowed Amount Files in accordance with guidance issued by the Departments.

The Departments recognized in the proposed rules that information in In-network Rate Files (referred to in the proposed rules as the Negotiated Rate Files) could change frequently and considered whether to require plans and issuers to update their In-network Rate Files more often than monthly to ensure that consumers have access to the most up-to-date negotiated rate information. Accordingly, the Departments sought comment on whether the final rules should require plans’ and issuers’ In-network Rate Files to be updated more frequently. The Departments also sought comment on an alternate proposal that would require plans and issuers to update negotiated rate information within 10 calendar days after the effective date of new rates with any in-network provider, and on whether the update timelines for negotiated rate information and historical out-of-network payment data should be the same.

For the reasons discussed elsewhere in this section of this preamble, the final rules adopt, as proposed, the requirement for a plan or issuer to update the information required to be included in each machine-readable file monthly. The final rules clarify that this requirement to update the machine-readable files monthly applies to all three machine-readable files being finalized through the final rules: the In-network Rate File, the Allowed Amount File, and the Prescription Drug File.

Several commenters stated that the requirement to update the In-network Rate Files and Allowed Amount Files monthly is operationally burdensome and the benefits of this requirement are limited because the information will not change significantly on a monthly basis. Some commenters recommended the Departments change the required frequency of updates to every six months, while others suggested that the final rules require updates to the In-network Rate File less frequently than monthly (for example, quarterly or semi-annually), but recommended that the Allowed Amount File should be updated monthly. Another commenter recommended a phased-in approach where the files would be updated twice a year in the first year of implementation and quarterly thereafter. In contrast, one commenter recommended the files be updated in real-time as soon as updates to rates are made.

Based on consultation with government-affiliated IT experts and the design of the file schemas, the Departments are of the view that building the first machine-readable file will facilitate the automation of the process to build future files. In other words, the ability to produce subsequent files should be streamlined after completing initial development. Therefore, the Departments do not find persuasive the contention that requiring file updates monthly will significantly increase the overall costs and burdens related to producing the files. The Departments, however, do not agree that the files should be updated in real-time as soon as updates are made. With the monthly update requirement, the Departments are seeking to balance the need to ensure the data is current and accurate for consumers with minimizing burdens on plans and issuers.

As noted in the proposed rules, the Departments acknowledge there will be some costs with making updates to the files, including costs to ensure the quality of data and costs associated with posting the information on a public website. The Departments are of the view that requiring plans and issuers to update the files on a monthly basis will sufficiently limit the burden while ensuring that the most current data generally available. However, requiring updates to the files more or less frequently would not adequately balance these interests. Requiring updates to the files more frequently (such as on a daily basis), would add potentially unnecessary burdens for plans and issuers. Requiring updates to the files less frequently would potentially result in consumers relying on outdated information for health care purchasing decisions. While negotiated rates, in particular, may not change frequently for any one contract with a provider or group of providers, the Departments understand that payer-provider contracts are updated on a rolling basis and throughout the year. Therefore, updates throughout the year are needed in order to ensure that the information disclosed remains up-to-date.

The final rules also require that the Prescription Drug File be updated on a monthly basis. The Departments understand the complexities of prescription drug pricing and are aware that drug prices can fluctuate as frequently as daily. However, the Departments have determined that aligning the frequency of updates of all machine-readable files will mitigate the burden associated with maintaining the files for plans and issuers, and will best balance the need for disclosing current and accurate information against that burden. The Departments are aware that the number of pricing updates in the monthly Prescription Drug File will likely be more than the number of monthly pricing updates for medical services in the In-network Rate File. However, the Departments are of the view that if plans and issuers can update their pharmacy claims processing systems in real-time to account for fluctuating prices and adjudicate claims for prescription drugs, then the burden to pull current pricing information into the Prescription Drug File should be manageable.

The Departments will monitor the implementation of the machine-readable file requirements and consider updates in future rulemaking if it is determined that monthly updates are not adequately balancing the need for accurate and current information against the burdens for plans and issuers.

5. Special Rules to Prevent Unnecessary Duplication and Allow for Aggregation

Similar to the proposed cost-sharing information disclosure requirements for participants, beneficiaries, and enrollees, the Departments proposed a special rule to streamline the publication of data that would be included in the proposed machine-readable files. This special rule has three components: one for insured group health plans where a health insurance issuer offering coverage in connection with the plan has agreed to provide the required information, another for plans and issuers that contract with third parties to provide the information on their behalf, and a special rule allowing aggregation of out-of-network allowed amount data.

a. Insured group health plans

The Departments proposed that, to the extent coverage under a group health plan consists of group health insurance coverage, the plan would satisfy the proposed machine-readable file requirements if the issuer offering the coverage were required to provide the information pursuant to a written agreement between the plan and issuer. Accordingly, if a plan sponsor and an issuer enter into a written agreement under which the issuer agrees to provide the information required under the proposed rules, and the issuer fails to provide full or timely information, then the issuer, but not the plan, has violated the final rule’s disclosure requirements. This special rule would only apply, however, to insured group health arrangements where the contractually-obligated issuer is independently subject to the final rules.

The Departments received comments expressing strong support of the special rule to streamline public disclosure and avoid unnecessary duplication of disclosures for insured group health insurance coverage. These commenters recommended the policy be retained in the final rules. Accordingly, the final rules retain this special rule as proposed.

b. Use of Third Parties to Satisfy Public Disclosure Requirements

The Departments recognize that self-insured group health plans may rely on written agreements with other parties, such as service providers, to obtain the necessary data to comply with the final rules’ disclosure requirements. Furthermore, it is the Departments’ understanding that most health care coverage claims in the U.S. are processed through health care clearinghouses and that these entities maintain and standardize health care information, including information regarding negotiated rates and out-of-network allowed amounts.²⁰⁷ As a result, the Departments noted in the proposed rules that a plan or issuer may reduce the burden associated with making negotiated rates and out-of-network allowed amounts available in machine-readable files by entering a business associate agreement and contracting with a health care claims clearinghouse or other HIPAA-compliant entity to disclose this data on its behalf.²⁰⁸ Accordingly, the Departments proposed to permit a plan or issuer to satisfy the public disclosure requirement of the proposed rules by entering into a written agreement under which another party (such as a TPA or health care claims clearinghouse) will make public the required information in compliance with this section. However, if a plan or issuer chooses to enter into such an agreement and the party with which it contracts fails to provide full or timely information, the plan or issuer will have violated the final rules’ disclosure requirements.

Generally, commenters supported the use of clearinghouses or TPAs to store all of the information that must be disclosed under the proposed rules. One commenter suggested that all HIPAA-compliant third parties, not just clearinghouses, be allowed to satisfy the public disclosure requirements. Some commenters raised concerns related to using clearinghouses noting that the feasibility of using clearinghouses is dependent on the clearinghouse receiving all of the necessary data from health insurance issuers and providers who possess the data. The commenter strongly recommended the final rules require entities that possess the data to share the information in a timely manner with the relevant clearinghouses. The commenter also noted the costs charged by clearinghouses associated with data storage and noted that the prices must be reasonable and not discriminatory (for example, against smaller plans).

Several commenters recommended the Departments’ special rule include protection for plan sponsors if they fail to meet the public disclosure requirements due to an inability, while acting in good faith, to obtain the data from a third-party service provider or when a contracted third-party withholds information or fails to submit information in a timely manner. One of these commenters also requested the Departments establish a policy that liability for failure to comply rests with a contracted third party in the event a plan sponsor can show that, acting in good faith, it is unable to comply with the disclosure requirements due to withholding of information by the third party.

This special rule, as finalized, continues to permit a plan or issuer to satisfy the public disclosure requirements of 26 CFR 54.9815-2715A3(b), 29 CFR 2590.715-2715A3(b), and, 45 CFR 147.212(b) of the final rules by entering into a written agreement under which another party (such as a TPA or health care claims clearinghouse) will make public the required information in compliance with this section. The final rules identify TPAs and health care claims clearinghouses as examples of the types of parties a plan or issuer may contract with, but these are not the only types of entities that may enter into such arrangements and the Departments expect that they will comply with any applicable privacy protection requirements, including applicable privacy protections under HIPAA.

Plans and issuers are not required to enter into such agreements in order to comply with the public disclosure requirements of the final rules. As the Departments noted in the preamble to the proposed rules, if a plan or issuer chooses to enter into such an agreement it is ultimately the responsibility of the plan or issuer to ensure that the third party provides the information required by the final rules. As noted earlier in this section, the special rule for insured plans is only available to plans that contract with an entity that is an issuer separately subject to final rules. This requirement ensures that the Departments retain a mechanism to enforce the final rules. Accordingly, this special rule relating to the use of third parties to satisfy these requirements continues to provide that the plan or issuer would violate the requirements of the final rules if the third party fails to provide full or timely information.

Another commenter recommended the Departments create a special rule or “safe harbor” for plans that are unable to disclose negotiated rate information due to antitrust laws, which prevent the plan from accessing information about its partners’ contracts when engaged in a partnership alliance agreement. The commenter described a partnership alliance as shared partner networks in other geographic areas in order to meet the needs of multi-state employer groups.

As discussed earlier in this preamble, the Departments acknowledge that the Sherman Antitrust Act prohibits any contract, combination, or conspiracy in restraint of trade or commerce.²⁰⁹ Specifically, the law prohibits any “person” from entering into any such contract, trust, or similar arrangement.²¹⁰ Nothing under the proposed or final rules creates, compels, or endorses agreements or conspiracies between or among persons to form illegal arrangements or trusts in restraint of trade or commerce. Antitrust law does not proscribe or limit action by the federal government, to improve competition and lower costs to consumers, even if these actions may involve disclosures that, if made by private parties under a collusive agreement, might invite antitrust scrutiny.²¹¹ Because the Departments are of the view that antitrust law will not prevent plans and issuers from making the public disclosures required under the final rules, there is no need for the Departments to create a special rule for plans that are unable to disclose negotiated rate information due to antitrust laws.

One commenter expressed a concern that multiemployer plans generally do not have access to the rate information needed to provide the cost-sharing disclosures required under the proposed rules, yet plans could be subject to significant penalties for failure to comply. The Departments note that insured multiemployer plans would qualify for the special rule for insured plans under which an issuer providing coverage for a plan enters into an agreement to provide the required information, which is being finalized through the final rules. If a multiemployer plan sponsor enters into a written agreement with an issuer under which the issuer agrees to provide the information required under the final rules, and the issuer fails to provide full or timely information, then the issuer, but not the plan, has violated the transparency disclosure requirements and may be subject to enforcement mechanisms applicable to plans under the PHS Act.²¹² Therefore, insured multiemployer plans that contract with an issuer to provide the information required under the final rules would not be subject to enforcement actions under this mechanism; rather, the issuers with whom they have contracted will be subject to enforcement action under the final rules for failure to meet the transparency disclosure requirements.

Under the second special rule, multiemployer plans may also contract with a TPA or other third party (for example, a clearinghouse) to meet the transparency disclosure requirements under the final rules. However, this commenter is correct that if a plan or issuer chooses to enter into such an agreement, and the party with which it contracts fails to provide full or timely information, the plan or issuer would violate the transparency disclosure requirements.

The notion that accountability for compliance rests with a plan or issuer when the issuer or plan enlists a contractor or vendor for a business function is not inconsistent with other applicable regulations.²¹³ While claims processing is the main function for which an issuer or plan has contracted in this example, other responsibilities, such as responding to federal audits and report requirements, may fall within the scope of the duties required by contract. The Departments clarify that nothing in the final rules prevents an issuer or plan from ensuring contracts with TPAs or other third parties include clear terms specifying functions required to meet the disclosure requirements of the final rules, as well as establish service level agreements and performance metrics to hold the entities with whom the issuer or plan decides to contract accountable.

Because multiemployer plans may be able to take advantage of the special rules established under the proposed rules, the Departments do not view additional special considerations necessary to address the ability of such plans to comply with the transparency requirements of the final rules.

c. Aggregation for Allowed Amount Files

In order to further mitigate privacy concerns and to eliminate unnecessary duplication, the Departments proposed to permit plans and issuers to satisfy the public disclosure requirements of the proposed rules by making available out-of-network allowed amount data that has been aggregated to include information from more than one plan or policy. As previously discussed, a plan or issuer may satisfy the disclosure requirement by disclosing out-of-network allowed amounts. Accordingly, under such circumstances, the proposed rules would have permitted plans and issuers to aggregate out-of-network allowed amounts for more than one plan or insurance policy or contract.

To the extent a plan or issuer provided aggregated out-of-network allowed amount information, the Departments proposed to apply the minimum claims threshold to the aggregated claims data set, but not at the plan or issuer level. Based on commenters’ requests for clarification, the Departments have determined that the proposed approach to apply the minimum claims threshold to the full aggregated claims data set could undermine the goal of the minimum claims threshold. The out-of-network Allowed Amount File must include a unique plan identifier for each plan or coverage included in the file under 26 CFR 54.9815-2715A3(b)(1)(ii)(A), 29 CFR 2590.715-2715A3(b)(1)(ii)(A), and 42 CFR 147.212(b)(1)(ii)(A). Therefore, even if the data for each plan or coverage were to be aggregated for purposes of determining whether the minimum claims threshold applies to a particular covered item or service, the data in the Allowed Amounts File would be distinguishable at the level of the plan identifier. The Departments are of the view that this could be problematic if all plans or coverage included in an aggregated Allowed Amount File meet the minimum claim threshold for an item or service when combined, but some or all individual plans do not independently meet the minimum claim threshold of 20 claims.

For instance, data for two plans are aggregated in the same Allowed Amount File under this rule. Plan A has 20 claims for Service X, while Plan B only has six claims for Service X. In aggregate, the plans meet the 20-claim threshold with 26 total claims for Service X. However, individually, only Plan A has met the minimum claim threshold. Under the proposal, data for Service X would be required to be included for both Plan A and Plan B, along with both the plan identifiers. The outcome of this requirement would be that Plan B would include data identifiable at the plan level for Service X. The Departments are of the view that allowing Plan B data to be included in the file for Service X would undermine the minimum claim threshold, increasing risk that individual patients’ claims histories could be identified. To prevent this outcome, data for each plan or coverage included in an aggregated Allowed Amount File must independently meet the minimum claims threshold for each item or service and for each plan or coverage included in the aggregated Allowed Amount File. To highlight this requirement, the Departments are finalizing this provision of the proposed rules with a minor modification clarifying that the flexibility to aggregate out-of-network allowed amounts for more than one plan or coverage in a single machine-readable file is still subject to the minimum claims threshold applicable to individual plans or coverage as described under paragraph (b)(1)(ii)(C) of the same section.

One commenter requested clarification of a plan’s obligation if a third party aggregates the Allowed Amount File. The commenter specifically requested clarification regarding whether the plan or third party would be responsible for posting the file, and whether there will be any special labeling requirements for an aggregated file, including if the file will need to include a disclosure that it includes aggregated data.

Nothing in the final rules prevents the Allowed Amount File from being hosted on a third-party website or prevents a plan administrator from contracting with a third party to post the file. The Departments have added text to the final rules to make clear that this flexibility exists and to provide that if a plan chooses not to also host the file separately on its own public website, it must provide a link on its website to the location where the file is publicly available. The Departments will provide additional information on the form and manner, including labeling, through the file technical implementation guidance.

As stated in the preamble to the proposed rules, consumers with health insurance often lack incentives to seek care from lower-cost providers, for example when consumers’ out-of-pocket costs are limited to a set copayment amount regardless of the costs incurred by the issuer. Innovative benefit designs can be used to increase consumer engagement in health care purchasing decisions. HHS proposed to allow issuers that empower and incentivize consumers through the introduction of new or different plans that include provisions encouraging consumers to shop for services from lower-cost, higher-value providers, and that share the resulting savings with consumers, to take credit for such “shared savings” payments in their MLR calculations. HHS believes this approach preserves the statutorily-required value consumers receive for coverage under the MLR program, while encouraging issuers to offer new or different plan designs that support competition and consumer engagement in health care.

Formula for Calculating an Issuer’s Medical Loss Ratio (45 CFR 158.221)

Section 2718(b) of the PHS Act requires a health insurance issuer offering group or individual health insurance coverage (including grandfathered health insurance plans) to provide rebates to enrollees if the issuer’s MLR falls below specified thresholds (generally, 80 percent in the individual and small group markets and 85 percent in the large group market). Section 2718(b) of the PHS Act generally defines MLR as the percentage of premium revenue (after certain adjustments) an issuer expended on reimbursement for clinical services provided to enrollees and on activities that improve health care quality. Consistent with section 2718(c) of the PHS Act, the standardized methodologies for calculating an issuer’s MLR must be designed to take into account the special circumstances of smaller plans, different types of plans, and newer plans.

Several states have considered or adopted legislation over the last few years to promote health care cost transparency and encourage issuers to design and make available plans that “share” savings with enrollees who shop for health care services and choose to obtain care from lower-cost, higher-value providers.²¹⁴ In addition, at least five states and a number of self-insured group health plans have incorporated such “shared savings” provisions into all or some of their health plans.²¹⁵ Under some plan designs, the savings are calculated as a percentage of the difference between the rate charged by the provider chosen by the consumer for a medical procedure and the average negotiated rate for that procedure across all providers in the issuer’s network. Under other plan designs, the “shared savings” are provided as a flat dollar amount according to a schedule that places providers in one or more tiers based on the rate charged by each provider for a specified medical procedure. Under various plan designs, the “shared savings” may be provided in form of a gift card, a reduction in cost sharing, or a premium credit. HHS is of the view that such unique plan designs would motivate consumers to make more informed choices by providing consumers with tangible incentives to shop for care at the best price. As explained elsewhere in the preamble to the proposed rules, there is ample evidence that increased transparency in health care costs would lead to increased competition among providers.²¹⁶ HHS is of the view that allowing flexibility for issuers to include savings they share with enrollees in the numerator of the MLR would increase issuers’ willingness to undertake the investment necessary to develop and administer plan features that may have the effect of increasing health care cost transparency, which in turn could lead to reduced health care costs.

HHS has in the past exercised its authority under section 2718(c) of the PHS Act to take into account the special circumstances of different types of plans by providing adjustments to increase the MLR numerator for “mini-med” and “expatriate” plans,²¹⁷ student health insurance plans,²¹⁸ as well as for QHPs that incurred Exchange implementation costs²¹⁹ and certain non-grandfathered plans (that is, “grandmothered” plans).²²⁰ This authority has also been exercised to recognize the special circumstances of new plans²²¹ and smaller plans.²²² Consistent with this approach, HHS proposed to exercise its authority to account for the special circumstances of new and different types of plans that provide “shared savings” to consumers who choose lower-cost, higher-value providers by adding a new paragraph 45 CFR 158.221(b)(9) to allow such “shared savings” payments to be included in the MLR numerator. HHS made this proposal so that issuers would not be required to pay MLR rebates based on a plan design that would provide a benefit to consumers that is not currently captured in any existing MLR revenue or expense category. HHS proposed that the amendment to 45 CFR 158.221 would become effective beginning with the 2020 MLR reporting year (for reports filed by July 31, 2021). HHS invited comments on this proposal.

After considering the public comments, HHS is finalizing the amendment to 45 CFR 158.221(b) as proposed.

The majority of comments on the proposed amendments to the MLR program rules supported the proposal to add a new paragraph to 45 CFR 158.221(b). Supporters noted that allowing issuers to include “shared savings” payments in their MLR calculation aligns issuer and enrollee incentives, aligns with MLR’s purposes, is innovative, provides enrollees with value, increases consumer engagement and empowerment, and will promote better enrollee decision-making and reduce total health care costs. Several supportive commenters also noted that the proposal may encourage more issuers to offer such “shared savings” programs, as allowing “shared savings” payments to be included in the MLR numerator will remove any existing barriers to such programs and facilitate the use of innovative benefit designs that increase consumer engagement in health care purchasing decisions, while disallowing this approach punishes issuers that offer innovative “shared savings” programs and disincentivizes issuers from adopting such programs. Several commenters stated that there is evidence that patients are more likely to shop for care when information on prices is coupled with incentives, and that such shopping can generate significant savings for issuers and lead health care providers to lower their prices in order to remain competitive in the marketplace.²²³

HHS agrees with the comments in support of the proposal and is finalizing this amendment as proposed to provide additional flexibility to states and issuers and encourage the economic effects the commenters highlighted.

Some commenters requested clarification regarding certain aspects of the “shared savings” plans. Several commenters requested that HHS develop uniform standards and a definition for “shared savings,” which according to commenters would, among other things, help prevent fraud and abuse; and that HHS clarify the criteria for low-cost, high-value providers. One commenter asked HHS to provide sub-regulatory guidance to specify in what form the savings can be shared, how issuers will report their “shared savings,” how double-counting can be prevented, and whether “shared savings” payments are taxable income. Other commenters suggested that HHS provide maximum flexibility for issuers and states to innovate and develop “shared savings” programs they determine are best suited for their populations.

While HHS appreciates these suggestions and is also concerned with preventing fraud and abuse, HHS is of the view that state legislators and regulators are currently in a better position than HHS to work with the issuers in their states to define the “shared savings” programs that they support, issue standards and criteria for the programs for their respective constituents, and decide in what form the savings can be made. These considerations include the operational details of any “shared savings” program, such as creating standards and definitions, developing acceptable payment methods, and addressing fraud concerns. HHS notes that several issuers have already developed and implemented such programs and that a few states have done the same. The amendment being finalized in this rulemaking is specific to the recognition of “shared savings” payments in issuer MLR calculations and is intended to encourage more state and issuer innovation with these types of programs. Accordingly, HHS will provide technical guidance in the MLR Annual Reporting Form Instructions to clarify the reporting of “shared savings” payments specifically for MLR purposes. With respect to the comment regarding how double-counting can be prevented, HHS notes that 45 CFR 158.170 prevents double-counting by requiring each expense to be reported in only one category or to be pro-rated between categories for MLR purposes. Finally, whether “shared savings” payments to enrollees are taxable will vary based on certain specific facts and circumstances. Some forms of “shared savings” may be taxable; however, HHS defers to the Department of the Treasury to address the taxability of such payments as necessary.

Opponents of the proposal stated that it fails to ensure that the savings are actually used for health care or quality improvement activities (QIA), that HHS is subverting the statutory scheme by allowing issuers to spend less on enrollees’ care and quality initiatives without returning the premium dollars saved to all enrollees, and that the proposal would allow issuers to further boost profits and diminish the MLR standards and issuer accountability. Some opponents of the proposal argued that since any plan type can offer “shared savings,” adding a “shared savings” payment component to a policy does not make it a “different” type of plan and it should not be treated as such. Others were concerned that the proposal would incentivize issuers to artificially drive down negotiated rates with providers and that these savings may not make their way back to enrollees. One commenter opposed extending “shared savings” programs to self-insured ERISA plans. Another commenter pointed out that the National Association of Insurance Commissioners (NAIC) did not mention the proposal in its comments and the MLR statute provides that the NAIC shall establish the definitions and methodologies for MLRs.

HHS agrees that “shared savings” are neither an incurred claim nor a QIA. Instead, in support of this amendment to 45 CFR 158.221(b), HHS is relying on the statutory directive under section 2718(c) of the PHS Act that the MLR standardized methodologies shall be designed to take into account the special circumstances of different types of plans and newer plans, such as plans that offer “shared savings” payments to enrollees that seek care from lower-cost, higher-value providers. HHS believes that any issuer that includes in its plan design(s) a “shared savings” component is offering a “different” type of plan and a “newer” plan, as a “shared savings” program is a new and unique feature. HHS notes that the amendment finalized in these rules helps provide policyholders with value for their premium dollars, as intended by section 2718 of the PHS Act. HHS disagrees that the amendment somehow subverts the statutory scheme as issuers that implement these programs are sharing the savings and returning dollars to enrollees who participate in these programs, and issuers must still otherwise meet the applicable MLR threshold or provide a rebate to enrollees. For the same reasons, HHS does not share certain commenters’ view that the amendment weakens the MLR standards and enables issuers to improperly boost profits, as the amendment simply allows issuers to account for the portion of the “shared savings” that is passed to participating enrollees and that consequently does not increase issuers’ profits. With respect to comments regarding the impact on provider negotiated rates and enrollee access to savings, HHS is unsure how the amendment would incentivize issuers to artificially drive down negotiated rates with providers. However, if as a result of this amendment, provider rates decrease, such a result would in fact benefit enrollees. In addition, because only actual payments made to enrollees can be included in an issuer’s MLR calculation under the amendment, issuers will benefit for MLR calculation and reporting purposes only if the savings are actually shared with enrollees. With respect to the comment regarding self-insured ERISA plans, HHS notes that this amendment does not apply to or impact, either self-funded ERISA plans, or self-funded non-ERISA plans, as these plans are not subject to the MLR reporting and rebate requirements under section 2718 of the PHS Act. Last, with respect to comments regarding the NAIC recommendations to HHS, section 2718(c) of the PHS Act directed the NAIC, subject to certification by the Secretary, to establish uniform definitions and standardized methodologies to guide MLR reporting and calculations. The NAIC met its statutory obligation when it provided recommendations to HHS in 2010 in the form of a model regulation.²²⁴ The NAIC’s recommendations informed the Secretary’s decisions about the federal definitions and methodologies for calculating MLRs.²²⁵ In this rulemaking, HHS is taking further action to recognize the special circumstances of the different and newer plans that include “shared savings” programs with the addition of new paragraph (b)(9) to 45 CFR 158.221.

Some commenters expressed concerns that “shared savings” programs in general could actually compromise the quality of care by driving consumer choices based on cost without regard for quality, and that these programs could encumber and curtail medically necessary clinical services in serving the financial interest of the payer. Some commenters requested that HHS only allow “shared savings” where there is evidence that the participating enrollees actually receive better care at reduced costs. One commenter stated that the proposal fails to define higher-value, which varies based on each enrollee’s circumstances. One commenter questioned the feasibility of measuring whether reward systems generate actual savings.

HHS disagrees that programs that reward enrollees for critically examining their options and pursuing cost-effective care interfere with the provision of medically necessary clinical services. However, HHS agrees that quality as well as cost should be determinants of what qualifies for inclusion in any given issuer’s “shared savings” program. That is why the amendment to 45 CFR 158.221 includes both a cost and quality component; it permits issuers to include in the MLR numerator “shared savings” payment made to enrollees choosing to obtain care from a lower-cost and higher-value provider. However, HHS did not propose and is not finalizing elements or criteria issuers must address or otherwise include in their respective “shared savings” programs. The amendment finalized in this rulemaking is specific to recognizing “shared savings” payments in issuer MLR calculations. As detailed above, HHS believes state legislators and regulators are currently in the best position to work with issuers in their states to develop standards and criteria for “shared savings” programs for their respective constituents. HHS further believes that issuers are in the best position to perform the necessary provider credentialing activities that will ensure that network providers that are included in their “shared savings” programs are high-value, high-quality providers. Since higher-value can vary by enrollee demographics and provider type, issuers must determine what this means for their enrollees and providers and maintain all documents and other evidence necessary to support that determination consistent with the maintenance of records requirements contained in 45 CFR 158.502. Issuers are sophisticated entities that understand that if their enrollees obtain lower-quality care, their costs over the long-term will increase rather than decrease as their enrollees will likely need additional and possibly corrective medical care. HHS therefore believes that issuers’ incentives are aligned with those of their enrollees when it comes to designing “shared savings” programs.

HHS received a few comments urging that issuers be allowed to include some or all of the costs of implementing the requirements of these price transparency rules as a QIA in the numerator of the MLR calculation. A few commenters urged HHS to allow issuers to include some or all of the costs of creating the cost estimator tool required by the price transparency aspects of the proposed rules.

Price transparency implementation costs do not constitute an improvement to the quality of health care and thus do not qualify as QIA and cannot be included in the numerator of the MLR calculation.

Lastly, several commenters expressed support for or opposition to the MLR reporting and rebate requirements in general. HHS appreciates these comments but notes that they are outside the scope of the amendments to the MLR program rules contained in the proposed rule.

A. In General

1. Entities Subject to the Final Rules

The Departments proposed requiring group health plans, including self-insured plans, and health insurance issuers of individual and group health insurance coverage to disclose pricing information, with certain exceptions as discussed in more detail in this preamble. The Departments are of the view that consumers across the private health insurance market will benefit from the availability of pricing information that is sufficient to support informed health care decisions. Although the Departments considered making the requirements applicable to a more limited segment of the private health insurance market, the Departments are of the view that consumers across the market should receive and benefit from the same access to standardized, meaningful pricing information and estimates. Moreover, applied broadly, these changes have a greater potential to reform health care markets.

Additionally, the preamble to the proposed rules discussed how pricing information related to items and services that are subject to capitation arrangements under a specific plan or contract could meet transparency standards by disclosing only the consumer’s anticipated liability. The Departments sought comment on whether there are certain reimbursement or payment models (such as ACOs or staff model HMOs) that should be partially or fully exempt from these requirements or should otherwise be treated differently. Further, the Departments sought comment on how consumers may become better informed about their cost-sharing requirements under these reimbursement or payment models.

The Departments also considered limiting applicability to issuers of individual health insurance coverage and insured group health insurance coverage, but concluded that limiting applicability would be inconsistent with section 2715A of the PHS Act. The Departments are concerned that a more limited approach might encourage plans and issuers to simply shift costs to sectors of the market where the final rules would not apply and where consumers have diminished access to pricing information. Additionally, the Departments are concerned that a more limited approach may distort the health care market by creating perverse incentives for plans and issuers to avoid participating in certain markets that require compliance with these requirements.

The Departments are aware that certain plans and health coverage are not subject to the transparency provisions under section 2715A of the PHS Act and, therefore, are not be subject to the final rules. This includes grandfathered health plans, excepted benefits, health care sharing ministries, and short-term, limited-duration insurance (STLDI).

Grandfathered health plans are health plans that were in existence as of March 23, 2010, the date of enactment of PPACA, and that are only subject to certain provisions of PPACA, as long as they maintain their status as grandfathered health plans under the applicable rules.²²⁶ Under section 1251 of PPACA, section 2715A of the PHS Act does not apply to grandfathered health plans. Therefore, the proposed rules would not have applied to grandfathered health plans (as defined in 26 CFR 54.9815-1251, 29 CFR 2590.715-1251, and 45 CFR 147.140).

In accordance with sections 2722 and 2763 of the PHS Act, section 732 of ERISA, and section 9831 of the Code, the requirements of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code do not apply to any group health plan (or group health insurance coverage offered in connection with a group health plan) or individual health insurance coverage in relation to its provision of excepted benefits. Excepted benefits are described in section 2791 of the PHS Act, section 733 of ERISA, and section 9832 of the Code. Section 2715A of the PHS Act is contained in title XXVII of the PHS Act, and, therefore, the proposed rules would not have applied to a plan or coverage consisting solely of excepted benefits.

The Departments also proposed that the rules would not apply to STLDI. Under section 2791(b)(5) of the PHS Act, STLDI is excluded from the definition of individual health insurance coverage and is therefore exempt from section 2715A of the PHS Act.²²⁷ Therefore, the proposed rules would not have applied to STLDI coverage.

The Departments also proposed that the rules would not apply to health reimbursement arrangements, or other account-based plans, as defined in 26 CFR 54.9815-2711(d)(6)(i), 29 CFR 2590.715-2711(d)(6)(i), and 45 CFR 147.126(d)(6)(i), that simply make reimbursements subject to a maximum fixed dollar amount for a period, with the result that cost-sharing concepts are not applicable to those arrangements.

In contrast, the Departments proposed that the final rules would apply to grandmothered plans, meaning certain non-grandfathered health insurance coverage in the individual and small group markets with respect to which CMS has announced it will not take enforcement action even though the coverage is out of compliance with certain specified market requirements.²²⁸ The Departments sought comment on whether grandmothered plans may face special challenges in complying with these transparency reporting provisions and whether the proposed rules should apply to grandmothered plans.

The final rules adopt these provisions as proposed. The final rules apply these requirements to group health plans, and health insurance issuers offering non-grandfathered group or individual health insurance coverage, with certain exceptions. Thus, the final rules apply to grandmothered plans. The Departments are finalizing, as proposed, that these requirements will not apply to certain plans and coverages that are not subject to the transparency provisions under section 2715A of the PHS Act, including grandfathered health plans, excepted benefits, and STLDI. Additionally, the final rules will not apply to health reimbursement arrangements, or other account-based plans, as defined in 26 CFR 54.9815-2711(d)(6)(i), 29 CFR 2590.715-2711(d)(6)(i), and 45 CFR 147.126(d)(6)(i), as these account-based arrangements simply make certain dollar amounts available, with the result that cost-sharing and price setting concepts are not applicable to those arrangements.

The majority of commenters supported applying these requirements to issuers of individual health insurance coverage and group health insurance coverage, as well as group health plans. Commenters supported allowing consumers across the market to access important pricing information. Some commenters suggested additional plans and coverages that should be required to comply with these requirements, as discussed later in this preamble. The Departments did not receive comments regarding application of the final rules to grandmothered plans.

One commenter stated that the proposed rules would create an uneven playing field that would unfairly advantage plans and issuers offering stand-alone dental or vision coverage over plans that incorporate such benefits into major medical coverage. For example, the commenter stated that a plan offering essential health benefits would have to include in a machine-readable file negotiated rates for pediatric dental services. However, a plan offering stand-alone dental coverage would not have to publish pricing information. For these reasons, the commenter recommended that vision, dental, and hearing benefits, if offered as part of a plan or coverage subject to the transparency requirements, should be excluded from information disclosed through the internet-based self-service tool and machine-readable files.

In response to this comment, the Departments note that section 2721(b), (c)(1) through (3) of the PHS Act provides an exemption from title XXVII of the PHS Act for “any individual coverage or any group health plan (and group health insurance coverage offered in connection with a group health plan) in relation to its provision of excepted benefits.” (See also section 732 (b), (c) of ERISA, and section 9831(b), (c) of the Code) (emphasis added).²²⁹ To the extent that a plan or issuer provides a participant, beneficiary, or enrollee with the opportunity to opt out of limited scope dental or vision benefits, those benefits are considered as not an integral part of the plan and, accordingly, are considered excepted benefits.²³⁰ Therefore, under the final rules, plans and issuers that offer excepted benefits, such as limited scope dental or vision benefits, along with their major medical coverage are not required to disclose the information required by the final rules regarding their provision of those excepted benefits. Accordingly, the final rules do not create an uneven playing field that would unfairly advantage plans and issuers offering stand-alone dental or vision coverage over plans that incorporate such benefits into major medical coverage.

The Departments received a mix of comments regarding whether the final rules should apply to alternative contracting and alternative payment model structures, such as ACOs or HMOs. One commenter recommended a narrower scope for ACOs and other capitated payment arrangements, including only requiring transparency tools to display amounts that are not service dependent (for example, flat copayments), as well as accumulator information about deductibles and out-of-pocket maximums. As discussed elsewhere in this preamble, some commenters expressed concern regarding how the final rules would apply to reference-based pricing models, direct primary care, bundled or capitated payment arrangements, and value-based insurance design. Additionally, some commenters expressed concern regarding how the final rules would apply to plans with rental networks and quality-adjusted and risk-adjusted contracts (under which prices can only be calculated after the fact). These commenters recommended that these kinds of arrangements be exempt from the final rules’ requirements.

On the other hand, other commenters suggested that there is no justification for excluding plans that reimburse their providers based on capitation from the requirements of the final rules as this would result in an incomplete data set, and issuers of risk adjustment-covered plans already assign values to services to administer benefits with deductibles and co-insurance, for risk adjustment purposes under 45 CFR 153.710(c), and for internal reporting. One commenter recommended that the final rules should apply to ACOs and other capitated arrangements and that these arrangements should be required to disclose their underlying financial incentive arrangements, not just consumer’s anticipated liability. The commenter also noted that any exemptions may incentivize plans to move to these pricing models, which the commenter characterized as opaque and potentially consumer-unfriendly. Several commenters agreed that pricing information related to items and services subject to capitation arrangements could meet transparency standards only through the disclosure of the consumer’s anticipated liability.

Some commenters raised the concern that the proposed rules would have a particularly negative impact on smaller entities that are less likely to have the financial reserves and technological resources to build and maintain systems to operationalize disclosure requirements. Some commenters requested that the final rules be optional or that smaller plans and TPAs be exempted from the requirements. For example, a few commenters recommended providing an exception to the price transparency requirement for small issuers, TPAs, and plans with revenue below the $41.5 million small entity threshold or with 100,000 commercial participants, beneficiaries, and enrollees or fewer. They suggested that an exception to the final rules would allow small issuers to adopt elements of the requirements of most relevance to their participants, beneficiaries, and enrollees while not forcing them to create a much more expensive option that may be of limited appeal.

In considering these concerns, the Departments weighed the competing goals of ensuring that consumers have access to pricing information, the burden on plans, including self-insured plans, and issuers of individual health insurance coverage and group health insurance coverage, and encouraging innovative plan design. As finalized, all issuers of non-grandfathered individual and group health insurance coverage and self-insured plans (that are not account-based plans), are required to comply with the final rules. Finalizing these rules to be applicable to plans as proposed is the most straightforward approach as it is impossible to define and predict all possible modifications, plans, or models. Furthermore, doing so mitigates creating incentives to adopt certain plan designs over others. The Departments believe that this is not likely to stifle innovation. Rather, the Departments are of the view that this approach creates a level playing field for non-grandfathered individual and group health insurance coverage and self-insured plans (that are not account-based plans) to create innovative plan designs and increase consumers’ access to pricing information that is sufficient to support informed health care decisions. The Departments are of the view that exempting plan designs, such as alternative contracting and alternative payment model structures, would create an opportunity for plans and issuers to avoid sharing important pricing information with consumers. The Departments maintain the view that consumers across the market should come to expect and receive the same access to standardized, meaningful pricing information and estimates for all plans affected by the final rules. In addition, as detailed earlier in this preamble, issuers of risk adjustment-covered plans that include capitation arrangements are required under the final rules to submit a derived amount, potentially using the same internal methodology the issuer uses to assign a price value to the item or service for purposes of submitting risk adjustment data under 45 CFR 153.710(c).

A few commenters supported exempting grandfathered health plans, HRAs or other account-based plans, excepted benefits, and STLDI from the proposed rules. However, a majority of commenters were concerned that the final rules, as proposed, would not apply to plans or arrangements that may have the highest potential cost-sharing obligations, such as STLDI and health care sharing ministries. These commenters were concerned that STLDI plans often have dollar limits on covered benefits, limits on prescription drug coverage and covered doctor visits, and excluded benefits, which often means consumers enrolled in these plans can face higher cost-sharing liability when seeking medical care than patients covered by individual health insurance coverage, as defined under section 2791(b)(5) of the PHS Act. They stated that it is even more important for these patients to have access to their cost-sharing liability under the final rules before receiving care or even signing up for a STLDI plan, so they are aware of their coverage limits and are prepared to receive bills from the hospital and other health care providers for amounts that exceed their coverage. One commenter stated that whether such plans are considered “individual health insurance” is not relevant for such a determination, as the proposed rules would not apply to just individual health insurance, but would also apply to group coverage and grandmothered plans.

The Departments appreciate the concerns raised by commenters regarding these plans. However, the final rules adopt these policies as proposed. As noted earlier in this section of this preamble, certain types of coverage and arrangements such as STLDI, excepted benefits and health care sharing ministries, are not subject to the transparency provisions under section 2715A of the PHS Act and, therefore, are not subject to the final rules. However, the Departments encourage all plans that are not subject to the final rules to work to increase the transparency and availability of pricing information, to enable consumers to make informed health care decisions.

One commenter sought clarification of the liability of individual employers concerning Multiple Employer Welfare Arrangements (MEWAs) and Taft-Hartley plans. Section 715 of ERISA incorporates section 2715A of the PHS Act into part 7 of ERISA. Generally, employers are only responsible for ensuring compliance with the requirements of ERISA for a Taft-Hartley plan (also known as a multi-employer plan), if they are a member of the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, or are otherwise a fiduciary of the plan. For MEWAs that are employee welfare benefit plans, the bona fide group or association that sponsors the MEWA assumes and retains responsibility for operating and administering the MEWA, including ensuring compliance with Part 7 of ERISA. In cases where the MEWA itself is not a plan, each employer that provides benefits through a MEWA and, therefore, maintains its own plan, is separately responsible for compliance with ERISA requirements, and thus with the requirements of the final rules.

Some commenters recommended adding additional plans and coverages to the list of health coverage not subject to these transparency requirements. One commenter recommended adding expatriate health plans because the Expatriate Health Coverage Clarification Act of 2014 exempts expatriate health plans from most of the provisions of PPACA, including sections 1311(e)(3) of PPACA and section 2715A of the PHS Act, both of which the Departments cite in asserting statutory authority to propose these transparency requirements. Another commenter recommended that Denominational Health Plans be specifically exempted from the final rules. This commenter noted that Denominational Health Plans can only offer coverage to a limited segment of the population —eligible employees in the denomination —based on church requirements, beliefs, and polity. Therefore, most of the individuals to which this information would be disclosed would not be eligible to enroll in these plans even if they wished to do so. Other commenters recommended extending the final rules to health coverage to which 2715A of the PHS Act does not apply. For example, a commenter recommended that the Departments add Medicaid Managed Care Organization plans and Medicare-Medicaid Plans to the list of health plans not subject to the transparency requirements. The commenter noted that the combination of Medicaid payment rates and low cost-sharing requirements limit the usefulness of this information in the Medicaid context.

The Departments are finalizing the final rules as proposed and, therefore, all plans subject to section 2715A of the PHS Act must comply with these requirements. The Departments agree with commenters that sections 1311(e)(3) of PPACA and 2715A of the PHS Act do not apply to expatriate health plans²³¹ and, therefore, such plans are not subject to the requirements in the final rules. Furthermore, the Departments’ authority for the final rules derive from section 2715A of the PHS Act, which only applies to group health plans and health insurance issuers offering group or individual health insurance coverage, and not Medicaid Managed Care Organization plans, Medicare-Medicaid Plans, and Denominational Health Plans.

Interaction of Final Rules with 45 CFR 156.220

The Departments recognize that health insurance issuers offering group or individual health insurance coverage as QHPs through an Exchange are already subject to reporting requirements under 45 CFR 156.220 that implement the transparency in coverage requirements of section 1311(e)(3) of PPACA. Pursuant to 45 CFR 156.220, issuers of QHPs offered through an individual market Exchange or a Small Business Health Options (SHOP) Exchange, including stand-alone dental plans, must submit specific information about their plans’ coverage to the appropriate Exchange, HHS, and the state insurance commissioner, as well as make the information available to the public in plain language.

The Departments acknowledge the similar purposes served by 45 CFR 156.220 and the final rules. The Departments, however, note the final rules do not alter requirements under section 45 CFR 156.220. Accordingly, QHP issuers must comply with both rules’ requirements. If necessary and to the extent appropriate, HHS may issue future guidance to address QHP issuers’ compliance with both section 45 CFR 156.220 and the final rules.

2. Applicability Dates

Except as otherwise provided for in the proposed MLR requirements,²³² the Departments proposed that all the proposed requirements would become applicable for plan years (or in the individual market, policy years) beginning on or after one year after the finalization of the final rules. The Departments requested feedback about this proposed timing. In particular, the Departments were interested in information regarding the time necessary to develop cost estimation tools and machine-readable files. The Departments are finalizing a modified applicability timeline for the machine-readable files at 26 CFR 54.9815-2715A3, 29 CFR 2590.715-54.9815-2715A3, and 45 CFR part 147.212. The requirements to publish the machine-readable files will become effective for plan years (or in the individual market, for policy years) beginning on or after January 1, 2022. The Departments, in response to comments, are finalizing an applicability date that is generally one-year later than the proposed applicability date for complying with the internet-based self-service tool requirements. Specifically, plans and issuers will be allowed to phase in the requirements at 26 CFR 54.9815-22715A2, 29 CFR 2590.715-2715A2, and 45 CFR part 147.211 regarding the items and services included in the internet-based self-service tool. Plans and issuers will be required to provide pricing information for a minimum of 500 items and services identified by the Departments beginning with plan years (or in the individual market, policy years) on or after January 1, 2023. Plans and issuers will be required to provide the pricing information through the internet-based self-service tool for all items and services by plan years (or in the individual market, policy years) beginning on or after January 1, 2024.

The Departments are finalizing applicability dates that do not tie applicability timelines to the beginning of plan years (or in the individual market policy years) that begin one year after the effective date of the rules, as proposed. Because most plan and policy years begin on January 1^st, the Departments are of the view that this change in the applicability date likely will not shorten the amount of time plans and issuers have to comply with the machine-readable file requirements, as it has been the Departments’ intent, including under the proposed rules, to require calendar year plans and policies to come into compliance with the final rules by January 1, 2022. The changed timeline is therefore unlikely to lead to increased burdens or costs. The Departments are finalizing a 3-year applicability timeline for the internet-based self-service tool requirements. Under the proposed rules, plans and issuers would have had to comply with all relevant proposed requirements beginning with plan or policy years beginning on or after January 1, 2023. Under the final rules, full compliance with all requirements associated with the internet-based self-service tool will not be required until plan or policy years beginning on or after January 1, 2024. For these reasons, the final rule’s applicability dates for the self-service tool requirements are also unlikely to lead to increased burdens or costs.

Many commenters submitted comments regarding the proposed applicability date of the proposed rules. The majority of commenters strongly recommended delaying the proposed applicability date for the internet-based self-service tool and machine-readable file requirements of the rules for at least one year and up to five years from publication of the final rules.

Commenters recommended delaying the applicability date of the final rules because complying with the requirements will require negotiations with administrative service providers, and the design, building, and testing of websites. Other commenters cited the challenges in accessing some of the required information from third parties and the technical challenges plans will likely face as additional reasons to delay the applicability dates of these requirements. Additionally, commenters noted that the proposed rules would require disclosure of large volumes of data, which will have to be coordinated among various parties and for which systems will need to be put into place to ensure timely, accurate disclosure. Some commenters noted that a delay would be needed due to complex operational and compliance issues related to contracting with TPAs, ownership of data, and building and operating new IT systems.

Commenters also cited vendor supply/demand challenges; extensive technology design, development, and deployment work; amending agreements with third parties; financing required to meet the requirements of the final rules; and time needed to test the tools for consumer use as reasons to delay the applicability date. One commenter noted that their current price estimator tools took considerable time and resources to develop, and large portions of a tool’s underlying logic or feature set may not be compatible with the approach envisioned in the proposed rules. Moreover, testing, evaluating, and resolving these types of issues will require significant investment in IT development, numerous iterations of quality assurance and consumer testing, extensive education and training for plan staff, and development of new consumer-facing materials, among other challenges. Another commenter recommended that employers/plan sponsors should not have to comply with the final rules until the first day of the first plan year that is two years after the date on which the rules are published. Similarly, commenters requested a lengthy phase-in period to give employers, third parties, issuers, and health care providers time to modify their contractual agreements to provide all of the data the proposed rules would require to be disclosed.

A few commenters stated the Departments severely underestimated the time needed to implement the machine-readable files. The commenter noted that the timeline to implement the machine-readable files is very short, which could compromise the integrity of the files and lead to unintended consequences for consumers. Another commenter noted that, if not eliminated, the requirement to make machine-readable files available should be applicable no earlier than plan or policy years beginning three years after the date the rules are finalized.

As discussed in the economic impact analysis, the Departments are of the view that developing the machine-readable files should be straightforward for most plans and issuers and that plans and issuers will incur limited additional administrative burdens or costs after the one-time initial file development. The development activities needed to establish the machine-readable files involve gathering, formatting, and making publicly available already existing data that plans and issuers use in their everyday operations. Plans and issuers need to keep this information current for operational purposes, and the additional costs and burdens of ensuring that the machine-readable files are updated monthly is expected to decrease in subsequent years and ultimately become minimal, as the Departments expect plans and issuers to automate the updating and verification processes in the years following initial development.

The Departments are of the view that providing for a phased-in approach with regard to the number of items and services required for the internet-based self-service tool will provide more time for plans and issuers to plan for any increased costs, work with various vendors, perform user testing, and build appropriate technology to handle the disclosure of data through the internet-based self-service tool. Therefore, the final rules require plans and issuers to include in the internet-based self-service tool (and by request, through the paper method) 500 items and services identified by the Departments for plan years (in the individual market, for policy years) beginning on or after January 1, 2023, and all items and services for plan years (in the individual market, for policy years) beginning on or after January 1, 2024. The Departments are of the view that providing more time to implement the internet-based self-service tool while generally maintaining the timeline for the machine-readable files, strikes the appropriate balance between minimizing burdens for issuers and maximizing price transparency for the public. Providing information to the public through the machine-readable files sooner will also accelerate researchers’ and third-party developers’ access to pricing information and potentially provide additional resources and incentives for plans to build out their own consumer-tools.

Many commenters also encouraged the Departments to allow for a phased-in approach for the internet-based self-service tool and machine-readable files. Some commenters suggested finalizing a rule that allows for a phased-in approach for different group health plans and health insurance issuers of individual and group health insurance coverage to come into compliance with the final rules. Some commenters recommended finalizing a rule that allows for a phased-in approach by allowing smaller entities an extended implementation timeframe (that is, an additional 3 to 5 years) due to the disproportionate IT burden that will be placed on these smaller entities. Additionally, commenters were concerned that the rules may create a competitive advantage for larger issuers and TPAs.

A few commenters recommended that the rules be implemented in a more gradual fashion by requiring a price transparency tool that covers a narrower data set initially, for example, one that includes only the most common shoppable services. These commenters asserted that, over time, this scope could be broadened to be fully inclusive, but an initial narrow focus could increase the chance that patients have critical, actionable information as soon as possible.

Other commenters recommended a phased approach that would focus first on the functionality providing the most value to consumers to establish a baseline standard of price transparency across plans, while allowing time for the industry to solve more difficult technical challenges. Another commenter recommended allowing employers that have highly customized benefit structures additional time to implement the internet-based self-service tool. One commenter recommended allowing for a transition period for issuers and plans to use their current tools to meet the requirements.

A few commenters recommended including quality metrics. These commenters noted that requiring quality information in the disclosures would take additional time. In particular, one commenter was concerned that in the absence of quality data, price transparency could actually increase spending. The commenter therefore recommended delaying the implementation of the final rules until quality information, such as information related to patient satisfaction and experience, adherence to clinical standards and evidence-based medicine, and patient safety and clinical outcomes, could be incorporated. Another commenter stated that, if pharmacy quality information could be included, the Departments would need to provide for several years to transform existing consensus-based processes to identify appropriate quality metrics to include health plans serving different populations. Another commenter urged the Departments to perform a study on the effects of price transparency and the potential consequences on consumers seeking care to better understand how best to integrate quality information alongside prices to allow consumers to evaluate the services that best respond to their individual needs.

As the Departments explain in section II.C.1 of this preamble, government and private sector actors are working to develop and implement reliable and reasonable quality measures that can be applied to produce quality rating information that consumers may access and consider alongside pricing. As commenters acknowledged, delaying the final rules for the purpose of requiring the integration of quality information with price information would require several additional years. While the Departments appreciate the value of quality information to informed health care decision-making, the Departments are of the view that price transparency in health coverage must not be delayed for years when some quality information is already available or under development. Indeed, the Departments expect that the ready availability of pricing information will create greater consumer interest in quality information and other data relevant to health care decision-making, and that the market will respond to provide such information through innovative resources such as online tools and mobile applications. The Departments anticipate that innovators will seek ways to best present and integrate pricing and quality data. However, the Departments also will consider what next steps are appropriate and feasible within the Departments’ current authorities, including the possibility of conducting a study to evaluate how to best integrate quality information alongside prices. For these reasons and those noted earlier in this preamble, the Departments decline to require plans and issuers to include quality information in the disclosures required by the final rules.

The Departments are finalizing the applicability dates of the final rules as described earlier in this preamble. The Departments are of the view that the additional time and flexibility regarding the internet-based self-service tool will help address the concerns commenters raised regarding smaller entities’ ability to comply with these requirements.

B. Enforcement and Good Faith Special Applicability

The preamble to the proposed rules did not discuss how the proposed rules would be enforced. State regulators, in their comments to the proposed rules, sought greater clarity on how the proposed rules’ requirements would be enforced as specifically applied to health issuers in the individual and group markets. Section 1311(e)(3) is located in title I of PPACA and, under section 1321(c)(2) of PPACA is subject to the enforcement scheme set forth in section 2723 of the PHS Act. Similarly, section 2715A of the PHS Act is subject to the enforcement scheme set forth in section 2723 of the PHS Act. Therefore, states will generally be the primary enforcers of the requirements imposed upon health insurance issuers by the final rules.²³³ The Departments expect to work closely with state regulators to design effective processes and partnerships for enforcing the final rules.

The proposed rules included a special applicability provision to address circumstances in which a group health plan or health insurance issuer, acting in good faith, makes an error or omission in its disclosures. Specifically, a plan or issuer would not fail to comply with the proposed rules solely because it, acting in good faith and with reasonable diligence, made an error or omission in a disclosure, provided that the plan or issuer corrects the information as soon as practicable. Additionally, to the extent such an error or omission was due to good faith reliance on information from another entity, the proposed rules included a special applicability provision under which, to the extent compliance would require a plan or issuer to obtain information from any other entity, the plan or issuer would not fail to comply with this section because it relied in good faith on information from the other entity, unless the plan or issuer knew, or reasonably should have known, that the information was incomplete or inaccurate. Under the proposed rules, if a plan or issuer had knowledge that such information was incomplete or inaccurate, the plan or issuer would be required to correct the information as soon as practicable.

Furthermore, the proposed rules also included a special applicability provision to account for circumstances in which a plan or issuer fails to make the required disclosures available due to its internet website being temporarily inaccessible. Accordingly, the proposed rules provided that a plan or issuer would not fail to comply with this section solely because, despite acting in good faith and with reasonable diligence, its internet website is temporarily inaccessible, provided that the plan or issuer makes the information available as soon as practicable.

The Departments solicited comments regarding whether, in addition to these special applicability provisions, additional measures should be taken to ensure that plans and issuers that have taken reasonable steps to ensure the accuracy of required information disclosures are not exposed to liability by virtue of providing such information as required by the proposed rules.

In general, commenters supported the good faith special applicability provisions (also referred to as “safe harbors”) and recommended certain clarifications. One commenter requested clarification regarding how the Departments would determine whether a plan or issuer acted in “good faith” and with “reasonable diligence.” Another commenter requested additional guidance on what it would mean to “correct” information, and specifically whether this requirement would apply on a prospective or retrospective basis. Another commenter recommended the Departments allow health plans 30 days to update accumulated amounts in the internet-based self-service tool.

The Departments are finalizing the “good faith” safe harbor as proposed. While “good faith” is not explicitly defined in the final rules, it is an established legal and business term that is generally understood to involve honesty in fact and the observance of reasonable commercial standards of fair dealing, according to the Uniform Commercial Code.²³⁴ Efforts to correct omitted or erroneous information should proceed promptly after the plan or issuer is informed of the error. At a minimum, correcting information should include replacing the incorrect information, and may include notifying those affected of the error and the correction, using digital or written communications to notify affected participants, beneficiaries, and enrollees, and posting a notice on the internet website of the expected time before the error will be corrected.

The Departments received few comments on the good faith special applicability provision to account for circumstances in which a plan or issuer fails to make the required disclosures available due to its internet website being temporarily inaccessible. One commenter recommended that the website inaccessibility safe harbor be expanded to cover situations in which the internet-based self-service tool or machine-readable files are temporarily inaccessible, including because the internet website is inaccessible. This clarification would cover other technical issues, for example, that may affect only these resources, even though the remainder of the issuer’s or plan’s website is accessible.

Several commenters recommended that the Departments expand the “safe harbor” to account for additional circumstances. Commenters recommended that a safe harbor be created for plans that do not have direct access to negotiated in-network rates and allowed amounts, or information regarding reference based re-pricing in real time, and that may be unable to obtain some of the required information despite good faith efforts. For example, commenters recommended exempting employers, plan sponsors, and self-insured plans that rely on TPAs from liability if they have made good faith efforts to obtain the required data but have failed to do so. Commenters also recommended exempting plan sponsors that have been unable to procure third-party vendors from liability if these plans sponsors have acted in good faith. One commenter recommended that the Departments finalize a good faith special applicability provision to protect health plans and issuers that provide cost estimates that meet the requirements of the final rules if the estimates do not match the amounts actually paid by participants, beneficiaries, or enrollees. This commenter also requested that this safe harbor be extended to the cost-sharing estimate requirements.

Commenters also recommended that the Departments consider a safe harbor provision for covered entities that clearly provides that issuers and plans are not responsible for the downstream privacy and security of PHI shared by a participant, beneficiary, or enrollee with a third-party application consistent with the recent guidance issued by the HHS OCR.²³⁵ Another commenter recommended the creation of additional safe harbor provisions to allow and encourage health care organizations to share threat information about security risks and incidents linked to third-party applications.

One commenter noted that disclosure of pricing information through the machine-readable files and cost-sharing tool raises concerns for plan sponsors about the potential for increased litigation under ERISA based on the release of payer-specific negotiated rates. The commenter encouraged DOL to effectively and expressly address this issue so that any disclosure requirement is crafted in a way that does not increase fiduciary liability for employer plan sponsors. The commenter recommended that DOL consider proposing a “safe harbor” to protect employers from downstream litigation risk related to the public disclosure of negotiated rates and disclosure of negotiated rates through the cost-sharing tool. Such a “safe harbor” could provide that so long as an employer can demonstrate it “considered” negotiated rates as part of its decision-making process in selecting an administrative service organization (ASO) for its plan, so that it would not be deemed to have acted imprudently as a fiduciary for purposes of ERISA with respect to the selection of the ASO by virtue of the negotiated rates. While the Departments appreciate this comment regarding increased litigation under ERISA, this request is beyond the scope of this rulemaking.

Finally, several commenters requested a deemed compliance standard for employers or plans that already offer transparency tools designed to assist participants with cost estimates and obtaining up-to-date cost-sharing information or for plans and issuers that voluntarily submit their data to multi-payer claims databases. Other commenters noted that some existing state laws require plans to provide the ability for enrollees to look up their out-of-pocket costs for several hundred procedures online or by phone. These commenters recommended—to reduce burden on issuer implementation and avoid duplication of effort—that health plans that comply with existing state laws requiring treatment cost-estimator functionality be deemed in compliance with any similar federal requirements. Another commenter recommended this safe harbor be extended to the machine-readable files.

The Departments understand that states have been at the forefront of transparency initiatives and some have required disclosure of pricing information for years. However, it is important to note that states do not have authority to require such disclosures by plans subject to ERISA, which compose a significant portion of the private market.²³⁶ As a result, a significant portion of consumers do not have access to information on their plans, even in states that have implemented transparency requirements. The Departments are also aware that many plans and issuers have moved in the direction of increased price transparency. Despite these price transparency efforts, the Departments understand that there continues to be a lack of easily accessible pricing information for consumers to use when shopping for health care services. The final rules are meant, in part, to address this lack of easily accessible pricing information, and represent a critical part of the ‘Departments’ overall strategy for reforming health care markets by promoting transparency, competition, and choice.

The Departments will take these additional safe harbor recommendations into consideration for future rulemaking. The Departments are not including in the final rules any safe harbor rule that would substitute the offering of existing tools or compliance with existing state transparency laws. The Departments have concluded that additional price transparency efforts are necessary to empower consumers, promote competition in the health care industry, and reduce the overall rate of growth in health care spending. The additional safe harbors recommended by commenters would not allow for the consistent baselines and standards that the Departments seek to establish with the final rules. As noted above, one of the goals of the final rules is to empower plans and issuers in the commercial health care market to innovate and compete in an industry where innovation and competition currently appear to be limited. By requiring public disclosure of pricing data a year after the effective date of the rules, the final rules will encourage issuers, TPAs, and third-party developers and innovators to create or enhance their shopping tools, including the self-service tools also required by these final rules. The development of these tools in turn will create additional consumerism, which will lead to lower prices throughout the health care market. This impact is only achievable, however if all applicable plans and issuers are held to the same standards and timelines. Furthermore, limiting the applicability of the final rules would undermine the Departments’ overall strategy for reforming health care markets by promoting transparency, competition, and choice across the health care industry.

The Departments are of the view that, ultimately, plans and issuers are responsible for complying with the requirements outlined in the final rules. The Departments understand that plans may have to make adjustments to their contracts and as such, the Departments have factored that into the burden estimates and timing requirements for implementation explained elsewhere in the final rules. As plans and issuers are responsible for complying with the requirements outlined in the final rules, they should carefully examine the capacity of any partners they may contract with to provide the required information. Finally, as discussed earlier in this preamble, the Departments recognize the privacy concerns raised by commenters, but are of the view that the final rules, which include an exemption for providers with fewer than 20 different claims for payment and do not require any disclosure of PII or PHI through an API, and the continuing obligation of plans and issuers to comply with applicable privacy requirements, do not raise sufficient privacy concerns to require an additional privacy-related safe harbor.

A. Summary/ Statement of Need

This regulatory action is taken, in part, in light of Executive Order 13877 directing the Departments to issue an ANPRM, soliciting comments consistent with applicable law, requiring providers, health insurance issuers, and self-insured group health plans to provide or facilitate access to information about expected out-of-pocket costs for items or services to patients before they receive care. As discussed previously in this preamble, in response to Executive Order 13877, the Departments published the proposed rules entitled “Transparency in Coverage.” Despite the growing number of initiatives and the growing consumer demand for, and awareness of, the need for pricing information, there continues to be a gap in easily accessible pricing information for consumers to use to shop for health care items and services. The final rules add new requirements to 26 CFR part 54, 29 CFR part 2590, and 45 CFR part 147 aimed at addressing this gap, and are a critical part of the Administration’s overall strategy for reforming health care markets by promoting transparency and competition, creating choice in the health care industry, and enabling consumers to make informed choices about their health care. As discussed later in the RIA, the Departments acknowledge that more than 90 percent of plans, issuers, and TPAs currently provide some form of internet-based self-service tool to their consumers. However, as stated in section I.B of the final rules, the Departments understand that utility and accuracy among existing issuer cost estimator tools varies widely. Based on issuer demonstrations of their tools given to the Departments, some estimators reflect a combined range of possible costs; others give estimates based off historical pricing or claims data from various sources, while others are restricted in the types of procedures they include. Moreover, some existing issuer tools do not take into account a participant’s, beneficiary’s, or enrollee’s accumulators.²³⁷ The Departments are of the view that it is important to establish a minimum set of standards of what is acceptable so that consumers can take advantage of the information market-wide. Consistency will give consumers confidence that the information presented by these tools will not change arbitrarily. Reliability assures consumers that information in these tools accurately reflects plans’ and issuers’ best estimates of costs. The availability of these tools across all markets will ensure that no participant, beneficiary, or enrollee is denied access to the benefits of this rule and the Departments are of the view that this consistency is vital for success and utilization. As discussed previously in section I.B, state transparency requirements are generally not applicable to self-insured group health plans, and as a result, a significant portion of consumers may not have access to information on their plans and their health care costs. The Departments encourage additional functionality and innovation to be built around the requirements of the final rules, but believe a baseline is required to give the participant, beneficiary, or enrollee some confidence that no matter which plans tool they used, it would at least offer the same basic information. By requiring group health plans and health insurance issuers to disclose to participants, beneficiaries, or enrollees such individual’s cost-sharing information for covered items or services furnished by a particular provider, the final rules provide them sufficient information to determine their potential out-of-pocket costs related to needed care and encourages them to consider price when making decisions about their health care.

B. Overall Impact

The Departments have examined the impact of the final rules as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), the Congressional Review Act (5 U.S.C. 804(2)), and Executive Order 13771 on Reducing Regulation and Controlling Regulatory Costs (January 30, 2017).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. A regulatory impact analysis (RIA) must be prepared for rules with economically significant effects ($100 million or more in any 1 year).

Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as an action that is likely to result in a rule: (1) having an annual effect on the economy of $100 million or more in any 1 year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as “economically significant”); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. An RIA must be prepared for major rules with economically significant effects ($100 million or more in any 1 year), and a “significant” regulatory action is subject to review by the Office of Management and Budget (OMB). The Departments have concluded that the final rules are likely to have economic impacts of $100 million or more in at least 1 year, and, therefore, meet the definition of “economically significant rule” under Executive Order 12866. Therefore, the Departments have provided an assessment of the potential costs, benefits, and transfers associated with the final rules. OMB reviewed this regulation in accordance with the provisions of Executive Order 12866.

Two commenters suggested that the proposed rules failed to comply with Executive Order 12866. Executive Order 12866 defines rules likely to have an economic impact in excess of $100 million as “significant” and requires that the agencies conduct an assessment of potential costs. The commenters suggested that the economic impact analysis and cost assessment the agencies provided for the proposed rules were short of the concrete, well-founded analysis required of the economic analysis directed by Executive Order 12866 that must accompany a proposed rulemaking as far-reaching, and potentially costly, as the proposed rules. One commenter suggested that the proposed rules were inconsistent with both Executive Order 12866 and Executive Order 13563, both of which direct agencies to carefully consider alternatives to regulations an agency has deemed necessary, and to select the least burdensome approach available. The commenter maintained that the agencies did not adequately consider alternatives and are proposing an unnecessarily and excessively burdensome approach.

After consideration and discussion of the comments related to proposed cost estimates received in response to the proposed rules, the Departments chose to reevaluate the cost estimates associated with the provisions in the final rules. The Departments also consulted with internal and external IT professionals to gain a better insight into what individuals and tasks would be needed to design, develop, and deploy the internet-based self-service tool and the three machine-readable files required by the final rules. Based on this consultation and additional research, the Departments have chosen to increase the cost estimates to account for the updated understanding of the costs posed by the final rules, as well as the additional requirements included in the final rules. The Departments further discuss changes to the final cost estimates later in this preamble and in the associated ICR sections.

The final rules will enable participants, beneficiaries, and enrollees to obtain information about their potential cost-sharing liability for covered items and services that they might receive from a particular provider by requiring plans and issuers to disclose cost-sharing information as described at 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211. As discussed earlier in section I.B. of the final rules, there has been a shift in the health care market from copayments to coinsurance. Coupled with increases in plans and coverages with high deductibles, generally requiring sizeable out-of-pocket expenditures prior to receiving coverage under the terms of the plan or policy, participants, beneficiaries, and enrollees are now shouldering a greater portion of their health care costs than before. For example, over the period from 2008 to 2018, the average health care costs incurred by families covered by large employers – including premium contributions and out-of-pocket spending on health care services – have increased 67 percent from $4,617 to $7,726 annually. Over the same period, the average out-of-pocket costs alone have increased from $1,779 to $3,020 annually.²³⁸ The Departments are of the view that disclosure of pricing information is crucial for participants, beneficiaries, or enrollees to engage in informed health care decision-making and believe that with greater price transparency and access to more accurate and actionable pricing information, participants, beneficiaries, and enrollees will be able to consider the value of an item or service when making decisions related to their health care.

In addition, as described at 26 CFR 54.9815-2715A1, 26 CFR 54.9815-2715A2, 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A1, 29 CFR 2590.715-2715A2, 29 CFR 2590.715-2715A3, and 45 CFR 147.210, 147.211 and 147.212, the final rules require group health plans and health insurance issuers to make public in-network rates, including amounts in underlying fee schedules, negotiated rates, and derived amounts for in-network providers; historical allowed amounts paid to out-of-network providers and billed charges for all covered items and services; and negotiated rates and historical net prices for prescription drugs. The Departments are of the view that these requirements, through providing greater transparency and access to pricing information, will provide consistency and confidence across all internet-based self-service tools. Access to data provided by the three machine-readable files will ensure that all consumers have the pricing information they need in a readily accessible format, which could inform their choices, in addition to potentially impacting cost disparities and improvements to the overall functioning of the health care market. The Departments are of the view that greater price transparency and the availability of price information to the public will empower the 26.1 million uninsured consumers²³⁹ to make more informed health care decisions and allow consumers who wish to shop among plans and coverage options to better understand the potential cost of their care. Public availability of this information will also allow third-party IT developers to provide consumers with more accurate information on provider, plan, and issuer value, as well as prescription drug pricing information, ensuring that such information is available to consumers where and when it is needed. Furthermore, providing the in-network rates along with out-of-pocket costs will also show what future costs could be for a participant, beneficiary, or enrollee for the same service, depending on the progress of his or her deductible. This information will help consumers make informed decisions related to their health care needs now and in the future.

The Departments received many comments regarding the underlying economic principles of the proposed rules. Many commenters were concerned the rules as proposed could disrupt contract negotiations between providers and health plans and result in providers acting in anticompetitive ways (such as collusion, consolidation, or price fixing), resulting in increased rates (a so-called “race to the top”). Some of these commenters were particularly concerned with the potential of the Departments’ proposals to spur anticompetitive behavior in highly concentrated markets. Several of these commenters cited the FTC’s concerns about the potential negative impacts of price transparency on competition in the health insurance markets, including the possibility that providers (or sellers) will coordinate their behavior or bid less aggressively, leading to higher prices. Commenters also cited similar concerns expressed by the Department of Justice (DOJ) and the Congressional Budget Office (CBO) about the unintended consequences of releasing competitive proprietary information such as the in-network rates of plans and issuers. Commenters further stated increased costs would negatively impact consumer choice and reduce the affordability of health insurance coverage of low- and middle-income consumers. One commenter expressed concern that plans and issuers could also coordinate to reduce provider payment levels below market competitive rates, which could negatively impact patient access to quality care. In contrast, one commenter suggested that concerns about potential collusion among providers are unfounded as local markets are currently populated by a limited number of providers who tend to have knowledge of each other’s rates and consumers currently receive pricing information through EOBs. The commenter also expressed the opinion that the argument put forth by issuers that in-network rates are trade secrets is self-serving and benefits them at the expense of consumers and the public.

One issuer stated that its experience in state markets where health care price transparency was implemented (Massachusetts, New Hampshire, and Maine) do not provide evidence that transparency efforts produce reduced health care prices and that state price transparency efforts negatively affected issuers’ ability to negotiate lower rates. However, another commenter cited a study of the New Hampshire transparency initiative that found “a significant reduction in negotiated prices.”²⁴⁰

Some commenters suggested that the Departments should ensure that strong protections are in place to prevent price fixing or unsustainably low reimbursement for care before requiring public disclosure of in-network and out-of-network rates. For example, to address concerns about price fixing, one commenter suggested working closely with the FTC and other appropriate federal and state authorities to monitor health care provider markets for any incidence of collusion, potentially leading to the prosecution of entities for violations that raise costs for patients and plan sponsors.

By contrast, several commenters expressed the view that the public disclosure of payer-specific in-network rates and transparency would promote competition in the health insurance markets and will drive down costs, which could result in lower, more reasonable health care prices. One commenter cited a paper that reviewed outcomes after the implementation of price transparency efforts and found evidence for behavioral changes that could place pressure on providers to lower rates.²⁴¹ Specifically, the paper found evidence of shopping activity among consumers, especially younger consumers, evidence of development activity by third-party application developers using this information, and evidence that employers will use the data to negotiate better rates. Another commenter noted that employers and health plans would be able to leverage the information to negotiate rates that are more reasonable and encourage patients to access higher-value providers.

As noted previously in sections I.B and I.C of this preamble, the Departments are of the view that greater price transparency and the public disclosure of pricing information is necessary to enable consumers to use and understand pricing data in a manner that will increase competition, improve markets, reduce disparities in health care prices, and potentially lower health care costs. The Departments continue to be of the view that effective downward pressure on health care pricing cannot be fully achieved without increased price transparency and the public disclosure of pricing information. As discussed in section E.3 of this preamble, the federal government maintains laws and processes to investigate reports of collusive or other anticompetitive practices.

Section 1311(e)(3) of PPACA and section 2715A of the PHS Act, as well the authority vested in the Departments, grant participants, beneficiaries, enrollees, and the public the right to know the prices of health care items and services, which will enable them make informed health care purchasing decisions. Without access to price information, consumers are unable to accurately assess and choose the least costly care and coverage options among all available options, and choice cannot be meaningful without adequate information about those choices. Currently, insured participants, beneficiaries, or enrollees, as well as uninsured consumers, do not have access to adequate and accessible pricing information related to care and coverage. The potential benefit of consumer access to this information is enormous. Furthermore, the Departments are aware of consumer demand for this information. According to a May 2019 poll conducted by the Harvard Center for American Political Studies, 88 percent of U.S. registered voters (out of a sample of 1,295) stated they would support an initiative by the government to mandate issuers, hospitals, doctors and other providers to disclose the cost of their services and discounted or negotiated rates between these groups.²⁴² Furthermore, 65 percent of these individuals would favor these initiatives even if in the short term they lead to an increase in prices by some providers.²⁴³ The vast majority of comments the Departments received in response to the proposed rules were from individuals who expressed general support for the transparency proposals and expressed frustration at the lack of information available about health care pricing and a desire to have access to this information.

As noted in the preamble to the proposed rules and earlier in this preamble, the belief that greater price transparency will reduce health care costs by encouraging providers to offer more competitive rates is consistent with the predictions of standard economic theory and a number of empirical studies regarding price transparency in other markets. The Departments agree, however, that the health care market presents unique challenges. The Departments reviewed a study that notes certain special characteristics of the health care market, including that: (1) diseases and treatments affect each patient differently, making health care difficult to standardize and making price dispersion difficult to monitor; (2) patients cannot always know what they want or need, and physicians effectively must serve as their agents (for example, by recommending specialists and determining whether a patient is admitted to a hospital); and (3) patients are typically in a poor position to choose a hospital because they do not have sufficient information about hospital quality and costs.²⁴⁴ This study suggests that these special characteristics of the health care market, among other relevant factors, make it difficult to draw conclusions based on empirical evidence gathered from other markets. Nevertheless, the same study concluded that despite these complications, greater price transparency, such as access to posted prices, might lead to more efficient outcomes and lower prices.

Another study evaluated hospital discharge information following the publication of prices.²⁴⁵ Hospital utilization increased for hospitals that priced below the mean market price, while hospital utilization decreased for hospitals that priced above the mean market price.

In a recent study of the New Hampshire price transparency tool, researchers found that health care price transparency could shift care to lower-cost providers and save consumers and payers money.²⁴⁶ The study specifically focused on X-rays, CT scans, and MRI scans; it determined that the transparency tool reduced the costs of medical imaging procedures by five percent for patients and four percent for issuers; and estimated savings of $7.9 million for patients and $36 million for issuers over a 5-year period.

In another example, in Kentucky, public employees were provided with a price transparency tool that allowed them to shop for health care services and share in any cost-savings realized by seeking lower-cost care.²⁴⁷ Over a 3-year period, 42 percent of eligible employees used the program to research information about prices and rewards.²⁴⁸ The study found that 57 percent of those that used the transparency tool chose at least one cost-effective provider, saving state taxpayers $13.2 million and resulting in $1.9 million in cash benefits paid to public employees for seeking lower cost care.²⁴⁹

The Departments recognize the transparency efforts in New Hampshire and Kentucky are not necessarily generalizable nationwide and provide only some empirical data to support the overarching goal of these final rules that transparency in health care can lead to savings for consumers and issuers by putting downward pressure on prices. The Departments are of the view that consumers equipped with information about the cost of their medical options prior to receiving care will allow them to be able to make more informed decisions that will put additional downward pressure on health care costs. While the often-unequal relationship between patients and providers can sometimes mean that patients are not always best equipped to determine their care, there are many health care purchasing decisions that could and should take into account a patient’s financial concerns. For instance, physician providers may also be able to provide health care transparency information when referring patients to specialists for in- or out-of-network care, such as for elective procedures. The pricing information, combined with the physician’s advice, could help health care consumers evaluate options along the cost and quality spectrums and help guide them to high-value options. The Departments are of the view that health care pricing transparency may increase the impact of economic market forces on the health care markets, despite the health care market’s unique characteristics. The Departments anticipate that once issuers, plans, and providers are aware that consumers can engage with the markets in an informed manner, they may adjust their costs to potentially be more competitive in their pricing of items and services.

1. Impact Estimates of the Transparency in Coverage Provisions and Accounting Table

The final rules set forth requirements for group health plans and health insurance issuers to disclose to a participant, beneficiary, or enrollee, his or her cost-sharing information for covered items or services from a particular provider or providers. The final rules also include requirements for plans and issuers to disclose in-network rates (including negotiated rates, amounts in underlying fee schedules and derived amounts) for in-network providers, historical allowed amounts and billed charges for covered items and services provided by out-of-network providers, and negotiated rates and historical net prices for prescription drugs through machine-readable files posted on a public internet website. In accordance with OMB Circular A-4, Table 2 depicts an accounting statement summarizing the Departments’ assessment of the benefits, costs, and transfers associated with this regulatory action.

The Departments are unable to quantify all benefits and costs of the final rules. The effects in Table 2 reflect non-quantified impacts and estimated direct monetary costs and transfers resulting from the provisions of the final rules for plans, issuers, beneficiaries, participants, enrollees, and state and the federal governments.

Table 2 provides the anticipated benefits and costs (quantitative and non-quantified) to plans and issuers to disclose cost-sharing information as described at 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, 45 CFR 147.211, and at 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, 45 CFR 147. 212, and make public in-network rates, amounts in underlying fee schedules, or derived amounts of in-network providers, out-of-network allowed amounts paid for covered items and services, and negotiated rates and historical net prices for prescription drugs. The following information describes the benefits and costs – qualitative and non-quantified – to plans and issuers separately for these three requirements. Some commenters stated that the Departments attempted analysis of the economic impact of the proposed rules was wholly inadequate and demonstrated that the Departments had not performed the basic fact-gathering and analysis that agencies are expected to undertake before undertaking notice-and-comment rulemaking. These comments stated that the material the Departments presented under section VII, “Economic Impact Analysis and Paperwork Burden” was a patchwork of speculation and assumptions without any grounding in empirical data or analysis. The commenters further stated: the Departments listed 10 specific cost elements that they did not attempt to quantify; failed to include any consideration of regulatory familiarization costs; omitted consideration of training costs for both government employees who will be charged with enforcing the regulation and for the staff of regulated issuers and plan sponsors who will be responsible for compliance; and failed to account for the impact of the litigation burden on regulated issuers, plan sponsors, and the public judicial system. Another commenter suggested that the Departments failed to conduct an adequate cost-benefit analysis because they failed to consider and quantify regulatory alternatives, failed to quantify potentially knowable costs, and failed to quantify benefits or offer additional evidence supporting such benefits. Similarly, another commenter stated that the Departments’ analysis was lacking in any quantitative assessment of benefits and did not credibly demonstrate that quantification of benefits might be difficult.

The Departments consulted with various stakeholders in an effort to develop the economic analysis associated with the final rules, including the estimated costs. Additionally, the Departments requested comment on the estimates presented in the proposed rules to obtain more information and input with respect to the unquantified costs and benefits. The Departments received a number of comments related to the cost estimates, which are discussed later in the RIA and ICR sections. However, the Departments did not receive any comments providing actionable information as it relates to a number of the unquantifiable aspects of the proposed rules.

As previously discussed in sections II.B.2.C and V.B.1 in this preamble, the Departments received comments related to the lack of estimated costs associated with the renegotiation of provider contracts, litigation expenses, and the removal of gag clauses. However, none of the comments received provided any information that would aid the Departments in estimating such costs. The Departments recognize that there are numerous aspects associated with the final rules that they are unable to estimate due to an overall lack of knowledge and information with regard to the actions that issuers, providers, or TPAs may be required to take to meet the requirements of the final rules. As discussed in sections V.C and D, the Departments have sought to provide estimates to account for the regulatory familiarization costs and other estimates related to the alternatives considered in the development of the final rules. For the final rules, the Departments have updated the regulatory review costs to include familiarization costs for each state DOI (including the District of Columbia), issuers, and TPAs.

2. Requirements for Disclosing Cost-sharing information to Participant, Beneficiaries, or Enrollees under 26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211

Costs

Under 26 CFR 54.9815-2715A2(b), 29 CFR 2590.715-2715A2(b), and 45 CFR 147.211(b) of the final rules group health plans and health insurance issuers must disclose required cost-sharing information in accordance with prescribed method and format requirements upon the request of a participant, beneficiary, or enrollee. The required cost-sharing information includes seven content elements, which are described in paragraph (b)(1) of the regulations and discussed earlier in section II.B.1 in this preamble. The quantitative costs associated with this requirement are detailed in the section VI.A.2 –of the ICR later in this preamble.

In addition to the costs described later in the corresponding ICR, the Departments recognize there may be other costs associated with this requirement that are difficult to quantify given the lack of information and data. For example, while the Departments are of the view that the overall effect of the final rules will lower health care costs, the Departments recognize that price transparency may have the opposite effect because in some markets where pricing is very transparent, price ranges can narrow in response to greater transparency, and costs can increase.²⁵⁰ In section II.B.2.C in this preamble, the Departments addressed comments related to the potential for unintended consequences related to the public disclosures required through the In-network Rate. The Departments note that the current lack of pricing information means that health care consumers are generally not able to include price in their health care purchasing decisions. The Departments are of the view that making pricing information available will begin to ameliorate distortions resulting from consumer decision-making not taking costs sufficiently into account. Additionally, the Departments recognize that states may incur additional costs to enforce the requirements in the final rules.

As described in section VI, the Departments assume most self-insured group health plans will work with a TPA to meet the requirements of the final rules. The Departments estimated costs in the high-range estimate by assuming that all issuers and TPAs (for self-insured group health plans) will need to develop and build their internet-based self-service tool.

As described in section VI.A.1 of the ICR, the Departments assume most self-insured group health plans will work with a TPA to meet the requirements of the final rules. The Departments estimated cost in the high-end estimate by assuming that all issuers and TPAs (for self-insured group health plans) will need to develop and build their internet-based self-service tools from scratch. However, the Departments also provide a low-end estimate by assuming that over 90 percent of plans, issuers, or TPAs currently provide an internet-based self-service tool and will only be required to modify an existing internet-based self-service tool which may already meet some (if not all) the requirements in the final rules.²⁵¹ The Departments recognize that some plans, issuers, or TPAs might also voluntarily elect to develop or enhance a mobile application, if one is already available or in some stage of planning and implementation, which will result in additional costs. Additionally, TPAs generally work with multiple self-insured group health plans, and as a result, the costs for each TPA and self-insured group health plan may be lower to the extent they are able to coordinate their efforts and leverage any resulting economies of scale.

Moreover, health care data breach statistics show there has been an upward trend in data breaches over the past 10 years, with 2019 having more reported data breaches than any other year since records first started being published. Between 2009 and 2019 there have been 3,054 health care data breaches involving more than 500 records; resulting in the loss, theft, exposure, or impermissible disclosure of 230,954,151 health care records, equating to more than 69.78 percent of the United States population. Health care data breaches are now being reported at a rate of more than one per day.²⁵² Based on this information, the Departments recognize the requirements of the final rules provide additional opportunities for health care data breaches. Although privacy and security costs have been imbedded into the development and implementation cost estimates discussed in the section VI.A.1 and further discussed in section II.B.4 of this preamble, the Departments expect that plans and issuers will follow existing applicable state and federal laws regarding persons who may or must be allowed to access and receive the information. The Departments recognize that some plans and issuers may incur additional expenses to ensure a consumers’ PHI and PII are secure and protected. Additionally, as consumers accessing the internet-based self-service tool may be required to input personal data to access the consumer-specific pricing information, consumers may be exposed to increased risk and experience identity theft as a result of breaches and theft of PII. As noted previously in section II.B.4 of this preamble, the Departments are finalizing a provision that reminds plans and issuers of their duty to comply with requirements under other applicable state or federal laws, including requirements governing the accessibility, privacy, or security of information, or those governing the ability of properly authorized representatives to access participant, beneficiary, or enrollee information held by plans and issuers.

One commenter stated that since multiemployer plans do not directly control the process of negotiations or the resulting information, these plans do not have access to the information necessary to satisfy the final rules and plans could be subject to significant penalties for failure to comply. Another commenter, that surveyed employers who sponsor self-insured ERISA-covered plans, noted that respondents would likely contract with a TPA to comply with the final rules because employers do not have all the necessary data nor the capability to collect that data. Employers indicated that contracting with a TPA for these requirements would come at a significant compliance cost to them. Commenters noted that they rent networks from issuers and contract with those issuers as TPAs to administer plan benefits. It is the issuer that holds the pricing information for medical services, facilities, and providers, not the self-insured employer. Another commenter stated that the burden incurred by plans, issuers, and TPAs would be crippling for smaller TPAs and health plans, and that burden would ultimately be passed along to employers, and, therefore, to consumers. Another commenter expressed concern that all of the data aggregation and collection required under the regulations—along with the need to contract with a third-party developer to create an on-line cost-sharing liability service tool that is capable of providing customized cost-sharing information to a particular participant, beneficiary, or enrollee—may be overly costly to plans. The commenter further suggested that there may also be significant costs associated with data storage.

The Departments appreciate the comments received in response to the proposed rules and recognize that not all plans will be the source of the material information required to meet the requirements of the final rules, and that many plans will ultimately seek out third-party assistance in the development of their internet-based self-service tool and machine-readable files, thus avoiding any potential penalties for noncompliance. As noted in section II.B.5 of this preamble, multiemployer plans may contract with a TPA or other third party (for example, a clearinghouse) to meet the requirements under the final rules. The Departments note that it is possible that obtaining third-party assistance to meet the requirements of the final rules could result in additional costs. The Departments expect, however, that TPA, or other third party, assistance will help alleviate some of the cost concerns expressed by commenters as a result of economies of scale. As noted above, commenters noted that many self-insured ERISA plans rent networks from issuers and contract with issuers as TPAs to administer plan benefits. By leveraging their relationships with their issuer-TPA, self-funded plans may be able to reduce their overall costs by using any tools developed by those issuers. The Departments also recognize that in order to meet the requirements of the final rules, some smaller TPAs and issuers could face disproportionate increases in costs. However, the Departments anticipate that a number of TPAs and issuer-TPAs will seek to coordinate their efforts and take advantage of any resulting economies of scale to reduce their overall costs, and that this approach can be leveraged in order to reduce concerns related to the development of both the internet-based self-service tool as well as the required machine-readable files. The Departments recognize that issuers and TPAs will incur potential costs associated with data storage and providing access to the internet-based self-service tool. These costs can be generally broken down into two sections: bandwidth pricing and disc space. Bandwidth Pricing accounts for the amount of traffic going to a site, the size of the information that is transferred from the server to the user’s browser, and the speed in which that happens. Provided that 99 percent of websites do not exceed 5 gigabytes of bandwidth per month,²⁵³ this means if an issuer’s or TPA’s self-service tool, hosted on Microsoft’s cloud product, would be free or minimal if beyond five gigabytes.²⁵⁴ Disk Space Pricing accounts for the size of the hard drives necessary to host a website. Assuming that each issuer or TPA would need an estimated 351 gigabytes of storage this would translate to approximately $8 per month. Thus, assuming that each issuer or TPA will not require five gigabytes of bandwidth for their internet-based self-service tool, the Departments are of the view that the overall costs to store and provide data through the internet-based self-service tool will be minimal. The Departments recognize that the final rules will impose significant costs on plans, issuers, and TPAs, and that some of these costs may be transferred to consumers in the form of higher premiums or changes in the cost-sharing structure of plans.

Intended Outcomes

Informed Consumers. Through increased price transparency, consumers armed with pricing information will have greater control over their own health care spending, which can foster competition among providers, resulting in less disparity in health care prices or an overall reduction in health care prices. Consumers who use the internet-based self-service tool will be able to access their cost-sharing amount paid to date; their progress toward meeting their accumulators, such as deductibles and out-of-pocket limits; their estimated cost-sharing liability for an identified item or service; negotiated rates for in-network providers for covered items and services, and the out-of-network allowed amounts for covered items and services. Additionally, consumers will know how much health care services will cost for a particular treatment-, and, and if applicable, whether coverage of a specific item or service is subject to a prerequisite. As discussed previously in section II.B.1.a of this preamble, section 2713 of PPACA requires group health plans and health insurance issuers to provide certain recommended preventive items and services without cost-sharing. However, if the same items or services are furnished as non-preventive actions or by an out-of-network provider, the participant, beneficiary, or enrollee may be subject to the cost-sharing terms of his or her plan. If a plan or issuer cannot determine whether the request is for a preventive item or service, the plan or issuer must display the non-preventive cost-sharing liability, along with a note that the item or service may not be subject to cost-sharing if it is billed as a preventive service. Pricing information also gives consumers the ability to plan ahead for any known items and services they may require in the near future. The Departments are of the view that access to this information is essential to enable consumers to make informed decisions regarding specific services or treatments, budget appropriately to pay any out-of-pocket expenses, and determine what impact any change in providers, items, or services will have on the cost of a particular service or treatment.

Several consumers stated that they want the opportunity to shop for the best price when seeking out medical care and expressed that this information is critical when deciding whether to proceed with a test or procedure. Other consumers expressed the desire to shop for items and services and stated that shopping for health care would give them more control over their personal health care decisions and spending. Some consumers felt strongly that they should be able to compare prices to find the best deal for non-life-threatening care. Some other consumers also expressed frustration when describing their own experiences of trying and failing to obtain pricing information before receiving a particular service.

The Departments agree that providing the information required in the final rules will provide consumers with tools and information they can use to determine and evaluate the potential costs associated with their particular health care needs, thus providing them the opportunity to obtain the care they need at a cost they find acceptable.

Consumers may become more cost conscious. The Departments are of the view that with increased price transparency consumers may begin to focus more carefully on the costs of services. Currently, consumers may be aware they have a coinsurance of 20 percent for an item or service, but they may be unaware of what dollar amount they will ultimately be responsible for paying. Knowing that dollar amount may motivate consumers to seek lower-cost providers and services or seek needed care they did not obtain because of uncertainty or concerns about the costs. As discussed in sections I.E.3, II.C, and V.B.2-4 in this preamble, there has been recent evidence in New Hampshire and Kentucky that supports the Departments’ view that having access to pricing information, along with currently available information on provider quality and incentives to shop for lower prices, can result in consumers choosing providers with lower costs for items and services, thus potentially lowering overall health care costs.²⁵⁵ The Departments acknowledge that this may only hold true if cost and cost sharing varies between services and providers. Depending on the degree of cost variation between specific items and services, there could be large variations in the degree to which prices change per item or service resulting in wide variations in health care costs and associated out-of-pocket costs.²⁵⁶ Cost sharing in some alternative contracting models, such as HMOs and Exclusive Provider Organizations (EPO), generally occurs through fixed copayment amounts regardless which provider furnishes a covered item or service and, therefore, the internet-based self-service tool will provide little incentive for consumers to choose less costly providers in this context.

Timely Payment of Medical Bills. The Departments anticipate that consumers with access to the information provided in response to the final rules will be more likely to pay their medical bills on time. A recent Transunion survey found that 79 percent of respondents said they would be more likely to pay their bills in a timely manner if they had price estimates before obtaining care.²⁵⁷ In addition, a non-profit hospital network found that the more information they shared with patients, the better prepared those patients were for meeting their responsibilities. The hospital network reported that providing price estimates to patients resulted in increased point of service cash collections from $3 million in 2010 to $6 million in 2011.²⁵⁸ However, the Departments recognize that consumers may not be aware of any potential balance billing charges, where not prohibited by state law, and other potential costs associated with their health care such as facility fees etc. While these consumers will have a better idea of the costs they will incur when obtaining health care, they will likely be unaware of any additional charges they could incur as a result of obtaining care resulting in higher than expected out-of-pocket costs. Additionally, consumers may not fully be aware of their costs due to potential medical complications that might arise during the course of treatment or while obtaining a specific service.

Increased Competition Among Providers. Studies have found that state price transparency regulations have resulted in hospitals decreasing their charges and a decrease in mean price and price variability for queried procedures. One study found the publication of chargemaster data resulted in a decrease in mean price and price variability for queried procedures.²⁵⁹ However, another study attributed the reduction in charges to the “reputational costs of perceived overcharging,” yet also noted that reductions in charges were associated with decreases in discounts leading to no consumer savings.²⁶⁰ Another issuer-initiated price transparency program, designed to encourage the selection of high-value providers, provided consumers with price differences among MRI facilities.²⁶¹ Those patients provided pricing information saw an 18.7 percent reduction in the cost per test and a decrease in the use of hospital-based facilities.²⁶² The study also found that price variations between hospital and non-hospital facilities were reduced by 30 percent.²⁶³ As discussed in sections I.B in this preamble, the Departments recognize that requiring hospitals to display payer-specific negotiated charges, discounted cash prices, and de-identified minimum and maximum negotiated charges for as many of the 70 CMS selected shoppable services and additional hospital-selected shoppable services for a combined total of at least 300 shoppable services may play a role in decreasing mean prices and price variability.²⁶⁴ However, the Departments are of the view that the Hospital Price Transparency final rule does not, in itself, result in reduced prices and price variability as the rule does not result in consumers receiving complete price estimates for health care items and services from both hospitals and issuers. Further, the Hospital Price Transparency final rule does not provide price transparency with respect to items and services provided by other health care providers. Therefore, the Departments are of the view that the requirements of the final rules will provide the additional price transparency necessary to empower a more price-conscious and responsible health care consumer and lead to increased competition among providers as consumers will be aware of and have the ability to compare the out-of-pocket cost of a covered item or service prior to receiving an item or service, which could force higher-cost providers to lower their prices in order to compete for the price sensitive consumer.

3. Requirements for Public Disclosure of In-network Provider Rates for Covered Items and Services, Out-of-network Allowed Amounts and Prescription Drug Pricing Information Through Machine-readable Files under 26 CFR 54.9815-2715A3, 29 CFR 2590.715-2715A3, and 45 CFR 147.212.

Costs

Under 26 CFR 54.9815-2715A3(b), 29 CFR 2590.715-2715A3(b), and 45 CFR 147.212(b) of the final rules, group health plans and health insurance issuers are required to make available to the public, on an internet website, three digital files in a machine-readable format. The first file (the In-network Rate File) must include information regarding all applicable rates, which may include negotiated rates, underlying fee schedules, or derived amounts, to the extent they may be used for purposes of determining provider reimbursement or cost-sharing for in-network providers. The Departments note that prescription drug products may be included in the In-network Rate File only to the extent they are included as part of an alternative payment arrangement, such as a bundled payment arrangement. The second file (the Allowed Amount File) must provide data showing the allowed amounts and billed charges with respect to covered items and services, including prescription drugs, furnished by out-of-network providers over a 90-day period beginning 180 days prior to the publication date of the machine-readable file. The third file (the Prescription Drug File) must include information for negotiated rates and historical net prices for prescription drugs, organized by NDC. Plans and issuers are required to make the information available in accordance with certain method and format requirements described at paragraph (b)(2) and update these files monthly as required under paragraph (b)(3). The quantitative costs associated with meeting these requirements are detailed in section VI.2 of the ICR section.

Some commenters stated that the requirement to use billing codes would be very costly and potentially cost-prohibitive. One commenter indicated this is because use of CPT codes, the most commonly used billing codes, requires licensure by the American Medical Association (AMA). According to the commenter, the AMA charges licensing fees based on use cases per user. Another commenter noted that some self-funded plans rent networks and do not have real-time access to network pricing, and there are fees charged to plans to access the negotiated discounts with the provider network the plan has rented. As a result, the commenter suggested that plans will have to pay the network access fees twice—once the information required under the final rules and a second time when the actual claim is received and processed through an intermediary—to meet the requirements of the final rules.

The Departments understand that the use of CPT codes may represent an additional cost for some plans and issuers. Generally, the Departments anticipate that if a plan or issuer currently has the capability or licensure to record CPT codes on EOBs mailed to consumers, the plans or issuers should also be able to use that CPT code to make the public disclosures required through the final rules without, or with minimal, additional costs. The Departments also have concluded that, as plans and issuers would already include licensing costs for using CPT codes in the cost of doing business, they would not incur additional costs to use the CPT codes to populate the machine-readable files. The Departments acknowledge that some plans and issuers could face instances where they could incur additional costs in order to access the required CPT or network information based on the structure of licensing agreements to which they are currently parties. However, due to an overall lack of specific information and knowledge associated with the number of plans and issuers that currently have such licensing agreements, the structure of those agreements, and the alternatives available to those plans and issuers, the Departments are unable to accurately estimate any associated costs that might be incurred under these circumstances.

One commenter stated that for many employer-sponsored health plans, in-network rates usually belong to a network administrator, not the health plan, and, in the event network administrators were to update their contractual agreements to permit plans to receive and share pricing information, it is likely they will charge fees or request financial concessions from plans, which will increase administrative burdens on group health plans.

The Departments understand that requiring release of this pricing information will affect certain commercial arrangements and expectations that prevail in parts of the health care industry today, which could result in certain one-time and ongoing administrative costs. However, the Departments are of the view that making this information available to consumers and the public will serve consumers’ long-term interests in facilitating a consumer-oriented, information-driven, more competitive market. Additionally, as discussed previously in section II.C in this preamble, the Departments are finalizing several special rules to streamline the provision of the public disclosures required through the final rules. These special rules were designed to reduce the overall compliance costs of the disclosures required by the final rules and to support smaller issuers and plans in meeting the requirements of the final rules by permitting certain contractual arrangements and the aggregation of allowed amount data in some circumstances.

The Departments also recognize that a certain amount of data storage will be required to post the machine-readable files on a publicly available internet website. Through the efficiencies of cloud computing and data storage, the cost to host large files dramatically decreased in price in the past several years. Popular services such as Simple Storage Service from Amazon Web Services and Standard Storage from the Google Cloud Platform can host files for roughly $0.026 per gigabyte. The Departments’ size estimates of roughly 5 gigabytes for each machine-readable file would incur a monthly data storage cost of approximately $0.39 for all of the machine-readable files.

Non-Quantified Costs for Public Disclosure of In-Network Rates. In addition to the costs described in section VI.A.2, the Departments recognize there may be other costs associated with the requirement to make in-network rates publicly available that are difficult to quantify given the current lack of information and data. While the Departments are of the view that the overall effect of the final rules will be to provide greater price transparency and potentially lower health care prices, there are instances in very transparent markets where price ranges can narrow and average costs can increase as a result of price transparency.²⁶⁵ The Departments also recognize that plans and issuers may experience ongoing additional costs (for example, the cost of quality control reviews) to ensure they comply with the requirements of the final rules. In addition, the Departments are aware that information disclosures allowing competitors to determine the rates their competitors are charging may dampen each competitor’s incentive to offer a lower price or result in a higher price equilibrium.²⁶⁶ While plans and issuers with the highest in-network rates may see a decrease in their in-network rates, as their providers respond to consumer and smaller issuers’ concerns regarding paying more for the same item and service, plans and issuers with the lowest in-network rates may see their lower cost providers adjust their rates upward. However, most research suggests that when better price information is available, prices for goods sold to consumers fall. For example, in an advertising-related study, researchers found that the act of advertising the price of a good or service is associated with lower prices.²⁶⁷

A potential additional non-quantified cost could be the cost to remove gag clauses from contracts between plans, issuers, and providers. Contracts between plans, issuers, and providers often include a gag clause, which prevents plans and issuers from disclosing in-network rates. The Departments recognize that plans, issuers and providers may incur a one-time expense for their attorneys to review and update their provider contracts to remove any relevant gag clauses. Comments received regarding gag clauses and contract negotiations are further discussed in section VI.A.2 later in this preamble.

Another potential cost concerns the final rules’ impact on a plan’s or issuer’s ability or incentive to establish a robust network of providers. A health insurance provider network is a group of providers that have contracted with a plan or issuer to provide care at a specified price the provider must accept as payment in full. Many times, plans and issuers want consumers to use the providers in their network because these providers have met the plan’s or issuer’s quality standards and agreed to accept an in-network rate for their services in exchange for the patient volume they will receive by being part of the plan’s or issuer’s network.²⁶⁸ Some plans and issuers offer a narrow network: these networks operate with a smaller number of providers, meaning a consumer will have fewer choices when it comes to in-network providers, but often offer lower monthly premiums and out-of-pocket costs.²⁶⁹ The Departments recognize that making in-network rates public may create a disincentive for plans and issuers to establish a contractual relationship with a provider (including in narrow networks) because providers may be unwilling to give a discount to plans and issuers when that discount will be made public. As addressed further in section VI.C later in this preamble, the requirements of the final rules could result in a reduction in revenue for those smaller plans and issuers that are unable to pay higher rates to providers and may require them to narrow their provider networks, which could affect access to care for some consumers. Due to smaller plans’ and issuers’ potential inability to pay providers with higher rates, smaller plans and issuers may further narrow their networks to include only providers with lower rates, possibly making it more difficult for smaller plans and issuers to fully comply with network adequacy standards described at 45 CFR 156.230 or other applicable state network adequacy requirements.

Some commenters stated that public disclosure of in-network rates could affect the sustainability and affordability of QHPs offered through the Exchanges by placing upward pressure on rates and by placing provider participation in networks at risk. One commenter stated that the potential negative effects on QHPs would especially harm unsubsidized consumers and consumers in rural areas where provider consolidation is most common and could impact overall marketplace stability and the risk pool. Furthermore, commenters asserted that increased premiums for QHPs could result in increased federal spending in the form of higher premium tax credit (PTC) payments, which could substantially increase the federal deficit over 10 years. One commenter stated that the Departments should not finalize the release of in-network rates until they fully evaluate the impact on affordable plan options on the Exchanges and the effects on federal spending.

As discussed later in section V.B.5 of this preamble, the Departments estimate premiums for the fully-insured markets will be $471 billion for 2022, including the individual, small group, and large group markets. The Departments estimate that the cost for 2022 represents approximately 2.4 percent of projected commercial insured premiums for the fully-insured market, 1.4 percent in 2023, 0.5 percent in 2024, and 0.5 percent in 2025. Assuming this level of premium increase in the individual market, PTC outlays are estimated to increase by about $1,047 million in 2022, $623 million in 2023, $216 million in 2024, and $218 million in 2025. Given that the 2021 President’s Budget estimates that PTC outlays are expected to be $43.8 billion in 2022, $44.8 billion in 2023, $45.875 billion in 2024, and $48.2 billion in 2025,²⁷⁰ the Departments expect the estimated increase of $1,047 million in 2022, $623 million in 2023, $216 million in 2024, and $218 million in 2025 to have minimal impacts on anticipated enrollment and are not of the view that this increase will result in any widespread negative effects on market stability. Additionally, the Departments have determined that enrollment impacts will be minimal, as estimated premium impacts are relatively small, and rate increases for subsidized enrollees in the individual market will be largely mitigated. Additionally, participants, beneficiaries, and enrollees currently make health insurance coverage decisions based on their particular health and financial situations, and it is not predictable how information provided as a result of the final rules will significantly impact those health insurance coverage decisions. Thus, the Departments do not expect the final rules to significantly increase the selection risk beyond the levels that currently exist. The Departments do acknowledge that the estimated increases in premiums could result in minor harm to unsubsidized consumers as they could be faced with increased premiums that would not be negated by any increases in PTC and this could impact those consumers’ decisions related to obtaining health insurance coverage.

The Departments received several comments from issuers, providers, and employers stating that the requirement to publicly disclose in-network rates would threaten the viability of their business models or business models upon which they rely. One commenter stated that the proposal to release in-network rates could affect the viability of individual and small group market health plans sold by small issuers. The commenter further suggested that “safety net” health plans (which serve individuals and families that do not have access to other sources of coverage in markets that other issuers find unprofitable) currently may be able to access more favorable contract terms with providers, and these types of arrangements would be at risk if the in-network rate information were required to be made public. The commenter expressed particular concern that exposure of the rates of safety net hospitals may uniquely disadvantage them in negotiations with plans and issuers because they may have to raise rates on certain services to support safety net activities. Similarly, a hospital system stated that publishing in-network rates would negatively impact its ability to contain costs and threaten its current participation in the networks of nearly all area health plans. Another commenter indicated that providers would leave plans’ and issuers’ networks if plans’ and issuers’ attempts to achieve more favorable rates using public in-network rate information proved unsuccessful. Another commenter argued that the policy requiring disclosure of in-network rates could also result in the collapse of the network administrator business model, which would result in significantly increased administrative costs for health plans that would need to contract separately with each participating provider.

The Departments understand that requiring the release of this pricing information will upset certain commercial arrangements and expectations that prevail in parts of the health care industry today, which could result in certain one-time and ongoing administrative costs. However, the Departments have concluded that providing increased price transparency and making this information available to the public will serve the public’s long-term interests in facilitating a consumer-oriented, information-driven, more competitive market potentially leading to reduced overall health care costs.

Some commenters suggested that, by using publicized in-network rate information, plans and issuers could also coordinate to reduce provider payment levels below market competitive rates, a so-called “race to the bottom.” Some of these commenters stated that this “race to the bottom” could also potentially hurt access to, and quality of, care. For example, one commenter stated that if provider reimbursement rates were set too low, patient access to care would be negatively impacted because providers will not have the resources to invest in technology, training, and equipment.

One commenter suggested that plans and issuers would likely want to re-negotiate rates once they learn local prices and that dominant issuers could use payer specific in-network rate information to deter and punish hospitals that lower their rates or enter into value-based arrangements with the dominant issuer’s competitors.

Several commenters stated that required disclosure of in-network rates could result in an increase in health care prices. Others specifically expressed concerns that making payer-specific in-network rates available would disrupt contract negotiations between providers and health plans and result in providers changing their rates in anticompetitive ways (“race to the top”) and could promote an environment that could support collusion between providers, resulting in increased prices. Other commenters suggested that required disclosures would lead to the consolidation of providers and even greater consolidation in the commercial health insurance industry, and expressed concerns that disclosures could particularly harm small health plans and TPAs who may have been able to get discounted rates by offering health plans in a limited service area.

One commenter noted that other states’ transparency systems used several distinguishable features to mitigate the risks of publicizing rates, but noted that, despite these efforts, the data was still used in contract negotiations.

The Departments recognize that there is the potential for adverse market outcomes as a result of the final rules. As noted previously, the Departments are aware of the potential that plans and issuers could seek to use the public availability of in-network rates or underlying fee schedules in attempts to lower prices in what certain commenters called a “race to the bottom.” As noted previously in this section, the Departments recognize the potential for anticompetitive behaviors and increased consolidation that may occur should providers use the in-network rate or fee schedule data to increase their rates or should smaller plans and issuers struggle to comply. The Departments recognize that provider collusion could result in increased prices, and also recognize that this sort of behavior could result in distinct coverage areas or agreements where providers choose not to compete for consumers. As discussed previously in this preamble, the Departments nonetheless have concluded that providing increased price transparency and making this information available to the public will serve the public’s long-term interests in facilitating a consumer-oriented, information-driven, more competitive health care market.²⁷¹ Should the market become more competitive, as the Departments anticipate, the reduction in prices may provide more options for those providers that function as “safety-net providers” to expand their networks or enhance the services they currently provide by organizing and delivering a significant level of health care and other related services to uninsured, Medicaid, and other vulnerable populations. The Departments also reason that the likelihood of price and other forms of collusion will be mitigated to some extent by the actions of state and federal regulatory and antitrust enforcement authorities and the enforcement of current market laws and regulations. The Departments are of the view that enforcement actions taken to reduce the likelihood of price collusion will further reduce the chances that issuers will seek to reduce the size of their networks.

Although consumer education is not a requirement of the final rules, plans, issuers and TPAs may face additional costs if they chose to inform and educate their consumers about the options available to them, how to use these tools, increase their general health care knowledge. Providing educational opportunities to participants, beneficiaries, or enrollees could encourage those participants, beneficiaries, or enrollees to seek lower cost services, providing plans, issuers and TPAs the potential to realize a return on the investments incurred to comply with the final rules.

Non-Quantified Cost for Public Disclosure of out-of-network allowed amounts. In addition to the costs described in section VI.A.2 and the previous analysis related to the public disclosure of in-network rates, the Departments recognize that there may be other costs associated with the requirement to make historical payments of out-of-network allowed amounts and billed charges publicly available that are difficult to quantify, given the current lack of information and data.

Furthermore, while plans and issuers must de-identify data (such as claim payment information for a single provider) and ensure certain sensitive data are adequately protected, unauthorized disclosures of PHI and PII may increase as a result of manual preparation and manipulation of the required data. The potential disclosures of PHI and PII may require plans, issuers, and TPAs to obtain additional cyber-security insurance that could lead to additional costs.

Non-Quantified Cost for Public Disclosure of Prescription Drug Pricing Information. In addition to the costs described in section VI.A.2and the previous analysis related to the public disclosure of in-network rates and allowed amounts, the Departments recognize that there are other costs associated with the requirement to make negotiated rates and historical net prices for prescription drugs publicly available that are difficult to quantify, given the current lack of information and data. For example, as a result of the availability of consolidated negotiated rates and historical net prices, drug manufacturers may seek to restructure their rebate and discount programs and could potentially cease providing rebates to plans and issuers, PBMs, or pharmacies, which could then result in less savings being passed on to consumers.

Intended Outcomes

The Departments are of the view that providing greater price transparency by requiring group health plans and health insurance issuers to make information regarding all applicable rates publicly available, which may include negotiated rates, amounts in underlying fee schedules, or derived amounts for in-network provider rates; 90-days of historical allowed amount and billed charges data for out-of-network providers; and prescription drug negotiated rates and historical net prices will ultimately benefit plans and issuers, regulatory authorities, consumers, and the overall health care market.

Group Health Plans and Health Insurance Issuers. Plans and issuers may benefit from these requirements because under the final rules a plan or issuer would have a better understanding of other plans’ or issuers’ in-network rates. This may allow plans and issuers paying higher rates for the same items or services to negotiate with certain providers to lower their rates, thereby lowering provider reimbursement rates, reducing price variation, and potentially resulting in an overall decrease in health care costs. The Departments acknowledge, however, as noted in the “costs” section (V.B.3) earlier in this preamble, that knowledge of other providers’ in-network rates could also drive up rates if a provider discovers they are currently being paid less than other providers by a plan or issuer and, therefore, seek to negotiates higher rates.

In addition, the final rules may result in more plans and issuers using a reference pricing structure. Under this structure, participants, beneficiaries, or enrollees who select a provider charging above the reference price (or contribution limit) must pay the entire difference and these differences do not typically count toward that individual’s deductible or out-of-pocket limit. Plans and issuers may want to use a reference pricing structure to pass on any potential additional costs associated with what they can identify as higher-cost providers to the participant, beneficiary, or enrollee. The Departments recognize that reference pricing might not impact every consumer. For example, the California Public Employees’ Retirement System (CalPERS) provides exceptions from reference pricing when a member lives more than 50 miles from a facility that offers the service below the price limit. It also exempts the patient if the patient’s physician gives a clinical justification for using a high-priced facility or hospital setting. Another example is a business with a self-insured group health plan that exempts laboratory tests for patients with a diagnosis of cancer from its reference pricing program. However, reference pricing has generally been shown to result in price reductions, as opposed to mere slowdowns in the rate of price growth. For example, in the first two years after implementation, reference pricing saved CalPERS $2.8 million for joint replacement surgery, $1.3 million for cataract surgery, $7.0 million for colonoscopy, and $2.3 million for arthroscopy.²⁷²

Regulatory Authorities. In many states, issuers must obtain prior approval for rate changes from the state’s DOI. Regulatory authorities such as state DOIs might benefit from the final rules because knowledge of provider in-network rates and out-of-network allowed amounts paid to out-of-network providers could support determinations of whether premium rates, including requests for premium rate increases, are reasonable and justifiable.

Consumers. Access to the in-network rates between plans and issuers and in-network providers, the amount plans and issuers have paid to out-of-network providers, and prescription drug pricing information will allow consumers to understand the impact of their choice of health insurance coverage option and their choices of providers on the cost of a particular service, item, or treatment. Giving consumers access to this information as part of their health care decision-making process may facilitate a greater degree of control over their own health care costs. Furthermore, having access to publicly available out-of-network allowed amounts will provide consumers who are shopping for health insurance coverage the ability to compare the different rates plans and issuers ultimately pay for items and services, including items and services from providers that might be out-of-network. While the Departments are of the view that consumers will benefit from the final rules, the Departments recognize that utilizing the required information will not be practical or reasonable in an emergency situation. Similarly, some consumers may need assistance in understanding complex terms or other associated mechanisms in order to utilize this information.

The Departments recognize that beneficiaries and enrollees in state and federal health care programs (including Medicare, Medicaid, CHIP, Basic Health Program and coverage provided by the Department of Defense and Veterans Administration) will be impacted by spillover effects related to any reductions or increase in prices for individual items and services and prescription drugs as a result of the final rules. For example, Medicare Part B has historically reimbursed physicians for physician-administered drugs using a formula that is based off the average sales price (ASP). To the extent the final rules drive changes in prescription drug prices, that will change the federal reimbursement rates under Medicare Part B and may impact Medicare beneficiaries’ out-of-pocket costs for their prescriptions. In addition, by law, Medicaid programs in every state receive the lowest negotiated rate for prescription drugs. To the extent the final rules drive changes in prescription drug prices, this will impact the amount all states, the federal government, and some beneficiaries pay for prescription drugs. Similarly, if providers start increasing (or decreasing) their in-network rates, there could also be spillover effects for Medicare Advantage or Medicaid Managed Care Organizations (MCO), particularly for issuers and plans that use the same network for both private plans, Medicare Advantage Plans and Medicaid MCOs. These changes will impact the amount the federal government, states, and beneficiaries will need to pay for their Medicare and/or Medicaid.

Overall Health Insurance Market. The price transparency required by the final rules may also induce an uninsured person to obtain health insurance coverage. Depending on premium rates, an uninsured individual might select health insurance coverage after learning the actual dollar difference between the usual and customary rates that he or she pays for items and services and the in-network rates and out-of-network allowed amounts under the terms of a plan or issuer’s policy. In addition, the final rules might force providers to lower their rates for certain items and services in order to compete for the price sensitive consumer, plan, or issuer. Although the immediate payment impact would be categorized as a transfer, any accompanying health and longevity improvements would be considered benefits (and any accompanying increases in utilization would, thus, be considered additional costs). As discussed in section V.B in this preamble, a study of New Hampshire’s HealthCost initiative found that the availability of pricing information resulted in a five percent reduction in costs for medical imaging procedures. The study further found that patients saved approximately $7.5 million dollars on X-Ray, CT, and MRI scans over the five-year study period (dollars are stated in 2010 dollars).²⁷³

Some commenters suggested that the biggest impact on health care spending and costs would come from self-insured employers who would now be able to access and use in-network rate data to negotiate lower rates on behalf of plan participants; improve their provider networks; make more informed decisions about plan offerings; help steer enrollees to higher-quality, lower-cost providers; and more meaningfully implement value-based payment designs. Other commenters stated that the proposed rules would help create more efficient and value-based health care systems by encouraging issuers to design innovative benefit designs that push patients toward lower-cost care. Another commenter stated that requiring plans and issuers to share publicly their in-network rates and the allowed amounts paid to out-of-network providers had the potential to increase competition among plans and issuers.

The Departments are of the view that the requirements in the final rules will provide providers, plans, and issuers the ability to provide quality health care services at lower costs to participants, beneficiaries, or enrollees through enhanced provider and payer competition.

4. Medical Loss Ratio (45 CFR 158.221)

“Shared savings” programs allow issuers to share with enrollees any savings that result from enrollees shopping for, and receiving care from, lower-cost, higher-value providers. In the final rules, HHS is amending 45 CFR 158.221(b) to allow health insurance issuers that elect to offer “shared savings” programs to take credit for such “shared savings” payments in their MLR calculations. For this impact estimate, HHS is assuming that only relatively large issuers (with at least 28,000 enrollees) that have consistently reported investment costs in health IT on the MLR Annual Reporting Form of at least $10.50 per enrollee, which represents issuers with 70 percent of total reported commercial market health IT investment or issuers that operate in states that currently or may soon support “shared savings” plan designs,²⁷⁴ will initially choose to offer plan designs with a “shared savings” component. HHS assumes that such issuers will share, on average, 50 percent of the savings with enrollees (which will increase the MLR numerator under the final rules), and that issuers whose MLRs were previously below the applicable MLR standards will use their retained portion of the savings to lower enrollees’ premiums in future years (which will reduce the MLR denominator). Based on 2017-2019 MLR data, HHS estimates that this will reduce MLR rebate payments from issuers to enrollees by approximately $120 million per year, while facilitating savings that will result from lower medical costs of approximately $154 million per year for issuers and enrollees (some of which will be retained by issuers, shared directly with enrollees, or used by issuers to reduce future premium rates).

5. Summary of Estimated Transfers

The Departments are assuming that because 2021 premium rates are nearly finalized, health insurance issuers will not be able to charge for the expenses incurred to implement the requirements of the final rules in their 2021 rates. Because issuers will not have the opportunity to reflect the 2021 development costs in the 2021 premium rates, some issuers may apply margin to the ongoing expenses as they develop premium rates for 2022 and after. The Departments estimate premiums for the fully-insured markets will be $471 billion for 2022, $494 billion in 2023, $516 billion in 2024, and $539 billion in 2025, which includes the individual, small group, and large group markets.²⁷⁵ The Departments estimate that the ongoing expense represents approximately 2.4 percent of projected commercial insured premiums for the fully-insured market in 2022, 1.4 percent in 2023, and 0.5 percent in 2024 and 2025 (an average of 1.2 percent per year). Assuming this level of premium increase in the individual market, PTC outlays are estimated to increase by about $1,047 million in 2022, $623 million in 2023, $216 million in 2024, and $218 million in 2025. Given that 2022 PTC outlays are expected to be $44 billion,²⁷⁶ the Departments expect that the estimated premium impacts will be relatively small, and rate increases for subsidized enrollees in the individual market will largely be mitigated. Therefore, the Departments expect enrollment impacts to be minimal. The Departments note that any impact of the final rules on provider prices has not been estimated as limited evidence has generally shown no predictable impact on provider prices. As a result, the Departments are assuming that the overall impact will be minimal. However, there is a large degree of uncertainty regarding the effect on prices, so actual experience could differ.

The Departments received comments stating that the broader impact to premiums was not considered in the proposed rules. Several commenters stated that increased health care prices could be passed along to consumers, patients, and taxpayers in the form of higher premiums. Some commenters specifically observed that the cost of developing and maintaining the required machine-readable files on a monthly basis would likely be passed on to consumers in the form of higher premiums. Another commenter noted that employers, TPAs, and issuers might incur increased costs relative to the rules regarding potential data breaches, increased liability, and cyber-coverage costs (liability insurance designed to cover financial losses that result from data breaches and other cyber events) that could also impact plan premiums.

Other commenters suggested that use of information in the In-network Rate File could be used by consumers to engage in practices that would lead to adverse selection and potentially higher premiums. One commenter asserted that the proposed rules would allow individuals to enter the insurance pool for specific costly treatments or procedures and then drop coverage or switch coverage at the end of the contract year for a plan with lower premiums, which would result in higher premiums for all consumers because there is no ability for health plans to spread the risk across a reliable and long-term customer base.

By contrast, one commenter observed that premium increases could be mitigated if low- deductible participants, beneficiaries, or enrollees were given information about the cost of the health care they utilize, and that over time price transparency could create lower health care costs.

The Departments recognize that many issuers and TPAs will likely transfer the costs associated with meeting the requirements in the final rules to consumers in the form of increased premiums. However, the Departments do not currently have enough information or evidence to determine the overall effects the final rules will have on premiums and therefore have not estimated how the final rules will impact an individual’s premium. The Departments also note that adverse selection risk currently exists in the individual market; individuals already make health care coverage decisions based on their particular health and financial situations. It is not clear how the price information contained in the In-network Rate, Allowed Amount, and Prescription Drug Files will significantly impact an individual’s health care coverage decisions. The Departments do not expect the final rules to significantly increase the selection risk beyond the levels that currently exist.

Also, it is questionable how much the final rules will lower health care costs for low deductible participants, beneficiaries, or enrollees because cost-sharing amounts are usually much less than the cost of the services, so that the participants, beneficiaries, or enrollee have no economic incentive to seek lower cost services. Additionally, evidence is limited but generally does not show significant differences in insured participant, beneficiary, or enrollee behavior as a result of price transparency.

C. Regulatory Review Costs

Affected entities will need to understand the requirements of the final rules before they can comply. Group health plans and health insurance issuers are responsible for ensuring compliance with the final rules. However, as assumed elsewhere, it is expected that issuers and TPAs (for self-insured group health plans) will incur this cost and burden for most group health plans, and only the largest self-insured plans may incur this cost and burden directly. Thus, issuers and TPAs (and possibly some of the largest self-insured plans) will be responsible for providing plans with compliant services. The Departments are currently not aware of any specific number of large self-insured plans that will seek to meet the requirements of the final rules without third-party assistance and are thus unable to accurately account for those plans, however, those plans will incur similar costs and burdens as TPAs and issuers in order to develop the required tools and to review and understand the final rules. Therefore, the cost and burden for the regulatory review is estimated to be incurred by the 1,959 issuers and TPAs. The Departments also are of the view that each state DOI, 50 states plus the District of Columbia, will need to review and understand the final rules in order to be able to provide the appropriate level of oversight and enforcement.

If regulations impose administrative costs on private entities, such as the time needed to read and interpret the final rules, the Departments should estimate the cost associated with regulatory review. Due to the uncertainty involved with accurately quantifying the number of entities that will review and interpret the final rules, the Departments are assuming that the total number of issuers, TPAs, and state DOIs will be required to comply with the final rules.

Nonetheless, the Departments acknowledge that this assumption may understate or overstate the costs of reviewing the final rules. It is possible that not all affected entities will review the final rules in detail, and some entities may seek the assistance of outside counsel to read and interpret them. For these reasons, the Departments are of the view that the number of issuers, TPAs, and DOIs would be a fair estimate of the number of reviewers of the final rules.

Using the wage information from the Bureau of Labor Statistics (BLS)²⁷⁷ for a Computer and Information Systems Manager (Code 11-3021), a Lawyer (Code 23-1011) and a state Compliance Officer (Code 13-1041).²⁷⁸ The Departments estimate that the cost for each issuer or TPA to review the final rules will be $285.66 per hour, including overhead and fringe benefits, and each state DOI will incur a cost of approximately $55.58 per hour.²⁷⁹ Assuming an average reading speed, the Departments estimate that it will take approximately two hours for each staff member to review and interpret the final rules; therefore, the Departments estimate that the cost of reviewing and interpreting the final rules for each issuer and TPA will be approximately $571.32 and $111.16 for each state DOI, including the District of Columbia. Thus, the Departments estimate that the overall cost for the estimated 1,959 issuers and TPAs and each state DOI will be $1,124,885.04 (($571.32 x 1,959 (total number of estimated issuers and TPAs)) + ($111.16 x 51 (total number of DOIs))).

D. Regulatory Alternatives Considered

In developing the policies contained in the final rules, the Departments considered alternatives to the final rules. In the following paragraphs, the Departments discuss the key regulatory alternatives the Departments considered.

1. Limiting Cost-sharing Disclosures to Certain Covered Items and Services, and Certain Types of Group Health Plans and Health Insurance Issuers

The final rules require group health plans and health insurance issuers to disclose cost-sharing information for any requested covered item or service. The Departments considered limiting the number of items or services for which plans and issuers would be required to provide cost-sharing information to lessen the costs on these entities. However, limiting disclosures to a specified set of items and services reduces the breadth and availability of useful cost estimates to determine anticipated cost-sharing liability and limits the impact of price transparency efforts by reducing the incentives to lower prices and provide higher-quality care. The Departments assumed that plans (or TPAs on their behalf) and issuers, whether for a limited set of covered items and services or for all covered items and services, would be deriving these data from the same data source. Because the data source would be the same, the Departments assumed that any additional costs to produce the information required for all covered items and services, as opposed to a limited set of covered items and services, would be minimal. The Departments are of the view that this limited additional cost is outweighed by the potentially large benefit to consumers of having access to the required pricing information for the full scope of items and services covered by their plan or issuer. For these reasons, in order to allow consumers to estimate their out-of-pocket costs for all services and items covered under their plan or coverage, and to achieve lower health care costs and reduce spending through increased price transparency, the final rules are requiring cost-sharing information be disclosed for all covered items and services. However, in recognition of commenters’ concerns regarding the implementation timetable for the internet-based self-service tool, the final rules include a staggered implementation schedule for the disclosure of cost-sharing information through the internet-based self-service tool.

The Departments also considered implementing a more limited approach by imposing requirements only on individual market plans and fully-insured group coverage. However, the Departments are concerned that this limited approach might encourage plans to simply shift costs to sectors of the market where these requirements would not apply and where consumers would have less access to pricing information. The Departments are of the view that all consumers should be able to access the benefits of greater price transparency and that a broader approach will have the greatest likelihood of controlling the cost of health care industry-wide. Indeed, if the requirements of the final rules were limited to only individual market plans, the Departments estimate only 9,716,000 individuals would receive the intended benefits of the final rules. In contrast, under the final rules, a total of 212,314,000 participants, beneficiaries, and enrollees may receive the intended benefits.²⁸⁰ The Departments acknowledge that limiting applicability of the requirements of the final rules to the individual market would likely reduce the overall cost estimates identified in section V.B.2, but the overall cost estimates per covered life would likely increase. Further, there is a great deal of overlap in issuers that offer coverage in both the individual and group markets. Issuers offering coverage in both markets would be required to comply with the requirements of the final rules even if the Department limited the applicability to only the individual market. Because TPAs provide administrative functionality for self-insured group health insurance coverage, those non-issuer TPA entities would not incur any costs because they do not have any overlap between the individual and group markets. The Departments are of the view that the benefits of providing consumer pricing information to an estimated total 212,314,000 participants, beneficiaries, and enrollees outweigh the increased costs that a subset of plans, issuers, and TPAs, that are not active participants in the individual market, would incur. The Departments have determined that the benefits of the final rules being widely applicable will not only provide access to health care pricing information to a greater number of individuals, but that any developed economies of scale will have a much greater likelihood of achieving the goal of controlling the cost of health care industry-wide.

As noted in section I.B of this preamble, in the summer and fall of 2018, HHS hosted listening sessions in which attendees stated that existing tools usually use historical claims data, which results in broad, sometimes regional, estimates, rather than accurate and individualized prices. The Departments considered allowing plans and issuers to use rate information from historical claims data to calculate price estimates. The Departments recognize that many plans and issuers use historical claims data to inform and determine cost-sharing estimates, but the Departments are of the view that using pricing information such as negotiated rates will provide for a more accurate and reliable estimate. Providing more accurate estimates of consumer prices will provide more benefit to consumers, allowing them to better estimate their potential out-of-pocket costs and search for items and services they feel are more affordable.

2. Requirement to Make Available Machine-Readable Files of In-Network Rates, Historical Data for Out-of-network Allowed Amount Payments Made to Out-of-network Providers, and Prescription Drug Pricing Information on a Public Website

In proposing the requirement that group health plans and health insurance issuers post in-network rates, historical data for out-of-network allowed amount payments made to out-of-network providers, and negotiated rates and historical net prices for each prescription drug on a publicly accessible website, the Departments considered requiring plans and issuers to submit the internet addresses for the machine-readable files to CMS. CMS would then make the information available to the public from CMS’s website. A central location could allow the public to access in-network rate information, out-of-network allowed amounts, and prescription drug information for all plans and issuers in one place, potentially reducing confusion and increasing accessibility. Posting in-network rates, out-of-network allowed amounts, and prescription drug information in a central location might also make it easier to post available quality information alongside price information. However, to provide flexibility and reduce costs, the Departments are of the view that plans and issuers should determine where to post the in-network rate, out-of-network allowed amount, and prescription drug information rather than prescribing the location where the information is to be disclosed. Further, requiring plans and issuers to submit internet addresses for their machine-readable files to CMS would result in additional costs to the extent plans and issuers already post this information in a different location.

3. Frequency of Updates to Machine-Readable Files

In developing 26 CFR 54.9815-2715A3(b)(3), 29 CFR 2590.715-2715A3(b)(3), and 45 CFR 147.212(b)(3) of the final rules, the Departments considered requiring more frequent updates (i.e., within 10 calendar days of new rate finalization) to the in-network rates, out-of-network allowed amounts, and prescription drug information. More frequent updates would provide a number of benefits for patients, providers, and the public at large. Specifically, such a process would ensure that the public has access to the most up-to-date rate information so that consumers can make the most meaningful, informed decisions about their health care utilization. Requiring group health plans, health insurance issuers, and TPAs (or other entity acting on a plan or issuers behalf) to update the machine-readable files more frequently would result in increased costs for those affected entities, however. With respect to the In-network Rate File, the Departments estimate that requiring updates within 10 calendar days of rate finalization would result in each plan, issuer, or TPA incurring a burden of 4,428 hours, with an associated equivalent cost of $635,112 in the second year after implementation of the final rules and an annual burden of 1,116 hours, with an associated equivalent cost of $162,828 in subsequent years. Based on recent data the Departments estimate a total 1,959 entities – 1,754 issuers²⁸¹ and 205 TPAs²⁸² – will be responsible for implementing the final rules. For all 1,959 issuers and TPAs, the total burden, in the second year of implementation of the final rules, would be 8,674,452 hours, with an associated equivalent cost of $1,244,184,408 and an annual ongoing burden of 2,186,244 hours, with an associated ongoing annual costs of $318,980,052 in subsequent years. As discussed in section VI.A.2, requiring a less frequent 30 calendar day update will reduce the burden, in year two, for each entity to 1,476 hours with an associated equivalent cost of $211,704. The burden and associated costs, in subsequent years, will be reduced to 372 hours, with an associated cost of $54,276. For all 1,959 issuers and TPAs, the total burden, in year two, is reduced to 2,891,484 hours, with and associated equivalent cost of $414,728,136. For subsequent years, the total burden is reduced to 728,748 hours, with an associated equivalent cost of $106,326,684. With respect to the Allowed Amount File, the Departments estimate that requiring updates within 10 calendar days of rate finalization would result in each plan, issuer, or TPA incurring a burden of 1,908 hours, with an associated equivalent cost of $290,628 in the second year and an annual ongoing burden of 468 hours, with an associated equivalent cost of $61,452 in subsequent years. For all 1,959 issuers and TPAs, the total burden, in year two, would be 3,737,772 hours with and associated equivalent cost of $569,340,252. For subsequent years, the total ongoing burden would be 916,812 hours, with an associated equivalent cost of $120,384,468. As further discussed in section VI.A.2, requiring a less frequent update will reduce the year two burden for each issuer and TPA to 636 hours, with an associated equivalent cost of $96,876. For subsequent years, the total ongoing burden will be reduced to 156 hours, with an associated equivalent cost of $20,848. For all 1,959 issuers and TPAs, the total burden for year two is reduced to 1,245,924 hours, with an associated equivalent cost of $189,780,084. For subsequent years, the total ongoing burden will be reduced to 305,604 hours, with an associated equivalent cost of $40,128,156. With respect to the Prescription Drug File, the Departments estimate that requiring updates within 10 calendar days of rate finalization would result in each plan, issuer, or TPA incurring a burden of 2,700 hours, with an associated equivalent cost of $416,664 in the second year and an annual ongoing burden of 1,116 hours, with an associated equivalent cost of $162,828 in subsequent years. For all 1,959 issuers and TPAs, the total burden, in year two, would be 5,289,300 hours with and associated equivalent cost of $816,244,776. For subsequent years, the total ongoing burden would 2,186,244 hours, with an associated equivalent cost of $318,980,052. As discussed in section VI.A.2, requiring a less frequent update will reduce the year two burden for each issuer and TPA to 900 hours, with an associated equivalent cost of $138,888. For subsequent years, the total ongoing burden will be reduced to 372 hours, with an associated equivalent cost of $54,276. For all 1,959 issuers and TPAs, the total burden for year two is reduced to 1,763,100 hours, with an associated equivalent cost of $272,081,592. For subsequent years, the total ongoing annual burden will be reduced to 728,748 hours, with an associated equivalent cost of $106,326,684. By requiring monthly updates to the machine-readable files, rather than updates every 10 calendar days, the Departments have chosen to strike a balance between placing a significant burden on issuers (and their service providers) and assuring the availability of accurate information.

4. File Format Requirements

In 26 CFR 54.9815-2715A3(b)(2), 29 CFR 2590.715-2715A3(b)(2), and 45 CFR 147.212(b)(2), the final rules require group health plans and health insurance issuers to post information in three machine-readable files. A machine-readable file is defined as a digital representation of data or information in a file that can be imported or read by a computer system for further processing without human intervention, while ensuring no semantic meaning is lost. The final rules require each machine-readable file to use a non-proprietary, open format. The Departments considered requiring issuers and TPAs to post in-network rates, allowed amounts paid for out-of-network services, and prescription drug information using a specific file format, namely JSON. However, the Departments are of the view that being overly prescriptive regarding the file type will impose an unnecessary costs on issuers and TPAs despite the advantages of JSON, namely that JSON files are downloadable and readable for many health care consumers, and the potential for JSON to simplify the ability of price transparency tool developers to access the data. Therefore, the Departments are requiring that issuers and TPAs post the in-network rate, allowed amount, and prescription drug pricing information in three distinct machine-readable files using a non-proprietary, open format. The Departments will provide additional guidance regarding the file format in future technical implementation guidance.

In addition, the Departments considered requiring plans and issuers to provide the specific out-of-network allowed amount methodology needed for consumers to determine out-of-pocket liability for services by providers not considered in-network by the plan or issuer, rather than historical data on paid out-of-network claims. However, the Departments understand providing a formula or methodology for calculating a provider’s out-of-network allowed amount does not provide the data users need in an easy-to-use machine-readable format. The Departments determined that providing monthly data files on allowed amounts by plans and issuers over a 90-day period for items and services provided by out-of-network providers will enable users to more readily determine what costs a plan or issuer may pay toward items or services obtained out-of-network. Because a plan or issuer does not have a contract with an out-of-network provider that establishes negotiated rates, the plan or issuer cannot anticipate what that provider’s charges will be for any given item or service; therefore, the Departments, as discussed previously in this preamble, are requiring the inclusion of billed charges in the Allowed Amounts File.

Providing data on the billed charge in connection with each unique allowed amount on the out-of-network Allowed Amount File will provide consumer with information related to what their plan or issuer will likely contribute to the costs of items or services obtained from out-of-network providers and the billed charges associated with those item or services. This information will provide the consumer with a reasonably accurate estimate of the amount of additional liability a consumer could be required to pay for a particular item or service received from an out-of-network provider. Out-of-network allowed amount and billed charges data will provide increased price transparency for consumers, and the costs related to producing these data are not considered to be significantly higher than that associated with producing the methodology for determining allowed amounts for payments to out-of-network providers. Given these circumstances, the final rules are requiring that payers provide allowed amount data for out-of-network covered items or services furnished by a particular out-of-network provider during the 90-day time period that begins 180 days prior to the publication date of the Allowed Amount File, and billed charges rather than requiring plans and issuers to report their methodology or formula for calculating the allowed amounts for out-of-network items and services.

5. Requiring Disclosure of Cost-sharing information to Participants, Beneficiaries, and Enrollees and Publicly-posted Machine-readable Files with In-network Rates, Out-of-network Allowed Amounts, and Prescription drug pricing information.

The Departments considered whether it would be duplicative to require group health plans and health insurance issuers to disclose cost-sharing information through an internet-based self-service tool or in paper form to participants, beneficiaries, or enrollees so that they may obtain an estimate of their cost-sharing liability for covered items and services and publicly-posted machine-readable files containing data on in-network rates, out-of-network allowed amounts, and prescription drug pricing information. The requirement to disclose cost-sharing information to participants, beneficiaries, or enrollees in the final rules require plans and issuers to provide consumer-specific information on potential cost-sharing liability to enrolled consumers, complete with information about their deductibles, copays, and coinsurance. However, cost-sharing information for these plans and coverage would not be available or applicable to consumers who are uninsured or shopping for plans pre-enrollment. Data disclosed to participants, beneficiaries, or enrollees would also not be available to third parties who are interested in creating internet-based self-service tools to assist both uninsured and insured consumers with shopping for the most affordable items or services. Limiting access to data to a subset of consumers would not promote the transparency goals of the final rules and would reduce the potential for the final rules to drive down health care costs by increasing competition.

As discussed in more detail in section VI.A.1 in this preamble, the Departments have estimated the high-end three-year average annual cost to develop only the internet-based self-service tool, including the initial tool build and maintenance, customer service training, customer assistance, and mailing costs. The Departments estimate the three-year average total burden per issuer, or TPA will be approximately 23,338 hours, with an associated equivalent average annual cost of approximately $3,262,262. For all 1,959 issuers and TPAs, the Departments estimate the total three-year average annual burden will be 45,718,171 hours with an associated equivalent total average annual cost of approximately $6,390,770,952.

Additionally, the Departments estimated that for implementation of the required internet-based self-service tool in conjunction with the out-of-network allowed amount, in-network and prescription drug machine-readable files, the Departments estimate that the annual high-end three-year average annual costs and burden for each issuer or TPA will be approximately 28,958 hours, with an associated equivalent cost of approximately $4,040,142. For all 1,959 issuers and TPAs, the Departments estimate the total three-year average annual burden and cost to be 56,727,751 hours with an associated equivalent total average annual cost of approximately $7,914,635,260.

In contrast, and as discussed in more detail in section VI.A.1, the Departments estimate that the low-end three-year average burden and cost to develop and maintain only the internet-based self-service tool, including the initial tool build and maintenance, customer service training, customer assistance, and mailing costs. The Departments estimate the total three-year average cost and burden per issuer or TPA will be approximately 15,475 hours, with an associated equivalent average annual cost of approximately $2,150,169. For all 1,959 issuers and TPAs, the Departments estimate the total three-year average annual burden to be 30,315,730 hours with an associated equivalent total average annual cost of approximately $4,212,181,157.

Finally, the Departments estimated that for implementation of the required internet-based self-service tool in conjunction with the out-of-network allowed amount, in-network rate, and prescription drug machine-readable files, the Departments estimate that the three-year average annual low-end cost and burden for each issuer or TPA will be approximately 21,095 hours, with an associated equivalent average annual cost of approximately $2,928,048. For all 1,959 issuers and TPAs, the Departments estimate the total three-year average annual low-end burden and cost will be 41,325,310 hours with an associated equivalent total average annual cost of approximately $5,736,045,465. While the Departments recognize that requiring disclosures through all mechanisms will increase the costs for issuers and TPAs required to comply with the final rules, the Departments are of the view that the additional costs associated with greater price transparency are outweighed by the benefits that will accrue to the broader group of consumers (such as the uninsured and individuals shopping for coverage) and other individuals who would benefit directly from the additional information provided through the machine-readable files. Additionally, the Departments are of the view that the final rules have the potential to reduce the cost of surprise billing to consumers. The Departments further believe that the final rules will, with the disclosure of in-network rates, potentially apply pressure on providers to bill less aggressively. Consumer advocacy groups could also use the wide price dispersion of the same CPT level service or NDC level drug by the same providers with different negotiated rates, depending upon issuer or TPA contract, to further place downward pressure on health care costs. In addition, as noted earlier in section II.C.1-2 of this preamble, researchers and third-party developers will also be able to use the data included in the machine-readable files in a way that could create even more benefits to consumers, including those consumers not currently enrolled in a particular plan or coverage. For these reasons, the Departments have concluded that, in addition to requiring plans and issuers to disclose cost-sharing information to participants, beneficiaries, or enrollees through an internet-based self-service tool, requiring plans and issuers to publicly disclose information regarding in-network rates, out-of-network allowed amounts, and prescription drug pricing will further the goals of price transparency and create benefits for all potentially affected stakeholders.

6. Requiring an Internet-Based Self-Service Tool and Machine-Readable Files in Lieu of an API

The Departments considered whether to require group health plans and health insurance issuers to make the information required by the final rules available through a standards-based API, instead of through the proposed internet-based self-service tool and machine-readable files. Access to pricing information through an API could have a number of benefits for consumers, providers, and the public at large. This information could ensure the public has access to the most up-to-date rate information. Providing real-time access to pricing information through a standards-based API could allow third-party innovators to incorporate the information into applications used by consumers or combined with electronic medical records for point-of-care decision-making and referral opportunities by clinicians for their patients. Additionally, being able to access this data through a standards-based API would allow consumers to use the application of their choice to obtain personalized, actionable health care price estimates, rather than being required to use one developed by their plan or issuer (or a service provider), although those consumers may be required to pay for access to those applications.

While there are many benefits to a standards-based API, it is the Departments’ view that both an internet-based tool and machine-readable files are the first iterative steps towards developing price transparency standards-based APIs. It is the Departments’ view that standards-based API would be a natural next technological step. The Departments also recognize that the majority of issuers have an existing internet-based tool that could be enhanced to meet the disclosure requirements in the final rules. The burden associated with updating existing tools to standardize data attributes is going to be less than building a standards-based API. Looking at the average cost over a 3-year period for the API for all 1,959 issuers and TPAs, the Departments estimate an average annual cost that would significantly exceed the estimated annual cost of implementing the internet-based self-service tool and machine-readable files. The Departments recognize that the development of an API may be streamlined by leveraging existing APIs currently used by plans, issuers, or TPAs for their own applications. Additionally, any requirements for an API would build on the requirements finalized in CMS’s Interoperability & Patient Access final rule²⁸³ requiring certain entities, such as Federally-facilitated Exchange QHP issuers and companies that participate in both Medicare and the individual or group market, to provide certain data through a standards-based API. Building on the Interoperability & Patient Access final rule could result in significantly lower costs for issuers and TPAs as it relates to the development and implementation of a standards-based API. Nonetheless, while the Interoperability & Patient Access final rule focuses on the disclosure of information regarding post care and clinical data, the rules finalized here require plans and issuers to provide information related to a participant’s, beneficiary’s, or enrollee’s individual’s cost-sharing, allowed amounts for covered items and services from out-of-network providers, and negotiated rates and historical net prices for each prescription drug prior to seeking or obtaining care. The Departments are therefore of the view that plans, issuers, and TPAs would incur significant and distinct costs if required to us a standards-based API to comply with the final rules.

Although not estimated here, the Departments expect any associated maintenance costs would also decline in succeeding years as plans, issuers, and TPAs gain additional efficiencies or undertake similar procedures to maintain any currently used internal APIs. Nonetheless, weighing the costs of providing the required information using an internet-based self-service tool and machine-readable files against the potential costs of using a standards-based API, particularly given the timeframes required by the final rules, the Departments are of the view that, at least in the short-term, requiring an internet-based self-service tool and machine-readable files is the more sensible approach.

Even though the Departments are of the view that an internet-based self-service tool and machine-readable files are appropriate in the short-term, as discussed earlier in this preamble, the Departments recognize that a standards-based API format in the long-term may be more beneficial to the public, as it would provide access to the most up-to-date rate information; would allow health care consumers to use the application of their choice to obtain personalized, actionable health care service price estimates; and would allow third-party developers to use the collected data to develop internet-based self-service tools. Therefore, the Departments are considering future rulemaking to further expand access to pricing information through standards-based APIs, including individuals’ access to estimates about their own cost-sharing liability and information about in-network rates, historical payment data for out-of-network allowed amounts, and negotiated rates and historical net prices for prescription drugs.

The final rules contain ICRs that are subject to review by OMB. A description of these provisions is given in the following paragraphs with an estimate of the annual burden, summarized in Table 24.

To fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that the Departments solicit comment on the following issues:

The Departments solicited comment on each of the required issues under section 3506(c)(2)(A) of the PRA for the following information collection requirements.

A. Wage Estimates

To derive wage estimates, the Departments generally use data from the BLS to derive average labor costs (including a 100 percent increase for fringe benefits and overhead) for estimating the burden associated with ICRs.²⁸⁴ One commenter noted that the markup rates for labor, fringe benefits, and overhead are underestimated at 100 percent, while the conventional standard is 200 percent to 300 percent. The commenter further stated that if the Departments were to update the burden estimates with the conventional standard for overhead markup, the total of annual quantified costs would increase to over $500 million per year.

The Departments acknowledge that there are various methodologies used to determine and estimate fringe benefits and other overhead costs; however, the commenter did not provide any source recognizing or supporting their assertion that the conventional standard is to use 200 percent to 300 percent increases. The Departments agree that if a higher percentage were used to estimate hourly wages and overhead, then the estimated costs for the final rules could potentially be significantly higher. However, the Departments note that the use of 100 percent is necessarily a rough adjustment, both because fringe benefits and overhead costs vary significantly across employers, and because methods of estimating these costs vary widely across studies. The Departments are of the view that doubling the hourly wage to estimate total cost is a reasonably acceptable estimation method.

The Departments recognize that the maturity of technology will vary from organization to organization. An independent study by Bates White Economic Consulting (Bates White), commissioned by one commenter, developed an assessment of the costs of the proposed rules by interviewing a mix of 18 large and small health insurance issuers covering about 78 million lives. They reported various degrees of existing tools’ compliance with the requirements of the proposed rules. The Departments reevaluated its initial burden estimates developed for the proposed rules based on feedback from commenters and the Bates Whites study. Because the Departments could not make an estimate for any specific issuer, an independent government cost estimate (IGCE) was conducted for each of the machine-readable files and the internet-based self-service tool to aid the Departments in conducting the burden and cost estimates for the final rules. The goals of an IGCE are to aid the government acquisition process in determining a project’s cost estimates based on project requirements or objectives that are typically found in a performance work statement or statement of work. IGCEs are developed by the government without contractor influence and are based on market research. The estimated skill sets required to build both the internet based self-service tool and machine-readable files can be found in TABLE 3 below. The Departments based the IGCE cost estimates on the rule’s requirements and each IGCE has baseline assumptions that are built into the final estimate.

The IGCE assumptions for the internet-based self-service tool included things such as research, engineering development, and design and were not based on any existing tools. There was an assumption that product development would be done in the cloud to take advantage of economies of scale or with on-premise infrastructure that allows for the development of “infrastructure as code.” The IGCE assumptions for the machine-readable files included that all items and services for a specific plan have a negotiated price, that all price numbers are digitized, that pricing information is stored in many locations (not in a single database), that pricing information is accessible through internal systems, that building the first machine-readable file will facilitate automation for building future machine-readable files, and that there is an ability to run queries against claims data.

Based on comments discussed later sections VI.A.1-2, the Departments have chosen to use the Contract Awarded Labor Category (CALC)²⁸⁵ database tool, managed by the General Services Administration (GSA), to derive the hourly rates for the burden and cost estimates in the final rules. The CALC tool was built to assist acquisition professionals with market research and price analysis for labor categories on multiple U.S. GSA & Veterans Administration (VA) contracts. Wages obtained from the CALC database are fully burdened to account for fringe benefits and overhead costs. The Departments chose to use wages derived from the CALC database because, even though the BLS data set is valuable to economists, researchers, and others that would be interested in larger, more macro-trends in parts of the economy, the CALC data set is meant to help market research based on existing government contracts in determining how much a project/product will cost based on the required skill sets needed. The CALC data set also factors in the fully-burdened hourly rates (base pay + benefits) into wages whereas BLS rates do not. CALC occupations and wages provide the Departments with data that aligns more with, and provides more detail related to, the occupations required for the implementation of the requirements in the final rules. As discussed earlier, after consideration and discussion of comments, the Departments chose to further reevaluate the cost and burden estimates. Based on the Departments consultation with internal and external IT professionals and additional research, the Departments have chosen to increase our overall costs and burden estimates to account for our updated understanding of the burdens associated with the final rules and the additional requirements included in the final rules. The Departments further discuss changes to the final cost and burden estimates in the corresponding ICR sections.

While the following estimates for the internet-based self-service tool assume that entities are either iterating on an existing tool or building a brand new tool from the ground up, the Departments are of the view that it is highly likely that third-party developers will take this opportunity to build white-label products that meet the requirements of the final rules and that they will reduce costs through economies of scale by doing so. As such, the Departments’ cost estimates may have some tendency towards over-estimation.

1. ICR Regarding Requirements for Disclosures to Participants, Beneficiaries, or Enrollees (26 CFR 54.9815-2715A2, 29 CFR 2590.715-2715A2, and 45 CFR 147.211)

The Departments add 26 CFR 54.9815-2715A2(b), 29 CFR 2590.715-2715A2(b), and 45 CFR 147.211(b), requiring group health plans and health insurance issuers of individual and group health insurance coverage to disclose, upon request, to a participant, beneficiary, or enrollee, such individual’s cost-sharing information for items; negotiated rates and underlying fee schedule rates for in-network providers; and allowed amounts for covered items and services from out-of-network providers. As discussed previously in section II.B.1 of this preamble, in paragraphs 26 CFR 54.9815-2715A2(b)(1)(i), 29 CFR 2590.715-2715A2(b)(1)(i), and 45 CFR 147.211 (b)(1)(i) through (vii) the final rules require plans and issuers to make this information available through an internet-based self-service tool on an internet website and, if requested, in paper form or other format agreed upon between the plan, issuer, or TPA and participant, beneficiary, or enrollee.

The final rules require plans and issuers to disclose, upon request, certain information relevant to a determination of a participant’s, beneficiary’s, or enrollee’s cost-sharing liability for a particular health care item or service from a particular provider, to the extent relevant to the individual’s cost-sharing liability for the item or service, in accordance with seven content elements: the individual-specific estimated cost-sharing liability; the individual-specific accumulated amounts; the in-network rate; the out-of-network allowed amount for a covered item or service, if applicable; the items and services content list when the information is for items and services subject to a bundled payment arrangement; a notice of prerequisites to coverage (such as prior authorization); and a disclosure notice. However, as discussed earlier in this section II.B.1 of this preamble, in instances where items or services, generally considered preventive, are furnished as non-preventive items or services, the participant, beneficiary, or enrollee may be subject to the cost-sharing terms of his or her plan. If a plan or issuer cannot determine whether the request is for a preventive item or service, the plan or issuer must display the non-preventive cost-sharing liability, along with a note that the item or service may not be subject to cost-sharing if it is billed as a preventive service. The final rules also require the disclosure notice to include several statements, written in plain language, which include disclaimers relevant to the limitations of the cost-sharing information disclosed, including: a statement that out-of-network providers may balance bill participants, beneficiaries, or enrollees, a statement that the actual charges may differ from those for which a cost-sharing liability estimate is given, and a statement that the estimated cost-sharing liability for a covered item is not a guarantee that coverage will be provided for those items and services. In addition, plans and issuers will be permitted to add other disclaimers they determine appropriate so long as such information is not in conflict with the disclosure requirements of the final rules. The Departments have developed model language that plans and issuers will be able to use to satisfy the requirement to provide the notice statements described earlier in section II.B.1 of this preamble.

As discussed in section II.B.1 of this preamble, the final rules require plans and issuers to make available the information described in 26 CFR 54.9815-2715A2(b), 29 CFR 2590.715-2715A2(b), and 45 CFR 147.211(b) of the final rules through an internet-based self-service tool. The information is required to be provided in plain-language through real-time responses. Plans and issuers will be required to allow participants, beneficiaries, or enrollees to search for cost-sharing information for covered items and services by billing code, or by descriptive term, per the user’s request, in connection with a specific in-network provider, or for all in-network providers. In addition, the internet-based self-service tool must allow users to input information necessary to determine the out-of-network allowed amount for a covered item or service provided by an out-of-network provider (such as zip code). The internet-based self-service tool is required to have the capability to refine and reorder results by the geographic proximity of in-network providers, and the estimated amount of cost-sharing liability to the beneficiary, participant, or enrollee.

As discussed in sections II.B.1 and 2 earlier in this preamble, the final rules require plans and issuers to furnish upon request, in paper form, the information required to be disclosed under 26 CFR 54.9815-2715A2(b)(1), 29 CFR 2590.715-2715A2(b)(1), and 45 CFR 147.211(b)(1) of the final rules to a participant, beneficiary, or enrollee. As discussed in sections II.B.1 and 2 in this preamble, a paper disclosure is required to be furnished according to the consumer’s filtering and sorting preferences and mailed to the participant, beneficiary, or enrollee within two business days of receiving the request. Plans or issuers may, upon request, provide the required information through other methods, such as over the phone, through face-to-face encounters, by facsimile, or by email.

The Departments assume fully-insured group health plans will rely on issuers to develop and maintain the internet-based self-service tool and provide any requested disclosures in paper form. While the Departments recognize that some self-insured plans might independently develop and maintain the internet-based self-service tool, at this time the Departments assume that self-insured plans will rely on TPAs (including issuers providing administrative services and non-issuer TPAs) to develop the required internet-based self-service tool. The Departments make this assumption because the Departments understand that most self-insured group health plans rely on TPAs for performing most administrative duties, such as enrollment and claims processing. For those self-insured plans that choose to develop their own internet-based self-service tools, the Departments assume that they will incur a similar cost and burden as estimated for issuers and TPAs, as discussed in section VI.A.1 later in this preamble. In addition, 26 CFR 54.9815-2715A2(b)(3), 29 CFR 2590.715-2715A2(b)(3), and 45 CFR 147.211(b)(3) of the final rules provide for a special rule to prevent unnecessary duplication of the disclosures with respect to health insurance coverage, which provides that a plan may satisfy the disclosure requirements if the issuer offering the coverage is required to provide the information pursuant to a written agreement between the plan and issuer. Thus, the Departments have used issuers and TPAs as the unit of analysis for the purposes of estimating required changes to IT infrastructure and administrative costs and burdens. The Departments estimate approximately 1,754 issuers and 205 TPAs will be affected by the final rules.

The Departments acknowledge that the costs described in these ICRs may vary depending on the number of lives covered, the number of providers and items and services for which cost-sharing information must be disclosed, and the fact that some plans and issuers already have robust tools that can be easily adapted to meet the requirements of the final rules. In addition, plans and issuers may be able to license existing cost estimator tools offered by third-party vendors, obviating the need to establish and maintain their own internet-based self- service tools. The Departments assume that any related vendor licensing fees would be dependent upon complexity, volume, and frequency of use, but assume that such fees would be lower than an overall initial build and associated maintenance costs. Nonetheless, for purposes of the estimates in these ICRs, the Departments assume all 1,959 issuers and TPAs will be affected by the final rules. The Departments also developed the following estimates based on the mean average size, by covered lives, of issuers or TPAs. As noted later in this section, the Departments sought comment on the inputs and assumptions that were used to develop these cost and burden estimates, particularly regarding existing efficiencies that would reduce the cost and burden estimates.

High range estimate for Internet-based self-service tool from start-up to operational functionality.

The Departments estimate that the one-time costs and burden each issuer or TPA will incur to complete the one-time technical build; including activities such as planning, assessment, budgeting, contracting, building and systems testing, incorporating any necessary security measures, incorporating disclaimer and model notice language, or development of the model and disclaimer notice materials for those that choose to make alterations. The Departments assume that this one-time cost and burden will be incurred in 2022 to develop and build the internet-based self-service tool and provide information for the 500 required items and services, and additional one-time costs will be incurred in 2023 in order to fully meet the requirements of the final rules. As mentioned earlier in section V.A.2 of this preamble, the Departments acknowledge that a number of issuers and TPAs have previously developed some level of internet-based self-service tool similar to, and containing some functionality related to, the requirements in the final rules. The Departments thus seek to estimate a burden and cost range (high-end and low-end) associated with the final rules for those issuers and TPAs. In order to develop the high-end hourly burden and cost estimates, the Departments assume that all issuers and TPAs will need to develop and build their internet-based self-service tool from start-up to operational functionality. The Departments estimate that for each issuer or TPA it will take a Project Manager/Team Lead 4,160 hours (at $153 per hour), a Scrum Master 4,160 hours (at $105 per hour), a Technical Architect/Sr. Developer 4,160 hours (at $149 per hour), an Application Developer, Senior 4,160 hours (at $143 per hour), a Business Analyst 4,160 hours (at $120 per hour), a UX Researcher/Service Designer 4,160 hours (at $154 per hour), a Designer 4,160 hours (at $116 per hour), a DevOps Engineer 4,160 hours (at $181 per hour), and a Web Database/Application Developer IV 4,160 hours to complete this task. The Departments estimate the total burden per issuer or TPA will be approximately 37,440 hours, with an equivalent cost of approximately $5,295,680. For all 1,959 issuers and TPAs, the total first year one-time total burden is estimated to be 73,344,960 hours, with an equivalent total cost of approximately $10,374,237,120. The Departments’ estimates are higher-bound estimates that do not consider potential cost savings that could be realized should issuers and TPAs buy or lease an internet-based self-service tool from a third-party vendor or other issuer. However, the Departments are of the view that issuers or TPAs that choose to buy or rent an internet-based self-service tool from another entity could incur significantly less costs and burdens.

Several commenters stated that the Departments grossly underestimated the cost burden of implementation on plans and issuers. One commenter stated that surveyed issuers estimated an average cost of $6.2 million to build, develop or modify, implement, test, and launch an internet-based self-service tool. This is 28 times greater than the Departments’ proposed estimate for an issuer that needs to build a new tool and 112 times greater than the Departments’ estimate for an issuer that has an existing tool. Furthermore, this commenter noted that surveyed issuers estimated average annual maintenance costs of $1.4 million per issuer—over 100 times greater than those anticipated by the Departments. Surveyed issuers also estimated set-up costs that averaged about $5.53 million (ranging from $1,000,000 to $15,000,000) compared to the Departments’ proposed estimate of $221,029. This is more than 25 times what the Departments estimated as the cost for a full build of the internet-based self-service tool. Although most of the issuers surveyed had an existing internet-based self-service tool meeting many of the required elements of the final rules, several issuers expressed significant concern about the cost and feasibility of complying with the requirements of the proposed rules. Specifically, the issuers surveyed expressed concerns noting that the requirements may necessitate a complete rebuild of their consumer tool. The surveyed issuers further indicated that the proposed rules would be costlier than implementing real-time claims adjudication, in which the claim for the medical service is adjudicated at the time the service is provided. They stated that they would need to effectively adjudicate the claim before it actually happens – to provide estimates for every conceivable type of medical item or service while integrating this information with various benefits. The surveyed issuers also noted that condensing all of the detail required in the final rules into a user-friendly format for use by enrollees would be a considerable and possibly even infeasible challenge. They further stated that the Departments’ assumption that issuers with an existing internet-based self-service tool would face a lower hour burdens and costs to comply with the proposed rules was incorrect.

The Departments have considered the comments submitted in response to the cost and burden estimates related to the internet-based self-service tool. In response, the Departments have adjusted the costs and burden estimates to better reflect and align with the values submitted by commenters. In addition, the Departments have developed the estimates above, and in other ICR sections, using CALC wage rates as discussed in section VI.A of this preamble.