Title I, SEC. 1541. DEVELOPMENT OF A RISK ADJUSTMENT AND REINSURANCE METHODOLOGY. (a) Development. (1) Initial development. Not later than April 1, 1995, the Board shall develop a risk adjustment and reinsurance methodology in accordance with this subpart. (2) Improvements. The Board shall make such improvements in such methodology as may be appropriate to achieve the purposes described in subsection (b)(1). (b) Methodology. (1) Purposes. Such methodology shall provide for the adjustment of payments to regional alliance health plans for the purposes of (A) assuring that payments to such plans reflect the expected relative utilization and expenditures for such services by each plan's enrollees compared to the average utilization and expenditures for regional alliance eligible individuals, and (B) protecting health plans that enroll a disproportionate share of regional alliance eligible individuals with respect to whom expected utilization of health care services (included in the comprehensive benefit package) and expected health care expenditures for such services are greater than the average level of such utilization and expenditures for regional alliance eligible individuals. (2) Factors to be considered. In developing such methodology, the Board shall take into account the following factors: (A) Demographic characteristics. (B) Health status. (C) Geographic area of residence. (D) Socio-economic status. (E) Subject to paragraph (5), (i) the proportion of enrollees who are SSI recipients and (ii) the proportion of enrollees who are AFDC recipients. (F) Any other factors determined by the Board to be material to the purposes described in paragraph (1). (3) Zero sum. The methodology shall assure that the total payments to health plans by the regional alliance after application of the methodology are the same as the amount of payments that would have been made without application of the methodology. (4) Prospective adjustment of payments . The methodology, to the extent possible and except in the case of a mandatory reinsurance system described in subsection (b), shall be applied in manner that provides for the prospective adjustment of payments to health plans. (5) Treatment of ssi/afdc adjustment. The Board is not required to apply the factor described in clause (i) or (ii) of paragraph (2)(E) if the Board determines that the application of the other risk adjustment factors described in paragraph (2) is sufficient to adjust premiums to take into account the enrollment in plans of AFDC recipients and SSI recipients. (6) Special consideration for mental illness. In developing the methodology under this section, the Board shall give consideration to the unique problems of adjusting payments to health plans with respect to individuals with mental illness. (7) Special consideration for veterans, military, and indian health plans. In developing the methodology under this section, the Board shall give consideration to the special enrollment and funding provisions relating to plans described in section 1004(b). (8) Adjustment to account for use of estimates. Subject to section 1346(b)(3) (relating to establishment of regional alliance reserve funds), if the total payments made by a regional alliance to all regional alliance health plans in a year under section 1324(c) exceeds, or is less than, the total of such payments estimated by the alliance in the application of the methodology under this subsection, because of a difference between (A) the alliance's estimate of the distribution of enrolled families in different risk categories (assumed in the application of risk factors under this subsection in making payments to regional alliance health plans), and (B) the actual distribution of such enrolled families in such categories, the methodology under this subsection shall provide for an adjustment in the application of such methodology in the second succeeding year in a manner that would reduce, or increase, respectively, by the amount of such excess (or deficit) the total of such payments made by the alliance to all such plans. (b) Mandatory Reinsurance. (1) In general. The methodology developed under this section may include a system of mandatory reinsurance, but may not include a system of voluntary reinsurance. (2) Requirement in certain cases. If the Board determines that an adequate system of prospective adjustment of payments to health plans to account for the health status of individuals enrolled by regional alliance health plans cannot be developed (and ready for implementation) by the date specified in subsection (a)(1), the Board shall include a mandatory reinsurance system as a component of the methodology. The Board may thereafter reduce or eliminate such a system at such time as the Board determines that an adequate prospective payment adjustment for health status has been developed and is ready for implementation. (3) Reinsurance system. The Board, in developing the methodology for a mandatory reinsurance system under this subsection, shall (A) provide for health plans to make payments to state-established reinsurance programs for the purpose of reinsuring part or all of the health care expenses for items and services included in the comprehensive benefit package for specified classes of high-cost enrollees or specified high-cost treatments or diagnoses; and (B) specify the manner of creation, structure, and operation of the system in each State, including (i) the manner (which may be prospective or retrospective) in which health plans make payments to the system, and (ii) the type and level of reinsurance coverage provided by the system. (c) Confidentiality of Information. The methodology shall be developed in a manner consistent with privacy standards promulgated under section 5102(a). In developing such standards, the Board shall take into account any potential need of alliances for certain individually identifiable health information in order to carry out risk-adjustment and reinsurance activities under this Act, but only to the minimum extent necessary to carry out such activities and with protections provided to minimize the identification of the individuals to whom the information relates.