Bulletin No. 1997–19

Bulletin No. 1997–19

May 12, 1997

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be relied

upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

Rev. Rul. 97–20, page 4.

Medical savings accounts—high-deductible plan.

Guidance is given concerning the definition of the term

‘‘high-deductible plan’’ under section 220(c)(2)(A)(ii) of

the Code.

Announcement 97–47, page 94.

New Publication 968, Tax Benefits for Adoption, is now

available.

EXCISE TAX

T.D. 8716, page 5.

REG–253578–96, page 93.

Temporary and proposed regulations relate to group

health plan portability, access, and renewability requirements added to section 9801 of the Code by the Health

Insurance Portability and Accountability Act of 1996.

Finding Lists begin on page 97.

Announcement of Disbarments and Suspensions begins on page 95.

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,

court decisions, and other items of general interest. It is

published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin

contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a

single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory

requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 220.—Medical Savings

Accounts

Definition of high-deductible health

plan. Guidance is given concerning the

definition of a ‘‘high-deductible health

plan’’ under section 220(c)(2)(A) of the

Code.

Rev. Rul. 97–20

ISSUE

In the case of family coverage, what

constitutes a ‘‘high-deductible health

plan’’ for purposes of section

220(c)(2)(A) of the Code?

FACTS

Situation 1

Plan A is a health plan that provides

for the payment of medical expenses.

Taxpayer X and her family are covered

by Plan A. Plan A provides for payment

of covered medical expenses for all

members of the family after the family’s

total covered medical expenses exceed

$3,000 for the year. Plan A does not

provide for payment of covered medical

expenses until the family’s total covered

medical expenses exceed $3,000 for the

year, regardless of which family member or members incur those covered

expenses. Plan A limits out-of-pocket

expenses to $5,000 for any year.

Situation 2

Plan B is a health plan that provides

for the payment of medical expenses.

Taxpayer Y and his family are covered

by Plan B. Plan B provides for payment

of covered medical expenses for all

members of the family after the family

has satisfied a family deductible of

$3,000 for the year. Plan B also provides for payment of covered medical

expenses of any member of the family

after that family member has satisfied

an individual deductible by incurring

covered medical expenses for the year

of at least $1,500. Plan B limits out-ofpocket expenses to $5,000 for any year.

Neither of the special rules regarding

the definition of a high-deductible health

plan applies to Plan A or B (see section

220(c)(2)(B)).

LAW

The Health Insurance Portability and

Accountability Act of 1996, Pub. L.

104–191, added section 220 to the Code

to permit eligible individuals to establish

medical savings accounts (MSAs) under

a pilot project beginning on January 1,

1997.

The section 220(c)(1) definition of an

‘‘eligible individual’’ includes, as one

prerequisite for eligibility, the requirement that an individual be covered under a high-deductible health plan. Section 220(c)(2)(A) provides that ‘‘[t]he

term ‘high-deductible health plan’ means

a health plan —

(i) in the case of self-only coverage,

which has an annual deductible which is

not less than $1,500 and not more than

$2,250,

(ii) in the case of family coverage,

which has an annual deductible which is

not less than $3,000 and not more than

$4,500, and

(iii) the annual out-of-pocket expenses

required to be paid under the plan (other

than for premiums) for covered benefits

does not exceed —

(I) $3,000 for self-only coverage, and

(II) $5,500 for family coverage.’’

Section 220(c)(5) defines family coverage as coverage that is not self-only

coverage.

ANALYSIS AND HOLDING

Situation 1

Plan A provides coverage for Taxpayer X and other members of her

family and is, therefore, family coverage

within the meaning of section 220(c)(5).

Because Plan A provides family coverage, Plan A is a high-deductible health

plan only if, as required by section

220(c)(2)(A)(ii), it has an annual deductible that is not less than $3,000 and not

more than $4,500. Plan A provides for

the payment of covered medical expenses for Taxpayer X or her family

members only after the family has incurred covered medical expenses during

the year of $3,000. Accordingly,

the deductible under Plan A is $3,000.

Because Plan A has a deductible that is

not less than $3,000 and is not more

than $4,500, Plan A meets the requirement with respect to the minimum and

maximum deductible for a highdeductible health plan under section

220(c)(2)(A)(ii). Because the annual outof-pocket expenses required to be paid

under Plan A can never exceed $5,000,

which is less than $5,500, Plan A is a

high-deductible health plan for purposes

of section 220.

4

Situation 2

Plan B provides coverage for Taxpayer Y and other members of his

family and is, therefore, family coverage

within the meaning of section 220(c)(5).

Plan B provides for the payment of

covered medical expenses of any member of Taxpayer Y’s family if the member has incurred covered medical expenses during the year in excess of

$1,500, even if the family has not

incurred covered medical expenses in

excess of $3,000. For example, if Taxpayer Y incurred covered medical expenses of $2,000 in a year, Plan B

would pay $500. Accordingly, depending on which family members incur the

covered medical expenses, benefits are

potentially available under Plan B even

if the family’s covered medical expenses

do not exceed $3,000. Because Plan B

provides family coverage with an annual

deductible of less than $3,000, Plan B is

not a high-deductible health plan as

defined in section 220(c)(2).

CONCLUSION

In the case of family coverage, except

as provided in section 220(c)(2)(B), a

plan is a ‘‘high-deductible health plan’’

under section 220(c)(2)(A) only if, under the terms of the plan and without

regard to which family member or

members incur expenses:

(1) No amounts are payable until the

family has incurred annual covered

medical expenses in excess of $3,000,

(2) Amounts for covered benefits are

always payable after the family has

incurred annual covered medical expenses in excess of $4,500, and

(3) The annual out-of-pocket expenses

required to be paid under the plan for

covered benefits do not exceed $5,500.

APPLICATION OF SECTION 7805(b)

Section 7805(b) of the Code provides

that the Secretary may prescribe the

extent, if any, to which any ruling

relating to the internal revenue laws

shall be applied without retroactive effect.

Pursuant to section 7805(b), a health

plan acquired before November 1, 1997

that provides family coverage that becomes effective before November 1,

1997 will not fail to be treated as a

high-deductible health plan merely because the health plan provides for individual deductibles of at least $1,500 and

not in excess of $2,250 (the permitted

range of deductibles for a highdeductible health plan providing selfonly coverage). The relief provided in

the preceding sentence will apply until

the first renewal date on or after December 31, 1997 (in the case of a health

plan that provides for renewal) or for

the term of the health plan (in the case

of a health plan that has a specified

term and that does not provide for

renewal). For purposes of this paragraph, a health plan that continues in

force for an indeterminate period as

long as premiums are paid and does not

otherwise provide for renewal, will be

treated as a health plan that provides for

renewal and each premium due date

(determined without regard to any grace

period) will be treated as a renewal date.

In no event will the relief provided in

this paragraph terminate before December 31, 1997 or extend beyond December 31, 1998.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Felix Zech of the Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations). For

further information regarding this revenue ruling contact Mr. Zech at (202)

622–4606 (not a toll-free number).

Section 9801.—Increased

Portability Through Limitations on

Preexisting Condition Exclusions

Department of Labor; Health Care Financing Administration, Department of

Health and Human Services.

ACTION: Interim rules with request for

comments.

SUMMARY: This document contains

interim rules governing access, portability and renewability requirements for

group health plans and issuers of health

insurance coverage offered in connection with a group health plan. The rules

contained in this document implement

changes made to certain provisions of

the Internal Revenue Code of 1986

(Code), the Employee Retirement Income Security Act of 1974 (ERISA),

and the Public Health Service Act (PHS

Act) enacted as part of the Health

Insurance Portability and Accountability

Act of 1996 (HIPAA). Interested persons are invited to submit comments on

the interim rules for consideration by

the Department of Health and Human

Services, the Department of Labor, and

the Department of the Treasury (Departments) in developing final rules. The

rules contained in this document are

being adopted on an interim basis to

accommodate statutorily established

time frames intended to ensure that

sponsors and administrators of group

health plans, participants and beneficiaries, States, and issuers of group health

insurance coverage have timely guidance concerning compliance with the

recently enacted requirements of

HIPAA.

26 CFR 54.9801–5T: Certification and disclosure

of previous coverage (temporary).

DATES: Effective date. These interim

rules are effective on June 1, 1997.

T.D. 8716

Comment date. Written comments on

these interim rules are invited and must

be received by the Departments on or

before July 7, 1997.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing

Administration

45 CFR subtitle A, Parts 144 and

146

Interim Rules for Health Insurance

Portability for Group Health Plans

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension

and Welfare Benefits Administration,

Applicability dates. For group health

plans maintained pursuant to one or

more collective bargaining agreements

ratified before August 21, 1996, the

rules (other than the certification requirements) do not apply to plan years

beginning before the later of July 1,

1997 or the date on which the last

collective bargaining agreement relating

to the plan terminates without regard to

any extension agreed to after August 21,

1996.

The rules implementing the certification provisions do not require any action

to be taken before June 1, 1997, although certain certification requirements

apply to periods of coverage and events

that occur after June 30, 1996. The

5

certification requirement for events that

occurred on or after October 1, 1996

and before June 1, 1997 may be satisfied using an optional notice described

in this preamble.

Information collection. Affected parties

do not have to comply with the information collection requirements in these

interim rules until the Departments publish in the Federal Register the control

numbers assigned by the Office of Management and Budget (OMB) to these

information collection requirements.

Publication of the control numbers notifies the public that OMB has approved

these information collection requirements under the Paperwork Reduction

Act of 1995. The Departments have

asked for OMB clearance as soon as

possible, and OMB approval is anticipated by the applicable effective date.

ADDRESSES: Written comments should

be submitted with a signed original and

three copies to any of the addresses

specified below. All comments will be

available for public inspection and copying in their entirety. Interested persons

are invited to submit written comments

on these interim rules to:

Health Care Financing Administration, Department of Health and Human

Services, Attention: [BPD–890–IFC],

P.O. Box 26688, Baltimore, MD 21207

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N–5669, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Interim Portability and Renewability Rules

CC:DOM:CORP:T:R (REG–253578–

96), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

DC 20044

Alternatively, comments may be submitted electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting comments directly to the IRS Internet site at

http://www.irs.ustreas.gov/tax_regs/

comments.html

In the alternative:

Written comments for the Department

of Health and Human Services may be

hand delivered from 8:30 a.m. to 5:00

p.m. to:

Room 309–G, Hubert Humphrey

Building, 200 Independence Avenue,

SW, Washington, DC 20201, or Room

C5–09–26, 7500 Security Boulevard,

Baltimore, MD 21244–1850

Written comments for the Department

of Labor may be hand delivered from

8:15 a.m. to 4:45 p.m. to the above

address for the Pension and Welfare

Benefits Administration, U.S. Department of Labor.

Written comments for the Internal

Revenue Service may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to:

CC:DOM:CORP:T:R (REG–253578–

96), Courier’s Desk, Internal Revenue

Service, room 5228, 1111 Constitution

Avenue, NW, Washington, DC

All submissions to the Department of

Health and Human Services will be

open to public inspection as they are

received, generally beginning three

weeks after publication, in room 309–G

of the Department of Health and Human

Services offices at 200 Independence

Avenue, SW, Washington, DC, from

8:30 a.m. to 5:00 p.m. All submissions

to the Department of Labor will be open

to public inspection at the Public Documents Room, Pension and Welfare Benefits Administration, U.S. Department of

Labor, Room N–5638, 200 Constitution

Avenue NW, Washington, DC, from

8:30 a.m. to 5:30 p.m. All submissions

to the Internal Revenue Service will be

open to public inspection and copying in

room 1621, 1111 Constitution Avenue,

NW, Washington, DC, from 9:00 a.m. to

4:00 p.m.

FOR FURTHER INFORMATION CONTACT: Julie Walton, Health Care Financing Administration, at 410–786–

1565; Mark Connor, Office of Regulations and Interpretations, Pension and

Welfare Benefits Administration, Department of Labor, at 202–219–4377; Diane

Pedulla, Plan Benefits Security Division,

Office of the Solicitor, Department of

Labor, at 202–219–4377; or Russ

Weinheimer, Internal Revenue Service,

at 202–622–4695. These are not toll-free

numbers.

CUSTOMER SERVICE INFORMATION: Individuals interested in obtaining a copy of the Department of Labor’s

booklet entitled ‘‘Questions and Answers: Recent Changes in Health Care

Law’’ may obtain a copy by calling the

following toll-free number 1–800–998–

7542.

SUPPLEMENTARY INFORMATION:

A. Background

The Health Insurance Portability and

Accountability Act of 1996 (HIPAA),

Pub. L. 104–191, was enacted on August 21, 1996. HIPAA amended the

Public Health Service Act (PHS Act),

the Employee Retirement Income Security Act of 1974 (ERISA), and the

Internal Revenue Code of 1986 (Code)

to provide for, among other things,

improved portability and continuity of

health insurance coverage in the group

and individual insurance markets, and

group health plan coverage provided in

connection with employment. Sections

102(c)(4), 101(g)(4), and 401(c)(4) of

HIPAA require the Secretaries of Health

and Human Services, Labor, and the

Treasury, each to issue regulations necessary to carry out these provisions.1

B. Overview of HIPAA and the Interim

Rules

Areas of Guidance. The access, portability, and renewability provisions of

HIPAA affect group health plans and

health insurance issuers. Group health

plans are generally plans sponsored by

employers or employee organizations or

both. These HIPAA provisions are designed to improve the availability and

portability of health coverage by:

• limiting exclusions for preexisting

medical conditions;

• providing credit for prior health

coverage and a process for transmitting

certificates and other information concerning prior coverage to a new group

health plan or issuer;

• providing new rights that allow individuals to enroll for health coverage

when they lose other health coverage or

have a new dependent;

• prohibiting discrimination in enrollment and premiums against employees

and their dependents based on health

status;

• guaranteeing availability of health

insurance coverage for small employers

and renewability of health insurance

coverage in both the small and large

group markets; and

• preserving, through narrow preemption provisions, the States’ traditional

role in regulating health insurance, including State flexibility to provide

greater protections.

The regulations provide guidance with

respect to these provisions. In implementing these new rules, the regulations

provide protections for individuals seek1

In addition to the group market regulations in this

document, the Department of the Treasury is

issuing a proposed Treasury regulation that crossreferences these regulations and the Department of

Labor is issuing an interim regulation relating to

certain disclosure requirements under HIPAA.

Each of these regulations appears separately in this

issue of the Federal Register.

6

ing health coverage while minimizing

burdens on employers and insurers.

Reducing Burdens. The regulations

reduce burdens by:

• providing for a simple model certificate that can be used by plans and

issuers;

• reducing unnecessary duplication in

the issuance of certificates;

• including flexible rules for dependents to receive the coverage information they need;

• allowing coverage information to be

provided by telephone if all parties

agree;

• relieving plans and issuers of the

need to report the starting date of coverage and waiting period information

where a certificate shows 18 months of

creditable coverage;

• including a transition rule permitting plans and issuers to give individuals

a notice in lieu of a certificate where

coverage ended before June 1, 1997;

and

• providing for a model notice that

may be used to satisfy the transition rule

and a model notice for information

relating to categories of benefits provided under a plan.

Implementing Individual Protections.

The regulations protect and assist participants and their dependents by:

• ensuring that individuals are notified of the length of time that a preexisting condition exclusion clause in any

new health plan may apply to them after

taking into account their prior creditable

coverage;

• ensuring that individuals are notified of their rights to special enrollment

under a plan;

• permitting individuals to obtain a

certificate before coverage under a plan

ceases; and

• creating practical ways for individuals to demonstrate creditable coverage to

a new plan (where the individual’s prior

plan fails to provide the certificate).

C. Overview of Coordination of Group

Market Regulation Among Departments

The HIPAA portability provisions relating to group health plans and health

insurance coverage offered in connection with group health plans (referred to

below as the ‘‘group market’’ provisions) are set forth under a new Part A

of Title XXVII of the PHS Act, a new

Part 7 of Subtitle B of Title I of ERISA,

and a new Subtitle K of the Internal

Revenue Code. HIPAA also added provisions governing insurance in the indi-

vidual market that are contained only in

the PHS Act, and thus are not within the

regulatory jurisdiction of the Department

of Labor or the Department of the

Treasury. (These portability provisions

are referred to below as the ‘‘individual

market’’ provisions.)

In general, the group market provisions create concurrent jurisdiction for

the Secretaries of Health and Human

Services, Labor, and the Treasury. These

provisions include similar rules relating

to preexisting conditions exclusions,

special enrollment rights, and prohibition of discrimination against individuals

based on health status-related factors.

(These group market provisions are referred to below as the ‘‘shared group

market’’ provisions.) Accordingly, the

three Departments share regulatory responsibility for most, but not all, of the

group market provisions.

The shared group market provisions

are substantially similar, except as follows:

• The shared group market provisions

in the PHS Act apply generally to

insurance issuers that offer health insurance in connection with group health

plans (subject to an exception that may

apply for plans with fewer than two

participants who are current employees

(‘‘very small plans’’)), and certain State

and local government plans. Only the

PHS Act contains group market provisions relating to availability and renewability of health insurance.2 In addition,

the PHS Act imposes certification requirements on certain federal entities not

otherwise subject to the HIPAA portability provisions. Further, the States, in the

first instance, will enforce the PHS Act

with respect to issuers. In addition,

individuals may be able to pursue

claims through State mechanisms. Only

if a State does not substantially enforce

any provisions under its insurance laws,

will the Department of Health and Human Services enforce the provisions,

through the imposition of civil money

penalties. (The group market provisions

relating to guaranteed renewability for

multiemployer plans and multiple employer welfare arrangements (MEWAs)

are in ERISA and the Internal Revenue

Code, but not the PHS Act.)

• The ERISA shared group market

provisions apply generally to all group

2

The PHS Act does not include requirements on

availability of insurance for employers in the large

group market. Under section 2711(b)(3) of the

PHS Act, however, the General Accounting Office

(GAO) is to report to Congress on such availability in 1998.

health plans other than governmental

plans, church plans, very small plans,

and certain other plans. The shared

group market provisions of ERISA also

apply to health insurance issuers that

offer health insurance in connection

with such group health plans. Generally,

the Secretary of Labor enforces the

provisions of HIPAA that amend

ERISA, except that no enforcement action may be taken by the Secretary

against issuers relating to the new

shared group market provisions in Part 7

of ERISA. However, individuals may

generally pursue actions against issuers

under ERISA and, in some circumstances, under State laws.

• The shared group market provisions

in the Internal Revenue Code generally

apply to all group health plans other

than governmental plans and very small

plans, but not to health insurance issuers. A taxpayer that fails to comply with

these provisions may be subject to an

excise tax under section 4980D of the

Code. (The group market provisions

relating to preemption and affiliation

periods for HMOs are in the PHS Act

and ERISA, but not in the Internal

Revenue Code.)

The regulations being issued today by

the Secretaries of Health and Human

Services, Labor, and the Treasury have

been developed on a coordinated basis

by the Departments. Except to the extent

needed to reflect the statutory differences described above, the shared group

market provisions in these regulations of

each Department are substantively identical. However, there are certain

nonsubstantive differences. The PHS Act

regulations are numbered and organized

differently. Also, there are differences in

the regulations that are necessary because of statutory provisions that are not

common to all three Departments (in the

definitions sections, for example). Further, the regulations reflect certain stylistic differences in language and structure to conform to conventions used by

a particular Department. These differences have been minimized and any

differences in wording are not intended

to create any substantive difference, so

that these regulations will have the same

effect with respect to overlapping statutory provisions, as required by section

104 of HIPAA.

Act regulations, all health insurance

coverage in a State generally is sold in

one of two markets: the group market

(see section 146) and the individual

market (see section 148). The group

market is further divided into the large

group market and the small group market. Section 146 of the PHS Act regulations applies the group market provisions only to insurance sold to group

health plans (which are generally plans

sponsored by employers or employee

organizations or both), regardless of

whether State law provides otherwise.

State law may expand the definition of

the small group market to include certain coverage that, under the federal law,

would otherwise be considered coverage

in the large group market or the individual market.

The protections provided in the PHS

Act to particular individuals and employers are different depending on

whether the coverage involved is obtained in the small group market, the

large group market, or the individual

market. Small employers are guaranteed

availability of insurance coverage sold

in the small group market under the

PHS Act. Small and large employers are

guaranteed the right to renew their

group coverage under the PHS Act,

subject to certain exceptions. Eligible

individuals are guaranteed availability of

coverage sold in the individual market

under the PHS Act, and all coverage in

the individual market must be guaranteed renewable under the PHS Act.

Coverage that is provided to associations, but is not related to employment

(so that the coverage is not in connection with a group health plan), is not

coverage in the group market under

HIPAA. This coverage is instead coverage in the individual market under the

PHS Act, regardless of whether it is

considered group coverage under State

law.

D. Special Information Concerning

State Insurance Law

This section provides most of the

definitions used in the regulations

implementing the provisions of HIPAA

that were added to the PHS Act, ERISA,

and the Code, relating to the group

For purposes of the PHS Act and

sections 144 through 148 in the PHS

7

E. Discussion of the Shared Group

Market Provisions in the Regulations

The most significant items relating to

the shared group market in these regulations are discussed in detail below.

Definitions - 26 CFR § 54.9801–2, 29

CFR § 2590.701–2, 45 CFR § 144.103

market.3 The definitions in this section

of the regulations include both statutory

definitions provided in HIPAA, as well

as certain others used in the regulations.

Limitation on Preexisting Condition

Exclusion Period - 26 CFR

§ 54.9801–3, 29 CFR § 2590.701–3, 45

CFR § 146.111

Definition of Preexisting Condition

Exclusion. A preexisting condition exclusion is defined broadly to be any

limitation or exclusion of benefits based

on the fact the condition was present

before the first day of coverage, whether

or not any medical advice, diagnosis,

care, or treatment was recommended or

received before that day. HIPAA imposes certain limitations (described below) on the use of such an exclusion in

the group market (and also uses this

definition for purposes of the individual

market rules, under which no preexisting

condition exclusion is permitted to be

imposed on an eligible individual).

HIPAA’s broad definition of a preexisting condition exclusion is at variance

with some State laws and regulations

because the relevant National Association of Insurance Commissioners

(NAIC) models, on which many State

laws are based, have imposed limitations

on coverage for preexisting conditions

without use of such a definition.

New Limitations on Preexisting Condition Exclusions. Paragraph (a) of this

section4 of the regulations describes the

limitations on the preexisting condition

exclusion period. A group health plan,

and a health insurance issuer offering

group health insurance coverage, is permitted to impose a preexisting condition

exclusion with respect to a participant or

beneficiary only if the following conditions are met:

1. 6-month look-back rule. The preexisting condition exclusion must relate

to a condition (whether physical or

mental, and regardless of the cause of

the condition) for which medical advice,

diagnosis, care, or treatment was recommended or received within the 6-month

period ending on the enrollment date.

For these purposes, genetic information

3

The regulations for the PHS Act also contain

certain definitions relating to those provisions

added under the PHS Act regarding the individual

market, in order to create a single, comprehensive

reference for the definitions necessary under the

PHS Act regulations.

4

References to paragraphs of a section refer to

paragraphs of each regulation section identified in

the heading. For example, this reference is to

paragraph (a) in each of 45 CFR § 146.111, 29

CFR § 2590.701–3, and 26 CFR § 54.9801–3.

is not a condition.5 In order to be taken

into account, the medical advice, diagnosis, care, or treatment must have been

recommended or received from an individual licensed or similarly authorized

to provide such services under State law

and operating within the scope of practice authorized by the State law. Under

the new HIPAA standard, a plan would

generally determine that an individual

has a preexisting condition through

medical records (such as diagnosis

codes on bills, a physician’s notes of a

visit or telephone call, pharmacy prescription records, HMO encounter data,

or other records indicating that medical

services were actually recommended or

received during the 6-month look-back

period). The ‘‘prudent person’’ standard

of some State laws (under which a

condition is taken into account if a

prudent person would have sought care

whether or not care is actually received)

no longer may be used to determine a

preexisting condition.

This 6-month ‘‘look-back’’ period is

based on the 6-month ‘‘anniversary

date’’ of the enrollment date. As a result,

an individual whose enrollment date is

August 1, 1998 has a 6-month look-back

period from February 1, 1998 through

July 31, 1998.

2. Length of preexisting condition exclusion period. The exclusion period

cannot extend for more than 12 months

(18 months for late enrollees) after the

enrollment date. The 12- or 18-month

‘‘look-forward’’ period is also based on

the anniversary date of the enrollment

date. A late enrollee is defined as an

individual who enrolls in a plan at a

time other than at the first time the

individual is eligible to enroll or during

a special enrollment period (described

below). If an individual loses eligibility

for coverage as a result of terminating

employment or a general suspension of

coverage under the plan, then upon

becoming eligible again due to resumption of employment or due to resumption of plan coverage, only the most

recent period of eligibility is considered

for purposes of determining whether the

individual is a late enrollee.

3. Reduction of preexisting condition

exclusion period by prior coverage. In

general, the preexisting condition exclu5

The definition of genetic information in the

regulations was developed taking into account

hearing testimony related to genetic information

given in connection with Senate Report 104–156,

other legislative initiatives, and public comments

(including those submitted in response to the

request for information published by the Departments on December 30, 1996).

8

sion period is reduced by the individual’s days of creditable coverage6 as of

the enrollment date. Creditable coverage

is defined as coverage of an individual

from a wide range of specified sources,

including group health plans, health insurance coverage, Medicare, and Medicaid.

Definition of Enrollment Date. The

limitations on preexisting condition exclusions are measured from an individual’s ‘‘enrollment date.’’ The enrollment

date is defined as the first day of

coverage or, if there is a waiting period,

the first day of the waiting period

(typically the date employment begins).

The term ‘‘first day of coverage’’ is

used in the regulations in place of the

term ‘‘date of enrollment’’ in the statute,

such as in the definitions of the terms

‘‘preexisting condition exclusion’’ and

‘‘enrollment date.’’ This is intended to

clarify the difference between the statutory terms ‘‘date of enrollment’’ and

‘‘enrollment date’’ (which have no difference in common usage).

The term ‘‘waiting period’’ generally

refers to the period in which there is a

delay between the first day of employment and the first day of coverage under

the plan. Accordingly, because the preexisting condition exclusion period runs

from the enrollment date, any waiting

period would run concurrently with any

preexisting condition exclusion period.

Further:

• The enrollment date for a late enrollee or anyone who enrolls on a

special enrollment date (see the section

on special enrollment periods below) is

the first date of coverage. Thus, the time

between the date a late enrollee or

special enrollee first becomes eligible

for enrollment under the plan and the

first day of coverage is not treated as a

waiting period.

• Because the 6-month look-back

limitation runs from the beginning of

any applicable waiting period, the current practice of some plans that require

physical examinations prior to commencement of coverage for the purpose

of identifying preexisting conditions

may be affected. If the examination is

conducted during the waiting period

(after employment begins and before

enrollment), rather than before employ6

The phrase ‘‘days of creditable coverage’’ is used

instead of the statutory phrase ‘‘aggregate periods

of creditable coverage’’ for administrative ease in

the calculation of creditable coverage. Use of days

of creditable coverage also conforms to the practice of many States for crediting prior coverage

under pre-HIPAA small group market reforms.

ment begins, a plan may not exclude

coverage for any condition identified in

the examination (unless, independent of

the examination, medical advice, diagnosis, care, or treatment was in fact

recommended or received for the condition during the 6-month look-back period). The use of such examinations for

other purposes, such as worker safety, is

not affected.7

Elimination of Preexisting Condition

Exclusion for Pregnancy and for Certain

Children. A preexisting condition exclusion cannot apply to pregnancy. In addition, a preexisting condition exclusion

period cannot be applied to a newborn,

an adopted child under age 18, or a

child placed for adoption under age 18,

if the child becomes covered within 30

days of birth, adoption, or placement for

adoption. This exception does not apply

after the child has a significant break in

coverage (63 or more consecutive days).

(An example in paragraph (b)(1) of the

regulations illustrates these rules.)

Rules Relating to Creditable Coverage 26 CFR § 54.9801–4, 29 CFR

§ 2590.701–4, 45 CFR § 146.113

As noted above, a plan or issuer that

imposes a preexisting condition exclusion must reduce the length of the

exclusion by an individual’s creditable

coverage. This section defines the term

‘‘creditable coverage’’ and sets forth the

rules for how creditable coverage is

applied to reduce such an exclusion

period.

Creditable coverage includes health

insurance coverage and other health

coverage, such as coverage under group

health plans (whether or not provided

through an issuer), Medicaid, Medicare,

and public health plans, as well as other

types of coverage set forth in HIPAA

and the regulations. Comments are requested on whether the definition of a

public health plan should include the

public health systems of other countries.

Under the definition of creditable

coverage, all forms of health insurance

coverage are included, whether in the

individual market or group market, and

whether the coverage is short-term,

limited-duration coverage or other coverage for benefits for medical care for

which no certificate of creditable coverage is required. Creditable coverage

does not include coverage consisting

7

However, to avoid violating the Americans with

Disabilities Act, Pub. L. 101–336, as amended by

Pub. L. 102–166, the examination should generally

be conducted only after the employer has offered

employment to the individual.

solely of excepted benefits as defined in

the regulations and described below.8

Under paragraph (a)(3) of this section

of the regulation, a group health plan or

health insurance issuer offering group

health insurance coverage may determine the amount of creditable coverage

of an individual for purposes of reducing the period of a preexisting condition

exclusion by using either the standard

method described in paragraph (b) or

the alternative method described in paragraph (c).

Standard Method.

1. Counting. Under the standard

method, the plan or issuer determines

the amount of an individual’s creditable

coverage by determining all days during

which the individual had one or more

types of creditable coverage. This determination is made without regard to the

specific benefits included in the coverage. If creditable coverage is derived

from more than one source on a particular day, all of the creditable coverage

that the individual had on that day is

counted as one day of creditable coverage.

2. Significant break in coverage.

Days of creditable coverage that occur

before a significant break in coverage

are not required to be counted by the

plan or issuer in reducing a preexisting

condition exclusion. A significant break

in coverage means a period of 63 consecutive days during all of which the

individual did not have any creditable

coverage.

a. Waiting and affiliation periods.

Waiting periods and affiliation periods,

as defined in the regulation, are not

taken into account in determining a

significant break in coverage. This is the

case regardless of whether the person

ultimately fails to obtain coverage under

the plan (such as, where termination of

employment occurs before coverage begins). However, days in a waiting period

or affiliation period are not counted as

creditable coverage.

The regulations specify that the period between the date an individual files

8

Howver, if an individual has coverage of excepted benefits in addition to other forms of

creditable coverage, coverage of excepted benefits

is creditable coverage. This would make a difference only if a plan or issuer uses the alternative

method of determining creditable coverage (described below) with respect to a category that

includes excepted benefits. For example, coverage

of excepted benefits such as limited vision or

limited dental benefits, when offered in combination with other creditable coverage, may be used

to offset a preexisting condition exclusion period

for a category that includes those benefits under

the alternative method in paragraph(c).

9

a substantially complete application for

coverage in the individual market and

the effective date of such coverage is a

waiting period, so that the period is not

taken into account in determining a

significant break in coverage. In this

way, an application processing delay or

omission of details on a form would not

cause an applicant to incur a significant

break in coverage, which could adversely affect an individual who seeks

coverage under a group health plan after

purchasing coverage in the individual

market.

However, the waiting period for purchase of an individual policy tolls a

break in coverage only if the filing of

the application for the individual market

insurance actually results in purchase of

the coverage by the individual. (See

Examples 7 and 8 in paragraph

(b)(2)(iv).) By contrast, days in a waiting period for coverage under a group

health plan toll a significant break in

coverage regardless of whether coverage

under the plan is ultimately obtained.

(See Example 6.) The rule regarding the

individual market prevents an individual

from avoiding a significant break in

coverage by repeatedly submitting applications to individual market issuers

without ever purchasing coverage. This

rule responds to comments sent to the

Departments in response to the December 30, 1996 request for public comments. The comments asked for clear

rules on when a significant break is

tolled in the case of an application for

individual market insurance.

Issuers of health insurance coverage

in the individual market are subject to

the same certification requirements that

apply to plans and issuers in the group

market. Therefore, issuers in the individual market must provide individuals

with certificates that reflect information

regarding the beginning of the waiting

period (the date of application), the

effective date of coverage, and the date

coverage ends. This will assist people

with coverage in the individual market

who later become covered by a group

health plan in demonstrating their creditable coverage to the plan or issuer in

the group market.

b. Effect of State insurance law.

HIPAA provides that the significant

break in coverage rule does not preempt

State insurance laws that provide longer

periods than 63 days for a break in

coverage. (The preemption provisions

are described more fully below.) Accordingly, while federal law may allow

a plan to disregard prior coverage before

a 63-day significant break in coverage,

an issuer may be required to take such

coverage into account in order to comply with State insurance law. As a

result, application of the break rules can

vary between issuers located in different

States. Similarly, the break rules may

vary between insured plans and selfinsured plans (which are not subject to

State insurance laws) within a State, as

well as between the insured and selfinsured portions of a single plan. As

illustrated by Example 3 in paragraph

(b)(2)(iv), the laws of the State applicable to the insurance policy that has

the preexisting condition exclusion are

determinative of which break rule applies.

Alternative Method. Under the alternative method of counting creditable

coverage, the plan or issuer determines

the amount of an individual’s creditable

coverage for any of five identified categories of benefits. Those categories are

coverage for mental health, substance

abuse treatment, prescription drugs, dental care, and vision care. The plan or

issuer may use the alternative method

for any or all of the categories and may

apply a different preexisting condition

exclusion period with respect to each

category (as well as to coverage not

within a category). The creditable coverage determined for a category of benefits applies only for purposes of reducing the preexisting condition exclusion

period with respect to that category. The

standard method is used to determine an

individual’s creditable coverage for benefits that are not within any category for

which the alternative method is being

used. Disclosure statements concerning

the plan must indicate that the alternative method is being used, and this

disclosure must also be given to each

enrollee at the time of enrollment. These

statements must include a description of

the effect of using the alternative

method. Any issuer in the group market

must provide similar statements to each

employer at the time of offer or sale of

the coverage.

For purposes of reducing the preexisting condition exclusion period under the

alternative method, the plan or issuer

determines under the standard method

the amount of the individual’s creditable

coverage that can be counted, up to a

total of 365 days of the most recent

creditable coverage of the individual

(546 days for a late enrollee). The

period of this creditable coverage is

referred to as the ‘‘determination period.’’ The plan or issuer counts all days

of coverage within the applicable category that occurred during the determination period (without regard to any

significant breaks in that category of

coverage). Those days reduce the preexisting condition exclusion for coverage

within that category.

The regulations do not provide detailed definitions of the benefit categories. Comments are invited on whether

additional guidance is needed.

The regulations under the alternative

method of counting creditable coverage

do not include a category relating to

significant differences in deductible

amounts. Commentators expressed concerns about adverse selection if individuals can change from a high deductible plan when they become ill and

obtain ‘‘first dollar’’ coverage from an

HMO or other issuer that provides

broad, comprehensive care with only

low deductibles or copayments.9 However, it is unclear how such a category

would be defined or applied. Accordingly, the Departments solicit comments

on this issue.

Certificates and Disclosure of Previous

Coverage - 26 CFR § 54.9801–5, 29

CFR § 2590.701–5, 45 CFR § 146.115

This section of the regulations sets

forth guidance regarding the certification

requirements and other requirements

concerning disclosure of information relating to prior creditable coverage. The

provision of a certificate and other disclosures of information are intended to

enable an individual to establish his or

her prior creditable coverage for purposes of reducing any preexisting condition exclusion imposed on the individual

by any subsequent group health plan

coverage.

Form of Certificate. In general, the

certificate must be provided in writing,

including any form approved by the

Secretaries as a writing. In certain circumstances, where the individual requests that the certificate be sent to

another plan or issuer instead of to the

individual, and the other plan or issuer

agrees, the certification information may

be provided by other means, such as by

telephone. In some States, issuers transfer coverage information by telephone.

Comments are requested as to whether,

and under what conditions, other methods of transmitting certification informa9

See also the discussion below under the heading

‘‘HMO Affiliation as Alternative to Preexisting

Condition Exclusion.’’

10

tion (including electronic communication) should be permitted in future

guidance.

Information in Certificate. Paragraph

(a)(3) of this section of the regulations

sets forth the information that must be

included in a certificate. The regulations

allow a plan or issuer in an appropriate

case simply to state in the certificate

that the individual has at least 18

months of creditable coverage that was

not interrupted by a significant break in

coverage and to indicate the date coverage ended. (A certificate would never

have to reflect coverage in excess of 18

months without a 63-day break because

this is the maximum creditable coverage

that an individual could need under the

preexisting condition exclusion rules and

the rules for access to the individual

market.) In any other case, the certificate must disclose (1) the date any

waiting or affiliation period began,10 (2)

the date coverage began, and (3) the

date coverage ended (or indicate if coverage is continuing).11 For individuals

with fewer than 18 months of coverage

without a significant break in coverage,

the information about specific dates is

essential in order for a subsequent plan

or issuer in the group or individual

market to be able to apply the break

rules, especially in light of the possibility that an individual may have other

coverage from various sources and the

potential differences among State break

rules (described above).

Certification Events and Timing. Paragraph (a)(5) describes the rights of

participants and dependents to receive

certificates. In general, individuals have

the right to receive a certificate automatically (an ‘‘automatic certificate’’)

when they lose coverage under a plan

and when they have a right to elect

COBRA continuation coverage. The certificate must be furnished within the

time periods described below:

• First, for an individual who is a

qualified beneficiary entitled to elect

COBRA continuation coverage, the certificate is required to be provided no

later than when a notice is required to

be provided for a qualifying event under

COBRA.

• Second, for an individual who loses

coverage under a group health plan and

10

Because the ending date for a waiting or affiliation period will always be the date coverage

begins, the ending date does not have to be

separately stated in a certificate.

11

These dates would include any period of COBRA continuation coverage. A COBRA continuation coverage period does not have to be separately identified.

who is not a qualified beneficiary entitled to elect COBRA continuation coverage, the certificate is required to be

provided within a reasonable time after

the coverage ceases. (Typically, this

would apply to small employers’ plans

that are not subject to COBRA.) This

requirement is satisfied if the certificate

is provided by the time a notice is

required to be provided under a State

program similar to COBRA.

• Third, for an individual who is a

qualified beneficiary and has elected

COBRA continuation coverage, the certificate is required to be provided within

a reasonable time after either cessation

of COBRA continuation coverage or, if

applicable, after the expiration of any

grace period for the payment of COBRA

premiums.

In each of these three events, the regulations require the certificate to reflect

only the most recent period of continuous coverage under the plan.

Under COBRA, multiemployer plans

may provide notices within such longer

period of time as is provided for such

notices under the terms of the plan.

Under the general certification timing

rule described above, multiemployer

plans may use the same extended time

period for providing certificates. Comments are requested on how this may

affect a multiemployer plan and its

participants and their families.

A certificate may be mailed by first

class mail to the participant’s last known

address. A certificate for a participant’s

spouse with an address different from

the participant’s is to be sent to the

spouse’s address. A certificate may provide information with respect to both a

participant and the participant’s dependents if the information is identical for

each individual, or if the information is

not identical, a certificate may provide

information sufficient to satisfy the requirements of the regulations with respect to each individual on one document.

A certificate is also required to be

provided upon the request of, or on

behalf of, an individual (whether the

individual is a participant, the participant’s spouse, or any other dependent) if

the request is made within 24 months

after the individual loses coverage under

the plan. The certificate is required to be

provided at the earliest time that the

plan or issuer, acting in a reasonable

and prompt fashion, can provide the

certificate. In this case, the certificate

reflects each period of continuous cover-

age ending within the 24 months prior

to the Fdate of request.12

Responsibilities of Plans and Issuers. Paragraph (a)(1) clarifies the

statutory obligation of plans and issuers

to provide certificates. The statutory

obligation to furnish a written certificate

of information regarding creditable coverage is imposed on both the group

health plan and the health insurance

issuer offering group health insurance

coverage. This dual obligation was the

subject of many of the comments received by the three Departments in

response to the December 30, 1996

request for public comments published

in the Federal Register. Concerns were

raised about superfluous, duplicate certificates being issued and the potential

responsibility of issuers for reporting on

an individual’s coverage under the plan

after one issuer has been replaced by

another.

Paragraph (a)(1) addresses these concerns by providing that the obligation to

furnish a certificate is imposed on both

the plan and each health insurance issuer that provides group health insurance coverage under the plan, subject to

four exceptions.

First, paragraph (a)(1)(ii) provides

that an entity required to provide a

certificate is deemed to have satisfied

this requirement to the extent that any

other party provides the certificate and

the certificate discloses the creditable

coverage (including the waiting period

information) that was to be provided by

the entity.

Second, paragraph (a)(1)(iii) provides

that a plan is deemed to have satisfied

its obligation if there is an agreement

between an issuer and a plan under

which the issuer agrees to provide certificates for individuals covered under

the plan.

Third, paragraph (a)(1)(iv)(A) provides that an issuer is not required to

provide any coverage information regarding coverage periods for which it

was not responsible.

Fourth, paragraph (a)(1)(iv)(B) provides that if an individual switches from

one issuer to another option allowed

under the plan, or an issuer is replaced

by another before an individual’s coverage in the plan ceases, the first issuer is

required to provide sufficient information to the plan (or to another party

12

For example, for a participant who has had a

number of interruptions in coverage, a requested

certificate could consist of copies of all of the

automatic certificates that were previously provided to the individual for each of these periods.

11

designated by the plan), so that when

the individual leaves the plan, a certificate can be provided that includes the

period of coverage under the policy of

the first issuer. In this situation, no

certificate is required to be provided to

the individual, but the issuer must also

cooperate with the plan by providing

any information that may be requested

later pursuant to the alternative method.

(This rule will reduce unnecessary and

potentially misleading information from

being received while the individual’s

coverage under the plan is uninterrupted.) An issuer may presume that it is

the final issuer for an individual if the

individual’s coverage under the policy

ends at a time other than in connection

with the plan’s open season.

Other Entities Issuing Certificates.

Paragraph (a)(6) identifies the various

statutory authorities that create responsibility for other entities (that are not

subject to a particular Department’s

regulations) to provide certificates. As

described above, there are forms of

creditable coverage other than coverage

provided by group health plans and

health insurance coverage offered in

connection with a group health plan.

Accordingly, individuals who leave coverage provided by any such other entity

are entitled to have that coverage

counted by a group health plan and may

in many cases receive certificates for

their creditable coverage. This information is included in the regulations because plans that impose a preexisting

condition exclusion may find it helpful

to know when creditable coverage will

be provable through presentation of a

certificate and when other forms of

documentation or attestation may be

needed.

In cases where certifications are provided by entities not subject to ERISA’s

requirements, such as Medicaid, the Indian Health Service, and CHAMPUS,

certain adjustments in the certification

rules may be appropriate. The regulations do not address how the certification process applies to these other programs. Comments are requested on how

the certification requirements may be

adapted to entities responsible for providing this coverage.

Dependent Coverage Information.

Dependents are entitled to a written

certificate of creditable coverage. Concerns were raised in comments received

from the public regarding the certification of dependent coverage where information regarding dependents of participants in plans was not available. Plans

and issuers, the commenters stated, often do not know the existence of dependents or their coverage periods until

claims are filed. To address these concerns, the regulations have adopted two

special rules.

First, under a transition rule that lasts

through June 30, 1998, a plan or issuer

may satisfy its obligation to provide a

written certificate regarding the coverage

of a dependent of a participant by providing the name of the participant covered by the plan and specifying the type

of coverage provided in the certificate

(such as family coverage or employeeplus-spouse coverage). However, if

asked to provide a certificate relating to

a dependent, the plan must make reasonable efforts to obtain and provide the

name of the dependent. This rule will

provide plans and issuers with a transi-

tion period to update their data systems

to include information on dependents.

Second, the regulations include a special rule regarding dependent coverage

that is not limited to the transition

period. Under this rule, a plan or issuer

must make a reasonable effort to collect

the necessary information for dependents

and include it on the certificate. However, under this special rule, an automatic certificate is not required to be

issued until the plan or issuer knows (or,

making reasonable efforts, should know)

of the dependent’s cessation of coverage.

This information can be collected annually (during open enrollment).

Under the transition rule and the

special rule, an individual may use the

provisions described below to establish

creditable coverage (and waiting and

affiliation period information).

Information for Alternative Method of

Counting Creditable Coverage. Following receipt of the certificate, an entity

that uses the alternative method of

counting creditable coverage may request that the entity that issued the

certificate disclose additional information in order for the requesting entity to

determine the individual’s creditable

coverage with respect to any category of

benefits described in paragraph (b). The

requested entity may charge the requesting entity the reasonable cost of disclosing the information. The requesting entity may ask for a copy of the summary

plan description (SPD) that applied to

the individual’s coverage or may ask for

more specific information. Set forth below is a model form that may be used

for specific coverage information about

the categories of benefits:

INFORMATION ON CATEGORIES OF BENEFITS

1. Date of original certificate:

2. Name of group health plan providing the coverage:

3. Name of participant:

4. Identification number of participant:

5. Name of individual(s) to whom this information applies:

6. The following information applies to the coverage in the certificate that was provided to the individual(s) identified above:

a. MENTAL HEALTH:

b. SUBSTANCE ABUSE TREATMENT:

c. PRESCRIPTION DRUGS:

d. DENTAL CARE:

e. VISION CARE:

For each category above, enter ‘‘N/A’’ if the individual had no coverage within the category and either (i) enter both the date that the individual’s

coverage within the category began and the date that the individual’s coverage within the category ended (or indicate if continuing), or (ii) enter ‘‘same’’ on

the line if the beginning and ending dates for coverage within the category are the same as the beginning and ending dates for the coverage in the

certificate.

Demonstration of Coverage if Certificate is Not Provided. Under HIPAA, in

order to prevent an individual from

being adversely affected if the individual does not receive a certificate, the

individual has a right to demonstrate

creditable coverage through the presentation of documentation or other means.

For example, an individual may not

have a certificate because: an entity

failed to provide a certificate within the

required time period; an entity was not

required to provide a certificate; the

coverage of the individual was for a

period before July 1, 1996; or, the

individual has an urgent medical condition that necessitates an immediate determination of creditable coverage by

the plan or issuer. Under these circumstances, an individual may present evidence of creditable coverage through

documents, records, third party state-

12

ments, or other means, including telephone calls by the plan or issuer to a

third party provider. The plan administrator is required to take into account all

information presented in determining

whether to offset any or all of a preexisting condition exclusion. A plan or

issuer is required to treat the individual

as having furnished a certificate provided by a plan or issuer if the individual attests to the period of creditable

coverage, the individual presents relevant corroborating evidence of some

creditable coverage during the period,

and the individual cooperates with the

plan’s or issuer’s efforts to verify the

individual’s coverage.

If an individual needs to demonstrate

his or her status as a dependent of a

participant, the plan or issuer is required

to treat the individual as having furnished a certificate if an attestation to

such dependency and the period of such

status is provided, and if the individual

cooperates with the plan’s or issuer’s

efforts to verify the dependent status.

Similar rules apply relating to determining creditable coverage under the

alternative method.

Notice to Individual of Period of

Preexisting Condition Exclusion. Within

a reasonable time following the receipt

of the certificate, information relating to

the alternative method, or other evidence of coverage, a plan or issuer is

required to make a determination regarding the length of any preexisting

condition exclusion period that applies

to the individual and notify the individual of its determination. Whether a

determination and notification is made

within a reasonable period of time depends upon the relevant facts and circumstances including whether the application of the preexisting condition

exclusion period would prevent access

to urgent medical services. The plan or

issuer is required to notify the individual, however, only if, after considering the evidence, it has determined that

a preexisting condition exclusion period

will still be imposed on the individual.

The basis of the determination, including the source and substance of any

information on which the plan or issuer

relied, must be included in the notification. The notification must also explain

the plan’s appeals procedures and the

opportunity of the individual to present

additional evidence.

The plan or issuer may reconsider and

modify its initial determination if it

determines that the individual did not

have the claimed creditable coverage. In

this circumstance, the plan or issuer

must notify the individual of such reconsideration and, until a final determination is made, must act in accordance

with its initial determination for purposes of approving medical services.

Model Certificate. The following

model certificate has been authorized by

the Secretary of each of the Departments. Use of the model certificate will

satisfy the requirements of paragraph

(a)(3)(ii) of the regulations.

CERTIFICATE OF GROUP HEALTH PLAN COVERAGE

* IMPORTANT - This certificate provides evidence of your prior health coverage. You may need to furnish this certificate if you become eligible under a

group health plan that excludes coverage for certain medical conditions that you have before you enroll. This certificate may need to be provided if medical

advice, diagnosis, care, or treatment was recommended or received for the condition within the 6-month period prior to your enrollment in the new plan. If

you become covered under another group health plan, check with the plan administrator to see if you need to provide this certificate. You may also need

this certificate to buy, for yourself or your family, an insurance policy that does not exclude coverage for medical conditions that are present before you

enroll.

1. Date of this certificate:

2. Name of group health plan:

3. Name of participant:

4. Identification number of participant:

5. Name of any dependents to whom this certificate applies:

6. Name, address, and telephone number of plan administrator or issuer responsible for providing this certificate:

7. For further information, call:

8. If the individual(s) identified in line 3 and line 5 has at least 18 months of creditable coverage (disregarding periods of coverage before a 63-day break),

check here

and skip lines 9 and 10.

9. Date waiting period or affiliation period (if any) began:

10. Date coverage began:

11. Date coverage ended:

(or check if coverage is continuing as of the date of this certificate:

).

Note: Separate certificates will be furnished if information is not identical for the participant and each beneficiary.

Special Enrollment Periods -26 CFR

§ 54.9801–6, 29 CFR § 2590.701–6, 45

CFR § 146.117

This section of the regulations provides guidance regarding the new enroll-

ment rights provided to employees and

dependents under HIPAA. A group

health plan and a health insurance issuer

offering group health insurance coverage

are required to provide for special enrollment periods during which individu-

13

als who previously declined coverage

are allowed to enroll (without having to

wait until the plan’s next regular open

enrollment period). A special enrollment

period can occur if a person with other

health coverage loses that coverage or if

a person becomes a dependent through

marriage, birth, adoption, or placement

for adoption.

A plan must provide a description of

the special enrollment rights to anyone

who declines coverage. The regulations

provide a model of such a description.

A person who enrolls during a special

enrollment period (even if the period

also corresponds to a regular open enrollment period) is not treated as a late

enrollee. (Accordingly, the plan or issuer

may not impose a preexisting condition

exclusion period longer than 12 months

with respect to the person.)

Special Enrollment for Loss of Other

Coverage. The special enrollment period

for loss of other coverage is available to

employees and their dependents who

meet certain requirements. The employee

or dependent must otherwise be eligible

for coverage under the terms of the plan.

When the coverage was previously declined, the employee or dependent must

have been covered under another group

health plan or must have had other

health insurance coverage. The plan can

require that, when coverage in the plan

was previously declined, the employee

must have declared in writing that the

reason was other coverage, in which

case the plan must at that time have

provided notice of this requirement and

the consequences of the employee’s failure to provide the statement.

The special enrollment rights may

apply with respect to an employee, a

dependent of the employee, or both. An

employee who has not previously enrolled can enroll under these rules if it

is the employee who loses other coverage. An employee’s dependent can be

enrolled under these rules if it is the

dependent who loses other coverage and

the employee is already enrolled. In

addition, both the employee and a dependent can be enrolled together under

these rules if either the employee or the

dependent loses other coverage.

If the other coverage is COBRA continuation coverage, the special enrollment can only be requested after exhausting COBRA continuation coverage.

If the other coverage is not COBRA

continuation coverage, special enrollment can only be requested after losing

eligibility for the other coverage or after

cessation of employer contributions for

the other coverage. In each case, the

employee has 30 days to request special

enrollment. An individual does not have

to elect COBRA continuation coverage

or exercise similar continuation rights in

order to preserve the right to special

enrollment. However, an individual does

not have a special enrollment right if the

individual loses the other coverage as a

result of the individual’s failure to pay

premiums or for cause (such as making

a fraudulent claim). Coverage under special enrollment must be effective no

later than the first day of the month

after an employee requests the enrollment for himself or herself or on behalf

of a dependent.

Special

Enrollment

for

New

Dependents. A special enrollment period

also occurs if a person has a new

dependent by birth, marriage, adoption,

or placement for adoption. The election

to enroll can be made within 30 days

following the birth, marriage, adoption,

or placement for adoption. In the case of

a plan that does not offer any coverage

for dependents and is then modified to

offer dependent coverage, the election to

enroll can instead be made during the

30 days beginning on the date dependent coverage is made available.

The special enrollment rules allow an

eligible employee to enroll when he or

she marries or has a new child (as a

result of marriage, birth, adoption, or

placement for adoption). A spouse of a

participant can be enrolled separately at

the time of marriage or when a child is

born, adopted or placed for adoption.

The spouse can be enrolled together

with the employee when they marry or

when a child is born, adopted, or placed

for adoption. A child who becomes a

dependent of a participant as a result of

marriage, birth, adoption, or placement

for adoption can be enrolled when the

child becomes a dependent. Similarly, a

child who becomes a dependent of an

eligible employee as a result of marriage, birth, adoption, or placement for

adoption can be enrolled if the employee enrolls at the same time.

In the case of a dependent special

enrollment period, HIPAA provides that

coverage with respect to a marriage is

effective no later than the first day of

the month after the date the request for

enrollment is received and coverage

with respect to a birth, adoption, or

placement for adoption is effective on

the date of the birth, adoption, or placement for adoption.

HMO Affiliation Period as Alternative to

Preexisting Condition Exclusion - 29

CFR § 2590.701–7 and 45 CFR

§ 146.119

This section of the regulations permits

a group health plan offering health in-

14

surance through an HMO, or an HMO

that offers health insurance coverage in

connection with a group health plan, to

impose an affiliation period, but only if

certain other requirements are met. An

‘‘affiliation period’’ is defined in the

regulations as a period of time that must

expire before health insurance coverage

provided by the HMO becomes effective, and during which the HMO is not

required to provide benefits.

The regulations specify the following

requirements for imposing an affiliation

period:

• no preexisting condition exclusion

may be imposed with respect to coverage through the HMO;

• no premium may be charged to a

participant or beneficiary for the affiliation period;

• the affiliation period must be applied uniformly without regard to any

health status-related factors; and

• the affiliation period must begin on

the enrollment date, cannot exceed two

months (three months for a late enrollee), and must run concurrently with

any waiting period under the plan.

The regulations provide for the affiliation period to begin on the enrollment

date in the plan, not when coverage with

the HMO begins. Accordingly, if a plan

offers multiple coverage options simultaneously, the HMO cannot impose an

affiliation period on plan participants

who change to the HMO option. Comments are requested on this rule.

The regulations permit an HMO to

use alternatives in lieu of an affiliation

period to address adverse selection, as

approved by the State insurance commissioner or other official designated to

regulate HMOs. Because an affiliation

period may be imposed only if no

preexisting condition exclusion is used,

an alternative to an affiliation period

may not encompass an arrangement that

is in the nature of such an exclusion.13

While HMOs usually do not impose

preexisting condition exclusions, they

could choose to apply a preexisting

condition exclusion period for all enrollees based on the alternative method of

counting creditable coverage if the regulations were to add a category relating

to deductibles. However, as described

above under the heading ‘‘Alternative

Method,’’ the regulations currently do

not include such a category.

13

These alternatives that may be used in lieu of an

affiliation period to address adverse selection

should not be confused with the use of the

alternative method for counting creditable coverage discussed in the next paragraph.

Nondiscrimination In Eligibility and

Premiums in the Group Market - 26

CFR § 54.9802–1, 29 CFR § 2590.702,

45 CFR § 146.121

The regulations include provisions

implementing the nondiscrimination provisions in HIPAA. Comments are welcomed on these provisions, and, in particular, comments are requested on

whether guidance is needed concerning:

• the extent to which the statute prohibits discrimination against individuals

in eligibility for particular benefits;

• the extent to which the statute may

permit benefit limitations based on the

source of an injury;

• the permissible standards for defining groups of similarly situated individuals;

• application of the prohibitions on

discrimination between groups of similarly situated individuals; and

• the permissible standards for determining bona fide wellness programs.

The Departments intend to issue further

regulations on the nondiscrimination

rules in the near future. In no event will

the period for good faith compliance

(specified in HIPAA sections 102(c)(5),

101(g)(5), and 401(c)(5)) with respect to

section 2702 of the PHS Act, section

702 of ERISA, and section 9802 of the

Code end before the additional guidance

is provided.

A plan or issuer may not establish

rules for eligibility (including continued

eligibility) of an individual to enroll

under the terms of the plan based on a

health status-related factor. HIPAA and

the regulations provide a list of health

status-related factors. The Departments

are considering interpreting the statutory

language relating to eligibility to enroll

so that a plan or issuer would be

prohibited from providing lower benefits

to certain individuals based on health

status-related factors. Comments are

welcomed on this interpretation.

Among the health status-related factors listed in the statute is ‘‘evidence of

insurability (including conditions arising

out of acts of domestic violence).’’ The

Conference Report states that the inclusion of evidence of insurability in the

list of health status-related factors ‘‘is

intended to ensure, among other things,

that individuals are not excluded from

health care coverage due to their participation in activities such as motorcycling,

snowmobiling, all-terrain vehicle riding,

horseback riding, skiing and other similar activities.’’ However, HIPAA also

provides that a plan or issuer is not

required to provide particular benefits

other than those provided under the

terms of the plan. Moreover, HIPAA

provides that a plan or issuer may

establish limitations or restrictions on

the amount, level, extent, or nature of

the benefits or coverage for similarly

situated individuals enrolled in the plan.

Comments have been received indicating that some plans contain provisions

that exclude coverage for benefits based

on the source of injury (such as benefits

for injuries sustained in a motorcycle

accident, injuries sustained in a motorcycle accident as the result of not

wearing a helmet, or injuries sustained

in the commission of a felony). Accordingly, comments are requested on how

future guidance should treat benefit

limitations based on the source of an

injury.

The Conference Report also states

that ‘‘[t]he term ‘similarly situated’

means that a plan or coverage would be

permitted to vary benefits available to

different groups of employees, such as

full-time versus part-time employees or

employees in different geographic locations. In addition, a plan or coverage

could have different benefit schedules

for different collective bargaining units.’’

Accordingly, comments are requested

concerning the appropriate standards for

determining ‘‘similarly situated individuals,’’ including whether a plan is permitted to vary benefits based on an employee’s occupation. Because these

standards could impact on the small

group market, the Department of Health

and Human Services is particularly interested in receiving comments from

States with respect to how varying benefits based on occupation could affect

rate setting.

The Departments also request comments regarding how the prohibitions on

discrimination should be applied between groups of similarly situated individuals. For example, is guidance

needed on whether a plan covering

employees in two different locations

could have a longer waiting period for

employees at one location because the

health status of those employees results

in higher health costs?

A plan or issuer may not require any

individual (as a condition of enrollment

or continued enrollment) to pay a premium or contribution, that is greater

than that for a similarly situated individual enrolled in the plan, based on a

health status-related factor. However,

this limitation does not restrict the

amount that an issuer can charge an

15

employer for the coverage. In addition,

this limitation does not prevent a plan or

issuer from establishing premium discounts or rebates or otherwise modifying

applicable

copayments

or

deductibles in return for adherence to

programs of health promotion and disease prevention (bona fide wellness programs). Comments are requested regarding the standards for determining bona

fide wellness programs, including

whether such a program may provide a

discount for non-smokers.

Special Rules — Excepted Plans and

Excepted Benefits - 26 CFR

§ 54.9804–1, 29 CFR § 2590.732, 45

CFR § 146.145

This section of the regulations provides special rules for certain plans and

certain benefits.

Very Small Plans. The group market

requirements of HIPAA do not apply to

a group health plan, or to group health

insurance coverage offered in connection with a group health plan, for any

plan year if, on the first day of the plan

year, the plan has fewer than 2 participants who are current employees. However, a State may apply the group

market provisions in the PHS Act to

plans with fewer than two participants

who are current employees. In this case,

the State would apply its group market

insurance law requirements to such

small group plans (and such plans

would not be subject to the individual

market requirements).

Excepted Benefits. The group market

provisions and the related regulations

also do not apply to any group health

plan or group health insurance issuer in

relation to its provision of excepted

benefits. The benefits identified in paragraph (b)(2) are generally not health

insurance coverage and are excepted in

all circumstances. In contrast, the benefits identified in paragraphs (b)(3), (4),

and (5) are generally health insurance

coverage but are excepted if certain

conditions are met.

Limited-scope dental benefits, limitedscope vision benefits, and long-term

care benefits are excepted if they are

provided under a separate policy, certificate, or contract of insurance, or are

otherwise not an integral part of the

plan. For this purpose, limited-scope

dental coverage typically provides benefits for non-medical services such as

routine dental cleanings, x-rays, and

other preventive procedures. Such coverage may also provide discounts on the

cost of common dental procedures such

as fillings, root canals, crowns, full or

partial plates, or orthodontic services.

Limited-scope dental coverage typically

does not provide benefits for medical

services, such as those procedures associated with oral cancer or with a mouth

injury that results in broken, displaced,

or lost teeth.

Similarly, limited-scope vision coverage provides benefits for routine eye

examinations or the fitting of eyeglasses

or contact lenses. This coverage does

not include benefits for such ophthalmological services as treatment of an eye

disease (e.g., glaucoma or a bacterial

eye infection) or an eye injury.

Noncoordinated benefits may be excepted benefits. The term ‘‘noncoordinated benefits’’ refers to coverage for

a specified disease or illness (such as

cancer-only coverage) or hospital indemnity or other fixed dollar indemnity

insurance (such as insurance that pays

$100/day for a hospital stay as its only

insurance benefit) if three conditions are

met. First, the benefits are provided

under a separate policy, certificate, or

contract for insurance. Second, there is

no coordination between the provision

of these benefits and another exclusion

of benefits under a plan maintained by

the same plan sponsor. Third, benefits

are paid without regard to whether benefits are provided with respect to the

same event under a group health plan

maintained by the same plan sponsor.

Certain supplemental benefits are excepted only if they are provided under a

separate policy, certificate, or contract of

insurance. This category of excepted

benefits includes Medicare supplemental

(commonly called ‘‘Medigap’’ or

‘‘MedSupp’’) policies, CHAMPUS

supplements, and supplements to certain

employer group health plans. Such

supplemental coverage cannot duplicate

primary coverage and must be specifically designed to fill gaps in primary

coverage, coinsurance, or deductibles.14

The regulations do not address section

2721(e) of the PHS Act or section

14

Note that a group health plan, which provides

primary coverage while an individual is an active

employee, is often extended to retirees. When the

retiree becomes eligible for Medicare, the group

health plan commonly coordinates with Medicare

and may serve a supplemental function similar to

that of a Medigap policy. However, such

employer-provided retiree ‘‘wrap around’’ benefits

are not excepted benefits (because they are expressly excluded from the definition of a Medicare

supplement policy in section 1882(g)(1) of the

Social Security Act).

705(d) of ERISA relating to the treatment of partnerships (or the application

of the Code’s group market rules to

partnerships). Comments are requested

on these provisions, including how these

provisions coordinate with other provisions relating to self-employed individuals and partnerships.

F. Other Group Market Provisions 15

Guaranteed Renewability in

Multiemployer Plans and Multiple

Employer Welfare Arrangements Section 703 of ERISA and Section 9803

of the Code

Requirements relating to guaranteed

renewability in multiemployer plans and

multiple employer welfare arrangements

are set forth in section 703 of ERISA

and section 9803 of the Code (but not in

the PHS Act). These provisions state

that a group health plan that is a

multiemployer plan or that is a multiple

employer welfare arrangement may not

deny an employer whose employees are

covered under such a plan continued

access to the same or different coverage

under the terms of such plan, other than

for certain specified reasons. The Departments are not issuing regulations

under section 703 of ERISA or section

9803 of the Code at this time, but

anticipate issuing regulations under

these sections and solicit comments regarding these sections.

In these provisions, the terms ‘‘continued access’’ and ‘‘same or different

coverage’’ are not defined. Comments

are requested on how rules under these

provisions might address variations and

changes in a plan’s benefit packages and

contribution rates, differences in the

characteristics of multiemployer plans

and multiple employer welfare arrangements, and any possible implications for

the financial integrity of affected plans.

Preemption of State Laws; State

flexibility - 29 CFR § 2590.731 and 45

CFR § 146.190

The McCarran-Ferguson Act of 1945

(Pub. L. 79–15) exempts the business of

insurance from federal antitrust regulation to the extent that it is regulated by

the States and indicates that no federal

law should be interpreted as overriding

15

In this section (‘‘Other Group Market Provisions’’), references conform to usage in 45 CFR

Part 146, which uses ‘‘HCFA’’ in place of ‘‘Department of Health and Human Services’’ or

‘‘Secretary of Health and Human Services’’ and

‘‘HCFA regulations’’ in place of ‘‘PHS Act regulations.’’

16

State insurance regulation unless it

does so explicitly. Section 514(a) of

ERISA preempts State laws relating

to employee benefit plans (including

group health plans). However, section

514(b)(2) of ERISA saves from preemption any State law that regulates insurance. Section 2723 of the PHS Act and

section 731 of ERISA make clear that

Part A of Title XXVII of the PHS Act

and Part 7 of Subtitle B of Title I of

ERISA do not in any way affect or

modify section 514 of ERISA.

In addition, section 2723 of the PHS

Act and section 731(a) of ERISA preempt State insurance laws to the extent

such laws ‘‘prevent the application of’’

Part A of Title XXVII of the PHS Act

and Part 7 of Subtitle B of Title I of

ERISA. (There is no corresponding provision in the Code.) In this regard, the

Conference Report states that the conferees intended the narrowest preemption of State laws with regard to health

insurance issuers (not group health

plans) with respect to all the provisions

of Part A of Title XXVII of the PHS

Act and Part 7 of Subtitle B of Title I of

ERISA (except for preemption with respect to the provisions of section 2701

of the PHS Act and section 701 of

ERISA). Consequently, the Conference

Report states that State laws with regard

to health insurance issuers that are

broader than federal requirements in

certain areas would not ‘‘prevent the

application of’’ the provisions of Part A

of Title XXVII of the PHS Act or Part 7

of Subtitle B of Title I of ERISA.

However, the preemption is broader

for the statutory requirements of section

2701 of the PHS Act and 701 of ERISA

that limit the application of preexisting

condition exclusions. State laws cannot

‘‘differ’’ from the preexisting condition

exclusion requirements of section 2701

of the PHS Act or section 701 of

ERISA, except as specifically permitted

under section 2723(b)(2) of the PHS Act

and section 731(b)(2) of ERISA. These

specific exceptions permit a State to

impose on health insurance issuers certain stricter limitations relating to preexisting condition exclusions.

Comments are also solicited on issues

relating to the coordination of the new

requirements under HIPAA and State

requirements for associations that may

be multiple employer welfare arrangements as defined in section 3(40) of

ERISA.

Guaranteed Availability of Coverage for

Small Employers under the PHS Act

Group Market Provisions - 45 CFR

§ 146.150

Rules relating to guaranteed availability of coverage for employers in the

small group market appear only in the

PHS Act (at section 2711). In general,

this section requires health insurance

issuers that offer coverage in the small

group market to offer to any small

employer all of the products they actively market in that market. This is

generally referred to as an all-products

guarantee. However, as allowed under

applicable State law, the issuer can

require that the employer make a minimum contribution toward the premium

charged and have a minimum level of

participation by eligible individuals. The

issuer must also accept for enrollment

every eligible individual without regard

to health status. For purposes of this

section, an eligible individual is one

who meets the applicable requirements

of the group health plan, the issuer, and

State law for coverage under the plan.

Some States have, in recent years,

made reforms in their small group markets that only require guaranteed issue

of a basic and a standard policy, rather

than an all-products guarantee. They

have urged that an all-products guarantee not be adopted, arguing that the law

does not specifically require it. However, sections 2711 and 2741 of the PHS

Act, as added by HIPAA, contain virtually identical requirements requiring issuers that offer health insurance coverage in either the small group or

individual market to make ‘‘such coverage’’ available to, respectively, small

employers or eligible individuals. While

section 2741 explicitly permits issuers to

limit to two policies the offerings they

are required to make in the individual

market, the small group market provisions contain no similar exception. In

fact, section 2713(b)(1)(D) requires that

an issuer that offers health insurance to

any small employer must provide information concerning ‘‘the benefits and

premiums available under all health insurance coverage for which the employer is qualified.’’ (Emphasis added.)

This indicates that Congress intended to

require an all-products guarantee in the

small group market. (However, a State

that implements an ‘‘alternative mechanism’’ in the individual market under

section 2744 of the PHS Act has the

flexibility either to impose an allproducts guarantee or to use a com-

pletely different mechanism for making

insurance available to individuals guaranteed coverage under the statute.)

Various industry groups and persons

responding to the notice that the three

Departments published on December 30,

1996 asked that the term ‘‘offer’’ be

interpreted to mean ‘‘actively marketed,’’ so that issuers would not be

required to reopen closed blocks of

business. The regulations make this

clear.

Section 2711 also requires issuers to

accept for enrollment any individuals

who are eligible to enroll under the

terms of the plan, and who satisfy the

requirements of the issuer and applicable State law, during the period in

which the individual ‘‘first becomes eligible’’ to enroll under the terms of the

group health plan. Thus, the issuer is

not required to accept late enrollees. The

regulations make it clear that this protection extends to individuals if they

‘‘first become eligible’’ to enroll during

a special enrollment period. The special

enrollment provisions of the statute evidence the intent that individuals who

qualify for special enrollment be given

the same protections given to newlyhired employees and their dependents.

An issue has also been raised as to

whether the statutory definitions of premium contribution and group participation rules, which are repeated in the

regulations, relate only to percentages of

employees or premium dollars or to

absolute numbers of employees or premium amounts. If the latter interpretation were permitted, the effect would be

to undermine the all-products guarantee

by allowing, for example, some products

to be available to ‘‘larger’’ small employers, but not to the smallest employers. The regulations currently leave interpretation of this language to the

States, but comments are welcomed on

this issue.

Section 146.150 also includes rules

regarding the circumstances under which

issuers are permitted to deny coverage

to employers. If the product is a network plan, under which services are

furnished by a defined set of providers,

the issuer can deny coverage to an

employer whose eligible individuals do

not live, work, or reside in the network

plan’s service area. It can also deny

coverage if it has demonstrated to the

State that its network does not have the

capacity to deliver services to additional

groups, but is then barred for 180 days

from offering coverage in that service

area. An issuer may also deny coverage

17

if it demonstrates that it lacks sufficient

financial reserves to underwrite additional coverage, but is barred for 180

days from offering coverage in the small

group market in the State. Both of these

exceptions must be applied to all employers uniformly without consideration

of the health status or claims experience

of an employer’s employees or dependents. Neither of these exceptions relieves a network plan of its responsibility to continue servicing its in-force

business under the guaranteed renewability requirements of the regulations.

Finally, § 146.150 provides that if the

coverage is only made available to

members of ‘‘bona fide associations’’ as

that term is defined in the regulations, it

is not subject to the guaranteed availability requirements. (Accordingly, the

coverage does not have to be offered to

non-members.) However, employers that

obtain coverage through a bona fide

association are assured of guaranteed

access to the association’s coverage options as long as they remain members of

the association. This is because a bona

fide association cannot condition membership in the association on health

status-related factors. Moreover, it must

offer coverage to all employers who are

members without regard to health statusrelated factors relating to their employees or dependents. Therefore, an association cannot legally refuse enrollment

to members on a selective basis so long

as they meet the association’s membership criteria.

Guaranteed Renewability of Coverage

for Employers under the PHS Act Group

Market Provisions - 45 CFR § 146.152

Section 146.152 of the Health Care

Financing Administration (HCFA) regulations implements section 2712 of the

PHS Act, which requires issuers to renew or continue in force any coverage

in the large or small group market at the

option of the plan sponsor. The exceptions to this requirement include nonpayment of premiums, fraud, and violation of minimum participation or

contribution rules, as permitted under

applicable State law. Also, the issuer can

cease to offer either a particular product

or all coverage it offers in the particular

market, and can refuse to renew if the

group health plan’s participants all leave

the service area of a network plan, or if

the coverage is provided through a bona

fide association and the employer’s

membership ends.

Issuers that decide to discontinue offering a particular product or all coverage in the small or large group market

are subject to certain requirements outlined in paragraphs (c) and (d) of this

section of the regulations. Issuers discontinuing only a particular product

must give 90 days’ notice, must offer

the plan sponsor the option to purchase

other coverage the issuer offers in that

market, and must discontinue the product uniformly, without regard to claims

experience or health status of participants or dependents under a particular

group health plan. If the issuer terminates all coverage in a market or markets, it must provide 180 days’ notice to

each plan sponsor, and it is prohibited

from issuing coverage in the market(s)

or State involved for five years following the date of discontinuation. Plans or

issuers may modify the health insurance

coverage at the time of coverage renewal, provided the modification is consistent with State law and, for the small

group market, is effective uniformly

among group health plans with coverage

under that product.

Some States have asked whether an

issuer that chooses to stop selling comprehensive products, such as a basic or

standard policy, in a particular State’s

group market, must also cease selling

policies consisting of excepted benefits.

Because Congress permitted these types

of supplemental policies and limited

benefit plans to be excepted from the

requirements of HIPAA in both the

group and individual markets, HCFA

intends to defer to the States’ judgment

on this issue, and solicit comments.

State law may limit the extent to

which an issuer can abandon a product

or market, and under what circumstances. For example, a State may

choose to require an issuer vacating the

market to transfer its business to another

issuer through assumption reinsurance,

or some other means permitted under

State law.

Paragraph (g) of this section of the

regulations provides that, with respect to

group coverage offered only through

associations, the option of guaranteed

renewability extends to include employer members of an association. This

provision means that all employers covered by an issuer through an association

have the right to renew the coverage

they received if the association ceases to

serve its members, regardless of the

reason.

Disclosure of Information by Issuers to

Employers Seeking Coverage in the

Small Group Market - 45 CFR

§ 146.160

Section 146.160 of the HCFA regulations implements section 2713 of the

PHS Act by setting forth rules relating

to disclosure of information by issuers

to employers seeking coverage in the

small group market. In its solicitation

and sales materials, the issuer must

make a reasonable disclosure that the

specified information is available on

request. The information that must be

provided includes the issuer’s right to

change premium rates and the factors

that may affect changes in premium

rates, renewability of coverage, any preexisting condition exclusion (including

use of the alternative method of counting creditable coverage), any affiliation

periods applied by HMOs, the geographic areas served by HMOs, and the

benefits and premiums available under

all health insurance coverage for which

the employer is qualified under minimum contribution and participation

rules, as permitted by State law. The

issuer is exempted from disclosing proprietary or trade secret information under applicable law.

‘‘Factors that may affect changes in

premium rates’’ and ‘‘proprietary and

trade secret information under applicable

law’’ have not been defined. Comments

are requested regarding whether they

should be defined.

The information described in this section must be provided in language that

is understandable by the average small

employer and sufficient to reasonably

inform small employers of their rights

and obligations under the health insurance coverage. This requirement can be

satisfied by using as a model the outlines of coverage provided under Medicare Supplement insurance. (These outlines are required to provide easy

comparison of the coverage and cost of

all available products.) Reasonable information includes rating schedules for

each product to which more than one

rate applies, and, with respect to network plans, maps of service areas or

lists of counties served.

Exclusion of Certain Plans from the

PHS Act Group Market Requirements 45 CFR § 146.180

Section 146.180 of the HCFA regulations implements section 2721 of the

PHS Act, which permits certain

nonfederal governmental plans to elect

18

to be exempted from some or all of the

group market requirements of the HCFA

regulations, although they are subject to

the certification and disclosure requirements of § 146.115. With respect to

nonfederal governmental plans that are

collectively bargained, this section does

not preempt State and local collective

bargaining laws. The regulation establishes the form and manner of the

election, and requires a nonfederal governmental plan making this election to

notify plan participants, at the time of

enrollment and on an annual basis, that

it has made the election and what effect

the election has. The participant notice

and certification and disclosure obligations are integral parts of the election.

Failure to comply with these obligations

invalidates an election and subjects the

nonfederal governmental plan to the

requirements the election would have

permitted the plan to avoid.

Only nonfederal governmental plans

that are self-funded (in whole or in part)

can make the election, and the election

only applies to the self-funded portion.

A health insurance issuer that sells insurance coverage to a nonfederal plan

must comply with all the group market

requirements.

Enforcement of PHS Act Requirements 45 CFR § 146.184

Part 146 imposes requirements on

health insurance issuers that offer coverage in the group market in a State, and

on nonfederal governmental (i..e., State

and local) group health plans. With

respect to issuers, the statute makes it

clear that it is solely within the discretion of the States, in the first instance,

whether to take on the responsibility for

enforcing those requirements or whether

to leave enforcement to the federal

government. HCFA anticipates that the

States will choose to enforce the requirements. However, the statute also

makes clear that if a State does not

substantially enforce the requirements,

HCFA must enforce them. The statute

also requires HCFA to enforce the requirements applicable to nonfederal governmental plans.

Section 146.184(b)(2) sets forth the

procedures that HCFA will follow if a

question is raised about the State’s enforcement with respect to issuers. Under

the procedures, State are given every

opportunity to demonstrate why federal

enforcement is not required. The regulations also make it clear that the procedures will not be triggered unless HCFA

is satisfied that there has first been a

reasonable effort to exhaust any State

remedies. However, if, after giving the

State a reasonable opportunity to enforce, HCFA makes a final determination

that a State is not substantially enforcing

these requirements, HCFA will enforce

the requirements using the civil money

penalties provided for under the statute.

Paragraph (d) describes the process

for imposing civil money penalties

against issuers or nonfederal plans that

fail to comply with the group market

requirements in the PHS Act. If HCFA

receives a complaint or other information that indicates that a right guaranteed by the group market rules is being

denied, HCFA will first determine which

entity is potentially responsible for any

penalty. If the failure is by an issuer, the

issuer will be responsible. If a

nonfederal governmental plan is sponsored by a single employer, the employer will be liable, but if the plan is

sponsored by two or more employers,

the plan will be liable. If, after giving

the entity or entities an opportunity to

respond, HCFA assesses a penalty, the

regulation provides appeal rights. The

penalty can consist of up to $100 for

each day, for each individual whose

rights are violated.

Effective Dates - 26 CFR § 54.9806–1,

29 CFR § 2590.736, 45 CFR § 146.125

The group market provisions are generally effective for plan years beginning

after June 30, 1997.16 In many cases, no

preexisting condition exclusion may be

imposed with respect to an individual on

the effective date because any permitted

preexisting condition exclusion period is

measured from the individual’s enrollment date in the plan (even if the

enrollment date is before the statutory

effective date). An individual who has

not completed the maximum permitted

exclusion period under HIPAA before the

effective date for his or her plan may use

creditable coverage to reduce the remaining preexisting condition exclusion period. The regulations contain examples

illustrating the effect of these rules.

The requirement that a plan or issuer

provide certificates to show creditable

16

In these case of a group health plan maintained

pursuant to one or more collective bargaining

agreements between employee representatives and

one or more employers ratified before August 21,

1996, the group market provisions (other than the

requirements to provide certifications) do not

apply to plan years beginning before the later of

July 1, 1997 or the date on which the last of the

collective bargaining agreements relating to the

plan terminates (determined without regard to any

extension agreed to after August 21, 1996).

coverage applies to events occurring on

or after July 1, 1996, except that in no

case is a certificate required to be

provided before June 1, 1997 or to

reflect coverage before July 1, 1996.

For events occurring on or after July

1, 1996 but before October 1, 1996, a

certificate is required to be provided

only upon a written request by or on

behalf of the individual to whom the

certificate applies. For events occurring

on or after October 1, 1996 and before

June 1, 1997, a certificate must be

furnished no later than June 1, 1997 (or,

if later, any date that would otherwise

apply under the standard rules).

The regulations include an optional

transition rule for events before June 1,

1997. (The transition rule applies to

automatic certificate events; it does not

apply where a certificate is requested.) A

group health plan or health insurance

issuer offering group health coverage is

deemed to satisfy the automatic certificate requirements if a special notice is

provided no later than June 1, 1997. The

notice must be in writing and must

include information substantially similar

to the information included in a model

notice authorized by the Secretaries. For

this purpose, the following model notice

is authorized:

IMPORTANT NOTICE OF YOUR RIGHT TO DOCUMENTATION OF HEALTH COVERAGE

Recent changes in Federal law may affect your health coverage if you are enrolled or become eligible to enroll in health coverage that excludes coverage

for preexisting medical conditions.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) limits the circumstances under which coverage may be excluded for medical

conditions present before you enroll. Under the law, a preexisting condition exclusion generally may not be imposed for more than 12 months (18 months

for a late enrollee). The 12-month (or 18-month) exclusion period is reduced by your prior health coverage. You are entitled to a certificate that will show

evidence of your prior health coverage. If you buy health insurance other than through an employer group health plan, a certificate of prior coverage may

help you obtain coverage without a preexisting condition exclusion. Contact your State insurance department for further information.

For employer group health plans, these changes generally take effect at the beginning of the first plan year starting after June 30, 1997. For example, if

your employer’s plan year begins on January 1, 1998, the plan is not required to give you credit for your prior coverage until January 1, 1998.

You have the right to receive a certificate of prior health coverage since July 1, 1996. You may need to provide other documentation for earlier periods of

health care coverage. Check with your new plan administrator to see if your new plan excludes coverage for preexisting conditions and if you need to

provide a certificate or other documentation of your previous coverage.

To get a certificate, complete the attached form and return it to:

[Insert Name of Entity]:

[Insert Address]:

For additional information contact [Insert Telephone Number]:

The certificate must be provided to you promptly. Keep a copy of this completed form. You may also request certificates for any of your dependents

(including your spouse) who were enrolled under your health coverage.

**************************************************************************************************

REQUEST FOR CERTIFICATE OF HEALTH COVERAGE

Date:

Name of Participant:

Address:

Telephone Number:

Name and relationship of any dependents for whom certificates are requested (and their address if different from above):

19

The provisions in the regulations relating to method of delivery and entities

required to provide a certificate apply

with respect to the provision of the

notice. If an individual requests a certificate following receipt of the notice, the

certificate must be provided at the time

of the request as set forth in the regulations relating to certificates provided

upon request.

HIPAA provides that no enforcement

action is to be taken against a group

health plan or health insurance issuer

with respect to a violation of the group

market rules before January 1, 1998 if

the plan or issuer has sought to comply

in good faith with such requirements.

Compliance with the regulations is

deemed to be good faith compliance

with the group market rules.

G. Interim Rules and Request for

Comments

Section 707 of ERISA (redesignated

as section 734 by section 603(a)(3) of

the NMHPA), Section 2707 of the PHS

Act, and Section 9806 of the Code

added by HIPAA, provide, in part, that

the Secretaries of Labor, Treasury and

HHS may promulgate any interim final

rules as they determine are appropriate

to carry out the portability provisions of

HIPAA.

Under Section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et

seq.) a general notice of proposed

rulemaking is not required when the

agency, for good cause, finds that notice

and public comment thereon are impracticable, unnecessary or contrary to the

public interest.

These rules are being adopted on an

interim basis because the Secretaries

have determined that without prompt

guidance, some members of the regulated community will have difficulty

complying with the HIPAA’s certification requirements, and will be in violation of the statute. Congress expressly

intended that the certification and prior

creditable coverage provisions serve as

the mechanism for increasing the portability of health coverage for plan participants and their beneficiaries. Without

the Departments’ guidance, plans would

likely be unable to produce the necessary amendments to plan documents

reflecting HIPAA’s new requirements, as

well as the appropriate certifications of

prior coverage that would help participants and beneficiaries reduce any applicable preexisting condition exclusion periods imposed by a new health plan.

Thus, without the Departments’ prompt

guidance, participants and beneficiaries

will not have the benefit of a convenient

certificate of prior coverage to present

upon changing health coverage, and will

likely have greater difficulty proving

that they are entitled to health coverage

immediately, or soon after joining a new

health plan.

Moreover, HIPAA’s portability requirements will affect the regulated

community in the immediate future.

HIPAA’s certification requirements are

effective for all group health plans on

June 1, 1997. HIPAA’s underlying requirements concerning establishing periods of prior creditable coverage, preexisting condition exclusion provisions,

and the special enrollment requirements,

are generally applicable for group health

plans for plan years beginning on or

after July 1, 1997. Plan administrators

and sponsors, and participants and beneficiaries will need guidance on how to

comply with the new statutory provisions before these effective dates. These

rules have been written in order to

ensure that plan sponsors and administrators of group health plans, as well as

participants and beneficiaries, are provided timely guidance concerning compliance with these recently enacted

amendments to ERISA, the PHS Act

and the Code. These rules provide guidance on these statutory changes, and are

being adopted on an interim basis because the Departments find that issuance

of such regulations in interim final form

with a request for comments is appropriate to carry out the new regulatory

structure imposed by HIPAA on group

health plans and health insurance issuers. In addition, these rules are necessary to ensure that plan sponsors and

administrators of group health plans, as

well as participants and beneficiaries,

are provided timely guidance concerning

compliance with new and important disclosure obligations imposed by HIPAA.

Sections 101(g)(4), 102(c)(4), AND

401(c)(4) of HIPAA also mandate that

the Secretaries issue regulations necessary to carry out the portability amendments by April 1, 1997. Issuance of a

notice of proposed rule making with

public comment thereon prior to issuing

a final rule could delay significantly the

issuance of essential guidance and prevent the Departments from complying

with their statutory rule making deadline. Furthermore, these rules are being

adopted on an interim basis and the

Departments are inviting interested persons to submit written comments on the

20

rules for consideration in the development of the final rules relating to

HIPAA. Such final rules may be issued

in advance of January 1, 1998, after

affording the public an opportunity to

review and comment.

For the foregoing reasons, the Departments find that the publication of a

proposed regulation, for the purpose of

notice and public comment thereon,

would be impracticable, unnecessary,

and contrary to the public interest.

H. Regulatory Flexibility Act

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) (RFA) imposes

certain requirements with respect to

rules which would have significant economic impact on a substantial number

of small entities. Section 603 of the

RFA requires an agency publishing a

general notice of proposed rulemaking

(NPRM) under section 553 of the APA

to present at the time of the publication

of its NPRM an initial regulatory flexibility analysis, describing the impact of

the rule on small entities, and seeking

public comment on such impact.

Small entities include small businesses, non-profit organizations, and

governmental agencies. A ‘‘rule’’ under

the Regulatory Flexibility Act is one for

which a general notice of proposed

rulemaking is required under section

553(b) of the APA.

Since these rules are issued as interim

rules, and not as a general notice of

proposed rulemaking, for the reasons

stated above, an Initial Regulatory Flexibility analysis has not been prepared.

While these rules are being promulgated as interim final rules, the Departments nevertheless invite interested persons to submit comments for

consideration in the development of the

final rules regulating to HIPAA. Consistent with the policy of the Regulatory

Flexibility Act, the public is encouraged

to submit comments that suggest alternative rules that accomplish the stated

purpose of the statute and minimize the

impact on small entities. Specifically,

the public is encouraged to address:

• What information relating to prior

coverage, preexisting condition exclusions, health status, waiting periods and

similar issues do employers, plans and

issuers currently rely on in maintaining

health care coverage systems?

• What are the estimated costs of

complying with the statute’s requirements on certification of periods of prior

creditable coverage?

• How many small issuers offer products that may be subject to the regulations? Is there an anticipated effect on

these small companies’ competitiveness

due to the regulations?

• To what extent do group health

plans currently use service providers to

fulfill the administrative obligations, including reporting and disclosure, previously imposed by ERISA? To what

extent would group health plans also use

service providers to comply with this

regulation’s certification requirements?

I. Executive Order 12866, the Unfunded

Mandates Reform Act and the Small

Business Regulatory Enforcement

Fairness Act of 1995

These rules have been determined to

be a significant regulatory action under

Section 3(f) of Executive Order 12866.

The following analysis is consistent with

Section 6(a)(3)(C) of the Order.

These rules are not subject to the

Unfunded Mandates Reform Act of

1995 (Pub. L. 104–4), because they are

interim final rules. However, consistent

with the policy embodied in the Unfunded Mandates Reform Act, the regulation has been designed to be the least

burdensome alternative for state, local

and tribal governments and the private

sector, while achieving the objectives of

HIPAA. In addition, the following

analysis provides information concerning the effects of the regulation on state,

local, and tribal governments and the

private sector.

Throughout the regulatory process,

HHS met and consulted with representatives of affected state, local and tribal

governments. These groups include the

National Association of Insurance Commissioners, the National Governors’ Association, the National Council for State

Legislatures, the Indian Health Service,

and the American Public Welfare Association. HHS also provided technical

advice regarding its interpretation of the

statute to state insurance commissioners

and state legislatures at their request.

Generally, these groups have concerns

regarding:

• The statute’s preemption of state

laws that would prevent the implementation of statutory provisions;

• The burden on issuers and plans to

implement the statutory provisions, especially with regard to certification of

prior creditable coverage; and

• States’ desires to have considerable

flexibility in complying with the statute,

and continuing their traditional role as

regulators of insurance.

After serious consideration of these

concerns, HHS narrowly interpreted the

preemption of state law, taking the least

burdensome alternatives provided states

considerable flexibility in complying

with the statute, and recognized the

limited authority of federal agencies in

the regulation of health insurance.

The Administrator of the Office of

Information and Regulatory Affairs of

the Office of Management and Budget

has determined that this is a major rule

for purposes of the Small Business

Regulatory Enforcement Fairness Act of

1996 (5 U.S.C. Section 801 et seq.).

Set forth below is a discussion regarding the impact of the statute and a

discussion of the costs and benefits of

the regulations implementing the statute.

J. Extensions of Coverage Under the

Statute

These regulations implement certain

provisions of HIPAA. The statute was

enacted to, among other things, ‘‘improve portability and continuity of

health care coverage in the group and

individual markets,’’ as stated in the

Conference Report. The statute accomplishes these goals by instituting reforms

in the group and individual insurance

markets, including provisions limiting

the use of pre-existing condition exclusions, and requiring guaranteed access to

health care coverage and guaranteed

renewability for certain groups and individuals. There are also nondiscrimination provisions and special enrollment rights in the statute.

The pre-existing condition exclusion

periods that HIPAA restricts are widespread. According to the Bureau of

Labor Statistics (BLS), 46 percent of

participants in private-sector, employersponsored health plans are in plans with

pre-existing condition exclusions (1993–

1994 data). The same is true of 41

percent of participants in state and local

government employer-sponsored plans

(1994 data).

The duration of exclusion periods

varies from plan to plan. Based on Peat

Marwick’s 1995 employer survey, an

estimated 57 percent of participants in

plans with exclusions are in plans with

exclusions that last 12 months. The

remainder are distributed as follows: 13

percent in plans with 3-month exclusions, 22 percent in plans with 6-month

exclusions, 7 percent in plans with

21

9-month exclusions, and 1 percent in

plans with exclusions that last more than

12 months.

HIPAA’s portability provisions resemble provisions of many current state

laws. Importantly, however, HIPAA extends these provisions to self-insured

ERISA plans which federal law shields

from state regulation. In addition, it sets

a minimum uniform threshold for insured group plans and individual markets across all states.

HIPAA’s portability provisions will

result in both direct and social costs and

benefits.

In general, direct costs and benefits

arise directly from the application of

HIPAA’s insurance portability and access provisions. Direct costs and benefits are often best understood as transfers of resources among economic

agents, which do not necessarily represent changes in overall social welfare.

Stated differently, they represent

changes in how the economic pie is

divided (in this case, mainly with respect to health care), and not changes in

the size of the pie. Direct costs and

benefits are often easier to quantify than

social costs, as they are often directly

observable as transactions in the marketplace.

With respect to HIPAA’s portability

and access provisions, direct costs and

benefits arise from the extension of

insurance coverage to individuals and

conditions not otherwise covered. Direct

benefits to individuals include the payment of individuals’ claims for those

services and conditions. Direct costs to

individuals include the premiums associated with that coverage. Some available

estimates of these direct costs and benefits are presented below.

Social costs and benefits, in contrast,

do result in net changes in overall social

welfare. Social benefits generally reflect

social welfare gains that arise in connection with statutory or regulatory interventions that remedy market failures.

Likewise, social costs generally reflect

welfare losses arising from interventions

in otherwise efficient markets. Social

welfare changes often play out through

a complex set of behavioral responses to

interventions. They are more difficult to

quantify than direct costs and benefits.

With respect to HIPAA, social welfare

changes generally arise indirectly from

HIPAA’s portability and access provisions. They reflect dynamic behavioral

responses to HIPAA’s portability and

access provisions. Expected social benefits, primarily improved access to

health insurance and also improved job

mobility, cannot be meaningfully quantified. Expected social costs, which could

include erosions in coverage arising

from direct premium costs, are expected

to be small. Since no measures of

HIPAA’s many social welfare effects are

available, a mostly qualitative discussion

of major effects is offered below. A

more quantitative discussion of direct

costs and benefits follows later.

1. Social Welfare Effects of HIPAA’s

Portability and Access Provisions

The primary direct benefits of the law

are improved access to insurance coverage, and more comprehensive coverage,

through employers and in the individual

insurance market. Increased access and

comprehensiveness helps protect individuals from catastrophic expenses.

There are a number of social benefits

associated with improved access

• It reduces individuals’ risk of incurring large out-of-pocket costs;

• It is often more cost effective to

provide timely preventive and remedial

care than to delay care until conditions

worsen. Therefore, to the extent that

individuals receive more timely and appropriate care as a result of HIPAA,

over time, the long-term, cumulative

cost of their care may be lower. This

has the potential to reduce premiums for

all individuals within a risk pool, not

just the individuals directly affected by

HIPAA. Similarly, the Medicare program may benefit from reduced expenditures because more individuals who

become newly entitled to Medicare will

have had insurance coverage during the

course of their working life or through

the individual insurance market.

• To the extent that more timely care

results in improved health, worker attendance and productivity might improve.

• HIPAA’s portability provisions likewise help individuals transitioning from

state and federal welfare programs to

paid work. Individuals with health conditions can offset their new health plan’s

preexisting condition exclusions against

prior coverage from any source, including Medicaid.

• Reductions in job lock benefit both

individuals and the economy at large.

Increased mobility can boost individual

workers’ career opportunities. Increased

mobility also strengthens U.S. economic

efficiency and competitiveness;

• HIPAA’s federal minimum standards for small group and individual

access to insurance coverage may improve the functioning of small group

and individual markets. The standards

will alleviate disruptions that might otherwise arise when ‘‘riskier’’ groups and

individuals are denied or dropped from

coverage.

• To the extent that HIPAA results,

on net, in more insurance payment for

otherwise uncompensated care, costshifting and associated inefficiencies in

health care markets could be reduced.

HIPAA’s group-to-individual portability provisions may provide a benefit for

employees who move to jobs without

health coverage. Some small employers

that do not currently offer health care

coverage may be able to do so more

easily under HIPAA’s guaranteed issue

provisions. This may help level the

playing for small employers to compete

with larger ones in recruiting employees.

While premium increases resulting from

HIPAA may reduce the affordability of

coverage for some employers, this effect

is expected to be small, as noted below.

HIPAA also requires that issuers offering health insurance coverage in the

individual market renew coverage for all

individuals purchasing health insurance

coverage in the individual market, not

only eligible individuals. However,

when an eligible individual elects family

coverage, the issuer may apply a preexisting condition exclusion, under applicable State law, to any of the individual’s family members who are not

eligible individuals under the statute.

The group-to-group portability regulation is likely to benefit individuals who

maintain employer-sponsored health

benefit coverage and change jobs or

health plans, the dependents of such

individuals, and workers who face ‘‘job

lock’’ due to health coverage concerns.

Under HIPAA, health insurance coverage provided under a COBRA continuation policy qualifies as group health

coverage. This distinction is particularly

important for individuals moving from

the group to the individual market, or

from one group health plan to another,

since electing this coverage would enable these individuals to maintain continuous creditable coverage. In addition,

individuals seeking coverage in the individual market must elect and exhaust

COBRA continuation coverage in order

to qualify as an ‘‘eligible individual’’ in

the individual market.

Thus, the statute provides an additional incentive for those individuals

who lose coverage when they change

jobs to elect COBRA continuation coverage in order to avoid a break in

coverage. The statute also provides an

incentive for those individuals who are

22

seeking coverage in the individual market without a preexisting condition exclusion. Consequently, we expect more

individuals to elect COBRA continuation coverage.

Absent HIPAA’s group-to-group portability standards, individuals with

employer-sponsored health coverage

who have preexisting medical conditions

and who change health plans could be

denied coverage for their conditions. In

that case, individuals would have to pay

out of pocket for necessary medical

services, or forgo some services, thereby

risking adverse health consequences and

higher future costs. Other individuals

with preexisting medical conditions who

change health plans and face preexisting

condition exclusions may pay for COBRA continuation coverage in addition

to paying for their new health plan to

ensure coverage for the preexisting condition. Other workers who are concerned

about losing health care coverage would

stay in their jobs or turn down job

offers.

According to the U.S. General Accounting Office, over 20 million individuals changed jobs in 1993 (General

Accounting Office, Report HEHS–95–

257, ‘‘Health Insurance Portability: Reform Could Ensure Continued Coverage

for up to 25 Million Americans,’’ September 1995, pg. 7). Approximately 12

million of these workers had employersponsored health care coverage. Additionally, nearly 7 million non-working

dependents received employer-sponsored

health care coverage through these job

changers. According to GAO, many of

these 20 million could benefit from the

regulation’s requirement that prior health

care coverage be credited against a new

health plan’s preexisting condition exclusion period. GAO concludes that the

statute will allow approximately 9 million job changers (who have at least 12

months of prior creditable coverage),

with 5 million dependents, to change

jobs without the risk of facing any

preexisting condition exclusions. Another 3 million workers who change

jobs (who have some smaller amount of

prior coverage), with 2 million dependents, would face reduced waiting periods before receiving full coverage.

The number of workers and dependents actually gaining coverage for a

preexisting condition due to credit for

prior coverage following a job change

under HIPAA will be smaller than this,

however. GAO’s estimates of people

who could benefit include all job changers with prior coverage and their depen-

dents, irrespective of whether their new

employer offers a plan, whether their

new plan imposed a preexisting condition exclusion period, and whether they

actually suffer from a preexisting condition. Accounting for these narrower criteria, as discussed below, CBO estimates

that 100,000 will actually receive additional coverage under HIPAA’s credit for

prior coverage at any point in time.

In addition, employers, especially

smaller employers, that offer health care

benefits to their employees often change

health insurance issuers, exposing workers or their dependents with preexisting

medical conditions to gaps in coverage.

Small employers generally change insurance issuers every 3 to 4 years (Senate

Committee on Labor and Human Resources, Report 104–156, Oct. 12, 1995,

pg. 4). The provisions of the statute that

allow crediting of prior coverage should

reduce the likelihood of gaps in coverage.

One of the benefits of HIPAA to

individuals is that it alleviates ‘‘job

lock.’’ That is, employees who have

stayed in a particular job in order to

continue health care coverage can now

change to a job that the person might

not otherwise have taken because he or

she (or a dependent) would have been

subject to a pre-existing condition exclusion; or the person can seek coverage in

the individual insurance market as a

result of HIPAA’s provisions requiring

guaranteed issue for individuals coming

from the group market. According to the

GAO, there are one to four million

Americans ‘‘who at some time have

been unwilling to leave their jobs because of concerns about losing their

health care coverage’’ (Health Insurance

Portability: Reform Could Ensure Continued Coverage for Up to 25 Million

Americans, HEHS–95–257, September

1995). The GAO notes that ‘‘surveys

have found that between 11 and 30

percent of individuals report that they or

a family member have remained in a job

at some time because they did not want

to lose health care coverage.’’ Among

those individuals, twenty percent stated

that pre-existing conditions exclusions

constituted the basis for their reluctance

to change jobs.

These figures, reflecting individuals

stated intentions, may not accurately

predict their behavior under different

circumstances, however. Moreover,

HIPAA’s portability provisions will alleviate only some causes of ‘‘job lock’’—

for example, employees might still be

somewhat impeded from taking jobs

where no coverage is offered. Eligible

individuals might benefit in this case

from HIPAA’s group-to-individual portability provisions, but would have to

pay the premium themselves. Therefore,

many individuals who report job lock

will not necessarily change jobs as a

result of HIPAA.

There also appears to be a difference

by age categories of the extent of job

lock. The Health and Retirement Study

(HRS), conducted by the University of

Michigan’s Institute for Social Research,

which provides an emerging portrait of

Americans age 51 through 61 and their

spouses, found that job flexibility is a

key issue for this age group. ‘‘Almost

three-quarters of HRS respondents

would prefer to phase down from fulltime work to part-time work when they

retire, in sharp contrast to actual behavior, where most people who retire leave

the workforce entirely. About one-third

of the people who would not look for

another job are victims of ‘job lock,’

unable to leave because they might give

up valuable pensions or health insurance

benefits if they switched employers’’

(HRS National Institute on Aging Press

Release, June 17, 1993).

Empirical evidence for job lock is

mixed. Buchmueller and Valletta found

strong evidence of job lock among

women but weak evidence among men

(‘‘The Effects of Employer-provided

Health Insurance on Worker Mobility,’’

Industrial and Labor Relations Review,

volume 49, number 3, April 1996).

Monheit and Cooper conclude that the

magnitude and importance of job lock,

which some studies report as causing a

20 to 40 percent reduction in mobility,

is not as great as generally thought

(‘‘Health Insurance and Job Mobility:

Theory and Evidence,’’ Industrial and

Labor Relations Review, volume 48,

number 1, October 1994). Kapur found

that job lock does not have a significant

effect on job mobility (‘‘The Impact of

Pre-existing Health Conditions on Job

Mobility: A Measure of Job Lock,’’

WP–95–25, Institute for Policy Research), while Gruber and Madrian

found that COBRA continuation provisions, and similar state laws (allowing

individuals to continue coverage through

their employer group health plan for a

specified period), have led to a significant increase in job mobility (‘‘Health

Insurance and Job Mobility: the Effects

of Public Policy on Job-lock,’’ Industrial

and Labor Relations Review, volume 48,

number 1, October 1994).

23

CBO does not quantify potential relief

from ‘‘job lock,’’ which is a social,

rather than a direct, benefit of HIPAA.

Because people freed from job lock are

going from one type of insurance to

another (moving to a different group

health plan or to an individual insurance

policy under HIPAA portability), CBO

also views freedom from job lock as

consisting of ‘‘insured expenses . . .

transferred among different insurers . . .

[that] . . . are not . . . direct costs.’’

The majority of evidence indicates

that job lock is a concern for many

workers. HIPAA will address this concern, though the number of workers who

will gain an advantage is unclear and

how the value of the benefit can be

measured is also unclear.

As the forgoing discussion illustrates,

HIPAA’s social benefits are expected to

be far ranging, but they cannot be

meaningfully quantified.

HIPAA might also pose social costs.

In particular, increases in premiums under HIPAA’s portability and access provisions could erode coverage. These

costs are expected to be small, however,

particularly in the group market where

premium increases are estimated to be

very small relative to the overall market.

In summary, HIPAA’s portability and

access provisions are expected to result

in a number of largely unquantifiable

social benefits. These include greater

continuity of coverage, improved access

to health care and possible corollary

improvements in health and productivity,

improved stability and efficiency in insurance health care markets, eased

movement from public assistance to

work, and gains in job mobility that are

favorable to individual careers and to

U.S. competitiveness.

2. Direct Costs and Benefits of

HIPAA’s Portability and Access Provisions

HIPAA’s portability and access provisions impose direct costs and provide

direct benefits to a broad range of

entities, as well as to individual citizens.

Costs will be incurred by employers,

group plans, insurance companies and

managed care plans (‘‘issuers’’); states,

in their capacity as regulators, and states

and localities as entities providing health

care coverage for their employees, retirees and dependents; the federal government as regulator and as the source of

health care coverage for employees, annuitants and dependents, and for others

through programs such as Medicaid and

Medicare. Benefits will accrue to indi-

viduals and to small employers whose

access to comprehensive insurance is

improved.

A number of studies have evaluated

the direct economic impact of the law.

The CBO found that ‘‘to the extent that

states have not already implemented

similar rules, these changes would

clarify the insurance situation and possibly reduce gaps in coverage for many

people.’’

The CBO notes that because HIPAA

does not impose limits on premiums

issuers may charge, insurance coverage,

though available, may be expensive.

Consequently, CBO observes that the

law would ‘‘make insurance more por-

table for some people, [but] it would not

dramatically increase the availability of

insurance in general.’’ The controversial

question of the extent to which there

will be increases in issuer premiums is

discussed more extensively below.

CBO prepared estimates of the direct

effects of the provisions of the legislation included in these regulations (Letter

to the Honorable Bill Archer, August 1,

1996; notes are also from earlier CBO

cost estimates; see table below). The

direct cost estimates can reasonably be

read as representing direct benefits as

well, since they generally reflect transfers from a pre-HIPAA payer to a

post-HIPAA payer. Certain medical ex-

penses that individuals would pay out of

pocket absent HIPAA will be paid by

insurance programs under HIPAA. In

CBO’s estimates, this is reflected as a

similar transfer in responsibility for payment from individuals to insurance programs. However, the actual transfer

would be more complex. For example,

to pay the additional claims, insurers

must collect additional premiums, which

in turn will be paid by the individuals

gaining greater coverage and (in most

cases) by other covered individuals, or

by their employers. CBO’s estimates

represent gross costs to plans and gross

benefits to individuals, and do not account for these complexities.

CBO Cost Estimates and Number of People Affected

Provision

Yearly Cost (Direct Number of People Affected

Cost to Private

Sector)

Other Effects;

Comments

GROUP: Limiting Length of PreExisting Condition Exclusions to 12

Months

$50 million in first 300,000 people ‘‘would gain coverage’’

year (1997); $200 at any point in time, or 0.3% of people

million per year in with private employment-based coverage

subsequent years

Assumes ‘‘surge’’

in claims costs;

state laws taken

into account

GROUP: Creditable Coverage Reducing $25 million in first 100,000 people ‘‘would receive added

Pre-Ex

year; $100 million coverage’’ at any point in time

per year thereafter

GROUP: ABOVE TWO COMBINED

$300 million

INDIVIDUAL (group-to-individual port- $50 million

ability, no pre-existing condition exclusion, no denial because of health condition, guaranteed renewal)

small # of people

affected reflects

‘‘restrictive eligibility criteria’’

Comments: about .2% of total premiums in group and

employer-sponsored market; but may be overstated because

HMOs, now the dominant option, often do not use pre-ex exclusions

45,000 people covered by end of first

year

provisions would

apply in states that

currently have 5.4

million of estimated 13.4 million

people in indiv.

market (but see

analyses below)

‘‘in about four years, the number of

people covered . . . would plateau at

around 150,000’’

level of premiums

to be charged is

unknown; states

may limit allowable premiums, but

such limits may

impose indirect

costs

First year estimates:

INDIVIDUAL: subsequent years

$200 million by

fifth year

Virtually all of the insurance market

reform provisions of HIPAA that are

implemented through these regulations

have the potential to increase premiums

in the group market. Group plans may

have to bear higher costs because of the

statutory limits on pre-existing condition

exclusions and the creditable coverage

provisions reducing the application of

permissible pre-existing condition exclusions. CBO has estimated the total costs

of these two provisions at $300 million

annually after full implementation, or

0.2% of total premiums in the group

market. This reflects coverage for services which would have been excluded

under current law due to pre-existing

condition exclusions in insurance con-

24

tracts, but which would be covered

under HIPAA due to HIPAA’s 12months cap on exclusions and its provisions requiring credit for prior coverage.

CBO’s $300 million cost figure reflects only the costs of the statute’s

limits on pre-existing conditions exclusion, and its prior creditable coverage

provisions. It does not include the ad-

ministrative costs to plans and issuers of

the HIPAA’s certification requirement,

which the Department of Labor has

measured in its Paperwork Reduction

Act analysis below. Similarly, CBO’s

$300 million figure does not include any

other increased premium costs that

might be associated with the statute’s

health status nondiscrimination or guaranteed renewability provisions. CBO’s

figure does try to estimate (a) how

many people would benefit from the

statute’s limits on preexisting condition

exclusions, and its prior creditable coverage provision, and (b) the average cost

to insurers of the extension of coverage

to those individuals.

Preexisting condition exclusion limitation: CBO derived its $300 million

figure by estimating that approximately

300,000 people with private employment-based coverage would gain

coverage under the statute’s preexisting

condition exclusion limitation provision,

at a direct private sector cost of $200

million per year. CBO adjusted this

estimate to exclude people who reported

being limited by a preexisting condition

restriction, but who also had secondary

health coverage to pick up the cost of

their preexisting condition. CBO reasoned that under these circumstances,

the preexisting condition exclusion limitation would not raise the aggregate

costs imposed on employment-based

plans. CBO likewise adjusted its estimate to reflect the existence of state

laws which limited preexisting condition

exclusion limitations to one year or less

and require that previous coverage be

credited against those exclusions. These

state laws generally apply to group

plans of 50 or fewer employees, and do

not include self-funded health benefit

plans subject to ERISA rather than state

laws. Since plans covered by such state

laws would not have to change their

provisions as a result of HIPAA, CBO

lowered its initial estimate of the people

affected by the bill.

Crediting Prior Coverage: CBO’s

$300 million figure also includes an

estimate that 100,000 people, at a private sector cost of about $100 million

per year, would receive some added

coverage as a result of HIPAA’s prior

creditable coverage provision.

CBO reports that these estimates are

subject to considerable uncertainty for

several reasons. First, they are based on

individuals’ responses to surveys, which

should be treated with caution. Likewise, unforeseen changes in the health

insurance market, such as changes in

medical costs or the growth of managed

care plans, could raise or lower the

direct costs of the law. Increases in

medical costs would obviously raise the

costs, while the expansion of HMO

penetration in the market would tend to

reduce the law’s effect, since HMOs

generally do not use preexisting condition exclusions.

CBO also reports that in particular,

distribution of the costs these provisions

would be uneven across health plans.

CBO notes that ‘‘[o]nly plans that currently use pre-existing condition exclusions of more than 12 months would

face the $200 million direct costs of the

statute’s exclusion limitation.’’ Data

from a Peat Marwick survey used by

CBO indicate that 2.5% of employees

are in such plans. Consequently, ‘‘the

costs to health plans that use long

preexisting condition exclusions would

be about 4.5% of their premium costs.’’

Likewise, only those plans that use

preexisting condition exclusions would

face the $100 million direct cost of the

mandate to credit prior coverage against

the preexisting condition exclusion.

CBO reports that ‘‘almost half of employees are in such plans — implying

that the plans directly affected by this

mandate would have direct costs equal

to about one-tenth of one percent of

their premiums’’ absent the statute.

The increased costs may be shared by

insurers, plans, and insured individuals.

Additionally, costs also may be borne

directly by plans that an issuer ‘‘experience rates,’’ i.e. the insurer determines

rates according to the utilization of the

group being insured. Costs may also be

borne by others insured through an

issuer that uses some form of community rating, which spreads risk over a

greater number of ‘‘insured lives’’ beyond the particular group that is the

source of the additional costs. To a

certain extent, a group may have a

choice in the degree of burden: if the

group knows that its members incur

lower costs than the average of the

issuer’s pool, the group can avoid a

community-rated pool by becoming selfinsured.

There is also the possibility that

group market premiums may increase as

a result of the HIPAA reforms in the

individual market if insurers spread the

costs of claims in the individual market

across a pool that includes group members. HIPAA expressly provides for this

possibility as one of the elements of an

acceptable state alternative mechanism.

25

(Such issues relating to the individual

market are discussed in more detail

below.)

Assuming that the CBO is correct in

projecting that the premium effect translates into 0.2 percent of total premiums

in the group market, a minimal premium

effect is likely.

CBO did not quantify the cost of

nondiscrimination or special enrollment

provisions.

With respect to nondiscrimination, approximately 135,000 workers reported in

1993 that they were excluded from their

employer’s health plan because of their

health, according to DOL tabulations of

the April 1993 Current Population Survey. In general, HIPAA would require

plans to offer benefits to such individuals.

With respect to special enrollments,

HIPAA provides that individuals, under

certain conditions, are permitted to enroll for health coverage on the same

terms as new participants, rather than as

late enrollees. The conditions triggering

eligibility for special enrollment generally include events in which an individual loses coverage (such as when a

spouse changes jobs when couples legally separate or divorce) or joins a

family that is eligible for coverage

(through marriage, birth, or adoption).

Special enrollment requirements benefit individuals. Absent this provision,

eligible individuals could be subject to

pre-existing conditions exclusion periods

of up to 18 months, and therefore would

might need 18 months of prior creditable coverage to fully offset a preexisting condition exclusion period. Under

the provision, eligible individuals’ exclusion periods are limited to 12 months.

This special enrollment provision also

permits eligible individuals to enroll

immediately in plans which otherwise

prohibit late enrollment, or which allow

late enrollments only during annual

open enrollment periods.

Considering some of the major groups

that could benefit, the Departments estimate that 734,000 families would gain

eligibility for special enrollments due to

marriage, as would 701,000 due to

births, and 292,000 due to job changes

in the family. These estimates, based on

the Survey of Income and Program

Participation, reflect an annual count of

such events following which the relevant spouse or new born was uninsured, or covered under an individual

policy or Medicaid.

Special enrollments may result in a

marginal increase in aggregate premi-

ums and claims paid, but no change in

average premium levels for any one

individual, since eligible individuals are

not likely to have any higher health care

costs than the average new health plan

participant.

In summary, HIPAA’s portability and

access provisions will result in a number

of direct costs and benefits. These direct

costs represent transfers among parties

and not changes in overall social welfare. CBO estimates that HIPAA’s group

portability provisions will result in $300

million of additional annual direct costs

to insurance programs, which in turn

represents a direct benefit of $300 million in added coverage for individuals.

Additional direct costs and benefits will

arise from similar extensions of coverage under HIPAA’s group-to-individual

portability, special enrollment, and nondiscrimination provisions. Various estimates of the costs and benefits of the

group-to-individual provisions are offered below. Costs and benefits of the

special enrollment and nondiscrimination provisions have not been quantified.

3. Affected Market Segments

(1). Impact on State, Local and Tribal

Governments

The statute establishes federal standards and allows for federal enforcement in an area that has traditionally

been the domain of the states, the

regulation of insurance. However, the

statute also permits states to use alternative, state-specific mechanisms to

achieve greater portability and continuity in a manner similar to the federal

standards. Many states have undertaken

insurance reforms similar to the HIPAA

provisions and are likely to seek approval for the continuation of these

alternative mechanisms. The statute provides that enforcement of the requirements of the law will be the responsibility of the states (for those states

implementing alternative mechanisms as

well as for those states implementing

the federal standards), unless a state is

unwilling or unable to enforce the law.

Only in the latter case of unwillingness

or inability to enforce the law will the

federal government implement and enforce the law in a given state. It is

highly unlikely that there will be any

instance of the federal government assuming such a role, with the exception

perhaps of the territories. There is no

federal financial assistance or resources

to implement these provisions.

The CBO has generally determined

that there will be a negligible impact on

these governmental entities, even in the

event that, in their capacity as sponsors

of employee health care coverage, they

choose not to ‘‘opt out’’ of having

certain provisions of the statute apply to

them. HIPAA provides that states and

localities that self-insure their health

care coverage for employees, are permitted, under the statute, to ‘‘opt out’’ of

the provisions of the law affecting them

with respect to rules governing preexisting condition limitations. Some entities that have the option available will

‘‘opt out.’’ However, this does not relieve them of the responsibility of providing certifications of creditable coverage for their covered individuals.

HIPAA does not preempt state and local

government collective bargaining laws.

If there were no opt-out entities, CBO

projects that state and local governments

would see an increase in health care

costs of less than $50 million, or 0.1%

of the $40 billion annually in state and

local total health insurance expenditures.

Those who would benefit from the

imposition of HIPAA requirements on

state and local governments are individuals who are subject to a pre-existing

condition exclusion that would have

been shortened in length by HIPAA

either under the 12-month limit or the

crediting of prior creditable coverage

provision. As the CBO points out, this

benefit (for some) is coupled with a cost

to (all covered) individuals because it is

assumed that states and localities would

pass the cost off to their employees

through reduced compensation or benefits.

According to CBO, the impact of the

law on the states in their capacity as

regulators enforcing new insurance provision is marginal. For states that have

been enacting insurance reform measures in the small group and individual

markets, it could be argued that HIPAA

provides a benefit to the extent that the

introduction of federal standards facilitates the states’ ability to continue insurance reforms in these markets. According to the Intergovernmental Health

Policy Project (IHPP), in a report dated

June of 1996, all but two states had

enacted some type of small group market reform, and 35 states had enacted

some type of individual insurance market reform. The presence of a federal

standard that may be viewed as constituting a ‘‘floor’’ of requirements imposed on issuers in these two markets

may also benefit the states.

The individual insurance market has

traditionally been regulated by the

states, and Congress intended that, to

26

the maximum extent possible, the states

should continue this regulatory role. To

this end, the law provides states with

three options: 1) implement an alternative, state-specific mechanism to ensure

access to individual health care coverage; 2) adopt and administer the federal

standards of HIPAA; or 3) allow the

federal government to administer the

law.

In devising the first option, the implementation of an alternative mechanism,

Congress afforded states’ a good deal of

flexibility in establishing an alternative

mechanism. At least 30 states are expected to implement alternative mechanisms, each unique to the state’s demographics and market conditions. States

are encouraged to explore innovative

options and intend to afford states as

much flexibility as possible in the design of their alternative mechanisms.

Throughout the process of reviewing

proposed alternative mechanisms, the

states’ need for flexibility must be balanced with the rights of the individuals

afforded protection under the law.

Our main concern is that the primary

goal of HIPAA be achieved: that eligible

individuals are guaranteed coverage in

the individual market, to the extent that

policies are available, without a preexisting condition exclusion period. HHS

intends to review states’ mechanisms

with this goal in mind; so the information presented should present a clear

picture of the mechanism’s impact on

eligible individuals. The information requested in these regulations (section

148.126(h)) closely parallels the statutory provisions. While such information

collection requirements may impose a

burden on each state that chooses to

implement an alternative mechanism,

such information is necessary in order to

effectively evaluate the mechanism and

ensure that the mechanism will provide

eligible individuals the protection guaranteed by the law.

The states are unlikely to choose the

option whereby the Secretary (HCFA)

implements and enforces HIPAA in the

state. Eight states, however, may choose

the ‘‘federal fall-back’’ option of incorporating the HIPAA standards into state

law rather than developing an alternative

mechanism.

The statute provides that a state is

presumed to be implementing an acceptable alternative mechanism as of January 1, 1998, unless the Secretary of

HHS notifies a state of her disapproval

of the mechanism by July 1, 1997. In

states where the legislature does not

meet in a regular session between August 21, 1996 and August 20, 1997, the

state is presumed to be implementing an

acceptable alternative mechanism as of

July 1, 1998. To our knowledge, only

Kentucky qualifies for this exception.

The statute also provides an extension.

Before making any initial determination,

HHS intends to make every effort to

consult with the appropriate state officials. After consultation with appropriate

state officials, should there still be cause

for disapproval, HHS will allow the

state a reasonable opportunity to revise

the mechanism or submit a new mechanism. Throughout this process, HHS

may require further information from

state officials regarding particular aspects of their insurance market reform.

While such requests for information

may also impose an additional burden

on th

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