Interim Rules for Health Insurance Portability for Group Health Plans

[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]

[Rules and Regulations]

[Pages 16894-16976]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 97-8275]

[[Page 16893]]

_______________________________________________________________________

Part II

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

45 CFR Part 148

_______________________________________________________________________

Health Insurance Portability for Group Health Plans; Interim Rules and

Proposed Rule

Federal Register / Vol. 62, No. 67 / Tuesday, April 8, 1997 / Rules

and Regulations

[[Page 16894]]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[T.D. 8716]

RIN 1545-AV05

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2590

RIN 1210-AA54

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

45 CFR Subtitle A, Parts 144 and 146

RIN 0938-AI08

Interim Rules for Health Insurance Portability for Group Health

Plans

AGENCIES: Internal Revenue Service, Department of the Treasury; Pension

and Welfare Benefits Administration, Department of Labor; Health Care

Financing Administration, Department of Health and Human Services.

ACTION: Interim rules with request for comments.

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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 in 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.

DATES: Effective date: These interim rules are effective on June 7,

1997.

Comment dates: Written comments on these interim rules are invited

and must be received by the Departments on or before July 7, 1997.

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 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, Maryland

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, Washington, 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, Maryland 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-

[[Page 16895]]

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\

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\1\ In addition to the group market regulations in this

document, the Department of the Treasury is issuing a proposed

Treasury regulation that cross-references 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.

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B. Overview of HIPAA and the Interim Rules

Area 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 seeking 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 credible 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

individual 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. The 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

[[Page 16896]]

(MEWAs) are in ERISA and the Internal Revenue Code, but not the PHS

Act.)

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\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.

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The ERISA shared group market provisions apply generally

to all group 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 regulation 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.

D. Special Information Concerning State Insurance Law

For purposes of the PHS Act and sections 144 through 148 in the PHS

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.

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

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 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.

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\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.

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Limitation on Preexisting Condition Exclusion Period--26 CFR 54.9801-3,

29 CFR 2590.71-3, 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 section \4\ 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:

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\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.

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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

is not a condition.\5\ In order

[[Page 16897]]

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.

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\5\ 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).

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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 exclusion period is

reduced by the individual's days of creditable coverage \6\ 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.

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\6\ 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.

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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 useage).

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

employment 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\

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\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.

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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 solely of excepted benefits as

defined in the regulations and described below.\8\

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\8\ However, 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).

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Under paragraph (a)(3) of this section of the regulation, a group

health plan or health insurance issuer offering group

[[Page 16898]]

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 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 self-insured plans (which are

not subject to State insurance laws) within a State, as well as between

the insured and self-insured 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

[[Page 16899]]

category would be defined or applied. Accordingly, the Departments

solicit comments on this issue.

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\9\ See also the discussion below under the heading ``HMO

Affiliation as Alternative to Preexisting Condition Exclusion.''

---------------------------------------------------------------------------

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 information (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).

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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 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 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 coverage ending within

the 24 months prior to the date of request.\12\

---------------------------------------------------------------------------

\12\ For example, for participation 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.

---------------------------------------------------------------------------

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

[[Page 16900]]

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 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 employee-plus-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 transition 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

statements, or other means, including telephone calls by the plan or

issuer to a third party provider. The plan administrator is required to

take into

[[Page 16901]]

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

enrollment 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 individuals 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

[[Page 16902]]

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 request 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 insurance 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\

---------------------------------------------------------------------------

\13\ These alternative 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.

---------------------------------------------------------------------------

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.

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

[[Page 16903]]

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

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, limited-scope 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\

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\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).

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The regulations do not address section 2721(e) of the PHS Act or

section 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\

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\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.''

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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

[[Page 16904]]

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 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 the 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 all-products

guarantee or to use a completely 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 newly-hired employees and their dependents.

[[Page 16905]]

An issue has also been raised as to whether the statutory

definitions of premium contributions and group participation rules,

which are repeated in the regulations, related 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 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, Sec. 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 status-related 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

[[Page 16906]]

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 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 Sec. 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, States 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.

Parargarph (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.

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\16\ In the 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 provision (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).

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The requirement that a plan or issuer provide certificates to show

creditable 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.

[[Page 16907]]

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 or 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

Name of Participant:---------------------------------------------------

Date:------------------------------------------------------------------

Address:---------------------------------------------------------------

Telephone Number:------------------------------------------------------

Name and relationship of any dependents for whom certificates

are requested (and their address if different from above):

----------------------------------------------------------------------

----------------------------------------------------------------------

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, pre-existing 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 pubic 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 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 business, 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

[[Page 16908]]

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 in encouraged to

address:

What information relating to prior coverage, preexisting

condition exclusion, 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

State's desires to have considerable flexibility in

complying with the statue, 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 non-discrimination 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, employer-sponsored 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 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 of

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 of 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

[[Page 16909]]

connection with statutory or regulatory interventions that remedy

market failure. 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 behavorial

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 individual's 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 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, cost-shifting 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 pre-existing 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 provide 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

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 medial 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 employer-

sponsored 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

[[Page 16910]]

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 dependents, 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 full-time 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).

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

[[Page 16911]]

Medicare. Benefits will accrue to individuals 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 portable 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 expenses 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

----------------------------------------------------------------------------------------------------------------

Yearly cost (direct Number of people

Provision cost to private sector) affected Other effects; comments

----------------------------------------------------------------------------------------------------------------

Group: Limiting Length of Pre- $50 million in first 300,000 people ``would Assumes ``surge'' in

Existing Condition Exclusions to 12 year (1997); $200 gain coverage'' at any claims costs; state

Months. million per year in point in time, or 0.3% laws taken into

subsequent years. of people with private account.

employment-based

coverage.

Group: Creditable Coverage Reducing $25 million in first 100,000 people ``would Small No. of people

Pre-Ex. year; $100 million per receive added affected reflects

year thereafter. coverage'' at any ``restrictive

point in time. eligibility

criteria''.

Group: Above two combined............ $300 million...........

(1)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.

Individual (group-to-individual $50 million............ 45,000 people covered Provisions would apply

portability, no pre-existing by end of first year. in states that

condition exclusion, no denial currently have 5.4

because of health condition, million of estimated

guaranteed renewal). First year 13.4 million people in

estimates. indiv. market (but see

analyses below).

Individual: Subsequent years......... $200 million by fifth ``In about four years, Level of premiums to be

year. the number of people charged is unknown;

covered; would plateau states may limit

at around 150,000''. allowable premiums,

but such limits may

impose indirect costs.

----------------------------------------------------------------------------------------------------------------

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 contracts, but which would be covered under HIPAA due to

HIPAA's 12-months 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 administrative

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

[[Page 16912]]

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 conditions 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 self-insured.

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. (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

premiums 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

[[Page 16913]]

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 sponsor 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 pre-existing 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 or

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 the maximum extent possible,

the states should continue this regulatory role. To this end, the law

provides states with these 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 mechanism, 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 achieve: 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 states. 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 statutes 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 an

initial determination, HHS intend 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 the state, this information

will be necessary to insure that the mechanism will provide the

protections guaranteed to eligible individuals under the law.

As required by law, the Secretary of HHS will review each

alternative mechanism every three years. In this respect, the

regulation adheres closely to the statutory burden and merely clarified

that resubmission is required on every three-year anniversary of the

last submission date. HHS has also provided a process for review of

future mechanisms, should a state may wish to revise an existing

mechanism or propose a new mechanism.

In addition to implementing an alternative mechanism, a state may

choose to adopt and administer the federal statutory provisions. Our

regulations in this regard do not differ from the statutory provisions.

As noted above, it is likely that up to eight states would choose this

option.

Finally, a state may choose to allow the federal government to

administer the federal statutory provisions in the state. Although this

is a possibility contemplated in the statute, it is unlikely that any

state would choose this option. However, the impact of the regulations

that implement this option is discussed below.

In states that have an acceptable alternative mechanism for

ensuring access to individual insurance or health care coverage, the

implementation of laws and determination of compliance with those laws

is exclusively a state matter. For other states, HIPAA gives the

Secretary authority to issue

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regulations to carry out the implementation and enforcement of HIPAA

provisions for the states that choose the ``federal fallback'' option

(using federal standards), and for states in which the federal

government will directly administer the HIPAA provisions. These

regulations specify the following:

Documentation that must be submitted to the state (federal

default) or to HCFA (direct regulation by the federal government)

demonstrating compliance with the statute;

The manner in which an insurer markets individual

policies;

The procedure and time frames the issuer follows in

determining whether someone is an eligible individual, and the

effective date of the individual's coverage;

The procedure to follow for a request to limit enrollment

in the case of an HMO's or insurer's capacity limitations (network

capacity or financial capacity); and

The procedure for determining whether the benefit packages

offered in the individual market are consistent with statutory

requirements.

In states electing the federal fall-back approach, the state

determines the level of documentation required to establish compliance

with the HIPAA provisions. The Departments do not know the extent of

burden states will impose on plans as a result of HIPAA. Although there

is not likely to be direct federal enforcement in any state, in those

states in which HCFA does administer the law, issuers have 90 days

after July 1, 1997, to provide documentation concerning individual

policy forms the issuer already markets; and 90 days prior to the

beginning of the calendar year prior to marketing a new policy form.

With regard to these time frames, the 90-day period should not be

burdensome. Much of the information required to be submitted regarding

the policy forms in the individual market is material the issuer will

generally have filed with a state insurance commissioner (``information

on all products offered in the individual market''; marketing material,

often submitted to states on a ``file and use,'' or informational

basis). For such information the submission to the federal government

is burdensome only in that it is duplicative of material given to the

state. The HIPAA-specific materials are generally not duplicative and

constitute a burden on issuers to provide HCFA with the following

information:

An explanation of how the issuer is complying with the

provisions of HIPAA, including how the issuer will inform eligible

individuals of available policy forms;

Premium volumes or actuarial values (depending on which

election is made regarding compliance with rules on the type of policy

to be offered); and

A description of the risk spreading/financial

subsidization mechanism to be used for individual policy forms.

The last two items represent requirements of the statute, while the

first item is necessary to ensure that there is effective

implementation of the statute. For the first item, issuers will have to

become familiar with the provisions of HIPAA in order to comply with

the documentation requirement, which can be a considerable burden, but

the other information requirements should not be burdensome. One way in

which these regulations lessen the burden for plans electing to offer

``representative coverage'' rather than the most popular policy forms

is by not prescribing the method of determining the actuarial value of

representative coverage. Issuers may make their own determinations of

actuarial value and present them to HCFA for verification.

(2). Impact of the Law in Different States

The impact of the law on individuals, employers, group plans, and

issuers may vary somewhat from state to state. Many state reforms

resemble HIPAA's portability provisions, often meeting or exceeding

particular HIPAA standards. The CBO notes that it ``lowered its initial

estimate of the number of people affected by the bill'' in recognition

of such state reforms. Where state laws resembling HIPAA exist, the

marginal impact of HIPAA is reduced.

The degree to which a state's reforms lessen the impact of HIPAA's

portability provisions depends on the degree to which the state's

requirements exceed these provisions, and on what proportion of insured

individuals in the state are covered by the state's reforms. In

general, individuals not covered by state reforms are those enrolled in

programs for which such state reforms are preempted by federal law.

These include individuals enrolled in federal programs such as Medicare

and the Federal Employees Health Benefits Program or in self-insured

ERISA plans. Individuals enrolled in ERISA plans that are not self

insured are covered by such state reforms that are specifically saved

from preemption by HIPAA.

According to a study by Jacob Klerman of RAND, New Estimates of the

Effect of

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