Title XI, SEC. 11004. RESTRICTIONS ON PREMIUM INCREASES DURING TRANSITION. (a) Division of Health Insurance Plans by Sector. For purposes of this section, each health insurer shall divide its health insurance business into the following 3 sectors: (1) Health insurance for groups with at least 100 covered lives (in this section referred to as the ``large group sector'') (2) Health insurance for groups with fewer than 100 covered lives (in this section referred as the ``small group sector''). (3) Health insurance for individuals, and not for groups (in this section referred to as the ``individual sector''). (b) Premium Changes to Reflect Changes in Group or Individual Characteristics or Terms of Coverage. (1) Application. The provisions of this subsection shall apply to changes in premiums that reflect (A) changes in the number of individuals covered under a plan; (B) changes in the group or individual characteristics (including age, gender, family composition or geographic area but not including health status, claims experience or duration of coverage under the plan) of individuals covered under a plan; (C) changes in the level of benefits (including changes to in cost-sharing) under the plan; and (D) changes in any material terms and conditions of the health insurance plan (other than factors related to health status, claims experience and duration). (2) Specification of reference rate for each sector. Each health insurer shall calculate a reference rate for each such sector. The reference rate for a sector shall be calculated so that, if it were applied using the rate factors specified under paragraph (3), the average premium rate for individuals and groups in that sector would approximate the average premium rate charged individuals and groups in the sector as of the effective date of this title. (3) Single set of rate factors within each sector. (A) In general. Each health insurer shall develop for each sector a single set of rate factors which will be used to calculate any changes in premium that relate to the reasons described in subparagraphs (B) through (D) of paragraph (1). (B) Standards. Such rate factors (i) shall relate to reasonable and objective differences in demographic characteristics, in the design and in levels of coverage, and in other terms and conditions of a contract, (ii) shall not relate to expected health status, claims experience, or duration of coverage of the one or more groups or individuals, and (iii) shall comply with regulations established under subsection (f). (4) Computation of Premium Changes. (A) In general. Changes in premium rates that relate to the reasons described in paragraph (1) shall be calculated using the rate factors developed pursuant to paragraph (3). (B) Application to changes in number of covered individuals. In the case of a change in premium rates related to the reason described in paragraph (1)(A), the change in premium rates shall be calculated to reflect, with respect to the enrollees who enroll or disenroll in a health insurance plan, the sum of the products, for such individuals, of the reference rate (determined under paragraph (2)) and the rate factors (specified under paragraph (3)) applicable to such enrollees. (C) Application of other factors. (i) In general. In the case of a change in premium rates related to a reason described in subparagraph (B), (C), or (D) of paragraph (1), the change in premium rates with respect to each health insurance plan in each sector shall reflect the rate factors specified under paragraph (3) applicable to the reason as applied to the current premium charged for the health insurance plan. Such rate factors shall be applied in a manner so that the resulting adjustment, to the extent possible, reflects the premium that would have been charged under the plan if the reason for the change in premium had existed at the time that the current premium rate was calculated. (ii) No reflection of change in health status. In applying the rate factors under this subparagraph, the adjustment shall not reflect any change in the health status, claims experience or duration of coverage with respect to any employer or individual covered under the plan. (5) Limitation on application. This subsection shall only apply (A) to changes in premiums occurring on or after the date of the enactment of this Act to groups and individuals covered as of such date, and (B) with respect to groups and individuals subsequently covered, to changes in premiums subsequent to such coverage. (6) Application to community-rated plans. Nothing in this subsection shall require the application of rate factors related to individual or group characteristics with respect to community-rated plans. (c) Limitations on Changes in Premiums Related to Increases in Health Care Costs and Utilization. (1) Application. The provisions of this subsection shall apply to changes in premiums that reflect increases in health care costs and utilization. (2) Equal increase for all plans in all sectors. (A) In general. Subject to subparagraph (B), the annual percentage increase in premiums by a health insurer for health insurance plans in the individual sector, small group sector, and large group sector, to the extent such increase reflect increases in health care costs and utilization, shall be the same for all such plans in those sectors. (B) Special rule for large group sector. The annual percentage increase in premiums by a health insurer for health insurance plans in the large group sector may vary among such plans based on the claims experience of such employer (to the extent the experience is credible), so long as the weighted average of such increases for all such plans in the sector complies with the requirement of subparagraph (A). (C) Geographic application. Subparagraphs (A) and (B) (i) may be applied on a national level, or (ii) may vary based on geographic area, but only if (I) such areas are sufficiently large to provide credible data on which to calculate the variation and (II) the variation is due to reasonable factors related to the objective differences among such areas in costs and utilization of health services. (D) Exceptions to accommodate state rate reform efforts. Subparagraphs (A) and (B) shall not apply, in accordance with guidelines of the Secretary, to the extent necessary to permit a State to narrow the variations in premiums among health insurance plans offered by health insurers to similarly situated groups or individuals within a sector. (E) Exception for rates subject to prior approval. Subparagraphs (A) and (B) shall not apply to premiums that are subject to prior approval by a State insurance commissioner (or similar official) and are approved by such official. (F) Other reasons specified by the secretary. The Secretary may specify through regulations such other exceptions to the provisions of this subsection as the Secretary determines are required to enhance stability of the health insurance market and continued availability of coverage. (3) Even application throughout a year. In applying the provisions of this subsection to health insurance plans that are renewed in different months of a year, the annual percentage increase shall be applied in a consistent, even manner so that any variations in the rate of increase applied in consecutive months are even and continuous during the year. (4) Petition for exception. A health insurer may petition the Secretary (or a State acting under a contract with the Secretary under section 11001(b)(3)) for an exception from the application of the provisions of this subsection. The Secretary may approve such an exception if (A) the health insurer demonstrates that the application of this subsection would threaten the financial viability of the insurer, and (B) the health insurer offers an alternative method for increasing premiums that is not substantially discriminatory to any sector or to any group or individual covered by a health insurance plan offered by the insurer. (d) Prior Approval for Certain Rate Increases. (1) In general. If the percentage increase in the premium rate for the individual and small group sector exceeds a percentage specified by the Secretary under paragraph (2), annualized over any 12-month period, the increase shall not take effect unless the Secretary (or a State acting under a contract with the Secretary under section 11001(b)(3)) has approved the increase. (2) Percentage. The Secretary shall specify, for each 12-month period beginning after the date of the enactment of this Act, a percentage that will apply under paragraph (1). Such percentage shall be determined taking into consideration the rate of increase in health care costs and utilization, previous trends in health insurance premiums, and the conditions in the health insurance market. Within 30 days after the date of the enactment of this Act, the Secretary shall first specify a percentage under this paragraph. (e) Documentation of Compliance. (1) Period for conformance. Effective 1 year after the date of the enactment of this Act, the premium for each policy shall be conformed in a manner that complies with the provisions of this section. (2) Methodology. Each health insurer shall document the methodology used in applying subsections (b) and (c) with respect to each sector (and each applicable health plan). Such documentation shall be sufficient to permit the auditing of the application of such methodology to determine if such application was consistent with such subsections. (3) Certification. For each 6-month period in which this section is effective, each health insurer shall file a certification with the Secretary (or with a State with which the Secretary has entered into an arrangement under section 11001(b)(3)) that the insurer is in compliance with such requirements. (f) Regulations. The Secretary shall establish regulations to carry out this section. Such regulations may include guidelines relating to the permissible variation that results from the use of demographic or other characteristics in the development of rate factors. Such guidelines may be based on the guidelines currently used by States in applying rate limitations under State insurance regulations. (g) Effective Period. This section shall apply to premium increases occurring during the period beginning on the date of the enactment of this Act and ending, for a health insurance plan provided in a State, on the first day of the State's first year.